-----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, I9OLTm2iLZnsk1WHrgLV1riLnY3bulNC7ynlxr+i6uubYQUq7kpi8EQPrDN4kIyl f/NE8ZiKRtqjzlfol5GesA== 0000950123-99-009030.txt : 19991018 0000950123-99-009030.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950123-99-009030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19991001 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-K SEC ACT: SEC FILE NUMBER: 333-72121 FILM NUMBER: 99722005 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-K 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 JULY 3, 1999 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 the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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. [ ] At September 21, 1999, the aggregate market value of the voting stock held by non-affiliates of registrant was $51,408,124 based on the per share closing price on such date, and registrant had 7,491,421 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's definitive Proxy Statement relating to the 1999 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 71 models in its 2000 model year, the significant majority of which are hand assembled and constructed with hand-welded aluminum frames. Cannondale also sells other bicycle related products, which include clothing, shoes and bags, and a line of components, some of which are manufactured for the Company by third parties. In February 1998, the Company announced plans to manufacture and sell a Cannondale high-performance motocross (off-road) motorcycle (the "MX400"). The Company anticipates initial shipments of the MX400 to begin in the second quarter of its 2000 fiscal year. The Company was incorporated in Delaware in 1971. Despite the growth experienced by the Company, with net sales increasing from $54.5 million in fiscal 1991 to $176.8 million in fiscal 1999, the bicycle market has matured in recent years and its growth has subsided. The Company believes that it can leverage its domestic flexible manufacturing capabilities which allow it to consistently provide high quality and innovative products to the market faster than its competition to take strategic advantage of the current market conditions. Additionally, the Company believes that a marketing strategy consistent with the bicycle product line, one that focuses on innovation, differentiation, performance and quality leadership, used in the motocross motorcycle market, provides the Company with a viable diversification growth strategy. PRODUCTS. The Company's bicycles are marketed under the Cannondale brand name and "Handmade in USA" logo. The Company's 2000 bicycle line offers 71 models, the vast majority of which feature a lightweight Cannondale 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. The Company's 2000 bicycle line features the second generation Raven, a high-performance, full-suspension mountain bike that is composed of lightweight thermoplastic carbon fiber skins bonded to a magnesium spine, providing an even lighter frame weight than its steel and aluminum counterparts. The second generation Raven frame is 20% lighter than the original version of the Raven frame. 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 and straight handlebars and are designed for off-road riding. Road racing bikes are lightweight with thin tires and drop (curved) handlebars, and are used for competitions or fast-paced fitness riding on paved roads. Multi-sport bikes, designed for triathlons and other multi-sport races, typically have smaller diameter wheels than traditional road racing bikes, and are crafted from aerodynamic tubes. The recreational segment is composed of hybrid and comfort bikes. Both categories offer the more upright riding position of mountain bikes, making them popular with non-enthusiast riders. Hybrid models use thinner, more smoothly treaded tires than those found on mountain bikes for lower rolling resistance, while comfort bikes are equipped with generously padded saddles and other features to maximize rider comfort. The specialty bicycle market encompasses various niche products, including tandem, touring and cyclocross bikes. 1 3 The 71 bicycle models in Cannondale's 2000 model year are distributed in the five major bicycle categories as follows:
NUMBER OF CATEGORY 2000 MODELS - -------- ----------- Mountain Bikes: Full Suspension...................... 11 Front Suspension..................... 13 Non-Suspended........................ 3 Road Bikes: Front Suspension..................... 3 Non-Suspended........................ 15 Multi-Sport............................ 2 Recreational: Hybrid............................... 7 (three front suspension) Comfort.............................. 7 (two front suspension and one full suspension) Specialty: Tandem............................... 5 (three front suspension) Touring.............................. 3 (one front suspension) Cyclocross........................... 2 (one front suspension)
The Company's 2000 line of proprietary HeadShok front suspension forks is comprised of a total of fourteen models. Each HeadShok model offers the Company an important point of differentiation from other bicycle manufacturers, virtually all of whom use the same brand-name forks produced by one of two independent suppliers. The Company's 2000 HeadShok line is highlighted by the Lefty fork. The HeadShok Lefty features a single telescoping blade that dramatically reduces weight while delivering 100 mm of shock-absorbing travel. In the 2000 model year, there is one HeadShok fork model 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. The Company currently offers cranksets (front gear assemblies), pedals, hubs, wheels, disc brakes, handlebars, handlebar grips and stems, saddles and certain other components under its CODA brand name. As with the use of its proprietary HeadShok forks, the Company's use of its own CODA brand components on its bicycles helps distinguish its models from those of its competitors. 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 a complete line of men's and women's cycling apparel. The line includes numerous garments, and ranges from traditional cycling shorts and jerseys to specialized, water and windproof shells cut specifically for cold-weather cycling. The line consists of four collections: Vertex, a high-performance, competition-level line; HpX, a versatile line of performance-oriented apparel for riders of all abilities; Terra, more loosely-cut garments for off-road riding; and Sport, tailored, form-fitting garments for women cyclists. In addition to its bicycle, suspension fork, component and clothing lines, the Company manufactures and sells bicycle accessories, including bags, shoes and other items, 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. The MX400 is being marketed under the Cannondale brand name and "Handmade in USA" logo. The Cannondale MX400 motocross motorcycle allows the Company to extend its brand into a new market by capitalizing on several of its core competencies, particularly the ability to design, test and manufacture two- wheeled, welded and heat-treated aluminum-framed vehicles for off-road use. The MX400 will be powered by a proprietary liquid-cooled, electric-start, 400cc four-stroke engine with a unique reversed cylinder head. The 2 4 four-valve engine is fuel-injected to deliver the proper air/fuel mixture to the engine independent of changes in air temperature or altitude. Fuel injection also eliminates the carburetor, lowering the motorcycle's gas tank, and thus its center of gravity, for improved handling. The elimination of the carburetor also allows optimal shock absorber placement for improved rear wheel suspension performance. In addition to the MX400, the Company will sell replacement parts, and a collection of motorcycle apparel, Full Throttle Racewear. These items will be manufactured by Cannondale and introduced concurrently with the MX400. The Company also plans to introduce additional motorcycle models based on the MX400 platform. MARKETING. The goal of the Company's bicycle 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 significant 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. Cannondale's sponsorship of the Saeco/Cannondale professional cycling team is designed to increase the Company's visibility and credibility among the high-end consumers dedicated to road racing. A major force in the Giro d'Italia, Tour de France, U.S. Pro Championships and other top professional road cycling events, the Saeco/Cannondale team has competed aboard Cannondale bicycles and in the Company's cycling apparel since the spring of 1997. A third team, SoBe/HeadShok, is a developmental "grass-roots" squad that has also garnered significant exposure for the Company. A pair of SoBe/HeadShok trucks, one based in the Western U.S. and the other based in the East, attend major races around the country. Each truck is staffed by a trained mechanic who provides technical assistance to team riders, and who delivers instructional clinics to Cannondale retailers and their staffs while not attending races. The Company also sponsors several professional triathletes. 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 occasionally advertises in more general lifestyle publications targeting the upscale adult market with interests in outdoor and leisure activities. The Company also makes use of the internet to promote its brand and image, offering consumers a popular web site (www.cannondale.com), which averages more than 11,000 visitors each day. The bicycle segment of the web site incorporates several innovative features to link the Company and its products with potential customers. The site's Select-A-Bike tool helps match customers to appropriate bike models based upon their preferences and budget. The Test Ride function allows customers to locate a particular bike model and size in their geographic area by searching a database of dealer inventories, with a subsequent series of automated e-mails between Cannondale, the customer and their local dealer coordinating the test ride process. The site is also home to the Company's CHAIN Gang, a loose confederation of more than 40,000 Cannondale owners and fans of the Company who receive regular e-mail updates concerning new products, sales promotions, race results and other news. The Company is in the process of expanding its on-line presence by offering foreign language versions of key content areas. A password-protected dealer extranet, the Cannondale Insider, is also in development, and will ultimately allow the Company's retailers the ability to check backorders and product availability on-line, as well as place orders and review their account status. The MX400 is being promoted largely through a product-driven marketing strategy. Due to the innovations and significant new technology that the Company has incorporated in the MX400 design, the product has received significant amounts of favorable exposure in motocross enthusiast print media. The 3 5 MX400 is also supported by a dedicated area within the Company's web site, and with a motorcycle-specific on-line mailing list similar to the CHAIN Gang. 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 1,150 specialty bicycle retailer locations and sells accessories through approximately an additional 500 retailer locations. Generally, the Company's retailers do not have exclusive rights in any territory. In addition to selling bicycles, the Company's 37 member field-sales force is responsible for selling the Company's clothing, accessory, CODA and HeadShok lines offered by the Company. The Company's seven member sales management team and 37 member field-sales force contribute 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 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 and international bicycle retailers participate in the Authorized Retailer Program ("ARP"). For fiscal year 2000, in response to the inventory reduction that occurred among the Company's domestic and international dealers, Cannondale expanded its ARP for domestic and international bicycle retailers. Typically, retailers that participate in the ARP 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 are conducive with the seasonality of the business. Generally, retailers can place additional orders during the year and can adjust their original ARP order as their sales warrant. In order to reduce some of the unpredictability inherent in the dealers' ability to adjust their original ARP, under the expanded ARP, the Cannondale sales force formulates a delivery plan with its retailers, typically based upon historical delivery information, that conforms with the retailers' growth objectives and their inventory needs. This program incorporates freight and pricing discounts as incentives for the retailers to achieve their growth objectives formulated together by the retailers and the Company's sales force. The Company believes that the expanded ARP allows Cannondale to maximize the competitive advantage of its flexible domestic manufacturing capabilities which provide the Company with the ability to meet changes in market trends and demand rapidly. The payment terms offered by the Company generally vary from 30 to 210 days from the date of shipment, depending on the time of year and other factors. Orders may be canceled by the retailers without penalty up to 30 days before shipment. Cannondale's distribution strategy is to sell the MX400 through independent motor-sport franchises (motor-sport dealers). The Company is currently in the process of establishing its motor-sport dealer network. The Company's strategy is to partner itself with motor-sport dealers operated by motocross enthusiasts whose franchise is located to take advantage of demographics consistent with the Company's growth objectives. The motor-sport dealers must employ a staff that possesses the technical expertise to adequately service the Company's motorcycle, and be committed to providing ongoing support and performance assistance to its customers. In addition, the motor-sport dealers that the Company partners with to launch its MX400 must have access to sufficient amounts of capital. A significant majority of the Company's motor-sport dealers will 4 6 participate in a floor-planning arrangement that the Company has entered into with a major financial institution. The floor-planning arrangement offers the Company various dating options that generally vary between 10 to 60 days from the date of shipment. INTERNATIONAL OPERATIONS. The Company's products are sold in approximately 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 39 foreign distributors who sell the Company's products to specialty bicycle retailers overseas. During fiscal 1999, 1998 and 1997, Cannondale Europe accounted for 48%, 45% and 41%, respectively, of consolidated net sales, while Cannondale Japan accounted for 4%, 5% and 5%, respectively. Cannondale Australia, which was formed in fiscal 1997, accounted for 1% of consolidated net sales in fiscal 1999, 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, Ireland, Luxembourg, the Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom using locally based employee account managers supervised from the Oldenzaal headquarters. Distributors are used in Greece, Hungary, Turkey, Greenland, India, Bulgaria, Andorra, Malta, Estonia, Lithuania and the Czechoslovakian Republic. 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 300 specialty retailers and sells only accessories to an additional 27 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 and New Zealand 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 for its bicycles, is available from a number of domestic suppliers. The Company currently has a supply agreement for aluminum tubing expiring June 30, 2001, with an option to extend the agreement for an additional six months 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 component manufacturers are made through Cannondale Japan. The Company's largest component supplier is Shimano, which was the source of approximately 19% of the Company's total raw material inventory purchases in fiscal 1999. 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 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. 5 7 The Company has selected the majority of the suppliers that it will use to purchase raw material parts and components for the manufacturing operations of its MX400. In addition to quality and cost considerations of the materials that it will purchase, an important standard used during its selection process is either QS9000 or ISO9000 compliance by the vendor. QS9000 and ISO9000 refers to compliance with manufacturing standards for evaluating documented quality assurance systems. During the process of identifying these vendors, the Company has established strong relationships with key third-party suppliers; however, the Company has not yet entered into any long-term supply contracts. Generally, the raw material parts and components needed to manufacture its MX400 are available from a variety of sources; however, manufacturing operations may be interrupted or otherwise adversely affected by delays in the supply of parts or components from third-party suppliers. Even if parts and components are available from alternative sources, the Company may be subject to increased costs and production delays in connection with the replacement of an existing third-party supplier with one or more alternative suppliers. PATENTS AND TRADEMARKS. The Company holds 35 United States patents relating to various products, processes or designs with expiration dates ranging from 2001 to 2016. 