-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N3gl2M6FEf6CUkAdqt2uFQ3WwVnuDCHEO9sQ6IE3cHnPFi6ApCNSV5bnqM5Wic2F yw9eqLYEoJ9rdPci0nipOA== 0000950123-98-008534.txt : 19980928 0000950123-98-008534.hdr.sgml : 19980928 ACCESSION NUMBER: 0000950123-98-008534 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980925 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANNONDALE CORP / CENTRAL INDEX KEY: 0000930795 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 060871823 STATE OF INCORPORATION: DE FISCAL YEAR END: 0628 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24884 FILM NUMBER: 98715292 BUSINESS ADDRESS: STREET 1: 16 TROWBRIDGE DR CITY: BETHEL STATE: CT ZIP: 06829 BUSINESS PHONE: 2037497000 MAIL ADDRESS: STREET 1: 16 TROWBRIDGE DRIVE CITY: BETHEL STATE: CT ZIP: 06801 FORMER COMPANY: FORMER CONFORMED NAME: CANNONDALE CORP /DE/ DATE OF NAME CHANGE: 19940930 10-K405 1 CANNONDALE CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 27, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-24884 CANNONDALE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-0871823 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 16 TROWBRIDGE DRIVE, 06801 BETHEL, CONNECTICUT (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (203) 749-7000 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None N/A
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 COMMON STOCK PURCHASE RIGHTS 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At September 21, 1998, the aggregate market value of the voting stock held by non-affiliates of registrant was $53,288,297 based on the per share closing price on such date, and registrant had 7,448,679 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT RELATING TO THE 1998 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 66 models in its 1999 model year, the significant majority of which are hand assembled and constructed with hand welded aluminum frames. Cannondale also manufactures and sells other bicycle related products, which include clothing, shoes and bags, and a line of components. In February 1998, the Company announced plans to introduce a line of motocross motorcycles, currently in the prototype phase of development, for shipment in the summer of 1999. The Company was incorporated in Delaware in 1971. The Company has experienced growth, with net sales increasing from $54.5 million in fiscal 1991 to $171.5 million in fiscal 1998. 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 63 percent of all bicycle revenue in the United States in 1997. Based on data from the Bicycle Product Suppliers Association, the high-performance segment of the mountain-bike market has continued to grow as a percentage of the mountain-bike market as a whole, 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 1999 bicycle line offers 66 models, the vast majority of which feature a Cannondale lightweight hand-welded and hand-assembled 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. In June 1997, the Company began shipment of 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. There are five major categories of bicycles sold in the adult market: mountain, road racing, multi-sport, recreational and specialty. Mountain bikes have wide knobby tires, straight handlebars and are designed to handle off-road conditions. Road racing bikes are lightweight with thin tires and drop (curved) handlebars. Multi-Sport Bikes have smaller wheels than traditional road bikes with aero-tubed frames designed for triathlon, duathlon and other multi-sport races. Recreational bikes are composed of hybrid bikes which have straight handlebars and more upright riding position of mountain bikes, but use thinner tires, making them suited for on- and off-road use, and smooth-riding bikes which are designed with rider comfort in mind and are primarily for use on bike paths and the growing number of recreational riding areas. The specialty bicycle market encompasses various niche products, including tandem, touring and cyclocross bikes. 2 3 The 66 bicycle models in Cannondale's 1999 model year are distributed in the five major bicycle categories as follows:
NUMBER OF CATEGORY 1999 MODELS -------- ----------- Mountain Bikes: Full Suspension................... 13 Front Suspension.................. 11 Non-Suspended..................... 1 Road Bikes: Front Suspension.................. 2 Non-Suspended..................... 12 Multi-Sport....................... 3 Recreational: Hybrid............................ 9 (five front suspension) Smooth Riding..................... 5 (one front suspension and one full suspension) Specialty: Tandem............................ 4 (one front suspension) Touring........................... 4 (one front suspension) Cyclocross........................ 2 (one front suspension)
The Company's 1999 line of proprietary HeadShok front suspension forks features a total of fourteen 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. In the 1999 model year there are two HeadShok fork models that can be mounted to non-Cannondale frames; prior to 1996, all HeadShok forks functioned with the bicycle's frame as part of an integrated system. In addition, several independent manufacturers of bicycle frames have been manufacturing frames specifically to fit the Company's HeadShok suspension 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, discbrakes, 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. The Company also offers men's and women's apparel that is divided into three categories: Spring/ Summer, Fall/Winter and mid season. The collection consists of four lines: Vertex (a high-performance line for competition), HPX (a line for enthusiasts of all levels), Terra (a line geared for cyclists who prefer casual wear) and Sport (a line for female cyclists characterized by close-fitting silhouettes and progressive prints). The Company's Fall and Winter apparel features wind and waterproof garments that coordinate a full line of fleece offerings and base layers. In addition to its bicycle, suspension fork, component and clothing lines, the Company manufactures and sells bicycle accessories, including bags, shoes, and other accessories, some of which are manufactured for the Company by third parties. These products are sold primarily through the same distribution channels as the Company's bicycles, forks, components and apparel. In February 1998, the Company announced plans to introduce a line of motocross motorcycles. The Company's motocross motorcycle will have a 400cc four-stroke engine that will be manufactured in Bedford, Pennsylvania at the Company's facility. The motocross motorcycle enables the Company to capitalize on numerous core competencies including patented aluminum frame fabrication, patented Headshok needle bearing suspension and short-development cycles. The motocross motorcycle is currently in its fourth generation prototype. 3 4 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, differentiation, performance and quality leadership; publicity generated from the Company-sponsored professional athletes; and a media campaign designed to attract consumers to specialty bicycle retailers. Since 1994, the Volvo/Cannondale mountain bike racing team has made contributions to the product development effort of the Company, and served as a major focus of the Company's marketing effort. 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 sponsorship of the Saeco team is designed to increase Cannondale's visibility and credibility among the high-end consumers dedicated to road racing. A major force in the Giro d'Italia, Tour de France, CoreStates and other top professional road cycling events, the Saeco team began to compete aboard Cannondale bicycles, and in the Company's cycling apparel, in the spring of 1997. 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. During July 1998, the Company teamed up with a leading fashion designer, Tommy Hilfiger, to further promote its brand name. The Company entered into a license agreement to produce a high-performance bicycle for the designer's Hilfiger Athletics division. The bicycle will feature the Hilfiger Athletics logo and will be distributed beginning in the fall of 1998 through the Company's authorized retailer network. 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 eight 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. In addition, in order to increase the sales of its clothing and accessory lines, the Company expanded its distribution network to include sport-specialty retailers. The Company does not sell bicycles through mass merchandisers. A key aspect of the Company's strategy is to align itself with a network of specialty bicycle retailers that can support the Company's growth objectives. 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 1,375 specialty bicycle retailer locations and sells accessories through an additional 500 retailer locations. Generally, the Company's retailers do not have exclusive rights in any territory. In addition to a 34 member field-sales force dedicated to selling bicycles, the Company has a 13 member field-sales force whose focus is to sell the clothing, accessory, CODA and HeadShok lines offered by the Company. The Company's 6 member sales management team and 47 member field-sales force contributes to all aspects of customer service, including: 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. In addition, the Company employs a staff of inside sales representatives to handle 4 5 retailer orders between visits from the field-sales force and maintains staff to handle telemarketing and special incentive programs. 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, Japan and Australia are conducted through three wholly-owned subsidiaries, Cannondale Europe B.V. ("Cannondale Europe"), Cannondale Japan KK ("Cannondale Japan") and Cannondale Australia Pty Limited ("Cannondale Australia"), respectively. Sales in other foreign countries are made by the Company from the United States, through the use of 33 foreign distributors, who sell the Company's products to specialty bicycle retailers overseas. During fiscal 1998, 1997 and 1996, Cannondale Europe accounted for 45%, 41% and 37%, respectively, of consolidated net sales, while Cannondale Japan accounted for 5%, 5% and 6%, respectively. Cannondale Australia, which was formed in fiscal 1997, accounted for 1% of consolidated net sales in fiscal 1998 and 1997. Cannondale Europe. Cannondale Europe 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 1,400 specialty bicycle retailer locations in Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom and Ireland, using locally based employee account managers supervised from the Oldenzaal headquarters. Distributors are used in Greece, Hungary, Poland, Portugal, Turkey, India, Bulgaria, Malta, Russia and four republics comprising portions of former Czechoslovakia and Yugoslavia. 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 265 specialty retailers and sells only accessories to an additional 100 retailers Cannondale Australia. In July 1996, Cannondale Australia, 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 200 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, 1998, with an option to extend the agreement for an additional two years with price protection throughout the term of the contract. The Company believes that the termination of its current agreement would not have a significant impact on the availability of aluminum tubing as the supply is currently strong, and the Company utilizes other suppliers as required. Cannondale purchases most of its componentry from Japanese, Taiwanese and United States OEM suppliers. Purchases from Japanese 5 6 component manufacturers are made through Cannondale Japan. The Company's largest component supplier is Shimano, which was the source of approximately 17% of the Company's total inventory purchases in fiscal 1998. 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 believes that its future success will depend upon its ability to maintain flexible 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 35 United States patents relating to various products, processes or designs with expiration dates ranging from 1998 to 2015. 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 trademarks are also registered in Cannondale's significant foreign markets. The Company believes its CANNONDALE trademarks 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." 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, import restrictions and exchange rates. 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, and the creation of new and innovative products. It is the objective of the research and development group, with the assistance of the Company's race teams, and in particular the Volvo/Cannondale mountain bike racing team, which provide significant feedback from the field, to design and deliver innovative products 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 benefited from efficiencies realized through the use of computer-aided design tools and increased integration of the design and production processes. In addition, the Company's collaboration with its racing teams has led to the development of several competitive new products, including the fourth generation of CAAD (Cannondale Advanced Aluminum Design) road and mountain bicycle frames, the CODA disc brake 6 7 and 13% greater travel on the Company's proprietary HeadShok suspension, as well as the continuous refinement of the Company's existing products. The core competencies that the research and development group have developed by maintaining the Company's position as a technology leader of frame and suspension products in the bicycle industry will facilitate the Company's effort to introduce a line of innovative motocross motorcycles. These developments exemplify the commitment by the Company in fiscal 1998 to continue to invest in developing design, product and process technologies to differentiate itself from its competition. The Company invested $6.8 million, $3.6 million and $2.8 million on research and development during fiscal years 1998, 1997 and 1996, 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 was 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 Company received a waiver from the Department of Environmental Protection that provided for the cessation of this program. During the program, no groundwater contamination was indicated in the sampling results. In the unanticipated event that the situation surrounding this matter could change, and 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 27, 1998, the Company employed a total of 859 full time employees in the United States, Cannondale Europe employed 143 full time employees, Cannondale Japan employed 21 full time employees, and Cannondale Australia employed 5 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. In December 1997, the Company moved into its new corporate headquarters and research and development facility located in Bethel, Connecticut. The corporate headquarters and research and development facility contains 32,500 square feet on a five acre site. The cost of the new facility was partially financed with the proceeds ($1.7 million) from the sale of the Company's previous headquarters facility in Georgetown, Connecticut and a loan ($1.6 million) from the Connecticut Development Authority. The loan extends to February 2008 and is secured by the corporate headquarters and research and development facility. Cannondale has a manufacturing facility in Bedford, Pennsylvania. The Bedford plant contains 207,000 square feet on 23 acres and is the main production facility, and also houses customer service. In connection with the financing of the facility, the site is held in the names of local development agencies and is 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 (the year 2013), title to the property will be conveyed to the Company and PIDA's mortgages on the property will be released. During 1998, the Company completed construction of an addition to the Bedford facility of 82,000 square feet. The additional space is being used for warehousing and expanded production. Cannondale had a manufacturing facility in Philipsburg, Pennsylvania. The plant consisted of 40,000 square feet on 12 acres and housed the production of accessories, some clothing and bike sub-assemblies. During June 1998, operations from the Philipsburg facility were moved to the Bedford facility, and in 7 8 August 1998, the Philipsburg facility was sold to the Moshannon Valley Economic Development Authority for $1.4 million. During fiscal 1998, the Company entered into a contract with a general contractor, an entity controlled by a director of the Company, to build a facility for the motocross motorcycle and the Company's clothing line in Bedford, Pennsylvania. The proposed facility will contain 100,000 square feet on 23.9 acres. The project is expected to cost approximately $7.5 million, of which approximately 13% will be financed by the same agencies which have previously provided financing for the current Bedford facility. The Company anticipates that the new facility will be completed by the fourth quarter of fiscal 1999. 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 project, 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, cash flow or financial condition of the Company; however, due to the inherent uncertainty of litigation there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's results of operations, cash flow or financial condition. 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 1998 fiscal year. 8 9 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............................ 58 Chairman, President, Chief Executive Officer, Director William A. Luca................................. 55 Vice President of Finance, Treasurer, Chief Financial Officer, Director Daniel C. Alloway............................... 39 Vice President of Sales -- United States, Vice President of European Operations, Director Leonard J. Konecny.............................. 55 Vice President of Purchasing John P. Moriarty................................ 54 Assistant Treasurer and Assistant Secretary, Director of Accounting Mario Galasso................................... 32 Vice President of Product Development
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 of the Company. 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. 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). Mr. Alloway was appointed a director of the Company in June 1998. 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 P. 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). Mario Galasso joined Cannondale in 1991 as a Project Engineer. He served as the Manager of Research and Development from 1994 to 1996. Mr. Galasso currently serves as the Vice President of Product Development. Each of the officers of the Company is appointed by and serves at the pleasure of the Board of Directors. 9 10 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 16, 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 1998 First Quarter (6/29/97 to 9/27/97)........................ 24.38 17.50 Second Quarter (9/28/97 to 12/27/97)...................... 24.63 19.50 Third Quarter (12/28/97 to 3/28/98)....................... 22.94 16.13 Fourth Quarter (3/29/98 to 6/27/98)....................... 16.69 12.38 FISCAL 1997 First Quarter (6/30/96 to 9/28/96)........................ 23.75 17.50 Second Quarter (9/29/96 to 12/28/96)...................... 25.75 17.75 Third Quarter (12/29/96 to 3/29/97)....................... 27.25 17.50 Fourth Quarter (3/30/97 to 6/28/97)....................... 22.25 15.00
As of September 24, 1998, there were approximately 335 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 4,300 beneficial owners of its Common Stock as of such date. The Company has not paid any cash dividends on its Common Stock since its inception and does not anticipate paying any cash dividends in the foreseeable future. 10 11 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 Condition and Results of Operations" and the Consolidated Financial Statements and related Notes appearing elsewhere in this Form 10-K.
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS ENDED JUNE 27, ENDED JUNE 28, ENDED JUNE 29, ENDED JULY 1, ENDED JULY 2, 1998 1997 1996 1995 1994 -------------- -------------- -------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales...................................... $171,496 $162,496 $145,976 $122,081 $102,084 Cost of sales.................................. 110,113 101,334 92,804 79,816 72,083 -------- -------- -------- -------- -------- Gross profit................................... 61,383 61,162 53,172 42,265 30,001 -------- -------- -------- -------- -------- Expenses Selling, general and administrative.......... 39,361 35,707 32,577 27,023 22,290 Research and development..................... 6,750 3,576 2,837 1,751 1,317 Stock option compensation.................... -- -- -- -- 2,046 -------- -------- -------- -------- -------- Total operating expenses....................... 46,111 39,283 35,414 28,774 25,653 -------- -------- -------- -------- -------- Operating income............................... 15,272 21,879 17,758 13,491 4,348 -------- -------- -------- -------- -------- Other income (expense): Interest expense............................. (1,995) (1,574) (2,224) (3,929) (4,460) Other income................................. 653 843 414 24 324 -------- -------- -------- -------- -------- Total other income (expense)................... (1,342) (731) (1,810) (3,905) (4,136) -------- -------- -------- -------- -------- Income before income taxes and extraordinary item......................................... 13,930 21,148 15,948 9,586 212 Income tax expense............................. (4,578) (7,642) (5,802) (1,353) (791) -------- -------- -------- -------- -------- Income (loss) before extraordinary item........ 9,352 13,506 10,146 8,233 (579) Extraordinary item, net of income taxes(1)..... -- -- -- (685) -- -------- -------- -------- -------- -------- Net income (loss).............................. 9,352 13,506 10,146 7,548 (579) Accumulated preferred stock dividends(2)....... -- -- -- (400) (1,008) -------- -------- -------- -------- -------- Income (loss) applicable to common shares and equivalents.................................. $ 9,352 $ 13,506 $ 10,146 $ 7,148 $ (1,587) ======== ======== ======== ======== ======== BASIC INCOME PER COMMON SHARE(5): Income (loss) before extraordinary item(3)..... $ 1.11 $ 1.56 $ 1.23 $ 1.33 $ (.41) Net income (loss).............................. $ 1.11 $ 1.56 $ 1.23 $ 1.21 $ (.41) Weighted average common shares(4).............. 8,442 8,638 8,216 5,888 3,882 DILUTED INCOME PER COMMON SHARE(5): Income (loss) before extraordinary item(3)..... $ 1.08 $ 1.51 $ 1.19 $ 1.20 $ (.41) Net income (loss).............................. $ 1.08 $ 1.51 $ 1.19 $ 1.09 $ (.41) Weighted average common shares and common equivalent shares outstanding(4)............. 8,682 8,916 8,499 6,537 3,882
JUNE 27, JUNE 28, JUNE 29, JULY 1, JULY 2, 1998 1997 1996 1995 1994 -------------- -------------- -------------- ------------- ------------- BALANCE SHEET DATA: Working capital................................ $ 78,975 $ 77,196 $ 62,032 $ 40,304 $ 6,366 Total assets................................... 152,277 127,284 109,945 84,008 67,870 Subordinated debt.............................. -- -- -- -- 9,179 Total long-term debt and subordinated debt, excluding current portion.................... 40,352 20,319 13,114 23,593 16,174 Preferred stock................................ -- -- -- -- 6,718 Total stockholders' equity, including preferred stock........................................ 78,238 81,621 68,294 36,088 9,640
- --------------- (1) Extraordinary item consists of the costs relating to early extinguishment of debt, net of applicable tax benefit. (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) 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) The earnings per share amounts prior to fiscal 1998 have been restated as required to comply with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." For further discussion of earnings per share and the impact of SFAS 128, see the Summary of Significant Accounting Policies and Footnote 4 of the notes to the consolidated financial statements. 11 12 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 ----------------------- 1998 1997 1996 ----- ----- ----- Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................... 64.2 62.4 63.6 ----- ----- ----- Gross profit................................................ 35.8 37.6 36.4 ----- ----- ----- Expenses: Selling, general and administrative....................... 23.0 22.0 22.3 Research and development.................................. 3.9 2.2 1.9 ----- ----- ----- Total operating expenses.................................... 26.9 24.2 24.2 ----- ----- ----- Operating income............................................ 8.9 13.4 12.2 ----- ----- ----- Other income (expense): Interest expense.......................................... (1.2) (1.0) (1.5) Other income.............................................. 0.4 0.5 0.3 ----- ----- ----- Total other income (expense)................................ (0.8) (0.5) (1.2) ----- ----- ----- Income before income taxes.................................. 8.1 12.9 11.0 Income tax expense.......................................... (2.7) (4.7) (4.0) ----- ----- ----- Net income.................................................. 5.4% 8.2% 7.0% ===== ===== =====
COMPARISON OF FISCAL 1998, 1997 AND 1996. Net Sales. Net sales increased to $171.5 million in fiscal 1998, from $162.5 million in 1997 and $146.0 million in 1996. 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 three years, the number of specialty retailer locations serviced directly by the Company has increased to over 3,200 at the end of fiscal 1998 from approximately 2,800 at the end of 1996. The increase in sales to existing specialty retailers is attributable to the increase in the number of bicycle models offered from 53 models in fiscal 1996, to 59 models in 1998, as well as an increase in clothing sales and proprietary aftermarket componentry sold under the CODA and HeadShok brand names. The Company's rate of sales growth decreased from fiscal 1997 to 1998 primarily as a result of a stronger U.S. dollar relative to the Dutch guilder and Japanese yen compared to the prior-year periods, a reduction in inventory by many of the Company's domestic dealers and bad weather experienced in the United States, particularly during the second half of the 1998 fiscal year. Net sales reported by Cannondale USA were $83.3 million in fiscal 1998, $85.5 million in 1997 and $83.2 million in 1996. Net sales reported by Cannondale Europe increased to $78.0 million in fiscal 1998, from $67.0 million in 1997 and $53.6 million in 1996. The Company attributes this growth primarily to increased sales to existing foreign retailers, as well as an increase in the dealer base, and increased sales in non-bike categories. Net sales of Cannondale Japan increased slightly to $8.0 million in fiscal 1998 from $7.9 million in 1997, and decreased from $9.2 million in 1996. The majority of the decrease in sales by Cannondale Japan during fiscal 1998 and 1997 is attributable to the strength of the U.S. dollar compared to the Japanese yen during fiscal 1996. Net sales of Cannondale Australia increased slightly in 1998 compared to 1997, $2.2 million in 1998 compared to $2.1 million in fiscal 1997. 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 decreased to 35.8% in fiscal 1998 from 37.6% in 1997, and 36.4% in 1996. The decrease in the gross-profit rate in 1998 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 prior periods and a less favorable product mix in the United States during fiscal 1998 compared to 1997. The increase in the gross profit rate in fiscal 1997 compared to fiscal 1996 reflected a more 12 13 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. Operating Expenses. Selling, general and administrative expenses increased to $39.4 million in fiscal 1998, from $35.7 million in 1997 and $32.6 million in 1996. Increases in selling, general and administrative expenses are directly associated with the increased sales, and additional personnel, primarily associated with the Company's sales force, and advertising and marketing costs required to support the Company's current and future growth. As a percentage of net sales, selling, general and administrative expenses were at 23.0%, 22.0% and 22.3% in fiscal 1998, 1997 and 1996, respectively. The increased selling, general and administrative expenses as a percentage of net sales in fiscal 1998 reflects the Company's continued investment in costs to support future growth. Research and development expenses increased to $6.8 million in fiscal 1998, from $3.6 million in 1997 and $2.8 million in 1996, 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 1998 was primarily attributable to the product and process development of a new product line, the motocross motorcycle. In addition, the Company continued to increase its investment in the improvement and expansion of its existing bicycle and CODA product lines. Also, the Company's integration of its sponsored race teams, in particular the Volvo/Cannondale mountain bike racing team, into its research and development efforts, continued to be a significant aspect of its investment during fiscal 1998. The Company uses its race teams for regular testing of both prototype and finished production models. Interest Expense. Interest expense increased to $2.0 million in fiscal 1998, from $1.6 million in 1997, which decreased from $2.2 million in 1996. The increase in interest expense in 1998 compared to 1997 is primarily attributable to debt incurred associated with the Company's repurchase of $12.4 million of its common stock during fiscal 1998, its investment in its new corporate headquarters and research and development facility and the expansion of its production facility in Bedford, Pennsylvania and its increase in working capital levels related to the growth of the business. The decrease in interest expense in the 1998 and 1997 fiscal years compared to 1996 reflects the lower interest rates negotiated as a result of the Company's improved performance and capitalization and lower borrowing levels resulting from repayment of debt with the net proceeds from a public offering in September 1995. In addition, during fiscal 1998 and 1997, a portion of the Company's outstanding borrowings were denominated in Dutch guilders and Japanese yen, which offered significantly lower borrowing rates than U.S. dollar borrowings. Other Income (Expense). Other income primarily consists of finance charges relating to accounts receivable, which totaled $885,000, $810,000 and $552,000 for fiscal 1998, 1997 and 1996, respectively. The remaining balance consists primarily of foreign currency gains (losses) of ($232,000), $33,000, and ($138,000) for fiscal 1998, 1997 and 1996, respectively. Income Tax Expense. Income tax expense decreased to $4.6 million in fiscal 1998, from $7.6 million in 1997, and $5.8 million in 1996, which primarily reflects the Company's reduction in profitability in fiscal 1998. See Note 6 of Notes to Consolidated Financial Statements. 13 14 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 --------------------------------------------------------------------------------------------------------- JUNE 27, MARCH 28, DECEMBER 27, SEPTEMBER 27, JUNE 28, MARCH 29, DECEMBER 28, SEPTEMBER 28, 1998 1998 1997 1997 1997 1997 1996 1996 -------- --------- ------------ ------------- -------- --------- ------------ ------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.............. $44,181 $45,305 $47,701 $34,309 $42,093 $48,229 $41,294 $30,880 Cost of sales.......... 28,923 28,101 30,137 22,952 26,588 28,698 25,396 20,652 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit........... 15,258 17,204 17,564 11,357 15,505 19,531 15,898 10,228 ------- ------- ------- ------- ------- ------- ------- ------- Expenses Selling, general and administrative..... 10,243 10,277 9,736 9,105 8,481 9,436 9,451 8,339 Research and development........ 2,481 1,552 1,598 1,119 968 946 905 757 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............. 12,724 11,829 11,334 10,224 9,449 10,382 10,356 9,096 ------- ------- ------- ------- ------- ------- ------- ------- Operating income....... 2,534 5,375 6,230 1,133 6,056 9,149 5,542 1,132 Other income (expense)............ (605) (456) (250) (31) 219 (253) (322) (375) ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes................ 1,929 4,919 5,980 1,102 6,275 8,896 5,220 757 Income tax expense..... (276) (1,733) (2,137) (432) (1,963) (3,344) (2,067) (268) ------- ------- ------- ------- ------- ------- ------- ------- Net income............. $ 1,653 $ 3,186 $ 3,843 $ 670 $ 4,312 $ 5,552 $ 3,153 $ 489 ======= ======= ======= ======= ======= ======= ======= ======= Basic income per share (1).................. $ .20 $ .38 $ .45 $ .08 $ .50 $ .64 $ .37 $ .06 Diluted income per share (1)............ $ .20 $ .37 $ .43 $ .07 $ .48 $ .62 $ .35 $ .05
