Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Cannondale Corporation 59 378K
2: EX-4.2 1994 Stock Option Plan as Amended February 5, 1998 16 61K
3: EX-4.3 1994 Management Stock Option Plan as Amended 12 51K
4: EX-4.4 1995 Stock Option Plan as Amended February 5, 1998 19 63K
5: EX-4.5 1996 Stock Option Plan as Amended February 5, 1998 17 63K
6: EX-10.1.12 Second Amendment to Credit Agreement 5 20K
7: EX-10.1.13 Third Amendment to Credit Agreement 7 26K
8: EX-10.1.14 Fourth Amendment to Credit Agreement 6 22K
9: EX-21 Subsidiaries of the Registrant 1 6K
10: EX-23 Consent of Independent Auditors 1 7K
11: EX-27.A Financial Data Schedule for Year Ended 6/29/1996 1 8K
12: EX-27.B Financial Data Schedule for Year Ended 6/28/1997 1 8K
13: EX-27.C Financial Data Schedule for Year Ended 6/27/1998 1 8K
| Page | (sequential) | | | | (alphabetic) | Top |
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- Alternative Formats (Word, et al.)
- Cannondale Australia
- Cannondale Europe
- Cannondale Japan
- Certain Relationships and Related Transactions
- Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
- Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997
- Consolidated Statements of Cash Flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996
- Consolidated Statements of Earnings for the years ended June 27, 1998, June 28, 1997 and June 29, 1996
- Consolidated Statements of Stockholders' Equity for the years ended June 27, 1998, June 28, 1997 and June 29, 1996
- Directors and Executive Officers of the Registrant
- Executive Compensation
- Executive Officers of the Registrant
- Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- Financial Statements and Supplementary Data
- Item 1
- Legal Proceedings
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Market for Registrant's Common Equity and Related Stockholder Matters
- Notes to Consolidated Financial Statements
- Properties
- Quantitative and Qualitative Disclosures About Market Risk
- Report of Independent Auditors
- Security Ownership of Certain Beneficial Owners and Management
- Selected Consolidated Financial Data
- Selected Quarterly Financial Data; Seasonality
- Submission of Matters to A Vote of Security Holders
- 10.35 Master Equipment Lease, dated May 26, 1993, between XL/Datacomp, Inc. and the Company, to which are appended Schedule A, dated May 26, 1993, and Schedule B, dated August 3, 1993.*
- 3.1(i) Amended and Restated Certificate of Incorporation of the Company.*
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| 1 | 1st Page - Filing Submission
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| 2 | Item 1
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| 5 | Cannondale Europe
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| " | Cannondale Japan
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| " | Cannondale Australia
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| 7 | Item 2. Properties
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| 8 | Item 3. Legal Proceedings
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| " | Item 4. Submission of Matters to A Vote of Security Holders
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| 9 | Executive Officers of the Registrant
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| 10 | Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
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| 11 | Item 6. Selected Consolidated Financial Data
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| 12 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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| 14 | Selected Quarterly Financial Data; Seasonality
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| 20 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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| 22 | Item 8. Financial Statements and Supplementary Data
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| " | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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| 23 | Item 10. Directors and Executive Officers of the Registrant
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| " | Item 11. Executive Compensation
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| " | Item 12. Security Ownership of Certain Beneficial Owners and Management
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| " | Item 13. Certain Relationships and Related Transactions
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| 24 | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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| " | Report of Independent Auditors
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| " | Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997
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| " | Consolidated Statements of Earnings for the years ended June 27, 1998, June 28, 1997 and June 29, 1996
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| " | Consolidated Statements of Stockholders' Equity for the years ended June 27, 1998, June 28, 1997 and June 29, 1996
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| " | Consolidated Statements of Cash Flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996
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| " | Notes to Consolidated Financial Statements
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| " | 3.1(i) Amended and Restated Certificate of Incorporation of the Company.*
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| 27 | 10.35 Master Equipment Lease, dated May 26, 1993, between XL/Datacomp, Inc. and the Company, to which are appended Schedule A, dated May 26, 1993, and Schedule B, dated August 3, 1993.*
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-24884
CANNONDALE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
None N/A
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
COMMON STOCK PURCHASE RIGHTS
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At September 21, 1998, the aggregate market value of the voting stock held
by non-affiliates of registrant was $53,288,297 based on the per share closing
price on such date, and registrant had 7,448,679 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT RELATING TO THE 1998
ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III, AS
SET FORTH HEREIN.
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PART I
ITEM 1. BUSINESS.
GENERAL.
Cannondale Corporation ("Cannondale" or the "Company") is a leading
manufacturer of high performance bicycles. The Company's bicycle line has grown
from 21 models in its 1992 model year to 66 models in its 1999 model year, the
significant majority of which are hand assembled and constructed with hand
welded aluminum frames. Cannondale also manufactures and sells other bicycle
related products, which include clothing, shoes and bags, and a line of
components. In February 1998, the Company announced plans to introduce a line of
motocross motorcycles, currently in the prototype phase of development, for
shipment in the summer of 1999. The Company was incorporated in Delaware in
1971.
The Company has experienced growth, with net sales increasing from $54.5
million in fiscal 1991 to $171.5 million in fiscal 1998. The Company believes
that the growth in cycling in general, and mountain biking in particular, have
contributed to its growth. Industry sources estimate that mountain bikes
accounted for 63 percent of all bicycle revenue in the United States in 1997.
Based on data from the Bicycle Product Suppliers Association, the
high-performance segment of the mountain-bike market has continued to grow as a
percentage of the mountain-bike market as a whole, which the Company believes is
due in large part to innovations such as lighter weight frames and suspension
systems.
PRODUCTS.
The Company's bicycles are marketed under the Cannondale brand name and
"Handmade in USA" logo. The Company's 1999 bicycle line offers 66 models, the
vast majority of which feature a Cannondale lightweight hand-welded and
hand-assembled aluminum frame. Cannondale's use of aluminum allows it to produce
frames that are generally lighter in weight than steel frames. Cannondale
bicycles employ wide diameter tubing, which provides greater frame rigidity as
well as a distinctive look. Certain Cannondale models also have full or front
suspension systems, offering greater comfort and control than non-suspended
bikes.
In June 1997, the Company began shipment of the Raven, a new high
performance, full suspension mountain bike. A product of the Company's ongoing
research and development, the Raven's frame is composed of lightweight carbon
fiber skins bonded to an aluminum spine, providing an even lighter frame weight
than its steel and aluminum counterparts.
There are five major categories of bicycles sold in the adult market:
mountain, road racing, multi-sport, recreational and specialty. Mountain bikes
have wide knobby tires, straight handlebars and are designed to handle off-road
conditions. Road racing bikes are lightweight with thin tires and drop (curved)
handlebars. Multi-Sport Bikes have smaller wheels than traditional road bikes
with aero-tubed frames designed for triathlon, duathlon and other multi-sport
races. Recreational bikes are composed of hybrid bikes which have straight
handlebars and more upright riding position of mountain bikes, but use thinner
tires, making them suited for on- and off-road use, and smooth-riding bikes
which are designed with rider comfort in mind and are primarily for use on bike
paths and the growing number of recreational riding areas. The specialty bicycle
market encompasses various niche products, including tandem, touring and
cyclocross bikes.
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The 66 bicycle models in Cannondale's 1999 model year are distributed in
the five major bicycle categories as follows:
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NUMBER OF
CATEGORY 1999 MODELS
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Mountain Bikes:
Full Suspension................... 13
Front Suspension.................. 11
Non-Suspended..................... 1
Road Bikes:
Front Suspension.................. 2
Non-Suspended..................... 12
Multi-Sport....................... 3
Recreational:
Hybrid............................ 9 (five front suspension)
Smooth Riding..................... 5 (one front suspension and one full suspension)
Specialty:
Tandem............................ 4 (one front suspension)
Touring........................... 4 (one front suspension)
Cyclocross........................ 2 (one front suspension)
The Company's 1999 line of proprietary HeadShok front suspension forks
features a total of fourteen models. Each HeadShok model offers the Company an
important point of differentiation from other bicycle manufacturers, virtually
all of whose suspension bikes feature the same brand-name forks produced by one
of two independent suppliers. In the 1999 model year there are two HeadShok fork
models that can be mounted to non-Cannondale frames; prior to 1996, all HeadShok
forks functioned with the bicycle's frame as part of an integrated system. In
addition, several independent manufacturers of bicycle frames have been
manufacturing frames specifically to fit the Company's HeadShok suspension
system.
Like the HeadShok forks, the Company's use of its own CODA brand components
on its bicycles helps distinguish its models from those of its competitors. The
Company currently offers cranksets (chain rings), pedals, hubs, wheels,
discbrakes, handlebars, handlebar grips and stems, saddles, kickstands, and
certain other components under the CODA brand name. In addition to providing
value-added features exclusive to Cannondale's bicycles, CODA components also
provide revenues from aftermarket retail sales.
The Company also offers men's and women's apparel that is divided into
three categories: Spring/ Summer, Fall/Winter and mid season. The collection
consists of four lines: Vertex (a high-performance line for competition), HPX (a
line for enthusiasts of all levels), Terra (a line geared for cyclists who
prefer casual wear) and Sport (a line for female cyclists characterized by
close-fitting silhouettes and progressive prints). The Company's Fall and Winter
apparel features wind and waterproof garments that coordinate a full line of
fleece offerings and base layers.
In addition to its bicycle, suspension fork, component and clothing lines,
the Company manufactures and sells bicycle accessories, including bags, shoes,
and other accessories, some of which are manufactured for the Company by third
parties. These products are sold primarily through the same distribution
channels as the Company's bicycles, forks, components and apparel.
In February 1998, the Company announced plans to introduce a line of
motocross motorcycles. The Company's motocross motorcycle will have a 400cc
four-stroke engine that will be manufactured in Bedford, Pennsylvania at the
Company's facility. The motocross motorcycle enables the Company to capitalize
on numerous core competencies including patented aluminum frame fabrication,
patented Headshok needle bearing suspension and short-development cycles. The
motocross motorcycle is currently in its fourth generation prototype.
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MARKETING.
The goal of the Company's sales and marketing program is to establish
Cannondale as the leading high performance bicycle brand in the specialty
bicycle retail channel. The marketing effort is focused on innovation,
differentiation, performance and quality leadership; publicity generated from
the Company-sponsored professional athletes; and a media campaign designed to
attract consumers to specialty bicycle retailers.
Since 1994, the Volvo/Cannondale mountain bike racing team has made
contributions to the product development effort of the Company, and served as a
major focus of the Company's marketing effort. The Company is leveraging the
competitive success of the racing team by using photo images of the athletes in
print media, on point-of-sale literature, banners, product packaging and product
catalogs. The Company also supports racing programs in other cycling areas,
including the New Balance/Cannondale triathlon racing team and the Saeco
professional road cycling team.
The Company's sponsorship of the Saeco team is designed to increase
Cannondale's visibility and credibility among the high-end consumers dedicated
to road racing. A major force in the Giro d'Italia, Tour de France, CoreStates
and other top professional road cycling events, the Saeco team began to compete
aboard Cannondale bicycles, and in the Company's cycling apparel, in the spring
of 1997.
The Company has historically maintained an active program to generate
publicity regarding its products in a variety of print and broadcast media, both
enthusiast and general interest. The public relations effort has been
supplemented by the Company's advertising program, which is primarily directed
to the enthusiast press, although the Company also advertises in more general
lifestyle publications targeting the upscale adult market with interests in
outdoor and leisure activities.
During July 1998, the Company teamed up with a leading fashion designer,
Tommy Hilfiger, to further promote its brand name. The Company entered into a
license agreement to produce a high-performance bicycle for the designer's
Hilfiger Athletics division. The bicycle will feature the Hilfiger Athletics
logo and will be distributed beginning in the fall of 1998 through the Company's
authorized retailer network.
The Company has also made use of the internet to promote its brand and
image, offering consumers a web site (www.cannondale.com), which is currently
averaging more than eight million hits per month.
SALES AND DISTRIBUTION.
Cannondale's distribution strategy is to sell its bicycles through
specialty bicycle retailers who it believes have the ability to provide
knowledgeable sales assistance regarding the technical and performance
characteristics of its products and to provide an ongoing commitment to service
its bicycles. In addition, in order to increase the sales of its clothing and
accessory lines, the Company expanded its distribution network to include
sport-specialty retailers. The Company does not sell bicycles through mass
merchandisers. A key aspect of the Company's strategy is to align itself with a
network of specialty bicycle retailers that can support the Company's growth
objectives. When adding new retailers, the Company takes into account a number
of factors, including the targeting of certain market areas determined by
analyzing various population, demographic and competitive characteristics.
In the United States and Canada, the Company currently sells bicycles and
accessories directly to approximately 1,375 specialty bicycle retailer locations
and sells accessories through an additional 500 retailer locations. Generally,
the Company's retailers do not have exclusive rights in any territory. In
addition to a 34 member field-sales force dedicated to selling bicycles, the
Company has a 13 member field-sales force whose focus is to sell the clothing,
accessory, CODA and HeadShok lines offered by the Company. The Company's 6
member sales management team and 47 member field-sales force contributes to all
aspects of customer service, including: marketing the Company's products to
retailers, providing retailer assistance and assisting in the Company's accounts
receivable management. The account managers also monitor retail sales at the
retailer level, enabling the Company to better respond to changes in market
demand and to adjust production accordingly. In addition, the Company employs a
staff of inside sales representatives to handle
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retailer orders between visits from the field-sales force and maintains staff to
handle telemarketing and special incentive programs.
Substantially all of Cannondale's domestic bicycle retailers participate in
the Authorized Retailer Program ("ARP"), in which they place orders for the year
and agree to take delivery at predetermined points throughout the year. This
program enables retailers to plan their business around the scheduled deliveries
and provides freight and pricing discounts, as well as payment terms that
generally vary from 30 to 180 days from the date of shipment, depending on the
time of year and other factors. Generally, retailers can place additional orders
during the year and can adjust their original ARP order as their sales warrant.
In addition, the ARP provides the Company with a valuable production planning
tool and helps to balance the production schedule. Historically, the Company has
received a substantial portion of its orders for the year under the ARP during
the first and second fiscal quarters. Orders may be canceled by the retailers
without penalty up to 30 days before shipment.
INTERNATIONAL OPERATIONS.
The Company's products are sold in over 60 foreign countries. The Company's
activities in Europe, Japan and Australia are conducted through three
wholly-owned subsidiaries, Cannondale Europe B.V. ("Cannondale Europe"),
Cannondale Japan KK ("Cannondale Japan") and Cannondale Australia Pty Limited
("Cannondale Australia"), respectively. Sales in other foreign countries are
made by the Company from the United States, through the use of 33 foreign
distributors, who sell the Company's products to specialty bicycle retailers
overseas. During fiscal 1998, 1997 and 1996, Cannondale Europe accounted for
45%, 41% and 37%, respectively, of consolidated net sales, while Cannondale
Japan accounted for 5%, 5% and 6%, respectively. Cannondale Australia, which was
formed in fiscal 1997, accounted for 1% of consolidated net sales in fiscal 1998
and 1997.
Cannondale Europe. Cannondale Europe based in Oldenzaal, the Netherlands,
was formed in 1989. Cannondale Europe assembles bicycles at its Netherlands
facilities, using frames and components manufactured by the Company, as well as
components manufactured by third parties. Cannondale Europe sells bicycles and
accessories directly to approximately 1,400 specialty bicycle retailer locations
in Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands,
Norway, Spain, Sweden, Switzerland, the United Kingdom and Ireland, using
locally based employee account managers supervised from the Oldenzaal
headquarters. Distributors are used in Greece, Hungary, Poland, Portugal,
Turkey, India, Bulgaria, Malta, Russia and four republics comprising portions of
former Czechoslovakia and Yugoslavia.
Cannondale Japan. The Company formed Cannondale Japan in fiscal 1992 to
undertake direct sales to Japanese specialty bicycle retailers. Cannondale
Japan, based in Osaka, imports fully assembled bicycles and a full line of
accessories from the Company and various components manufactured by third
parties. Cannondale Japan sells bicycles and accessories directly to
approximately 265 specialty retailers and sells only accessories to an
additional 100 retailers
Cannondale Australia. In July 1996, Cannondale Australia, purchased
substantially all the assets of Beaushan Trading Pty Limited, an Australian
bicycle distribution company, to undertake direct sales to Australian specialty
bicycle retailers. Cannondale Australia, based in Sydney, imports fully
assembled bicycles and a full line of accessories from the Company and various
components manufactured by third parties. Cannondale Australia sells bicycles
and accessories directly to approximately 200 specialty retailers.
SUPPLIERS.
Aluminum tubing, the primary material employed in the Company's
manufacturing operations, is available from a number of domestic suppliers. The
Company currently has a supply agreement for aluminum tubing expiring December
31, 1998, with an option to extend the agreement for an additional two years
with price protection throughout the term of the contract. The Company believes
that the termination of its current agreement would not have a significant
impact on the availability of aluminum tubing as the supply is currently strong,
and the Company utilizes other suppliers as required. Cannondale purchases most
of its componentry from Japanese, Taiwanese and United States OEM suppliers.
Purchases from Japanese
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component manufacturers are made through Cannondale Japan. The Company's largest
component supplier is Shimano, which was the source of approximately 17% of the
Company's total inventory purchases in fiscal 1998. The Company has few
long-term agreements with its major component manufacturers, and has no long-
term agreement with Shimano. Although the Company believes it has established
close relationships with the principal suppliers of these components, the
Company's believes that its future success will depend upon its ability to
maintain flexible relationships, which may be terminated by such suppliers on
short notice, or to substitute new suppliers without interruption of supply.
PATENTS AND TRADEMARKS.
The Company holds 35 United States patents relating to various products,
processes or designs with expiration dates ranging from 1998 to 2015. The
Company focuses its attention in this area on obtaining patent protection for
the Company's core technologies and seeks broad coverage to protect its position
in the industry. The Company believes that its patented technology is a
reflection of its success in product innovation and that, collectively, its
patents enhance its ability to compete. However, in light of the nature of
innovation in the bicycle industry, the Company does not believe that the loss
of any one of its patents, or the expiration of any of its current patents,
would have a material adverse effect on the Company's business or results of
operations.