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. The Company also believes that its strong brand name will have a favorable effect on the Company's entry into the motorcycle market. SEASONALITY. The Company's business is highly seasonal due to consumer spending patterns, which in turn affect retailer delivery preferences, and historically resulted in significantly stronger operating results in the third and fourth fiscal quarters (January through June). During fiscal 1999 and 1998, the Company's operating results have deviated from this historical pattern. 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 fluctuations in 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. The motorcycle market is highly competitive. The Company's principal competitors will be foreign manufacturers that have financial resources substantially greater than those of the Company, have established manufacturing capabilities, market and sell a product with strong brand recognition in the market and are more diversified than the Company. As a result of the foregoing, there can be no assurance that the Company will successfully penetrate the motorcycle market. 6 8 RESEARCH AND DEVELOPMENT. Cannondale's bicycle development is directed at making bicycles lighter, stronger, faster and more comfortable, while creating new and innovative bicycle related 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 fifth generation of CAAD (Cannondale Advanced Aluminum Design) road and mountain bicycle frames, the HeadShok Lefty fork and the second-generation Raven, as well as the continuous refinement of the Company's existing products. The research and development group leveraged its core competencies as a technology leader of frame and suspension products in the bicycle industry to develop an innovative frame and suspension system for its motocross motorcycle. In addition, the Company developed a proprietary 400cc four-stroke engine that will also be manufactured at the Company's new production facility in Bedford, Pennsylvania. The research and development group will incorporate the design, testing and production techniques used in the development of its bicycle product line to continue to bring new and innovative motorcycle related products to the market. The Company invested approximately $5.9 million and $2.0 million into research and development of the motorcycle during fiscal years 1999 and 1998, respectively. The development of the MX400 and its bicycle related innovations exemplify the commitment by the Company in fiscal 1999 to continue to invest in developing design, product and process technologies to differentiate itself from its competition. The Company invested $10.2 million, $6.8 million and $3.6 million on research and development of its bicycle and motorcycle related products, combined, during fiscal years 1999, 1998 and 1997, 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 July 3, 1999, the Company employed a total of 779 full-time employees in the United States, Cannondale Europe employed 151 full-time employees, Cannondale Japan employed 16 full-time employees, and Cannondale Australia employed 6 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. 7 9 ITEM 2. PROPERTIES. The Company's corporate headquarters and research and development facility is 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 a loan ($1.6 million) from the Connecticut Development Authority ("CDA"). The loan extends to February 2008 and is secured by the corporate headquarters and research and development facility. Cannondale has a facility in Bedford, Pennsylvania for the production of its bicycles and some of its bicycle related products. This Bedford plant contains 289,000 square feet on 23 acres and not only is a production facility, but also houses the Company's customer service department and provides additional space for warehousing and future expanded production. 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. 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 bicycle manufacturing facility in Bedford, and in August 1998, the Philipsburg facility was sold to the Moshannon Valley Economic Development Authority for $1.4 million. During fiscal 1999, construction of a new facility in Bedford, Pennsylvania to house production of the Company's motorcycle and to provide additional warehousing space was completed. The facility contains 100,000 square feet on 23.9 acres. The project cost approximately $6.1 million, of which approximately 15% will be financed by the same agencies which have previously provided financing for the bicycle production facility. Cannondale Europe owns a 54,200 square foot facility in Oldenzaal, the Netherlands, which houses administrative and sales offices, a bicycle assembly plant and warehouse. Cannondale Europe's property provides additional space for further expansion. Cannondale Japan and Cannondale Australia lease a total of 5,940 and 2,500 square feet of office and warehouse space, respectively. The Company believes that its present facilities are in good condition and 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 1999 fiscal year. 8 10 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................... 59 Chairman, President, Chief Executive Officer, Director William A. Luca........................ 56 Vice President, Treasurer, Chief Financial Officer, Director Daniel C. Alloway...................... 40 Vice President of Sales Leonard J. Konecny..................... 56 Vice President of Purchasing John P. Moriarty....................... 55 Assistant Treasurer and Assistant Secretary, Chief Accounting Officer Mario Galasso.......................... 33 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 (November 1998 to present), Vice President of Sales -- United States and Vice President of European Operations (1994 to 1998), 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 Chief Accounting Officer. 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 11 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 1999 First Quarter (6/28/98 to 9/26/98)........................ 13.38 8.88 Second Quarter (9/27/98 to 12/26/98)...................... 12.38 7.00 Third Quarter (12/27/98 to 3/27/99)....................... 13.75 7.00 Fourth Quarter (3/28/99 to 7/3/99)........................ 11.75 8.25 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
As of September 21, 1999, there were approximately 450 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 6,600 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 12 ITEM 6. SELECTED 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 JULY 3, ENDED JUNE 27, ENDED JUNE 28, ENDED JUNE 29, ENDED JULY 1, 1999 1998 1997 1996 1995 ------------- -------------- -------------- -------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales......................... $176,819 $171,496 $162,496 $145,976 $122,081 Cost of sales..................... 114,627 110,113 101,334 92,804 79,816 -------- -------- -------- -------- -------- Gross profit...................... 62,192 61,383 61,162 53,172 42,265 -------- -------- -------- -------- -------- Expenses: Selling, general and administrative................ 40,599 39,361 35,707 32,577 27,023 Research and development........ 10,222 6,750 3,576 2,837 1,751 -------- -------- -------- -------- -------- Total operating expenses.......... 50,821 46,111 39,283 35,414 28,774 -------- -------- -------- -------- -------- Operating income.................. 11,371 15,272 21,879 17,758 13,491 -------- -------- -------- -------- -------- Other income (expense): Interest expense................ (4,557) (1,995) (1,574) (2,224) (3,929) Other income.................... 1,160 653 843 414 24 -------- -------- -------- -------- -------- Total other income (expense)...... (3,397) (1,342) (731) (1,810) (3,905) -------- -------- -------- -------- -------- Income before income taxes and extraordinary item.............. 7,974 13,930 21,148 15,948 9,586 Income tax expense................ (2,051) (4,578) (7,642) (5,802) (1,353) -------- -------- -------- -------- -------- Income before extraordinary item............................ 5,923 9,352 13,506 10,146 8,233 Extraordinary item, net of income taxes(1)........................ -- -- -- -- (685) -------- -------- -------- -------- -------- Net income........................ 5,923 9,352 13,506 10,146 7,548 Accumulated preferred stock dividends(2).................... -- -- -- -- (400) -------- -------- -------- -------- -------- Income applicable to common shares and equivalents................. $ 5,923 $ 9,352 $ 13,506 $ 10,146 $ 7,148 ======== ======== ======== ======== ======== BASIC INCOME PER COMMON SHARE: Income before extraordinary item(3)......................... $ 0.79 $ 1.11 $ 1.56 $ 1.23 $ 1.33 Net income........................ $ 0.79 $ 1.11 $ 1.56 $ 1.23 $ 1.21 Weighted average common shares(4)....................... 7,518 8,442 8,638 8,216 5,888 DILUTED INCOME PER COMMON SHARE: Income before extraordinary item(3)......................... $ 0.77 $ 1.08 $ 1.51 $ 1.19 $ 1.20 Net income........................ $ 0.77 $ 1.08 $ 1.51 $ 1.19 $ 1.09 Weighted average common shares and common equivalent shares outstanding (4)................. 7,686 8,682 8,916 8,499 6,537
JULY 3, JUNE 27, JUNE 28, JUNE 29, JULY 1, 1999 1998 1997 1996 1995 ------------- -------------- -------------- -------------- ------------- BALANCE SHEET DATA: Working capital................... $ 74,894 $ 78,975 $ 77,196 $ 62,032 $ 40,304 Total assets...................... 162,379 152,277 127,284 109,945 84,008 Total long-term debt, excluding current portion................. 55,997 40,352 20,319 13,114 23,593 Total stockholders' equity........ 75,010 78,238 81,621 68,294 36,088
- --------------- (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. 11 13 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 ----------------------- 1999 1998 1997 ----- ----- ----- Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................... 64.8 64.2 62.4 ----- ----- ----- Gross profit................................................ 35.2 35.8 37.6 ----- ----- ----- Expenses: Selling, general and administrative....................... 23.0 23.0 22.0 Research and development.................................. 5.8 3.9 2.2 ----- ----- ----- Total operating expenses.................................... 28.8 26.9 24.2 ----- ----- ----- Operating income............................................ 6.4 8.9 13.4 ----- ----- ----- Other income (expense): Interest expense.......................................... (2.6) (1.2) (1.0) Other income.............................................. 0.7 0.4 0.5 ----- ----- ----- Total other income (expense)................................ (1.9) (0.8) (0.5) ----- ----- ----- Income before income taxes.................................. 4.5 8.1 12.9 Income tax expense.......................................... (1.2) (2.7) (4.7) ----- ----- ----- Net income.................................................. 3.3% 5.4% 8.2% ===== ===== =====
COMPARISON OF FISCAL 1999, 1998 AND 1997. Net Sales. Net sales increased to $176.8 million in fiscal 1999, from $171.5 million in 1998 and $162.5 million in 1997. The increase in net sales over these periods is primarily due to sales growth in the European bicycle market as the awareness of the Cannondale brand has strengthened there. The Company's rate of sales growth during the past three years has decreased primarily as a result of the reduction in inventory by many of the Company's domestic dealers and the cessation of growth in the bicycle market. During fiscal 1999, the reduction of inventory also became prevalent among many of the Company's international dealers. In addition, during fiscal 1999 the Company's sales of high-end, higher-margin bicycles were negatively impacted by its suppliers' ability to provide sufficient quantities of certain components in the second quarter. Furthermore, sales volume was adversely affected by equipment problems at the Company's bicycle manufacturing facility related to the introduction of Year 2000 products, which hindered Cannondale's ability to produce sufficient quantities to fill orders in the fourth quarter. The Company has made an effort to partner itself with specialty bicycle retailers capable of achieving growth objectives consistent with those of the Company. As a result, over the last three years, the number of specialty retailer locations serviced directly by the Company has remained relatively constant, increasing to approximately 3,100 at the end of fiscal 1999 from approximately 3,000 at the end of 1997. Net sales reported by Cannondale U.S. were $81.4 million in fiscal 1999, $83.3 million in 1998 and $85.5 million in 1997. Net sales reported by Cannondale Europe increased to $85.6 million in fiscal 1999, from $78.0 million in 1998 and $67.0 million in 1997. Net sales of Cannondale Japan decreased to $7.1 million in fiscal 1999 from $8.0 million in fiscal 1998, which had increased slightly from $7.9 million in fiscal 1997. The Company believes the decrease in sales by Cannondale Japan during fiscal 1999 is primarily attributable to the slumping Japanese economy. Net sales of Cannondale Australia increased to $2.6 million in fiscal 1999 compared to $2.2 million in fiscal 1998 and $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. 12 14 Gross Profits. Gross profit as a percentage of net sales decreased to 35.2% in fiscal 1999, from 35.8% in 1998 and 37.6% in 1997. The decrease in the gross-profit rate in fiscal 1999 and 1998 compared to fiscal 1997 primarily reflects price pressure on the Company and other bicycle suppliers in conjunction with the maturation of the bicycle market and cessation of its growth. In addition, the stronger U.S. dollar during fiscal 1999 and 1998 adversely affected the gross-profit rate of the Company's foreign subsidiaries as the cost of materials purchased from the U.S. increased compared to fiscal 1997. In addition, during fiscal 1999, the Company's ability to ship high-end, higher-margin bicycles during its second fiscal quarter was limited by its suppliers' ability to provide sufficient quantities of certain components. Operating Expenses. Selling, general and administrative expenses increased to $40.6 million in fiscal 1999, from $39.4 million in 1998 and $35.7 million in 1997. Increased selling, general and administrative expenses in fiscal 1999 compared to fiscal 1998 primarily reflects higher warranty costs principally associated with increased sales in Europe and the impact of higher depreciation expense associated with the $15.3 million and $16.8 million of capital expenditures in fiscal 1999 and 1998, respectively. For fiscal 1998 compared to 1997, increased selling, general and administrative expenses are directly associated with additional personnel, primarily associated with the Company's sales force, and advertising and marketing costs required to support the planned growth. As a percentage of net sales, selling, general and administrative expenses were 23.0%, 23.0% and 22.0% in fiscal 1999, 1998 and 1997, respectively. The increased selling, general and administrative expenses as a percentage of net sales in fiscal 1999 and 1998 reflects the Company's continued investment to support planned growth. Research and development expenses increased to $10.2 million in fiscal 1999, from $6.8 million in 1998 and $3.6 million in 1997, reflecting the Company's commitment to improve its current products and processes, and to generate new and innovative products. The increase in spending during fiscal 1999 was primarily attributable to the development of the MX400 motorcycle and the manufacturing process associated with it. The Company invested approximately $5.9 million in research and development for its motorcycle during fiscal 1999 compared to $2.0 million during fiscal 1998. In addition, the Company continued to invest in the improvement and expansion of its existing bicycle and CODA product lines. The Company's integration of its sponsored race teams, in particular the Volvo/Cannondale mountain bike racing team and the Saeco/ Cannondale road racing team, into its research and development efforts, continued to be a significant aspect of its investment during fiscal 1999. The Company uses its race teams for regular testing of both prototype and finished production models. Interest Expense. Interest expense increased to $4.6 million in fiscal 1999, from $2.0 million in 1998 and $1.6 million in 1997. Increases in interest expense are primarily attributable to debt incurred associated with the Company's repurchase of $7.8 million and $12.4 million of its common stock during fiscal 1999 and fiscal 1998, respectively, its investment of $15.3 million and $16.8 million in capital expenditures during fiscal 1999 and fiscal 1998, respectively, and the increase in working capital requirements associated with seasonality of the business. Interest expense incurred by the Company in fiscal 1999 as a result of the $12.0 million loan to Joseph Montgomery is offset by interest charged to him and is recorded in other income (expense). Other Income (Expense). Other income primarily consists of finance charges relating to accounts receivable, which totaled $529,000, $885,000 and $810,000 for fiscal 1999, 1998 and 1997, respectively and foreign currency gains (losses) of ($78,000), ($232,000) and $33,000 for fiscal 1999, 1998 and 1997, respectively. In addition, for fiscal 1999 other income includes interest income of $804,000 related to the loan to Mr. Montgomery. See Note 15 of the Notes to the Consolidated Financial Statements. Income Tax Expense. Income tax expense decreased to $2.1 million in fiscal 1999, from $4.6 million in 1998 and $7.6 million in 1997, which primarily reflects the Company's reduction in profitability in fiscal 1999 and 1998. See Note 6 of the Notes to the Consolidated Financial Statements. 