- --------------- (1) The earnings per share amounts prior to the second quarter of fiscal 1998 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." For further discussion of earnings per share and the impact of Statement No. 128, see the Summary of Significant Accounting Policies and Footnote 4 of the notes to the consolidated financial statements 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, and historically has resulted in more shipments and significantly stronger results in the third and fourth fiscal quarters (January through June). Beginning 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 third and fourth fiscal quarters together accounted for 52% and 56% of the Company's total net sales in fiscal 1998 and 1997, respectively. Although sales orders are received throughout the course of the year, typically shipments are concentrated in the third and fourth fiscal quarters. The Company's gross margins fluctuate primarily according to product mix, the cost of materials, fluctuations in foreign exchange rates 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 52% and 70% of the operating income for fiscal 1998 and 1997, respectively. The decrease in the percentage of net sales and operating income recorded during the third and fourth fiscal quarters of 1998 as a percentage of total sales for fiscal 1998 can primarily be attributed to the inventory reduction by many of the Company's domestic dealers during that period. 14 15 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 quarters of fiscal 1998 and 1997, achieving profitable performances, 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 a public offering, which totaled approximately $22.1 million in fiscal 1996. In June 1997, the Company entered into an unsecured, multicurrency revolving credit facility which serves as the Company's principal source of working capital funding. The Company used the proceeds from the multicurrency revolving credit facility to refinance its previous revolving line of credit and domestic term loan. The credit facility, as amended in October 1997, which extends to June 2000, allows the Company, Cannondale Europe and Cannondale Japan to borrow up to $70,000,000 until September 1998, when the commitment of the lenders decreases by $1,250,000 each quarter thereafter. The credit facility includes a provision that permits the Company to borrow up to $10,000,000 on a short-term basis (less than 30 days). 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 (London Interbank Offered Rate) applicable to the currency borrowed plus an interest rate margin ("LIBOR margin"). The LIBOR margin (ranging from 30.0 to 75.0 basis points) is determined quarterly based upon predetermined performance criteria. The Company is obligated to pay a facility fee (ranging from 15.0 to 25.0 basis points) on the balance of the facility based on the same performance criteria as the LIBOR margin. 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 cash flow, capitalization, interest coverage and tangible net worth. The Company is currently in compliance with all restrictive and financial covenants. At June 27, 1998, the borrowings outstanding under the revolving credit facility were $34,661,000. Cannondale Europe and Cannondale Japan each maintain a separate credit facility for short-term borrowings. In February 1998, Cannondale Europe entered into a new multicurrency credit arrangement, which allows Cannondale Europe to borrow up to 12,500,000 Dutch guilders (approximately $6.1 million at June 27, 1998) on a short-term basis. The interest rate on outstanding borrowings is a market rate, applicable to the borrowed currencies, plus 1.5% with a minimum rate of 3.5%. The credit arrangement contains no specific expiration date, and may be terminated by either Cannondale Europe or the lender, at any time. Cannondale Japan has an unsecured revolving credit facility for up to 155,000,000 Japanese yen (approximately $1.1 million at June 27, 1998). Approximately $1,600,000 and $500,000 of principal amount was outstanding under the Dutch and Japanese facilities, respectively, at June 27, 1998. The Dutch and Japanese facilities are guaranteed by the Company. Net cash provided by (used in) operating activities was $7.2 million, $4.6 million, and ($6.8 million) in fiscal 1998, 1997 and 1996, 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. The increase in cash provided by operating activities in fiscal 1998 was primarily due to the Company's continued profitability and its management of receivable growth, offset by an increase in raw-material inventory levels caused by the lower sales growth levels in the last two quarters of the 1998 fiscal year. Cash provided by operating activities in fiscal 1997 was primarily attributable to the increased profitability of the Company and leveling of inventory growth compared to the prior-year period when the Company initiated a strategy to maintain higher inventory levels to capitalize on its flexible manufacturing capabilities. 15 16 Capital expenditures were $16.8 million, $9.8 million and $3.0 million in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, the majority of these expenditures related to the completion of the new corporate headquarters and research and development facility in Bethel, Connecticut and the expansion of the Company's production facility in Bedford, Pennsylvania ($4.8 million), and the commitment entered into by the Company to purchase a Cessna Citation jet ($2.8 million). The balance of capital expenditures principally represents investments in computer equipment and manufacturing equipment to support increases in production volume to support the Company's planned growth. In fiscal 1997, the majority of the capital expenditures ($5.6 million) related to the construction of the abovementioned facilities. The cost of the corporate headquarters and research and development facility was partially funded with the proceeds from the sale of the Company's previous headquarters facility ($1.7 million) in fiscal 1997, and from the Connecticut Development Authority ("CDA") financing of $1.6 million which was funded in fiscal 1998. The Company has also received approval from CDA for financing of up to $337,500 for research and development equipment to be acquired in conjunction with the new facilities. The Company has $2.0 million of financing from the Pennsylvania Industrial Development Authority available to fund approximately 40% of the cost for the expansion of the Company's production facility in Bedford, Pennsylvania, of which $1.6 million was received during fiscal 1998, and the balance was received during the first fiscal quarter of fiscal 1999. During fiscal 1998, the Company entered into a contract with a general contractor, an entity controlled by a director of the Company, to build a production facility for the motocross motorcycle and the Company's clothing line in Bedford, Pennsylvania. The proposed facility will contain 100,000 square feet on 23.9 acres. The project is expected to cost approximately $7.5 million, of which approximately 13% will be financed by the same agencies which have previously provided financing for the current Bedford facility. The Company anticipates that the new facility will be completed by the fourth quarter of fiscal 1999. In September 1997, the Company's Board of Directors authorized the repurchase by the Company of up to 1,000,000 shares of its common stock at an aggregate price not to exceed $20 million. As of September 21, 1998, the Company repurchased an aggregate of 1,000,000 shares of its common stock under the program at a cost of $16.7 million. In order to accommodate the capital requirements of the repurchase program, in October 1997, the Company and the lender amended its revolving credit facility to allow the Company and its subsidiaries to borrow up to $70,000,000. The amendment to the revolving credit facility included adjustments to specified levels of tangible net worth and cash flow levels that the Company must maintain. 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 $2,000,000 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 $10,000,000 for the purchase of certain real property, which loan has been combined with the previous $2,000,000 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. As of September 21, 1998, a principal amount of $12,000,000 was outstanding under the loan. In July 1998, the Company's Board of Directors authorized a new stock repurchase program by the Company to repurchase up to 1,000,000 shares of its common stock. Shares repurchased under the new program will be additional to the shares repurchased pursuant to the repurchase program announced in September 1997. Purchases by the Company can be made from time to time in the open market or in private transactions. The repurchase program can be suspended or discontinued at any time. Shares repurchased by the Company will be available for general corporate purposes, including the issuance upon exercise of stock options. As of September 21, 1998, the Company repurchased an aggregate of 292,900 shares of its common stock under the program at a cost of $3.5 million. Inflation is not a material factor affecting the Company's results of operations and financial condition. General operating expenses such as salaries, employee benefits and occupancy costs are, however, subject to normal inflationary pressures. 16 17 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. ACCOUNTING DEVELOPMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income", which is effective for financial statements beginning in the first quarter of 1999. SFAS 130 defines the concept of "comprehensive income" and establishes the standards for reporting "comprehensive income." Comprehensive income is defined to include net income, as currently reported, as well as unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments and certain other items not included in the income statement. SFAS 130 also sets forth requirements on how comprehensive income should be presented as part of the issuer's financial statements. The Company is currently assessing how it will disclose comprehensive income in its financial statements. The adoption of SFAS 130 will not affect the Company's earnings, liquidity or capital resources. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for companies with fiscal years beginning after December 15, 1997. SFAS 131 defines the criteria by which an issuer is to determine the number and nature of its "operating segments" and sets forth the financial information that is required to be disclosed about such segments. The Company is currently assessing the manner in which it will disclose the required information. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal quarters beginning after June 15, 1999. SFAS 133 defines the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. In fiscal 1999, the Company will assess how the provisions of this statement will affect its hedging operations and future earnings. At this time, the effect of the adoption of SFAS 133 on future earnings cannot be estimated. YEAR 2000 COMPLIANCE The Company is currently in the process of assessing its exposure to the Year 2000 problem and has established 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 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 internal and third-party service providers. The Company is currently in the modification stage of its Year 2000 remediation program, and anticipates that it will be in the testing and final implementation stages during the second and third fiscal quarters of 1999. In order to mitigate the possibility that the Company may not be successful modifying its current hardware and software applications, which it anticipates to be able to determine by the end of calendar 1998, it is actively evaluating Enterprise Resource Planning systems on the market to replace its current systems. In concert with the Company's assessment of its hardware and software applications, the Company's examination of its Year 2000 exposure also includes the following: (1) the Company is in the process of contacting its hardware and software vendors to determine their Year 2000 readiness, (2) the Company has contacted its major third-party suppliers to determine their status with Year 2000 compliance and is currently evaluating their responses, (3) and the Company is in the process of examining factory equipment with microprocessors to determine if Year 2000 dating effects them operationally. The Company estimates the cost of its remediation effort to be approximately $100,000. At June 27, 1998, the Company had already spent approximately $57,000 in this effort. The Company has 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 its current examination of the Year 2000 problem and its progress with modifications 17 18 to its internal systems, the Company does not anticipate that the Year 2000 problem will have a material adverse impact on its operations. If the Company is unsuccessful in completing its remediation of non-compliant operating systems, correcting 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 been or will be able to identify all of the Year 2000 issues that may affect the Company or that any remedial efforts it takes will adequately address any potential Year 2000 problems. THE EURO On January 1, 1999, certain member countries of the European Union will adopt 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 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. CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE This Annual Report on Form 10-K 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; statements regarding the impact of the Company's brand image, distribution, reputation and innovative products on the successful introduction of new products; statements regarding expected remediation and other costs relating to an environmental condition; statements regarding the effect of pending lawsuits on the Company; statements regarding the impact of the Year 2000 issue and the Euro conversion on computerized information systems; statements regarding the condition of the Company's present facilities and the ability of its present facilities and planned construction to support its current and future production capacity. 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. Among the more important factors which could adversely affect actual results of operations are the following: Seasonality. 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, and historically has resulted in more shipments and significantly stronger results in the third and fourth fiscal quarters (January through June). Beginning 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. Although sales orders are received throughout the course of the year, typically shipments are concentrated in the third and fourth fiscal quarters. The Company's gross margins fluctuate primarily according to product mix, the cost of materials, fluctuations in foreign exchange rates and the timing of product price adjustments 18 19 and markdowns. Although some operating expenses are variable with sales, most expenses are incurred evenly throughout the year. Introduction of New Products. The Company's ability to return to the growth pattern that characterized its operations in recent years is dependent, to a significant degree, on its ability to successfully anticipate and respond to changing consumer demands and trends in a timely manner, including the introduction of new or updated products at prices acceptable to customers. While currently, a substantial part of the Company's sales are attributable to mountain bikes, the introduction of new product lines and innovative product improvements will provide diversification of the Company's products. Additionally, the Company is introducing new products such as the motocross motorcycle. The Company's ability to recover its new product investments and earn a satisfactory profit thereon will depend on its ability to successfully produce the new products at acceptable cost levels and the satisfactory resolution of numerous design and manufacturing issues. In addition, market acceptance of these new products is difficult to predict and may require substantial marketing efforts. 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, import restrictions and exchange rates. 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. Foreign Exchange Rates. A substantial portion of the Company's sales are generated by the Company's foreign subsidiaries. Results of operations by these subsidiaries may be adversely affected by changes in the exchange ratio between the local currencies and the U.S. dollar. A substantial portion of the Company's raw materials are purchased from overseas suppliers. The gross margin of the Company may be adversely affected by changes in the exchange ratio between the U.S. dollar and the local currency of the supplier. Customer Base. Sales of the Company's products are made to specialty bicycle retailers, many of which are small businesses with limited capital. The Company's credit policies are designed to minimize the risks associated with business failures among such customers. Nevertheless, such unpredictable matters as poor weather could have a serious impact on important segments of the Company's customer base. Adverse Weather. The Company's products are primarily used outdoors and therefore adverse weather conditions can have a negative impact on consumer demand. Reliance on Key Vendor and Supplier Relationships. The Company's ability to distribute its products on schedule is highly dependent on timely receipt of an adequate supply of components and materials. The bicycles incorporate numerous components manufactured by other companies. Aluminum tubing, the primary material employed in the Company's manufacturing operations, is available from a number of domestic suppliers. The Company has few long-term agreements with its component manufacturers, and has no long-term agreement with Shimano, its largest single supplier, or with suppliers of many of the materials used in the manufacture of its products. Thus, the Company's supply of materials and components from most of its current suppliers is not assured. 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 flexible relationships, which may be terminated by such suppliers on short notice, or to substitute new suppliers without interruption of supply. The loss of Shimano or certain other key suppliers, or delays or disruptions in the delivery of components or materials, could adversely affect the Company's operations. Discretionary Consumer Spending. Purchases of bicycles, particularly high-performance models including those manufactured by the Company, and the Company's other products are discretionary for consumers. The success of the Company is influenced by a number of economic factors affecting disposable consumer income, such as employment levels, business conditions, interest rates and taxation rates. Adverse changes in these economic factors may restrict consumer spending, thereby negatively affecting the Company's growth and profitability. 19 20 Dependence on Key Personnel. The Company depends substantially on key personnel involved in the research and development, marketing, sales, finance and administration. The loss of the services of one or more of these key persons, particularly the loss of the services of Joseph S. Montgomery, the Company's Chairman, President and Chief Executive Officer could have a material adverse effect on the Company's operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risks relating to the Company's operations result primarily from changes in interest rates and foreign exchange rates, as well as credit risk concentrations. To address these risks the Company enters into various hedging transactions as described below. The Company does not use financial instruments for trading purposes. CREDIT RISKS The Company's customer base is composed of specialty bicycle retailers which 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 fiscal year ended June 27, 1998. As a result of the seasonality of the Company's business, the payment terms offered to its customers generally range from 30 to 180 days depending on the time of year and other factors. FOREIGN CURRENCY AND INTEREST RATE RISKS The Company enters into forward contracts to purchase and sell U.S., European, Australian and Japanese 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 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, Australian dollars and Japanese yen at rates agreed to at inception of the contracts. The Company does not hold foreign currency forward contracts for trading purposes. Deferred gains and losses resulting from effective hedges of existing assets, liabilities or firm commitments are included in prepaid expenses and other current assets and are recognized when the offsetting gains and losses are recognized on the related transaction. The net losses explicitly deferred at June 27, 1998 and June 28, 1997 were not significant. 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. The Company uses borrowings of Japanese yen and Dutch guilders to hedge its net investments in its foreign subsidiaries. Gains and losses on hedges of net investments are recognized in a separate component of stockholders' equity. The Company also hedges exposure to changes in interest rates on its revolving credit facility. On April 28, 1998, the Company entered into five year interest rate hedge agreements with a total notional principal amount of $20 million to manage interest costs associated with changing interest rates. These agreements convert underlying variable-rate debt based on LIBOR under the Company's revolving credit facility to fixed-rate debt with an interest rate of 6.05%. 20 21 The following table provides information about the Company's derivative financial instruments that are sensitive to changes in interest rates. The table presents for the Company's debt obligations, principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents the notional amount and strike rate by maturity date. The notional amount of the interest rate swaps is used to calculate the contractual cash flows to be exchanged under the contract. INTEREST RATE SENSITIVITY PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY INTEREST (SWAP) RATE
FAIR VALUE AT JUNE 27, 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998 ---- ------- ---- ---- ------- ---------- ------- ----------- (IN THOUSANDS) LIABILITIES: Long term debt, including current portion Fixed rate................... $488 $ 355 $310 $314 $ 299 $1,938 $ 3,704 $ 3,617 Average interest rate........ 4.65% 4.66% 3.87% 3.76% 3.76% 3.75% 3.97% Variable rate................ $ 53 $34,742 $125 $128 $ 133 $1,928 $37,109 $37,109 Average interest rate........ 6.20% 5.74% 5.94% 5.94% 5.93% 5.89% 5.75% INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS RELATED TO DEBT: Interest Rate Swaps Pay fixed/receive variable... -- -- -- -- $20,000 -- $20,000 $ (235) Average pay rate............. 6.05% 6.05% 6.05% 6.05% 6.05% -- 6.05% Average receive rate -- USD 1 Month LIBOR................ -- -- -- -- -- -- --
The following table summarizes information on instruments and transactions with the United States dollar functional currency that are sensitive to foreign currency exchange rates, including foreign currency forward exchange agreements. For foreign currency forward exchange agreements, the table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates. These notional amounts are used to calculate the contractual payments to be exchanged under the contract. EXPOSURES RELATED TO DERIVATIVE CONTRACTS AND LONG-TERM DEBT WITH UNITED STATES DOLLAR FUNCTIONAL CURRENCY PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY FORWARD FOREIGN CURRENCY EXCHANGE RATE (USD/FOREIGN CURRENCY)
FAIR VALUE AT JUNE 27, 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998 ------- ------ ------ ------ ------ ---------- ------- ----------- (IN THOUSANDS) FORWARD CONTRACTS TO SELL FOREIGN CURRENCY FOR U.S. DOLLARS: Australian Dollar Notional amount............ $ 610 -- -- -- -- -- $ 610 $ 7 Contract Rate............ 0.6095 0.6095 LONG-TERM DEBT DENOMINATED IN FOREIGN CURRENCIES: Dutch guilder Notional amount............ -- $3,624 -- -- -- -- $ 3,624 $191 Rate at Inception........ -- 0.5177 0.5177 Japanese Yen Notional amount............ -- $2,250 -- -- -- -- $ 2,250 $485 Rate at Inception........ -- 0.0090 0.0090
21 22 The following table summarizes information on instruments and transactions denominated in currencies other than the functional currency that are sensitive to foreign currency exchange rates, including foreign currency forward exchange agreements. For foreign currency forward exchange agreements, the table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates. These notional amounts are used to calculate the contractual payments to be exchanged under the contract. EXPOSURES RELATED TO DERIVATIVE CONTRACTS WITH DUTCH GUILDER FUNCTIONAL CURRENCY PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY FORWARD FOREIGN CURRENCY EXCHANGE RATE (NLG/FOREIGN CURRENCY)
FAIR VALUE AT JUNE 27, 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998 ------- ------ ------ ------ ------ ---------- ------- ----------- (IN THOUSANDS) FORWARD CONTRACTS TO SELL FOREIGN CURRENCY FOR DUTCH GUILDERS: Spanish Peseta Notional amount................... $ 653 -- -- -- -- -- $ 653 $ 2 Contract Rate................... 0.0133 0.0133 British Sterling Notional amount................... $ 2,176 -- -- -- -- -- $ 2,176 $ 5 Contract Rate................... 3.4124 3.4124 Italian Lira Notional amount................... $ 1,474 -- -- -- -- -- $ 1,474 $ 3 Contract Rate................... 0.0012 0.0012 FORWARD CONTRACTS TO BUY FOREIGN CURRENCY FOR DUTCH GUILDERS: Japanese Yen Notional amount................... $ 1,070 -- -- -- -- -- $ 1,070 $ 13 Contract Rate................... 0.0145 0.0145 United States Dollars Notional amount................... $ 4,400 -- -- -- -- -- $ 4,400 $(86) Contract Rate................... 1.9642 1.9642
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. 22 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 is incorporated by reference to the information appearing under the captions "Item 1 -- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to its 1998 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 of the Registrant" 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 1998 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 1998 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 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year. 23 24 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 27, 1998 and June 28, 1997. Consolidated Statements of Earnings for the years ended June 27, 1998, June 28, 1997 and June 29, 1996. Consolidated Statements of Stockholders' Equity for the years ended June 27, 1998, June 28, 1997 and June 29, 1996. Consolidated Statements of Cash Flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996. 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. The following is a list of all exhibits filed as part of this report.
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1(i) Amended and Restated Certificate of Incorporation of the Company.* 3.1(ii) Amended and Restated Bylaws of the Company.* 4.1 Rights Agreement, dated December 22, 1997, between the Company and BankBoston, N.A., as Rights Agent.(6) 4.2 1994 Stock Option Plan, as amended as of February 5, 1998.(1) 4.3 1994 Management Stock Option Plan, as amended as of February 5, 1998.(1) 4.4 1995 Stock Option Plan, as amended as of February 5, 1998.(1) 4.5 1996 Stock Option Plan, as amended as of February 5, 1998.(1) 10.1.8 $50,000,000 Credit Agreement, dated as of June 9, 1997, among the Company, certain subsidiaries of the Company and NationsBank N.A., as Administrative Agent, Fronting Bank and Swingline Bank and ABN Amro Bank N.V., New York Branch, as Documentation Agent and Syndication Agent.(2) 10.1.9 $10,000,000 Umbrella Arrangement Agreement, dated May 28, 1997, between Cannondale Europe and ABN Amro N.V., New York Branch.(2) 10.1.10 First Amendment to Credit Agreement, dated October 14, 1997, among the Company, certain subsidiaries of the Company and NationsBank N.A., ABN Amro Bank N.V., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(3) 10.1.11 Credit Agreement, dated February 5, 1998, between Cannondale Europe and ABN AMRO Bank N.V.(4)
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EXHIBIT NO. DESCRIPTION ------- ----------- 10.1.12 Second Amendment to Credit Agreement, dated April 15, 1998, among the Company, certain subsidiaries of the Company and NationsBank N.A., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(1) 10.1.13 Third Amendment to Credit Agreement, dated May 29, 1998, among the Company, certain subsidiaries of the Company and NationsBank N.A., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(1) 10.1.14 Fourth Amendment to Credit Agreement, dated June 25, 1998, among the Company, certain subsidiaries of the Company and NationsBank N.A., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(1) 10.6 Promissory Note, dated December 27, 1993, from the Company to General Electric Capital Corporation.* 10.7 Installment Sales Agreement, dated August 28, 1981, between the Company and Bedford Development Council. Amendments to Installment Sales Agreement, dated May 29, 1987, September 1, 1988 and October 26, 1993. Assignment of Fifth Supplemental Installment Sale Agreement, dated October 26, 1993, from Bedford Development Council to The Pennsylvania Industrial Development Authority.* 10.8 Consent, Subordination and Assumption Agreements, between the Company and Bedford Development Council, in favor of The Pennsylvania Industrial Development Authority, dated August 28, 1981, May 7, 1982, May 11, 1983, May 29, 1987, September 1, 1988, and October 26, 1993.* 10.9 Installment Sale Agreement, dated April 27, 1994, between the Company and Bedford Development Council. Assignment, dated April 27. 1994, from Bedford Development Council to Pennsylvania Industrial Development Authority.* 10.10 Consent, Subordination and Assumption Agreement, dated April 27, 1994, between the Company and Bedford Development Council, in favor of The Pennsylvania Industrial Development Authority.* 10.11 Loan Agreement, dated November 10, 1989, between the Company and Rush Township, Commonwealth of Pennsylvania.* 10.12 Promissory Note, dated November 10, 1989, from the Company to Rush Township, Commonwealth of Pennsylvania.* 10.13 Mortgage, dated November 10, 1989, from the Company to Rush Township, Commonwealth of Pennsylvania. Assignment of Note and Mortgage, dated June 30, 1989, from Rush Township, Commonwealth of Pennsylvania to Pennsylvania Department of Commerce.* 10.14 Loan Agreement, dated July 24, 1990, between the Company and Rush Township, Commonwealth of Pennsylvania.* 10.15 Promissory Note, dated July 24, 1990, from the Company to Rush Township, Commonwealth of Pennsylvania.* 10.16 Mortgage, dated July 24, 1990, from the Company to Rush Township Commonwealth of Pennsylvania.* 10.17 Installment Sales Agreement, dated December 4, 1990, between the Company and Moshannon Valley Economic Development Partnership. Assignment, dated December 4, 1990, from Moshannon Valley Economic Development Partnership to The Pennsylvania Industrial Development Authority.*
25 26
EXHIBIT NO. DESCRIPTION ------- ----------- 10.18 Mortgage Subordination Agreement, dated December 4, 1990, among the Company, Moshannon Valley Economic Development Partnership, Rush Township, Commonwealth of Pennsylvania and The Pennsylvania Industrial Development Authority.* 10.19 Consent, Subordination and Assumption Agreement, dated December 4, 1990, between the Company and Moshannon Valley Economic Development Partnership, in favor of The Pennsylvania Industrial Development Authority.* 10.20 Loan Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership.* 10.21 Installment Judgment Note, dated February 1, 1992, from the Company to Moshannon Valley Economic Development Partnership.* 10.22 Chattel Mortgage Security Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership.* 10.23 Business Infrastructure Development Loan Agreement, dated June 30, 1989, among the Company, Pennsylvania Department of Commerce and Rush Township, Commonwealth of Pennsylvania.* 10.24 Promissory Note, dated June 30, 1989, from the Company to Pennsylvania Department of Commerce. Amendment to Promissory Note, dated February 1, 1992, from the Company to Pennsylvania Department of Commerce.* 10.25 Escrow Agreement, dated June 30, 1989, among the Company, Rush Township, Commonwealth of Pennsylvania, Pennsylvania Department of Commerce and MidState Bank and Trust Company.* 10.26 Mortgage, dated July 23, 1991, from Cannondale Europe to Algemene-Bank Netherlands B.V. (In Dutch, with English summary).* 10.27 Financing Lease, dated May 31, 1991, between ABN Onroerend Goed Lease B.V., as lessor, and Cannondale Europe, as lessee. (In Dutch, with English translation).* 10.28 Loan Agreement, dated February 1, 1994, between Cannondale Europe and ABN AMRO Bank N.V. (In Dutch, with English translation).* 10.28.1 Loan Agreement Amendment, effective December 1, 1995, between Cannondale Europe and ABN Amro Bank N.V.@ 10.29 Term Loan Agreement, dated March 29, 1994, between Cannondale Europe and the Company.* 10.29.1 Subordination Agreement, dated March 23, 1993, between the Company and ABN AMRO Bank N.V. (In Dutch, with English translation).* 10.30 Loan Agreement, dated September 1, 1992, between Cannondale Japan and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese, with English translation).* 10.30.1 Guarantee Agreement, dated August 7, 1992, from the Company to The Dai-Ichi Kangyo Bank, Ltd.* 10.31 Master Lease Agreement, dated as of July 27, 1993, between General Electric Capital Corporation and the Company, to which are appended Equipment Schedule No. 1, dated August 6, 1993, and Equipment Schedule No. 2, dated August 6, 1993.* 10.32 Master Lease Agreement, dated April 11, 1994, between United States Leasing Corporation and the Company.* 10.33 Master Lease, dated June 17, 1991, between Norwest Equipment Finance, Inc. and the Company, together with Supplement to Master Lease.* 10.34 Master Lease Agreement, dated October 31, 1989, between Ford Equipment Leasing Company and the Company, to which is appended Schedule No. 3, dated February 22, 1991.*
26 27
EXHIBIT NO. DESCRIPTION ------- ----------- 10.35 Master Equipment Lease, dated May 26, 1993, between XL/Datacomp, Inc. and the Company, to which are appended Schedule A, dated May 26, 1993, and Schedule B, dated August 3, 1993.* 10.36 (Intentionally omitted) 10.37 Master Lease Agreement, dated May 23, 1991, between Center Capital Corporation and the Company, to which are appended Lease Schedule No. 1, dated May 23, 1991, and Lease Schedule No. 2, dated May 23, 1991.* 10.38 Equipment Lease Agreement, dated July 11, 1991, between New England Capital Corporation and the Company, to which is appended Lease Schedule No. 528102, dated November 8, 1991.* 10.39 Equipment Lease Agreement, dated March 26, 1992, between Citicorp Leasing, Inc. and the Company.* 10.40 Equipment Lease Agreement, executed as of May 3, 1991, between Greenwich Financial Services Inc. and the Company, to which are appended Schedule No. 1, dated May 3, 1991, and Schedule No. 2, dated May 3, 1991. Assignment from Greenwich Financial Services, Inc. to United States Capital Corporation, dated May 3, 1991.* 10.42 Sponsor Agreement, dated December 5, 1993, between the Company and Team Sports, Inc. (Certain portions of this Exhibit have been deleted pursuant to a requst for confidential treatment.)* 10.43 Agreement, dated March 2, 1994, between the Company and Bell Sports, Inc. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)* 10.44 Agreement, dated July 11, 1994, between the Company and Frank Roth Company. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)* 10.45 Agreement, dated July 28, 1994, between the Company and Quadrax Corporation. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)* 10.46 Precision Machine Tool Design and Research Center Membership Agreement, dated March 14, 1994, between the University of Connecticut and the Company.* 10.47 (Intentionally omitted) 10.48 Employment Agreement, dated January 3, 1994, between the Company and William A. Luca.* 10.49 Employee Patent and Confidential Information Agreement, dated August 20, 1982, between the Company and Daniel C. Alloway.* 10.50 Ownership and Confidentiality Agreement, dated June 21, 1988, between the Company and Richard J. Resch.* 10.51 Ownership and Confidentiality Agreement, dated May 30, 1990, between the Company and Harold DeWaltoff.* 10.52 Employment Agreement, dated December 1, 1993, between the Company and Daniel Pullman.* 10.53 Employment Agreement, dated June 6, 1994, between the Company and Leonard Konecny.* 10.54 Cannondale Corporation 401(k) Profit Sharing Plan.* 10.57 Cannondale Corporation Employee Stock Purchase Plan.*
27 28
EXHIBIT NO. DESCRIPTION ------- ----------- 10.58 Stockholders Agreement, dated as of June 3, 1992, among the Company, Princes Gate Investors, LP., Acorn Partnership L.L.P., PGI Investments Limited, Joseph S. Montgomery, James Scott Montgomery and PG Investors, Inc. Amendment No. 1 to Stockholders Agreement, dated as of July 2, 1993. Amendment No. 2 to Stockholders Agreement, dated July 28, 1994. Amendment No. 3 to Stockholders Agreement, dated as of August 10, 1994. Letter (undated) from the Company to Princes Gate Investors, LP., Acorn Partnership LLP, PGI Investments Limited and PG Investors. Inc.* 10.59 (Intentionally omitted) 10.60 Form of Indemnification Agreement between the Company and each of its directors and officers.* 10.61 Agreement between the Company and Mark-It Company, executed by the parties on September 16, 1994, and September 2, 1994, respectively. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)* 10.62 Aluminum Supply Agreement, dated November 16, 1994. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)+ 10.63 Contract of Sale, dated September 29, 1996, between Cannondale and Sandvick Associates, Inc., together with Assignment and Assumption Agreement dated as of September 30, 1996, between Sandvick Associates, Inc. and Nantucket Roost Associates, LLC.*** 10.64 Agreement of Lease, dated as of October 4, 1996, between Nantucket Roost Associates, LLC and Cannondale. *** 10.67 Aircraft Lease, dated as of October 6, 1996, between JSM, Inc. and Cannondale.**** 10.68 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and William A. Luca.(5) 10.68.1 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and Joseph S. Montgomery.(5) 10.68.2 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and John Moriarty.(5) 10.68.3 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and Daniel C. Alloway.(5) 10.68.4 Cannondale Corporation Change of Control Separation Plan A.(5) 10.68.5 Cannondale Corporation Change of Control Separation Plan B.(5) 21 Subsidiaries of the Registrant.(1) 23 Consent of Independent Auditors(1) 27.A Restated Financial Data Schedule for Fiscal Year Ended June 29, 1996(1) 27.B Restated Financial Data Schedule for Fiscal Year Ended June 28, 1997(1) 27.C Financial Data Schedule for Fiscal Year Ended June 27, 1998(1)
