The corporation has today announced that it intends to file a voluntary petition for reorganization under Chapter 11 of the US bankruptcy code.

Cannondale chooses Chapter 11 protection

Cannondale and its lenders, The CIT/Business Credit, Inc. and Pegasus Partners have reached an agreement in principle that, subject to bankruptcy court approval, will provide Cannondale with interim financing to fund post-petition operating expenses and to meet supplier and employee commitments.

"The interim financing will be used to continue the operation of our bicycle business," said Cannondale founder and president Joe Montgomery.

Cannondale has also reached an agreement to sell all of its assets to Pegasus Partners but, as is normal in such cases, is open to higher offers. Pegasus is now the ‘stalking horse’ i.e., a party whose offer may be used to attract higher and better offers from other parties. The stalking horse often inserts protective clauses in the asset purchase agreement in the event the debtor accepts another offer. These caveats include ‘no-shop clauses’, which prohibit a debtor-seller from actively soliciting or entertaining offers from third parties.

However, when other bids are received, an auction has to be held, and this was the way Pacific Cycles bought GT-Schwinn (in a room full to the brim with lawyers from all sides).

There are two forms of company banktruptcy in the US: chapter 11 and chapter 7. Chapter 11 is a protective process in order for the company to reorganise its debts. Chapter 7 is a full liquidation process.

Pegasus, which lent Cannondale $25m last July, would operate the bicycle business as a going concern with the involvement of current management and would purchase separately Cannondale’s motorsports assets, including the intellectual property related to the design of Cannondale’s motorsports products.

In the meantime, management continues to work with other potential interested buyers for either or both of these businesses, said a statement from Cannondale.

Because the company has obtained interim post-petition financing, Cannondale will be able to pay vendors for goods and services received after the filing in the ordinary course of business.

Montgomery explained that difficulties with Cannondale’s motorsports business made the filing necessary, and that operations of the motorsports division have been suspended.

"The motorsports division was threatening the bicycle division," said Montgomery.

"Although we believe in the value of our motorsports products, we did not have sufficient financial resources to make the additional investments necessary. We look forward to bringing a renewed focus to our core bicycle business and to working through this present challenge with the greatest possible speed."

The suspension of operations of the motorsports division will mean that production workers who had been furloughed from Cannondale’s motorsports factory in Bedford, Pennsylvania in December will not be recalled. Production workers at Cannondale’s Bedford bicycle factory, who have been idled during a recent shutdown, are scheduled to return to work in the near future.

The Company’s foreign subsidiaries are not included in the filing, although will be owned by Pegasus. Business done through Cannondale subsidiaries in Europe, Japan and Australia accounted for approximately 42 percent of Cannondale’s total sales in fiscal 2002.

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