13 15 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 -------------------------------------------------------------------------------------------------------- JULY 3, MARCH 27, DECEMBER 26, SEPTEMBER 26, JUNE 27, MARCH 28, DECEMBER 27, SEPTEMBER 27, 1999 1999 1998 1998 1998 1998 1997 1997 ------- --------- ------------ ------------- -------- --------- ------------ ------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.............. $44,986 $41,714 $47,901 $42,218 $44,181 $45,305 $47,701 $34,309 Cost of sales.......... 29,327 25,967 31,719 27,614 28,923 28,101 30,137 22,952 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit........... 15,659 15,747 16,182 14,604 15,258 17,204 17,564 11,357 ------- ------- ------- ------- ------- ------- ------- ------- Expenses: Selling, general and administrative(1)... 10,489 9,242 10,326 10,542 10,243 10,277 9,736 9,105 Research and development........ 2,709 2,540 2,820 2,153 2,481 1,552 1,598 1,119 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............. 13,198 11,782 13,146 12,695 12,724 11,829 11,334 10,224 ------- ------- ------- ------- ------- ------- ------- ------- Operating income....... 2,461 3,965 3,036 1,909 2,534 5,375 6,230 1,133 Other expense.......... (1,245) (598) (851) (703) (605) (456) (250) (31) ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes................ 1,216 3,367 2,185 1,206 1,929 4,919 5,980 1,102 Income tax expense..... (307) (997) (336) (411) (276) (1,733) (2,137) (432) ------- ------- ------- ------- ------- ------- ------- ------- Net income............. $ 909 $ 2,370 $ 1,849 $ 795 $ 1,653 $ 3,186 $ 3,843 $ 670 ======= ======= ======= ======= ======= ======= ======= ======= Basic income per share(1)............. $ .12 $ .32 $ .25 $ .10 $ .20 $ .38 $ .45 $ .08 Diluted income per share(1)............. $ .12 $ .31 $ .24 $ .10 $ .20 $ .37 $ .43 $ .07
- --------------- (1) Selling, general and administrative expenses have been restated, and as a result the earnings per share amounts for the first three fiscal quarters of 1999 have been restated pursuant to the Company's adoption of Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" during the fourth fiscal quarter of 1999. For further discussion of the impact of the adoption of SOP 98-1, see Note 14 of the Notes to the Consolidated Financial Statements. The Company's results fluctuate from quarter to quarter principally 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 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). Through its ARP program, the Company attempts to reduce the seasonality of its shipments and to smooth the production process by providing incentives for retailers to take delivery of a higher percentage of their annual bicycle order in the first and second fiscal quarters. During fiscal 1999, a trend that began in fiscal 1998, inventory reductions by domestic dealers, occurred among the Company's international dealers. For fiscal 1999, the inventory reduction by the Company's dealers was a significant cause of the variation in the historical pattern of stronger sales in the Company's third and fourth fiscal quarters. The third and fourth fiscal quarters together accounted for 49% and 52% of the Company's total net sales in fiscal 1999 and 1998, respectively. As a result of the change in dealer delivery preferences, the Company expanded its ARP at the end of fiscal 1999. Under the expanded ARP, the Cannondale sales force formulates a delivery plan with its retailers, typically based upon historical delivery information, that conforms with the retailers' growth objectives and their inventory needs. This program incorporates freight and pricing discounts as incentives for the retailers to achieve their growth objectives formulated together by the retailers and the Company's sales force. The Company believes that the expanded ARP allows Cannondale to maximize the competitive advantage of its flexible domestic manufacturing capabilities which provides the Company with the ability to meet changes in market trends and demand rapidly. 14 16 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. The third and fourth fiscal quarters accounted for 57% and 52% of the operating income for fiscal 1999 and 1998, respectively. In addition to lower net sales attributable to the inventory reduction by the Company's bicycle dealers, operating income during the fourth quarter of fiscal 1999 was adversely affected by equipment problems at the Company's bicycle manufacturing facility related to the introduction of Year 2000 products that hindered its ability to produce sufficient quantities to fill orders and by the increased investment in research and development primarily related to the development of its motorcycle. It is unlikely that the seasonal nature of the business will change significantly in the future. While the Company was successful in reducing the impact of the seasonality during fiscal 1999 and 1998, and in achieving profitable performances each quarter, the Company in the past has incurred, and may in the future incur, operating losses in a 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 credit facilities. On January 22, 1999, the Company entered into an $85.0 million amended and restated multicurrency credit facility (the "facility") secured by all of the Company's tangible and intangible domestic assets. The facility, as amended May 1, 1999, extends through January 2002. It allows for Cannondale U.S., Cannondale Europe and Cannondale Japan to borrow up to $65.0 million under a multicurrency revolving line of credit and provides for a $20.0 million term loan that amortizes by $10.0 million 30 months from the inception date of the facility. The facility includes a provision that permits the Company to borrow up to $10.0 million of the $65.0 million revolving line of credit on a short-term basis (less than 30 days). Under the revolving line of credit, the Company has the option to borrow at the following rates: (1) a variable rate that is defined as the higher of the bank's prime rate or the Federal Funds Rate plus 50.0 basis points, (2) a short-term market rate that is an offered rate per annum quoted by the bank or (3) the LIBOR (London Interbank Offered Rate) applicable to the currency borrowed plus an interest rate margin ("LIBOR margin"). The LIBOR margin (ranging from 75.0 to 170.0 basis points) is determined quarterly based upon predetermined performance criteria. The Company is obligated to pay a facility fee (ranging from 25.0 to 30.0 basis points) on the balance of the facility based on the same performance criteria as the LIBOR margin. The interest rate on the term loan is the LIBOR plus a margin that was 225.0 basis points at July 3, 1999, and increases to 250.0 basis points January 1, 2000, 275.0 basis points April 1, 2000 and 300 basis points July 1, 2000. The facility contains restrictive and financial covenants relating to, among other things, the payment of dividends, the repurchase of shares of the Company's common stock and the maintenance of minimum levels of cash flow, capitalization, interest coverage and tangible net worth. The Company is currently in compliance with all restrictive and financial covenants. At July 3, 1999, the borrowings outstanding under the facility were $50.6 million. Cannondale Europe and Cannondale Japan each maintain a separate credit facility for short-term borrowings. 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 $5.8 million at July 3, 1999) on a short-term basis. The interest rate on outstanding borrowings is a market rate, applicable to the currencies borrowed, plus 1.50% with a minimum rate of 3.00%. Cannondale Japan has an unsecured revolving credit facility for up to 155,000,000 Japanese yen (approximately $1.3 million at July 3, 1999). Approximately $300,000 and $600,000 of principal amount was outstanding under the Dutch and Japanese facilities, respectively, at July 3, 1999. The credit arrangements contain no specific expiration date, and may be terminated by either Cannondale Europe, Cannondale Japan or the lenders, at any time. The Dutch and Japanese facilities are guaranteed by Cannondale U.S. Net cash provided by operating activities was $14.7 million, $7.2 million and $4.6 million in fiscal 1999, 1998 and 1997, respectively. The principal uses of cash in operating activities over the three-year period were primarily to support the increased investment in accounts receivable and inventories associated with the 15 17 Company's growth in sales and market conditions. The increase in cash provided by operating activities in fiscal 1999 was primarily due to a reduction of inventory compared to the end of fiscal 1998 which reflects the effort by the Company to maintain inventory levels consistent with its sales levels. 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. Capital expenditures were $15.3 million, $16.8 million and $9.8 million in fiscal 1999, 1998 and 1997, respectively. In fiscal 1999, a significant portion of the expenditures related to the construction of the motorcycle manufacturing facility and equipment to develop and manufacture the motorcycle ($9.1 million). In fiscal 1998, the majority of the expenditures related to the completion of the corporate headquarters and research and development facility in Bethel, Connecticut and the expansion of the Company's bicycle 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). For both fiscal 1999 and 1998, 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 headquarters and research and development facility in Bethel, Connecticut and the expansion of the Company's bicycle production facility in Bedford, Pennsylvania. 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 CDA financing of $1.6 million which was funded in fiscal 1998. The Company also received funding in fiscal 1999 ($337,500) from the Department of Economic and Community Development for research and development equipment acquired in conjunction with the new facilities. The Company obtained $2.0 million of financing from PIDA to fund approximately 40% of the cost for the expansion of the Company's bicycle production facility in Bedford, Pennsylvania, of which $1.6 million was received during fiscal 1998, and the balance was received during the first quarter of fiscal 1999. During the first quarter of fiscal 1999, the Company completed the sale of its Philipsburg facility to the Moshannon Valley Development Authority for approximately $1.4 million, an amount which approximated the net book value of the facility. The operations from the Philipsburg facility were moved to the Bedford facility in June 1998. During the third quarter of fiscal 1999, the Company entered into a $2.9 million sale-leaseback transaction for its Cessna Citation Jet aircraft. The sale resulted in a $131,000 gain for the Company which was deferred and is being amortized over the five-year term of the lease. The lease provides the Company with the option to terminate the lease before the end of the lease term for predetermined amounts without penalty. At the end of the lease term, the Company can purchase the equipment for 90% of its original cost, renew the lease for the then fair market value rental or sell the aircraft to a third party. If the proceeds from the sale of the aircraft are less than 90% of the purchase price, the Company shall make a final payment in the amount of the deficiency not to exceed 72% of the original cost. The related lease is being accounted for as an operating lease and will result in rent expense of approximately $273,000 annually. 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 $20.0 million. In July 1998, the Company's Board of Directors authorized a second stock repurchase program by the Company to repurchase up to 1,000,000 shares of its common stock. Under both plans, purchases by the Company can be made from time to time in the open market or in private transactions. The repurchase programs 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, 1999, the Company repurchased an aggregate of 1,292,000 shares of its common stock under the programs at a cost of $20.2 million. In April 1998, the Company provided Joseph Montgomery, the President and Chief Executive Officer of the Company, with a loan in the principal amount of $2.0 million to enable him to meet certain tax 16 18 obligations. In June 1998, the Company agreed to provide Mr. Montgomery with an additional loan in the principal amount of $10.0 million for the purchase of certain real property, which loan has been combined with the previous $2.0 million loan made in April 1998. The loan matures on August 1, 2003, at which time the entire principal balance is due. The interest rate on the loan is set at the prime rate as published in the Wall Street Journal from time to time, and the loan is secured by a pledge to the Company of all of the shares of the Company's common stock held by Mr. Montgomery and by a mortgage on such real property. As of September 21, 1998, a principal amount of $12.0 million was outstanding under the loan. The Company has agreed to defer the interest payment of approximately $900,000 payable by Mr. Montgomery to the Company due August 1, 1999 pursuant to the terms of the loan. Under the terms of the deferral, Mr. Montgomery is obligated to sell 75,000 shares of his stock in the Company per quarter commencing in the Company's third quarter of fiscal 2000. The net proceeds of such sales will be remitted to the Company to pay the deferred interest. The stock selling program by Mr. Montgomery is subject to applicable securities laws and other restrictions which may preclude Mr. Montgomery from selling a total of 75,000 shares per quarter. This selling program will continue until the balance of the deferred interest is paid by Mr. Montgomery in its entirety. 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. 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 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 defines the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement No. 133," which extends the effective date of SFAS No. 133 to fiscal quarters beginning after June 15, 2000. In fiscal 2000, 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 No. 133 on future earnings cannot be estimated. YEAR 2000 COMPLIANCE. The Company has assessed its exposure to the Year 2000 problem and has completed a comprehensive response to that exposure. Generally, the Company has potential Year 2000 exposures in three areas: (i) financial and management operating computer systems used to manage the Company's business, (ii) manufacturing equipment used by the Company ("embedded chips") and (iii) computer systems used by third parties, in particular customers and suppliers of the Company. The Company performed an examination of its hardware and software applications to determine whether the systems it uses to operate its business are prepared to accommodate the Year 2000. Upon identifying the applications that required modification to accommodate Year 2000 dating, the Company initiated a program to modify the software using internal and third-party service providers. The Company completed the programming changes to its software applications to accommodate Year 2000 dating and the testing thereon, and completed the implementation of its Year 2000 system modifications during the fourth quarter of fiscal 1999. In concert with the Company's assessment and modification of its hardware and software applications, the Company's examination of its Year 2000 exposure also included the following: (1) the Company contacted its hardware and software vendors to determine their Year 2000 readiness; (2) the Company completed a survey of its major third-party suppliers to determine their status with Year 2000 compliance; and (3) the Company completed its examination of factory equipment with microprocessors to determine if Year 2000 dating affects the equipment operationally. The Company spent approximately $62,000 in this effort. The 17 19 Company increased its overall information technologies budget to accommodate Year 2000 issues and has not delayed other information technology projects critical to the Company's business as a result of the increase. Based on the Company's examination of the Year 2000 problem, its implementation of modifications to its internal systems, the representations made by its suppliers through its survey and the completion of its examination of factory equipment, the Company does not anticipate that the Year 2000 problem will have a material adverse impact on its operations. However, if the Company's changes are not successful in the remediation of non-compliant operating systems or the correction of embedded chips or if customers or suppliers did not in fact 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 adopted the Euro as their common legal currency. Between January 1, 1999 and January 1, 2002, transactions may be conducted in either the Euro or the participating countries' national currency. However, by July 1, 2002, the participating countries will withdraw their national currency as legal tender and complete the conversion to the Euro. The Company conducts business in Europe and does not expect the conversion to the Euro to have a material adverse effect on its competitive position or consolidated financial position. The Company has completed the necessary system modifications that allow the Company to conduct business in both the Euro as well as the participating countries' national currency. RECENT DEVELOPMENTS In September 1999, a major earthquake struck the country of Taiwan. Several of Cannondale's suppliers of bicycle components are located there. Due to the magnitude of the disaster, and the anticipated lack of certain components coming from these suppliers in Taiwan, Cannondale believes that there could be delays in the bicycle manufacturing process. At this time, however, the extent of the adverse effect of this event on Cannondale's business as a whole cannot be determined. 