- --------------- * Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Registration Statement on Form S-1, Registration No. 33-84566 + Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended December 31, 1994. ++ Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended April 1, 1995. @ Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended December 30, 1995. 28 29 *** Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended September 28, 1996. **** Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended December 28, 1996. (1) Filed herewith. (2) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-K/A filed for the year end June 28, 1997. (3) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q for the quarterly period ended December 27, 1997. (4) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q for the quarterly period ended March 28, 1998. (5) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q/A for the quarterly period ended March 28, 1998. (6) Incorporated by reference to the registrant's Form 8-K filed on December 23, 1997. The Company undertakes to provide a copy of any of the foregoing Exhibits to any Company stockholder of record on September 30, 1998. Requests should be made in writing to the Company at 16 Trowbridge Drive, Bethel, Connecticut 06801, 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 29 30 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, 1998 /s/ WILLIAM A. LUCA -------------------------------------- William A. Luca Vice President of Finance, Treasurer and Chief Financial Officer KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William A. Luca his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOSEPH S. MONTGOMERY Chairman, President, Chief September 25, 1998 - ----------------------------------- Executive Officer and Director Joseph S. Montgomery (Principal Executive Officer) /s/ WILLIAM A. LUCA Vice President of Finance, September 25, 1998 - ----------------------------------- Treasurer, Chief Financial William A. Luca Officer, and Director (Principal Financial Officer) /s/ DANIEL C. ALLOWAY Vice President Sales -- United September 25, 1998 - ----------------------------------- States and Vice President of Daniel C. Alloway European Operations and Director /s/ JOHN P. MORIARTY Assistant Treasurer and Assistant September 25, 1998 - ----------------------------------- Secretary, Director of Accounting John P. Moriarty (Principal Accounting Officer) /s/ JAMES S. MONTGOMERY Director September 25, 1998 - ----------------------------------- James S. Montgomery /s/ JOHN H.T. WILSON Director September 25, 1998 - ----------------------------------- John H.T. Wilson Director September 25, 1998 - ----------------------------------- John Sanders /s/ MICHAEL J. STIMOLA Director September 25, 1998 - ----------------------------------- Michael J. Stimola
30 31 CANNONDALE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997...................................................... F-3 Consolidated Statements of Earnings for the years ended June 27, 1998, June 28, 1997 and June 29, 1996................. F-4 Consolidated Statements of Stockholders' Equity for the years ended June 27, 1998, June 28, 1997 and June 29, 1996...................................................... F-5 Consolidated Statements of Cash Flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996............ F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 32 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 27, 1998 and June 28, 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996. 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 27, 1998 and June 28, 1997, and the consolidated results of their operations and their cash flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Stamford, Connecticut August 10, 1998, except for Note 15, as to which the date is September 22, 1998 F-2 33 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 27, 1998 JUNE 28, 1997 --------------- --------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash...................................................... $ 3,031 $ 5,521 Trade accounts receivable, less allowances of $8,479 and $6,432................................................. 61,746 61,272 Inventory................................................. 39,420 30,105 Deferred income taxes..................................... 2,172 2,623 Prepaid expenses and other current assets................. 4,449 2,386 -------- -------- Total current assets........................................ 110,818 101,907 Property, plant and equipment............................... 35,769 23,105 Notes receivable and advances to related parties............ 2,688 227 Other assets................................................ 3,002 2,045 -------- -------- Total assets................................................ $152,277 $127,284 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 16,747 $ 12,330 Revolving line of credit.................................. 2,141 1,022 Income taxes payable...................................... 1,732 2,946 Other accrued expenses.................................... 3,838 3,916 Accrued warranty expense.................................. 1,982 2,085 Payroll and other employee related benefits............... 2,142 1,850 Payable to related party.................................. 2,800 -- Current installments of long-term debt.................... 461 562 -------- -------- Total current liabilities................................... 31,843 24,711 Long-term debt, less current installments................... 40,352 20,319 Deferred income taxes....................................... 1,569 339 Other noncurrent liabilities................................ 275 294 -------- -------- Total liabilities........................................... 74,039 45,663 -------- -------- Stockholders' equity: Common Stock, $.01 par value: Authorized shares -- 40,000,000 Issued shares -- 8,737,088, issued and outstanding shares -- 8,687,615................................... 87 87 Additional paid-in capital................................ 57,303 56,860 Retained earnings......................................... 35,405 26,053 Less 656,400 shares in treasury at cost................... (12,417) -- Cumulative translation adjustment......................... (2,140) (1,379) -------- -------- Total stockholders' equity.................................. 78,238 81,621 -------- -------- Total liabilities and stockholders' equity.................. $152,277 $127,284 ======== ========
See accompanying notes F-3 34 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............................................ $171,496 $162,496 $145,976 Cost of sales........................................ 110,113 101,334 92,804 -------- -------- -------- Gross profit......................................... 61,383 61,162 53,172 -------- -------- -------- Expenses: Selling, general and administrative................ 39,361 35,707 32,577 Research and development........................... 6,750 3,576 2,837 -------- -------- -------- 46,111 39,283 35,414 -------- -------- -------- Operating income..................................... 15,272 21,879 17,758 -------- -------- -------- Other income (expense): Interest expense................................... (1,995) (1,574) (2,224) Other income....................................... 653 843 414 -------- -------- -------- (1,342) (731) (1,810) -------- -------- -------- Income before income taxes........................... 13,930 21,148 15,948 Income tax expense................................... (4,578) (7,642) (5,802) -------- -------- -------- Net income........................................... $ 9,352 $ 13,506 $ 10,146 ======== ======== ======== Basic income per share............................... $ 1.11 $ 1.56 $ 1.23 Diluted income per share............................. $ 1.08 $ 1.51 $ 1.19
See accompanying notes F-4 35 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK CUMULATIVE ----------------- PAID-IN RETAINED ------------------- TRANSLATION SHARES VALUE CAPITAL EARNINGS SHARES VALUE ADJUSTMENT TOTAL --------- ----- ---------- -------- -------- -------- ----------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 Net income.................. -- -- -- 13,506 -- -- -- 13,506 Exercise of options......... 75,900 1 895 -- -- -- -- 896 Foreign currency adjustment................ -- -- -- -- -- -- (1,075) (1,075) --------- --- ------- ------- -------- -------- ------- -------- Balance at June 28, 1997...... 8,687,615 87 56,860 26,053 -- -- (1,379) 81,621 Net income.................. -- -- -- 9,352 -- -- -- 9,352 Exercise of options......... 49,473 -- 443 -- -- -- -- 443 Purchase of treasury stock..................... -- -- -- -- (656,400) (12,417) -- (12,417) Foreign currency adjustment................ -- -- -- -- -- -- (761) (761) --------- --- ------- ------- -------- -------- ------- -------- Balance at June 27, 1998...... 8,737,088 $87 $57,303 $35,405 (656,400) $(12,417) $(2,140) $ 78,238 ========= === ======= ======= ======== ======== ======= ========
See accompanying notes F-5 36 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996 ------------- ------------- ------------- (IN THOUSANDS) OPERATING ACTIVITIES Net income........................................... $ 9,352 $13,506 $10,146 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................... 4,054 3,211 2,994 Provision for bad debt, discount, credit and return and late charge reserves............... 7,141 5,762 10,114 Provision for obsolete inventory................ 1,425 1,484 883 Unrealized (gain) loss on foreign currency transactions.................................. 642 107 (43) Deferred income taxes........................... 425 (442) (616) Other........................................... 16 (1) 31 Changes in assets and liabilities: Trade accounts receivable..................... (8,894) (17,399) (25,136) Inventory..................................... (11,589) (1,975) (10,402) Prepaid expenses and other assets............. (3,319) (2,089) 174 Accounts payable.............................. 4,711 138 3,058 Warranty and other accrued expenses........... 3,174 805 323 Income taxes payable and other liabilities.... 36 1,470 1,686 -------- ------- ------- Net cash provided by (used in) operating activities......................................... 7,174 4,577 (6,788) -------- ------- ------- INVESTING ACTIVITIES Capital expenditures................................. (16,762) (9,766) (3,023) Proceeds from sale of building....................... -- 1,676 -- Loans provided to related parties.................... (2,461) (227) -- -------- ------- ------- Net cash used in investing activities................ (19,223) (8,317) (3,023) -------- ------- ------- FINANCING ACTIVITIES Net proceeds from the issuance of common stock....... 443 896 22,686 Payments for the purchase of treasury stock.......... (12,417) -- -- Proceeds from issuance of long-term debt............. 3,203 21,383 489 Net proceeds from (repayments of) borrowings under short-term revolving credit agreements............. 1,291 (3,555) 478 Net proceeds from (repayments of) borrowings under long-term debt and capital lease agreements........ 16,833 (15,133) (11,291) -------- ------- ------- Net cash provided by financing activities............ 9,353 3,591 12,362 -------- ------- ------- Effect of exchange rate changes on cash.............. 206 1,365 (501) -------- ------- ------- Net increase (decrease) in cash...................... (2,490) 1,216 2,050 Cash at beginning of period.......................... 5,521 4,305 2,255 -------- ------- ------- Cash at end of period................................ $ 3,031 $ 5,521 $ 4,305 ======== ======= ======= SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest........................................... $ 2,071 $ 1,781 $ 2,426 ======== ======= ======= Income taxes, net of refunds....................... $ 7,341 $ 6,788 $ 4,375 ======== ======= =======
See accompanying notes F-6 37 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Description of Business Cannondale Corporation (the "Company") manufactures and distributes bicycles and bicycling accessories and equipment. International operations are conducted through the Company's wholly-owned subsidiaries: Cannondale Europe B.V. ("Cannondale Europe"), Cannondale Japan KK ("Cannondale Japan") and Cannondale Australia Pty Limited ("Cannondale Australia"). 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 27, 1998, June 28, 1997 or June 29, 1996. As a result of the seasonality of the Company's business, the payment terms offered to its customers generally range from 30 to 180 days depending on the time of year and other factors. 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. That single supplier was the source of approximately 17% of the Company's total inventory purchases in fiscal 1998. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company 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 either a one year, five year or lifetime warranty for the bicycle frame, depending on model type 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 21 to 40 years for buildings and improvements and 3 to 10 years for equipment. Amortization of assets recorded under F-7 38 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Interest costs for the construction of certain long-term assets are capitalized and amortized over the related asset's useful life. The Company capitalized interest costs of $88,000 and $133,000 for the years ended June 27, 1998 and June 28, 1997, respectively, related to the construction of the Company's new headquarters facility and the expansion of the manufacturing facility. Total interest incurred before the recognition of the capitalized amount was $2,083,000 and $1,707,000 for fiscal 1998 and 1997, respectively. There was no interest capitalized in fiscal 1996. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") 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 The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at current exchange rates. Revenues, costs and expenses are translated at the average exchange rates applicable for the period. Translation adjustments resulting from changes in exchange rates are reported as a separate component of stockholders' equity. 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 were translated at year-end exchange rates, while revenues and expenses were 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. Financial Instruments The Company enters into forward contracts to purchase and sell U.S., European, Japanese and Australian 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 a component of other income or expense. During fiscal 1998, the Company entered into interest rate swap agreements to manage exposure to fluctuations in interest rates. The differential between the interest paid or received on a specified notional amount is recognized as an adjustment to interest expense. The fair value of the swap agreements and changes in the fair value as a result of changes in the fair value of market interest rates are not recognized in the financial statements. F-8 39 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock-Based Compensation The Company grants stock options to officers, directors, employees, consultants and advisors with an exercise price determined by the Board of Directors at the time of grant. The Company accounts for stock option grants, except for those granted to consultants and advisors of the Company, in accordance with Accounting Principles Board Standard ("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 and the amount that the employee is required to pay. The Company accounts for stock option grants to consultants and advisors in accordance with SFAS 123 and has not incurred any material charges to date. As prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has disclosed in Note 7 the pro-forma effects on net income and earnings per share of recording compensation expense for the fair value of stock options granted subsequent to July 1, 1995. It is the opinion of management that the existing model to estimate the fair value of employee options according to SFAS 123, and the assumptions used to calculate the impact, may not be representative of the effects on future years and does not necessarily provide a reliable single measure of the fair value of its employee stock options. 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. Earnings per Share Amounts In 1997, the FASB ("Financial Accounting Standards Board") issued SFAS 128, "Earnings Per Share." SFAS Statement 128 replaced the calculation of 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 have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. Reclassifications Certain 1997 amounts have been reclassified to conform to the current year's presentation. Intangible Assets Included in other assets are intangible assets, which represent the cost of patents, goodwill and deferred financing charges. Intangible assets were $1,395,000 and $1,260,000 at June 27, 1998 and June 28, 1997, respectively. Accumulated amortization on intangible assets amounted to $314,000 and $234,000 at June 27, 1998 and June 28, 1997, respectively. Amortization of goodwill and patents is provided using the straight-line method over the estimated useful lives of the assets, not exceeding 17 years. Amortization of deferred financing charges is provided over the term of the related debt instrument. Advertising Expenses Advertising expenses are charged to income during the year that they are incurred. Selling, general and administrative expenses of the Company include advertising and promotion costs of $3,906,000, $3,867,000 and $2,780,000 for the years ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively. F-9 40 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accounting Developments In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income", which is effective for financial statements beginning in the first fiscal quarter of 1999. SFAS 130 defines the concept of "comprehensive income" and establishes the standards for reporting "comprehensive income." Comprehensive income is defined to include net income, as currently reported, as well as unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments and certain other items not included in the income statement. SFAS 130 also sets forth requirements on how comprehensive income should be presented as part of the issuer's financial statements. The Company is currently assessing how it will disclose comprehensive income in its financial statements. The adoption of SFAS 130 will not affect the Company's earnings, liquidity or capital resources. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for companies with fiscal years beginning after December 15, 1997. SFAS 131 defines the criteria by which an issuer is to determine the number and nature of its "operating segments" and sets forth the financial information that is required to be disclosed about such segments. The Company is currently assessing the manner in which it will disclose the required information. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal quarters beginning after June 15, 1999. SFAS 133 defines the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. In fiscal 1999, the Company will assess how the provisions of this statement will affect its hedging operations and future earnings. At this time, the effect of the adoption of SFAS 133 on future earnings cannot be estimated. 2. INVENTORY The components of inventory are as follows (in thousands):
JUNE 27, 1998 JUNE 28, 1997 ------------- ------------- Raw materials...................................... $20,439 $13,394 Work-in process.................................... 2,856 1,455 Finished goods..................................... 16,931 16,325 ------- ------- 40,226 31,174 Less reserve for obsolete inventory................ (806) (1,069) ------- ------- $39,420 $30,105 ======= =======
F-10 41 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 27, 1998 JUNE 28, 1997 ------------- ------------- Land............................................... $ 1,270 $ 1,324 Buildings and improvements......................... 18,328 8,700 Factory and office equipment....................... 33,366 24,388 Cessna Citation jet................................ 2,800 -- Construction and projects in progress.............. 1,577 6,493 -------- -------- 57,341 40,905 Less accumulated depreciation and amortization..... (21,572) (17,800) -------- -------- $ 35,769 $ 23,105 ======== ========
Purchases of equipment through capitalized lease obligations and notes were $28,000 and $291,000 in fiscal 1997 and 1996, respectively. The Company did not enter into any capital leases during fiscal 1998. 4. EARNINGS PER SHARE The following table is an illustration of the reconciliation of the numerator and denominator of basic and diluted income per share computations and other related disclosures required by SFAS 128 (in thousands, except earnings per share data):
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996 ------------- ------------- ------------- NUMERATOR: Numerator for basic and diluted earnings per share -- income available to common stockholders... $9,352 $13,506 $10,146 ====== ======= ======= DENOMINATOR: Denominator for basic earnings per share -- weighted-average shares... 8,442 8,638 8,216 Effect of dilutive securities: Employee stock options............. 240 278 283 ------ ------- ------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions..... 8,682 8,916 8,499 ====== ======= ======= Basic earnings per share............. $ 1.11 $ 1.56 $ 1.23 ====== ======= ======= Diluted earnings per share........... $ 1.08 $ 1.51 $ 1.19 ====== ======= =======
The average number of options to purchase shares of common stock excluded from the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares, therefore, having an antidilutive effect, were 377,528, 118,844 and 16,578 for fiscal 1998, 1997 and 1996, respectively. F-11 42 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. DEBT Short-term revolving credit advances (in thousands):
JUNE 27, 1998 JUNE 28, 1997 ------------- ------------- Cannondale Europe.................................. $1,578 $ 193 Cannondale Japan................................... 563 829 ------ ------ $2,141 $1,022 ====== ======
In February 1998, Cannondale Europe entered into a multicurrency credit arrangement, which allows Cannondale Europe to borrow up to 12,500,000 Dutch guilders (approximately $6,131,000 at June 27, 1998) on a short-term basis. The interest rate on outstanding borrowings is a market rate, applicable to the currencies borrowed, plus 1.5% with a minimum rate of 3.5%. The credit arrangement contains no specific expiration date, and may be terminated by either the borrower or the lender, at any time. Cannondale Europe's multicurrency credit arrangement is guaranteed by Cannondale U.S.. Prior to establishing the February 1998 agreement, Cannondale Europe entered into a multi-currency credit arrangement, which allowed Cannondale Europe to borrow up to $10,000,000 on a short-term basis. The interest rate on outstanding borrowings was a market rate, applicable to the borrowed currencies, plus 1.5% with a minimum rate of 3.5%. The credit arrangement contained no specific expiration date, and could have been terminated by either the borrower or the lender, at any time. Cannondale Japan has an unsecured revolving credit facility for up to 155,000,000 Japanese yen (approximately $1,092,000 at June 27, 1998). The interest rate on the outstanding borrowings was 2.875% at June 27, 1998 and June 28, 1997. The credit facility contains no specific expiration date, and may be terminated by either the borrower or the lender, at any time. Cannondale Japan's unsecured revolving credit facility is guaranteed by Cannondale U.S.. The weighted average interest rate on the Company's revolving lines of credit was 5.05% and 4.48% at June 27, 1998 and June 28, 1997, respectively. Long-Term Debt (in thousands):
JUNE 27, 1998 JUNE 28, 1997 ------------- ------------- Revolving credit facility.......................... $34,661 $17,278 Pennsylvania Industrial Development Authority bonds, interest rates ranging from 2.0% to 4.5%............................................. 3,049 1,605 Connecticut Development Authority Loan............. 1,602 -- Algemene Bank Nederland N.V........................ 846 937 Rush Township Construction Loan, interest at 3.0%............................................. 378 422 Daiichi Kangyo Bank term loan, interest at 3.25%... 115 290 Notes secured by equipment and capitalized leases........................................... 162 349 ------- ------- 40,813 20,881 Less current portion............................... (461) (562) ------- ------- $40,352 $20,319 ======= =======
In June 1997, the Company entered into an unsecured, multicurrency revolving credit facility. The agreement, as amended in October 1997, which extends to June 2000, allows the Company and its subsidiaries to borrow up to $70,000,000 until September 1998, when the commitment of the lenders decreases by $1,250,000 each quarter thereafter. The agreement includes a provision that permits the Company to borrow F-12 43 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) up to $10,000,000 of the $70,000,000 facility on a short-term basis (less than 30 days). The outstanding borrowings consisted of U.S. dollars ($27,500,000 and $6,413,000), Dutch guilders (11,000,000 and 17,000,000) and Japanese yen (250,705,000 and 250,705,000) at June 27, 1998 and June 28, 1997, respectively. The agreement requires the maintenance of specified levels of cash flow, capitalization, interest coverage and tangible net worth. The Company has the option to borrow at the following rates: (1) a variable rate (8.50% at June 28, 1997) 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 (6.225% and 6.275% at June 27, 1998 and June 28, 1997, respectively) that is an offered rate per annum quoted by the bank; or (3) the LIBOR (London Interbank Offered Rate) applicable to the currency borrowed plus an interest rate margin ("LIBOR margin"). At June 27, 1998, the rate(s) of outstanding borrowings under the LIBOR option ranged from 6.175% to 6.44% for U.S. dollar borrowings, and were 4.24% and 4.25% for Dutch guilder borrowings and was 1.29% for Japanese yen borrowings. At June 28, 1997, the rates of outstanding borrowings under the LIBOR option were 3.25% and .56% for Dutch guilder and Japanese yen borrowings, respectively . The LIBOR margin (ranging from 30.0 to 75.0 basis points) is determined quarterly based upon predetermined performance criteria. The Company is obligated to pay a facility fee (ranging from 15.0 to 25.0 basis points) on the balance of the facility based on the same performance criteria as the LIBOR margin. The LIBOR margin was 75.0 basis points and 42.5 basis points at June 27, 1998 and June 28, 1997, respectively. The facility fee was 25.0 basis points and 20.0 basis points at June 27, 1998 and June 28, 1997, respectively. The weighted average interest rate for borrowings under this facility was 5.74% and 4.54% at June 27, 1998 and June 28, 1997, respectively. The Pennsylvania Industrial Development Authority bonds are secured by the Company's Bedford, Pennsylvania facility. The loans extend through 2013, and are payable in equal monthly payments. The Connecticut Development Authority loan is secured by the Company's Bethel, Connecticut headquarters and research and development facility. The interest rate is fixed at 5.75% until January 1999; thereafter, the interest rate will be adjusted annually to yield the U.S. Government Securities Ten Year Treasury. The loan is payable in monthly installments with no obligation to amortize the principal portion of the loan until February 2000. Thereafter, the loan is payable in amounts sufficient to amortize the principal balance over a fifteen-year term plus interest, with the balance due on February 1, 2008. The Algemene Bank of Nederland N.V. loan is secured by Cannondale Europe's factory in Oldenzaal, Netherlands. The interest rate is a variable market rate determined quarterly with a maximum of 7.55%. The interest rate was 6.2% and 5.9% at June 27, 1998 and June 28, 1997, respectively. The loan extends to May 2004 and is payable quarterly in Dutch guilders with equal principal payments plus interest, and the balance of 1,100,000 Dutch guilders (approximately $540,000 at June 27, 1998) due at the expiration of the agreement. The Rush Township Construction Loan is secured by the Company's Philipsburg, Pennsylvania facility. The loan extends through 2003, and is payable in equal monthly installments. The Daiichi Kangyo Bank term loan is unsecured. The loan extends through 1999, and is payable in quarterly installments. Capitalized lease obligations extend through 2000, and represent the present value of future minimum lease payments, discounted at rates ranging from 7.5% to 9.54%, payable in monthly installments. F-13 44 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): 1999............................................... $ 544 2000............................................... 35,097 2001............................................... 435 2002............................................... 442 2003............................................... 432 Thereafter......................................... 3,866 ------- 40,816 Amounts representing interest on capital lease obligations...................................... (3) ------- $40,813 =======
6. INCOME TAXES Income (loss) before income taxes by geographic location is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27,1998 JUNE 28,1997 JUNE 29,1996 ------------ ------------ ------------ United States.......................... $ (872) $ 7,770 $ 5,925 Foreign................................ 14,802 13,378 10,023 ------- ------- ------- $13,930 $21,148 $15,948 ======= ======= =======
The income tax provision consists of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27,1998 JUNE 28,1997 JUNE 29,1996 ------------ ------------ ------------ Current: Federal.............................. $ (786) $2,884 $2,281 Foreign.............................. 5,067 4,698 3,551 State................................ (128) 502 586 ------ ------ ------ Total Current................ 4,153 8,084 6,418 ------ ------ ------ Deferred: Federal.............................. 412 (408) (384) Foreign.............................. (59) 36 (189) State................................ 72 (70) (43) ------ ------ ------ Total Deferred............... 425 (442) (616) ------ ------ ------ Total........................ $4,578 $7,642 $5,802 ====== ====== ======
F-14 45 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes on income before income taxes 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 27,1998 JUNE 28,1997 JUNE 29,1996 ------------ ------------ ------------ Tax at U.S. statutory rate............. 34.0% 34.0% 34.0% State income taxes, net of federal benefit.............................. (0.6) 1.6 2.4 Higher (lower) effective income taxes of other countries................... (0.2) 0.9 1.6 Change in valuation allowance of deferred tax assets.................. -- -- (1.5) Other.................................. (0.3) (0.4) (0.1) ---- ---- ---- 32.9% 36.1% 36.4% ==== ==== ====
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 at June 27, 1998 and June 28, 1997 are as follows (in thousands):
JUNE 27, 1998 JUNE 28, 1997 ------------- ------------- Deferred tax assets: Accounts receivable and inventory reserves............... $ 1,586 $1,549 Stock option compensation................................ 307 371 Accrued liabilities...................................... 843 845 Other.................................................... 489 394 ------- ------ Total deferred assets.................................... 3,225 3,159 ------- ------ Deferred tax liabilities: Tax over book depreciation............................... (955) (658) Accounts receivable fair value adjustment................ (1,145) -- Other.................................................... (522) (217) ------- ------ Total deferred liabilities............................... (2,622) (875) ======= ====== Net deferred tax assets.................................... $ 603 $2,284 ======= ======
SFAS 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. 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. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $26,307,000 at June 27, 1998. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however unrecognized foreign tax credit carryforwards would be available to reduce some of the portion of the U.S. liability. Withholding taxes of approximately $1,424,000 would be payable upon remittance of all previously unremitted earnings at June 27, 1998. F-15 46 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. STOCK OPTIONS At June 27, 1998, the Company had four fixed option plans, which are described below. The Company applies APB Opinion 25 and related Interpretations in accounting for its employee stock option plans. Under APB Opinion 25, the Company does not recognize compensation expense since the exercise price of the options granted is equal to the market value of the Company's common stock on the date of grant. SFAS 123 requires that the Company disclose the pro-forma impact on net income and earnings per share as if compensation expense associated with employee stock options had been calculated under the fair value method for employee stock options granted subsequent to July 1, 1995. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively: an expected volatility of .50, .45 and .50, an expected term of 4.18, 4.66 and 4.09 years, risk-free interest rates of 5.50%, 6.05% and 5.89% and no expected dividend yield. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro-forma information is as follows (in thousands, except per share data):
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27,1998 JUNE 28,1997 JUNE 29,1996 ------------ ------------ ------------ Pro Forma Net Income........................... $7,000 $11,986 $9,399 Pro Forma Basic Earnings Per Share............. $ .83 $ 1.39 $ 1.14 Pro Forma Diluted Earnings Per Share........... $ .80 $ 1.38 $ 1.14
The SFAS 123 pro-forma effect will be not be fully reflected until 2001 due to the calculation reflecting only the effect of options granted subsequent to July 1, 1995. The Company has four fixed option plans: the 1994 Stock Option Plan (the "1994 Plan"), the 1994 Management Stock Option Plan (the "Management Plan"), the 1995 Stock Option Plan (the "1995 Plan") and the 1996 Stock Option Plan (the "1996 Plan"). Under the terms of the plans, the committee administering the plans may grant options to purchase shares of the Company's common stock to officers, directors, employees, consultants and advisors for up to 1,957,500 shares. The vesting of options granted under the plans is at the discretion of the Board of Directors. Other than options granted under the 1994 Plan to purchase 373,743 shares of common stock at an exercise price of $.34, substantially all of which vested on July 2, 1994, and options granted to new non-employee directors (1,000 on the date of election or appointment) which vest immediately, options vest over a three- to five-year period. The 1994 Plan, the Management Plan, the 1995 Plan and the 1996 Plan terminate on December 31, 2003, December 31, 2004, December 31, 2005 and December 31, 2006, respectively. In February 1998, the Company amended its stock option plans to include a provision whereby upon a change of control, as defined by the plans, any option granted and outstanding shall immediately become vested. On June 15, 1998, an aggregate of 1,430,652 options to purchase common stock with exercise prices in excess of $12.50 were canceled and new options were issued with the same exercise prices and terms as the old options; provided, however, that in the event of a change of control, the exercise price of the new options will be $12.50 (the fair value of the Company's common stock at the time of the grant). On March 27, 1998, an aggregate of 509,426 options to purchase common stock with exercise prices in excess of $16.50 were canceled and new options were issued in replacement thereof with exercise prices of $16.50 and terms identical to those canceled. F-16 47 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of the Company's stock option plans as of June 27, 1998, June 28, 1997 and June 29, 1996, and changes during the years ending on those dates is presented below:
1998 1997 1996 --------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- -------- --------- -------- --------- -------- Outstanding at beginning of year..................... 1,353,204 $14.25 1,035,495 $11.71 641,605 $ 6.34 Granted.................... 2,379,758 $16.30 454,196 $19.21 543,769 $15.79 Exercised.................. (49,473) $ 5.47 (75,900) $ 7.44 (117,868) $ 0.85 Terminated or canceled..... (2,032,042) $16.83 (60,587) $16.45 (32,011) $13.37 ---------- --------- --------- Outstanding at end of year..................... 1,651,447 $14.30 1,353,204 $14.25 1,035,495 $11.71 ========== ========= ========= Options exercisable at end of year.................. 742,898 $11.73 509,756 $ 9.20 318,231 $ 4.33 Weighted average fair value of options granted during the year................. $5.92 $8.51 $7.27
The following table summarizes information about fixed stock options outstanding at June 27, 1998.