The Company holds numerous United States trademarks, covering the
CANNONDALE, CODA and HeadShok names and the names of a variety of products and
components. The CANNONDALE and CODA trademarks are also registered in
Cannondale's significant foreign markets. The Company believes its CANNONDALE
trademarks have strong brand name recognition in the bicycle and accessory
markets, which the Company believes is a significant competitive factor.
SEASONALITY.
The Company's business is highly seasonal due to consumer spending
patterns, which in turn affect retailer delivery preferences, traditionally
resulting in significantly stronger operating results in the third and fourth
fiscal quarters (January through June). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Selected Quarterly
Financial Data; Seasonality."
COMPETITION.
Competition in the high-performance segment of the bicycle industry is
based primarily on perceived value, brand image, performance features, product
innovation and price. Competition in foreign markets may also be affected by
duties, tariffs, taxes and the effect of various trade agreements, import
restrictions and exchange rates. The worldwide market for bicycles and
accessories is extremely competitive, and the Company faces competition from a
number of manufacturers in each of its product lines. A number of the Company's
competitors are larger and have greater resources than the Company. The Company
competes on the basis of the breadth and quality of its product line, the
development of an effective specialty retailer network and its brand
recognition.
RESEARCH AND DEVELOPMENT.
Cannondale's product development is directed at making bicycles lighter,
stronger, faster and more comfortable, and the creation of new and innovative
products. It is the objective of the research and development group, with the
assistance of the Company's race teams, and in particular the Volvo/Cannondale
mountain bike racing team, which provide significant feedback from the field, to
design and deliver innovative products to further the Company's efforts to
position itself as an innovation leader. The Company's research and development
efforts have resulted in design and production systems that allow the Company to
compress the time between concept and production. The Company believes that its
research and development efforts have benefited from efficiencies realized
through the use of computer-aided design tools and increased integration of the
design and production processes. In addition, the Company's collaboration with
its racing teams has led to the development of several competitive new products,
including the fourth generation of CAAD (Cannondale Advanced Aluminum Design)
road and mountain bicycle frames, the CODA disc brake
6
and 13% greater travel on the Company's proprietary HeadShok suspension, as well
as the continuous refinement of the Company's existing products. The core
competencies that the research and development group have developed by
maintaining the Company's position as a technology leader of frame and
suspension products in the bicycle industry will facilitate the Company's effort
to introduce a line of innovative motocross motorcycles. These developments
exemplify the commitment by the Company in fiscal 1998 to continue to invest in
developing design, product and process technologies to differentiate itself from
its competition. The Company invested $6.8 million, $3.6 million and $2.8
million on research and development during fiscal years 1998, 1997 and 1996,
respectively.
ENVIRONMENTAL MATTERS.
The Company is subject to all applicable federal, state and local laws and
regulations relating to the discharge of materials into the environment, or
otherwise relating to the protection of the environment. The Company does not
believe that compliance with these regulations has an adverse effect upon its
business.
A portion of the Company's Bedford, Pennsylvania property acquired in 1992
was the subject of a groundwater monitoring program, stemming from the removal,
prior to Cannondale's acquisition of the property, of certain underground
storage tanks. The Company received a waiver from the Department of
Environmental Protection that provided for the cessation of this program. During
the program, no groundwater contamination was indicated in the sampling results.
In the unanticipated event that the situation surrounding this matter could
change, and conditions requiring remediation were discovered, the costs of such
remediation could have a material adverse effect on the Company's financial
condition.
EMPLOYEES.
As of June 27, 1998, the Company employed a total of 859 full time
employees in the United States, Cannondale Europe employed 143 full time
employees, Cannondale Japan employed 21 full time employees, and Cannondale
Australia employed 5 full time employees.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Please refer to Note 13 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
ITEM 2. PROPERTIES.
In December 1997, the Company moved into its new corporate headquarters and
research and development facility located in Bethel, Connecticut. The corporate
headquarters and research and development facility contains 32,500 square feet
on a five acre site. The cost of the new facility was partially financed with
the proceeds ($1.7 million) from the sale of the Company's previous headquarters
facility in Georgetown, Connecticut and a loan ($1.6 million) from the
Connecticut Development Authority. The loan extends to February 2008 and is
secured by the corporate headquarters and research and development facility.
Cannondale has a manufacturing facility in Bedford, Pennsylvania. The
Bedford plant contains 207,000 square feet on 23 acres and is the main
production facility, and also houses customer service. In connection with the
financing of the facility, the site is held in the names of local development
agencies and is occupied by the Company pursuant to installment sales
agreements. The Company makes monthly payments which will fully amortize the
financing from the local agencies and additional financing provided by the
Pennsylvania Industrial Development Authority ("PIDA"). Upon final amortization
(the year 2013), title to the property will be conveyed to the Company and
PIDA's mortgages on the property will be released. During 1998, the Company
completed construction of an addition to the Bedford facility of 82,000 square
feet. The additional space is being used for warehousing and expanded
production.
Cannondale had a manufacturing facility in Philipsburg, Pennsylvania. The
plant consisted of 40,000 square feet on 12 acres and housed the production of
accessories, some clothing and bike sub-assemblies. During June 1998, operations
from the Philipsburg facility were moved to the Bedford facility, and in
7
August 1998, the Philipsburg facility was sold to the Moshannon Valley Economic
Development Authority for $1.4 million.
During fiscal 1998, the Company entered into a contract with a general
contractor, an entity controlled by a director of the Company, to build a
facility for the motocross motorcycle and the Company's clothing line in
Bedford, Pennsylvania. The proposed facility will contain 100,000 square feet on
23.9 acres. The project is expected to cost approximately $7.5 million, of which
approximately 13% will be financed by the same agencies which have previously
provided financing for the current Bedford facility. The Company anticipates
that the new facility will be completed by the fourth quarter of fiscal 1999.
Cannondale Europe owns a 54,200 square foot facility in Oldenzaal, the
Netherlands, which houses administrative and sales offices, a bicycle assembly
plant and warehouse. Cannondale Europe's property provides additional space for
further expansion. Cannondale Japan and Cannondale Australia lease a total of
5,940 and 2,500 square feet of office and warehouse space, respectively.
The Company believes that its present facilities are in good condition and,
upon completion of the planned construction project, will be suitable for the
Company's operations and will provide sufficient capacity to meet the Company's
anticipated requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in product
liability lawsuits and other litigation incidental to the conduct of its
business. The Company is not a party to any lawsuit or proceeding that, in the
opinion of management, is likely to have a material adverse effect on the
results of operations, cash flow or financial condition of the Company; however,
due to the inherent uncertainty of litigation there can be no assurance that the
resolution of any particular claim or proceeding would not have a material
adverse effect on the Company's results of operations, cash flow or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders of the Company during
the fourth quarter of the Company's 1998 fiscal year.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers and other key members of management of the Company.
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NAME AGE POSITION
---- --- --------
Joseph S. Montgomery............................ 58 Chairman, President, Chief Executive Officer,
Director
William A. Luca................................. 55 Vice President of Finance, Treasurer, Chief
Financial Officer, Director
Daniel C. Alloway............................... 39 Vice President of Sales -- United States,
Vice President of European Operations,
Director
Leonard J. Konecny.............................. 55 Vice President of Purchasing
John P. Moriarty................................ 54 Assistant Treasurer and Assistant Secretary,
Director of Accounting
Mario Galasso................................... 32 Vice President of Product Development
Joseph S. Montgomery founded Cannondale in 1971 and has been its Chairman,
President and Chief Executive Officer and a director since its formation. Mr.
Montgomery is the father of James Scott Montgomery, who is also a director of
the Company.
William A. Luca joined Cannondale in January 1994 as Vice President of
Finance, Treasurer and Chief Financial Officer. Prior to joining the Company he
served as a management consultant from 1989 to 1993, including consulting for
the Company between August and December 1993. Mr. Luca was appointed a director
of the Company in August 1994.
Daniel C. Alloway has held a number of positions since joining Cannondale
in 1982, including Vice President of Sales -- United States and Vice President
of European Operations (March 1994 to the present), Managing Director of
Cannondale Europe (1992 to 1994), Director of Sales and Marketing (1990 to 1992)
and National Sales Manager (1987 to 1990). Mr. Alloway was appointed a director
of the Company in June 1998.
Leonard J. Konecny joined Cannondale in 1994 as Vice President of
Purchasing. From 1988 to 1994 he was Director of Materials for General Signal
Building Systems (Dual-Lite and Edwards divisions), responsible for the
materials and purchasing functions.
John P. Moriarty joined Cannondale in 1993 as Assistant Treasurer and
Director of Accounting. From 1990 to 1993 he was Controller of Cuno, Inc., a
manufacturer of fluid filtration products. Between 1981 and 1989 he was employed
by Dual-Lite, Inc., as Vice President -- Finance (1983 to 1989) and Controller
(1981 to 1983).
Mario Galasso joined Cannondale in 1991 as a Project Engineer. He served as
the Manager of Research and Development from 1994 to 1996. Mr. Galasso currently
serves as the Vice President of Product Development.
Each of the officers of the Company is appointed by and serves at the
pleasure of the Board of Directors.
9
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.
[Download Table]
HIGH LOW
----- -----
FISCAL 1998
First Quarter (6/29/97 to 9/27/97)........................ 24.38 17.50
Second Quarter (9/28/97 to 12/27/97)...................... 24.63 19.50
Third Quarter (12/28/97 to 3/28/98)....................... 22.94 16.13
Fourth Quarter (3/29/98 to 6/27/98)....................... 16.69 12.38
FISCAL 1997
First Quarter (6/30/96 to 9/28/96)........................ 23.75 17.50
Second Quarter (9/29/96 to 12/28/96)...................... 25.75 17.75
Third Quarter (12/29/96 to 3/29/97)....................... 27.25 17.50
Fourth Quarter (3/30/97 to 6/28/97)....................... 22.25 15.00
As of September 24, 1998, there were approximately 335 stockholders of
record of the Common Stock, excluding beneficial owners holding shares through
nominee names. Based on information available to it, the Company believes it had
more than 4,300 beneficial owners of its Common Stock as of such date.
The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying any cash dividends in the foreseeable
future.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected historical statement of operations data and balance
sheet data have been derived from the Consolidated Financial Statements of the
Company, some of which are presented herein. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-K.
[Enlarge/Download Table]
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED JUNE 27, ENDED JUNE 28, ENDED JUNE 29, ENDED JULY 1, ENDED JULY 2,
1998 1997 1996 1995 1994
-------------- -------------- -------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $171,496 $162,496 $145,976 $122,081 $102,084
Cost of sales.................................. 110,113 101,334 92,804 79,816 72,083
-------- -------- -------- -------- --------
Gross profit................................... 61,383 61,162 53,172 42,265 30,001
-------- -------- -------- -------- --------
Expenses
Selling, general and administrative.......... 39,361 35,707 32,577 27,023 22,290
Research and development..................... 6,750 3,576 2,837 1,751 1,317
Stock option compensation.................... -- -- -- -- 2,046
-------- -------- -------- -------- --------
Total operating expenses....................... 46,111 39,283 35,414 28,774 25,653
-------- -------- -------- -------- --------
Operating income............................... 15,272 21,879 17,758 13,491 4,348
-------- -------- -------- -------- --------
Other income (expense):
Interest expense............................. (1,995) (1,574) (2,224) (3,929) (4,460)
Other income................................. 653 843 414 24 324
-------- -------- -------- -------- --------
Total other income (expense)................... (1,342) (731) (1,810) (3,905) (4,136)
-------- -------- -------- -------- --------
Income before income taxes and extraordinary
item......................................... 13,930 21,148 15,948 9,586 212
Income tax expense............................. (4,578) (7,642) (5,802) (1,353) (791)
-------- -------- -------- -------- --------
Income (loss) before extraordinary item........ 9,352 13,506 10,146 8,233 (579)
Extraordinary item, net of income taxes(1)..... -- -- -- (685) --
-------- -------- -------- -------- --------
Net income (loss).............................. 9,352 13,506 10,146 7,548 (579)
Accumulated preferred stock dividends(2)....... -- -- -- (400) (1,008)
-------- -------- -------- -------- --------
Income (loss) applicable to common shares and
equivalents.................................. $ 9,352 $ 13,506 $ 10,146 $ 7,148 $ (1,587)
======== ======== ======== ======== ========
BASIC INCOME PER COMMON SHARE(5):
Income (loss) before extraordinary item(3)..... $ 1.11 $ 1.56 $ 1.23 $ 1.33 $ (.41)
Net income (loss).............................. $ 1.11 $ 1.56 $ 1.23 $ 1.21 $ (.41)
Weighted average common shares(4).............. 8,442 8,638 8,216 5,888 3,882
DILUTED INCOME PER COMMON SHARE(5):
Income (loss) before extraordinary item(3)..... $ 1.08 $ 1.51 $ 1.19 $ 1.20 $ (.41)
Net income (loss).............................. $ 1.08 $ 1.51 $ 1.19 $ 1.09 $ (.41)
Weighted average common shares and common
equivalent shares outstanding(4)............. 8,682 8,916 8,499 6,537 3,882
[Enlarge/Download Table]
JUNE 27, JUNE 28, JUNE 29, JULY 1, JULY 2,
1998 1997 1996 1995 1994
-------------- -------------- -------------- ------------- -------------
BALANCE SHEET DATA:
Working capital................................ $ 78,975 $ 77,196 $ 62,032 $ 40,304 $ 6,366
Total assets................................... 152,277 127,284 109,945 84,008 67,870
Subordinated debt.............................. -- -- -- -- 9,179
Total long-term debt and subordinated debt,
excluding current portion.................... 40,352 20,319 13,114 23,593 16,174
Preferred stock................................ -- -- -- -- 6,718
Total stockholders' equity, including preferred
stock........................................ 78,238 81,621 68,294 36,088 9,640
---------------
(1) Extraordinary item consists of the costs relating to early extinguishment of
debt, net of applicable tax benefit.
(2) Reflects preferred stock dividends accumulated during the fiscal period. All
cumulative preferred stock dividends were paid in fiscal 1995 at the time of
the redemption of the preferred stock in connection with the Company's
initial public offering.
(3) No cash dividends were declared or paid on the Common Stock during any of
these periods.
(4) Weighted average number of shares outstanding in fiscal 1995 reflects the
issuance of 2,300,000 shares of Common Stock in connection with the
Company's initial public offering. Weighted average number of shares
outstanding in 1996 reflects the issuance of 1,366,666 shares of Common
Stock in connection with a public offering in fiscal 1996.
(5) The earnings per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share." For further discussion of earnings per share
and the impact of SFAS 128, see the Summary of Significant Accounting
Policies and Footnote 4 of the notes to the consolidated financial
statements.
11
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.
[Enlarge/Download Table]
FISCAL
-----------------------
1998 1997 1996
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 64.2 62.4 63.6
----- ----- -----
Gross profit................................................ 35.8 37.6 36.4
----- ----- -----
Expenses:
Selling, general and administrative....................... 23.0 22.0 22.3
Research and development.................................. 3.9 2.2 1.9
----- ----- -----
Total operating expenses.................................... 26.9 24.2 24.2
----- ----- -----
Operating income............................................ 8.9 13.4 12.2
----- ----- -----
Other income (expense):
Interest expense.......................................... (1.2) (1.0) (1.5)
Other income.............................................. 0.4 0.5 0.3
----- ----- -----
Total other income (expense)................................ (0.8) (0.5) (1.2)
----- ----- -----
Income before income taxes.................................. 8.1 12.9 11.0
Income tax expense.......................................... (2.7) (4.7) (4.0)
----- ----- -----
Net income.................................................. 5.4% 8.2% 7.0%
===== ===== =====
COMPARISON OF FISCAL 1998, 1997 AND 1996.
Net Sales. Net sales increased to $171.5 million in fiscal 1998, from
$162.5 million in 1997 and $146.0 million in 1996. The increase in net sales
over these periods is primarily due to expansion of the Company's specialty
bicycle retailer network and growth in sales to existing specialty retailers.
Over the last three years, the number of specialty retailer locations serviced
directly by the Company has increased to over 3,200 at the end of fiscal 1998
from approximately 2,800 at the end of 1996. The increase in sales to existing
specialty retailers is attributable to the increase in the number of bicycle
models offered from 53 models in fiscal 1996, to 59 models in 1998, as well as
an increase in clothing sales and proprietary aftermarket componentry sold under
the CODA and HeadShok brand names. The Company's rate of sales growth decreased
from fiscal 1997 to 1998 primarily as a result of a stronger U.S. dollar
relative to the Dutch guilder and Japanese yen compared to the prior-year
periods, a reduction in inventory by many of the Company's domestic dealers and
bad weather experienced in the United States, particularly during the second
half of the 1998 fiscal year. Net sales reported by Cannondale USA were $83.3
million in fiscal 1998, $85.5 million in 1997 and $83.2 million in 1996. Net
sales reported by Cannondale Europe increased to $78.0 million in fiscal 1998,
from $67.0 million in 1997 and $53.6 million in 1996. The Company attributes
this growth primarily to increased sales to existing foreign retailers, as well
as an increase in the dealer base, and increased sales in non-bike categories.
Net sales of Cannondale Japan increased slightly to $8.0 million in fiscal 1998
from $7.9 million in 1997, and decreased from $9.2 million in 1996. The majority
of the decrease in sales by Cannondale Japan during fiscal 1998 and 1997 is
attributable to the strength of the U.S. dollar compared to the Japanese yen
during fiscal 1996. Net sales of Cannondale Australia increased slightly in 1998
compared to 1997, $2.2 million in 1998 compared to $2.1 million in fiscal 1997.
Based on the Company's relative market share within the domestic and
international markets, management anticipates that international sales will
continue to increase as a percentage of total sales in the future.