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 state of the bicycle industry and the growth opportunity pursued by the Company with its motorcycle; statements regarding the sufficiency of the Company's capital and current operational investments to finance its future growth; 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 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: 18 20 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). 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. It is unlikely that the seasonal nature of the business will change significantly in the future. While the Company was successful in reducing the impact of the seasonality during fiscal 1999 and 1998, and in achieving profitable performances each quarter, the Company in the past has incurred, and may in the future incur, operating losses in a fiscal quarter, as the business remains highly seasonal. 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, particularly its motorcycle, will provide diversification of the Company's products. 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 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 fluctuations in 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. The motorcycle market is highly competitive. The Company's principal competitors will be foreign manufacturers with financial resources substantially greater than those of the Company, that have established manufacturing capabilities, market and sell a product with strong brand recognition in the market and are more diversified than the Company. As a result of the foregoing, there can be no assurance that the Company will successfully penetrate the motorcycle market. 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. The Company is currently in the process of establishing its motor-sport dealer network. There can be no assurance that the Company will successfully establish a motor-sport dealer network through which it would be able to recover its new product investments and earn a satisfactory profit thereon. 19 21 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. The Company has identified the majority of the suppliers that it will use to purchase the raw material parts and components for the manufacturing operations of its motorcycle. During the process of identifying these vendors, the Company has established strong relationships with key third-party suppliers; however, the Company has not yet entered into any long-term supply contracts. Generally, the raw material parts and components needed to manufacture its motorcycle are available from a variety of sources; however, manufacturing operations may be interrupted or otherwise adversely affected by delays in the supply of parts or components from third-party suppliers. Even if parts and components are available from alternative sources, the Company may be subject to increased costs and production delays in connection with the replacement of an existing third-party supplier with one or more alternative suppliers. Discretionary Consumer Spending. Purchases of bicycles and motorcycles, 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. 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. Executive officers of the Company and other management personnel frequently travel between the Company's executive offices and its manufacturing facility on an aircraft leased by the Company. An accident involving the corporate aircraft and resulting injury or loss of life could have a material adverse effect on the Company. 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. The Company's net sales are concentrated in the United States and Germany. No other single country accounted for more than 10% of the Company's net sales during fiscal 1999, 1998 and 1997. No single customer accounted for more than 5% of the Company's sales during fiscal 1999, 20 22 1998 and 1997. As a result of the seasonality of the Company's business, the payment terms offered to its bicycle dealers generally range from 30 to 210 days depending on the time of year and other factors. FOREIGN CURRENCY AND INTEREST RATE RISKS. The Company enters into forward contracts to purchase and sell U.S., European, Australian, Canadian 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 and Dutch guilders 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 gains (losses) explicitly deferred at July 3, 1999 and June 27, 1998 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 as a component of accumulated other comprehensive income. The Company also hedges exposure to changes in interest rates on its revolving credit facility. On April 28, 1998, the Company entered into two five year interest rate hedge agreements with a total notional principal amount of $20.0 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 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 (IN THOUSANDS)
FAIR VALUE AT JULY 3, 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999 ----- ----- ------- ------- ----- ---------- ------- ---------- LIABILITIES: Long-term debt, including current portion Fixed rate................................... $ 354 $ 347 $ 298 $ 265 $ 264 $1,930 $ 3,458 $ 3,296 Average interest rate........................ 4.22% 3.98% 3.83% 3.78% 3.78% 3.77% 3.85% Variable rate................................ $ 104 $ 157 $50,801 $ 157 $ 656 $1,120 $52,995 $52,995 Average interest rate........................ 4.97% 4.86% 6.57% 4.86% 5.19% 4.65% 6.50% INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS RELATED TO DEBT: Interest Rate Swaps Pay fixed/receive variable................... -- -- -- $20,000 -- -- $20,000 $ 47 Average pay rate............................. 6.05% 6.05% 6.05% 6.05% -- -- 6.05% Average receive rate -- USD 1 Month LIBOR.... -- -- -- -- -- -- --
21 23 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) (IN THOUSANDS)
FAIR VALUE AT JULY 3, 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999 ------- ---- ------- ---- ---- ---------- ------- ---------- FORWARD CONTRACTS TO SELL FOREIGN CURRENCY FOR U.S. DOLLARS: Australian Dollar Notional amount........................ $ 857 -- -- -- -- -- $ 857 $(13) Contract Rate........................ 0.6590 0.6590 Canadian Dollar Notional amount........................ $ 1,151 -- -- -- -- -- $ 1,151 $ (3) Contract Rate........................ 0.6772 0.6772 LONG-TERM DEBT DENOMINATED IN FOREIGN CURRENCIES: Dutch guilder Notional amount........................ -- -- $ 3,624 -- -- -- $ 3,624 $372 Rate at Inception.................... -- -- 0.5177 0.5177 Japanese Yen Notional amount........................ -- -- $ 2,250 -- -- -- $ 2,250 $179 Rate at Inception.................... -- -- 0.0090 0.0090
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) (IN THOUSANDS)
FAIR VALUE AT JULY 3, 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999 ------- ---- ---- ---- ---- ---------- ------- ---------- FORWARD CONTRACTS TO SELL FOREIGN CURRENCY FOR DUTCH GUILDERS: Norwegian Krona Notional amount........................... $ 963 -- -- -- -- -- $ 963 $ 4 Contract Rate........................... 0.2727 0.2727 British Sterling Notional amount........................... $ 2,284 -- -- -- -- -- $ 2,284 $ 8 Contract Rate........................... 3.3903 3.3903 FORWARD CONTRACTS TO BUY FOREIGN CURRENCY FOR DUTCH GUILDERS: United States Dollars Notional amount........................... $ 5,000 -- -- -- -- -- $ 5,000 $(12) Contract Rate........................... 2.1521 2.1521 Japanese Yen Notional amount........................... $ 165 -- -- -- -- -- $ 165 $ 1 Contract Rate........................... 0.0178 0.0178
22 24 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. 23 25 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year. 24 26 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 July 3, 1999 and June 27, 1998. Consolidated Statements of Earnings for the years ended July 3, 1999, June 27, 1998 and June 28, 1997. Consolidated Statements of Stockholders' Equity for the years ended July 3, 1999, June 27, 1998 and June 28, 1997. Consolidated Statements of Cash Flows for the years ended July 3, 1999, June 27, 1998 and June 28, 1997. 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) Form of Amended and Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 3.1.1(i) Certificate of Amendment to Restated Certificate of Incorporation, effective as of November 17, 1997. (Filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-8, Registration No. 333-40879).+ 3.1(ii) Amended and Restated Bylaws of the Company. (Filed as Exhibit 3.1(ii) to the Registrant's Form 10-Q for the quarterly period ended March 27, 1999).+ 4.1 Rights Agreement, dated December 22, 1997, between the Company and BankBoston, N.A., as Rights Agent. (Filed with the Registrants's Form 8-K filed on December 23, 1997).+ 4.2 1994 Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.2 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.3 1994 Management Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.3 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.4 1995 Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.4 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.5 1996 Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.5 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.6 1998 Stock Option Plan. (Filed as Exhibit 4.10 to the Registrant's Registration Statement on Form S-8, Registration No. 333-72121).+
25 27
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 First Amendment to Amended and Restated Credit Agreement, dated as of May 1, 1999, among the Company and NationsBank N.A., as Administrative Agent, Fronting Bank, Documentation Agent and Swingline Bank and Fleet National Bank, The Chase Manhattan Bank, State Street Bank and Trust Company and BankBoston, N.A.* 10.2 Amended and Restated Credit Agreement, dated as of January 22, 1999, among the Company and NationsBank N.A., as Administrative Agent, Fronting Bank, Documentation Agent and Swingline Bank and Fleet National Bank, The Chase Manhattan Bank, State Street Bank and Trust Company and BankBoston, N.A. (Filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarterly period ended March 27, 1999).+ 10.3 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. (Filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.4 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. (Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.5 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. (Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.6 Consent, Subordination and Assumption Agreement, dated April 27, 1994, between the Company and Bedford Development Council, in favor of The Pennsylvania Industrial Development Authority. (Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.7 Loan Agreement, dated November 10, 1989, between the Company and Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.8 Promissory Note, dated November 10, 1989, from the Company to Rush Township, Commonwealth of Pennsylvania. (Filed as exhibit 10.12 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.9 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. (Filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.10 Loan Agreement, dated July 24, 1990, between the Company and Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.11 Promissory Note, dated July 24, 1990, from the Company to Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.12 Mortgage, dated July 24, 1990, from the Company to Rush Township Commonwealth of Pennsylvania. (Filed as Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+
26 28
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.13 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. (Filed as Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.14 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. (Filed as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.15 Consent, Subordination and assumption Agreement, dated December 4, 1990, between the Company and Moshannnon Valley Economic Development Partnership, in favor of The Pennsylvania Industrial Development Authority. (Filed as Exhibit 10.19 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.16 Loan Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership. (Filed as Exhibit 10.20 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.17 Installment Judgment Note, dated February 1, 1992, from the Company to Moshannon Valley Economic Development Partnership. (Filed as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.18 Chattel Mortgage Security Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership. (Filed as Exhibit 10.22 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.19 Business Infrastructure Development Loan Agreement, dated June 30, 1989, among the Company, Pennsylvania Department of Commerce and Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.23 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.20 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. (Filed as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.21 Escrow Agreement, dated June 30, 1989, among the Company, Rush Township, Commonwealth of Pennsylvania, Pennsylvania Department of Commerce and MidState Bank and Trust Company. (Filed as Exhibit 10.25 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.22 Mortgage, dated July 23, 1991, from Cannondale Europe, B.V. to Algemene-Bank Netherlands B.V. (In Dutch, with English summary). (Filed as Exhibit 10.26 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.23 Financing Lease, dated May 31, 1991, between ABN Onroerend Goed Lease B.V., as lessor, and Cannondale Europe B.V., as lessee. (In Dutch, with English translation). (Filed as Exhibit 10.27 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.24 Credit Agreement, dated February 5, 1998, between Cannondale Europe B.V. and ABN AMRO Bank N.V. (Filed as Exhibit 10.1.11 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.25 Loan Agreement, dated September 1, 1992, between Cannondale Japan KK and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese, with English translation). (Filed as Exhibit 10.30 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.26 Guarantee Agreement, dated August 7, 1992, from the Company to The Dai-Ichi Kangyo Bank, Ltd. (Filed as Exhibit 10.30.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+
27 29