OPTIONS EXERCISABLE OPTIONS OUTSTANDING --------------------------------- ------------------------------------------------------- NUMBER OF NUMBER OF OPTIONS WEIGHTED-AVERAGE WEIGHTED- OPTIONS WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISE EXERCISABLE AT AVERAGE EXERCISE RANGE OF EXERCISE PRICES JUNE 27, 1998 CONTRACTUAL LIFE PRICE JUNE 27, 1998 PRICE - ------------------------ ----------------- ---------------- ---------------- -------------- ---------------- $0.34 to $0.34....... 154,425 6.00 $ 0.34 154,425 $ 0.34 $12.50 to $15.00...... 396,928 6.82 $13.73 346,655 $13.58 $15.25 to $16.56...... 1,100,094 8.86 $16.47 241,818 $16.37 --------- ------- $0.34 to $16.56...... 1,651,447 8.10 $14.30 742,898 $11.73 ========= =======
8. 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 1998, 1997 or 1996. 9. STOCKHOLDERS' EQUITY In September 1997, the Company's Board of Directors authorized the repurchase by the Company of up to 1,000,000 shares of its common stock at an aggregate price not to exceed $20 million. Purchases by the Corporation may be made from time to time in the open market or in private transactions. The repurchase program may be suspended or discontinued at any time. Shares repurchased by the Corporation are available for general corporate purposes, including issuance upon the exercise of employee options. At June 27, 1998, the Company had repurchased an aggregate of 656,400 shares of its common stock under the program at a cost of $12.4 million. In November 1997, the stockholders of the Company approved an increase in its authorized shares of common stock to 40,000,000 from 18,000,000. F-17 48 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1997, the Company's Board of Directors adopted a Stockholders' Rights Plan pursuant to which rights to purchase shares of common stock of the Company were distributed as a dividend, one right per share, to record owners of common stock as of the close of business on December 22, 1997, and for each share of common stock issued subsequent to that date. Each right entitles the registered holder to purchase that number of shares of common stock of the Company having a market value of two times the then applicable exercise price of the right. Subject to certain exceptions, the rights become exercisable on the earlier of ten business days following a public announcement that a person or group acquired or obtained the right to acquire beneficial ownership of 20% or more of the outstanding common stock of the Company, or ten business days following the commencement or announcement by a person or group of a tender offer or exchange offer which would result in beneficial ownership of 20% or more of the common stock of the Company. In the event that the Company is acquired in a merger or other business combination, or 50% or more of the Company's consolidated assets or earnings power are sold, proper provisions will be made so that each holder of a right will be entitled to receive, upon the exercise of the right, at the then applicable exercise price, that number of shares of common stock of the acquiring company that at the time of such transaction will have a market value of two times the applicable exercise price of the right. Until a right is exercised, the holder of the right will have no rights as a stockholder of the Company, including, without limitation, the right to vote, or to receive dividends. The rights expire December 22, 2007 unless extended or unless rights are redeemed by the Company. 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. Under the terms of the Purchase Plan, the purchase price of a share of common stock is the lower of: 85% of the closing price of the Company's common stock on the date the offering period begins and 85% of the closing price of the Company's common stock on the termination date of the offering period. In January 1998, the Company gave qualified employees the option to participate in the first six month offering period under the Purchase Plan. Subsequent to June 27, 1998, 4,491 shares of common stock were issued for $11.37 per share pursuant to the first six month offering period. 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, diluted and basic earnings per share for the year ended June 29, 1996 would have been $1.18 and $1.23, respectively. At June 27, 1998 there were 2,041,547 shares of common stock reserved for the exercise of options and employee stock purchases. 10. OPERATING LEASES The Company and its subsidiaries lease a hangar, software, computer, and other office and factory equipment under long-term operating leases with varying terms. The aggregate future minimum lease F-18 49 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payments under noncancellable operating leases with initial or remaining lease terms of greater than one year are as follows (in thousands): 1999................................................ $ 953 2000................................................ 472 2001................................................ 246 2002................................................ 36 2003 and after...................................... 657 ------ $2,364 ======
Rent expense amounted to $2,052,000, $2,273,000 and $1,203,000 in fiscal 1998, 1997 and 1996, respectively. 11. FINANCIAL INSTRUMENTS Balance Sheet Financial Instruments At June 27, 1998, 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. Forward Foreign Exchange Contracts At June 27, 1998 and June 28, 1997, the Company had approximately $10.3 million and $7.7 million, respectively, of forward exchange contracts outstanding to exchange European, Japanese, Australian 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 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, Australian dollars and Japanese yen at rates agreed to at inception of the contracts. At June 27, 1998, the net loss explicitly deferred from hedging firm sale and purchase commitments was not significant and will be recognized in earnings during fiscal 1999. 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. At June 27, 1998, 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. 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. The Company uses borrowings of Japanese yen and Dutch guilders to hedge its net investments in its foreign subsidiaries. At June 27, 1998, the Company had outstanding borrowings of 251 million Japanese yen (approximately $1,766,000) and 7 million Dutch guilders (approximately $3,433,000). At June 28, 1997, the Company had outstanding borrowings of 251 million Japanese yen (approximately $2,191,000) and 17 million Dutch guilders (approximately $8,674,000). Gains and losses on hedges of net investments are recognized as a component of the cumulative translation adjustment in stockholders' equity. F-19 50 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest Rate Swaps In April 1998, the Company entered into five year interest rate swap agreements with a total notional principal amount of $20 million to manage interest costs associated with changing interest rates. These agreements convert underlying variable-rate debt based on LIBOR under the Company's revolving credit facility to fixed-rate debt with an interest rate of 6.05%. The fair value of the Company's interest rate swap agreements, based on estimates received from financial institutions, would have required the Company to pay approximately $235,000 to settle these agreements. 12. OTHER INCOME For the years ended June 27, 1998, June 28, 1997 and June 29, 1996, net foreign currency gains and (losses) included in other income aggregated approximately ($232,000), $33,000 and ($138,000), respectively. The balance consists principally of finance charges related to accounts receivable. 13. GEOGRAPHIC DATA Summarized data by geographic area is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996 ------------- ------------- ------------- Net Sales: United States.............................. $119,604 $115,931 $106,035 Europe and Other........................... 104,889 90,884 78,449 Intercompany............................... (52,997) (44,319) (38,508) -------- -------- -------- $171,496 $162,496 $145,976 ======== ======== ======== Operating Income: United States.............................. $ 238 $ 8,337 $ 6,650 Europe and Other........................... 15,201 13,876 11,199 Intercompany............................... (167) (334) (91) -------- -------- -------- $ 15,272 $ 21,879 $ 17,758 ======== ======== ======== Identifiable Assets: United States.............................. $124,185 $107,754 $ 93,627 Europe and Other........................... 47,750 40,959 30,090 Intercompany............................... (19,658) (21,429) (13,772) -------- -------- -------- $152,277 $127,284 $109,945 ======== ======== ========
At June 27, 1998, the net assets of Cannondale Europe, Cannondale Japan and Cannondale Australia were $22,331,000, $1,209,000 and $715,000, respectively. 14. 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 $2,000,000 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 $10,000,000 for the purchase of certain real property, which loan has been combined with the previous $2,000,000 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 F-20 51 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's common stock held by Mr. Montgomery and a mortgage on such real property. The principal balance of the outstanding loan to Mr. Montgomery was $2,000,000 at June 27, 1998. On June 30, 1998, the Company purchased a Cessna Citation Jet aircraft from JSM, Inc. ("JSM"), a corporation of which Mr. Montgomery is the sole stockholder, for $2,800,000 and terminated its lease with JSM for the rental of the same aircraft. The purchase price of the Cessna Citation Jet aircraft was determined by the Company based on independent valuations of the market value of the aircraft. The Company also assumed the obligations of JSM Aviation, LLC ("JSM LLC"), a Connecticut limited liability company in which Mr. Montgomery and a director of the Company are each members, as sublessee under a hangar lease which houses the Cessna Citation jet aircraft. As part of the assumption of the hangar lease obligations, the Company reimbursed JSM LLC $160,922 for the cost of certain leasehold improvements made to the hangar by JSM LLC. The Company uses the Cessna Citation Jet aircraft largely for transporting personnel between its Connecticut headquarters and its Pennsylvania manufacturing facility, and anticipates that it will have an increased need for an aircraft in connection with the growth of the business. In connection with the purchase of the Cessna Citation Jet aircraft, the Company also purchased, for $500,000, JSM's right to acquire a Learjet aircraft. JSM had entered into a contract with Learjet, Inc. ("Learjet") to purchase an aircraft, and had paid Learjet $500,000 as a deposit with respect to such purchase. The Company has assumed JSM's rights and obligations under this contract. In connection with these transactions, JSM obtained a right of first refusal with respect to the Cessna Citation Jet aircraft and the Learjet aircraft under certain circumstances. It is not the intention of the Company to own both the Cessna Citation Jet aircraft and the Learjet aircraft simultaneously. The Company has provided two officers of the Company with interest-free loans to enable them to purchase homes in the vicinity of the Company's headquarters. As of June 27, 1998, $575,000 had been loaned to the officers. The loans mature on December 29, 2006 and September 1, 2007, at which dates the entire principal balance of each of the respective loans is due. The loans are secured by mortgages on the officer's residences. During 1998, the Company completed the construction of a new headquarters and research and development facility and the expansion of its manufacturing facility. The Company contracted an entity controlled by a director of the Company to act as the general contractor for the construction of both projects. The Company paid the entity approximately $5.6 million and $4.4 million for the construction of both facilities during the fiscal years ended June 27, 1998 and June 28, 1997, respectively. 15. SUBSEQUENT EVENTS On July 31, 1998, the Company's Board of Directors authorized a new stock repurchase program by the Company to repurchase up to 1,000,000 shares of its common stock. Shares repurchased under the new program will be additional to the shares repurchased pursuant to the repurchase program announced September 3, 1997. Purchases by the Company may be made from time to time in the open market or in private transactions. The repurchase program may be suspended or discontinued at any time. Shares repurchased by the Company will be available for general corporate purposes, including issuance upon the exercise of employee stock options. As of September 21, 1998, the Company had repurchased an aggregate of 1,292,900 shares of its common stock under both programs at a cost of $20.2 million. The principal balance of the outstanding loan to Mr. Montgomery was $12,000,000 at September 21, 1998. F-21 52 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On September 3, 1998, an aggregate of 1,460,052 options to purchase common stock with exercise prices in excess of $9.31 were canceled and new options were issued in replacement thereof with exercise prices of $9.31 and terms identical to those canceled. During June 1998, operations from the Philipsburg facility were moved to the Bedford facility, and in August 1998, the Philipsburg facility was sold to the Moshannon Valley Economic Development Authority for $1.4 million, an amount that approximated the net book value of the property. F-22 53 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders Cannondale Corporation and Subsidiaries We have audited the consolidated financial statements of Cannondale Corporation as of June 27, 1998 and June 28, 1997, and for the years ended June 27, 1998, June 28, 1997 and June 29, 1996, and have issued our report thereon dated August 10, 1998, except for Note 15, as to which the date is September 22, 1998 (included elsewhere in this Annual Report). Our audits also included the financial statement schedule listed in Item 14(a)(2) of this Annual Report. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Stamford, Connecticut August 10, 1998 F-23 54 SCHEDULE II CANNONDALE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS -------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ------------ ---------- ---------- ---------- ---------- (IN THOUSANDS) Allowance for doubtful accounts, returns, discounts and late charges Year ended June 29, 1996....... $3,693 $9,944 $ 45 $(8,444)(1) $5,238 ====== ====== Year ended June 28, 1997....... $5,238 $5,545 $(34) $(4,317)(1) $6,432 ====== ====== Year ended June 27, 1998....... $6,432 $7,586 $ (5) $(5,534)(1) $8,479 ====== ====== Reserve for obsolete inventory Year ended June 29, 1996....... $1,256 $ 977 $ 11 $ (829)(2) $1,415 ====== ====== Year ended June 28, 1997....... $1,415 $1,484 $(43) $(1,787)(2) $1,069 ====== ====== Year ended June 27, 1998....... $1,069 $1,425 $(39) $(1,649)(2) $ 806 ====== ======
- --------------- (1) Discounts, late charges and uncollectible accounts written off, net of recoveries. (2) Inventory disposed. II-1 55 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES ------- ----------- ------------ 3.1(i) Amended and Restated Certificate of Incorporation of the Company.*................................................... 3.1(ii) Amended and Restated Bylaws of the Company.*................ 4.1 Rights Agreement, dated December 22, 1997, between the Company and BankBoston, N.A., as Rights Agent.(6)........... 4.2 1994 Stock Option Plan, as amended as of February 5, 1998.(1).................................................... 4.3 1994 Management Stock Option Plan, as amended as of February 5, 1998.(1)................................................. 4.4 1995 Stock Option Plan, as amended as of February 5, 1998.(1).................................................... 4.5 1996 Stock Option Plan, as amended as of February 5, 1998.(1).................................................... 10.1.8 $50,000,000 Credit Agreement, dated as of June 9, 1997, among the Company, certain subsidiaries of the Company and NationsBank N.A., as Administrative Agent, Fronting Bank and Swingline Bank and ABN Amro Bank N.V., New York Branch, as Documentation Agent and Syndication Agent.(2)............... 10.1.9 $10,000,000 Umbrella Arrangement Agreement, dated May 28, 1997, between Cannondale Europe and ABN Amro N.V., New York Branch.(2).................................................. 10.1.10 First Amendment to Credit Agreement, dated October 14, 1997, among the Company, certain subsidiaries of the Company and NationsBank N.A., ABN Amro Bank N.V., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(3)................................................. 10.1.11 Credit Agreement, dated February 5, 1998, between Cannondale Europe and ABN AMRO Bank N.V.(4)............................ 10.1.12 Second Amendment to Credit Agreement, dated April 15, 1998, among the Company, certain subsidiaries of the Company and NationsBank N.A., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(1)............ 10.1.13 Third Amendment to Credit Agreement, dated May 29, 1998, among the Company, certain subsidiaries of the Company and NationsBank N.A., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(1)............ 10.1.14 Fourth Amendment to Credit Agreement, dated June 25, 1998, among the Company, certain subsidiaries of the Company and NationsBank N.A., Fleet National Bank, The Chase Manhattan Bank and State Street Bank and Trust Company.(1)............ 10.6 Promissory Note, dated December 27, 1993, from the Company to General Electric Capital Corporation.*................... 10.7 Installment Sales Agreement, dated August 28, 1981, between the Company and Bedford Development Council. Amendments to Installment Sales Agreement, dated May 29, 1987, September 1, 1988 and October 26, 1993. Assignment of Fifth Supplemental Installment Sale Agreement, dated October 26, 1993, from Bedford Development Council to The Pennsylvania Industrial Development Authority.*.......................... 10.8 Consent, Subordination and Assumption Agreements, between the Company and Bedford Development Council, in favor of The Pennsylvania Industrial Development Authority, dated August 28, 1981, May 7, 1982, May 11, 1983, May 29, 1987, September 1, 1988, and October 26, 1993.*............................. 10.9 Installment Sale Agreement, dated April 27, 1994, between the Company and Bedford Development Council. Assignment, dated April 27. 1994, from Bedford Development Council to Pennsylvania Industrial Development Authority.*.............
56
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES ------- ----------- ------------ 10.10 Consent, Subordination and Assumption Agreement, dated April 27, 1994, between the Company and Bedford Development Council, in favor of The Pennsylvania Industrial Development Authority.*................................................. 10.11 Loan Agreement, dated November 10, 1989, between the Company and Rush Township, Commonwealth of Pennsylvania.*........... 10.12 Promissory Note, dated November 10, 1989, from the Company to Rush Township, Commonwealth of Pennsylvania.*............ 10.13 Mortgage, dated November 10, 1989, from the Company to Rush Township, Commonwealth of Pennsylvania. Assignment of Note and Mortgage, dated June 30, 1989, from Rush Township, Commonwealth of Pennsylvania to Pennsylvania Department of Commerce.*.................................................. 10.14 Loan Agreement, dated July 24, 1990, between the Company and Rush Township, Commonwealth of Pennsylvania.*............... 10.15 Promissory Note, dated July 24, 1990, from the Company to Rush Township, Commonwealth of Pennsylvania.*............... 10.16 Mortgage, dated July 24, 1990, from the Company to Rush Township Commonwealth of Pennsylvania.*..................... 10.17 Installment Sales Agreement, dated December 4, 1990, between the Company and Moshannon Valley Economic Development Partnership. Assignment, dated December 4, 1990, from Moshannon Valley Economic Development Partnership to The Pennsylvania Industrial Development Authority.*............. 10.18 Mortgage Subordination Agreement, dated December 4, 1990, among the Company, Moshannon Valley Economic Development Partnership, Rush Township, Commonwealth of Pennsylvania and The Pennsylvania Industrial Development Authority.*......... 10.19 Consent, Subordination and Assumption Agreement, dated December 4, 1990, between the Company and Moshannon Valley Economic Development Partnership, in favor of The Pennsylvania Industrial Development Authority.*............. 10.20 Loan Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership.*..... 10.21 Installment Judgment Note, dated February 1, 1992, from the Company to Moshannon Valley Economic Development Partnership.*............................................... 10.22 Chattel Mortgage Security Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership.*................................... 10.23 Business Infrastructure Development Loan Agreement, dated June 30, 1989, among the Company, Pennsylvania Department of Commerce and Rush Township, Commonwealth of Pennsylvania.*.............................................. 10.24 Promissory Note, dated June 30, 1989, from the Company to Pennsylvania Department of Commerce. Amendment to Promissory Note, dated February 1, 1992, from the Company to Pennsylvania Department of Commerce.*....................... 10.25 Escrow Agreement, dated June 30, 1989, among the Company, Rush Township, Commonwealth of Pennsylvania, Pennsylvania Department of Commerce and MidState Bank and Trust Company.*................................................... 10.26 Mortgage, dated July 23, 1991, from Cannondale Europe to Algemene-Bank Netherlands B.V. (In Dutch, with English summary).*.................................................. 10.27 Financing Lease, dated May 31, 1991, between ABN Onroerend Goed Lease B.V., as lessor, and Cannondale Europe, as lessee. (In Dutch, with English translation).*.............. 10.28 Loan Agreement, dated February 1, 1994, between Cannondale Europe and ABN AMRO Bank N.V. (In Dutch, with English translation).*..............................................
57
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES ------- ----------- ------------ 10.28.1 Loan Agreement Amendment, effective December 1, 1995, between Cannondale Europe and ABN Amro Bank N.V.@........... 10.29 Term Loan Agreement, dated March 29, 1994, between Cannondale Europe and the Company.*......................... 10.29.1 Subordination Agreement, dated March 23, 1993, between the Company and ABN AMRO Bank N.V. (In Dutch, with English translation).*.............................................. 10.30 Loan Agreement, dated September 1, 1992, between Cannondale Japan and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese, with English translation).*...................................... 10.30.1 Guarantee Agreement, dated August 7, 1992, from the Company to The Dai-Ichi Kangyo Bank, Ltd.*.......................... 10.31 Master Lease Agreement, dated as of July 27, 1993, between General Electric Capital Corporation and the Company, to which are appended Equipment Schedule No. 1, dated August 6, 1993, and Equipment Schedule No. 2, dated August 6, 1993.*...................................................... 10.32 Master Lease Agreement, dated April 11, 1994, between United States Leasing Corporation and the Company.*................ 10.33 Master Lease, dated June 17, 1991, between Norwest Equipment Finance, Inc. and the Company, together with Supplement to Master Lease.*.............................................. 10.34 Master Lease Agreement, dated October 31, 1989, between Ford Equipment Leasing Company and the Company, to which is appended Schedule No. 3, dated February 22, 1991.*.......... 10.35 Master Equipment Lease, dated May 26, 1993, between XL/Datacomp, Inc. and the Company, to which are appended Schedule A, dated May 26, 1993, and Schedule B, dated August 3, 1993.*................................................... 10.36 (Intentionally omitted)..................................... 10.37 Master Lease Agreement, dated May 23, 1991, between Center Capital Corporation and the Company, to which are appended Lease Schedule No. 1, dated May 23, 1991, and Lease Schedule No. 2, dated May 23, 1991.*................................. 10.38 Equipment Lease Agreement, dated July 11, 1991, between New England Capital Corporation and the Company, to which is appended Lease Schedule No. 528102, dated November 8, 1991.*...................................................... 10.39 Equipment Lease Agreement, dated March 26, 1992, between Citicorp Leasing, Inc. and the Company.*.................... 10.40 Equipment Lease Agreement, executed as of May 3, 1991, between Greenwich Financial Services Inc. and the Company, to which are appended Schedule No. 1, dated May 3, 1991, and Schedule No. 2, dated May 3, 1991. Assignment from Greenwich Financial Services, Inc. to United States Capital Corporation, dated May 3, 1991.*............................ 10.42 Sponsor Agreement, dated December 5, 1993, between the Company and Team Sports, Inc. (Certain portions of this Exhibit have been deleted pursuant to a requst for confidential treatment.)*................................... 10.43 Agreement, dated March 2, 1994, between the Company and Bell Sports, Inc. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)*................................................ 10.44 Agreement, dated July 11, 1994, between the Company and Frank Roth Company. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)*................................................ 10.45 Agreement, dated July 28, 1994, between the Company and Quadrax Corporation. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)*................................................
58
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES ------- ----------- ------------ 10.46 Precision Machine Tool Design and Research Center Membership Agreement, dated March 14, 1994, between the University of Connecticut and the Company.*............................... 10.47 (Intentionally omitted)..................................... 10.48 Employment Agreement, dated January 3, 1994, between the Company and William A. Luca.*............................... 10.49 Employee Patent and Confidential Information Agreement, dated August 20, 1982, between the Company and Daniel C. Alloway.*................................................... 10.50 Ownership and Confidentiality Agreement, dated June 21, 1988, between the Company and Richard J. Resch.*............ 10.51 Ownership and Confidentiality Agreement, dated May 30, 1990, between the Company and Harold DeWaltoff.*.................. 10.52 Employment Agreement, dated December 1, 1993, between the Company and Daniel Pullman.*................................ 10.53 Employment Agreement, dated June 6, 1994, between the Company and Leonard Konecny.*............................... 10.54 Cannondale Corporation 401(k) Profit Sharing Plan.*......... 10.57 Cannondale Corporation Employee Stock Purchase Plan.*....... 10.58 Stockholders Agreement, dated as of June 3, 1992, among the Company, Princes Gate Investors, LP., Acorn Partnership L.L.P., PGI Investments Limited, Joseph S. Montgomery, James Scott Montgomery and PG Investors, Inc. Amendment No. 1 to Stockholders Agreement, dated as of July 2, 1993. Amendment No. 2 to Stockholders Agreement, dated July 28, 1994. Amendment No. 3 to Stockholders Agreement, dated as of August 10, 1994. Letter (undated) from the Company to Princes Gate Investors, LP., Acorn Partnership LLP, PGI Investments Limited and PG Investors. Inc.*................. 10.59 (Intentionally omitted)..................................... 10.60 Form of Indemnification Agreement between the Company and each of its directors and officers.*........................ 10.61 Agreement between the Company and Mark-It Company, executed by the parties on September 16, 1994, and September 2, 1994, respectively. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)*................................................ 10.62 Aluminum Supply Agreement, dated November 16, 1994. (Certain portions of this Exhibit have been deleted pursuant to a request for confidential treatment.)+....................... 10.63 Contract of Sale, dated September 29, 1996, between Cannondale and Sandvick Associates, Inc., together with Assignment and Assumption Agreement dated as of September 30, 1996, between Sandvick Associates, Inc. and Nantucket Roost Associates, LLC.***................................... 10.64 Agreement of Lease, dated as of October 4, 1996, between Nantucket Roost Associates, LLC and Cannondale. ***......... 10.67 Aircraft Lease, dated as of October 6, 1996, between JSM, Inc. and Cannondale.****.................................... 10.68 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and William A. Luca.(5)............ 10.68.1 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and Joseph S. Montgomery.(5)....... 10.68.2 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and John Moriarty.(5).............. 10.68.3 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale and Daniel C. Alloway.(5)..........
59
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES ------- ----------- ------------ 10.68.4 Cannondale Corporation Change of Control Separation Plan A.(5)....................................................... 10.68.5 Cannondale Corporation Change of Control Separation Plan B.(5)....................................................... 21 Subsidiaries of the Registrant.(1).......................... 23 Consent of Independent Auditors(1).......................... 27.A Restated Financial Data Schedule for Fiscal Year Ended June 29, 1996(1)................................................. 27.B Restated Financial Data Schedule for Fiscal Year Ended June 28, 1997(1)................................................. 27.C Financial Data Schedule for Fiscal Year Ended June 27, 1998(1).....................................................