Gross Profits. Gross profit as a percentage of net sales decreased to
35.8% in fiscal 1998 from 37.6% in 1997, and 36.4% in 1996. The decrease in the
gross-profit rate in 1998 primarily reflects the effect of a stronger U.S.
dollar on sales by the Company's foreign subsidiaries as the cost of materials
purchased from the U.S. increased compared to prior periods and a less favorable
product mix in the United States during fiscal 1998 compared to 1997. The
increase in the gross profit rate in fiscal 1997 compared to fiscal 1996
reflected a more
12
favorable product mix, with higher-end, higher-margin full-suspension bicycles
representing a larger portion of overall sales, growth in the Company's
international markets, cost-reduction programs and the Company's continued
integration of proprietary technology through the use of Cannondale bicycle
frames, CODA components and HeadShok suspension systems.
Operating Expenses. Selling, general and administrative expenses
increased to $39.4 million in fiscal 1998, from $35.7 million in 1997 and $32.6
million in 1996. Increases in selling, general and administrative expenses are
directly associated with the increased sales, and additional personnel,
primarily associated with the Company's sales force, and advertising and
marketing costs required to support the Company's current and future growth. As
a percentage of net sales, selling, general and administrative expenses were at
23.0%, 22.0% and 22.3% in fiscal 1998, 1997 and 1996, respectively. The
increased selling, general and administrative expenses as a percentage of net
sales in fiscal 1998 reflects the Company's continued investment in costs to
support future growth.
Research and development expenses increased to $6.8 million in fiscal 1998,
from $3.6 million in 1997 and $2.8 million in 1996, reflecting the Company's
commitment to improvement of its current products and the generation of new
products and manufacturing processes. The increase in spending during fiscal
1998 was primarily attributable to the product and process development of a new
product line, the motocross motorcycle. In addition, the Company continued to
increase its investment in the improvement and expansion of its existing bicycle
and CODA product lines. Also, the Company's integration of its sponsored race
teams, in particular the Volvo/Cannondale mountain bike racing team, into its
research and development efforts, continued to be a significant aspect of its
investment during fiscal 1998. The Company uses its race teams for regular
testing of both prototype and finished production models.
Interest Expense. Interest expense increased to $2.0 million in fiscal
1998, from $1.6 million in 1997, which decreased from $2.2 million in 1996. The
increase in interest expense in 1998 compared to 1997 is primarily attributable
to debt incurred associated with the Company's repurchase of $12.4 million of
its common stock during fiscal 1998, its investment in its new corporate
headquarters and research and development facility and the expansion of its
production facility in Bedford, Pennsylvania and its increase in working capital
levels related to the growth of the business. The decrease in interest expense
in the 1998 and 1997 fiscal years compared to 1996 reflects the lower interest
rates negotiated as a result of the Company's improved performance and
capitalization and lower borrowing levels resulting from repayment of debt with
the net proceeds from a public offering in September 1995. In addition, during
fiscal 1998 and 1997, a portion of the Company's outstanding borrowings were
denominated in Dutch guilders and Japanese yen, which offered significantly
lower borrowing rates than U.S. dollar borrowings.
Other Income (Expense). Other income primarily consists of finance
charges relating to accounts receivable, which totaled $885,000, $810,000 and
$552,000 for fiscal 1998, 1997 and 1996, respectively. The remaining balance
consists primarily of foreign currency gains (losses) of ($232,000), $33,000,
and ($138,000) for fiscal 1998, 1997 and 1996, respectively.
Income Tax Expense. Income tax expense decreased to $4.6 million in
fiscal 1998, from $7.6 million in 1997, and $5.8 million in 1996, which
primarily reflects the Company's reduction in profitability in fiscal 1998. See
Note 6 of Notes to Consolidated Financial Statements.
13
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.
[Enlarge/Download Table]
FOR THE QUARTER ENDED
---------------------------------------------------------------------------------------------------------
JUNE 27, MARCH 28, DECEMBER 27, SEPTEMBER 27, JUNE 28, MARCH 29, DECEMBER 28, SEPTEMBER 28,
1998 1998 1997 1997 1997 1997 1996 1996
-------- --------- ------------ ------------- -------- --------- ------------ -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.............. $44,181 $45,305 $47,701 $34,309 $42,093 $48,229 $41,294 $30,880
Cost of sales.......... 28,923 28,101 30,137 22,952 26,588 28,698 25,396 20,652
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 15,258 17,204 17,564 11,357 15,505 19,531 15,898 10,228
------- ------- ------- ------- ------- ------- ------- -------
Expenses
Selling, general and
administrative..... 10,243 10,277 9,736 9,105 8,481 9,436 9,451 8,339
Research and
development........ 2,481 1,552 1,598 1,119 968 946 905 757
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 12,724 11,829 11,334 10,224 9,449 10,382 10,356 9,096
------- ------- ------- ------- ------- ------- ------- -------
Operating income....... 2,534 5,375 6,230 1,133 6,056 9,149 5,542 1,132
Other income
(expense)............ (605) (456) (250) (31) 219 (253) (322) (375)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes................ 1,929 4,919 5,980 1,102 6,275 8,896 5,220 757
Income tax expense..... (276) (1,733) (2,137) (432) (1,963) (3,344) (2,067) (268)
------- ------- ------- ------- ------- ------- ------- -------
Net income............. $ 1,653 $ 3,186 $ 3,843 $ 670 $ 4,312 $ 5,552 $ 3,153 $ 489
======= ======= ======= ======= ======= ======= ======= =======
Basic income per share
(1).................. $ .20 $ .38 $ .45 $ .08 $ .50 $ .64 $ .37 $ .06
Diluted income per
share (1)............ $ .20 $ .37 $ .43 $ .07 $ .48 $ .62 $ .35 $ .05
---------------
(1) The earnings per share amounts prior to the second quarter of fiscal 1998
have been restated as required to comply with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." For further discussion
of earnings per share and the impact of Statement No. 128, see the Summary
of Significant Accounting Policies and Footnote 4 of the notes to the
consolidated financial statements
The Company's results fluctuate from quarter to quarter as a result of a
number of factors, including product mix, the timing and number of new retailer
openings, the timing of shipments and new product introductions, and the effect
of adverse weather conditions on consumer purchases. In addition, the Company's
business is highly seasonal due to consumer spending patterns, which in turn
affect dealer delivery preferences, and historically has resulted in more
shipments and significantly stronger results in the third and fourth fiscal
quarters (January through June). Beginning in fiscal 1996, in an effort to
reduce the seasonality of its shipments and to smooth the production process,
the Company, through its ARP, provided incentives for retailers to take delivery
of a higher percentage of their annual bicycle order in the first fiscal
quarter. The third and fourth fiscal quarters together accounted for 52% and 56%
of the Company's total net sales in fiscal 1998 and 1997, respectively. Although
sales orders are received throughout the course of the year, typically shipments
are concentrated in the third and fourth fiscal quarters. The Company's gross
margins fluctuate primarily according to product mix, the cost of materials,
fluctuations in foreign exchange rates and the timing of product price
adjustments and markdowns. Although some operating expenses are variable with
sales, most expenses are incurred evenly throughout the year. As a result, the
third and fourth fiscal quarters accounted for 52% and 70% of the operating
income for fiscal 1998 and 1997, respectively. The decrease in the percentage of
net sales and operating income recorded during the third and fourth fiscal
quarters of 1998 as a percentage of total sales for fiscal 1998 can primarily be
attributed to the inventory reduction by many of the Company's domestic dealers
during that period.
14
It is unlikely that this seasonal pattern will change significantly in the
future. While the Company was successful in reducing the impact of the
seasonality in the first quarters of fiscal 1998 and 1997, achieving profitable
performances, the Company in the past has incurred, and may in the future incur,
operating losses in the first fiscal quarter, as the business remains highly
seasonal.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's primary sources of working capital used over the past three
years have been borrowings under its revolving credit facilities, and the net
proceeds of a public offering, which totaled approximately $22.1 million in
fiscal 1996.
In June 1997, the Company entered into an unsecured, multicurrency
revolving credit facility which serves as the Company's principal source of
working capital funding. The Company used the proceeds from the multicurrency
revolving credit facility to refinance its previous revolving line of credit and
domestic term loan. The credit facility, as amended in October 1997, which
extends to June 2000, allows the Company, Cannondale Europe and Cannondale Japan
to borrow up to $70,000,000 until September 1998, when the commitment of the
lenders decreases by $1,250,000 each quarter thereafter. The credit facility
includes a provision that permits the Company to borrow up to $10,000,000 on a
short-term basis (less than 30 days). The Company has the option to borrow at
the following rates: (1) a variable rate that is defined as the higher of the
bank's prime rate or the Federal Funds Rate plus 50.0 basis points; (2) a
short-term market rate that is an offered rate per annum quoted by the bank; or
(3) the LIBOR (London Interbank Offered Rate) applicable to the currency
borrowed plus an interest rate margin ("LIBOR margin"). The LIBOR margin
(ranging from 30.0 to 75.0 basis points) is determined quarterly based upon
predetermined performance criteria. The Company is obligated to pay a facility
fee (ranging from 15.0 to 25.0 basis points) on the balance of the facility
based on the same performance criteria as the LIBOR margin. As a result of the
seasonality of the Company's business and payment terms, which typically vary
between 30 and 180 days from the date of shipment (depending on time of year and
other factors), borrowings under the Company's and subsidiaries' credit
facilities typically reach their highest level near the end of the third fiscal
quarter and are typically at their lowest level near the end of the first fiscal
quarter. The Company's credit facility contains restrictive and financial
covenants relating to, among other things, the maintenance of minimum levels of
cash flow, capitalization, interest coverage and tangible net worth. The Company
is currently in compliance with all restrictive and financial covenants. At June
27, 1998, the borrowings outstanding under the revolving credit facility were
$34,661,000.
Cannondale Europe and Cannondale Japan each maintain a separate credit
facility for short-term borrowings. In February 1998, Cannondale Europe entered
into a new multicurrency credit arrangement, which allows Cannondale Europe to
borrow up to 12,500,000 Dutch guilders (approximately $6.1 million at June 27,
1998) on a short-term basis. The interest rate on outstanding borrowings is a
market rate, applicable to the borrowed currencies, plus 1.5% with a minimum
rate of 3.5%. The credit arrangement contains no specific expiration date, and
may be terminated by either Cannondale Europe or the lender, at any time.
Cannondale Japan has an unsecured revolving credit facility for up to
155,000,000 Japanese yen (approximately $1.1 million at June 27, 1998).
Approximately $1,600,000 and $500,000 of principal amount was outstanding under
the Dutch and Japanese facilities, respectively, at June 27, 1998. The Dutch and
Japanese facilities are guaranteed by the Company.
Net cash provided by (used in) operating activities was $7.2 million, $4.6
million, and ($6.8 million) in fiscal 1998, 1997 and 1996, respectively. The
principal uses of cash in operating activities over the three-year period were
to support the increased investment in accounts receivable and inventories
associated with the Company's growth in sales. The increase in cash provided by
operating activities in fiscal 1998 was primarily due to the Company's continued
profitability and its management of receivable growth, offset by an increase in
raw-material inventory levels caused by the lower sales growth levels in the
last two quarters of the 1998 fiscal year. Cash provided by operating activities
in fiscal 1997 was primarily attributable to the increased profitability of the
Company and leveling of inventory growth compared to the prior-year period when
the Company initiated a strategy to maintain higher inventory levels to
capitalize on its flexible manufacturing capabilities.
15
Capital expenditures were $16.8 million, $9.8 million and $3.0 million in
fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, the majority of these
expenditures related to the completion of the new corporate headquarters and
research and development facility in Bethel, Connecticut and the expansion of
the Company's production facility in Bedford, Pennsylvania ($4.8 million), and
the commitment entered into by the Company to purchase a Cessna Citation jet
($2.8 million). The balance of capital expenditures principally represents
investments in computer equipment and manufacturing equipment to support
increases in production volume to support the Company's planned growth. In
fiscal 1997, the majority of the capital expenditures ($5.6 million) related to
the construction of the abovementioned facilities. The cost of the corporate
headquarters and research and development facility was partially funded with the
proceeds from the sale of the Company's previous headquarters facility ($1.7
million) in fiscal 1997, and from the Connecticut Development Authority ("CDA")
financing of $1.6 million which was funded in fiscal 1998. The Company has also
received approval from CDA for financing of up to $337,500 for research and
development equipment to be acquired in conjunction with the new facilities. The
Company has $2.0 million of financing from the Pennsylvania Industrial
Development Authority available to fund approximately 40% of the cost for the
expansion of the Company's production facility in Bedford, Pennsylvania, of
which $1.6 million was received during fiscal 1998, and the balance was received
during the first fiscal quarter of fiscal 1999.
During fiscal 1998, the Company entered into a contract with a general
contractor, an entity controlled by a director of the Company, to build a
production facility for the motocross motorcycle and the Company's clothing line
in Bedford, Pennsylvania. The proposed facility will contain 100,000 square feet
on 23.9 acres. The project is expected to cost approximately $7.5 million, of
which approximately 13% will be financed by the same agencies which have
previously provided financing for the current Bedford facility. The Company
anticipates that the new facility will be completed by the fourth quarter of
fiscal 1999.
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20 million. As of September 21, 1998, the Company
repurchased an aggregate of 1,000,000 shares of its common stock under the
program at a cost of $16.7 million. In order to accommodate the capital
requirements of the repurchase program, in October 1997, the Company and the
lender amended its revolving credit facility to allow the Company and its
subsidiaries to borrow up to $70,000,000. The amendment to the revolving credit
facility included adjustments to specified levels of tangible net worth and cash
flow levels that the Company must maintain.
In April 1998, the Company provided Joseph Montgomery, the President and
Chief Executive Officer of the Company, with a loan in the principal amount of
$2,000,000 to enable him to meet certain tax obligations. In June 1998, the
Company agreed to provide Mr. Montgomery with an additional loan in the
principal amount of $10,000,000 for the purchase of certain real property, which
loan has been combined with the previous $2,000,000 loan made in April 1998. The
loan matures on August 1, 2003, at which time the entire principal balance is
due. The interest rate on the loan is set at the prime rate as published in the
Wall Street Journal from time to time, and the loan is secured by a pledge to
the Company of all of the shares of the Company's common stock held by Mr.
Montgomery and by a mortgage on such real property. As of September 21, 1998, a
principal amount of $12,000,000 was outstanding under the loan.
In July 1998, the Company's Board of Directors authorized a new stock
repurchase program by the Company to repurchase up to 1,000,000 shares of its
common stock. Shares repurchased under the new program will be additional to the
shares repurchased pursuant to the repurchase program announced in September
1997. Purchases by the Company can be made from time to time in the open market
or in private transactions. The repurchase program can be suspended or
discontinued at any time. Shares repurchased by the Company will be available
for general corporate purposes, including the issuance upon exercise of stock
options. As of September 21, 1998, the Company repurchased an aggregate of
292,900 shares of its common stock under the program at a cost of $3.5 million.
Inflation is not a material factor affecting the Company's results of
operations and financial condition. General operating expenses such as salaries,
employee benefits and occupancy costs are, however, subject to normal
inflationary pressures.
16
The Company expects that cash flow generated by its operations and
borrowings under the revolving credit facilities will be sufficient to meet its
planned operating and capital requirements for the foreseeable future.
ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income", which is effective for financial
statements beginning in the first quarter of 1999. SFAS 130 defines the concept
of "comprehensive income" and establishes the standards for reporting
"comprehensive income." Comprehensive income is defined to include net income,
as currently reported, as well as unrealized gains and losses on
available-for-sale securities, foreign currency translation adjustments and
certain other items not included in the income statement. SFAS 130 also sets
forth requirements on how comprehensive income should be presented as part of
the issuer's financial statements. The Company is currently assessing how it
will disclose comprehensive income in its financial statements. The adoption of
SFAS 130 will not affect the Company's earnings, liquidity or capital resources.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for companies with
fiscal years beginning after December 15, 1997. SFAS 131 defines the criteria by
which an issuer is to determine the number and nature of its "operating
segments" and sets forth the financial information that is required to be
disclosed about such segments. The Company is currently assessing the manner in
which it will disclose the required information.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal quarters
beginning after June 15, 1999. SFAS 133 defines the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. In fiscal 1999, the Company will assess how
the provisions of this statement will affect its hedging operations and future
earnings. At this time, the effect of the adoption of SFAS 133 on future
earnings cannot be estimated.
YEAR 2000 COMPLIANCE
The Company is currently in the process of assessing its exposure to the
Year 2000 problem and has established a comprehensive response to that exposure.
Generally, the Company has potential Year 2000 exposures in three areas: (i)
financial and management operating computer systems used to manage the Company's
business, (ii) manufacturing equipment used by the Company ("embedded chips")
and (iii) computer systems used by third parties, in particular customers and
suppliers of the Company.
The Company has performed an examination of its hardware and software
applications to determine whether the systems it uses to operate its business
are prepared to accommodate the Year 2000. Upon identifying the applications
that require modification to accommodate Year 2000 dating, the Company initiated
a program to modify the software using internal and third-party service
providers. The Company is currently in the modification stage of its Year 2000
remediation program, and anticipates that it will be in the testing and final
implementation stages during the second and third fiscal quarters of 1999. In
order to mitigate the possibility that the Company may not be successful
modifying its current hardware and software applications, which it anticipates
to be able to determine by the end of calendar 1998, it is actively evaluating
Enterprise Resource Planning systems on the market to replace its current
systems. In concert with the Company's assessment of its hardware and software
applications, the Company's examination of its Year 2000 exposure also includes
the following: (1) the Company is in the process of contacting its hardware and
software vendors to determine their Year 2000 readiness, (2) the Company has
contacted its major third-party suppliers to determine their status with Year
2000 compliance and is currently evaluating their responses, (3) and the Company
is in the process of examining factory equipment with microprocessors to
determine if Year 2000 dating effects them operationally. The Company estimates
the cost of its remediation effort to be approximately $100,000. At June 27,
1998, the Company had already spent approximately $57,000 in this effort. The
Company has increased its overall information technologies budget to accommodate
Year 2000 issues and has not delayed other information technology projects
critical to the Company's business as a result of the increase. Based on its
current examination of the Year 2000 problem and its progress with modifications
17
to its internal systems, the Company does not anticipate that the Year 2000
problem will have a material adverse impact on its operations.
