sec.yahoo.com :
May 11, 1998
CANNONDALE CORP / (BIKE)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales decreased from $48.2 million in the third quarter of
fiscal 1997 to $45.3 million in the third quarter of fiscal 1998, a decrease of
$2.9 million or 6.1%. The decrease in sales for the quarter was primarily
caused by a reduction in inventory by many of the Company's domestic
dealers and bad weather in the United States. For the first nine months,
net sales increased 5.7% from $120.4 million in fiscal 1997 to $127.3
million in fiscal 1998, an increase of $6.9 million. The increase in sales for
the first nine months of fiscal 1998 was a primarily a result of strong
international demand for Cannondale products.
Gross Profit. Gross profit as a percentage of net sales decreased to 38.0%
for the third quarter of fiscal 1998 compared to 40.5% for the third
quarter of fiscal 1997. The gross profit for the third quarter of 1998 was
$17.2 million, a decrease of $2.3 million, or 11.9% below the gross profit of
$19.5 million for the third quarter of fiscal 1997. For the first nine months
of fiscal 1998, gross profit as a percentage of net sales decreased to 36.2%
compared to 37.9% in fiscal 1997. The gross profit for the first nine
months of fiscal 1998 was $46.1 million, an increase of approximately
$400,000 over the gross profit of $45.7 million for the for the first nine
months of fiscal 1997. In both periods, the lower gross-profit rate
primarily reflects the effect of a stronger U.S. dollar on sales by the
Company's foreign subsidiaries, as the cost of materials purchased from
the U.S. increased compared to the same period last year. The impact of
the stronger U.S. dollar offset the benefits of a mix that favored
international markets, cost-reduction programs and the Company's
continued integration of proprietary technology through the use of its
Cannondale bicycle frames, CODA components and HeadShok
suspension systems.
Operating Expenses. Operating expenses were $11.8 million for the third
quarter of fiscal 1998, an increase of approximately $1.4 million, or 13.9%
over the third quarter fiscal 1997 operating expenses of $10.4 million. For
the first nine months of fiscal 1998, operating expenses were $33.4
million, an increase of approximately $3.6 million, or 11.9% over the
$29.8 million recorded for the first nine months of fiscal 1997.
For both periods, increased selling, general and administrative expenses,
offset by the effect of a stronger U.S. dollar, were primarily associated
with meeting the Company's current and planned growth objectives. The
additional expenses related to personnel hired for the expanded
field-sales force, increased investment in international marketing,
increased depreciation expense associated with the growth of capital
expenditures and expenses associated with upgrading the Company's
shipping system. As a percentage of net sales, selling, general and
administrative expenses remained relatively constant during the first
nine months of fiscal 1998 at 22.9%, compared to 22.6% during the
prior-year period.
The increase in research and development expenses reflects the
Company's commitment to innovation and the generation of new
products and manufacturing processes. During the first nine months of
fiscal 1998, as a percentage of net sales, the Company increased its
investment in research and development to 3.4% compared to 2.2%
during the prior-year period.
Other income (expense). Interest expense for the third quarter of fiscal
1998 was $685,000, an increase of approximately $142,000 from the third
quarter of fiscal 1997. Adjusted for capitalized interest costs related to the
construction of the Company's new headquarters facility and the
expansion of the manufacturing facility, interest expense for the first
nine months of fiscal 1998 was $1.3 million, an increase of approximately
$103,000 from the first nine months of fiscal 1997. In both periods, the
increase in interest expense reflects the effect of higher average
borrowings primarily relating to the Company's common stock
repurchase program and increased capital expenditures, partially offset
by lower interest rates available under the Company's unsecured
multi-currency revolving credit facility.
In both periods, other income primarily represents the receipt of finance
charges payable by dealers.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $17.8 million for the first nine
months of fiscal 1998, which was relatively constant compared to the
$18.2 million used for the first nine months of fiscal 1997. The net use of
cash is typical for the first nine months of the fiscal year due to seasonal
activity, which includes higher working capital requirements during the
busiest shipping period of the fiscal year and seasonal terms offered to
dealers through the Company's Authorized Retailer Program.
Capital expenditures were $10.6 million for the first nine months of fiscal
1998, compared to $6.2 million in the first nine months of fiscal 1997. The
increase in spending primarily reflects the completion of the Company's
new administrative headquarters and research and development facility
and the expansion of the Company's production facility in fiscal 1998,
which was required to support increases in production volume and to
support future growth. During fiscal 1997, the proceeds from the sale of
the Company's former headquarters facility, $1.7 million, were
reinvested in this expansion.
Net cash provided by financing activities for the first six months of fiscal
1998 was $23.6 million, an increase of $2.9 million compared to the $20.7
million for the first nine months of fiscal 1997. Net cash provided by
financing activities in the first nine months of the fiscal year primarily
represents borrowings under the Company's long-term revolving credit
facility to meet its operating and capital requirements. The increase in
proceeds from long-term borrowings in fiscal 1998 primarily reflects the
investment in its new administrative headquarters and research and
development facility and the expansion of the Company's production
facility, as well as the effect of the repurchase of $10.1 million of the
Company's common stock. The Company is authorized to repurchase up
to 1,000,000 shares of its common stock at an aggregate price not to
exceed $20 million. In order to accommodate the capital requirements of
the repurchase program, on October 14, 1997, the Company and its
lenders amended the revolving credit facility to allow the Company and
its subsidiaries to borrow up to $70 million. The amendment to the
revolving credit facility includes adjustments to specified levels of tangible
net worth and cash flow levels that the Company must maintain. The
Company expects that cash flow generated by its operations and
borrowings under the revolving credit facilities will be sufficient to meet
its planned operating and capital requirements, and to accommodate the
capital requirements of the Company's share repurchase program for
the foreseeable future.
YEAR 2000 COMPLIANCE
The Company has performed an examination of its hardware and
software applications to determine whether the systems it uses to operate
its business are prepared to accommodate the year 2000. Upon
identifying the applications that require modification to accommodate
year 2000 dating, the Company initiated a program to modify the
software using third-party service providers. This program is currently
in process and the Company anticipates that it will be completed by the
end of fiscal year 1999. The Company believes that the cost associated
with the modifications of software will not be material to its financial
results. In concert with the Company's assessment of its internal systems,
it also initiated a program to contact its major third-party suppliers to
determine their status with year 2000 compliance. This program is in
progress and the Company has not completely assessed the status of its
third-party suppliers and the year 2000 problem. Based on its current
examination of the year 2000 problem and its progress with modifications
to its internal systems, the Company does not anticipate that the year
2000 problem will have a material adverse impact on its operations or its
financial condition. |