- --------------- * Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Registration Statement on Form S-1, Registration No. 33-84566 + Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended December 31, 1994. ++ Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended April 1, 1995. @ Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended December 30, 1995. *** Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended September 28, 1996. **** Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q filed for the quarterly period ended December 28, 1996. (1) Filed herewith. (2) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-K/A filed for the year end June 28, 1997. (3) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q for the quarterly period ended December 27, 1997. (4) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q for the quarterly period ended March 28, 1998. (5) Incorporated by reference to the corresponding numbered Exhibit filed with the registrant's Form 10-Q/A for the quarterly period ended March 28, 1998. (6) Incorporated by reference to the registrant's Form 8-K filed on December 23, 1997. EX-4.2 2 1994 STOCK OPTION PLAN AS AMENDED FEBRUARY 5, 1998 1 EXHIBIT 4.2 CANNONDALE CORPORATION 1994 STOCK OPTION PLAN (As amended as of February 5, 1998) l. Purpose. The purpose of the Cannondale Corporation 1994 Stock Option Plan (the "Plan") is to enable Cannondale Corporation (the "Company") and its stockholders to secure the benefits of common stock ownership by employees, officers and directors of the Company and its subsidiaries. The Board of Directors of the Company (the "Board") believes that the granting of options under the Plan will foster the Company's ability to attract, retain and motivate those individuals who will be largely responsible for the continued profitability and long-term future growth of the Company. 2. Stock Subject to the Plan. The Company may issue and sell a total of 50,000 shares of its Common Stock, $0.01 par value per share (the "Common Stock"), pursuant to the Plan. Such shares may be either authorized and unissued or held by the Company in its treasury. New options may be granted under the Plan with respect to shares of Common Stock which are covered by the unexercised portion of an option which has terminated or expired by its terms, by cancellation or otherwise. 3. Administration. The Plan will be administered by a committee (the "Committee") consisting of at least two directors appointed by and serving at the pleasure of the Board, none of whom is, during the one year period prior to service on the Committee or during such service, granted or awarded any options pursuant to the Plan or any other plan of the Company (except under circumstances which will not result in such director ceasing to be a "disinterested person" within the meaning of Rule 16b-3(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Act")). If a Committee is not so established, the Board will perform the duties and functions ascribed herein to the Committee; provided, however, that from and after the date on which the Company first registers a class of equity securities under Section 12 of the Act, the Plan will be administered by a Committee as provided in the preceding sentence of this paragraph 3. Subject to the provisions of the Plan, the Committee, acting it its sole and absolute discretion, will have full power and authority to grant options under the Plan, to interpret the provisions of the Plan and option agreements made under the Plan, to supervise the administration of the Plan, and to take such other action as may be necessary or desirable in order to carry out the provisions of the Plan. A majority of the members of the Committee will constitute a quorum. The Committee may act by the vote of a majority of its members present at a meeting at which there is a quorum or by unanimous written consent. The decision of the Committee as to any disputed question, including questions of construction, interpretation and administration, will be final and conclusive on all persons. The Committee will keep a record of its proceedings and acts and will keep or cause to be kept such books and records as may be necessary in connection with the proper administration of the Plan. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 2 4. Eligibility. Options may be granted under the Plan to individuals who at present or in the future serve as directors, officers or employees of the Company or a subsidiary of the Company (a "Subsidiary") within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the provisions of the Plan, the Committee may from time to time select the persons to whom options will be granted under the Plan, and will fix the number of shares covered by each such option and establish the terms and conditions thereof (including, without limitation, exercise price and restrictions on exercisability of the option or on the shares of Common Stock issued upon exercise thereof). 5. Terms and Conditions of Options. Each option granted under the Plan will be evidenced by a written agreement in substantially the form attached hereto as Exhibit I, or such other form approved by the Committee from time to time. Each such option will be subject to the terms and conditions set forth in this paragraph and such additional terms and conditions not inconsistent with the Plan as the Committee deems appropriate. (a) Option Exercise Price. The exercise price per share may not be less than $1.00 per share. (b) Exercise of Options. No option will become exercisable unless the person to whom the option was granted remains in the continuous employ or service as an officer or director of the Company or an affiliate for at least one year (or for such other period as the Committee may designate) from the date the option is granted. For purposes hereof, "affiliate" means either a Subsidiary or any entity in an unbroken chain of entities ending with the Company if each of the entities other than the Company owns an equity interest holding 25% of the total combined voting power of all equity holders in one of the other entities in such chain. Subject to earlier termination of the option as provided herein, unless the Committee determines otherwise, the option will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company or an affiliate following the date of grant:
Full Percentage of Years of Continuous Option Employment/Service Exercisable ------------------ ----------- Less than 3 0% 3 or more 100%
provided, however, that in the event the exercise period of an Option is five years or less, the foregoing schedule shall be deemed to be modified to provide that any remaining portion of the option shares which have not yet become exercisable shall become exercisable on the date which is one year prior to the date of expiration of the option. 2 3 All or part of the exercisable portion of an option may be exercised at any time during the option period, except that, without the consent of the Committee, no partial exercise of an option may be for less than 50 shares. An option may be exercised by transmitting to the Company (l) a written notice specifying the number of shares to be purchased, and (2) payment of the exercise price together with the amount, if any, deemed necessary by the Committee to enable the Company to satisfy its income tax withholding obligations with respect to such exercise (unless other arrangements acceptable to the Company are made with respect to the satisfaction of such withholding obligations). (c) Payment of Exercise Price. The purchase price of shares of Common Stock acquired pursuant to the exercise of an option granted under the Plan may be paid in cash and/or such other form of payment as may be permitted under the option agreement, including, without limitation, previously-owned shares of Common Stock owned for at least six months prior to the date of the option exercise. (d) Rights as a Stockholder. No shares of Common Stock will be issued in respect of the exercise of an option granted under the Plan until full payment therefor has been made (and/or provided for where all or a portion of the purchase price is being paid in installments). The holder of an option will have no rights as a stockholder with respect to any shares covered by an option until the date a stock certificate for such shares is issued to him or her. Except as otherwise provided herein, no adjustments shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. (e) Nontransferability of Options. No option granted under the Plan may be assigned or transferred except by will or by the applicable laws of descent and distribution and each such Option may be exercised during the optionee's lifetime only by the optionee. (f) Termination of Employment or Other Service. If an Optionee ceases to be an employee or to perform services as an officer or director for the Company and any affiliate for any reason other than death or disability (defined below), then each outstanding option granted to him or her under the Plan will terminate on the date three months after the date of such termination of employment or service (or, if earlier, the date specified in the option agreement). If an optionee's employment or service is terminated by reason of the optionee's death or disability (or if the optionee's employment or service is terminated by reason of his or her disability and the optionee dies within one year after such termination of employment or service), then each outstanding option granted to the optionee under the Plan will terminate on the date one year after the date of such termination of employment or service (or one year after the later death of a disabled optionee) or, if earlier, the date specified in the option agreement. For purposes hereof, the term "disability" means the inability of an optionee to perform the customary duties of his or her employment or other service for the Company or an affiliate by reason of a physical or mental incapacity which is expected to result in death or be of indefinite duration (but in any event no less than twelve months). 3 4 (g) Other Provisions. The Committee may impose such other conditions with respect to the exercise of options, including, without limitation, any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable. 6. Capital Changes, Reorganization, Sale. (a) Adjustments Upon Changes in Capitalization. The aggregate number and class of shares for which options may be granted under the Plan, the number and class of shares covered by such outstanding option and the exercise price per share shall all be adjusted proportionately for any increase or decrease in the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or any like capital adjustment, or the payment of any stock dividend. (b) Change of Control. (i) Except as provided in subparagraph (c) below, upon a Change of Control (as defined below), any option granted hereunder shall immediately become vested and the optionee shall have the right to exercise his or her option in whole or in part, so long as such option remains outstanding, whether or not any other vesting requirements set forth in the option agreement or herein have been satisfied. (ii) For the purpose of this Plan, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of Common Stock (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subparagraph A, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subparagraph C of this Section 6(b)(ii); or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or 4 5 C. Approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination would beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (c) Conversion of Options on Stock for Stock Exchange. If the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reorganization or the creation of a holding company), all options granted hereunder shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted hereunder shall not be converted into options to purchase shares of Exchange Stock but instead shall terminate in accordance with the provisions of subparagraph (b) above. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board 5 6 determines otherwise, the converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement or herein have been satisfied. (d) Fractional Shares. In the event of any adjustment in the number of shares covered by any option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded and each such option will cover only the number of full shares resulting from the adjustment. (e) Determination of Board to be Final. All adjustments under this paragraph 6 shall be made by the Board, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 7. Amendment and Termination of the Plan. The Board may amend or terminate the Plan. Except as otherwise provided in the Plan with respect to equity changes, any amendment which would increase the aggregate number of shares of Common Stock as to which options may be granted under the Plan, materially increase the benefits under the Plan, or modify the class of persons eligible to receive options under the Plan shall be subject to the approval of the holders of a majority of the Common Stock issued and outstanding and such other approvals as may be required by the provisions of the Company's Certificate of Incorporation or otherwise. No amendment or termination may affect adversely any outstanding option without the written consent of the optionee. 8. No Rights Conferred. Nothing contained herein will be deemed to give any individual any right to receive an option under the Plan or to be retained in the employ or service of the Company or any Subsidiary. 9. Governing Law. The Plan and each option agreement shall be governed by the laws of the State of Delaware. l0. Term of the Plan. The Plan shall be effective as of January l, 1994 subject to the approval of the stockholders of the Company. The Plan will terminate on December 31, 2003, unless sooner terminated by the Board. The rights of optionees under options outstanding at the time of the termination of the Plan shall not be affected solely by reason of the termination and shall continue in accordance with the terms of the option (as then in effect or thereafter amended). 6 7 EXHIBIT I FORM OF CANNONDALE CORPORATION NON-QUALIFIED STOCK OPTION AGREEMENT AGREEMENT made as of [_________________], 199___ by and between CANNONDALE CORPORATION, a Delaware corporation (the "Company") and [___________] (the "Optionee"). Pursuant to the Cannondale Corporation 1994 Stock Option Plan (the "Plan"), the Company desires to grant to the Optionee and the Optionee desires to accept an option to purchase shares of the Common Stock, $0.01 par value, of the Company (the "Common Stock") upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the Company and the Optionee agree as follows: 1. Grant of Option; Option Price. The Company hereby grants to the Optionee an option to purchase [_________] shares of Common Stock at a purchase price per share of $[_____] (the "Option"). The Option is intended to be treated as an option which is not an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986. 2. Entitlement to Exercise Option; Term of Option. The Option shall only become exercisable in accordance with the following schedule based upon the number of full years of the Optionee's continuous employment, or continuous service as an officer or director of the Company or an affiliate of the Company following the date of grant:
Full Years of Continuous Cumulative Percentage Employment/Service of Option Exercisable ------------------ --------------------- Less than 1 0% 3 or more 100%
[OTHER ALTERNATIVES MAY BE CHOSEN BY THE COMMITTEE] Unless sooner terminated pursuant to the terms of this Agreement, the Option will expire if and to the extent it is not exercised on or before [____________]. 3. Exercise of Option. Once the Optionee has satisfied the required continuous employment or service as an officer in accordance with Section 2, the Option may be exercised in whole at any time or in part from time to time during the term of the option, except that no partial exercise may be for less than 50 shares. To exercise the Option, the Optionee shall deliver to the President of the Company (a) a written notice specifying the number of shares of Common 8 Stock to be purchased, and (b) payment in full of the exercise price, together with the amount, if any, deemed necessary by the Company to enable it to satisfy any income tax withholding obligations with respect to the exercise of the Option (unless other arrangements, acceptable to the Company, are made for the satisfaction of such withholding obligations); and (c) the Stockholders Agreement described in Section 12 below, fully executed by Optionee. The Company may (in its sole and absolute discretion) permit all or part of the exercise price to be paid with previously-owned shares of Common Stock owned for at least six months prior to the date of option exercise. 4. Rights as a Stockholder. No shares of Common Stock will be issued and delivered pursuant to an exercise of the Option until full payment for such shares has been made. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until a stock certificate for such shares is issued to the Optionee. Except as otherwise provided herein, no adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 5. Nontransferability of Option. The Option is not assignable or transferable except by will or by the applicable laws of descent and distribution, and is exercisable during the Optionee's lifetime only by the Optionee. 6. Termination of Employment or Service as Officer or Director. If the Optionee ceases to be employed by or to be an officer or director of the Company or any subsidiary for any reason other than death or disability, then, unless sooner terminated under the terms hereof, the Option will terminate on the date three months after the date of the Optionee's termination of employment or service as an officer or director. If the Optionee's employment or service is terminated by reason of the Optionee's death or disability (or if the Optionee's employment or service is terminated by reason of the Optionee's disability and the Optionee dies within one year after such termination of employment or service), then, unless sooner terminated under the terms hereof, the Option will terminate on the date one year after the date of such termination of employment or service (or one year after the disabled Optionee's later death). 7. Investment Representation. In consideration of the grant of the Option, the Optionee hereby represents and warrants to the Company that upon an exercise of the Option, the shares purchased by the Optionee pursuant to such exercise, will be acquired for the Optionee's account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof. The Optionee further acknowledges that neither the Option nor any shares of Common Stock issuable upon exercise of the Option have been registered under the Securities Act of 1933 (the "Act") and may not be sold unless a registration under the Act is in effect with respect to the Shares and all relevant state securities laws have been complied with or unless an exemption from such registration or compliance is available under the Act or any relevant state securities law. The certificates representing any shares of Common Stock issued upon exercise of the Option shall bear a legend to such effect as the Company's counsel shall deem necessary or desirable. The Option shall in no event be exercisable and shares shall not be issued 2 9 hereunder if, in the opinion of counsel to the Company, such exercise and/or issuance would result in a violation of federal and state securities laws. 8. Capital Changes, Reorganization, Sale. (a) In case of any split-up or consolidation of shares or any like capital adjustment, or the payment of a stock dividend, which increases or decreases the number of outstanding shares of Common Stock, appropriate adjustment shall be made to the number of shares and the exercise price per share which may still be purchased under this Agreement. (b) Upon a Change of Control (as defined in the Plan), the Option granted hereunder shall immediately become vested and the Optionee shall have the right to exercise the Option in whole or in part, so long as the Option remains outstanding, whether or not the one year of continuous employment or service as an officer as provided in Section 2 has been satisfied. (c) However, if the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), the Option granted hereunder shall be converted into an option to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that the Option shall not be converted into an option to purchase shares of Exchange Stock but instead shall vest in accordance with the provisions set forth in subparagraph (b) above. The amount and price of the converted option shall be determined by adjusting the amount and price of the Option granted hereunder on the same basis as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board of Directors of the Company determines otherwise, the converted option shall be fully vested, whether or not the requirements set forth in this Agreement shall have been satisfied. (d) In the event of any adjustment in the number of shares covered by the Option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded, and the Option will cover only the number of full shares resulting from the adjustment. (e) All adjustments under this Section 8 shall be made by the Board of Directors, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 3 10 9. No Rights Conferred. Nothing in this Agreement shall give the Optionee any right to continue in the employ or service of the Company or an affiliate or interfere in any way with the right of the Company to terminate the employment or service of the Optionee. 10. Plan Provisions Control. The provisions of the Plan shall govern if and to the extent that there are inconsistencies between the provisions of the Plan and the provisions of this Agreement. The Optionee acknowledges that the Optionee has received a copy of the Plan prior to the execution of this Agreement, and that the provisions of the Plan are incorporated herein by reference. 11. Tax Considerations. Optionee hereby acknowledges and understands that (a) pursuant to the Internal Revenue Code as currently in effect, the difference between the fair market value of the Stock on the date he exercises the Option and the Option price will be taxable income to him in the year he exercises the Option and (b) the Company may be required to withhold Federal, state or local taxes with respect to the compensation income, if any, realized by Optionee upon an exercise of the Option. If the Company determines that such withholding is required, Optionee agrees either to provide the Company at the time of any exercise of the Option with funds equal to the amount of taxes which the Company determines must be withheld or to make other arrangements satisfactory to the Company regarding such payment, including authorizing the Company to withhold such amounts from any payment, including authorizing the Company to withhold such amounts from any payments to which he is entitled. All matters with respect to the withholding of taxes resulting from an exercise of the Option shall be determined by the Board of Directors of the Company and such determination shall be conclusive and binding. 12. Stockholders Agreement. The Optionee hereby acknowledges and agrees that all shares of Common Stock issued upon an exercise of the Option shall be subject to the restrictions and obligations on transfer imposed on a Stockholder as provided in the form of Stockholders Agreement, attached hereto between the Company and the Optionee (the "Stockholders Agreement"), a copy of which accompanies this Agreement. The Optionee, as a condition to the receipt of the Option, hereby agrees to execute the Stockholders Agreement upon exercise of the Option in whole or in part and to be bound by all the terms and conditions imposed on a Stockholder under the Stockholders Agreement with respect to the shares of Common Stock issuable upon exercise of the Option and consents to the legending of the stock certificates for such shares in accordance with the Stockholders Agreement. 13. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. 14. Governing Law; Entire Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and may not be modified except by written instrument executed by the parties. 4 11 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CANNONDALE CORPORATION By:______________________________ Its:_____________________________ (signature of Optionee) 5 12 AMENDMENT dated as of _____________ to the Non-qualified Stock Option Agreement (the "Agreement") by and between CANNONDALE CORPORATION (the "Company") and ____________________ (the "Optionee"). Pursuant to the Cannondale Corporation 1994 Stock Option Plan, the Company has heretofore granted to the Optionee the option to purchase shares of the Company's Common Stock pursuant to the Agreement. The Company has agreed to accelerate the vesting schedule set forth in the Agreement conditioned upon the Optionee's agreements set forth herein. Now, therefore, in consideration of the foregoing the Company and the Optionee agree that the Agreement is amended as follows: Paragraph 2 of the Agreement is deleted and-replaced in its entirety with the following: 2. Entitlement to Exercise Option; Term of Option. The Option shall be exercisable from and after July 2, 1994. Unless sooner terminated pursuant to the terms of this Agreement, the Option will expire if and to the extent it is not exercised on or before December 31, 2002. Except as amended as provided herein, the Agreement remains full force and effect in accordance with its terms. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CANNONDALE CORPORATION By:____________________________ Its:___________________________ 13 FORM OF STOCKHOLDERS AGREEMENT UNDER 1994 OPTION PLAN Cannondale Corporation is a Delaware corporation maintaining its principal place of business at 16 Trowbridge Drive, Bethel, Connecticut. It will be referred to in this Agreement as "Cannondale." You and the other parties to this Agreement are all directors, officers or employees of Cannondale who have acquired shares of common stock in Cannondale under options granted pursuant to the Cannondale Corporation 1994 Stock Option Plan (the "Plan"). Each such Stockholder is referred to this Agreement as "Stockholder" and the Cannondale common stock (or other capital stock of Cannondale issuable in respect of the common stock pursuant to an adjustment under the Plan) acquired by the officer or employee under an option granted pursuant to the Plan from time to time is referred to as "Stock". You have so acquired _______ shares of Stock and understand that the difference between the fair market value of such stock and the price you paid for such stock constitutes taxable income to you. As a condition of its receipt, you, as a Stockholder, have entered into this Agreement. This Agreement imposes restrictions on the sale or transfer of any Stock held by a Stockholder. The Stockholder agrees with Cannondale as follows: 1. So long as the Stockholder owns Stock, the Stockholder agrees to the restrictions described below on any voluntary or involuntary sale, gift, transfer, encumbrance or other disposition of any of the Stock or any interest in the Stock. 2. Unless the Stockholder shall have obtained the prior written approval of Cannondale, a Stockholder must offer to sell his Stock to Cannondale if any of the following events happen: (a) the Stockholder intends to attempts to sell or in any way transfers or encumbers any of the Stock or an interest in it to another party (except incident to the sale or transfer of substantially all of the outstanding Stock of the Corporation), or the Stock becomes subject to an involuntary transfer, such as by court order; (b) the Stockholder's employment by Cannondale is terminated for any reason, or in the case of a director of Cannondale the Stockholder ceases to be a member of the Cannondale Board of Directors for any reason; (c) the Stockholder seeks protection under any laws relating to debtors' or creditors' rights; (d) the death or permanent disability of the Stockholder; or (e) the Stockholder does not comply with this Agreement. 14 If either of the events listed under (a) or (c) above occurs, the Stockholder must give written notice to Cannondale. If either of the events listed under (b) or (d) occur, Cannondale will be deemed to have notice on the date the event happens and in if the event listed in paragraph (e) occurs, notice will be deemed to have occurred on the date ten days following the date on which Cannondale notifies a Stockholder that he is in breach of this Agreement, providing the Stockholder has not cured that breach to the satisfaction of Cannondale during that ten-day period. 3. The receipt of actual or deemed notice by Cannondale will constitute an offer by the affected Stockholder to sell all his Stock to Cannondale. Cannondale will then have a period of ninety days after the receipt of that notice to send written notice to the Stockholder (or in the case of the death of a Stockholder, to his or her legal representative) that Cannondale chooses to purchase the Stockholder's Stock. The purchase price for the Stock will be calculated in the manner described in paragraph 4 below. In addition to choosing to purchase the Stock itself, Cannondale may also designate another party to purchase the Stock, providing that party pays the same purchase price as Cannondale would. Once Cannondale provides notice that it accepts the offer to purchase the Stock, the Stockholder (or his legal representative) shall sell the Stock to Cannondale or its designee at a closing to be held at Cannondale's office within ninety days after that date, or sooner at Cannondale's election. If Cannondale chooses not to accept the offer to purchase the Stock prior to the end of the ninety-day period, then the Stockholder shall have an additional ninety-day period during which the Stockholder may sell or transfer the Stock free and clear of restrictions set forth in this Agreement, provided the Stockholder first notifies Cannondale of the terms and conditions of any such sale or transfer and gives Cannondale a ten-day option to purchase the Stock on the same terms and conditions. If the Stockholder chooses not to sell or transfer the Stock during that additional ninety-day period, the restrictions will continue and the Stockholder agrees to give notice to Cannondale of the occurrence of any subsequent event described in paragraph 2. 4. At the closing for the purchase of the Stock, the Stockholder (or his personal representative upon furnishing appropriate evidence of authority) shall deliver the Stock, duly endorsed for transfer or accompanied by a fully executed stock power, and shall receive the Purchase Price for each share of the Stock sold. The Purchase Price shall be computed by multiplying the Earnings Per Share of Stock times five. Earnings Per Share shall be equal to Average Net Income per share based on the weighted average number of shares of common stock during the most recent fiscal year determined on a fully diluted basis, taking into account all unexercised options and other similar arrangements as to rights to acquire common stock of Cannondale. Average Net Income shall be an amount equal to the sum of the following divided by four: (i) two times the consolidated net after tax income for the Cannondale's most recent fiscal year preceding the occurrence of the event causing the sale, (ii) consolidated net after tax income for the second most recent fiscal 2 15 year preceding such an event, and (iii) consolidated net after tax income for the third most recent fiscal year preceding such event. For purposes of the computation: (a) net income in any given year shall not be less than zero; (b) the following shall be excluded in the computation of net income: (i) income (or loss) from the sale or other disposition of assets outside the ordinary course of the Cannondale business and (ii) income (or loss) from any extraordinary items; and (c) in any year in which there are outstanding shares of Preferred Stock of the Corporation which provide for payment of dividends on a cumulative basis, the dividends paid or accrued on such Preferred Stock for such year shall be treated as expenses. All such computations shall be made in accordance with generally accepted accounting principles, except as otherwise specifically provided herein, applied by Cannondale's principal financial officer, or at Cannondale's election by its independent auditors, and shall be final and binding for the purposes of this Agreement unless shown to have been prepared in bad faith. In the event that the Corporation causes to be filed with the United States Securities and Exchange Commission (the "S.E.C.") a registration statement in connection with the sale of the common stock of the Corporation, from and after the date that such registration is deemed effective by the S.E.C. and for so long as such stock remains publicly traded, the Purchase Price shall be equal to the sum of the average closing sales prices per share of such stock on the principal market on which such stock is traded on each of the five trading days prior to (but not including) the date of closing of the purchase hereunder, divided by five. 5. Notwithstanding anything to the contrary contained herein, the restrictions contained in this Agreement on sale, gift, transfer, encumbrance or other disposition of Stock or any interest in Stock shall not be in effect for so long as stock of the same class as the Stock is publicly traded. 6. Each Stockholder understands that each certificate representing the Stock and any further certificates representing the Stock issued to him will state either on the front or back of the certificate that: The securities represented by the certificate are subject to the limitations and restrictions on their transfer provided in an agreement entitled "Stockholders Agreement," a copy of which is on file at Cannondale Corporation at its principal business office. The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under any state securities laws. Such shares have been acquired for investment purposes only and not with a view to distribution thereof. They may not be sold, offered for sale, transferred or otherwise disposed of in the absence of an effective registration statement under said Act or compliance with the requirements of any relevant state securities laws, or an opinion of counsel satisfactory to Cannondale Corporation that such registration or compliance is not required. This Agreement shall be governed by and construed under the laws of the State of Delaware. It may be signed in one or more counterparts, each of which shall be deemed an 3 16 original, but all of which together will constitute one and the same agreement. It shall be binding upon and enforceable by all of the parties o sign it and their respective successors, assigns, heirs, executors, administrators, other legal representatives or transferees. If any part of this Agreement is determined to be unenforceable, the remainder of the Agreement will continue in full force and effect. Any notices or communications given pursuant to this Agreement shall be either hand delivered or mailed by certified or registered mail to Cannondale at its principal office or to any Stockholder at the address shown on the employment records of Cannondale unless another address is provided in writing to Cannondale. This Agreement is effective as of _____________________, 199___. CANNONDALE CORPORATION By:________________________ Joseph S. Montgomery Its President STOCKHOLDER ___________________________ 4 EX-4.3 3 1994 MANAGEMENT STOCK OPTION PLAN AS AMENDED 1 EXHIBIT 4.3 CANNONDALE CORPORATION 1994 MANAGEMENT STOCK OPTION PLAN (As amended as of February 5, 1998) 1. Purpose. The purpose of the Cannondale Corporation 1994 Stock Option Plan (the "Plan") is to enable Cannondale Corporation (the "Company") and its stockholders to secure the benefits of common stock ownership by key executive employees of the Company and its subsidiaries, consultants and advisors to the Company and its subsidiaries, and outside directors of the Company. The Board of Directors of the Company (the "Board") believes that the granting of options under the Plan will foster the Company's ability to attract, retain and motivate those individuals who will be largely responsible for the continued profitability and long-term future growth of the Company. 2. Stock Subject to the Plan. The Company may issue and sell a total of 320,000 shares of its Common Stock, $0.01 par value per share (the "Common Stock"), pursuant to the Plan, 10,000 of which shall be set aside for options to directors to be issued pursuant to paragraph 4(b) below. Such shares may be either authorized and unissued or held by the Company in its treasury. New options may be granted under the Plan with respect to shares of Common Stock which are covered by the unexercised portion of an option which has terminated or expired by its terms, by cancellation or otherwise. 3. Administration. The Plan will be administered by a committee (the "Committee") consisting of at least two directors appointed by and serving at the pleasure of the Board, none of whom is, during the one year period prior to service on the Committee or during such service, granted or awarded any options pursuant to the Plan or any other plan of the Company (except under circumstances which will not result in such director ceasing to be a "disinterested person" within the meaning of Rule 16b-3(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Act")). If a Committee i8 not so established, the Board will perform the duties and functions ascribed herein to the Committee; provided, however, that from and after the date on which the Company first registers a class of equity securities under Section 12 of the Act, the Plan will be administered by a Committee as provided in the preceding sentence of this paragraph 3. Subject to the provisions of the Plan, the Committee, acting in its sole and absolute discretion, will have full power and authority to grant options under the Plan, to interpret the provisions of the Plan and option agreements made under the Plan, to supervise the administration of the Plan, and to take such other action as may be necessary or desirable in order to carry out the provisions of the Plan. A majority of the members of the Committee will constitute a quorum. The Committee may act by the vote of a majority of its members present at a meeting at which there is a quorum or by unanimous written consent. The decision of the Committee as to any disputed question, including questions of construction, interpretation and administration, will be final 2 and conclusive on all persons. The Committee will keep a record of its proceedings and acts and will keep or cause to be kept such books and records as may be necessary in connection with the proper administration of the Plan. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 4. Eligibility. (a) Options may be granted under the Plan to individuals who at present or in the future are employed in key executive positions with the Company or a subsidiary of the Company (a "Subsidiary") within the meaning of Section 424 (f) of the Internal Revenue Code of 1986, as amended (the "Code"), or who at the time of grant are engaged as consultants or advisors to the Company or a Subsidiary. Subject to the provisions of the Plan, the Committee may from time to time select the persons to whom options will be granted under the Plan, and will fix the number of shares covered by each such option and establish the terms and conditions thereof (including, without limitation, exercise price and restrictions on exercisability of the option or on the shares of Common Stock issued upon exercise thereof). (b) Options for 1,000 shares of Common Stock (up to 10,000 in the aggregate) shall be issued to each new director of the Company who is not an employee of the Company or a Subsidiary on the date such director was first elected to the Board, effective on the date of such director's appointment to the Board. Notwithstanding any other provision of the Plan, all such options issued under this paragraph 4(b) shall (i) have as the exercise price per share an amount equal to the fair market value on the effective date of the option and (ii) be fully vested and immediately exercisable. 5. Terms and Conditions of Options. Each option granted under the Plan will be evidenced by a written agreement in substantially the form attached hereto as Exhibit I, or such other form approved by the Committee from time to time. Each such option will be subject to the terms and conditions set forth in this paragraph and such additional terms and conditions not inconsistent with the Plan as the Committee deems appropriate. (a) Option Exercise Price. The exercise price per share may not be less than $1.00 per Share. (b) Exercise of Options. No option will become exercisable unless the person to whom the option was granted remains in the continuous employ or service as an officer or director of the Company or an affiliate for at least one year (or for such other period as the Committee may designate) from the date the option is granted; provided, however, that in the case of an option granted to a consultant or advisor to the Company or a Subsidiary there shall be no requirement for such person's continued provision of services to the Company or an affiliate unless such requirement is imposed by the Committee at the time the option is granted. For purposes hereof, "affiliate" means either a Subsidiary or any entity in an unbroken chain of 2 3 entities ending with the Company if each of the entities other than the Company owns an equity interest holding 25% of the total combined voting power of all equity holders in one of the other entities in such chain. Subject to earlier termination of the option as provided herein, unless the Committee determines otherwise, the option will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company or an affiliate following the date of grant:
