<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
PROSPECTUS
4,800,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by ROCKSHOX, INC. (the
"Company" or "RockShox").
Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting" for information relating to the determination of the initial
public offering price.
The Common Stock has been approved for quotation on The Nasdaq Stock Market
under the symbol "RSHX," subject to commencement of the Offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share......................... $15.00 $1.05 $13.95
Total (3)......................... $72,000,000 $5,040,000 $66,960,000
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,000,000.
(3) The Selling Stockholders named herein have granted the several Underwriters
an option, exercisable within 30 days after the date hereof, to purchase up
to an aggregate of 720,000 additional shares of Common Stock, on the same
terms as set forth above, to cover over-allotments, if any. The Company will
not receive any of the proceeds from the sale of such shares by the Selling
Stockholders. If all such additional shares are purchased, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholders will be $82,800,000, $5,796,000, $66,960,000 and
$10,044,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made in New York, New York
on or about October 2, 1996.
------------------------
MERRILL LYNCH & CO.
ROBERTSON, STEPHENS & COMPANY
JEFFERIES & COMPANY, INC.
------------------
The date of this Prospectus is September 26, 1996.
<PAGE>
[PICTURES]
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, THE
"COMPANY" OR "ROCKSHOX," AS USED IN THIS PROSPECTUS, MEANS ROCKSHOX, INC., ITS
PREDECESSORS AND THEIR RESPECTIVE PARENTS AND SUBSIDIARIES ON A CONSOLIDATED
BASIS. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO A FISCAL YEAR
ARE TO THE COMPANY'S FISCAL YEAR. IN 1995, THE COMPANY CHANGED ITS FISCAL YEAR
END FROM DECEMBER 31 TO MARCH 31.
THE COMPANY
RockShox is the worldwide leader in the design, manufacture and marketing of
high performance bicycle suspension products. The Company developed the first
widely accepted front suspension fork for the mountain bike industry, and,
through a series of new product introductions, has continued to be at the
forefront of the design and development of bicycle suspension. ROCKSHOX
suspension products enhance riding performance and comfort by mitigating the
impact of rough terrain and providing better wheel contact with the riding
surface. The Company, which currently manufactures both front suspension forks
and rear shocks for mountain bikes, has combined technical innovation with high
quality products and creative marketing to establish one of the most widely
recognized brand names in the bicycle industry. In a 1995 BICYCLING MAGAZINE
readers' survey, 45% of the respondents who owned a suspension fork owned a
RockShox manufactured product--more than twice the share of the next leading
manufacturer--and more than 65% of the respondents who planned to purchase a
suspension fork within the next two years planned to purchase a ROCKSHOX
suspension fork.
The Company's sales have grown rapidly, from approximately $6 million in
fiscal 1991 to approximately $83.5 million in fiscal 1996, a compound annual
growth rate of approximately 85.5%. The Company believes that its growth has
been the result of increasing market acceptance of bicycle suspension worldwide
and, more specifically, growing demand for ROCKSHOX suspension products. From
1992 to 1996, the number of mountain bike models available in the U.S. with
suspension has increased from approximately 80 to over 660. The Company has been
a key contributor to this growth, with ROCKSHOX components now specified on over
460, or more than 60%, of these 1996 suspension-equipped mountain bike models.
The Company believes that significant opportunities for growth continue to exist
worldwide. Although the number of mountain bikes sold with suspension has been
rapidly increasing, suspension was included on only 17% of all mountain bike
units sold domestically by independent bicycle dealers ("IBDs") in 1995. The
Company believes that the market penetration of suspension-equipped mountain
bikes is even lower internationally.
RockShox currently markets ten front suspension forks and three rear shocks
under its JUDY, INDY, QUADRA, MAG and DELUXE product lines. The Company's
products have been repeatedly recognized for their innovative design and
superior performance. For example, the Company's first product, the RS1, won a
"Best of 1989" award from BICYCLE GUIDE MAGAZINE, and, in 1993, its first QUADRA
front suspension fork was voted "Best Product Tried This Year" by readers of
MOUNTAIN BIKE MAGAZINE. The Company's JUDY suspension fork received the 1994
award for "Best Technical Development of the Year" in the bicycle industry from
VELO NEWS, and, in 1995, the Company's QUADRA suspension fork was designated as
the "Best Value" among suspension forks by BICYCLING MAGAZINE'S BUYERS GUIDE. As
further evidence of the advanced design and technical benefits of its products,
ROCKSHOX suspension was used by more than half of the mountain bike racers
competing in the 1996 Olympic Games in Atlanta.
Approximately two-thirds of the Company's sales are to bicycle manufacturers
("OEMs"), including Trek, GT and Specialized, who incorporate ROCKSHOX branded
components as part of new, fully-assembled mountain bikes sold worldwide. The
Company is the primary supplier of front suspension forks to eight out of the
ten leading OEMs selling through domestic IBDs. Management believes that OEM
customers
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
recognize the strength of the Company's brand name as a deciding factor in the
consumer's choice of mountain bikes. In addition, the Company believes that OEMs
choose RockShox for product innovation and quality as well as reliable worldwide
distribution and service.