If the Company is unsuccessful in completing its remediation of
non-compliant operating systems, correcting embedded chips or if customers or
suppliers cannot rectify Year 2000 issues applicable to them, the Company is
likely to incur substantial additional costs to develop alternative methods of
managing its business and replacing non-compliant equipment. The Company may
also experience delays in payments by customers or to suppliers and delays in
providing its products to customers. The Year 2000 problem is pervasive and
complex and there can be no assurance that the Company has been or will be able
to identify all of the Year 2000 issues that may affect the Company or that any
remedial efforts it takes will adequately address any potential Year 2000
problems.
THE EURO
On January 1, 1999, certain member countries of the European Union will
adopt the Euro as their common legal currency. Between January 1, 1999 and
January 1, 2002, transactions may be conducted in either the Euro or the
participating countries national currency. However, by July 1, 2002, the
participating countries will withdraw their national currency as legal tender
and complete the conversion to the Euro. The Company conducts business in Europe
and does not expect the conversion to the Euro to have a material adverse effect
on its competitive position or consolidated financial position. The Company is
in the process of making the necessary system modifications that will allow the
Company to conduct business in both the Euro as well as the participating
countries national currency. The Company has determined that failure to
implement systems that are able to process both Euro and participating countries
national currency may cause disruptions to operations including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE
This Annual Report on Form 10-K contains certain forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events, including, but
not limited to, the following: statements regarding the Company's capital and
current operational investments to finance the future growth of the Company;
statements regarding the Company's expected cash needs and sources of cash to
fund its planned operating and capital requirements; statements regarding the
impact of the Company's brand image, distribution, reputation and innovative
products on the successful introduction of new products; statements regarding
expected remediation and other costs relating to an environmental condition;
statements regarding the effect of pending lawsuits on the Company; statements
regarding the impact of the Year 2000 issue and the Euro conversion on
computerized information systems; statements regarding the condition of the
Company's present facilities and the ability of its present facilities and
planned construction to support its current and future production capacity. Such
statements are based upon the facts presently known to the Company and
assumptions as to important future events, many of which are beyond the control
of the Company. Among the more important factors which could adversely affect
actual results of operations are the following:
Seasonality. The Company's results fluctuate from quarter to quarter as a
result of a number of factors, including product mix, the timing and number of
new retailer openings, the timing of shipments and new product introductions,
and the effect of adverse weather conditions on consumer purchases. In addition,
the Company's business is highly seasonal due to consumer spending patterns,
which in turn affect dealer delivery preferences, and historically has resulted
in more shipments and significantly stronger results in the third and fourth
fiscal quarters (January through June). Beginning in fiscal 1996, in an effort
to reduce the seasonality of its shipments and to smooth the production process,
the Company, through its ARP, provided incentives for retailers to take delivery
of a higher percentage of their annual bicycle order in the first fiscal
quarter. Although sales orders are received throughout the course of the year,
typically shipments are concentrated in the third and fourth fiscal quarters.
The Company's gross margins fluctuate primarily according to product mix, the
cost of materials, fluctuations in foreign exchange rates and the timing of
product price adjustments
18
and markdowns. Although some operating expenses are variable with sales, most
expenses are incurred evenly throughout the year.
Introduction of New Products. The Company's ability to return to the
growth pattern that characterized its operations in recent years is dependent,
to a significant degree, on its ability to successfully anticipate and respond
to changing consumer demands and trends in a timely manner, including the
introduction of new or updated products at prices acceptable to customers. While
currently, a substantial part of the Company's sales are attributable to
mountain bikes, the introduction of new product lines and innovative product
improvements will provide diversification of the Company's products.
Additionally, the Company is introducing new products such as the motocross
motorcycle. The Company's ability to recover its new product investments and
earn a satisfactory profit thereon will depend on its ability to successfully
produce the new products at acceptable cost levels and the satisfactory
resolution of numerous design and manufacturing issues. In addition, market
acceptance of these new products is difficult to predict and may require
substantial marketing efforts.
Competition. Competition in the high-performance segment of the bicycle
industry is based primarily on perceived value, brand image, performance
features, product innovation and price. Competition in foreign markets may also
be affected by duties, tariffs, taxes and the effect of various trade
agreements, import restrictions and exchange rates. The worldwide market for
bicycles and accessories is extremely competitive, and the Company faces
competition from a number of manufacturers in each of its product lines. A
number of the Company's competitors are larger and have greater resources than
the Company. The Company competes on the basis of the breadth and quality of its
product line, the development of an effective specialty retailer network and its
brand recognition.
Foreign Exchange Rates. A substantial portion of the Company's sales are
generated by the Company's foreign subsidiaries. Results of operations by these
subsidiaries may be adversely affected by changes in the exchange ratio between
the local currencies and the U.S. dollar. A substantial portion of the Company's
raw materials are purchased from overseas suppliers. The gross margin of the
Company may be adversely affected by changes in the exchange ratio between the
U.S. dollar and the local currency of the supplier.
Customer Base. Sales of the Company's products are made to specialty
bicycle retailers, many of which are small businesses with limited capital. The
Company's credit policies are designed to minimize the risks associated with
business failures among such customers. Nevertheless, such unpredictable matters
as poor weather could have a serious impact on important segments of the
Company's customer base.
Adverse Weather. The Company's products are primarily used outdoors and
therefore adverse weather conditions can have a negative impact on consumer
demand.
Reliance on Key Vendor and Supplier Relationships. The Company's ability
to distribute its products on schedule is highly dependent on timely receipt of
an adequate supply of components and materials. The bicycles incorporate
numerous components manufactured by other companies. Aluminum tubing, the
primary material employed in the Company's manufacturing operations, is
available from a number of domestic suppliers. The Company has few long-term
agreements with its component manufacturers, and has no long-term agreement with
Shimano, its largest single supplier, or with suppliers of many of the materials
used in the manufacture of its products. Thus, the Company's supply of materials
and components from most of its current suppliers is not assured. Although the
Company believes it has established close relationships with the principal
suppliers of these components, the Company's future success will depend upon its
ability to maintain flexible relationships, which may be terminated by such
suppliers on short notice, or to substitute new suppliers without interruption
of supply. The loss of Shimano or certain other key suppliers, or delays or
disruptions in the delivery of components or materials, could adversely affect
the Company's operations.
Discretionary Consumer Spending. Purchases of bicycles, particularly
high-performance models including those manufactured by the Company, and the
Company's other products are discretionary for consumers. The success of the
Company is influenced by a number of economic factors affecting disposable
consumer income, such as employment levels, business conditions, interest rates
and taxation rates. Adverse changes in these economic factors may restrict
consumer spending, thereby negatively affecting the Company's growth and
profitability.
19
Dependence on Key Personnel. The Company depends substantially on key
personnel involved in the research and development, marketing, sales, finance
and administration. The loss of the services of one or more of these key
persons, particularly the loss of the services of Joseph S. Montgomery, the
Company's Chairman, President and Chief Executive Officer could have a material
adverse effect on the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in interest rates and foreign exchange rates, as well as credit risk
concentrations. To address these risks the Company enters into various hedging
transactions as described below. The Company does not use financial instruments
for trading purposes.
CREDIT RISKS
The Company's customer base is composed of specialty bicycle retailers
which are located principally throughout the United States and Europe. There is
no single geographic area of concentration in the United States or Europe. No
single customer accounted for more than 5% of the Company's sales during the
fiscal year ended June 27, 1998. As a result of the seasonality of the Company's
business, the payment terms offered to its customers generally range from 30 to
180 days depending on the time of year and other factors.
FOREIGN CURRENCY AND INTEREST RATE RISKS
The Company enters into forward contracts to purchase and sell U.S.,
European, Australian and Japanese currencies to reduce exposures to foreign
currency risk. The Company enters into forward foreign currency contracts for a
significant portion of its current and net balance sheet exposures, principally
relating to trade receivables and payables denominated in foreign currencies,
and firm sale and purchase commitments. The forward exchange contracts generally
have maturities that do not exceed 12 months and require the Company to
exchange, at maturity, various currencies for U.S. dollars, Dutch guilders,
Australian dollars and Japanese yen at rates agreed to at inception of the
contracts. The Company does not hold foreign currency forward contracts for
trading purposes. Deferred gains and losses resulting from effective hedges of
existing assets, liabilities or firm commitments are included in prepaid
expenses and other current assets and are recognized when the offsetting gains
and losses are recognized on the related transaction. The net losses explicitly
deferred at June 27, 1998 and June 28, 1997 were not significant. Gains and
losses on foreign currency transactions that do not satisfy the accounting
requirements of an effective hedge are reported currently as other income or
expense.
The Company uses borrowings of Japanese yen and Dutch guilders to hedge its
net investments in its foreign subsidiaries. Gains and losses on hedges of net
investments are recognized in a separate component of stockholders' equity.
The Company also hedges exposure to changes in interest rates on its
revolving credit facility. On April 28, 1998, the Company entered into five year
interest rate hedge agreements with a total notional principal amount of $20
million to manage interest costs associated with changing interest rates. These
agreements convert underlying variable-rate debt based on LIBOR under the
Company's revolving credit facility to fixed-rate debt with an interest rate of
6.05%.
20
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
[Enlarge/Download Table]
FAIR VALUE
AT JUNE 27,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---- ------- ---- ---- ------- ---------- ------- -----------
(IN THOUSANDS)
LIABILITIES:
Long term debt, including
current portion
Fixed rate................... $488 $ 355 $310 $314 $ 299 $1,938 $ 3,704 $ 3,617
Average interest rate........ 4.65% 4.66% 3.87% 3.76% 3.76% 3.75% 3.97%
Variable rate................ $ 53 $34,742 $125 $128 $ 133 $1,928 $37,109 $37,109
Average interest rate........ 6.20% 5.74% 5.94% 5.94% 5.93% 5.89% 5.75%
INTEREST RATE DERIVATIVE
FINANCIAL INSTRUMENTS RELATED
TO DEBT:
Interest Rate Swaps
Pay fixed/receive variable... -- -- -- -- $20,000 -- $20,000 $ (235)
Average pay rate............. 6.05% 6.05% 6.05% 6.05% 6.05% -- 6.05%
Average receive rate -- USD 1
Month LIBOR................ -- -- -- -- -- -- --
The following table summarizes information on instruments and transactions
with the United States dollar functional currency that are sensitive to foreign
currency exchange rates, including foreign currency forward exchange agreements.
For foreign currency forward exchange agreements, the table presents the
notional amounts and weighted average exchange rates by expected (contractual)
maturity dates. These notional amounts are used to calculate the contractual
payments to be exchanged under the contract.
EXPOSURES RELATED TO DERIVATIVE CONTRACTS AND LONG-TERM DEBT
WITH UNITED STATES DOLLAR FUNCTIONAL CURRENCY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
FORWARD FOREIGN CURRENCY EXCHANGE RATE (USD/FOREIGN CURRENCY)
[Enlarge/Download Table]
FAIR VALUE
AT JUNE 27,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------- ------ ------ ------ ------ ---------- ------- -----------
(IN THOUSANDS)
FORWARD CONTRACTS TO SELL
FOREIGN CURRENCY FOR U.S.
DOLLARS:
Australian Dollar
Notional amount............ $ 610 -- -- -- -- -- $ 610 $ 7
Contract Rate............ 0.6095 0.6095
LONG-TERM DEBT DENOMINATED
IN FOREIGN CURRENCIES:
Dutch guilder
Notional amount............ -- $3,624 -- -- -- -- $ 3,624 $191
Rate at Inception........ -- 0.5177 0.5177
Japanese Yen
Notional amount............ -- $2,250 -- -- -- -- $ 2,250 $485
Rate at Inception........ -- 0.0090 0.0090
21
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)
[Enlarge/Download Table]
FAIR VALUE
AT JUNE 27,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------- ------ ------ ------ ------ ---------- ------- -----------
(IN THOUSANDS)
FORWARD CONTRACTS TO SELL FOREIGN
CURRENCY FOR DUTCH GUILDERS:
Spanish Peseta
Notional amount................... $ 653 -- -- -- -- -- $ 653 $ 2
Contract Rate................... 0.0133 0.0133
British Sterling
Notional amount................... $ 2,176 -- -- -- -- -- $ 2,176 $ 5
Contract Rate................... 3.4124 3.4124
Italian Lira
Notional amount................... $ 1,474 -- -- -- -- -- $ 1,474 $ 3
Contract Rate................... 0.0012 0.0012
FORWARD CONTRACTS TO BUY FOREIGN
CURRENCY FOR DUTCH GUILDERS:
Japanese Yen
Notional amount................... $ 1,070 -- -- -- -- -- $ 1,070 $ 13
Contract Rate................... 0.0145 0.0145
United States Dollars
Notional amount................... $ 4,400 -- -- -- -- -- $ 4,400 $(86)
Contract Rate................... 1.9642 1.9642
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Part II, Item
8, are included in Part IV, as indexed at Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference to the
information appearing under the captions "Item 1 -- Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission within 120 days after
the close of its fiscal year. The information required by Item 10 regarding
executive officers appears under the caption "Executive Officers of the
Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the
Company's definitive Proxy Statement relating to its 1998 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
relating to its 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the close of its fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement relating to its 1998
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal year.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements.
Report of Independent Auditors.
Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997.
Consolidated Statements of Earnings for the years ended June 27, 1998, June
28, 1997 and June 29, 1996.
Consolidated Statements of Stockholders' Equity for the years ended June
27, 1998, June 28, 1997 and June 29, 1996.
Consolidated Statements of Cash Flows for the years ended June 27, 1998,
June 28, 1997 and June 29, 1996.
Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULE.
Report of Independent Auditors on Financial Statement Schedule.
Schedule II -- Valuation and Qualifying Accounts.
All other financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the Consolidated Financial Statements or Notes thereto.
(a)(3) EXHIBITS.
The following is a list of all exhibits filed as part of this report.