Full Incremental Cumulative Years of Continuous Percentage of Percentage of Employment/ Option Option Service Exercisable Exercisable - ------- ----------- ----------- Less than 1 0% 0% 1 33-1/3% 33-1/3% 2 33-1/3% 66-2/3% 3 or more 33-1/3% 100%
provided, however, that in the event the exercise period of an option is three years or less, the foregoing schedule shall be deemed to be modified to provide that any remaining portion of the option shares which have not yet become exercisable shall become exercisable on the date which is one year prior to the date of expiration of the option; and provided, further, that an option granted to a consultant or advisor to the Company or an affiliate shall be immediately exercisable in full unless the Committee determines otherwise at the time of the option grant. All or part of the exercisable portion of an option may be exercised at any time during the option period, except that, without the consent of the Committee, no partial exercise of an option may be for less than 50 shares. An option may be exercised by transmitting to the Company (l) a written notice specifying the number of shares to be purchased, and (2) payment of the exercise price together with the amount, if any, deemed necessary by the Committee to enable the Company to satisfy its income tax withholding obligations with respect to such exercise (unless other arrangements acceptable to the Company are made with respect to the satisfaction of such withholding obligations). (c) Payment of Exercise Price. The purchase price of shares of Common Stock acquired pursuant to the exercise of an option granted under the Plan may be paid in cash and/or such other form of payment as may be permitted under the option agreement, including, without limitation, previously-owned shares of Common Stock owned for at least six months prior to the date of the option exercise. (d) Rights as a Stockholder. No shares of Common Stock will be issued in respect of the exercise of an option granted under the Plan until full payment therefor has been made (and/or provided for where all or a portion of the purchase price 3 4 is being paid in installments). The holder of an option will have no rights as a stockholder with respect to any shares covered by an option until the date a stock certificate for such shares is issued to him or her. Except as otherwise provided herein, no adjustments shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. (e) Nontransferability of Options. No option granted under the Plan may be assigned or transferred except by will or by the applicable laws of descent and distribution and each such option may be exercised during the optionee's lifetime only by the optionee. (f) Termination of Employment or Other Service. If an optionee ceases to be an employee of the Company or to perform services as a director for the Company and any affiliate for any reason other than death or disability (defined below), then each outstanding option granted to him or her under the Plan will terminate on the date three months after the date of such termination of employment or service (or, if earlier, the date specified in the option agreement). If an optionee's employment or service as director is terminated by reason of the optionee's death or disability (or if the optionee's employment or service is terminated by reason of his or her disability and the optionee dies within one year after such termination of employment or service), then each outstanding option granted to the optionee under the Plan will terminate on the date one year after the date of such termination of employment or service (or one year after the later death of a disabled optionee) or, if earlier, the date specified in the option agreement. For purposes hereof, the term "disability" means the inability of an optionee to perform the customary duties of his or her employment or service as director for the Company or an affiliate by reason of a physical or mental incapacity which is expected to result in death or be of indefinite duration (but in any event no less than twelve months). Notwithstanding the foregoing, if and to the extent that the option is exercisable at the time of the termination of services, an option granted to a consultant or advisor to the Company or an affiliate shall not terminate because such person ceases to provide services to the Company or an affiliate, unless the Committee provides otherwise at the time the option is granted. (g) Other Provisions. The Committee may impose such other conditions with respect to the exercise of options, including, without limitation, any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable. 6. Capital Changes; Reorganization; Sale. (a) Adjustments Upon Changes in Capitalization. The aggregate number and class of shares for which options may be granted under the Plan, the number and class of shares covered by 4 5 each outstanding option and the exercise price per share shall all be adjusted proportionately for any increase or decrease in the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or any like capital adjustment, or the payment of any Stock dividend. (b) Change of Control. (i) Except as provided in subparagraph (c) below, upon a Change of Control (as defined below), any option granted hereunder shall immediately become vested and the optionee shall have the right to exercise his or her option in whole or in part, so long as such option remains outstanding, whether or not any other vesting requirements set forth in the option agreement or herein have been satisfied. (ii) For the purpose of this Plan, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of Common Stock (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subparagraph A, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subparagraph C of this Section 6(b)(ii); or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C. Approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, 5 6 following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination would beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (c) Conversion of Options on Stock for Stock Exchange. If the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their Shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), all options granted hereunder shall be converted into options to purchase Shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their Role discretion, determine that any or all such options granted hereunder shall not be converted into options to purchase shares of Exchange Stock but instead shall terminate in accordance with the provisions of subparagraph (b) above. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, 6 7 consolidation, acquisition of property or stock, separation or reorganization. Unless the Board determines otherwise, the converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement or herein have been satisfied. (d) Fractional Shares. In the event of any adjustment in the number of shares covered by any option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded and each such option will cover only the number of full shares resulting from the adjustment. (e) Determination of Board to be Final. All adjustments under this paragraph 6 shall be made by the Board, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 7. Amendment and Termination of the Plan. The Board may amend or terminate the Plan. Except as otherwise provided in the Plan with respect to equity changes, any amendment which would increase the aggregate number of shares of Common Stock as to which options may be granted under the Plan, materially increase the benefits under the Plan, or modify the class of persons eligible to receive options under the Plan shall be subject to the approval of the holders of a majority of the Common Stock issued and outstanding and such other approvals as may be required by the provisions of the Company's Certificate of Incorporation or otherwise. No amendment or termination may affect adversely any outstanding option without the written consent of the optionee. 8. No Rights Conferred. Nothing contained herein will be deemed to give any individual any right to receive an option under the Plan or to be retained in the employ or service of the Company or any Subsidiary. 9. Governing Law. The Plan and each option agreement shall be governed by the laws of the State of Delaware. 10. Term of the Plan. The Plan shall be effective on the date the Plan is approved by the Board subject to the approval of the stockholders of the Company. The Plan will terminate on December 31, 2004, unless sooner terminated by the Board. The rights of optionees under options outstanding at the time of the termination of the Plan shall not be affected solely by reason of the termination and shall continue in accordance with the terms of the option (as then in effect or thereafter amended). 7 8 EXHIBIT I FORM OF CANNONDALE CORPORATION NON-QUALIFIED STOCK OPTION AGREEMENT AGREEMENT made as of __________, 199_ by and between CANNONDALE CORPORATION, a Delaware corporation (the "Company") and [__________] (the "Optionee"). Pursuant to the Cannondale Corporation 1994 Management Stock Option Plan (the "Plan"), the Company desires to grant to the Optionee and the Optionee desires to accept an option to purchase shares of the Common Stock, $0.01 par value, of the Company (the "Common Stock") upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the Company and the Optionee agree as follows: 1. Grant of Option; Option Price. The Company hereby grants to the Optionee an option to purchase [_________] shares of Common Stock at a purchase price per share of $[__________] (the "Option"). The Option is intended to be treated as an option which is not an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986. 2. Entitlement to Exercise Option; Term of Option. The Option shall only become exercisable in accordance with the following schedule based upon the number of full years of the Optionee's continuous employment, or continuous service as director, with the Company or an affiliate of the Company following the date of grant:
Full Incremental Cumulative Years of Continuous Percentage of Percentage of Employment/ Option Option Service Exercisable Exercisable - ------- ----------- ----------- Less than 1 0% 0% 1 33-1/3% 33-1/3% 2 33-1/3% 66-2/3% 3 or more 33-1/3% 100%
[OTHER ALTERNATIVES MAY BE CHOSEN BY THE COMMITTEE] Unless sooner terminated pursuant to the terms of this Agreement, the Option will expire if and to the extent it is not exercised on or before [__________________]. 3. Exercise of Option. Once the Optionee has satisfied the required continuous employment or services as a director in accordance with Section 2, the Option may be exercised in whole at any time or in part from time to time during the term of the 9 option, except that no partial exercise may be for less than 50 shares. To exercise the Option, the Optionee shall deliver to the President of the Company (a) a written notice specifying the number of shares of Common Stock to be purchased, and (b) payment in full of the exercise price, together with the amount, if any, deemed necessary by the Company to enable it to satisfy any income tax withholding obligations with respect to the exercise of the Option (unless other arrangements, acceptable to the Company, are made for the satisfaction of such withholding obligations); and (c) the Stockholders Agreement described in Section 12 below, fully executed by Optionee. The Company may (in its sole and absolute discretion) permit all or part of the exercise price to be paid with previously-owned Shares of Common Stock owned for at least six months prior to the date of option exercise. 4. Rights as a Stockholder. No Shares of Common Stock will be issued and delivered pursuant to an exercise of the Option until full payment for such shares has been made. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until a stock certificate for such shares is issued to the Optionee. Except as otherwise provided herein, no adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 5. Nontransferability of Option. The Option is not assignable or transferable except by will or by the applicable laws of descent and distribution, and is exercisable during the Optionee's lifetime only by the Optionee. 6. Termination of Employment or Service as a Director. If the Optionee ceases to be employed by or to be a director of the Company or any subsidiary for any reason other than death or disability, then, unless sooner terminated under the terms hereof, the Option will terminate on the date three months after the date of the optionee's termination of employment or service as director. If the Optionee's employment or service as a director i5 terminated by reason of the Optionee's death or disability (or if the optionee's employment or service is terminated by reason of the Optionee's disability and the Optionee dies within one year after such termination of employment or service), then, unless sooner terminated under the terms hereof, the Option will terminate on the date one year after the date of such termination of employment or service a8 director (or one year after the disabled Optionee's later death). 7. Investment Representation. In consideration of the grant of the Option, the Optionee hereby represents and warrants to the Company that upon an exercise of the Option, the shares purchased by the Optionee pursuant to such exercise, will be acquired for the Optionee's account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof. The optionee further acknowledges that 2 10 neither the Option nor any shares of Common Stock issuable upon exercise of the Option have been registered under the Securities Act of 1933 (the "Act") and may not be sold unless a registration under the Act is in effect with respect to the Shares and all relevant state securities laws have been complied with or unless an exemption from such registration or compliance is available under the Act or any relevant state securities law. The certificates representing any shares of Common Stock issued upon exercise of the Option shall bear a legend to such effect as the Company's counsel shall deem necessary or desirable. The Option shall in no event be exercisable and shares shall not be issued hereunder if, in the opinion of counsel to the Company, such exercise and/or issuance would result in a violation of federal or state securities laws. 8. Capital Changes, Reorganization, Sale. (a) In case of any split-up or consolidation of shares or any like capital adjustment, or the payment of a stock dividend, which increase or decreases the number of outstanding shares of Common Stock, appropriate adjustment shall be made to the number of shares and the exercise price per share which may still be purchased under this Agreement. (b) Upon a Change of Control (as defined in the Plan), the Option granted hereunder shall immediately become vested and the Optionee shall have the right to exercise the Option in whole or in part, so long as the Option remains outstanding, whether or not the one year of continuous employment or service as an officer as provided in Section 2 has been satisfied. (c) However, if the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), the Option granted hereunder shall be converted into an option to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that the option shall not be converted into an option to purchase shares of Exchange Stock but instead shall vest in accordance with the provisions set forth in subparagraph (b) above. The amount and price of the converted option shall be determined by adjusting the amount and price of the Option granted hereunder on the same basis as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board of Directors of the Company determines otherwise, the converted option shall be fully vested, whether or not the 3 11 requirements set forth in this Agreement shall have been satisfied. (d) In the event of any adjustment in the number of shares covered by the Option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded, and the Option will cover only the number of full shares resulting from the adjustment. (e) All adjustments under this Section 8 shall be made by the Board of Directors, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 9. No Rights Conferred. Nothing in this Agreement shall give the Optionee any right to continue in the employ or service of the Company or an affiliate or interfere in any way with the right of the Company to terminate the employment or service of the Optionee. 10. Plan Provisions Control. The provisions of the Plan shall govern if and to the extent that there are inconsistencies between the provisions of the Plan and the provisions of this Agreement. The Optionee acknowledges that the Optionee has received a copy of the Plan prior to the execution of this Agreement, and that the provisions of the Plan are incorporated herein by reference. 11. Tax Considerations. Optionee hereby acknowledges and understands that (a) pursuant to the Internal Revenue Code as currently in effect, the difference between the fair market value of the Stock on the date he exercises the Option and the Option price will be taxable income to him in the year he exercises the Option and (b) the Company may be required to withhold Federal, state or local taxes with respect to the compensation income, if any, realized by Optionee upon an exercise of the Option. If the Company determines that such withholding is required, Optionee agrees either to provide the Company at the time of any exercise of the Option with funds equal to the amount of taxes which the Company determines must be withheld or to make other arrangements satisfactory to the Company regarding such payment, including authorizing the Company to withhold such amounts from any payment, including authorizing the Company to withhold such amounts from any payments to which he is entitled. All matters with respect to the withholding of taxes resulting from an exercise of the Option shall be determined by the Board of Directors of the Company and such determination shall be conclusive and binding. 12. Stockholders Agreement. The Optionee hereby acknowledges and agrees that all shares of Common Stock issued upon an exercise of the Option shall be subject to the restrictions and obligations on transfer imposed on a Stockholder as provided in the form of Stockholders Agreement, attached 4 12 hereto between the Company and the Optionee (the "Stockholders Agreement"), a copy of which accompanies this Agreement. The Optionee, as a condition to the receipt of the Option, hereby agrees to execute the Stockholders Agreement upon exercise of the Option in whole or in part and to be bound by all the terms and conditions imposed on a Stockholder under the Stockholders Agreement with respect to the shares of Common Stock issuable upon exercise of the Option and consents to the legending of the stock certificates for such shares in accordance with the Stockholders Agreement. 13. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns. 14. Governing Law; Entire Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and may not be modified except by written instrument executed by the parties. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CANNONDALE CORPORATION By:__________________________________ Its_____________________________ _____________________________________ [signature of Optionee] 5 EX-4.4 4 1995 STOCK OPTION PLAN AS AMENDED FEBRUARY 5, 1998 1 EXHIBIT 4.4 CANNONDALE CORPORATION 1995 STOCK OPTION PLAN (As amended as of February 5, 1998) 1. Purpose. The purpose of the Cannondale Corporation 1995 Stock Option Plan (the "Plan") is to enable Cannondale Corporation (the "Company") and its stockholders to secure the benefits of common stock ownership by employees and officers of the Company and its subsidiaries, and by consultants and advisors to the Company and its subsidiaries. The Board of Directors of the Company (the "Board") believes that the granting of options under the Plan will foster the Company's ability to attract, retain and motivate those individuals who will be largely responsible for the continued profitability and long-term future growth of the Company. 2. Stock Subject to the Plan. The Company may issue and sell a total of 500,000 shares of its Common Stock, $0.01 par value per share (the "Common Stock"), pursuant to the Plan. Such shares may be either authorized and unissued or held by the Company in its treasury. New options may be granted under the Plan with respect to shares of Common Stock which are covered by the unexercised portion of an option which has terminated or expired by its terms, by cancellation or otherwise. 3. Administration. The Plan will be administered by a committee (the "Committee") consisting of at least two directors appointed by and serving at the pleasure of the Board, none of whom is, during the one year period prior to service on the Committee or during such service, granted or awarded any options pursuant to the Plan or any other plan of the Company (except under circumstances which will not result in such director ceasing to be a "disinterested person" within the meaning of Rule 16b-3(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Act")). Subject to the provisions of the Plan, the Committee, acting in its sole and absolute discretion, will have full power and authority to grant options under the Plan, to interpret the provisions of the Plan and option agreements made under the Plan, to supervise the administration of the Plan, and to take such other action as may be necessary or desirable in order to carry out the provisions of the Plan. A majority of the members of the Committee will constitute a quorum. The Committee may act by the vote of a majority of its members present at a meeting at which there is a quorum or by unanimous written consent. The decision of the Committee as to any disputed question, including questions of construction, interpretation and administration, will be final and conclusive on all persons. The Committee will keep a record of its proceedings and acts and will keep or cause to be kept such books and records as may be necessary in connection with the proper administration of the Plan. No member of the Committee shall be liable for any action 2 taken or decision made in good faith relating to the Plan or any award thereunder. 4. Eligibility. Options may be granted under the Plan to individuals who at present or in the future serve as employees or officers of the Company or a subsidiary of the Company (a "Subsidiary") within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or who at the time of grant are engaged as consultants or advisors to the Company or a Subsidiary. Subject to the provisions of the Plan, the Committee may from time to time select the persons to whom options will be granted under the Plan, and will fix the number of shares covered by each such option and establish the terms and conditions thereof (including, without limitation, exercise price and restrictions on exercisability of the option or on the shares of Common Stock issued upon exercise thereof). 5. Terms and Conditions of Options. Each option granted under the Plan will be evidenced by a written agreement in substantially the form attached hereto as Exhibit I, or such other form approved by the Committee from time to time. Each such option will be subject to the terms and conditions set forth in this paragraph and such additional terms and conditions not inconsistent with the Plan as the Committee deems appropriate. (a) Option Exercise Price. The exercise price per share may not be less than $1.00 per share. (b) Exercise of Options. No option will become exercisable unless the person to whom the option was granted remains in the continuous employ or service as an officer of the Company or an affiliate for at least one year (or for such other period as the Committee may designate) from the date the option is granted; provided, however, that in the case of an option granted to a consultant or advisor to the Company or a Subsidiary, there shall be no requirement for such person's continued provision of services to the Company or an affiliate unless such requirement is imposed by the Committee at the time the option is granted. For purposes hereof, "affiliate" means either a Subsidiary or any entity in an unbroken chain of entities ending with the Company if each of the entities other than the Company owns an equity interest holding 25% of the total combined voting power of all equity holders in one of the other entities in such chain. Subject to earlier termination of the option as provided herein, unless the Committee determines otherwise, the option will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company or an affiliate following the date of grant: - 2 - 3
Full Cumulative Years of Continuous Percentage of Percentage of Employment/ Option Option Service Exercisable Exercisable Less than 1 0% 0% 1 33_% 33_% 2 33_% 66_% 3 or more 33_% 100%
provided, however, that in the event the exercise period of an option is three years or less, the foregoing schedule shall be deemed to be modified to provide that any remaining portion of the option shares which have not yet become exercisable shall become exercisable on the date which is one year prior to the date of expiration of the option; and provided, further, that an option granted to a consultant or advisor to the Company or an affiliate shall be immediately exercisable in full unless the Committee determines otherwise at the time of the option grant. All or part of the exercisable portion of an option may be exercised at any time during the option period, except that, without the consent of the Committee, no partial exercise of an option may be for less than 50 shares. An option may be exercised by transmitting to the Company (1) a written notice specifying the number of shares to be purchased, and (2) payment of the exercise price together with the amount, if any, deemed necessary by the Committee to enable the Company to satisfy its income tax withholding obligations with respect to such exercise (unless other arrangements acceptable to the Company are made with respect to the satisfaction of such withholding obligations). (c) Payment of Exercise Price. The purchase price of shares of Common Stock acquired pursuant to the exercise of an option granted under the Plan may be paid in cash and/or such other form of payment as may be permitted under the option agreement, including, without limitation, previously-owned shares of Common Stock owned for at least six months prior to the date of option exercise. (d) Rights as a Stockholder. No shares of Common Stock will be issued in respect of the exercise of an option granted under the Plan until full payment therefor has been made (and/or provided for where all or a portion of the purchase price is being paid in installments). The holder of an option will have no rights as a stockholder with respect to any shares covered by an option until the date a stock certificate for such shares is issued to him or her. Except as otherwise provided herein, no adjustments shall be made for dividends or - 3 - 4 distributions or other rights for which the record date is prior to the date such stock certificate is issued. (e) Nontransferability of Options. No option granted under the Plan may be assigned or transferred except by will or by the applicable laws of descent and distribution and each such option may be exercised during the optionee's lifetime only by the optionee. (f) Termination of Employment or Other Service. If an optionee ceases to be an employee or to perform services as an officer for the Company and any affiliate for any reason other than death or disability (defined below), then each outstanding option granted to him or her under the Plan will terminate on the date three months after the date of such termination of employment or service (or, if earlier, the date specified in the option agreement). If an optionee's employment or service is terminated by reason of the optionee's death or disability (or if the optionee's employment or service is terminated by reason of his or her disability and the optionee dies within one year after such termination of employment or service), then each outstanding option granted to the optionee under the Plan will terminate on the date one year after the date of such termination of employment or service (or one year after the later death of a disabled optionee) or, if earlier, the date specified in the option agreement. For purposes hereof, the term "disability" means the inability of an optionee to perform the customary duties of his or her employment or other service for the Company or an affiliate by reason of a physical or mental incapacity which is expected to result in death or be of indefinite duration (but in any event no less than twelve months). Notwithstanding the foregoing, if and to the extent that the option is exercisable at the time of termination of services, an option granted to a consultant or advisor to the Company or an affiliate shall not terminate because such person ceases to provide services to the Company or an affiliate, unless the Committee provides otherwise at the time the option is granted. (g) Other Provisions. The Committee may impose such other conditions with respect to the exercise of options, including, without limitation, any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable. 6. Capital Changes, Reorganization, Sale. (a) Adjustments Upon Changes in Capitalization. The aggregate number and class of shares for which options may be granted under the Plan, the number and class of shares covered by each outstanding option and the exercise price per share shall all be adjusted proportionately for any increase or decrease in - 4 - 5 the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or any like capital adjustment, or the payment of any stock dividend. (b) Change of Control. (i) Except as provided in subparagraph (c) below, upon a Change of Control (as defined below), any option granted hereunder shall immediately become vested and the optionee shall have the right to exercise his or her option in whole or in part, so long as such option remains outstanding, whether or not any other vesting requirements set forth in the option agreement or herein have been satisfied. (ii) For the purpose of this Plan, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of Common Stock (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subparagraph A, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subparagraph C of this Section 6(b)(ii); or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C. Approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or - 5 - 6 other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination would beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (c) Conversion of Options on Stock for Stock Exchange. If the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), all options granted hereunder shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted hereunder shall not be converted into options to purchase shares - 6 - 7 of Exchange Stock but instead shall be exercisable and terminate in accordance with the provisions of subparagraph (b) above. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board determines otherwise, the converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement or herein have been satisfied. (d) Fractional Shares. In the event of any adjustment in the number of shares covered by any option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded and each such option will cover only the number of full shares resulting from the adjustment. (e) Determination of Board to be Final. All adjustments under this paragraph 6 shall be made by the Board, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 7. Amendment and Termination of the Plan. The Board may amend or terminate the Plan. Except as otherwise provided in the Plan with respect to equity changes, any amendment which would increase the aggregate number of shares of Common Stock as to which options may be granted under the Plan, materially increase the benefits under the Plan, or modify the class of persons eligible to receive options under the Plan shall be subject to the approval of the holders of a majority of the Common Stock issued and outstanding and such other approvals as may be required by the provisions of the Company's Certificate of Incorporation or otherwise. No amendment or termination may affect adversely any outstanding option without the written consent of the optionee. 8. No Rights Conferred. Nothing contained herein will be deemed to give any individual any right to receive an option under the Plan or to be retained in the employ or service of the Company or any Subsidiary. 9. Governing Law. The Plan and each option agreement shall be governed by the laws of the State of Delaware. 10. Stockholder Approval; Term of the Plan. The Plan shall be effective as of September 28, 1995, subject to the approval of the stockholders of the Company on or before September 28, 1996. Any options awarded under the Plan prior to such stockholder approval shall be conditioned upon such approval being obtained and in the event such approval is not obtained all such options - 7 - 8 shall be automatically null and void. The Plan will terminate on December 31, 2005, unless sooner terminated by the Board. The rights of optionees under options outstanding at the time of the termination of the Plan shall not be affected solely by reason of the termination and shall continue in accordance with the terms of the option (as then in effect or thereafter amended). - 8 - 9 EXHIBIT I FORM OF CANNONDALE CORPORATION NON-QUALIFIED STOCK OPTION AGREEMENT AGREEMENT made as of [__________], 199 by and between CANNONDALE CORPORATION, a Delaware corporation (the "Company") and [__________] (the "Optionee"). Pursuant to the Cannondale Corporation 1995 Stock Option Plan (the "Plan"), the Company desires to grant to the Optionee and the Optionee desires to accept an option to purchase shares of the Common Stock, $0.01 par value, of the Company (the "Common Stock") upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the Company and the Optionee agree as follows: 1. Grant of Option; Option Price. The Company hereby grants to the Optionee an option to purchase [____] shares of Common Stock at a purchase price per share of $[_____] (the "Option"). The Option is intended to be treated as an option which is not an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986. 2. Entitlement to Exercise Option; Term of Option. [FOR EMPLOYEES AND OFFICERS:] The Option shall only become exercisable in accordance with the following schedule based upon the number of full years of the Optionee's continuous employment, or continuous service as an officer of the Company or an affiliate of the Company following the date of grant:
Full Cumulative Years of Continuous Percentage of Percentage of Employment/ Option Option Service Exercisable Exercisable Less than 1 0% 0% 1 33_% 33_% 2 33_% 66_% 3 or more 33_% 100%