The Company's products are also sold as an accessory component to consumers
through a network of over 10,000 IBDs worldwide. According to a
Company-sponsored survey, 85% of responding domestic IBDs identified ROCKSHOX as
the most important brand of suspension product sold in their stores and
management believes that the Company enjoys a similar retail presence
internationally. The Company's front suspension forks and rear shocks are
generally priced to consumers from $199 to $649 and from $199 to $289,
respectively.
Management believes that the Company can continue to take advantage of
significant growth opportunities by (i) maintaining its leadership in providing
front suspension forks to the high-end of the mountain bike market, a segment
that grew at a compound annual rate of approximately 40% from 1992 to 1995, (ii)
expanding its product offerings with recently-introduced rear shocks that allow
the Company to more aggressively pursue the fast growing market for full
suspension mountain bikes (i.e., bikes that include both front suspension and
rear shocks), (iii) developing more moderately priced suspension forks, such as
the QUADRA 5, which meet the needs of the emerging high-volume, mid-priced
mountain bike suspension market, and (iv) leveraging the ROCKSHOX brand name
into new product categories, including suspension products for road and trekking
bikes.
The Company's principal executive office is located at 401 Charcot Avenue,
San Jose, California 95131; its telephone number is (408) 435-7469.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 4,800,000 shares
Common Stock to be outstanding after the
Offering.................................... 13,620,000 shares (1)
Use of proceeds.............................. The net proceeds to the Company will be used
to repay indebtedness, to redeem all of the
outstanding shares of Holdings Preferred
Stock (as defined below), to make a payment
to terminate the Bonus Plan (as defined
below) and for working capital purposes. See
"Use of Proceeds."
Listing...................................... The Common Stock has been approved for
quotation on The Nasdaq Stock Market under
the symbol "RSHX," subject to commencement
of the Offering.
</TABLE>
- ------------------------
(1) Excludes approximately 821,320 shares of Common Stock issuable upon exercise
of stock options outstanding under the Amended and Restated RSx Holdings,
Inc. 1996 Stock Plan (the "Stock Plan"). See "Management -- 1996 Stock
Plan."
------------------------
Unless otherwise noted, all Common Stock share amounts, per share data and
other information set forth in this Prospectus (i) have been adjusted to reflect
the consummation of the Merger (as defined below) and (ii) assume that the
Underwriters' over-allotment option granted by certain stockholders of the
Company (the "Selling Stockholders") has not been exercised. See "The
Recapitalization and the Merger."
This Prospectus includes references to registered trademarks and brand names
of the Company and of manufacturers who purchase the Company's products,
including Trek Bicycle Corp. ("Trek"), GT Bicycles, Inc. ("GT") and Specialized
Bicycle Components, Inc. ("Specialized"). The Company's trademarks and brand
names include: ROCKSHOX, ROCKSHOX, JUDY, INDY, DELUXE, QUADRA, MAG and ROCKSHOX
GARB.
Market data and industry information referred to in this Prospectus are
derived from various trade publications and industry sources (including the
results of a suspension study conducted by the Bicycle Market Research Institute
("BMRI"), BMRI's U.S. 1995 Annual Market Assessment Report for Bicycles (20" and
over), MOUNTAIN BIKE MAGAZINE'S 1996 Industry Survey and BICYCLING MAGAZINE'S
September 1995 Subscriber Study) as well as the Company's own research and
estimates. Unless otherwise noted, all references to "IBDs" include bike shops,
other sports specialty stores, mail order and television shopping.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH
THREE
MONTHS 31, 1996 (1)
YEAR ENDED DECEMBER 31, ENDED ------------------
--------------------------------- MARCH 31, PRO
1991 1992 1993 1994 1995 (1) ACTUAL FORMA (2)
------ ------- ------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales.................... $6,050 $16,442 $30,941 $37,900 $14,279 $83,509 $83,509
Cost of sales............... 4,017 10,565 20,113 24,477 9,590 54,110 54,110
------ ------- ------- ------- --------- ------- ---------
Gross profit.............. 2,033 5,877 10,828 13,423 4,689 29,399 29,399
Operating expenses.......... 1,923 5,541 6,634 6,283 7,627 14,621 12,871
------ ------- ------- ------- --------- ------- ---------
Income (loss) from opera-
tions...................... 110 336 4,194 7,140 (2,938) 14,778 16,528
Interest and other (income)
expense, net............... 21 67 16 6 51 5,650 (136)
------ ------- ------- ------- --------- ------- ---------
Income (loss) before income
taxes...................... 89 269 4,178 7,134 (2,989) 9,128 16,664
Provision for (benefit from)
income taxes............... 9 104 1,521 2,420 (653) 3,464 6,478
------ ------- ------- ------- --------- ------- ---------
Net income (loss)........... $ 80 $ 165 $ 2,657 $ 4,714 $(2,336) $ 5,664 $10,186
------ ------- ------- ------- --------- ------- ---------
------ ------- ------- ------- --------- ------- ---------
Net income (loss) per share
(3)........................ $ 0.01 $ 0.02 $ 0.29 $ 0.51 $ (0.25) $ 0.57 $ 0.75
------ ------- ------- ------- --------- ------- ---------
------ ------- ------- ------- --------- ------- ---------