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1(i) Amended and Restated Certificate of Incorporation of the
Company.*
3.1(ii) Amended and Restated Bylaws of the Company.*
4.1 Rights Agreement, dated December 22, 1997, between the
Company and BankBoston, N.A., as Rights Agent.(6)
4.2 1994 Stock Option Plan, as amended as of February 5,
1998.(1)
4.3 1994 Management Stock Option Plan, as amended as of February
5, 1998.(1)
4.4 1995 Stock Option Plan, as amended as of February 5,
1998.(1)
4.5 1996 Stock Option Plan, as amended as of February 5,
1998.(1)
10.1.8 $50,000,000 Credit Agreement, dated as of June 9, 1997,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., as Administrative Agent, Fronting Bank and
Swingline Bank and ABN Amro Bank N.V., New York Branch, as
Documentation Agent and Syndication Agent.(2)
10.1.9 $10,000,000 Umbrella Arrangement Agreement, dated May 28,
1997, between Cannondale Europe and ABN Amro N.V., New York
Branch.(2)
10.1.10 First Amendment to Credit Agreement, dated October 14, 1997,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., ABN Amro Bank N.V., Fleet National Bank,
The Chase Manhattan Bank and State Street Bank and Trust
Company.(3)
10.1.11 Credit Agreement, dated February 5, 1998, between Cannondale
Europe and ABN AMRO Bank N.V.(4)
24
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1.12 Second Amendment to Credit Agreement, dated April 15, 1998,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., Fleet National Bank, The Chase Manhattan
Bank and State Street Bank and Trust Company.(1)
10.1.13 Third Amendment to Credit Agreement, dated May 29, 1998,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., Fleet National Bank, The Chase Manhattan
Bank and State Street Bank and Trust Company.(1)
10.1.14 Fourth Amendment to Credit Agreement, dated June 25, 1998,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., Fleet National Bank, The Chase Manhattan
Bank and State Street Bank and Trust Company.(1)
10.6 Promissory Note, dated December 27, 1993, from the Company
to General Electric Capital Corporation.*
10.7 Installment Sales Agreement, dated August 28, 1981, between
the Company and Bedford Development Council. Amendments to
Installment Sales Agreement, dated May 29, 1987, September
1, 1988 and October 26, 1993. Assignment of Fifth
Supplemental Installment Sale Agreement, dated October 26,
1993, from Bedford Development Council to The Pennsylvania
Industrial Development Authority.*
10.8 Consent, Subordination and Assumption Agreements, between
the Company and Bedford Development Council, in favor of The
Pennsylvania Industrial Development Authority, dated August
28, 1981, May 7, 1982, May 11, 1983, May 29, 1987, September
1, 1988, and October 26, 1993.*
10.9 Installment Sale Agreement, dated April 27, 1994, between
the Company and Bedford Development Council. Assignment,
dated April 27. 1994, from Bedford Development Council to
Pennsylvania Industrial Development Authority.*
10.10 Consent, Subordination and Assumption Agreement, dated April
27, 1994, between the Company and Bedford Development
Council, in favor of The Pennsylvania Industrial Development
Authority.*
10.11 Loan Agreement, dated November 10, 1989, between the Company
and Rush Township, Commonwealth of Pennsylvania.*
10.12 Promissory Note, dated November 10, 1989, from the Company
to Rush Township, Commonwealth of Pennsylvania.*
10.13 Mortgage, dated November 10, 1989, from the Company to Rush
Township, Commonwealth of Pennsylvania. Assignment of Note
and Mortgage, dated June 30, 1989, from Rush Township,
Commonwealth of Pennsylvania to Pennsylvania Department of
Commerce.*
10.14 Loan Agreement, dated July 24, 1990, between the Company and
Rush Township, Commonwealth of Pennsylvania.*
10.15 Promissory Note, dated July 24, 1990, from the Company to
Rush Township, Commonwealth of Pennsylvania.*
10.16 Mortgage, dated July 24, 1990, from the Company to Rush
Township Commonwealth of Pennsylvania.*
10.17 Installment Sales Agreement, dated December 4, 1990, between
the Company and Moshannon Valley Economic Development
Partnership. Assignment, dated December 4, 1990, from
Moshannon Valley Economic Development Partnership to The
Pennsylvania Industrial Development Authority.*
25
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
10.18 Mortgage Subordination Agreement, dated December 4, 1990,
among the Company, Moshannon Valley Economic Development
Partnership, Rush Township, Commonwealth of Pennsylvania and
The Pennsylvania Industrial Development Authority.*
10.19 Consent, Subordination and Assumption Agreement, dated
December 4, 1990, between the Company and Moshannon Valley
Economic Development Partnership, in favor of The
Pennsylvania Industrial Development Authority.*
10.20 Loan Agreement, dated February 1, 1992, between the Company
and Moshannon Valley Economic Development Partnership.*
10.21 Installment Judgment Note, dated February 1, 1992, from the
Company to Moshannon Valley Economic Development
Partnership.*
10.22 Chattel Mortgage Security Agreement, dated February 1, 1992,
between the Company and Moshannon Valley Economic
Development Partnership.*
10.23 Business Infrastructure Development Loan Agreement, dated
June 30, 1989, among the Company, Pennsylvania Department of
Commerce and Rush Township, Commonwealth of Pennsylvania.*
10.24 Promissory Note, dated June 30, 1989, from the Company to
Pennsylvania Department of Commerce. Amendment to Promissory
Note, dated February 1, 1992, from the Company to
Pennsylvania Department of Commerce.*
10.25 Escrow Agreement, dated June 30, 1989, among the Company,
Rush Township, Commonwealth of Pennsylvania, Pennsylvania
Department of Commerce and MidState Bank and Trust Company.*
10.26 Mortgage, dated July 23, 1991, from Cannondale Europe to
Algemene-Bank Netherlands B.V. (In Dutch, with English
summary).*
10.27 Financing Lease, dated May 31, 1991, between ABN Onroerend
Goed Lease B.V., as lessor, and Cannondale Europe, as
lessee. (In Dutch, with English translation).*
10.28 Loan Agreement, dated February 1, 1994, between Cannondale
Europe and ABN AMRO Bank N.V. (In Dutch, with English
translation).*
10.28.1 Loan Agreement Amendment, effective December 1, 1995,
between Cannondale Europe and ABN Amro Bank N.V.@
10.29 Term Loan Agreement, dated March 29, 1994, between
Cannondale Europe and the Company.*
10.29.1 Subordination Agreement, dated March 23, 1993, between the
Company and ABN AMRO Bank N.V. (In Dutch, with English
translation).*
10.30 Loan Agreement, dated September 1, 1992, between Cannondale
Japan and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese, with
English translation).*
10.30.1 Guarantee Agreement, dated August 7, 1992, from the Company
to The Dai-Ichi Kangyo Bank, Ltd.*
10.31 Master Lease Agreement, dated as of July 27, 1993, between
General Electric Capital Corporation and the Company, to
which are appended Equipment Schedule No. 1, dated August 6,
1993, and Equipment Schedule No. 2, dated August 6, 1993.*
10.32 Master Lease Agreement, dated April 11, 1994, between United
States Leasing Corporation and the Company.*
10.33 Master Lease, dated June 17, 1991, between Norwest Equipment
Finance, Inc. and the Company, together with Supplement to
Master Lease.*
10.34 Master Lease Agreement, dated October 31, 1989, between Ford
Equipment Leasing Company and the Company, to which is
appended Schedule No. 3, dated February 22, 1991.*
26
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
10.35 Master Equipment Lease, dated May 26, 1993, between
XL/Datacomp, Inc. and the Company, to which are appended
Schedule A, dated May 26, 1993, and Schedule B, dated August
3, 1993.*
10.36 (Intentionally omitted)
10.37 Master Lease Agreement, dated May 23, 1991, between Center
Capital Corporation and the Company, to which are appended
Lease Schedule No. 1, dated May 23, 1991, and Lease Schedule
No. 2, dated May 23, 1991.*
10.38 Equipment Lease Agreement, dated July 11, 1991, between New
England Capital Corporation and the Company, to which is
appended Lease Schedule No. 528102, dated November 8, 1991.*
10.39 Equipment Lease Agreement, dated March 26, 1992, between
Citicorp Leasing, Inc. and the Company.*
10.40 Equipment Lease Agreement, executed as of May 3, 1991,
between Greenwich Financial Services Inc. and the Company,
to which are appended Schedule No. 1, dated May 3, 1991, and
Schedule No. 2, dated May 3, 1991. Assignment from Greenwich
Financial Services, Inc. to United States Capital
Corporation, dated May 3, 1991.*
10.42 Sponsor Agreement, dated December 5, 1993, between the
Company and Team Sports, Inc. (Certain portions of this
Exhibit have been deleted pursuant to a requst for
confidential treatment.)*
10.43 Agreement, dated March 2, 1994, between the Company and Bell
Sports, Inc. (Certain portions of this Exhibit have been
deleted pursuant to a request for confidential treatment.)*
10.44 Agreement, dated July 11, 1994, between the Company and
Frank Roth Company. (Certain portions of this Exhibit have
been deleted pursuant to a request for confidential
treatment.)*
10.45 Agreement, dated July 28, 1994, between the Company and
Quadrax Corporation. (Certain portions of this Exhibit have
been deleted pursuant to a request for confidential
treatment.)*
10.46 Precision Machine Tool Design and Research Center Membership
Agreement, dated March 14, 1994, between the University of
Connecticut and the Company.*
10.47 (Intentionally omitted)
10.48 Employment Agreement, dated January 3, 1994, between the
Company and William A. Luca.*
10.49 Employee Patent and Confidential Information Agreement,
dated August 20, 1982, between the Company and Daniel C.
Alloway.*
10.50 Ownership and Confidentiality Agreement, dated June 21,
1988, between the Company and Richard J. Resch.*
10.51 Ownership and Confidentiality Agreement, dated May 30, 1990,
between the Company and Harold DeWaltoff.*
10.52 Employment Agreement, dated December 1, 1993, between the
Company and Daniel Pullman.*
10.53 Employment Agreement, dated June 6, 1994, between the
Company and Leonard Konecny.*
10.54 Cannondale Corporation 401(k) Profit Sharing Plan.*
10.57 Cannondale Corporation Employee Stock Purchase Plan.*
27
[Download Table]
EXHIBIT
NO. DESCRIPTION
------- -----------
10.58 Stockholders Agreement, dated as of June 3, 1992, among the
Company, Princes Gate Investors, LP., Acorn Partnership
L.L.P., PGI Investments Limited, Joseph S. Montgomery, James
Scott Montgomery and PG Investors, Inc. Amendment No. 1 to
Stockholders Agreement, dated as of July 2, 1993. Amendment
No. 2 to Stockholders Agreement, dated July 28, 1994.
Amendment No. 3 to Stockholders Agreement, dated as of
August 10, 1994. Letter (undated) from the Company to
Princes Gate Investors, LP., Acorn Partnership LLP, PGI
Investments Limited and PG Investors. Inc.*
10.59 (Intentionally omitted)
10.60 Form of Indemnification Agreement between the Company and
each of its directors and officers.*
10.61 Agreement between the Company and Mark-It Company, executed
by the parties on September 16, 1994, and September 2, 1994,
respectively. (Certain portions of this Exhibit have been
deleted pursuant to a request for confidential treatment.)*
10.62 Aluminum Supply Agreement, dated November 16, 1994. (Certain
portions of this Exhibit have been deleted pursuant to a
request for confidential treatment.)+
10.63 Contract of Sale, dated September 29, 1996, between
Cannondale and Sandvick Associates, Inc., together with
Assignment and Assumption Agreement dated as of September
30, 1996, between Sandvick Associates, Inc. and Nantucket
Roost Associates, LLC.***
10.64 Agreement of Lease, dated as of October 4, 1996, between
Nantucket Roost Associates, LLC and Cannondale. ***
10.67 Aircraft Lease, dated as of October 6, 1996, between JSM,
Inc. and Cannondale.****
10.68 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and William A. Luca.(5)
10.68.1 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and Joseph S. Montgomery.(5)
10.68.2 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and John Moriarty.(5)
10.68.3 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and Daniel C. Alloway.(5)
10.68.4 Cannondale Corporation Change of Control Separation Plan
A.(5)
10.68.5 Cannondale Corporation Change of Control Separation Plan
B.(5)
21 Subsidiaries of the Registrant.(1)
23 Consent of Independent Auditors(1)
27.A Restated Financial Data Schedule for Fiscal Year Ended June
29, 1996(1)
27.B Restated Financial Data Schedule for Fiscal Year Ended June
28, 1997(1)
27.C Financial Data Schedule for Fiscal Year Ended June 27,
1998(1)
---------------
* Incorporated by reference to the corresponding numbered Exhibit filed
with the registrant's Registration Statement on Form S-1, Registration
No. 33-84566
+ Incorporated by reference to the corresponding numbered Exhibit filed
with the registrant's Form 10-Q filed for the quarterly period ended
December 31, 1994.
++ Incorporated by reference to the corresponding numbered Exhibit filed
with the registrant's Form 10-Q filed for the quarterly period ended
April 1, 1995.
@ Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q filed for the quarterly period ended December
30, 1995.
28
*** Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q filed for the quarterly period ended September
28, 1996.
**** Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q filed for the quarterly period ended December
28, 1996.
(1) Filed herewith.
(2) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-K/A filed for the year end June 28, 1997.
(3) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q for the quarterly period ended December 27,
1997.
(4) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q for the quarterly period ended March 28, 1998.
(5) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q/A for the quarterly period ended March 28,
1998.
(6) Incorporated by reference to the registrant's Form 8-K filed on December
23, 1997.
The Company undertakes to provide a copy of any of the foregoing Exhibits
to any Company stockholder of record on September 30, 1998. Requests should be
made in writing to the Company at 16 Trowbridge Drive, Bethel, Connecticut
06801, ATTN: Investor Relations, and should be accompanied by payment of $5.00
per Exhibit, to cover the Company's expenses in providing such Exhibit(s).
(b) REPORTS ON FORM 8-K.
None
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CANNONDALE CORPORATION
September 25, 1998 /s/ WILLIAM A. LUCA
--------------------------------------
William A. Luca
Vice President of Finance,
Treasurer and Chief Financial Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William A. Luca his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOSEPH S. MONTGOMERY Chairman, President, Chief September 25, 1998
----------------------------------- Executive Officer and Director
Joseph S. Montgomery (Principal Executive Officer)
/s/ WILLIAM A. LUCA Vice President of Finance, September 25, 1998
----------------------------------- Treasurer, Chief Financial
William A. Luca Officer, and Director (Principal
Financial Officer)
/s/ DANIEL C. ALLOWAY Vice President Sales -- United September 25, 1998
----------------------------------- States and Vice President of
Daniel C. Alloway European Operations and Director
/s/ JOHN P. MORIARTY Assistant Treasurer and Assistant September 25, 1998
----------------------------------- Secretary, Director of Accounting
John P. Moriarty (Principal Accounting Officer)
/s/ JAMES S. MONTGOMERY Director September 25, 1998
-----------------------------------
James S. Montgomery
/s/ JOHN H.T. WILSON Director September 25, 1998
-----------------------------------
John H.T. Wilson
Director September 25, 1998
-----------------------------------
John Sanders
/s/ MICHAEL J. STIMOLA Director September 25, 1998
-----------------------------------
Michael J. Stimola
30
CANNONDALE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of June 27, 1998 and June 28,
1997...................................................... F-3
Consolidated Statements of Earnings for the years ended June
27, 1998, June 28, 1997 and June 29, 1996................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 27, 1998, June 28, 1997 and June 29,
1996...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
June 27, 1998, June 28, 1997 and June 29, 1996............ F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cannondale Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cannondale
Corporation and subsidiaries as of June 27, 1998 and June 28, 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cannondale
Corporation and subsidiaries at June 27, 1998 and June 28, 1997, and the
consolidated results of their operations and their cash flows for the years
ended June 27, 1998, June 28, 1997 and June 29, 1996, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 10, 1998,
except for Note 15, as
to which the date is
September 22, 1998
F-2
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
JUNE 27, 1998 JUNE 28, 1997
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash...................................................... $ 3,031 $ 5,521
Trade accounts receivable, less allowances of $8,479 and
$6,432................................................. 61,746 61,272
Inventory................................................. 39,420 30,105
Deferred income taxes..................................... 2,172 2,623
Prepaid expenses and other current assets................. 4,449 2,386
-------- --------
Total current assets........................................ 110,818 101,907
Property, plant and equipment............................... 35,769 23,105
Notes receivable and advances to related parties............ 2,688 227
Other assets................................................ 3,002 2,045
-------- --------
Total assets................................................ $152,277 $127,284
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,747 $ 12,330
Revolving line of credit.................................. 2,141 1,022
Income taxes payable...................................... 1,732 2,946
Other accrued expenses.................................... 3,838 3,916
Accrued warranty expense.................................. 1,982 2,085
Payroll and other employee related benefits............... 2,142 1,850
Payable to related party.................................. 2,800 --
Current installments of long-term debt.................... 461 562
-------- --------
Total current liabilities................................... 31,843 24,711
Long-term debt, less current installments................... 40,352 20,319
Deferred income taxes....................................... 1,569 339
Other noncurrent liabilities................................ 275 294
-------- --------
Total liabilities........................................... 74,039 45,663
-------- --------
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares -- 40,000,000
Issued shares -- 8,737,088, issued and outstanding
shares -- 8,687,615................................... 87 87
Additional paid-in capital................................ 57,303 56,860
Retained earnings......................................... 35,405 26,053
Less 656,400 shares in treasury at cost................... (12,417) --
Cumulative translation adjustment......................... (2,140) (1,379)
-------- --------
Total stockholders' equity.................................. 78,238 81,621
-------- --------
Total liabilities and stockholders' equity.................. $152,277 $127,284
======== ========
See accompanying notes
F-3
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
[Enlarge/Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............................................ $171,496 $162,496 $145,976
Cost of sales........................................ 110,113 101,334 92,804
-------- -------- --------
Gross profit......................................... 61,383 61,162 53,172
-------- -------- --------
Expenses:
Selling, general and administrative................ 39,361 35,707 32,577
Research and development........................... 6,750 3,576 2,837
-------- -------- --------
46,111 39,283 35,414
-------- -------- --------
Operating income..................................... 15,272 21,879 17,758
-------- -------- --------
Other income (expense):
Interest expense................................... (1,995) (1,574) (2,224)
Other income....................................... 653 843 414
-------- -------- --------
(1,342) (731) (1,810)
-------- -------- --------
Income before income taxes........................... 13,930 21,148 15,948
Income tax expense................................... (4,578) (7,642) (5,802)
-------- -------- --------
Net income........................................... $ 9,352 $ 13,506 $ 10,146
======== ======== ========
Basic income per share............................... $ 1.11 $ 1.56 $ 1.23
Diluted income per share............................. $ 1.08 $ 1.51 $ 1.19
See accompanying notes
F-4
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
COMMON STOCK ADDITIONAL TREASURY STOCK CUMULATIVE
----------------- PAID-IN RETAINED ------------------- TRANSLATION
SHARES VALUE CAPITAL EARNINGS SHARES VALUE ADJUSTMENT TOTAL
--------- ----- ---------- -------- -------- -------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at July 1, 1995....... 7,127,181 $71 $33,294 $ 2,401 -- $ -- $ 322 $ 36,088
Net income.................. -- -- -- 10,146 -- -- -- 10,146
Issuance of common stock
(Net of $1,490 of offering
costs).................... 1,366,666 14 22,071 -- -- -- -- 22,085
Exercise of options......... 117,868 1 600 -- -- -- -- 601
Foreign currency
adjustment................ -- -- -- -- -- -- (626) (626)
--------- --- ------- ------- -------- -------- ------- --------
Balance at June 29, 1996...... 8,611,715 86 55,965 12,547 -- -- (304) 68,294
Net income.................. -- -- -- 13,506 -- -- -- 13,506
Exercise of options......... 75,900 1 895 -- -- -- -- 896
Foreign currency
adjustment................ -- -- -- -- -- -- (1,075) (1,075)
--------- --- ------- ------- -------- -------- ------- --------
Balance at June 28, 1997...... 8,687,615 87 56,860 26,053 -- -- (1,379) 81,621
Net income.................. -- -- -- 9,352 -- -- -- 9,352
Exercise of options......... 49,473 -- 443 -- -- -- -- 443
Purchase of treasury
stock..................... -- -- -- -- (656,400) (12,417) -- (12,417)
Foreign currency
adjustment................ -- -- -- -- -- -- (761) (761)
--------- --- ------- ------- -------- -------- ------- --------
Balance at June 27, 1998...... 8,737,088 $87 $57,303 $35,405 (656,400) $(12,417) $(2,140) $ 78,238
========= === ======= ======= ======== ======== ======= ========
See accompanying notes
F-5
CANNONDALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income........................................... $ 9,352 $13,506 $10,146
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 4,054 3,211 2,994
Provision for bad debt, discount, credit and
return and late charge reserves............... 7,141 5,762 10,114
Provision for obsolete inventory................ 1,425 1,484 883
Unrealized (gain) loss on foreign currency
transactions.................................. 642 107 (43)
Deferred income taxes........................... 425 (442) (616)
Other........................................... 16 (1) 31
Changes in assets and liabilities:
Trade accounts receivable..................... (8,894) (17,399) (25,136)
Inventory..................................... (11,589) (1,975) (10,402)
Prepaid expenses and other assets............. (3,319) (2,089) 174
Accounts payable.............................. 4,711 138 3,058
Warranty and other accrued expenses........... 3,174 805 323
Income taxes payable and other liabilities.... 36 1,470 1,686
-------- ------- -------
Net cash provided by (used in) operating
activities......................................... 7,174 4,577 (6,788)
-------- ------- -------
INVESTING ACTIVITIES
Capital expenditures................................. (16,762) (9,766) (3,023)
Proceeds from sale of building....................... -- 1,676 --
Loans provided to related parties.................... (2,461) (227) --
-------- ------- -------
Net cash used in investing activities................ (19,223) (8,317) (3,023)
-------- ------- -------
FINANCING ACTIVITIES
Net proceeds from the issuance of common stock....... 443 896 22,686
Payments for the purchase of treasury stock.......... (12,417) -- --
Proceeds from issuance of long-term debt............. 3,203 21,383 489
Net proceeds from (repayments of) borrowings under
short-term revolving credit agreements............. 1,291 (3,555) 478
Net proceeds from (repayments of) borrowings under
long-term debt and capital lease agreements........ 16,833 (15,133) (11,291)
-------- ------- -------
Net cash provided by financing activities............ 9,353 3,591 12,362
-------- ------- -------
Effect of exchange rate changes on cash.............. 206 1,365 (501)
-------- ------- -------
Net increase (decrease) in cash...................... (2,490) 1,216 2,050
Cash at beginning of period.......................... 5,521 4,305 2,255
-------- ------- -------
Cash at end of period................................ $ 3,031 $ 5,521 $ 4,305
======== ======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest........................................... $ 2,071 $ 1,781 $ 2,426
======== ======= =======
Income taxes, net of refunds....................... $ 7,341 $ 6,788 $ 4,375
======== ======= =======
See accompanying notes
F-6
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Description of Business
Cannondale Corporation (the "Company") manufactures and distributes
bicycles and bicycling accessories and equipment. International operations are
conducted through the Company's wholly-owned subsidiaries: Cannondale Europe
B.V. ("Cannondale Europe"), Cannondale Japan KK ("Cannondale Japan") and
Cannondale Australia Pty Limited ("Cannondale Australia").