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.27 Master Lease Agreement, dated April 11, 1994, between United States Leasing Corporation and the Company. (Filed as Exhibit 10.32 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.28 Employment Agreement, dated January 3, 1994, between the Company and William A. Luca. (Filed as Exhibit 10.48 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.29 Employee Patent and Confidential Information Agreement, dated August 20, 1982, between the Company and Daniel C. Alloway. (Filed as Exhibit 10.49 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.30 Employment Agreement, dated June 6, 1994, between the Company and Leonard Konecny. (Filed as Exhibit 10.53 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.31 Cannondale Corporation 401(k) Profit Sharing Plan. (Filed as Exhibit 10.54 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.32 Cannondale Corporation Employee Stock Purchase Plan. (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8, Registration No. 333-40879).+ 10.33 Form of Indemnification Agreement between the Company and each of its directors and officers. (Filed as Exhibit 10.60 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.34 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and William A. Luca. (Filed as Exhibit 10.68 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.35 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and Joseph S. Montgomery. (Filed as Exhibit 10.68.1 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.36 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and John Moriarty. (Filed as Exhibit 10.68.2 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.37 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and Daniel C. Alloway. (Filed as Exhibit 10.68.3 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.38 Cannondale Corporation Change of Control Separation Plan A. (Filed as Exhibit 10.68.4 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.39 Cannondale Corporation Change of Control Separation Plan B. (Filed as Exhibit 10.68.5 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 21 Subsidiaries of the Registrant.* 23 Consent of Independent Auditors.* 24 Power of Attorney (appears on signature page ).* 27.1 Financial Data Schedule For Fiscal Year Ended July 3, 1999.* 27.2 Restated Financial Data Schedules for the Nine-Month, Six-Month and Three-Month Periods Ended March 27, 1999, December 26, 1998 and September 26, 1998, respectively.*
- --------------- + Incorporated by reference. * Filed herewith. (b) REPORTS ON FORM 8-K. None 28 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 October 1, 1999 /s/ WILLIAM A. LUCA -------------------------------------- William A. Luca Vice President, 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 October 1, 1999 - --------------------------------------------------- Executive Officer and Director Joseph S. Montgomery (Principal Executive Officer) /s/ WILLIAM A. LUCA Vice President, Treasurer, Chief October 1, 1999 - --------------------------------------------------- Financial Officer, and Director William A. Luca (Principal Financial Officer) /s/ DANIEL C. ALLOWAY Vice President of Sales and October 1, 1999 - --------------------------------------------------- Director Daniel C. Alloway /s/ JOHN P. MORIARTY Assistant Treasurer and Assistant October 1, 1999 - --------------------------------------------------- Secretary, Chief Accounting John P. Moriarty Officer (Principal Accounting Officer) /s/ JAMES S. MONTGOMERY Director October 1, 1999 - --------------------------------------------------- James S. Montgomery /s/ GREGORY GRIFFIN Director October 1, 1999 - --------------------------------------------------- Gregory Griffin /s/ JOHN SANDERS Director October 1, 1999 - --------------------------------------------------- John Sanders /s/ MICHAEL J. STIMOLA Director October 1, 1999 - --------------------------------------------------- Michael J. Stimola /s/ SALLY G. PALMER Director October 1, 1999 - --------------------------------------------------- Sally G. Palmer
29 31 CANNONDALE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of July 3, 1999 and June 27, 1998...................................................... F-3 Consolidated Statements of Earnings for the years ended July 3, 1999, June 27, 1998 and June 28, 1997.................. F-4 Consolidated Statements of Stockholders' Equity for the years ended July 3, 1999, June 27, 1998 and June 28, 1997...................................................... F-5 Consolidated Statements of Cash Flows for the years ended July 3, 1999, June 27, 1998 and June 28, 1997............. 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 July 3, 1999 and June 27, 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years ended July 3, 1999, June 27, 1998 and June 28, 1997. 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 July 3, 1999 and June 27, 1998, and the consolidated results of their operations and their cash flows for the years ended July 3, 1999, June 27, 1998 and June 28, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Stamford, Connecticut August 10, 1999, except for the first paragraph of Note 15, as to which the date is September 30, 1999. F-2 33 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JULY 3, 1999 JUNE 27, 1998 ------------ ------------- ASSETS Current assets: Cash...................................................... $ 3,300 $ 3,031 Trade accounts receivable, less allowances of $10,074 and $8,479................................................. 59,379 61,746 Inventory................................................. 33,165 39,420 Deferred income taxes..................................... 2,749 2,172 Prepaid expenses and other current assets................. 4,827 4,426 Interest receivable from a related party.................. 827 23 -------- -------- Total current assets........................................ 104,247 110,818 Property, plant and equipment............................... 41,377 35,769 Notes receivable and advances to related parties............ 12,919 2,688 Other assets................................................ 3,836 3,002 -------- -------- Total assets................................................ $162,379 $152,277 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 17,329 $ 16,747 Revolving line of credit.................................. 882 2,141 Income taxes payable...................................... 2,252 1,732 Other accrued expenses.................................... 4,476 3,838 Accrued warranty expense.................................. 2,808 1,982 Payroll and other employee related benefits............... 1,150 2,142 Payable to related party.................................. -- 2,800 Current installments of long-term debt.................... 456 461 -------- -------- Total current liabilities................................... 29,353 31,843 Long-term debt, less current installments................... 55,997 40,352 Deferred income taxes....................................... 1,619 1,569 Other noncurrent liabilities................................ 400 275 -------- -------- Total liabilities........................................... 87,369 74,039 -------- -------- Stockholders' equity: Common Stock, $.01 par value: Authorized shares -- 40,000,000 Issued 8,784,308 and 8,737,088 shares.................. 88 87 Additional paid-in capital................................ 57,815 57,303 Retained earnings......................................... 41,328 35,405 Less 1,292,900 and 656,400 shares in treasury at cost..... (20,162) (12,417) Accumulated other comprehensive income.................... (4,059) (2,140) -------- -------- Total stockholders' equity.................................. 75,010 78,238 -------- -------- Total liabilities and stockholders' equity.................. $162,379 $152,277 ======== ========
See accompanying notes F-3 34 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- Net sales............................................. $176,819 $171,496 $162,496 Cost of sales......................................... 114,627 110,113 101,334 -------- -------- -------- Gross profit.......................................... 62,192 61,383 61,162 -------- -------- -------- Expenses: Selling, general and administrative................. 40,599 39,361 35,707 Research and development............................ 10,222 6,750 3,576 -------- -------- -------- 50,821 46,111 39,283 -------- -------- -------- Operating income...................................... 11,371 15,272 21,879 -------- -------- -------- Other income (expense): Interest expense.................................... (4,557) (1,995) (1,574) Other income........................................ 1,160 653 843 -------- -------- -------- (3,397) (1,342) (731) -------- -------- -------- Income before income taxes............................ 7,974 13,930 21,148 Income tax expense.................................... (2,051) (4,578) (7,642) -------- -------- -------- Net income............................................ $ 5,923 $ 9,352 $ 13,506 ======== ======== ======== Basic income per share................................ $ .79 $ 1.11 $ 1.56 Diluted income per share.............................. $ .77 $ 1.08 $ 1.51
See accompanying notes F-4 35 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED COMMON STOCK ADDITIONAL TREASURY STOCK OTHER ----------------- PAID-IN RETAINED --------------------- COMPREHENSIVE SHARES VALUE CAPITAL EARNINGS SHARES VALUE INCOME TOTAL --------- ----- ---------- -------- ---------- -------- ------------- ------- BALANCE AT JUNE 29, 1996.... 8,611,715 $86 $55,965 $12,547 -- $ -- $ (304) $68,294 ------- Net income.................. -- -- -- 13,506 -- -- -- 13,506 Foreign currency translation, (net of tax expense of $510).......... -- -- -- -- -- -- (1,075) (1,075) ------- Comprehensive income........ 12,431 Exercise of options......... 75,900 1 895 -- -- -- -- 896 --------- --- ------- ------- ---------- -------- ------- ------- BALANCE AT JUNE 28, 1997.... 8,687,615 87 56,860 26,053 -- -- (1,379) 81,621 ------- Net income.................. -- -- -- 9,352 -- -- -- 9,352 Foreign currency translation, (net of tax expense of $247).......... -- -- -- -- -- -- (761) (761) ------- Comprehensive income........ 8,591 Exercise of options......... 49,473 -- 443 -- -- -- -- 443 Purchase of treasury stock..................... -- -- -- -- (656,400) (12,417) -- (12,417) --------- --- ------- ------- ---------- -------- ------- ------- BALANCE AT JUNE 27, 1998.... 8,737,088 87 57,303 35,405 (656,400) (12,417) (2,140) 78,238 ------- Net income.................. -- -- -- 5,923 -- -- -- 5,923 Foreign currency translation, (net of tax benefit of $25)........... -- -- -- -- -- -- (1,919) (1,919) ------- Comprehensive income........ 4,004 Exercise of options......... 17,875 -- 169 -- -- -- -- 169 Shares issued under employee stock purchase plan....... 29,345 1 238 -- -- -- -- 239 Stock option compensation... -- -- 105 -- -- -- -- 105 Purchase of treasury stock..................... -- -- -- -- (636,500) (7,745) -- (7,745) --------- --- ------- ------- ---------- -------- ------- ------- BALANCE AT JULY 3, 1999..... 8,784,308 $88 $57,815 $41,328 (1,292,900) $(20,162) $(4,059) $75,010 ========= === ======= ======= ========== ======== ======= =======
See accompanying notes F-5 36 CANNONDALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- OPERATING ACTIVITIES Net income............................................ $ 5,923 $ 9,352 $ 13,506 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.................... 5,782 4,054 3,211 Provision for bad debt, discount, credit and return and late charge reserves................ 9,498 7,141 5,762 Provision for obsolete inventory................. 2,309 1,425 1,484 Unrealized (gain) loss on foreign currency transactions................................... (865) 642 107 Deferred income taxes............................ (129) 425 (442) Stock option compensation........................ 105 -- -- Other............................................ 122 16 (1) Changes in assets and liabilities: Trade accounts receivable...................... (8,151) (8,894) (17,399) Inventory...................................... 4,040 (11,589) (1,975) Prepaid expenses and other assets.............. (2,723) (3,319) (2,089) Accounts payable............................... 505 4,711 138 Warranty and other accrued expenses............ (2,480) 3,174 805 Income taxes payable and other liabilities..... 743 36 1,470 -------- -------- -------- Net cash provided by operating activities............. 14,679 7,174 4,577 -------- -------- -------- INVESTING ACTIVITIES Capital expenditures.................................. (15,257) (16,762) (9,766) Proceeds from sale of airplane and buildings.......... 4,264 -- 1,676 Loans provided to related parties..................... (10,269) (2,461) (227) Proceeds from repayments of loans to related parties............................................. 38 -- -- -------- -------- -------- Net cash used in investing activities................. (21,224) (19,223) (8,317) -------- -------- -------- FINANCING ACTIVITIES Net proceeds from the issuance of common stock........ 408 443 896 Payments for the purchase of treasury stock........... (7,745) (12,417) -- Proceeds from issuance of long-term debt.............. 20,738 3,203 21,383 Net proceeds from (repayments of) borrowings under short-term revolving credit agreements.............. (1,383) 1,291 (3,555) Net proceeds from (repayments of) borrowings under long-term debt and capital lease agreements......... (5,267) 16,833 (15,133) -------- -------- -------- Net cash provided by financing activities............. 6,751 9,353 3,591 -------- -------- -------- Effect of exchange rate changes on cash............... 63 206 1,365 -------- -------- -------- Net increase (decrease) in cash....................... 269 (2,490) 1,216 Cash at beginning of period........................... 3,031 5,521 4,305 -------- -------- -------- Cash at end of period................................. $ 3,300 $ 3,031 $ 5,521 ======== ======== ======== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest............................................ $ 3,889 $ 2,071 $ 1,781 ======== ======== ======== Income taxes, net of refunds........................ $ 2,385 $ 7,341 $ 6,788 ======== ======== ========
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"). In February 1998, the Company announced plans to introduce a line of motocross motorcycles. The Company's motocross motorcycle business is in the start-up stage of operations and no revenues have been generated as of July 3, 1999. 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. The Company's net sales are concentrated in the United States and Germany. No other single country accounted for more than 10% of the Company's net sales during fiscal 1999, 1998 and 1997. No single customer accounted for more than 5% of the Company's sales during the years ended July 3, 1999, June 27, 1998 or June 28, 1997. As a result of the seasonality of the Company's business, the payment terms offered to its bicycle dealers generally range from 30 to 210 days depending on the time of year and other factors. The Company's raw materials are readily available and the Company is not completely dependent upon 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 19% of the Company's total raw material inventory purchases in fiscal 1999. 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 a lifetime warranty for the bicycle frame 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. F-7 38 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation of plant and equipment is calculated on the straight-line method over 20 to 40 years for buildings and improvements and 3 to 10 years for equipment. Amortization of assets recorded under capitalized lease obligations is recognized over the lesser of the useful lives or lease terms and such amount is included in depreciation and amortization expense. Interest costs for the construction of certain long-lived assets are capitalized and amortized over the related asset's useful life. The Company capitalized interest costs of $101,000, $88,000 and $133,000 for the years ended July 3, 1999, June 27, 1998 and June 28, 1997, respectively, related to the construction of the Company's new motorcycle facility, headquarters facility and the expansion of its bicycle manufacturing facility. Total interest incurred before the recognition of the capitalized amount was $4,658,000, $2,083,000 and $1,707,000 for fiscal 1999, 1998 and 1997, respectively. 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 component of accumulated other comprehensive income pursuant to SFAS No. 130, "Reporting Comprehensive Income." Financial Instruments The Company enters into foreign currency forward contracts to purchase and sell U.S., European, Japanese, Australian and Canadian 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 two 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 market interest rates are not recognized in the financial statements. 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 No. 123, "Accounting F-8 39 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for Stock-Based Compensation." During fiscal 1999, the Company incurred $105,000 of stock option compensation related to options granted to consultants of the Company. As prescribed under SFAS No. 123, 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 all 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 No. 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. Reclassifications Certain 1998 and 1997 amounts have been reclassified to conform to the current year's presentation. Computer Software Developed for Internal Use During the fourth fiscal quarter of 1999, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with SOP 98-1, the Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Intangible Assets Included in other assets are intangible assets, which represent the cost of patents, goodwill and deferred financing charges. Intangible assets were $2,378,000 and $1,453,000 at July 3, 1999 and June 27, 1998, respectively. Accumulated amortization on intangible assets amounted to $624,000 and $372,000 at July 3, 1999 and June 27, 1998, 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 $3,441,000, $3,906,000 and $3,867,000 for the years ended July 3, 1999, June 27, 1998, and June 28, 1997, respectively. Accounting Developments During fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which was effective for the Company's first fiscal quarter of 1999. SFAS No. 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 No. 130 also sets forth requirements on how comprehensive income should be presented as part of the issuer's financial statements. The Company's comprehensive income comprises net income and foreign translation adjustments. The adoption of SFAS No. 130 had no impact on the Company's net income or shareholders' equity. F-9 40 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On July 3, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for companies with fiscal years beginning after December 15, 1997. SFAS No. 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. SFAS No. 131 also establishes standards for disclosures related to geographic areas, products and services and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 defines the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an Amendment of FASB Statement No. 133," which extends the effective date of SFAS No. 133 to fiscal quarters beginning after June 15, 2000. In fiscal 2000, 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 No. 133 on future earnings cannot be estimated. 2. INVENTORY The components of inventory are as follows (in thousands):