[FOR NON-EMPLOYEE ADVISORS AND CONSULTANTS ONLY:] The Option shall be immediately exercisable in full. [OTHER ALTERNATIVES MAY BE CHOSEN BY THE COMMITTEE] 10 Unless sooner terminated pursuant to the terms of this Agreement, the Option will expire if and to the extent it is not exercised on or before [ ]. 3. Exercise of Option. Once the Optionee has satisfied the continuous employment, service as an officer or other requirements, if any, contained in Section 2, the Option may be exercised in whole at any time or in part from time to time during the term of the Option, except that no partial exercise may be for less than 50 shares. To exercise the Option, the Optionee shall deliver to the President of the Company (a) a written notice specifying the number of shares of Common Stock to be purchased, and (b) payment in full of the exercise price, together with the amount, if any, deemed necessary by the Company to enable it to satisfy any income tax withholding obligations with respect to the exercise of the Option (unless other arrangements, acceptable to the Company, are made for the satisfaction of such withholding obligations), and (c) the Stockholders Agreement described in Section 12 below, fully executed by Optionee. The Company may (in its sole and absolute discretion) permit all or part of the exercise price to be paid with previously-owned shares of Common Stock owned for at least six months prior to the date of option exercise. 4. Rights as a Stockholder. No shares of Common Stock will be issued and delivered pursuant to an exercise of the Option until full payment for such shares has been made. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until a stock certificate for such shares is issued to the Optionee. Except as otherwise provided herein, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such stock certificate is issued. 5. Nontransferability of Option. The Option is not assignable or transferable except by will or by the applicable laws of descent and distribution, and is exercisable during the Optionee's lifetime only by the Optionee. 6. Termination of Employment or Service as Officer. If the Optionee ceases to be employed by or to be an officer of the Company or any subsidiary for any reason other than death or disability, then, unless sooner terminated under the terms hereof, the Option will terminate on the date three months after the date of the Optionee's termination of employment or service as an officer. If the Optionee's employment or service is terminated by reason of the Optionee's death or disability (or if the Optionee's employment or service is terminated by reason of the Optionee's disability and the Optionee dies within one year after such termination of employment or service), then, unless sooner terminated under the terms hereof, the Option will terminate on the date one year after the date of such termination of employment or service (or one year after the disabled - 2 - 11 Optionee's later death). This paragraph shall not be applicable to an Option granted to an Optionee as an outside consultant or advisor to the Company. [NOTE - - THE COMMITTEE MAY DETERMINE OTHERWISE, IN WHICH CASE PARAGRAPH WOULD BE MODIFIED] 7. Investment Representation. In consideration of the grant of the Option, the Optionee hereby represents and warrants to the Company that upon an exercise of the Option, the shares purchased by the Optionee pursuant to such exercise, will be acquired for the Optionee's account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof. The Optionee further acknowledges that neither the Option nor any shares of Common Stock issuable upon exercise of the Option have been registered under the Securities Act of 1933 (the "Act") and may not be sold unless a registration under the Act is in effect with respect to the Shares and all relevant state securities laws have been complied with or unless an exemption from such registration or compliance is available under the Act or any relevant state securities law. The certificates representing any shares of Common Stock issued upon exercise of the Option shall bear a legend to such effect as the Company's counsel shall deem necessary or desirable. The Option shall in no event be exercisable and shares shall not be issued hereunder if, in the opinion of counsel to the Company, such exercise and/or issuance would result in a violation of federal or state securities laws. 8. Capital Changes, Reorganization, Sale. (a) In case of any split-up or consolidation of shares or any like capital adjustment, or the payment of a stock dividend, which increases or decreases the number of outstanding shares of Common Stock, appropriate adjustment shall be made to the number of shares and the exercise price per share which may still be purchased under this Agreement. (b) Upon a Change of Control (as defined in the Plan), the Option granted hereunder shall immediately become vested and the Optionee shall have the right to exercise the Option in whole or in part, so long as the Option remains outstanding, whether or not the requirements of continuous employment or service as an officer as provided in Section 2 has been satisfied. (c) However, if the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), the Option granted hereunder shall be converted into an option to purchase shares of Exchange Stock unless the Company - 3 - 12 and the corporation issuing the Exchange Stock, in their sole discretion, determine that the Option shall not be converted into an option to purchase shares of Exchange Stock but instead shall vest in accordance with the provisions set forth in subparagraph (b) above. The amount and price of the converted option shall be determined by adjusting the amount and price of the Option granted hereunder on the same basis as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board of Directors of the Company determines otherwise, the converted option shall be fully vested, whether or not the requirements set forth in this Agreement shall have been satisfied. (d) In the event of any adjustment in the number of shares covered by the Option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded, and the Option will cover only the number of full shares resulting from the adjustment. (e) All adjustments under this Section 8 shall be made by the Board of Directors, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 9. No Rights Conferred. Nothing in this Agreement shall give the Optionee any right to continue in the employ or service of the Company or an affiliate or interfere in any way with the right of the Company to terminate the employment or service of the Optionee. 10. Plan Provisions Control. The provisions of the Plan shall govern if and to the extent that there are inconsistencies between the provisions of the Plan and the provisions of this Agreement. The Optionee acknowledges that the Optionee has received a copy of the Plan prior to the execution of this Agreement, and that the provisions of the Plan are incorporated herein by reference. 11. Tax Considerations. Optionee hereby acknowledges and understands that (a) pursuant to the Internal Revenue Code as currently in effect, the difference between the fair market value of the Stock on the date he exercises the Option and the Option price will be taxable income to him in the year he exercises the Option and (b) the Company may be required to withhold Federal, state or local taxes with respect to the compensation income, if any, realized by Optionee upon an exercise of the Option. If the Company determines that such withholding is required, Optionee agrees either to provide the Company at the time of any exercise of the Option with funds equal to the amount of taxes which the Company determines must be withheld or to make other arrangements satisfactory to the Company regarding such payment, including - 4 - 13 authorizing the Company to withhold such amounts from any payments to which he is entitled. All matters with respect to the withholding of taxes resulting from an exercise of the Option shall be determined by the Board of Directors of the Company and such determination shall be conclusive and binding. 12. Stockholders Agreement. The Optionee hereby acknowledges and agrees that all shares of Common Stock issued upon an exercise of the Option shall be subject to the restrictions and obligations on transfer imposed on a Stockholder as provided in the form of Stockholders Agreement, attached hereto between the Company and the Optionee (the "Stockholders Agreement"), a copy of which accompanies this Agreement. The Optionee, as a condition to the receipt of the Option, hereby agrees to execute the Stockholders Agreement upon exercise of the Option in whole or in part and to be bound by all the terms and conditions imposed on a Stockholder under the Stockholders Agreement with respect to the shares of Common Stock issuable upon exercise of the Option and consents to the legending of the stock certificates for such shares in accordance with the Stockholders Agreement. 13. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and permitted assigns; provided however, that this Agreement and the grant of the Option hereunder shall be null and void and of no further force and effect in the event the Plan is not approved by the stockholders of the Company on or before September 28, 1996. 14. Governing Law; Entire Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and may not be modified except by written instrument executed by the parties. - 5 - 14 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CANNONDALE CORPORATION By:_________________________ Its__________________ [signature of Optionee] ____________________________________ - 6 - 15 FORM OF STOCKHOLDERS AGREEMENT UNDER 1995 OPTION PLAN Cannondale Corporation is a Delaware corporation maintaining its principal place of business at 16 Trowbridge Drive, Bethel, Connecticut. It will be referred to in this Agreement as "Cannondale." You and the other parties to this Agreement are all employees or officers of Cannondale, or consultants or advisors to Cannondale, who have acquired shares of common stock in Cannondale under options granted pursuant to the Cannondale Corporation 1995 Stock Option Plan (the "Plan"). Each such Stockholder is referred to in this Agreement as "Stockholder" and the Cannondale common stock (or other capital stock of Cannondale issuable in respect of the common stock pursuant to an adjustment under the Plan) acquired by the person under an option granted pursuant to the Plan from time to time is referred to as "Stock". You have so acquired shares of Stock and understand that the difference between the fair market value of such stock and the price you paid for such stock constitutes taxable income to you. As a condition of its receipt, you, as a Stockholder, have entered into this Agreement. This Agreement imposes restrictions on the sale or transfer of any Stock held by a Stockholder. The Stockholder agrees with Cannondale as follows: 1. So long as the Stockholder owns Stock, the Stockholder agrees to the restrictions described below on any voluntary or involuntary sale, gift, transfer, encumbrance or other disposition of any of the Stock or any interest in the Stock. 2. Unless the Stockholder shall have obtained the prior written approval of Cannondale, a Stockholder must offer to sell his Stock to Cannondale if any of the following events happen: (a) the Stockholder intends or attempts to sell or in any way transfers or encumbers any of the Stock or an interest in - 7 - 16 it to another party (except incident to the sale or transfer of substantially all of the outstanding Stock of the Corporation), or the Stock becomes subject to an involuntary transfer, such as by court order; (b) the Stockholder's employment by Cannondale is terminated for any reason, or in the case of a non-employee officer of Cannondale, the Stockholder ceases to be an officer of Cannondale for any reason; (c) the Stockholder seeks protection under any laws relating to debtors' or creditors' rights; (d) the death or permanent disability of the Stockholder; or (e) the Stockholder does not comply with this Agreement. If either of the events listed under (a) or (c) above occurs, the Stockholder must give written notice to Cannondale. If either of the events listed under (b) or (d) occur, Cannondale will be deemed to have notice on the date the event happens and if the event listed in paragraph (e) occurs, notice will be deemed to have occurred on the date ten days following the date on which Cannondale notifies a Stockholder that he is in breach of this Agreement, providing the Stockholder has not cured that breach to the satisfaction of Cannondale during that ten-day period. 3. The receipt of actual or deemed notice by Cannondale will constitute an offer by the affected Stockholder to sell all his Stock to Cannondale. Cannondale will then have a period of ninety days after the receipt of that notice to send written notice to the Stockholder (or in the case of the death of a Stockholder, to his or her legal representative) that Cannondale chooses to purchase the Stockholder's Stock. The purchase price for the Stock will be calculated in the manner described in paragraph 4 below. In addition to choosing to purchase the Stock itself, Cannondale may also designate another - 8 - 17 party to purchase the Stock, providing that party pays the same purchase price as Cannondale would. Once Cannondale provides notice that it accepts the offer to purchase the Stock, the Stockholder (or his legal representative) shall sell the Stock to Cannondale or its designee at a closing to be held at Cannondale's office within ninety days after that date, or sooner at Cannondale's election. If Cannondale chooses not to accept the offer to purchase the Stock prior to the end of the ninety-day period, then the Stockholder shall have an additional ninety-day period during which the Stockholder may sell or transfer the Stock free and clear of restrictions set forth in this Agreement, provided the Stockholder first notifies Cannondale of the terms and conditions of any such sale or transfer and gives Cannondale a ten-day option to purchase the Stock on the same terms and conditions. If the Stockholder chooses not to sell or transfer the Stock during that additional ninety-day period, the restrictions will continue and the Stockholder agrees to give notice to Cannondale of the occurrence of any subsequent event described in paragraph 2. 4. At the closing for the purchase of the Stock, the Stockholder (or his personal representative upon furnishing appropriate evidence of authority) shall deliver the Stock, duly endorsed for transfer or accompanied by a fully executed stock power, and shall receive the Purchase Price for each share of the Stock sold. The Purchase Price shall be computed by multiplying the Earnings Per Share of Stock times five. Earnings Per Share shall be equal to Average Net Income per share based on the weighted average number of shares of common stock during the most recent fiscal year determined on a fully diluted basis, taking into account all unexercised options and other similar arrangements as to rights to acquire common stock of Cannondale. Average Net Income shall be an amount equal to the sum of the following divided by four: (i) two times the consolidated net after tax - 9 - 18 income for Cannondale's most recent fiscal year preceding the occurrence of the event causing the sale, (ii) consolidated net after tax income for the second most recent fiscal year preceding such an event, and (iii) consolidated net after tax income for the third most recent fiscal year preceding such event. For purposes of the computation: (a) net income in any given year shall not be less than zero; (b) the following shall be excluded in the computation of net income: (i) income (or loss) from the sale or other disposition of assets outside the ordinary course of the Cannondale business, and (ii) income (or loss) from any extraordinary items; and (c) in any year in which there are outstanding shares of Preferred Stock of the Corporation which provide for payment of dividends on a cumulative basis, the dividends paid or accrued on such Preferred Stock for such year shall be treated as expenses. All such computations shall be made in accordance with generally accepted accounting principles, except as otherwise specifically provided herein, applied by Cannondale's principal financial officer, or at Cannondale's election by its independent auditors, and shall be final and binding for the purposes of this Agreement unless shown to have been prepared in bad faith. In the event that the Corporation causes to be filed with the United States Securities and Exchange Commission (the "S.E.C.") a registration statement in connection with the sale of the common stock of the Corporation, from and after the date that such registration is deemed effective by the S.E.C. and for so long as such stock remains publicly traded, the Purchase Price shall be equal to the sum of the average closing sales prices per share of such stock on the principal market on which such stock is traded on each of the five trading days prior to (but not including) the date of closing of the purchase hereunder, divided by five. 5. Notwithstanding anything to the contrary contained herein, the restrictions contained in this Agreement on sale, gift, transfer, encumbrance or other disposition of Stock or any - 10 - 19 interest in Stock shall not be in effect for so long as stock of the same class as the Stock is publicly traded. 6. Each Stockholder understands that each certificate representing the Stock and any further certificates representing the Stock issued to him will bear such legends as are applicable, including without limitation, the following: The securities represented by the certificate are subject to the limitations and restrictions on their transfer provided in an agreement entitled "Stockholders Agreement," a copy of which is on file at Cannondale Corporation at its principal business office. This Agreement shall be governed by and construed under the laws of the State of Delaware. It may be signed in one or more counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same agreement. It shall be binding upon and enforceable by all of the parties who sign it and their respective successors, assigns, heirs, executors, administrators, other legal representatives or transferees. If any part of this Agreement is determined to be unenforceable, the remainder of the Agreement will continue in full force and effect. Any notices or communications given pursuant to this Agreement shall be either hand delivered or mailed by certified or registered mail to Cannondale at its principal office or to any Stockholder at the address shown on the employment records of Cannondale unless another address is provided in writing to Cannondale. This Agreement is effective as of ____________, 199_. CANNONDALE CORPORATION By: ______________________________ Joseph S. Montgomery Its President STOCKHOLDER _________________________________ - 11 - EX-4.5 5 1996 STOCK OPTION PLAN AS AMENDED FEBRUARY 5, 1998 1 CANNONDALE CORPORATION 1996 STOCK OPTION PLAN (As amended as of February 5, 1998) 1. Purpose. The purpose of the Cannondale Corporation 1996 Stock Option Plan (the "Plan") is to enable Cannondale Corporation (the "Company") and its stockholders to secure the benefits of common stock ownership by employees and officers of the Company and its subsidiaries and by consultants and advisors to the Company and its subsidiaries. The Board of Directors of the Company (the "Board") believes that the granting of options under the Plan will foster the Company's ability to attract, retain and motivate those individuals who will be largely responsible for the continued profitability and long-term future growth of the Company. 2. Stock Subject to the Plan. The Company may issue and sell a total of 750,000 shares of its Common Stock, $0.01 par value per share (the "Common Stock"), pursuant to the Plan. Such shares may be either authorized and unissued or held by the Company in its treasury. New options may be granted under the Plan with respect to shares of Common Stock which are covered by the unexercised portion of an option which has terminated or expired by its terms, by cancellation or otherwise. 3. Administration. The Plan will be administered by a committee (the "Committee") consisting of at least two Non-Employee directors within the meaning of Rule 16b-3(b)(3) promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), appointed by and serving at the pleasure of the Board. Subject to the provisions of the Plan, the Committee, acting in its sole and absolute discretion, will have full power and authority to grant options under the Plan, to interpret the provisions of the Plan and option award agreements made under the Plan, to supervise the administration of the Plan, and to take such other action as may be necessary or desirable in order to carry out the provisions of the Plan. A majority of the members of the Committee will constitute a quorum. The Committee may act by the vote of a majority of its members present at a meeting at which there is a quorum or by unanimous written consent. The decision of the Committee as to any disputed question, including questions of construction, interpretation and administration, will be final and conclusive on all persons. The Committee will keep a record of its proceedings and acts and will keep or cause to be kept such books and records as may be necessary in connection with the proper administration of the Plan. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 4. Eligibility. Options may be granted under the Plan to individuals who at present or in the future serve as employees or officers of the Company or a subsidiary of the Company (a "Subsidiary") within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or who at the time of grant are engaged as consultants or advisors to the Company or a Subsidiary. Subject to the provisions of the Plan, the Committee may from time to time select the persons to whom options will be granted under the Plan, and will fix the number of shares covered by each such option and establish the terms and conditions thereof 2 (including, without limitation, exercise price and restrictions on exercisability of the option or on the shares of Common Stock issued upon exercise thereof). 5. Terms and Conditions of Options. Each option granted under the Plan will be evidenced by a written award agreement in substantially the form attached hereto as Exhibit I, or such other form approved by the Committee from time to time. Each such option will be subject to the terms and conditions set forth in this paragraph and such additional terms and conditions not inconsistent with the Plan as the Committee deems appropriate as reflected in the written award agreement. (a) Option Exercise Price. The exercise price per share may not be less than 100% of the Fair Market Value of a share of the Common Stock on the date of grant of the option. "Fair Market Value" shall mean the closing price of a share of the Common Stock on the Nasdaq National Market, or, if the Company elects to list the Common Stock on another exchange instead of the Nasdaq National Market, on such other exchange, on the date immediately preceding the date of grant of the option, or if no shares were traded on such determination date, the next preceding date on which the Common Stock was traded, or the Fair Market Value as determined by any other method adopted by the Committee from time to time, which the Committee may deem appropriate under the circumstances, or as may be required in order to comply with the requirements of applicable laws and regulations. (b) Exercise of Options. No option will become exercisable unless the person to whom the option was granted remains in the continuous employ or service as an officer of the Company or an affiliate for at least one year (or for such other period as the Committee may designate) from the date the option is granted; provided, however, that in the case of an option granted to a consultant or advisor to the Company or a Subsidiary, there shall be no requirement for such person's continued provision of services to the Company or an affiliate unless such requirement is imposed by the Committee at the time the option is granted. For purposes of this Plan, "affiliate" means either a Subsidiary or any entity in an unbroken chain of entities ending with the Company if each of the entities other than the Company owns an equity interest holding 25% of the total combined voting power of all equity holders in one of the other entities in such chain. Subject to earlier termination of the option as provided herein, unless the Committee determines otherwise, the option will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company or an affiliate following the date of grant: Full Incremental Cumulative Years of Continuous Percentage of Percentage of Employment/ Option Option Service Exercisable Exercisable Less than 1 0% 0% 1 33 1/3% 33 1/3% 2 33 1/3% 66 2/3% 3 or more 33 1/3% 100% 2 3 provided, however, that in the event the exercise period of an option is three years or less, the foregoing schedule shall be deemed to be modified to provide that any remaining portion of the option shares which have not yet become exercisable shall become exercisable on the date which is one year prior to the date of expiration of the option; and provided, further, that an option granted to a consultant or advisor to the Company or an affiliate shall be immediately exercisable in full unless the Committee determines otherwise at the time of the option grant. All or any part of the exercisable portion of an option may be exercised at any time during the option period, except that, without the written consent of the Committee, no partial exercise of an option may be for less than 50 shares. An option may be exercised by transmitting to the Company (1) a written notice specifying the number of shares to be purchased, and (2) payment of the exercise price together with the amount, if any, deemed necessary by the Committee to enable the Company to satisfy its income tax withholding obligations with respect to such exercise (unless other arrangements acceptable to the Company are made with respect to the satisfaction of such withholding obligations). (c) Payment of Exercise Price. The purchase price of shares of Common Stock acquired pursuant to the exercise of an option granted under the Plan may be paid in cash and/or such other form of payment as may be permitted under the option award agreement, including, without limitation, previously-owned shares of Common Stock owned for at least six months prior to the date of option exercise. (d) Rights as a Stockholder. No shares of Common Stock will be issued in respect of the exercise of an option granted under the Plan until full payment therefor has been made (and/or provided for where all or a portion of the purchase price is being paid in installments). The holder of an option will have no rights as a stockholder with respect to any shares covered by an option until the date a stock certificate for such shares is issued to him or her. Except as otherwise provided herein, no adjustments shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. (e) Nontransferability of Options. No option granted under the Plan may be assigned or transferred except by will or by the applicable laws of descent and distribution and each such option may be exercised during the optionee's lifetime only by the optionee. (f) Termination of Employment or Other Service. If an optionee ceases to be an employee or to perform services as an officer for the Company and any affiliate for any reason other than death or disability (defined below), then each outstanding option granted to him or her under the Plan will terminate on the date three months after the date of such termination of employment or service (or, if earlier, the date specified in the option agreement). If an optionee's employment or service is terminated by reason of the optionee's death or disability (or if the optionee's employment or service is terminated by reason of his or her disability and the optionee dies within one year after such termination of employment or service), then each outstanding option granted to the optionee under the Plan will terminate on the date one year after the date of such termination of employment or service (or one year after the later death of a disabled optionee) or, if earlier, the date specified in the option agreement. For purposes hereof, the term 3 4 "disability" means the inability of an optionee to perform the customary duties of his or her employment or other service for the Company or an affiliate by reason of a physical or mental incapacity which is expected to result in death or be of indefinite duration (but in any event no less than twelve months). Notwithstanding the foregoing, if and to the extent that the option is exercisable at the time of termination of services, an option granted to a consultant or advisor to the Company or an affiliate shall not terminate because such person ceases to provide services to the Company or an affiliate, unless the Committee provides otherwise at the time the option is granted. (g) Other Provisions. The Committee may impose such other conditions with respect to the exercise of options, including, without limitation, any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable. 6. Capital Changes, Reorganization, Sale. (a) Adjustments Upon Changes in Capitalization. The aggregate number and class of shares for which options may be granted under the Plan, the number and class of shares covered by each outstanding option and the exercise price per share shall all be adjusted proportionately for any increase or decrease in the number of issued shares of Common Stock resulting from a split-up or consolidation of shares or any like capital adjustment, or the payment of any stock dividend. (b) Change of Control. (i) Except as provided in subparagraph (c) below, upon a Change of Control (as defined below), any option granted hereunder shall immediately become vested and the optionee shall have the right to exercise his or her option in whole or in part, so long as such option remains outstanding, whether or not any other vesting requirements set forth in the option agreement or herein have been satisfied. (ii) For the purpose of this Plan, a "Change of Control" shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of Common Stock (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subparagraph A, the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subparagraph C of this Section 6(b)(ii); or B. Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose 4 5 election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C. Approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination would beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or D. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (c) Conversion of Options on Stock for Stock Exchange. If the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), all options granted hereunder shall be converted into options to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted hereunder shall not be converted into options to purchase shares of Exchange Stock but instead shall be exercisable and terminate in accordance with the provisions of 5 6 subparagraph (b) above. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted hereunder in the same proportion as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board determines otherwise, the converted options shall be fully vested whether or not the vesting requirements set forth in the option agreement or herein have been satisfied. (d) Fractional Shares. In the event of any adjustment in the number of shares covered by any option pursuant to the provisions hereof, any fractional shares resulting from such adjustment will be disregarded and each such option will cover only the number of full shares resulting from the adjustment. (e) Determination of Board to be Final. All adjustments under this paragraph 6 shall be made by the Board, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 7. Amendment and Termination of the Plan. The Board may amend or terminate the Plan. Except as otherwise provided in the Plan with respect to equity changes, any amendment which would increase the aggregate number of shares of Common Stock as to which options may be granted under the Plan, materially increase the benefits under the Plan, or modify the class of persons eligible to receive options under the Plan shall be subject to the approval of the holders of a majority of the Common Stock issued and outstanding and such other approvals as may be required by the provisions of the Company's Certificate of Incorporation or otherwise. No amendment or termination may affect adversely any outstanding option without the written consent of the optionee. 8. No Rights Conferred. Nothing contained herein will be deemed to give any individual any right to receive an option under the Plan or to be retained in the employ or service of the Company or any Subsidiary. 9. Governing Law. The Plan and each option agreement shall be governed by the laws of the State of Delaware. 10. Stockholder Approval; Term of the Plan. The Plan shall be effective as of May 17, 1996, subject to the approval of the stockholders of the Company on or before May 17, 1997. Any options awarded under the Plan prior to such stockholder approval shall be conditioned upon such approval being obtained and in the event such approval is not obtained all such options shall be automatically null and void. The Plan will terminate on December 31, 2006, unless sooner terminated by the Board. The rights of optionees under options outstanding at the time of the termination of the Plan shall not be affected solely by reason of the termination and shall continue in accordance with the terms of the option (as then in effect or thereafter amended). 11. Interpretation. The Plan is intended to enable transactions under the Plan with respect to directors and officers (within the meaning of Section 16(a) under the Act) to satisfy the 6 7 conditions of Rule 16b-3 or its successors; to the extent that any provision of the Plan would cause a conflict with such conditions or would cause the administration of the Plan as provided in Section 3 to fail to satisfy the conditions of Rule 16b-3, such provision shall be deemed null and void to the extent permitted by applicable law. This Section shall not be applicable if no class of the Company's equity securities is then registered pursuant to Section 12 of the Act. 7 8 EXHIBIT I FORM OF CANNONDALE CORPORATION NON-QUALIFIED STOCK OPTION AGREEMENT AGREEMENT made as of [ ], 199_ by and between CANNONDALE CORPORATION, a Delaware corporation (the "Company") and [ ] (the "Optionee"). Pursuant to the Cannondale Corporation 1996 Stock Option Plan (the "Plan"), the Company desires to grant to the Optionee and the Optionee desires to accept an option to purchase shares of the Common Stock, $0.01 par value, of the Company (the "Common Stock") upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the Company and the Optionee agree as follows: 1. Grant of Option; Option Price. The Company hereby grants to the Optionee an option to purchase [____] shares of Common Stock at a purchase price per share of $[ ] (the "Option"). The Option is intended to be treated as an option which is not an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986. 2. Entitlement to Exercise Option; Term of Option. The Option shall only become exercisable in accordance with the following schedule based upon the number of full years of the Optionee's continuous employment, or continuous service as an officer of the Company or an affiliate of the Company following the date of grant:
Full Incremental Cumulative Years of Continuous Percentage of Percentage of Employment/ Option Option Service Exercisable Exercisable Less than 1 0% 0% 1 33-1/3% 33-1/3% 2 33-1/3% 66-2/3% 3 or more 33-1/3% 100%
[FOR NON-EMPLOYEE ADVISORS AND CONSULTANTS ONLY:] The option shall be immediately exercisable in full. [OTHER ALTERNATIVES MAY BE CHOSEN BY THE COMMITTEE] 9 Unless sooner terminated pursuant to the terms of this Agreement, the Option will expire if and to the extent it is not exercised on or before [ ]. 3. Exercise of Option. Once the Optionee has satisfied the required continuous employment, service as an officer or other requirements, if any, in accordance with Section 2, the Option may be exercised in whole at any time or in part from time to time during the term of the Option, except that no partial exercise may be for less than 50 shares. To exercise the Option, the Optionee shall deliver to the President of the Company (a) a written notice specifying the number of shares of Common Stock to be purchased; (b) payment in full of the exercise price, together with the amount, if any, deemed necessary by the Company to enable it to satisfy any income tax withholding obligations with respect to the exercise of the Option (unless other arrangements, acceptable to the Company, are made for the satisfaction of such withholding obligations); and (c) the Stockholders Agreement described in Section 12 below, fully executed by Optionee. The Company may (in its sole and absolute discretion) permit all or part of the exercise price to be paid with previously-owned shares of Common Stock owned for at least six months prior to the date of option exercise. 4. Rights as a Stockholder. No shares of Common Stock will be issued and delivered pursuant to an exercise of the Option until full payment for such shares has been made. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until a stock certificate for such shares is issued to the Optionee. Except as otherwise provided herein, no adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 5. Nontransferability of Option. The Option is not assignable or transferable except by will or by the applicable laws of descent and distribution, and is exercisable during the Optionee's lifetime only by the Optionee. 6. Termination of Employment or Service as an Officer. If the Optionee ceases to be employed by or to be an officer of the Company or any subsidiary for any reason other than death or disability, then, unless sooner terminated under the terms hereof, the Option will terminate on the date three months after the date of the Optionee's termination of employment or service as director. If the Optionee's employment or service is terminated by reason of the Optionee's death or disability (or if the Optionee's employment or service is terminated by reason of the Optionee's disability and the Optionee dies within one year after such termination of employment or service), then, unless sooner terminated under the terms hereof, the Option will terminate on the date one year after the date of such termination of employment or service (or one year after the disabled Optionee's later death). This paragraph shall not be applicable to an Option granted to an Optionee as an outside consultant or advisor to the Company. [NOTE - - THE COMMITTEE MAY DETERMINE OTHERWISE, IN WHICH CASE PARAGRAPH WOULD BE MODIFIED]. 7. Investment Representation. In consideration of the grant of the Option, the Optionee hereby represents and warrants to the Company that upon an exercise of the Option, the 2 10 shares purchased by the Optionee pursuant to such exercise, will be acquired for the Optionee's account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof. The Optionee further acknowledges that neither the Option nor any shares of Common Stock issuable upon exercise of the Option have been registered under the Securities Act of 1933 (the "Act") and may not be sold unless a registration under the Act is in effect with respect to the Shares and all relevant state securities laws have been complied with or unless an exemption from such registration or compliance is available under the Act or any relevant state securities law. The certificates representing any shares of Common Stock issued upon exercise of the Option shall bear a legend to such effect as the Company's counsel shall deem necessary or desirable. The Option shall in no event be exercisable and shares shall not be issued hereunder if, in the opinion of counsel to the Company, such exercise and/or issuance would result in a violation of federal or state securities laws. 8. Capital Changes, Reorganization, Sale. (a) In case of any split-up or consolidation of shares or any like capital adjustment, or the payment of a stock dividend, which increases or decreases the number of outstanding shares of Common Stock, appropriate adjustment shall be made to the number of shares and the exercise price per share which may still be purchased under this Agreement. (b) Upon a Change of Control (as defined in the Plan), the Option granted hereunder shall immediately become vested and the Optionee shall have the right to exercise the Option in whole or in part, so long as the Option remains outstanding, whether or not the one year of continuous employment or service as an officer as provided in Section 2 has been satisfied. (c) However, if the stockholders of the Company receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of Common Stock in any transaction involving a merger (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock in the surviving corporation immediately after the merger), consolidation, acquisition of property or stock, separation or reorganization (other than a mere reincorporation or the creation of a holding company), the Option granted hereunder shall be converted into an option to purchase shares of Exchange Stock unless the Company and the corporation issuing the Exchange Stock, in their sole discretion, determine that the Option shall not be converted into an option to purchase shares of Exchange Stock but instead shall vest in accordance with the provisions set forth in subparagraph (b) above. The amount and price of the converted option shall be determined by adjusting the amount and price of the Option granted hereunder on the same basis as used for determining the number of shares of Exchange Stock the holders of the Common Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless the Board of Directors of the Company determines otherwise, the converted option shall be fully vested, whether or not the requirements set forth in this Agreement shall have been satisfied. (d) In the event of any adjustment in the number of shares covered by the Option pursuant to the provisions hereof, any fractional shares resulting from such adjustment 3 11 will be disregarded, and the Option will cover only the number of full shares resulting from the adjustment. (e) All adjustments under this Section 8 shall be made by the Board of Directors, and its determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 9. No Rights Conferred. Nothing in this Agreement shall give the Optionee any right to continue in the employ or service of the Company or an affiliate or interfere in any way with the right of the Company to terminate the employment or service of the Optionee. 10. Plan Provisions Control. The provisions of the Plan shall govern if and to the extent that there are inconsistencies between the provisions of the Plan and the provisions of this Agreement. The Optionee acknowledges that the Optionee has received a copy of the Plan prior to the execution of this Agreement, and that the provisions of the Plan are incorporated herein by reference. 11. Tax Considerations. Optionee hereby acknowledges and understands that (a) pursuant to the Internal Revenue Code as currently in effect, the difference between the fair market value of the Stock on the date he exercises the Option and the Option price will be taxable income to him in the year he exercises the Option and (b) the Company may be required to withhold Federal, state or local taxes with respect to the compensation income, if any, realized by Optionee upon an exercise of the Option. If the Company determines that such withholding is required, Optionee agrees either to provide the Company at the time of any exercise of the Option with funds equal to the amount of taxes which the Company determines must be withheld or to make other arrangements satisfactory to the Company regarding such payment, including authorizing the Company to withhold such amounts from any payment, including authorizing the Company to withhold such amounts from any payments to which he is entitled. All matters with respect to the withholding of taxes resulting from an exercise of the Option shall be determined by the Board of Directors of the Company and such determination shall be conclusive and binding. 