Business and Credit Concentrations
The Company's customer base is composed of specialty bicycle retailers who
are located principally throughout the United States and Europe. There is no
single geographic area of concentration in the United States or Europe. No
single customer accounted for more than 5% of the Company's sales during the
years ended June 27, 1998, June 28, 1997 or June 29, 1996. As a result of the
seasonality of the Company's business, the payment terms offered to its
customers generally range from 30 to 180 days depending on the time of year and
other factors.
The Company's raw materials are readily available and the Company is not
completely dependent on a single supplier. The Company has, however, preferences
with respect to continuing its relationships with certain selected vendors, and
a material portion of the Company's inventory purchases is from a single
supplier. That single supplier was the source of approximately 17% of the
Company's total inventory purchases in fiscal 1998.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Sales, net of estimated returns and allowances, are recognized when
products are shipped. Provisions for returns and allowances are determined
principally on the basis of past experience.
Product Warranties
The Company provides original owners of its bicycles with either a one
year, five year or lifetime warranty for the bicycle frame, depending on model
type and a one-year warranty for suspensions and components. During the warranty
period, the Company will repair or replace a defective part or assembly at no
cost to the owner. Provisions for estimated warranty expense are recognized at
the time of sale, determined principally on the basis of past experience.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Plant and equipment under
capitalized lease obligations are recorded at the present value of minimum lease
payments.
Depreciation of plant and equipment is calculated on the straight-line
method over 21 to 40 years for buildings and improvements and 3 to 10 years for
equipment. Amortization of assets recorded under
F-7
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized lease obligations is recognized over the lesser of the useful lives
or lease terms and such amount is included in depreciation and amortization
expense.
Interest costs for the construction of certain long-term assets are
capitalized and amortized over the related asset's useful life. The Company
capitalized interest costs of $88,000 and $133,000 for the years ended June 27,
1998 and June 28, 1997, respectively, related to the construction of the
Company's new headquarters facility and the expansion of the manufacturing
facility. Total interest incurred before the recognition of the capitalized
amount was $2,083,000 and $1,707,000 for fiscal 1998 and 1997, respectively.
There was no interest capitalized in fiscal 1996.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
It requires an asset and liability approach for financial accounting and
reporting for deferred income taxes. Taxes are recognized for all temporary
differences between the tax and financial reporting bases of the Company's
assets and liabilities based on the enacted tax laws and statutory tax rates
applicable to the periods in which differences are expected to affect taxable
income.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at current exchange rates. Revenues, costs and
expenses are translated at the average exchange rates applicable for the period.
Translation adjustments resulting from changes in exchange rates are reported as
a separate component of stockholders' equity.
During the year ended June 29, 1996, management reevaluated the
appropriateness of continuing the designation of the U.S. dollar as Cannondale
Europe's functional currency. Due to significant changes in the economic facts
and circumstances of Cannondale Europe, it was determined that the Dutch guilder
most accurately portrays the economic results of Cannondale Europe. Accordingly,
effective March 31, 1996, the Company designated the Dutch guilder as the
functional currency of Cannondale Europe. At June 29, 1996, the assets and
liabilities of Cannondale Europe were translated at year-end exchange rates,
while revenues and expenses were translated at average rates of exchange in
effect during the three-month period ended June 29, 1996. Prior to the change in
Cannondale Europe's functional currency, remeasurement adjustments related to
its operations were included in net income. Subsequently, cumulative translation
adjustments relating to Cannondale Europe have been recorded as a separate
component of stockholders' equity.
Financial Instruments
The Company enters into forward contracts to purchase and sell U.S.,
European, Japanese and Australian currencies to reduce exposures to foreign
currency risk. The Company does not hold foreign currency forward contracts for
trading purposes. Gains and losses resulting from effective hedges of existing
assets, liabilities or firm commitments are deferred and recognized when the
offsetting gains and losses are recognized on the related transaction. Gains and
losses on foreign currency transactions that do not satisfy the accounting
requirements of an effective hedge are reported currently as a component of
other income or expense.
During fiscal 1998, the Company entered into interest rate swap agreements
to manage exposure to fluctuations in interest rates. The differential between
the interest paid or received on a specified notional amount is recognized as an
adjustment to interest expense. The fair value of the swap agreements and
changes in the fair value as a result of changes in the fair value of market
interest rates are not recognized in the financial statements.
F-8
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation
The Company grants stock options to officers, directors, employees,
consultants and advisors with an exercise price determined by the Board of
Directors at the time of grant. The Company accounts for stock option grants,
except for those granted to consultants and advisors of the Company, in
accordance with Accounting Principles Board Standard ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires that compensation
expense be recognized for the difference between the quoted market price of the
stock at the grant date and the amount that the employee is required to pay. The
Company accounts for stock option grants to consultants and advisors in
accordance with SFAS 123 and has not incurred any material charges to date. As
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has disclosed in Note 7 the pro-forma effects on net income and earnings
per share of recording compensation expense for the fair value of stock options
granted subsequent to July 1, 1995. It is the opinion of management that the
existing model to estimate the fair value of employee options according to SFAS
123, and the assumptions used to calculate the impact, may not be representative
of the effects on future years and does not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Earnings per Share Amounts
In 1997, the FASB ("Financial Accounting Standards Board") issued SFAS 128,
"Earnings Per Share." SFAS Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented, and
where appropriate, restated to conform to the SFAS 128 requirements.
Reclassifications
Certain 1997 amounts have been reclassified to conform to the current
year's presentation.
Intangible Assets
Included in other assets are intangible assets, which represent the cost of
patents, goodwill and deferred financing charges. Intangible assets were
$1,395,000 and $1,260,000 at June 27, 1998 and June 28, 1997, respectively.
Accumulated amortization on intangible assets amounted to $314,000 and $234,000
at June 27, 1998 and June 28, 1997, respectively. Amortization of goodwill and
patents is provided using the straight-line method over the estimated useful
lives of the assets, not exceeding 17 years. Amortization of deferred financing
charges is provided over the term of the related debt instrument.
Advertising Expenses
Advertising expenses are charged to income during the year that they are
incurred. Selling, general and administrative expenses of the Company include
advertising and promotion costs of $3,906,000, $3,867,000 and $2,780,000 for the
years ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively.
F-9
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Developments
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income",
which is effective for financial statements beginning in the first fiscal
quarter of 1999. SFAS 130 defines the concept of "comprehensive income" and
establishes the standards for reporting "comprehensive income." Comprehensive
income is defined to include net income, as currently reported, as well as
unrealized gains and losses on available-for-sale securities, foreign currency
translation adjustments and certain other items not included in the income
statement. SFAS 130 also sets forth requirements on how comprehensive income
should be presented as part of the issuer's financial statements. The Company is
currently assessing how it will disclose comprehensive income in its financial
statements. The adoption of SFAS 130 will not affect the Company's earnings,
liquidity or capital resources.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for companies with
fiscal years beginning after December 15, 1997. SFAS 131 defines the criteria by
which an issuer is to determine the number and nature of its "operating
segments" and sets forth the financial information that is required to be
disclosed about such segments. The Company is currently assessing the manner in
which it will disclose the required information.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal quarters
beginning after June 15, 1999. SFAS 133 defines the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. In fiscal 1999, the Company will assess how
the provisions of this statement will affect its hedging operations and future
earnings. At this time, the effect of the adoption of SFAS 133 on future
earnings cannot be estimated.
2. INVENTORY
The components of inventory are as follows (in thousands):
[Download Table]
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
Raw materials...................................... $20,439 $13,394
Work-in process.................................... 2,856 1,455
Finished goods..................................... 16,931 16,325
------- -------
40,226 31,174
Less reserve for obsolete inventory................ (806) (1,069)
------- -------
$39,420 $30,105
======= =======
F-10
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
[Download Table]
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
Land............................................... $ 1,270 $ 1,324
Buildings and improvements......................... 18,328 8,700
Factory and office equipment....................... 33,366 24,388
Cessna Citation jet................................ 2,800 --
Construction and projects in progress.............. 1,577 6,493
-------- --------
57,341 40,905
Less accumulated depreciation and amortization..... (21,572) (17,800)
-------- --------
$ 35,769 $ 23,105
======== ========
Purchases of equipment through capitalized lease obligations and notes were
$28,000 and $291,000 in fiscal 1997 and 1996, respectively. The Company did not
enter into any capital leases during fiscal 1998.
4. EARNINGS PER SHARE
The following table is an illustration of the reconciliation of the
numerator and denominator of basic and diluted income per share computations and
other related disclosures required by SFAS 128 (in thousands, except earnings
per share data):
[Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
NUMERATOR:
Numerator for basic and diluted
earnings per share -- income
available to common stockholders... $9,352 $13,506 $10,146
====== ======= =======
DENOMINATOR:
Denominator for basic earnings per
share -- weighted-average shares... 8,442 8,638 8,216
Effect of dilutive securities:
Employee stock options............. 240 278 283
------ ------- -------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions..... 8,682 8,916 8,499
====== ======= =======
Basic earnings per share............. $ 1.11 $ 1.56 $ 1.23
====== ======= =======
Diluted earnings per share........... $ 1.08 $ 1.51 $ 1.19
====== ======= =======
The average number of options to purchase shares of common stock excluded
from the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares,
therefore, having an antidilutive effect, were 377,528, 118,844 and 16,578 for
fiscal 1998, 1997 and 1996, respectively.
F-11
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
Short-term revolving credit advances (in thousands):
[Download Table]
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
Cannondale Europe.................................. $1,578 $ 193
Cannondale Japan................................... 563 829
------ ------
$2,141 $1,022
====== ======
In February 1998, Cannondale Europe entered into a multicurrency credit
arrangement, which allows Cannondale Europe to borrow up to 12,500,000 Dutch
guilders (approximately $6,131,000 at June 27, 1998) on a short-term basis. The
interest rate on outstanding borrowings is a market rate, applicable to the
currencies borrowed, plus 1.5% with a minimum rate of 3.5%. The credit
arrangement contains no specific expiration date, and may be terminated by
either the borrower or the lender, at any time. Cannondale Europe's
multicurrency credit arrangement is guaranteed by Cannondale U.S..
Prior to establishing the February 1998 agreement, Cannondale Europe
entered into a multi-currency credit arrangement, which allowed Cannondale
Europe to borrow up to $10,000,000 on a short-term basis. The interest rate on
outstanding borrowings was a market rate, applicable to the borrowed currencies,
plus 1.5% with a minimum rate of 3.5%. The credit arrangement contained no
specific expiration date, and could have been terminated by either the borrower
or the lender, at any time.
Cannondale Japan has an unsecured revolving credit facility for up to
155,000,000 Japanese yen (approximately $1,092,000 at June 27, 1998). The
interest rate on the outstanding borrowings was 2.875% at June 27, 1998 and June
28, 1997. The credit facility contains no specific expiration date, and may be
terminated by either the borrower or the lender, at any time. Cannondale Japan's
unsecured revolving credit facility is guaranteed by Cannondale U.S..
The weighted average interest rate on the Company's revolving lines of
credit was 5.05% and 4.48% at June 27, 1998 and June 28, 1997, respectively.
Long-Term Debt (in thousands):
[Download Table]
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
Revolving credit facility.......................... $34,661 $17,278
Pennsylvania Industrial Development Authority
bonds, interest rates ranging from 2.0% to
4.5%............................................. 3,049 1,605
Connecticut Development Authority Loan............. 1,602 --
Algemene Bank Nederland N.V........................ 846 937
Rush Township Construction Loan, interest at
3.0%............................................. 378 422
Daiichi Kangyo Bank term loan, interest at 3.25%... 115 290
Notes secured by equipment and capitalized
leases........................................... 162 349
------- -------
40,813 20,881
Less current portion............................... (461) (562)
------- -------
$40,352 $20,319
======= =======
In June 1997, the Company entered into an unsecured, multicurrency
revolving credit facility. The agreement, as amended in October 1997, which
extends to June 2000, allows the Company and its subsidiaries to borrow up to
$70,000,000 until September 1998, when the commitment of the lenders decreases
by $1,250,000 each quarter thereafter. The agreement includes a provision that
permits the Company to borrow
F-12
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
up to $10,000,000 of the $70,000,000 facility on a short-term basis (less than
30 days). The outstanding borrowings consisted of U.S. dollars ($27,500,000 and
$6,413,000), Dutch guilders (11,000,000 and 17,000,000) and Japanese yen
(250,705,000 and 250,705,000) at June 27, 1998 and June 28, 1997, respectively.
The agreement requires the maintenance of specified levels of cash flow,
capitalization, interest coverage and tangible net worth.
The Company has the option to borrow at the following rates: (1) a variable
rate (8.50% at June 28, 1997) that is defined as the higher of the bank's prime
rate or the Federal Funds Rate plus 50.0 basis points; (2) a short-term market
rate (6.225% and 6.275% at June 27, 1998 and June 28, 1997, respectively) that
is an offered rate per annum quoted by the bank; or (3) the LIBOR (London
Interbank Offered Rate) applicable to the currency borrowed plus an interest
rate margin ("LIBOR margin"). At June 27, 1998, the rate(s) of outstanding
borrowings under the LIBOR option ranged from 6.175% to 6.44% for U.S. dollar
borrowings, and were 4.24% and 4.25% for Dutch guilder borrowings and was 1.29%
for Japanese yen borrowings. At June 28, 1997, the rates of outstanding
borrowings under the LIBOR option were 3.25% and .56% for Dutch guilder and
Japanese yen borrowings, respectively . The LIBOR margin (ranging from 30.0 to
75.0 basis points) is determined quarterly based upon predetermined performance
criteria. The Company is obligated to pay a facility fee (ranging from 15.0 to
25.0 basis points) on the balance of the facility based on the same performance
criteria as the LIBOR margin. The LIBOR margin was 75.0 basis points and 42.5
basis points at June 27, 1998 and June 28, 1997, respectively. The facility fee
was 25.0 basis points and 20.0 basis points at June 27, 1998 and June 28, 1997,
respectively. The weighted average interest rate for borrowings under this
facility was 5.74% and 4.54% at June 27, 1998 and June 28, 1997, respectively.
The Pennsylvania Industrial Development Authority bonds are secured by the
Company's Bedford, Pennsylvania facility. The loans extend through 2013, and are
payable in equal monthly payments.
The Connecticut Development Authority loan is secured by the Company's
Bethel, Connecticut headquarters and research and development facility. The
interest rate is fixed at 5.75% until January 1999; thereafter, the interest
rate will be adjusted annually to yield the U.S. Government Securities Ten Year
Treasury. The loan is payable in monthly installments with no obligation to
amortize the principal portion of the loan until February 2000. Thereafter, the
loan is payable in amounts sufficient to amortize the principal balance over a
fifteen-year term plus interest, with the balance due on February 1, 2008.
The Algemene Bank of Nederland N.V. loan is secured by Cannondale Europe's
factory in Oldenzaal, Netherlands. The interest rate is a variable market rate
determined quarterly with a maximum of 7.55%. The interest rate was 6.2% and
5.9% at June 27, 1998 and June 28, 1997, respectively. The loan extends to May
2004 and is payable quarterly in Dutch guilders with equal principal payments
plus interest, and the balance of 1,100,000 Dutch guilders (approximately
$540,000 at June 27, 1998) due at the expiration of the agreement.
The Rush Township Construction Loan is secured by the Company's
Philipsburg, Pennsylvania facility. The loan extends through 2003, and is
payable in equal monthly installments.
The Daiichi Kangyo Bank term loan is unsecured. The loan extends through
1999, and is payable in quarterly installments.
Capitalized lease obligations extend through 2000, and represent the
present value of future minimum lease payments, discounted at rates ranging from
7.5% to 9.54%, payable in monthly installments.