JULY 3, 1999 JUNE 27, 1998 ------------ ------------- Raw materials....................................... $17,723 $20,439 Work-in process..................................... 2,110 2,856 Finished goods...................................... 14,993 16,931 ------- ------- 34,826 40,226 Less reserve for obsolete inventory................. (1,661) (806) ------- ------- $33,165 $39,420 ======= =======
3. PROPERTY, PLANT AND EQUIPMENT The components of property, plant and equipment are as follows (in thousands):
JULY 3, 1999 JUNE 27, 1998 ------------ ------------- Land................................................ $ 1,841 $ 1,270 Buildings and improvements.......................... 22,868 18,328 Factory and office equipment........................ 39,633 33,366 Cessna Citation jet................................. -- 2,800 Construction and projects in progress............... 3,369 1,577 -------- -------- 67,711 57,341 Less accumulated depreciation and amortization...... (26,334) (21,572) -------- -------- $ 41,377 $ 35,769 ======== ========
Purchases of equipment through capitalized lease obligations and notes were $146,000 and $28,000 in fiscal 1999 and 1997, respectively. The Company did not enter into any capital leases during fiscal 1998. F-10 41 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. EARNINGS PER SHARE The following table is an illustration of the reconciliation of the numerator and denominator of basic and diluted earnings per share computations and other related disclosures required by SFAS No. 128 "Earnings Per Share" (in thousands, except earnings per share data):
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- NUMERATOR: Numerator for basic and diluted earnings per share -- income available to common stockholders................................ $5,923 $9,352 $13,506 ====== ====== ======= DENOMINATOR: Denominator for basic earnings per share -- weighted-average shares..................... 7,518 8,442 8,638 Effect of dilutive securities: Employee stock options...................... 168 240 278 ------ ------ ------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions................................. 7,686 8,682 8,916 ====== ====== ======= Basic earnings per share...................... $ .79 $ 1.11 $ 1.56 ====== ====== ======= Diluted earnings per share.................... $ .77 $ 1.08 $ 1.51 ====== ====== =======
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 1,021,843, 377,528, and 118,844 for fiscal 1999, 1998, and 1997, respectively. 5. DEBT Short-term revolving credit advances (in thousands):
JULY 3, 1999 JUNE 27, 1998 ------------ ------------- Cannondale Europe................................... $262 $1,578 Cannondale Japan.................................... 620 563 ---- ------ $882 $2,141 ==== ======
In February 1998, Cannondale Europe entered into a multi-currency credit arrangement, which allows Cannondale Europe to borrow up to 12,500,000 Dutch guilders (approximately $5,807,000 at July 3, 1999) on a short-term basis. The interest rate on outstanding borrowings is a market rate, applicable to the currencies borrowed, plus 1.50% with a minimum rate of 3.00%. 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. Cannondale Japan has an unsecured revolving credit facility for up to 155,000,000 Japanese yen (approximately $1,281,000 at July 3, 1999). The interest rate on the outstanding borrowings was 2.875% at July 3, 1999 and June 27, 1998. 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. F-11 42 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average interest rate on the Company's revolving lines of credit was 3.32% and 5.05% at July 3, 1999 and June 27, 1998, respectively. Long-Term Debt (in thousands):
JULY 3, 1999 JUNE 27, 1998 ------------ ------------- Revolving credit facility................................... $30,643 $34,661 Term loan, interest at 7.25%................................ 20,000 -- Pennsylvania Industrial Development Authority bonds, interest rates ranging from 2.0% to 4.5%.................. 2,951 3,049 Connecticut Development Authority Loan...................... 1,602 1,602 Algemene Bank Nederland N.V. Loan........................... 751 846 Department of Economic Community Development, interest at 4.0%...................................................... 321 -- Rush Township Construction Loan, interest at 3.0%........... -- 378 Daiichi Kangyo Bank term loan, interest at 3.25%............ -- 115 Notes secured by equipment and capitalized leases........... 185 162 ------- ------- 56,453 40,813 Less current portion........................................ (456) (461) ------- ------- $55,997 $40,352 ======= =======
On January 22, 1999, the Company entered into an $85.0 million amended and restated multicurrency credit facility (the "facility") secured by all of the Company's tangible and intangible domestic assets. The facility, as amended May 1, 1999, extends through January 2002. It allows for Cannondale U.S., Cannondale Europe and Cannondale Japan to borrow up to $65.0 million under a multicurrency revolving line of credit and provides for a $20.0 million term loan that amortizes by $10.0 million 30 months from the inception date of the facility. The facility includes a provision that permits the Company to borrow up to $10.0 million of the $65.0 million revolving line of credit on a short-term basis (less than 30 days). The outstanding borrowings consisted of U.S. dollars ($45,320,000), Dutch guilders (7,000,000) and Japanese yen (250,705,000) at July 3, 1999. The facility contains restrictive and financial covenants relating to, among other things, the payment of dividends and the repurchase of shares of the Company's common stock, and the maintenance of minimum levels of cash flow, capitalization, interest coverage and tangible net worth. Under the facility, the Company has the option to borrow at the following rates: (1) a variable rate that is defined as the higher of the bank 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 (the "LIBOR margin"). At July 3, 1999, the rate(s) of outstanding borrowings under the LIBOR option were 6.70% and 6.76% for U.S. dollar borrowings, 4.31% for Dutch guilder borrowings and 1.84% for Japanese yen borrowings. The LIBOR margin (ranging from 75.0 to 170.0 basis points) is determined quarterly based upon predetermined performance criteria. The Company is obligated to pay a facility fee (ranging from 25.0 to 30.0 basis points) on the balance of the facility based on the same performance criteria as the LIBOR margin. The LIBOR margin was 170.0 basis points at July 3, 1999. The facility fee was 30.0 basis points at July 3, 1999. The interest rate on the term loan is the LIBOR plus a margin that was 225.0 basis points at July 3, 1999, and increases to 250.0 basis points January 1, 2000, 275.0 basis points April 1, 2000 and 300 basis points July 1, 2000. The weighted average interest rate for borrowings under this facility was 6.58% at July 3, 1999. In June 1997, the Company entered into an unsecured, multicurrency revolving credit facility (the "credit facility"). The agreement, as amended in October 1997, extended to June 2000 and allowed the Company and its subsidiaries to borrow up to $70.0 million until September 1998, when the commitment of the lenders was to decrease by $1.25 million each quarter thereafter. The credit facility included a provision F-12 43 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that permitted the Company to borrow up to $10.0 million of the $70.0 million facility on a short-term basis (less than 30 days). The outstanding borrowings consisted of U.S. dollars ($27,500,000), Dutch guilders (11,000,000) and Japanese yen (250,705,000) at June 27, 1998. The credit facility required the maintenance of minimum levels of cash flow, capitalization, interest coverage and tangible net worth. Under the credit facility, the Company had the option to borrow at the following rates: (1) a variable rate that was 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% at June 27, 1998) that was an offered rate per annum quoted by the bank or (3) the LIBOR applicable to the currency borrowed plus a 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, were 4.24% and 4.25% for Dutch guilder borrowings and was 1.29% for Japanese yen borrowings. The LIBOR margin (ranged from 30.0 to 75.0 basis points) was determined quarterly based upon predetermined performance criteria. The Company was obligated to pay a facility fee (ranged 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 at June 27, 1998. The facility fee was 25.0 basis points at June 27, 1998. The weighted average interest rate for borrowings under this facility was 5.74% at June 27, 1998. This credit facility was refinanced pursuant to the amended and restated multicurrency credit facility dated January 22, 1999. 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 4.65% until January 2000; 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 5.30% and 6.20% at July 3, 1999 and June 27, 1998, respectively. The loan extends to May 2004 and is payable quarterly in Dutch guilders with equal principal payments plus interest, with the balance of 1,100,000 Dutch guilders (approximately $511,000 at July 3, 1999) due at the expiration of the agreement. The Department of Economic and Community Development loan is secured by certain pieces of machinery and equipment used for research and development by the Company. The loan extends through 2009 and is payable in equal monthly installments. The Rush Township Construction loan was secured by the Company's Philipsburg, Pennsylvania facility which was sold during fiscal 1999. The Daiichi Kangyo Bank term loan was unsecured. The loan extended through 1999, and was paid in quarterly installments. Capitalized lease obligations extend through 2002, and represent the present value of future minimum lease payments, discounted at rates ranging from 4.70% to 10.20%, 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): 2000....................................................... $ 471 2001....................................................... 511 2002....................................................... 51,099 2003....................................................... 422 2004....................................................... 920 Thereafter................................................. 3,050 ------- 56,473 Amounts representing interest on capital lease obligations.............................................. (20) ------- $56,453 =======
6. INCOME TAXES Income (loss) before income taxes by geographic location is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- United States................................. $ (22) $ (872) $ 7,770 Foreign....................................... 7,996 14,802 13,378 ------ ------- ------- $7,974 $13,930 $21,148 ====== ======= =======
The income tax provision consists of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- Current: Federal..................................... $ (309) $ (786) $2,884 Foreign..................................... 2,733 5,067 4,698 State....................................... (244) (128) 502 ------ ------ ------ Total current............................ 2,180 4,153 8,084 ------ ------ ------ Deferred: Federal..................................... (52) 412 (408) Foreign..................................... (71) (59) 36 State....................................... (6) 72 (70) ------ ------ ------ Total deferred........................... (129) 425 (442) ------ ------ ------ Total......................................... $2,051 $4,578 $7,642 ====== ====== ======
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 (34.0%) because of the effects of the following items:
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- Tax at U.S. statutory rate.................... 34.0% 34.0% 34.0% State income taxes, net of federal benefit.... (3.2) (0.6) 1.6 Higher (lower) effective income taxes of other countries................................... (0.7) (0.2) 0.9 Tax effect of research and development credit...................................... (5.0) (1.8) (0.5) Other......................................... 0.6 1.5 0.1 ---- ---- ---- 25.7% 32.9% 36.1% ==== ==== ====
The significant components of the Company's deferred tax assets and liabilities at July 3, 1999 and June 27, 1998 are as follows (in thousands):
JULY 3, 1999 JUNE 27, 1998 ------------ ------------- Deferred tax assets: Accounts receivable and inventory reserves................ $ 1,988 $ 1,586 Stock option compensation................................. 304 307 Accrued liabilities....................................... 1,119 843 Other..................................................... 523 489 ------- ------- Total deferred assets..................................... 3,934 3,225 ------- ------- Deferred tax liabilities: Tax over book depreciation................................ (1,078) (955) Accounts receivable fair value adjustment................. (858) (1,145) Other..................................................... (868) (522) ------- ------- Total deferred liabilities................................ (2,804) (2,622) ------- ------- Net deferred tax assets..................................... $ 1,130 $ 603 ======= =======
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $31,686,000 at July 3, 1999. 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 the 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 $1,716,000 would be payable upon remittance of all previously unremitted earnings at July 3, 1999. F-15 46 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. STOCK OPTIONS At July 3, 1999, the Company had five fixed option plans, which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its employee stock option grants. Under APB Opinion No. 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 No. 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 July 3, 1999, June 27, 1998 and June 28, 1997, respectively: an expected volatility of .43, .50 and .45, an expected term of 4.29, 4.18 and 4.66, risk-free interest rates of 4.85%, 5.50% and 6.05%, 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 JULY 3, 1999 JUNE 27,1998 JUNE 28,1997 ------------ ------------ ------------ Pro Forma Net Income........................... $3,107 $7,000 $11,986 Pro Forma Basic Earnings Per Share............. $ .41 $ .83 $ 1.39 Pro Forma Diluted Earnings Per Share........... $ .41 $ .80 $ 1.38
The pro-forma effect of SFAS No. 123 will be not be fully reflected until 2001 due to the inclusion of options granted only subsequent to July 1, 1995. The Company has five 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"), the 1996 Stock Option Plan (the "1996 Plan") and the 1998 Stock Option Plan (the "1998 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 2,957,500 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 $0.34, 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, the 1996 Plan and the 1998 Plan terminate on December 31, 2003, December 31, 2004, December 31, 2005, December 31, 2006 and December 31, 2008, 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. On September 3, 1998, an aggregate of 1,462,252 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. 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 July 3, 1999, June 27, 1998 and June 28, 1997, and changes during the years ending on those dates is presented below:
1999 1998 1997 ---------------------- ---------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ----------- -------- ----------- -------- ---------- -------- Outstanding at beginning of year................. 1,651,447 $14.30 1,353,204 $14.25 1,035,495 $11.71 Granted.......................................... 2,208,552 $ 8.90 2,379,758 $16.30 454,196 $19.21 Exercised........................................ (17,875) $ 8.53 (49,473) $ 5.47 (75,900) $ 7.44 Terminated or canceled........................... (1,567,858) $15.48 (2,032,042) $16.83 (60,587) $16.45 ----------- ----------- ---------- Outstanding at end of year....................... 2,274,266 $ 8.30 1,651,447 $14.30 1,353,204 $14.25 =========== =========== ========== Options exercisable at end of year............... 874,017 $ 7.72 742,898 $11.73 509,756 $ 9.20 Weighted average fair value of options granted during the year................................ $ 3.47 $ 5.92 $ 8.51