12. Stockholders Agreement. The Optionee hereby acknowledges and agrees that all shares of Common Stock issued upon an exercise of the Option shall be subject to the restrictions and obligations on transfer imposed on a Stockholder as provided in the form of Stockholders Agreement, attached hereto between the Company and the Optionee (the "Stockholders Agreement"), a copy of which accompanies this Agreement. The Optionee, as a condition to the receipt of the Option, hereby agrees to execute the Stockholders Agreement upon exercise of the Option in whole or in part and to be bound by all the terms and conditions imposed on a Stockholder under the Stockholders Agreement with respect to the shares of Common Stock issuable upon exercise of the Option and consents to the legending of the stock certificates for such shares in accordance with the Stockholders Agreement. 13. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and 4 12 permitted assigns, provided however, that this Agreement and the grant of an Option hereunder shall be null and void and of no further force and effect in the event the Plan is not approved by the stockholders of the Company on or before May 17, 1997. 14. Governing Law; Entire Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and may not be modified except by written instrument executed by the parties. 5 13 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. CANNONDALE CORPORATION By: Its [signature of Optionee] 6 14 EXHIBIT II FORM OF STOCKHOLDERS AGREEMENT UNDER 1996 OPTION PLAN Cannondale Corporation is a Delaware corporation maintaining its principal place of business at 16 Trowbridge Drive, Bethel, Connecticut. It will be referred to in this Agreement as "Cannondale." You and the other parties to this Agreement are all employees or officers of Cannondale, or consultants or advisors to Cannondale, who have acquired shares of common stock in Cannondale under options granted pursuant to the Cannondale Corporation 1996 Stock Option Plan (the "Plan"). Each such Stockholder is referred to in this Agreement as "Stockholder" and the Cannondale common stock (or other capital stock of Cannondale issuable in respect of the common stock pursuant to an adjustment under the Plan) acquired by the person under an option granted pursuant to the Plan from time to time is referred to as "Stock". You have so acquired shares of Stock and understand that the difference between the fair market value of such stock and the price you paid for such stock constitutes taxable income to you. As a condition of its receipt, you, as a Stockholder, have entered into this Agreement. This Agreement imposes restrictions on the sale or transfer of any Stock held by a Stockholder. The Stockholder agrees with Cannondale as follows: 1. So long as the Stockholder owns Stock, the Stockholder agrees to the restrictions described below on any voluntary or involuntary sale, gift, transfer, encumbrance or other disposition of any of the Stock or any interest in the Stock. 2. Unless the Stockholder shall have obtained the prior written approval of Cannondale, a Stockholder must offer to sell his Stock to Cannondale if any of the following events happen: (a) the Stockholder intends or attempts to sell or in any way transfers or encumbers any of the Stock or an interest in it to another party (except incident to the sale or transfer of substantially all of the outstanding Stock of the Corporation), or the Stock becomes subject to an involuntary transfer, such as by court order; (b) the Stockholder's employment by Cannondale is terminated for any reason, or in the case of a non-employee officer of Cannondale, the Stockholder ceases to be an officer of Cannondale for any reason; (c) the Stockholder seeks protection under any laws relating to debtors' or creditors' rights; (d) the death or permanent disability of the Stockholder; or 15 (e) the Stockholder does not comply with this Agreement. If either of the events listed under (a) or (c) above occurs, the Stockholder must give written notice to Cannondale. If either of the events listed under (b) or (d) occur, Cannondale will be deemed to have notice on the date the event happens and if the event listed in paragraph (e) occurs, notice will be deemed to have occurred on the date ten days following the date on which Cannondale notifies a Stockholder that he is in breach of this Agreement, providing the Stockholder has not cured that breach to the satisfaction of Cannondale during that ten-day period. 3. The receipt of actual or deemed notice by Cannondale will constitute an offer by the affected Stockholder to sell all his Stock to Cannondale. Cannondale will then have a period of ninety days after the receipt of that notice to send written notice to the Stockholder (or in the case of the death of a Stockholder, to his or her legal representative) that Cannondale chooses to purchase the Stockholder's Stock. The purchase price for the Stock will be calculated in the manner described in paragraph 4 below. In addition to choosing to purchase the Stock itself, Cannondale may also designate another party to purchase the Stock, providing that party pays the same purchase price as Cannondale would. Once Cannondale provides notice that it accepts the offer to purchase the Stock, the Stockholder (or his legal representative) shall sell the Stock to Cannondale or its designee at a closing to be held at Cannondale's office within ninety days after that date, or sooner at Cannondale's election. If Cannondale chooses not to accept the offer to purchase the Stock prior to the end of the ninety-day period, then the Stockholder shall have an additional ninety-day period during which the Stockholder may sell or transfer the Stock free and clear of restrictions set forth in this Agreement, provided the Stockholder first notifies Cannondale of the terms and conditions of any such sale or transfer and gives Cannondale a ten-day option to purchase the Stock on the same terms and conditions. If the Stockholder chooses not to sell or transfer the Stock during that additional ninety-day period, the restrictions will continue and the Stockholder agrees to give notice to Cannondale of the occurrence of any subsequent event described in paragraph 2. 4. At the closing for the purchase of the Stock, the Stockholder (or his personal representative upon furnishing appropriate evidence of authority) shall deliver the Stock, duly endorsed for transfer or accompanied by a fully executed stock power, and shall receive the Purchase Price for each share of the Stock sold. The Purchase Price shall be computed by multiplying the Earnings Per Share of Stock times five. Earnings Per Share shall be equal to Average Net Income per share based on the weighted average number of shares of common stock during the most recent fiscal year determined on a fully diluted basis, taking into account all unexercised options and other similar arrangements as to rights to acquire common stock of Cannondale. Average Net Income shall be 2 16 an amount equal to the sum of the following divided by four: (i) two times the consolidated net after tax income for Cannondale's most recent fiscal year preceding the occurrence of the event causing the sale, (ii) consolidated net after tax income for the second most recent fiscal year preceding such an event, and (iii) consolidated net after tax income for the third most recent fiscal year preceding such event. For purposes of the computation: (a) net income in any given year shall not be less than zero; (b) the following shall be excluded in the computation of net income: (i) income (or loss) from the sale or other disposition of assets outside the ordinary course of the Cannondale business, and (ii) income (or loss) from any extraordinary items; and (c) in any year in which there are outstanding shares of Preferred Stock of the Corporation which provide for payment of dividends on a cumulative basis, the dividends paid or accrued on such Preferred Stock for such year shall be treated as expenses. All such computations shall be made in accordance with generally accepted accounting principles, except as otherwise specifically provided herein, applied by Cannondale's principal financial officer, or at Cannondale's election by its independent auditors, and shall be final and binding for the purposes of this Agreement unless shown to have been prepared in bad faith. In the event that the Corporation causes to be filed with the United States Securities and Exchange Commission (the "S.E.C.") a registration statement in connection with the sale of the common stock of the Corporation, from and after the date that such registration is deemed effective by the S.E.C. and for so long as such stock remains publicly traded, the Purchase Price shall be equal to the sum of the average closing sales prices per share of such stock on the principal market on which such stock is traded on each of the five trading days prior to (but not including) the date of closing of the purchase hereunder, divided by five. 5. Notwithstanding anything to the contrary contained herein, the restrictions contained in this Agreement on sale, gift, transfer, encumbrance or other disposition of Stock or any interest in Stock shall not be in effect for so long as stock of the same class as the Stock is publicly traded. 6. Each Stockholder understands that each certificate representing the Stock and any further certificates representing the Stock issued to him will bear such legends as are applicable, including without limitation, the following: The securities represented by the certificate are subject to the limitations and restrictions on their transfer provided in an agreement entitled "Stockholders Agreement," a copy of which is on file at Cannondale Corporation at its principal business office. This Agreement shall be governed by and construed under the laws of the State of Delaware. It may be signed in one or more counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same agreement. It shall be binding upon and enforceable by all of the parties who sign it and their respective successors, assigns, heirs, executors, administrators, other legal representatives or transferees. If any part of this Agreement is determined to be unenforceable, the remainder of the Agreement will continue in full force and effect. 3 17 Any notices or communications given pursuant to this Agreement shall be either hand delivered or mailed by certified or registered mail to Cannondale at its principal office or to any Stockholder at the address shown on the employment records of Cannondale unless another address is provided in writing to Cannondale. This Agreement is effective as of _________, 199_. CANNONDALE CORPORATION By: Joseph S. Montgomery Its President STOCKHOLDER 4 EX-10.1.12 6 SECOND AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.1.12 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of April 15, 1998 (this "Amendment"), by and among CANNONDALE CORPORATION, a corporation organized under the laws of the State of Delaware ("Cannondale"), each of the Subsidiaries of Cannondale which is a signatory to the Credit Agreement (as defined below) (the Subsidiaries of Cannondale, together with Cannondale, the "Borrowers"), NATIONSBANK, N.A., a national banking association organized under the laws of the United States of America ("NationsBank"), FLEET NATIONAL BANK, a national banking association organized under the laws of the United States of America ("Fleet"), THE CHASE MANHATTAN BANK, a bank organized under the laws of New York ("Chase"), STATE STREET BANK AND TRUST COMPANY, a trust company organized under the laws of Massachusetts ("State Street") (each of NationsBank, Fleet, Chase and State Street may be referred to individually as a "Bank" and collectively as the "Banks"), and NATIONSBANK as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). Background A. Reference is made to that certain Credit Agreement dated as of June 9, 1997 (the "Credit Agreement") among the Borrowers, the Administrative Agent, NationsBank, Fleet and the other parties signatory thereto. B. The Credit Agreement was amended by the First Amendment To Credit Agreement dated as of October 14, 1997 (the "First Amendment") among the Borrowers, the Administrative Agent, the Banks and the other parties signatory thereto. C. The parties hereto wish to further amend the Credit Agreement as herein provided. D. Capitalized terms not otherwise defined shall have the meanings ascribed to them in the Credit Agreement, as amended by the First Amendment and as amended hereby. Agreement In consideration of the Background, which is incorporated by reference, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Modification. All the terms and provisions of the Credit Agreement and the other Facility Documents, as amended to date, shall remain in full force and effect except as follows: 2 Clause (f) of Section 8.5 of the Credit Agreement is deleted and the following is substituted therefor: (f) loans to employees of such Borrower or any Subsidiary that, together with all such loans to employees made by all Borrowers and their Subsidiaries, do not exceed an aggregate principal amount of $3,500,000 outstanding at any one time. 2. Conditions to effectiveness. This Amendment shall not be effective until such date as the Administrative Agent shall have received the following, all in form, scope and content acceptable to the Administrative Agent and Lenders in their sole discretion: (a) This Amendment, executed by the Borrowers and the Required Banks; and (b) Such other agreements and instruments as the Administrative Agent shall reasonably require. 3. Reaffirmation by the Borrowers. Each of the Borrowers acknowledges and agrees, and reaffirms, both prior to and after taking into account this Amendment, that each is legally, validly and enforceably indebted to the Banks under the Notes without defense, counterclaim or offset, and that each is legally, validly and enforceably liable to the Banks for all costs and expenses of collection and reasonable attorneys' fees as and to the extent provided in this Amendment, the Credit Agreement, the Notes and the other Facility Documents. Each of the Borrowers hereby restates and agrees to be bound by all covenants contained in the Credit Agreement and the other Facility Documents and hereby reaffirms that all of the representations and warranties contained in the Credit Agreement and the other Facility Documents remain true and correct in all material respects with the exception that the representations and warranties regarding the financial statements described therein are deemed true as of the date made. Each of the Borrowers represents that except as set forth in the Credit Agreement and the other Facility Documents, there are not pending, nor to each Borrower's knowledge, threatened, legal proceedings to which any of the Borrowers is a party, which materially or adversely affect the transactions contemplated by this Amendment or the ability of any of the Borrowers to conduct its business on a consolidated basis. Cannondale and Cannondale Europe B.V. each acknowledge and represent that the resolutions of each dated May 28, 1997, and June 9, 1997, respectively, remain in full force and effect and have not been amended, modified, rescinded or otherwise abrogated. 4. Reaffirmation re: Collateral. Cannondale reaffirms the liens, security interests and pledges granted to NationsBank, N.A., as Administrative Agent, for the benefit of the Banks pursuant to the Credit Agreement and the other Facility Documents to secure the obligations of each Borrower thereunder. 2 3 5. Other representations by the Borrowers. Each of the Borrowers represents and confirms that (a) no Default or Event of Default has occurred and is continuing and that neither the Agents nor the Banks has given its consent to or waived any Default or Event of Default, and (b) the Credit Agreement and the other Facility Documents are in full force and effect and enforceable against the Borrowers in accordance with the terms thereof. Each of the Borrowers represents and confirms that as of the date hereof, each has no claim or defense (and each of the Borrowers hereby waives every claim and defense as of the date hereof) against the Agents or the Banks arising out of or relating to the Credit Agreement or the other Facility Documents or arising out of or relating to the making, administration or enforcement of the Loans or the remedies provided for under the Facility Documents. 6. No waiver by the Banks. Each of the Borrowers acknowledges that (a) the Banks, by execution of this Amendment, are not waiving any Default or Event of Default, whether now existing or hereafter occurring, disclosed or undisclosed, by the Borrowers under the Facility Documents, and (b) the Banks reserve all rights and remedies available to them under the Facility Documents and otherwise. 7. Miscellaneous. (a) This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (b) This Amendment and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with, the laws of the State of New York. (c) This Amendment shall be deemed a, and included in the definition of, Facility Document under the Credit Agreement for all purposes. (d) The Credit Agreement, as amended by the First Amendment and as amended hereby, and the other Facility Documents remain in full force and effect in accordance with their terms. 3 4 IN WITNESS WHEREOF, the parties have executed this Amendment on the date first written above. BORROWERS: CANNONDALE CORPORATION By /s/ WILLIAM A. LUCA Name: William A. Luca Title: Vice President of Finance, Chief Financial Officer CANNONDALE EUROPE B.V. By /s/ JORG HILFIKER Name: Jorg Hilfiker Title: President CANNONDALE JAPAN KK By /s/ JEFFREY TURCK Name: Jeffrey Turck Title: President ADMINISTRATIVE AGENT: NATIONSBANK, N.A. By /s/ SUSAN TIMMERMAN Name: Susan Timmerman Title: Vice President 4 5 BANKS: NATIONSBANK, N.A. By /s/ SUSAN TIMMERMAN Name: Susan Timmerman Title: Vice President FLEET NATIONAL BANK By /s/ MARGARET D. HARWOOD Name: Margaret D. Harwood Title: Vice President THE CHASE MANHATTAN BANK By /s/ THOMAS D. MCCORMICK Name: Thomas D. McCormick Title: Vice President STATE STREET BANK AND TRUST COMPANY By /s/ ARLENE M. DOHERTY Name: Arlene M. Doherty Title: Vice President 5 EX-10.1.13 7 THIRD AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.1.13 THIRD AMENDMENT TO CREDIT AGREEMENT THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of May 29, 1998 (this "Amendment"), by and among CANNONDALE CORPORATION, a corporation organized under the laws of the State of Delaware ("Cannondale"); each of the Subsidiaries of Cannondale which is a signatory to the Credit Agreement (as defined below) (the Subsidiaries of Cannondale, together with Cannondale, the "Borrowers"); NATIONSBANK, N.A., a national banking association organized under the laws of the United States of America ("NationsBank"); FLEET NATIONAL BANK, a national banking association organized under the laws of the United States of America ("Fleet"); THE CHASE MANHATTAN BANK, a bank organized under the laws of New York ("Chase"); STATE STREET BANK AND TRUST COMPANY, a trust company organized under the laws of Massachusetts ("State Street") (each of NationsBank, Fleet, Chase and State Street may be referred to individually as a "Bank" and collectively as the "Banks"); and NATIONSBANK as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). Background A. Reference is made to that certain Credit Agreement dated as of June 9, 1997 (the "Credit Agreement"), among the Borrowers, the Administrative Agent, NationsBank, Fleet, and the other parties signatory thereto. B. The Credit Agreement was amended by the First Amendment To Credit Agreement dated as of October 14, 1997 (the "First Amendment"), among the Borrowers, the Administrative Agent, the Banks, and the other parties signatory thereto. C. The Credit Agreement was further amended by the Second Amendment To Credit Agreement dated as of April [15], 1998 (the "Second Amendment"), among the Borrowers, the Administrative Agent, the Banks, and the other parties signatory thereto. D. The parties hereto wish to further amend the Credit Agreement as herein provided. E. Capitalized terms not otherwise defined shall have the meanings ascribed to them in the Credit Agreement, as amended by the First Amendment, the Second Amendment, and as amended hereby. 2 2 Agreement In consideration of the Background, which is incorporated by reference, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Modification. All the terms and provisions of the Credit Agreement and the other Facility Documents, as amended to date, shall remain in full force and effect except as follows: (a) The following definition is inserted into Section 1.1 of the Credit Agreement in proper alphabetical order: "Interest Rate Protection Agreement" means any interest rate protection agreement entered into with any bank or other financial institution whereby the Borrowers obtain a hedge or cap for the interest rate that will be payable by the Borrowers on the Loans under this Agreement. (b) The following Section 2.14 is added to the Credit Agreement immediately following Section 2.13: Section 2.14 Interest Rate Protection. The Borrowers may enter into Interest Rate Protection Agreements so long as no Default or Event of Default would result therefrom, including any violation of any of the covenants contained in Article 9 on a pro forma basis based upon the most recent calculations delivered to the Banks in accordance with Section 7.8. The obligations of the Borrowers to a Bank (but not to any other bank or other financial institution that is not a "Bank" hereunder) under such Interest Rate Protection Agreements will automatically constitute obligations of the Borrowers under this Agreement and will be secured by any Lien granted under the Facility Documents pari passu with the other obligations of the Borrowers under this Agreement. (c) Subsection (j) of Section 7.8 of the Credit Agreement is deleted and the following is substituted therefor: (j) promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any Interest Rate Protection Agreement or any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Banks pursuant to any other clause of this Section 7.8; 3 3 (d) Section (a) of Section 8.1 of the Credit Agreement is deleted and the following is substituted therefor: (a) Debt of such Borrower under this Agreement, the Notes or any Interest Rate Protection Agreement; (e) Subsection (b) of Section 8.3 of the Credit Agreement is deleted and the following is substituted therefor: (b) Liens in favor of the Administrative Agent on behalf of the Banks securing the Loans hereunder and Liens in favor of the Administrative Agent on behalf of one or more Banks securing the Borrowers' obligations under Interest Rate Protection Agreements permitted by Section 2.14; (f) Subsection (c) of Section 8.5 of the Credit Agreement is deleted and the following is substituted therefor: (c) any Acceptable Acquisition or any Interest Rate Protection Agreement; (g) Subsection (d) of Section 10.1 of the Credit Agreement is deleted and the following is substituted therefor: (d) (i) any Borrower or any of its Subsidiaries shall fail to pay any indebtedness under any Interest Rate Protection Agreement or any other indebtedness in an aggregate amount in excess of $500,000, including but not limited to indebtedness for borrowed money (other than the payment obligations described in (a) above), of such Borrower or such Subsidiary, as the case may be, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or (ii) any Borrower or any of its Subsidiaries shall fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Interest Rate Protection Agreement or other indebtedness, when required to be performed or observed, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, after the giving of notice or passage of time, or both, the maturity of such indebtedness (unless such failure to perform or observe shall be timely waived by the holder of such indebtedness); or (iii) any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; 4 4 2. Conditions to effectiveness. This Amendment shall not be effective until such date as the Administrative Agent shall have received the following, all in form, scope, and content acceptable to the Administrative Agent and Lenders in their sole discretion: (a) This Amendment, executed by the Borrowers and the Required Banks; and (b) Such other agreements and instruments as the Administrative Agent shall reasonably require. 3. Reaffirmation by the Borrowers. Each of the Borrowers acknowledges, agrees, and reaffirms, both prior to and after taking into account this Amendment, that each is legally, validly, and enforceably indebted to the Banks under the Notes without defense, counterclaim, or offset, and that each is legally, validly, and enforceably liable to the Banks for all costs and expenses of collection and reasonable attorneys' fees as and to the extent provided in this Amendment, the Credit Agreement, the Notes, and the other Facility Documents. Each of the Borrowers hereby restates and agrees to be bound by all covenants contained in the Credit Agreement and the other Facility Documents and hereby reaffirms that all of the representations and warranties contained in the Credit Agreement and the other Facility Documents remain true and correct in all material respects with the exception that the representations and warranties regarding the financial statements described therein are deemed true as of the date made. Each of the Borrowers represents that except as set forth in the Credit Agreement and the other Facility Documents, there are neither pending, nor to each Borrower's knowledge, threatened, legal proceedings to which any of the Borrowers is a party that materially or adversely affect the transactions contemplated by this Amendment or the ability of any of the Borrowers to conduct its business on a consolidated basis. Cannondale and Cannondale Europe B.V. each acknowledge and represent that the resolutions of each dated May 28, 1997, and June 9, 1997, respectively, remain in full force and effect and have not been amended, modified, rescinded, or otherwise abrogated. 4. Reaffirmation re: Collateral. Cannondale reaffirms the liens, security interests, and pledges granted to NationsBank, N.A., as Administrative Agent, for the benefit of the Banks pursuant to the Credit Agreement and the other Facility Documents to secure the obligations of each Borrower thereunder. 5. Other representations by the Borrowers. Each of the Borrowers represents and confirms that: (a) no Default or Event of Default has occurred and is continuing, and that neither the Agents nor the Banks has given its consent to or waived any Default or Event of Default, and (b) the Credit Agreement and the other Facility Documents are in full force and effect and enforceable against the Borrowers in accordance with the terms thereof. Each of the Borrowers represents and confirms that as of the date hereof, each has no claim or defense (and each of the Borrowers hereby waives every claim and defense as 5 5 of the date hereof) against the Agents or the Banks arising out of or relating to the Credit Agreement or the other Facility Documents or arising out of or relating to the making, administration or enforcement of the Loans or the remedies provided for under the Facility Documents. 6. No waiver by the Banks. Each of the Borrowers acknowledges that: (a) the Banks, by execution of this Amendment, are not waiving any Default or Event of Default, whether now existing or hereafter occurring, disclosed or undisclosed, by the Borrowers under the Facility Documents, and (b) the Banks reserve all rights and remedies available to them under the Facility Documents and otherwise. 7. Miscellaneous. (a) This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (b) This Amendment and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with, the laws of the State of New York. (c) This Amendment shall be deemed a, and included in the definition of, Facility Document under the Credit Agreement for all purposes. (d) The Credit Agreement, as amended by the First Amendment, the Second Amendment, and as amended hereby, and the other Facility Documents remain in full force and effect in accordance with their terms. [The balance of this page left intentionally blank. The next page is the signature page.] 6 6 IN WITNESS WHEREOF, the parties have executed this Amendment on the date first written above. BORROWERS CANNONDALE CORPORATION By /s/ WILLIAM A. LUCA Name: William A. Luca Title: Vice President of Finance, Chief Financial Officer CANNONDALE EUROPE B.V. By /s/ JORG HILFIKER Name: Jorg Hilfiker Title: President CANNONDALE JAPAN KK By /s/ JEFFREY TURCK Name: Jeffrey Turck Title: President ADMINISTRATIVE AGENT NATIONSBANK, N.A. By /s/ SUSAN TIMMERMAN Name: Susan Timmerman Title: Vice President 7 7 BANKS NATIONSBANK, N.A. By /s/ SUSAN TIMMERMAN Name: Susan Timmerman Title: Vice President FLEET NATIONAL BANK By /s/ MARGARET D. HARWOOD Name: Margaret D. Harwood Title: Vice President THE CHASE MANHATTAN BANK By /s/ THOMAS D. MCCORMICK Name: Thomas D. McCormick Title: Vice President STATE STREET BANK AND TRUST COMPANY By /s/ ARLENE M. DOHERTY Name: Arlene M. Doherty Title: Vice President EX-10.1.14 8 FOURTH AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.1.14 FOURTH AMENDMENT TO CREDIT AGREEMENT FOURTH AMENDMENT TO CREDIT AGREEMENT, dated as of June 25, 1998 (this "Amendment"), by and among CANNONDALE CORPORATION, a corporation organized under the laws of the State of Delaware ("Cannondale"); each of the Subsidiaries of Cannondale which is a signatory to the Credit Agreement (as defined below) (the Subsidiaries of Cannondale, together with Cannondale, the "Borrowers"); NATIONSBANK, N.A., a national banking association organized under the laws of the United States of America ("NationsBank"); FLEET NATIONAL BANK, a national banking association organized under the laws of the United States of America ("Fleet"); THE CHASE MANHATTAN BANK, a bank organized under the laws of New York ("Chase"); STATE STREET BANK AND TRUST COMPANY, a trust company organized under the laws of Massachusetts ("State Street") (each of NationsBank, Fleet, Chase and State Street may be referred to individually as a "Bank" and collectively as the "Banks"); and NATIONSBANK as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"). Background A. Reference is made to that certain Credit Agreement dated as of June 9, 1997 (the "Credit Agreement"), among the Borrowers, the Administrative Agent, NationsBank, Fleet, and the other parties signatory thereto. B. The Credit Agreement was amended by the First Amendment To Credit Agreement dated as of October 14, 1997 (the "First Amendment"), among the Borrowers, the Administrative Agent, the Banks, and the other parties signatory thereto. C. The Credit Agreement was further amended by the Second Amendment To Credit Agreement dated as of April 15, 1998 (the "Second Amendment"), among the Borrowers, the Administrative Agent, the Banks, and the other parties signatory thereto. D. The Credit Agreement was further amended by the Third Amendment To Credit Agreement dated as of May 29, 1998 (the "Third Amendment"), among the Borrowers, the Administrative Agent, the Banks, and the other parties signatory thereto. E. The parties hereto wish to further amend the Credit Agreement as herein provided. F. Capitalized terms not otherwise defined shall have the meanings ascribed to them in the Credit Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment, and as amended hereby. 2 2 Agreement In consideration of the Background, which is incorporated by reference, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Modification. All the terms and provisions of the Credit Agreement and the other Facility Documents, as amended to date, shall remain in full force and effect except as follows: Clause (f) of Section 8.5 of the Credit Agreement is deleted and the following is substituted therefor: (f) loans to employees of such Borrower or any Subsidiary that, together with all such loans to employees made by all Borrowers and their Subsidiaries, do not exceed an aggregate principal amount of $13,500,000 outstanding at any one time. 2. Conditions to effectiveness. This Amendment shall not be effective until such date as the Administrative Agent shall have received the following, all in form, scope, and content acceptable to the Administrative Agent and Lenders in their sole discretion: (a) This Amendment, executed by the Borrowers and the Required Banks; and (b) Such other agreements and instruments as the Administrative Agent shall reasonably require. 3. Reaffirmation by the Borrowers. Each of the Borrowers acknowledges, agrees, and reaffirms, both prior to and after taking into account this Amendment, that each is legally, validly, and enforceably indebted to the Banks under the Notes without defense, counterclaim, or offset, and that each is legally, validly, and enforceably liable to the Banks for all costs and expenses of collection and reasonable attorneys' fees as and to the extent provided in this Amendment, the Credit Agreement, the Notes, and the other Facility Documents. Each of the Borrowers hereby restates and agrees to be bound by all covenants contained in the Credit Agreement and the other Facility Documents and hereby reaffirms that all of the representations and warranties contained in the Credit Agreement and the other Facility Documents remain true and correct in all material respects with the exception that the representations and warranties regarding the financial statements described therein are deemed true as of the date made. Each of the Borrowers represents that except as set forth in the Credit Agreement and the other Facility Documents, there are neither pending, nor to each Borrower's knowledge, threatened, legal proceedings to which any of the Borrowers is a party that materially or adversely affect the transactions contemplated by this Amendment or the ability of any of the Borrowers to conduct its business on a consolidated basis. Cannondale and Cannondale Europe B.V. each acknowledge and 3 3 represent that the resolutions of each dated May 28, 1997, and June 9, 1997, respectively, remain in full force and effect and have not been amended, modified, rescinded, or otherwise abrogated. 4. Reaffirmation re: Collateral. Cannondale reaffirms the liens, security interests, and pledges granted to NationsBank, N.A., as Administrative Agent, for the benefit of the Banks pursuant to the Credit Agreement and the other Facility Documents to secure the obligations of each Borrower thereunder. 5. Other representations by the Borrowers. Each of the Borrowers represents and confirms that: (a) no Default or Event of Default has occurred and is continuing, and that neither the Agents nor the Banks has given its consent to or waived any Default or Event of Default, and (b) the Credit Agreement and the other Facility Documents are in full force and effect and enforceable against the Borrowers in accordance with the terms thereof. Each of the Borrowers represents and confirms that as of the date hereof, each has no claim or defense (and each of the Borrowers hereby waives every claim and defense as of the date hereof) against the Agents or the Banks arising out of or relating to the Credit Agreement or the other Facility Documents or arising out of or relating to the making, administration or enforcement of the Loans or the remedies provided for under the Facility Documents. 6. No waiver by the Banks. Each of the Borrowers acknowledges that: (a) the Banks, by execution of this Amendment, are not waiving any Default or Event of Default, whether now existing or hereafter occurring, disclosed or undisclosed, by the Borrowers under the Facility Documents, and (b) the Banks reserve all rights and remedies available to them under the Facility Documents and otherwise. 7. Miscellaneous. (a) This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (b) This Amendment and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with, the laws of the State of New York. (c) This Amendment shall be deemed a, and included in the definition of, Facility Document under the Credit Agreement for all purposes. 4 4 (d) The Credit Agreement, as amended by the First Amendment, the Second Amendment, the Third Amendment, and as amended hereby, and the other Facility Documents remain in full force and effect in accordance with their terms. [The balance of this page left intentionally blank. The next page is the signature page.] 5 5 IN WITNESS WHEREOF, the parties have executed this Amendment on the date first written above. BORROWERS CANNONDALE CORPORATION By /s/ WILLIAM A. LUCA ----------------------------------------- Name: William A. Luca Title: Vice President of Finance, Chief Financial Officer CANNONDALE EUROPE B.V. By /s/ JORG HILFIKER ----------------------------------------- Name: Jorg Hilfiker Title: President CANNONDALE JAPAN K.K. By /s/ JEFFREY TURCK ----------------------------------------- Name: Jeffrey Turck Title: President ADMINISTRATIVE AGENT NATIONSBANK, N.A. By /s/ SUSAN TIMMERMAN ---------------------------------------- Name: Susan Timmerman Title: Vice President 6 6 BANKS NATIONSBANK, N.A. By /s/ SUSAN TIMMERMAN ----------------------------------------- Name: Susan Timmerman Title: Vice President FLEET NATIONAL BANK By /s/ MARGARET D. HARWOOD ----------------------------------------- Name: Margaret D. Harwood Title: Vice President THE CHASE MANHATTAN BANK By /s/ ALAN ARIA ----------------------------------------- Name: Alan Aria Title: Vice President STATE STREET BANK AND TRUST COMPANY By /s/ ARLENE M. DOHERTY ----------------------------------------- Name: Arlene M. Doherty Title: Vice President EX-21 9 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 LIST OF OPERATING SUBSIDIARIES
NAME OF COMPANY JURISDICTION OF ORGANIZATION - --------------- ----------------------------- Cannondale Europe B.V....................................... Netherlands Cannondale Japan KK......................................... Japan Cannondale Australia Pty Limited............................ Australia
EX-23 10 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-40879) pertaining to the 1994 Employee Stock Purchase Plan and Registration Statement (Form S-8 No. 33-16807) pertaining to the 1996 Stock Option Plan and Registration Statement (Form S-8 No. 33-80073) pertaining to the 1995 Stock Option Plan and Registration Statement (Form S-8 No. 33-87328) pertaining to the 1994 Stock Option Plan and the 1994 Management Stock Option Plan of Cannondale Corporation of our report dated August 10, 1998, except for Note 15, as to which the date is September 22, 1998, with respect to the consolidated financial statements and schedule of Cannondale Corporation included in the Annual Report (Form 10-K) for the year ended June 27, 1998. ERNST & YOUNG LLP Stamford, Connecticut September 22, 1998 EX-27.A 11 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 6/29/1996
5 1,000 12-MOS JUN-29-1996 JUL-02-1995 JUN-29-1996 4,305 0 57,265 5,238 30,526 90,053 34,015 15,488 109,945 28,021 13,114 0 0 86 68,208 109,945 145,976 145,976 92,804 92,804 35,414 10,114 2,224 15,948 5,802 10,146 0 0 0 10,146 1.23 1.19 REPRESENTS BASIC INCOME PER COMMON SHARE
EX-27.B 12 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 6/28/1997
5 1,000 12-MOS JUN-28-1997 JUN-30-1996 JUN-28-1997 5,521 0 67,704 6,432 30,105 101,907 40,905 17,800 127,284 24,711 20,319 0 0 87 81,534 127,284 162,496 162,496 101,334 101,334 39,283 5,762 1,574 21,148 7,642 13,056 0 0 0 13,506 1.56 1.51 REPRESENTS BASIC INCOME PER COMMON SHARE
EX-27.C 13 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 6/27/1998
5 1,000 12-MOS JUN-27-1998 JUN-29-1997 JUN-27-1998 3,031 0 70,225 8,479 39,420 110,818 57,341 21,572 152,277 31,843 40,352 0 0 87 78,151 152,277 171,496 171,496 110,113 110,113 46,111 7,141 1,995 13,930 4,578 9,352 0 0 0 9,352 1.11 1.08 REPRESENTS BASIC INCOME PER COMMON SHARE
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