F-13
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):
[Download Table]
1999............................................... $ 544
2000............................................... 35,097
2001............................................... 435
2002............................................... 442
2003............................................... 432
Thereafter......................................... 3,866
-------
40,816
Amounts representing interest on capital lease
obligations...................................... (3)
-------
$40,813
=======
6. INCOME TAXES
Income (loss) before income taxes by geographic location is as follows (in
thousands):
[Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27,1998 JUNE 28,1997 JUNE 29,1996
------------ ------------ ------------
United States.......................... $ (872) $ 7,770 $ 5,925
Foreign................................ 14,802 13,378 10,023
------- ------- -------
$13,930 $21,148 $15,948
======= ======= =======
The income tax provision consists of the following (in thousands):
[Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27,1998 JUNE 28,1997 JUNE 29,1996
------------ ------------ ------------
Current:
Federal.............................. $ (786) $2,884 $2,281
Foreign.............................. 5,067 4,698 3,551
State................................ (128) 502 586
------ ------ ------
Total Current................ 4,153 8,084 6,418
------ ------ ------
Deferred:
Federal.............................. 412 (408) (384)
Foreign.............................. (59) 36 (189)
State................................ 72 (70) (43)
------ ------ ------
Total Deferred............... 425 (442) (616)
------ ------ ------
Total........................ $4,578 $7,642 $5,802
====== ====== ======
F-14
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes on income before income taxes differs from
the amount computed by applying the U.S. federal income tax rate (34%) because
of the effects of the following items:
[Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27,1998 JUNE 28,1997 JUNE 29,1996
------------ ------------ ------------
Tax at U.S. statutory rate............. 34.0% 34.0% 34.0%
State income taxes, net of federal
benefit.............................. (0.6) 1.6 2.4
Higher (lower) effective income taxes
of other countries................... (0.2) 0.9 1.6
Change in valuation allowance of
deferred tax assets.................. -- -- (1.5)
Other.................................. (0.3) (0.4) (0.1)
---- ---- ----
32.9% 36.1% 36.4%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities at June 27, 1998
and June 28, 1997 are as follows (in thousands):
[Enlarge/Download Table]
JUNE 27, 1998 JUNE 28, 1997
------------- -------------
Deferred tax assets:
Accounts receivable and inventory reserves............... $ 1,586 $1,549
Stock option compensation................................ 307 371
Accrued liabilities...................................... 843 845
Other.................................................... 489 394
------- ------
Total deferred assets.................................... 3,225 3,159
------- ------
Deferred tax liabilities:
Tax over book depreciation............................... (955) (658)
Accounts receivable fair value adjustment................ (1,145) --
Other.................................................... (522) (217)
------- ------
Total deferred liabilities............................... (2,622) (875)
======= ======
Net deferred tax assets.................................... $ 603 $2,284
======= ======
SFAS 109 generally provides that net deferred tax assets are not recognized
when a company has cumulative losses in recent years. Accordingly, a valuation
allowance was established in prior years for the excess of deferred tax assets
over deferred tax liabilities. For the fiscal year ended June 29, 1996, the
Company reduced its valuation allowance by $232,000 due to the reevaluation of
the recoverability of deferred tax assets.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $26,307,000 at June 27, 1998. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however unrecognized foreign tax credit carryforwards would be available to
reduce some of the portion of the U.S. liability. Withholding taxes of
approximately $1,424,000 would be payable upon remittance of all previously
unremitted earnings at June 27, 1998.
F-15
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS
At June 27, 1998, the Company had four fixed option plans, which are
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its employee stock option plans. Under APB Opinion 25, the
Company does not recognize compensation expense since the exercise price of the
options granted is equal to the market value of the Company's common stock on
the date of grant.
SFAS 123 requires that the Company disclose the pro-forma impact on net
income and earnings per share as if compensation expense associated with
employee stock options had been calculated under the fair value method for
employee stock options granted subsequent to July 1, 1995. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the years
ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively: an expected
volatility of .50, .45 and .50, an expected term of 4.18, 4.66 and 4.09 years,
risk-free interest rates of 5.50%, 6.05% and 5.89% and no expected dividend
yield.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro-forma information is as follows (in thousands, except per share data):
[Enlarge/Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27,1998 JUNE 28,1997 JUNE 29,1996
------------ ------------ ------------
Pro Forma Net Income........................... $7,000 $11,986 $9,399
Pro Forma Basic Earnings Per Share............. $ .83 $ 1.39 $ 1.14
Pro Forma Diluted Earnings Per Share........... $ .80 $ 1.38 $ 1.14
The SFAS 123 pro-forma effect will be not be fully reflected until 2001 due
to the calculation reflecting only the effect of options granted subsequent to
July 1, 1995.
The Company has four fixed option plans: the 1994 Stock Option Plan (the
"1994 Plan"), the 1994 Management Stock Option Plan (the "Management Plan"), the
1995 Stock Option Plan (the "1995 Plan") and the 1996 Stock Option Plan (the
"1996 Plan"). Under the terms of the plans, the committee administering the
plans may grant options to purchase shares of the Company's common stock to
officers, directors, employees, consultants and advisors for up to 1,957,500
shares. The vesting of options granted under the plans is at the discretion of
the Board of Directors. Other than options granted under the 1994 Plan to
purchase 373,743 shares of common stock at an exercise price of $.34,
substantially all of which vested on July 2, 1994, and options granted to new
non-employee directors (1,000 on the date of election or appointment) which vest
immediately, options vest over a three- to five-year period. The 1994 Plan, the
Management Plan, the 1995 Plan and the 1996 Plan terminate on December 31, 2003,
December 31, 2004, December 31, 2005 and December 31, 2006, respectively.
In February 1998, the Company amended its stock option plans to include a
provision whereby upon a change of control, as defined by the plans, any option
granted and outstanding shall immediately become vested. On June 15, 1998, an
aggregate of 1,430,652 options to purchase common stock with exercise prices in
excess of $12.50 were canceled and new options were issued with the same
exercise prices and terms as the old options; provided, however, that in the
event of a change of control, the exercise price of the new options will be
$12.50 (the fair value of the Company's common stock at the time of the grant).
On March 27, 1998, an aggregate of 509,426 options to purchase common stock
with exercise prices in excess of $16.50 were canceled and new options were
issued in replacement thereof with exercise prices of $16.50 and terms identical
to those canceled.
F-16
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of June 27,
1998, June 28, 1997 and June 29, 1996, and changes during the years ending on
those dates is presented below:
[Enlarge/Download Table]
1998 1997 1996
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- --------- --------
Outstanding at beginning of
year..................... 1,353,204 $14.25 1,035,495 $11.71 641,605 $ 6.34
Granted.................... 2,379,758 $16.30 454,196 $19.21 543,769 $15.79
Exercised.................. (49,473) $ 5.47 (75,900) $ 7.44 (117,868) $ 0.85
Terminated or canceled..... (2,032,042) $16.83 (60,587) $16.45 (32,011) $13.37
---------- --------- ---------
Outstanding at end of
year..................... 1,651,447 $14.30 1,353,204 $14.25 1,035,495 $11.71
========== ========= =========
Options exercisable at end
of year.................. 742,898 $11.73 509,756 $ 9.20 318,231 $ 4.33
Weighted average fair value
of options granted during
the year................. $5.92 $8.51 $7.27
The following table summarizes information about fixed stock options
outstanding at June 27, 1998.
[Enlarge/Download Table]
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ---------------------------------
------------------------------------------------------- NUMBER OF
NUMBER OF OPTIONS WEIGHTED-AVERAGE WEIGHTED- OPTIONS WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISE EXERCISABLE AT AVERAGE EXERCISE
RANGE OF EXERCISE PRICES JUNE 27, 1998 CONTRACTUAL LIFE PRICE JUNE 27, 1998 PRICE
------------------------ ----------------- ---------------- ---------------- -------------- ----------------
$0.34 to $0.34....... 154,425 6.00 $ 0.34 154,425 $ 0.34
$12.50 to $15.00...... 396,928 6.82 $13.73 346,655 $13.58
$15.25 to $16.56...... 1,100,094 8.86 $16.47 241,818 $16.37
--------- -------
$0.34 to $16.56...... 1,651,447 8.10 $14.30 742,898 $11.73
========= =======
8. PROFIT SHARING PLAN
The Company has a qualified, defined contribution savings plan covering all
full-time U.S. employees who have attained the age of 18 with more than three
months of service. Contributions to the plan, which are discretionary, are
determined annually by the Board of Directors. There were no contributions in
fiscal 1998, 1997 or 1996.
9. STOCKHOLDERS' EQUITY
In September 1997, the Company's Board of Directors authorized the
repurchase by the Company of up to 1,000,000 shares of its common stock at an
aggregate price not to exceed $20 million. Purchases by the Corporation may be
made from time to time in the open market or in private transactions. The
repurchase program may be suspended or discontinued at any time. Shares
repurchased by the Corporation are available for general corporate purposes,
including issuance upon the exercise of employee options. At June 27, 1998, the
Company had repurchased an aggregate of 656,400 shares of its common stock under
the program at a cost of $12.4 million.
In November 1997, the stockholders of the Company approved an increase in
its authorized shares of common stock to 40,000,000 from 18,000,000.
F-17
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1997, the Company's Board of Directors adopted a Stockholders'
Rights Plan pursuant to which rights to purchase shares of common stock of the
Company were distributed as a dividend, one right per share, to record owners of
common stock as of the close of business on December 22, 1997, and for each
share of common stock issued subsequent to that date. Each right entitles the
registered holder to purchase that number of shares of common stock of the
Company having a market value of two times the then applicable exercise price of
the right. Subject to certain exceptions, the rights become exercisable on the
earlier of ten business days following a public announcement that a person or
group acquired or obtained the right to acquire beneficial ownership of 20% or
more of the outstanding common stock of the Company, or ten business days
following the commencement or announcement by a person or group of a tender
offer or exchange offer which would result in beneficial ownership of 20% or
more of the common stock of the Company. In the event that the Company is
acquired in a merger or other business combination, or 50% or more of the
Company's consolidated assets or earnings power are sold, proper provisions will
be made so that each holder of a right will be entitled to receive, upon the
exercise of the right, at the then applicable exercise price, that number of
shares of common stock of the acquiring company that at the time of such
transaction will have a market value of two times the applicable exercise price
of the right. Until a right is exercised, the holder of the right will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote, or to receive dividends. The rights expire December 22, 2007 unless
extended or unless rights are redeemed by the Company.
In September 1994, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"), which is intended to allow qualified employees to purchase
common stock of the Company at a discount to the market value of such common
stock. A total of 348,750 shares of Common Stock have been reserved for issuance
under the Purchase Plan. Under the terms of the Purchase Plan, the purchase
price of a share of common stock is the lower of: 85% of the closing price of
the Company's common stock on the date the offering period begins and 85% of the
closing price of the Company's common stock on the termination date of the
offering period. In January 1998, the Company gave qualified employees the
option to participate in the first six month offering period under the Purchase
Plan. Subsequent to June 27, 1998, 4,491 shares of common stock were issued for
$11.37 per share pursuant to the first six month offering period.
In September 1995, the Company completed a public offering of 1,300,000
shares of common stock at a price of $17.25 per share. The net proceeds were
approximately $21.0 million after deducting the underwriting discount and
offering expenses. Additionally, in October 1995, the Company issued 66,666
shares of common stock, upon the partial exercise of the over-allotment option
granted to the underwriters in connection with the September 1995 public
offering. The net proceeds to the Company from the additional shares issued, at
the public offering price of $17.25 per share, were approximately $1.1 million
after deducting the underwriting discount and expenses. The net proceeds of the
offering were used to reduce outstanding borrowings under the Company's domestic
revolving credit facility. Had the offering occurred on July 2, 1995, diluted
and basic earnings per share for the year ended June 29, 1996 would have been
$1.18 and $1.23, respectively.
At June 27, 1998 there were 2,041,547 shares of common stock reserved for
the exercise of options and employee stock purchases.
10. OPERATING LEASES
The Company and its subsidiaries lease a hangar, software, computer, and
other office and factory equipment under long-term operating leases with varying
terms. The aggregate future minimum lease
F-18
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments under noncancellable operating leases with initial or remaining lease
terms of greater than one year are as follows (in thousands):
[Download Table]
1999................................................ $ 953
2000................................................ 472
2001................................................ 246
2002................................................ 36
2003 and after...................................... 657
------
$2,364
======
Rent expense amounted to $2,052,000, $2,273,000 and $1,203,000 in fiscal
1998, 1997 and 1996, respectively.
11. FINANCIAL INSTRUMENTS
Balance Sheet Financial Instruments
At June 27, 1998, the carrying value of financial instruments such as cash,
trade receivables and payables approximated their fair values, based on the
short-term maturities of these instruments. The carrying amounts of the
Company's borrowings under its variable rate short- and long-term credit
agreements approximate their fair value. The carrying value of the Company's
other long-term debt, which approximates its fair value, is estimated based on
expected future cash flows, discounted at current rates for the same or similar
issues.
Forward Foreign Exchange Contracts
At June 27, 1998 and June 28, 1997, the Company had approximately $10.3
million and $7.7 million, respectively, of forward exchange contracts
outstanding to exchange European, Japanese, Australian and U.S. currencies to
reduce exposures to foreign currency risk. The Company enters into forward
foreign currency contracts for a significant portion of its current and net
balance sheet exposures, principally relating to trade receivables and payables
denominated in foreign currencies, and firm sale and purchase commitments. The
forward exchange contracts generally have maturities that do not exceed 12
months and require the Company to exchange, at maturity, various currencies for
U.S. dollars, Dutch guilders, Australian dollars and Japanese yen at rates
agreed to at inception of the contracts. At June 27, 1998, the net loss
explicitly deferred from hedging firm sale and purchase commitments was not
significant and will be recognized in earnings during fiscal 1999. Deferred
gains and losses are included in prepaid expenses and other current assets, and
are recognized in earnings when the future sales and purchases occur. At June
27, 1998, the carrying value of the Company's foreign currency forward
contracts, which approximates their fair value, is the amount at which the
contracts could be settled based on quotes provided by major financial
institutions.
The Company's credit risk in these transactions is the cost of replacing
these contracts, at current market rates, in the event of default by a
counterparty, which is typically a major international financial institution.
Additionally, market risk exists during the period between the date of the
contract and its designation as an effective hedge for financial reporting
purposes. The Company believes that its exposure to credit risk and market risk
in these transactions is not significant in relation to earnings.
The Company uses borrowings of Japanese yen and Dutch guilders to hedge its
net investments in its foreign subsidiaries. At June 27, 1998, the Company had
outstanding borrowings of 251 million Japanese yen (approximately $1,766,000)
and 7 million Dutch guilders (approximately $3,433,000). At June 28, 1997, the
Company had outstanding borrowings of 251 million Japanese yen (approximately
$2,191,000) and 17 million Dutch guilders (approximately $8,674,000). Gains and
losses on hedges of net investments are recognized as a component of the
cumulative translation adjustment in stockholders' equity.
F-19
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Swaps
In April 1998, the Company entered into five year interest rate swap
agreements with a total notional principal amount of $20 million to manage
interest costs associated with changing interest rates. These agreements convert
underlying variable-rate debt based on LIBOR under the Company's revolving
credit facility to fixed-rate debt with an interest rate of 6.05%. The fair
value of the Company's interest rate swap agreements, based on estimates
received from financial institutions, would have required the Company to pay
approximately $235,000 to settle these agreements.
12. OTHER INCOME
For the years ended June 27, 1998, June 28, 1997 and June 29, 1996, net
foreign currency gains and (losses) included in other income aggregated
approximately ($232,000), $33,000 and ($138,000), respectively. The balance
consists principally of finance charges related to accounts receivable.
13. GEOGRAPHIC DATA
Summarized data by geographic area is as follows (in thousands):
[Enlarge/Download Table]
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27, 1998 JUNE 28, 1997 JUNE 29, 1996
------------- ------------- -------------
Net Sales:
United States.............................. $119,604 $115,931 $106,035
Europe and Other........................... 104,889 90,884 78,449
Intercompany............................... (52,997) (44,319) (38,508)
-------- -------- --------
$171,496 $162,496 $145,976
======== ======== ========
Operating Income:
United States.............................. $ 238 $ 8,337 $ 6,650
Europe and Other........................... 15,201 13,876 11,199
Intercompany............................... (167) (334) (91)
-------- -------- --------
$ 15,272 $ 21,879 $ 17,758
======== ======== ========
Identifiable Assets:
United States.............................. $124,185 $107,754 $ 93,627
Europe and Other........................... 47,750 40,959 30,090
Intercompany............................... (19,658) (21,429) (13,772)
-------- -------- --------
$152,277 $127,284 $109,945
======== ======== ========
At June 27, 1998, the net assets of Cannondale Europe, Cannondale Japan and
Cannondale Australia were $22,331,000, $1,209,000 and $715,000, respectively.
14. RELATED PARTY TRANSACTIONS
In April 1998, the Company provided Joseph Montgomery, the President and
Chief Executive Officer of the Company, with a loan in the principal amount of
$2,000,000 to enable him to meet certain tax obligations. In June 1998, the
Company agreed to provide Mr. Montgomery with an additional loan in the
principal amount of $10,000,000 for the purchase of certain real property, which
loan has been combined with the previous $2,000,000 loan made in April 1998. The
loan matures on August 1, 2003, at which time the entire principal balance is
due. The interest rate on the loan is set at the prime rate as published in the
Wall Street Journal from time to time, and the loan is secured by a pledge to
the Company of all of the shares of the
F-20
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's common stock held by Mr. Montgomery and a mortgage on such real
property. The principal balance of the outstanding loan to Mr. Montgomery was
$2,000,000 at June 27, 1998.
On June 30, 1998, the Company purchased a Cessna Citation Jet aircraft from
JSM, Inc. ("JSM"), a corporation of which Mr. Montgomery is the sole
stockholder, for $2,800,000 and terminated its lease with JSM for the rental of
the same aircraft. The purchase price of the Cessna Citation Jet aircraft was
determined by the Company based on independent valuations of the market value of
the aircraft. The Company also assumed the obligations of JSM Aviation, LLC
("JSM LLC"), a Connecticut limited liability company in which Mr. Montgomery and
a director of the Company are each members, as sublessee under a hangar lease
which houses the Cessna Citation jet aircraft. As part of the assumption of the
hangar lease obligations, the Company reimbursed JSM LLC $160,922 for the cost
of certain leasehold improvements made to the hangar by JSM LLC. The Company
uses the Cessna Citation Jet aircraft largely for transporting personnel between
its Connecticut headquarters and its Pennsylvania manufacturing facility, and
anticipates that it will have an increased need for an aircraft in connection
with the growth of the business. In connection with the purchase of the Cessna
Citation Jet aircraft, the Company also purchased, for $500,000, JSM's right to
acquire a Learjet aircraft. JSM had entered into a contract with Learjet, Inc.
("Learjet") to purchase an aircraft, and had paid Learjet $500,000 as a deposit
with respect to such purchase. The Company has assumed JSM's rights and
obligations under this contract. In connection with these transactions, JSM
obtained a right of first refusal with respect to the Cessna Citation Jet
aircraft and the Learjet aircraft under certain circumstances. It is not the
intention of the Company to own both the Cessna Citation Jet aircraft and the
Learjet aircraft simultaneously.