The following table summarizes information about fixed stock options outstanding at July 3, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------- NUMBER OF WEIGHTED- NUMBER OF RANGE OF OPTIONS AVERAGE WEIGHTED- OPTIONS WEIGHTED- EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE PRICES JULY 3, 1999 CONTRACTUAL LIFE EXERCISE PRICE JULY 3, 1999 EXERCISE PRICE - ---------------- -------------- ---------------- -------------- -------------- -------------- $ 0.34 152,875 4.98 $ 0.34 152,875 $ 0.34 $ 7.41 to $ 9.69 2,108,392 8.01 $ 8.87 716,143 $ 9.27 $10.00 to $15.00 12,999 9.40 $10.56 4,999 $11.45 --------- ------- $ 0.34 to $15.00 2,274,266 7.81 $ 8.30 874,017 $ 7.72 ========= =======
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 1999, 1998 or 1997. 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 $20.0 million. 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 are to be additional to the shares repurchased pursuant to the repurchase program announced in September 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. At July 3, 1999, the Company had repurchased an aggregate of 1,292,900 shares of its common stock under the programs at a cost of $20.2 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. 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 F-17 48 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 or 85% of the closing price of the Company's common stock on the termination date of the offering period. During fiscal year 1999, employees purchased 29,345 shares of common stock pursuant to the Purchase Plan at prices ranging from $7.23 to $11.37 per share. At July 3, 1999 there were 2,994,327 shares of common stock reserved for the exercise of options and employee stock purchases. 10. OPERATING LEASES The Company and its subsidiaries lease a Cessna Citation Jet, computer software and hardware and other office and factory equipment under long-term operating leases with varying terms. The aggregate future minimum lease payments under noncancellable operating leases with initial or remaining lease terms of greater than one year are as follows (in thousands): 2000........................................................ $1,161 2001........................................................ 767 2002........................................................ 428 2003........................................................ 425 2004 and after.............................................. 726 ------ $3,507 ======
Rent expense amounted to $1,582,000, $2,052,000 and $2,273,000 in fiscal 1999, 1998 and 1997, respectively. During the third quarter of fiscal 1999, the Company entered into a $2.9 million sale-leaseback transaction for its Cessna Citation Jet aircraft. The sale resulted in a gain of $131,000 which was deferred and is being amortized over the five-year term of the lease. The lease provides the Company with the option to terminate the lease before the end of the lease term for predetermined amounts without penalty. At the end of the lease term, the Company can purchase the equipment for 90% of its original cost, renew the lease for the F-18 49 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) then fair market value rental or sell the aircraft to a third party. If the proceeds from the sale of the aircraft are less than 90% of the purchase price, the Company shall make a final payment in the amount of the deficiency not to exceed 72% of the original cost. The related lease is being accounted for as an operating lease and will result in rent expense of approximately $273,000 annually. 11. FINANCIAL INSTRUMENTS Balance Sheet Financial Instruments At July 3, 1999, 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 July 3, 1999 and June 27, 1998, the Company had approximately $10.4 and $10.3 million, respectively, of forward exchange contracts outstanding to exchange European, Japanese, Australian, Canadian 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 and Dutch guilders at rates agreed to at the inception of the contracts. At July 3, 1999, the net gain deferred from hedging firm sale and purchase commitments was not significant and will be recognized in earnings during fiscal 2000. 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 July 3, 1999, 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. The Company had outstanding borrowings of 251.0 million Japanese yen (approximately $2,072,000 and $1,766,000 at July 3, 1999 and June 27, 1998, respectively) and 7.0 million Dutch guilders (approximately $3,252,000 and $3,433,000 at July 3, 1999 and June 27, 1998, respectively). Gains and losses on hedges of net investments are recognized as a component of accumulated other comprehensive income in stockholders' equity. Interest Rate Swaps In April 1998, the Company entered into two five year interest rate swap agreements with a total notional principal amount of $20.0 million to manage interest costs associated with changing interest rates. These agreements convert underlying variable-rate debt based on the LIBOR under the Company's multicurrency revolving line of credit 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 financial institutions to pay the Company approximately $47,000 to settle these agreements on July 2, 1999. F-19 50 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. OTHER INCOME Other income primarily consists of finance charges relating to accounts receivable, which totaled $529,000, $885,000 and $810,000 for fiscal 1999, 1998 and 1997, respectively, foreign currency gains (losses) of ($78,000), ($232,000) and $33,000 for fiscal 1999, 1998 and 1997, respectively and for fiscal 1999 interest income of $804,000 related to a related party loan. 13. OPERATIONS BY INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS In fiscal year 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changed the method the Company uses in reporting information about its operating segments. As a result of the adoption, segment information for 1998 and 1997 has been restated to conform to the 1999 presentation. The Company's reportable segments are Bicycles and Motorcycles. The Company operates predominantly in the bicycle industry as a manufacturer and distributor of high-performance bicycles and bicycle-related products, which include clothing, shoes and bags, and a line of components. Due to the similarities in the nature of the products, production processes, customers and methods of distribution, bicycles and bicycle related products are aggregated in the bicycle segment. The Company has also developed a line of motocross motorcycles, which is in the start-up stage of operations, and for which no revenues have been generated as of July 3, 1999. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Summarized segment data is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- Net Sales From External Customers: Bicycles........................................... $176,819 $171,496 $162,496 Motorcycles........................................ -- -- -- -------- -------- -------- $176,819 $171,496 $162,496 ======== ======== ======== Operating Income (Loss): Bicycles........................................... $ 17,278 $ 17,306 $ 21,879 Motorcycles........................................ (5,907) (2,034) -- -------- -------- -------- $ 11,371 $ 15,272 $ 21,879 ======== ======== ======== Identifiable Assets: Bicycles........................................... $153,072 $152,018 $127,284 Motorcycles........................................ 9,307 259 -- -------- -------- -------- $162,379 $152,277 $127,284 ======== ======== ======== Capital Expenditures: Bicycles........................................... $ 6,190 $ 16,503 $ 9,766 Motorcycles........................................ 9,067 259 -- -------- -------- -------- $ 15,257 $ 16,762 $ 9,766 ======== ======== ======== Depreciation and Amortization Expense: Bicycles........................................... $ 5,721 $ 4,054 $ 3,211 Motorcycles........................................ 61 -- -- -------- -------- -------- $ 5,782 $ 4,054 $ 3,211 ======== ======== ========
F-20 51 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company evaluates performance of its segments based on profit or loss from operations. The amounts below are not allocated between the segments.
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- Total operating income for reportable segments.................................... $11,371 $15,272 $21,879 Other income (expense): Interest expense............................ (4,557) (1,995) (1,574) Other income................................ 1,160 653 843 ------- ------- ------- (3,397) (1,342) (731) ------- ------- ------- Income before income taxes.................... $ 7,974 $13,930 $21,148 ======= ======= =======
Summarized data by geographic area is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED JULY 3, 1999 JUNE 27, 1998 JUNE 28, 1997 ------------ ------------- ------------- Net Sales From External Customers(a): United States............................... $ 72,413 $ 75,193 $ 80,542 Other European countries.................... 59,008 52,603 43,478 Germany..................................... 26,639 25,382 23,569 All other countries......................... 18,759 18,318 14,907 -------- -------- -------- $176,819 $171,496 $162,496 ======== ======== ======== Long-Lived Assets(b): United States............................... $ 54,798 $ 37,937 $ 21,905 Netherlands................................. 2,886 3,141 2,949 All other countries......................... 449 380 522 -------- -------- -------- $ 58,133 $ 41,458 $ 25,376 ======== ======== ========
- --------------- (a) Net Sales are attributed to countries based on location of customer. (b) Long-lived assets are located in the respective geographic regions. At July 3, 1999, the net assets of Cannondale Europe, Cannondale Japan and Cannondale Australia were $25,350,000, $1,442,000 and $1,022,000, respectively. 14. CAPITALIZATION OF COSTS OF COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting For the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1, which was adopted by the Company as of the beginning of its fourth fiscal quarter of 1999, requires capitalization of certain costs incurred in connection with developing or obtaining internal use software. In the prior year, the Company expensed such costs as incurred. SOP 98-1 requires companies to adopt its provisions as of the beginning of the fiscal year and restate previously reported interim results. The effect of this accounting change was to increase net income for the fiscal year ended July 3, 1999 by $322,000 ($0.04 per share). In addition, the F-21 52 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company restated previously reported 1999 quarterly earnings as follows (in thousands, except per share data):
THREE MONTHS THREE MONTHS SIX MONTHS THREE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED ENDED SEPTEMBER 27, DECEMBER 27, DECEMBER 27, MARCH 27, MARCH 27, 1998 1998 1998 1999 1999 -------------- ------------ ------------ ------------ ----------- Previously reported earnings.......... $ 712 $1,775 $2,487 $2,317 $4,804 Change in accounting for internal use software............................ 83 74 157 53 210 ----- ------ ------ ------ ------ Adjusted earnings..................... $ 795 $1,849 $2,644 $2,370 $5,014 ===== ====== ====== ====== ====== Previously reported basic earnings per share............................... $0.09 $ 0.24 $ 0.33 $ 0.31 $ 0.64 Adjusted basic earnings per share..... $0.10 $ 0.25 $ 0.35 $ 0.32 $ 0.67 Previously reported diluted earnings per share........................... $0.09 $ 0.23 $ 0.32 $ 0.30 $ 0.62 Adjusted diluted earnings per share... $0.10 $ 0.24 $ 0.34 $ 0.31 $ 0.65
15. RELATED PARTY TRANSACTIONS In April 1998, the Company provided Joseph Montgomery, the President and Chief Executive Officer of the Company, with a loan in the principal amount of $2.0 million to enable him to meet certain tax obligations. In June 1998, the Company agreed to provide Mr. Montgomery with an additional loan in the principal amount of $10.0 million for the purchase of certain real property, which loan has been combined with the previous $2.0 million loan made in April 1998. The loan matures on August 1, 2003, at which time the entire principal balance is due. The interest rate on the loan is set at the prime rate as published in the Wall Street Journal from time to time, and the loan is secured by a pledge to the Company of all of the shares of the Company's common stock held by Mr. Montgomery and a mortgage on such real property. The principal balance of the outstanding loan to Mr. Montgomery was $12.0 million at July 3, 1999. The Company has agreed to defer the interest payment of approximately $900,000 payable by Mr. Montgomery to the Company due August 1, 1999 pursuant to the terms of the loan. Under the terms of the deferral, Mr. Montgomery is obligated to sell 75,000 shares of his stock in the Company per quarter commencing in the Company's third quarter of fiscal 2000. The net proceeds of such sales will be remitted to the Company to pay the deferred interest. The stock selling program by Mr. Montgomery is subject to applicable securities laws and other restrictions which may preclude Mr. Montgomery from selling a total of 75,000 shares per quarter. This selling program will continue until the balance of the deferred interest is paid by Mr. Montgomery in its entirety. 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 $2.8 million 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 facilities, 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 F-22 53 CANNONDALE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 operate both the Cessna Citation Jet aircraft and the Learjet aircraft simultaneously. During the third quarter of fiscal 1999, the Company entered into a $2.9 million sale-leaseback transaction for the Cessna Citation Jet (See Note 10). The lease provides JSM with the right of first refusal should the Company purchase the aircraft pursuant to the terms of the lease agreement. 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 July 3, 1999, $650,000 and $125,000 had been loaned to the two 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. In addition, during fiscal 1999, another officer received an advance of $80,000 against his future salary. This advance was still outstanding at July 3, 1999. During fiscal 1998, construction of the Company's headquarters and research and development facility and the expansion of its manufacturing facility was completed. During fiscal 1999, the construction of the Company's new motorcycle manufacturing facility was completed. The Company contracted an entity controlled by a director of the Company to act as the general contractor for the construction of these projects. The Company paid the entity approximately $6.3 million and $5.6 million for the construction of these facilities during the fiscal years ended July 3, 1999 and June 27, 1998, respectively. At July 3, 1999, the Company owed the entity a final payment of approximately $131,000 for the construction of the motorcycle manufacturing facility. F-23 54 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 July 3, 1999 and June 27, 1998, and for the years ended July 3, 1999, June 27, 1998 and June 28, 1997, and have issued our report thereon dated August 10, 1999, except for the first paragraph of Note 15, as to which the date is September 30, 1999 (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, 1999 55 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 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 ====== ======= Year ended July 3, 1999.......... $8,479 $9,297 $ 4 $(7,706)(1) $10,074 ====== ======= RESERVE FOR OBSOLETE INVENTORY 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 ====== ======= Year ended July 3, 1999.......... $ 806 $2,309 $ 5 $(1,459)(2) $ 1,661 ====== =======
