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Creditors for Bethel, Conn.-Based Bicycle Maker Square Off over Assets
BRIDGEPORT, Conn., Mar 01, 2003 (Connecticut Post - Knight Ridder/Tribune Business News via COMTEX) -- Creditors in the $105 million bankruptcy of Bethel-based Cannondale Corp. squared off Friday in U.S. Bankruptcy Court over the March 20 sale of the bicycle company's assets.
Lawyers for secured and unsecured creditors argued over the appointment of one of Cannondale's biggest creditors, Stamford-based Pegasus Partners II, as the "stalking horse" in the auction proceedings.
Cannondale filed for Chapter 11 bankruptcy protection on Jan. 29 with listed assets of more than $114 million and liabilities totaling more than $105 million. The company has headquarters and research facilities in Bethel and two production facilities in Bedford, Pa. It also has operations in the Netherlands.
A stalking horse acts as a catalyst for getting bids in a bankruptcy action. In the Cannondale case, Pegasus, which holds $28.5 million of Cannondale's debt, would assume that role and place an initial bid of $57.8 million to buy the company. Other companies would have to beat that bid.
The only witness called in Friday's proceedings was Jeffrey Manning, managing director of Legg Mason, a Baltimore-based investment banking company.
Manning, whose company advised Cannondale to file Chapter 11 bankruptcy as early as November 2002, detailed how the company found itself in bankruptcy and why Pegasus should be allowed to be the stalking horse in this sale.
Cannondale's decision to go into the motorcycle and all-terrain vehicle business to try to spur "double-digit growth" caused its problems, Manning said.
"They brought a knife to a gunfight," Manning quipped on the stand, indicating the company wasn't prepared to go into the motorcycle business.
The investment banker said the company spent $80 million developing an engine and taking money from its more profitable bicycle business. He said the company did not separate the two business divisions.
Based on his 20 years of experience, Manning said it is unusual to have a major creditor act as the stalking horse, but because the company is trying to sell its assets by March to meet the spring bicycle production season, Pegasus is the only real candidate.
Other candidates would take much longer to get into place, because they would have to meet certain financial obligations, he said. Manning testified that the stalking horse assures a certain return on the sale and that he has been talking to a lot of businesses that are interested in purchasing Cannondale's operations in Pennsylvania and overseas.
Attorney Thomas D. Goldberg represented the Cannondale creditors holding unsecured claims.
While questioning Manning, Goldberg pointed out that Pegasus became a major creditor very late in the game, when the company was already in trouble.
Pegasus loaned Cannondale a disputed $25 million to pay outstanding loans and operational costs in August 2002, charging a 20 percent interest rate, according to Goldberg. That rate climbed to 22 percent when Cannondale didn't make its payments, according to Goldberg.
The heart of the issue for Goldberg's clients is that Pegasus is hedging its bet that it will get its money back or acquire Cannondale for a lot less than what the company is worth. Should no bidder beat Pegasus' bid, Pegasus would buy the company by putting up only a portion of the real cost, as its credit holdings would count toward that purchase price.
That would leave the uninsured creditors out in the cold because, in any bankruptcy proceeding, secured debt holders are paid first and then the estate and unsecured debt holders get whatever is left. The states of Connecticut and Pennsylvania are among the secured debt holders.
The exact number of unsecured creditors is not known, but Goldberg estimated that the amount of debt they hold could total more than $40 million.
Cannondale will file a comprehensive list of creditors with the court on Monday and its lawyers said it appears that everything is moving in the right direction to meet the March 20 sale date.
By Rob Varnon
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