The Company has provided two officers of the Company with interest-free
loans to enable them to purchase homes in the vicinity of the Company's
headquarters. As of June 27, 1998, $575,000 had been loaned to the officers. The
loans mature on December 29, 2006 and September 1, 2007, at which dates the
entire principal balance of each of the respective loans is due. The loans are
secured by mortgages on the officer's residences.
During 1998, the Company completed the construction of a new headquarters
and research and development facility and the expansion of its manufacturing
facility. The Company contracted an entity controlled by a director of the
Company to act as the general contractor for the construction of both projects.
The Company paid the entity approximately $5.6 million and $4.4 million for the
construction of both facilities during the fiscal years ended June 27, 1998 and
June 28, 1997, respectively.
15. SUBSEQUENT EVENTS
On July 31, 1998, the Company's Board of Directors authorized a new stock
repurchase program by the Company to repurchase up to 1,000,000 shares of its
common stock. Shares repurchased under the new program will be additional to the
shares repurchased pursuant to the repurchase program announced September 3,
1997. Purchases by the Company may be made from time to time in the open market
or in private transactions. The repurchase program may be suspended or
discontinued at any time. Shares repurchased by the Company will be available
for general corporate purposes, including issuance upon the exercise of employee
stock options. As of September 21, 1998, the Company had repurchased an
aggregate of 1,292,900 shares of its common stock under both programs at a cost
of $20.2 million.
The principal balance of the outstanding loan to Mr. Montgomery was
$12,000,000 at September 21, 1998.
F-21
CANNONDALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 3, 1998, an aggregate of 1,460,052 options to purchase common
stock with exercise prices in excess of $9.31 were canceled and new options were
issued in replacement thereof with exercise prices of $9.31 and terms identical
to those canceled.
During June 1998, operations from the Philipsburg facility were moved to
the Bedford facility, and in August 1998, the Philipsburg facility was sold to
the Moshannon Valley Economic Development Authority for $1.4 million, an amount
that approximated the net book value of the property.
F-22
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Cannondale Corporation and Subsidiaries
We have audited the consolidated financial statements of Cannondale
Corporation as of June 27, 1998 and June 28, 1997, and for the years ended June
27, 1998, June 28, 1997 and June 29, 1996, and have issued our report thereon
dated August 10, 1998, except for Note 15, as to which the date is September 22,
1998 (included elsewhere in this Annual Report). Our audits also included the
financial statement schedule listed in Item 14(a)(2) of this Annual Report. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 10, 1998
F-23
SCHEDULE II
CANNONDALE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
[Enlarge/Download Table]
ADDITIONS
--------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
Allowance for doubtful accounts,
returns, discounts and late
charges
Year ended June 29, 1996....... $3,693 $9,944 $ 45 $(8,444)(1) $5,238
====== ======
Year ended June 28, 1997....... $5,238 $5,545 $(34) $(4,317)(1) $6,432
====== ======
Year ended June 27, 1998....... $6,432 $7,586 $ (5) $(5,534)(1) $8,479
====== ======
Reserve for obsolete inventory
Year ended June 29, 1996....... $1,256 $ 977 $ 11 $ (829)(2) $1,415
====== ======
Year ended June 28, 1997....... $1,415 $1,484 $(43) $(1,787)(2) $1,069
====== ======
Year ended June 27, 1998....... $1,069 $1,425 $(39) $(1,649)(2) $ 806
====== ======
---------------
(1) Discounts, late charges and uncollectible accounts written off, net of
recoveries.
(2) Inventory disposed.
II-1
EXHIBIT INDEX
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SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
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3.1(i) Amended and Restated Certificate of Incorporation of the
Company.*...................................................
3.1(ii) Amended and Restated Bylaws of the Company.*................
4.1 Rights Agreement, dated December 22, 1997, between the
Company and BankBoston, N.A., as Rights Agent.(6)...........
4.2 1994 Stock Option Plan, as amended as of February 5,
1998.(1)....................................................
4.3 1994 Management Stock Option Plan, as amended as of February
5, 1998.(1).................................................
4.4 1995 Stock Option Plan, as amended as of February 5,
1998.(1)....................................................
4.5 1996 Stock Option Plan, as amended as of February 5,
1998.(1)....................................................
10.1.8 $50,000,000 Credit Agreement, dated as of June 9, 1997,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., as Administrative Agent, Fronting Bank and
Swingline Bank and ABN Amro Bank N.V., New York Branch, as
Documentation Agent and Syndication Agent.(2)...............
10.1.9 $10,000,000 Umbrella Arrangement Agreement, dated May 28,
1997, between Cannondale Europe and ABN Amro N.V., New York
Branch.(2)..................................................
10.1.10 First Amendment to Credit Agreement, dated October 14, 1997,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., ABN Amro Bank N.V., Fleet National Bank,
The Chase Manhattan Bank and State Street Bank and Trust
Company.(3).................................................
10.1.11 Credit Agreement, dated February 5, 1998, between Cannondale
Europe and ABN AMRO Bank N.V.(4)............................
10.1.12 Second Amendment to Credit Agreement, dated April 15, 1998,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., Fleet National Bank, The Chase Manhattan
Bank and State Street Bank and Trust Company.(1)............
10.1.13 Third Amendment to Credit Agreement, dated May 29, 1998,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., Fleet National Bank, The Chase Manhattan
Bank and State Street Bank and Trust Company.(1)............
10.1.14 Fourth Amendment to Credit Agreement, dated June 25, 1998,
among the Company, certain subsidiaries of the Company and
NationsBank N.A., Fleet National Bank, The Chase Manhattan
Bank and State Street Bank and Trust Company.(1)............
10.6 Promissory Note, dated December 27, 1993, from the Company
to General Electric Capital Corporation.*...................
10.7 Installment Sales Agreement, dated August 28, 1981, between
the Company and Bedford Development Council. Amendments to
Installment Sales Agreement, dated May 29, 1987, September
1, 1988 and October 26, 1993. Assignment of Fifth
Supplemental Installment Sale Agreement, dated October 26,
1993, from Bedford Development Council to The Pennsylvania
Industrial Development Authority.*..........................
10.8 Consent, Subordination and Assumption Agreements, between
the Company and Bedford Development Council, in favor of The
Pennsylvania Industrial Development Authority, dated August
28, 1981, May 7, 1982, May 11, 1983, May 29, 1987, September
1, 1988, and October 26, 1993.*.............................
10.9 Installment Sale Agreement, dated April 27, 1994, between
the Company and Bedford Development Council. Assignment,
dated April 27. 1994, from Bedford Development Council to
Pennsylvania Industrial Development Authority.*.............
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SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
10.10 Consent, Subordination and Assumption Agreement, dated April
27, 1994, between the Company and Bedford Development
Council, in favor of The Pennsylvania Industrial Development
Authority.*.................................................
10.11 Loan Agreement, dated November 10, 1989, between the Company
and Rush Township, Commonwealth of Pennsylvania.*...........
10.12 Promissory Note, dated November 10, 1989, from the Company
to Rush Township, Commonwealth of Pennsylvania.*............
10.13 Mortgage, dated November 10, 1989, from the Company to Rush
Township, Commonwealth of Pennsylvania. Assignment of Note
and Mortgage, dated June 30, 1989, from Rush Township,
Commonwealth of Pennsylvania to Pennsylvania Department of
Commerce.*..................................................
10.14 Loan Agreement, dated July 24, 1990, between the Company and
Rush Township, Commonwealth of Pennsylvania.*...............
10.15 Promissory Note, dated July 24, 1990, from the Company to
Rush Township, Commonwealth of Pennsylvania.*...............
10.16 Mortgage, dated July 24, 1990, from the Company to Rush
Township Commonwealth of Pennsylvania.*.....................
10.17 Installment Sales Agreement, dated December 4, 1990, between
the Company and Moshannon Valley Economic Development
Partnership. Assignment, dated December 4, 1990, from
Moshannon Valley Economic Development Partnership to The
Pennsylvania Industrial Development Authority.*.............
10.18 Mortgage Subordination Agreement, dated December 4, 1990,
among the Company, Moshannon Valley Economic Development
Partnership, Rush Township, Commonwealth of Pennsylvania and
The Pennsylvania Industrial Development Authority.*.........
10.19 Consent, Subordination and Assumption Agreement, dated
December 4, 1990, between the Company and Moshannon Valley
Economic Development Partnership, in favor of The
Pennsylvania Industrial Development Authority.*.............
10.20 Loan Agreement, dated February 1, 1992, between the Company
and Moshannon Valley Economic Development Partnership.*.....
10.21 Installment Judgment Note, dated February 1, 1992, from the
Company to Moshannon Valley Economic Development
Partnership.*...............................................
10.22 Chattel Mortgage Security Agreement, dated February 1, 1992,
between the Company and Moshannon Valley Economic
Development Partnership.*...................................
10.23 Business Infrastructure Development Loan Agreement, dated
June 30, 1989, among the Company, Pennsylvania Department of
Commerce and Rush Township, Commonwealth of
Pennsylvania.*..............................................
10.24 Promissory Note, dated June 30, 1989, from the Company to
Pennsylvania Department of Commerce. Amendment to Promissory
Note, dated February 1, 1992, from the Company to
Pennsylvania Department of Commerce.*.......................
10.25 Escrow Agreement, dated June 30, 1989, among the Company,
Rush Township, Commonwealth of Pennsylvania, Pennsylvania
Department of Commerce and MidState Bank and Trust
Company.*...................................................
10.26 Mortgage, dated July 23, 1991, from Cannondale Europe to
Algemene-Bank Netherlands B.V. (In Dutch, with English
summary).*..................................................
10.27 Financing Lease, dated May 31, 1991, between ABN Onroerend
Goed Lease B.V., as lessor, and Cannondale Europe, as
lessee. (In Dutch, with English translation).*..............
10.28 Loan Agreement, dated February 1, 1994, between Cannondale
Europe and ABN AMRO Bank N.V. (In Dutch, with English
translation).*..............................................
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SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
10.28.1 Loan Agreement Amendment, effective December 1, 1995,
between Cannondale Europe and ABN Amro Bank N.V.@...........
10.29 Term Loan Agreement, dated March 29, 1994, between
Cannondale Europe and the Company.*.........................
10.29.1 Subordination Agreement, dated March 23, 1993, between the
Company and ABN AMRO Bank N.V. (In Dutch, with English
translation).*..............................................
10.30 Loan Agreement, dated September 1, 1992, between Cannondale
Japan and The Dai-Ichi Kangyo Bank, Ltd. (In Japanese, with
English translation).*......................................
10.30.1 Guarantee Agreement, dated August 7, 1992, from the Company
to The Dai-Ichi Kangyo Bank, Ltd.*..........................
10.31 Master Lease Agreement, dated as of July 27, 1993, between
General Electric Capital Corporation and the Company, to
which are appended Equipment Schedule No. 1, dated August 6,
1993, and Equipment Schedule No. 2, dated August 6,
1993.*......................................................
10.32 Master Lease Agreement, dated April 11, 1994, between United
States Leasing Corporation and the Company.*................
10.33 Master Lease, dated June 17, 1991, between Norwest Equipment
Finance, Inc. and the Company, together with Supplement to
Master Lease.*..............................................
10.34 Master Lease Agreement, dated October 31, 1989, between Ford
Equipment Leasing Company and the Company, to which is
appended Schedule No. 3, dated February 22, 1991.*..........
10.35 Master Equipment Lease, dated May 26, 1993, between
XL/Datacomp, Inc. and the Company, to which are appended
Schedule A, dated May 26, 1993, and Schedule B, dated August
3, 1993.*...................................................
10.36 (Intentionally omitted).....................................
10.37 Master Lease Agreement, dated May 23, 1991, between Center
Capital Corporation and the Company, to which are appended
Lease Schedule No. 1, dated May 23, 1991, and Lease Schedule
No. 2, dated May 23, 1991.*.................................
10.38 Equipment Lease Agreement, dated July 11, 1991, between New
England Capital Corporation and the Company, to which is
appended Lease Schedule No. 528102, dated November 8,
1991.*......................................................
10.39 Equipment Lease Agreement, dated March 26, 1992, between
Citicorp Leasing, Inc. and the Company.*....................
10.40 Equipment Lease Agreement, executed as of May 3, 1991,
between Greenwich Financial Services Inc. and the Company,
to which are appended Schedule No. 1, dated May 3, 1991, and
Schedule No. 2, dated May 3, 1991. Assignment from Greenwich
Financial Services, Inc. to United States Capital
Corporation, dated May 3, 1991.*............................
10.42 Sponsor Agreement, dated December 5, 1993, between the
Company and Team Sports, Inc. (Certain portions of this
Exhibit have been deleted pursuant to a requst for
confidential treatment.)*...................................
10.43 Agreement, dated March 2, 1994, between the Company and Bell
Sports, Inc. (Certain portions of this Exhibit have been
deleted pursuant to a request for confidential
treatment.)*................................................
10.44 Agreement, dated July 11, 1994, between the Company and
Frank Roth Company. (Certain portions of this Exhibit have
been deleted pursuant to a request for confidential
treatment.)*................................................
10.45 Agreement, dated July 28, 1994, between the Company and
Quadrax Corporation. (Certain portions of this Exhibit have
been deleted pursuant to a request for confidential
treatment.)*................................................
[Enlarge/Download Table]
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
10.46 Precision Machine Tool Design and Research Center Membership
Agreement, dated March 14, 1994, between the University of
Connecticut and the Company.*...............................
10.47 (Intentionally omitted).....................................
10.48 Employment Agreement, dated January 3, 1994, between the
Company and William A. Luca.*...............................
10.49 Employee Patent and Confidential Information Agreement,
dated August 20, 1982, between the Company and Daniel C.
Alloway.*...................................................
10.50 Ownership and Confidentiality Agreement, dated June 21,
1988, between the Company and Richard J. Resch.*............
10.51 Ownership and Confidentiality Agreement, dated May 30, 1990,
between the Company and Harold DeWaltoff.*..................
10.52 Employment Agreement, dated December 1, 1993, between the
Company and Daniel Pullman.*................................
10.53 Employment Agreement, dated June 6, 1994, between the
Company and Leonard Konecny.*...............................
10.54 Cannondale Corporation 401(k) Profit Sharing Plan.*.........
10.57 Cannondale Corporation Employee Stock Purchase Plan.*.......
10.58 Stockholders Agreement, dated as of June 3, 1992, among the
Company, Princes Gate Investors, LP., Acorn Partnership
L.L.P., PGI Investments Limited, Joseph S. Montgomery, James
Scott Montgomery and PG Investors, Inc. Amendment No. 1 to
Stockholders Agreement, dated as of July 2, 1993. Amendment
No. 2 to Stockholders Agreement, dated July 28, 1994.
Amendment No. 3 to Stockholders Agreement, dated as of
August 10, 1994. Letter (undated) from the Company to
Princes Gate Investors, LP., Acorn Partnership LLP, PGI
Investments Limited and PG Investors. Inc.*.................
10.59 (Intentionally omitted).....................................
10.60 Form of Indemnification Agreement between the Company and
each of its directors and officers.*........................
10.61 Agreement between the Company and Mark-It Company, executed
by the parties on September 16, 1994, and September 2, 1994,
respectively. (Certain portions of this Exhibit have been
deleted pursuant to a request for confidential
treatment.)*................................................
10.62 Aluminum Supply Agreement, dated November 16, 1994. (Certain
portions of this Exhibit have been deleted pursuant to a
request for confidential treatment.)+.......................
10.63 Contract of Sale, dated September 29, 1996, between
Cannondale and Sandvick Associates, Inc., together with
Assignment and Assumption Agreement dated as of September
30, 1996, between Sandvick Associates, Inc. and Nantucket
Roost Associates, LLC.***...................................
10.64 Agreement of Lease, dated as of October 4, 1996, between
Nantucket Roost Associates, LLC and Cannondale. ***.........
10.67 Aircraft Lease, dated as of October 6, 1996, between JSM,
Inc. and Cannondale.****....................................
10.68 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and William A. Luca.(5)............
10.68.1 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and Joseph S. Montgomery.(5).......
10.68.2 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and John Moriarty.(5)..............
10.68.3 Change of Control Employment Agreement, dated February 5,
1998, between Cannondale and Daniel C. Alloway.(5)..........
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SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
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10.68.4 Cannondale Corporation Change of Control Separation Plan
A.(5).......................................................
10.68.5 Cannondale Corporation Change of Control Separation Plan
B.(5).......................................................
21 Subsidiaries of the Registrant.(1)..........................
23 Consent of Independent Auditors(1)..........................
27.A Restated Financial Data Schedule for Fiscal Year Ended June
29, 1996(1).................................................
27.B Restated Financial Data Schedule for Fiscal Year Ended June
28, 1997(1).................................................
27.C Financial Data Schedule for Fiscal Year Ended June 27,
1998(1).....................................................
---------------
* Incorporated by reference to the corresponding numbered Exhibit filed
with the registrant's Registration Statement on Form S-1, Registration
No. 33-84566
+ Incorporated by reference to the corresponding numbered Exhibit filed
with the registrant's Form 10-Q filed for the quarterly period ended
December 31, 1994.
++ Incorporated by reference to the corresponding numbered Exhibit filed
with the registrant's Form 10-Q filed for the quarterly period ended
April 1, 1995.
@ Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q filed for the quarterly period ended December
30, 1995.
*** Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q filed for the quarterly period ended September
28, 1996.
**** Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q filed for the quarterly period ended December
28, 1996.
(1) Filed herewith.
(2) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-K/A filed for the year end June 28, 1997.
(3) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q for the quarterly period ended December 27,
1997.
(4) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q for the quarterly period ended March 28, 1998.
(5) Incorporated by reference to the corresponding numbered Exhibit filed with
the registrant's Form 10-Q/A for the quarterly period ended March 28,
1998.
(6) Incorporated by reference to the registrant's Form 8-K filed on December
23, 1997.
Dates Referenced Herein and Documents Incorporated by Reference
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