- --------------- (1) Discounts, late charges and uncollectible accounts written off, net of recoveries. (2) Inventory disposed. 56 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES - ----------- ----------- ------------ 3.1(i) Form of Amended and Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 3.1.1(i) Certificate of Amendment to Restated Certificate of Incorporation, effective as of November 17, 1997. (Filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-8, Registration No. 333-40879).+ 3.1(ii) Amended and Restated Bylaws of the Company. (Filed as Exhibit 3.1(ii) to the Registrant's Form 10-Q for the quarterly period ended March 27, 1999).+ 4.1 Rights Agreement, dated December 22, 1997, between the Company and BankBoston, N.A., as Rights Agent. (Filed with the Registrants's Form 8-K filed on December 23, 1997).+ 4.2 1994 Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.2 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.3 1994 Management Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.3 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.4 1995 Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.4 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.5 1996 Stock Option Plan, as amended as of February 5, 1998. (Filed as Exhibit 4.5 to the Registrant's Form 10-K for the fiscal year ended June 27, 1998).+ 4.6 1998 Stock Option Plan. (Filed as Exhibit 4.10 to the Registrant's Registration Statement on Form S-8, Registration No. 333-72121).+ 10.1 First Amendment to Amended and Restated Credit Agreement, dated as of May 1, 1999, among the Company and NationsBank N.A., as Administrative Agent, Fronting Bank, Documentation Agent and Swingline Bank and Fleet National Bank, The Chase Manhattan Bank, State Street Bank and Trust Company and BankBoston, N.A.* 10.2 Amended and Restated Credit Agreement, dated as of January 22, 1999, among the Company and NationsBank N.A., as Administrative Agent, Fronting Bank, Documentation Agent and Swingline Bank and Fleet National Bank, The Chase Manhattan Bank, State Street Bank and Trust Company and BankBoston, N.A. (Filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarterly period ended March 27, 1999).+ 10.3 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. (Filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+
57
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES - ----------- ----------- ------------ 10.4 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. (Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.5 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. (Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.6 Consent, Subordination and Assumption Agreement, dated April 27, 1994, between the Company and Bedford Development Council, in favor of The Pennsylvania Industrial Development Authority. (Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.7 Loan Agreement, dated November 10, 1989, between the Company and Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.8 Promissory Note, dated November 10, 1989, from the Company to Rush Township, Commonwealth of Pennsylvania. (Filed as exhibit 10.12 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.9 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. (Filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.10 Loan Agreement, dated July 24, 1990, between the Company and Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.11 Promissory Note, dated July 24, 1990, from the Company to Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.12 Mortgage, dated July 24, 1990, from the Company to Rush Township Commonwealth of Pennsylvania. (Filed as Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.13 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. (Filed as Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+
58
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES - ----------- ----------- ------------ 10.14 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. (Filed as Exhibit 10.18 to the Registrant's Form S-1, Registration No. 33-84566).+ 10.15 Consent, Subordination and assumption Agreement, dated December 4, 1990, between the Company and Moshannnon Valley Economic Development Partnership, in favor of The Pennsylvania Industrial Development Authority. (Filed as Exhibit 10.19 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.16 Loan Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership. (Filed as Exhibit 10.20 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.17 Installment Judgment Note, dated February 1, 1992, from the Company to Moshannon Valley Economic Development Partnership. (Filed as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.18 Chattel Mortgage Security Agreement, dated February 1, 1992, between the Company and Moshannon Valley Economic Development Partnership. (Filed as Exhibit 10.22 to the Registrant's Form S-1, Registration No. 33-84566).+ 10.19 Business Infrastructure Development Loan Agreement, dated June 30, 1989, among the Company, Pennsylvania Department of Commerce and Rush Township, Commonwealth of Pennsylvania. (Filed as Exhibit 10.23 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.20 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. (Filed as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.21 Escrow Agreement, dated June 30, 1989, among the Company, Rush Township, Commonwealth of Pennsylvania, Pennsylvania Department of Commerce and MidState Bank and Trust Company. (Filed as Exhibit 10.25 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.22 Mortgage, dated July 23, 1991, from Cannondale Europe, B.V. to Algemene-Bank Netherlands B.V. (In Dutch, with English summary). (Filed as Exhibit 10.26 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.23 Financing Lease, dated May 31, 1991, between ABN Onroerend Goed Lease B.V., as lessor, and Cannondale Europe B.V., as lessee. (In Dutch, with English translation). (Filed as Exhibit 10.27 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.24 Credit Agreement, dated February 5, 1998, between Cannondale Europe B.V. and ABN AMRO Bank N.V. (Filed as Exhibit 10.1.11 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+
59
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES - ----------- ----------- ------------ 10.25 Loan Agreement, dated September 1, 1992, between Cannondale Japan KK and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese, with English translation). (Filed as Exhibit 10.30 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.26 Guarantee Agreement, dated August 7, 1992, from the Company to The Dai-Ichi Kangyo Bank, Ltd. (Filed as Exhibit 10.30.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.27 Master Lease Agreement, dated April 11, 1994, between United States Leasing Corporation and the Company. (Filed as Exhibit 10.32 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.28 Employment Agreement, dated January 3, 1994, between the Company and William A. Luca. (Filed as Exhibit 10.48 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.29 Employee Patent and Confidential Information Agreement, dated August 20, 1982, between the Company and Daniel C. Alloway. (Filed as Exhibit 10.49 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.30 Employment Agreement, dated June 6, 1994, between the Company and Leonard Konecny. (Filed as Exhibit 10.53 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.31 Cannondale Corporation 401(k) Profit Sharing Plan. (Filed as Exhibit 10.54 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.32 Cannondale Corporation Employee Stock Purchase Plan. (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8, Registration No. 333-40879).+ 10.33 Form of Indemnification Agreement between the Company and each of its directors and officers. (Filed as Exhibit 10.60 to the Registrant's Registration Statement on Form S-1, Registration No. 33-84566).+ 10.34 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and William A. Luca. (Filed as Exhibit 10.68 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.35 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and Joseph S. Montgomery. (Filed as Exhibit 10.68.1 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.36 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and John Moriarty. (Filed as Exhibit 10.68.2 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.37 Change of Control Employment Agreement, dated February 5, 1998, between Cannondale Corporation and Daniel C. Alloway. (Filed as Exhibit 10.68.3 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 10.38 Cannondale Corporation Change of Control Separation Plan A. (Filed as Exhibit 10.68.4 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+
60
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGES - ----------- ----------- ------------ 10.39 Cannondale Corporation Change of Control Separation Plan B. (Filed as Exhibit 10.68.5 to the Registrant's Form 10-Q for the quarterly period ended March 28, 1998).+ 21 Subsidiaries of the Registrant.* 23 Consent of Independent Auditors.* 24 Power of Attorney (appears on signature page).* 27.1 Financial Data Schedule For Fiscal Year Ended July 3, 1999.* 27.2 Restated Financial Data Schedules for the Nine-Month, Six-Month and Three-Month Periods Ended March 27, 1999, December 26, 1998 and September 26, 1998, respectively.*
- --------------- + Incorporated by reference. * Filed herewith. EX-10.1 2 AMENDED & RESTATED CREDIT AGREEMENT 1 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of May 1, 1999 (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 that is a signatory to the Credit Agreement (as defined below) (such 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"); and BANKBOSTON, N.A., a national banking association organized under the laws of the United States of America ("BankBoston") (each of NationsBank, Fleet, Chase, State Street and BankBoston 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 Amended and Restated Credit Agreement dated as of January 22, 1999 (the "Credit Agreement"), among the Borrowers, the Administrative Agent, the Banks and the other parties signatory thereto. B. The parties hereto wish to amend the Credit Agreement as herein provided. C. Capitalized terms not otherwise defined shall have the meanings ascribed to them in the Credit Agreement, 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: (a) The definition of "Margin" contained in Section 1.1 of the Credit Agreement is deleted and the following is substituted therefor: "Margin" means (a) for each type of Revolving Loan, the number of basis points for such type of Revolving Loan set forth below opposite the range of the Consolidated Average Funded Debt to EBITDA Ratio of Cannondale in the schedule below as determined as of the last day of the immediately preceding Fiscal Quarter, with adjustments to become effective on the date of receipt by the Administrative Agent of the most recent financial statements of the Borrowers required to be furnished to the Banks under Section 7.8; provided, however, that in the event that the Borrowers fail to furnish such financial statements to the Banks on a timely basis under Section 7.8, "Margin" means, for each type of Revolving Loan during the continuance of such 2 failure until such financial statements are delivered, the highest number of basis points for such type of Revolving Loan set forth below:
MARGIN CONSOLIDATED AVERAGE FUNDED ---------------------------------------- DEBT TO EBITDA RATIO VARIABLE RATE LOANS EUROCURRENCY LOANS --------------------------- ------------------- ------------------ Less than 2.50 0 basis points 75.0 basis points Greater than or equal to 2.50, but 0 basis points 97.5 basis points less than 3.00 Greater than or equal to 3.00, but 0 basis points 120.0 basis points less than 3.30 Greater than or equal to 3.30, but 0 basis points 145.0 basis points less than 3.60 Greater than or equal to 3.60 0 basis points 170.0 basis points
and (b) for each type of Term Loan, the number of basis points for such type of Term Loan set forth below opposite the stated time period in the schedule below, with adjustments to become effective automatically without further action on the part of the Borrowers, the Administrative Agent or the Banks:
MARGIN ---------------------------------------- TIME PERIOD VARIABLE RATE LOANS EUROCURRENCY LOANS ----------- ------------------- ------------------ January 22, 1999 to 0 basis points 175 basis points April 30, 1999 May 1, 1999 to 0 basis points 225 basis points December 31, 1999 January 1, 2000 to 0 basis points 250 basis points March 31, 2000 April 1, 2000 to 0 basis points 275 basis points June 30, 2000 from and after July 1, 2000 0 basis points 300 basis points
(b) The facility fee schedule contained in Section 2.14(a) of the Credit Agreement is deleted and the following is substituted therefor:
CONSOLIDATED AVERAGE FUNDED DEBT TO EBITDA RATIO FACILITY FEE --------------------------- ------------ Less than 2.50 25 basis points Greater than or equal to 2.50, 27.5 basis points but less than 3.00 Greater than or equal to 3.00 30.0 basis points
(c) Section 9.4 to the Credit Agreement is deleted and the following is substituted therefor: Section 9.4. Debt Service Coverage Ratio. Cannondale shall maintain at all times, as certified at the end of each Fiscal Quarter of Cannondale, a Consolidated Average Funded Debt to EBITDA Ratio (for the four Fiscal Quarters then ended) of not greater than (a) 3.9 to 1.0 during the fourth Fiscal Quarter of Cannondale's 1999 Fiscal Year, (b) 3.8 to 1.0 and 3.6 to 1.0 during the first and second Fiscal Quarters, respectively, of Cannondale's 2000 Fiscal Year, and (c) 3.3 to 1.0 thereafter. 2. Amendment Fee. The Borrowers hereby agree to pay to the Administrative Agent, on the effective date of this Amendment, for the account of each Bank executing this Amendment prior to May 14, 1999, an amendment fee in the amount of .125% of such Bank's Commitment (used and unused) on such date. 3. 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 2 3 Administrative Agent and Required Banks in their sole discretion, and then shall be effective as of the date first above written: (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. 4. 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 January 6, 1999, in the case of Cannondale, and January 19, 1999, and January 21, 1999, in the case of Cannondale Europe B.V., remain in full force and effect and have not been amended, modified, rescinded, or otherwise abrogated. 5. Reaffirmation re: Collateral. Cannondale reaffirms the mortgages, 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. 6. 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. 7. No waiver by the Banks. Each of the Borrowers acknowledges that: (a) neither the Banks nor the Administrative Agent, by execution of this Amendment, are 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 and the Administrative Agent reserve all rights and remedies available to them under the Facility Documents and otherwise. 8. 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. 3 4 (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 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.] 4 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, CFO, Treasurer CANNONDALE EUROPE B.V. By /s/ JORG HILFIKER ------------------------------------ Name: Jorg Hilfiker Title: President CANNONDALE JAPAN K.K. By /s/ WILLIAM CONRADT ------------------------------------ Name: William Conradt Title: President ADMINISTRATIVE AGENT NATIONSBANK, N.A. By /s/ W.L. HESS ------------------------------------ Name: W.L. Hess Title: Managing Director BANKS NATIONSBANK, N.A. By /s/ W.L. HESS ------------------------------------ Name: W.L. Hess Title: Managing Director 5 6 FLEET NATIONAL BANK By ------------------------------------ Name: Title: THE CHASE MANHATTAN BANK By ------------------------------------ Name: Title: STATE STREET BANK AND TRUST COMPANY By /s/ ARLENE M. DOHERTY ------------------------------------ Name: Arlene M. Doherty Title: Vice President BANKBOSTON, N.A. By /s/ DIANE B. VACCARO ------------------------------------ Name: Diane B. Vaccaro Title: Vice President 6 EX-21 3 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 4 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 and Registration Statement (Form S-8 No. 333-72121) pertaining to the 1998 Stock Option Plan of Cannondale Corporation of our reports dated August 10, 1999, except for the first paragraph of Note 15, as to which the date is September 30 1999, with respect to the consolidated financial statements and schedule of Cannondale Corporation included in this Annual Report (Form 10-K) for the year ended July 3, 1999. /s/ ERNST & YOUNG LLP Stamford, Connecticut September 30, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF EARNINGS OF CANNONDALE CORPORATION FOR THE FISCAL YEAR ENDED JULY 3, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-03-1999 JUN-28-1998 JUL-03-1999 3,300 0 69,453 10,074 33,165 104,247 67,711 26,334 162,379 29,353 55,997 0 0 88 74,922 162,379 176,819 176,819 114,627 114,627 50,821 9,498 4,557 7,974 2,051 5,923 0 0 0 5,923 0.79 0.77 REPRESENTS BASIC INCOME PER COMMON SHARES
EX-27.2 6 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE RESTATED CONSOLIDATED STATEMENTS OF EARNINGS OF CANNONDALE CORPORATION FOR THE FISCAL NINE, SIX, AND THREE MONTH PERIODS ENDED MARCH 27, 1999, DECEMBER 26, 1998 AND SEPTEMBER 26, 1998, RESPECTIVELY, AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 6-MOS 3-MOS JUL-03-1999 JUL-03-1999 JUL-03-1999 JUN-28-1998 JUN-28-1998 JUN-28-1998 MAR-27-1999 DEC-26-1998 SEP-26-1998 2,190 879 2,407 0 0 0 87,503 80,703 65,822 10,359 10,238 8,747 35,832 40,284 46,404 123,212 120,215 114,717 63,293 62,443 59,703 25,133 24,170 22,835 177,556 174,379 167,321 29,690 28,506 29,336 70,897 69,288 63,261 0 0 0 0 0 0 88 87 87 75,155 74,648 72,801 177,556 174,379 167,321 131,833 90,119 42,218 131,833 90,119 42,218 85,300 59,333 27,614 85,300 59,333 27,614 37,623 25,841 12,695 7,323 4,714 2,264 3,182 1,945 839 6,758 3,391 1,206 1,744 747 411 5,014 2,644 795 0 0 0 0 0 0 0 0 0 5,014 2,644 795 0.67 0.35 0.10 0.65 0.34 0.10 REPRESENTS BASIC INCOME PER COMMON SHARES
-----END PRIVACY-ENHANCED MESSAGE-----