Shares used in
per share calculations
(3)........................ 9,240 9,240 9,240 9,240 9,240 9,240 13,610(4)
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------
1996 1996
1995 ACTUAL PRO FORMA (2)
------- ------- -------------
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales.................... $18,784 $21,378 $21,378
Cost of sales............... 12,285 13,733 13,733
------- ------- -------------
Gross profit.............. 6,499 7,645 7,645
Operating expenses.......... 3,411 4,159 3,503
------- ------- -------------
Income (loss) from opera-
tions...................... 3,088 3,486 4,142
Interest and other (income)
expense, net............... 1,484 1,292 (49)
------- ------- -------------
Income (loss) before income
taxes...................... 1,604 2,194 4,191
Provision for (benefit from)
income taxes............... 610 845 1,644
------- ------- -------------
Net income (loss)........... $ 994 1,349 $ 2,547
------- ------- -------------
------- ------- -------------
Net income (loss) per share
(3)........................ $ 0.10 $ 0.14 $ 0.19
------- ------- -------------
------- ------- -------------
Shares used in
per share calculations
(3)........................ 9,240 9,240 13,610(4)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
PRO FORMA
ACTUAL AS ADJUSTED (5)
------------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................... $ 1,797 $ 15,878
Total assets.................................................................. 28,665 36,362
Total debt.................................................................... 43,750 --
Mandatorily redeemable preferred stock........................................ 7,449 --
Stockholders' equity (deficit)................................................ (38,358) 21,194
</TABLE>
- ------------------------
(1) In 1995, the Company changed its fiscal year end from December 31 to March
31.
(2) The pro forma statement of operations data for the fiscal year ended March
31, 1996 and the quarter ended June 30, 1996 give effect to the Offering and
the application of the net proceeds therefrom as if the Offering had
occurred at the beginning of the respective periods, and reflect the
reduction of operating expenses of $1.8 million and $0.7 million,
respectively, related to the termination of the Bonus Plan, the reduction of
interest expense of $5.8 million and $1.3 million, respectively, and the tax
effect of the foregoing (but exclude the effect of write-offs of
approximately $2.4 million relating to unamortized debt issuance costs,
expenses of approximately $6.7 million relating to the termination of the
Bonus Plan and the tax effect of the foregoing). See "Selected Financial
Data," "Use of Proceeds" and Note 2 of Notes to Pro Forma Condensed
Consolidated Balance Sheet and Statements of Operations.
(CONTINUED ON THE FOLLOWING PAGE)
5
<PAGE>
(CONTINUED FROM PRIOR PAGE)
(3) For an explanation of the determination of the number of shares used in per
share calculations and net income (loss) per share, see Note 2 of Notes to
Consolidated Financial Statements. For the fiscal year ended March 31, 1996
and the quarters ended June 30, 1995 and 1996, net income has been reduced
by accretion for dividends on the Holdings Preferred Stock of $357,000,
$94,000 and $92,000, respectively.
(4) Pro forma computation of net income per share includes 4,370,400 shares of
Common Stock to be issued pursuant to the Offering, net of expenses, the
proceeds from the sale of which the Company intends to use as follows: (a)
$26.75 million to repay borrowings outstanding under the Existing Credit
Facilities (as defined below), (b) $17.0 million to repay the Senior Notes
(as defined below) and the Junior Notes (as defined below), (c) $7.4 million
to redeem all of the outstanding shares of Holdings Preferred Stock and (d)
$7.3 million to make payments to terminate the Bonus Plan. Shares to be
issued for working capital purposes have been excluded from the pro forma
computation of net income per share. See "Use of Proceeds" and Note 2 to Pro
Forma Condensed Consolidated Balance Sheet and Statements of Operations.
(5) Pro forma as adjusted to give effect to the Offering and the application of
the net proceeds therefrom as if the Offering had occurred on June 30, 1996,
including write-offs of approximately $2.4 million relating to unamortized
debt issuance costs, expenses of approximately $6.7 million relating to the
termination of the Bonus Plan, payments of approximately $7.4 million to
redeem all of the outstanding shares of Holdings Preferred Stock and $26.75
million, $11.0 million and $6.0 million to repay the Existing Credit
Facilities, the Senior Notes and the Junior Notes, respectively, and the tax
effect of the foregoing. See "Use of Proceeds," "Capitalization" and Note 1
of Notes to Pro Forma Condensed Consolidated Balance Sheet and Statements of
Operations.
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD TAKE INTO ACCOUNT THE CONSIDERATIONS SET FORTH
BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE
PURCHASING ANY OF THE SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THAT INVOLVE RISKS AND UNCERTAINTIES.
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
SUSCEPTIBILITY TO CHANGING ECONOMIC AND MARKET CONDITIONS
Consumer purchases of bicycles and bicycle components, including the
Company's products, are discretionary. Any decline in general economic
conditions, uncertainties regarding future economic prospects or changes in
other economic factors that affect consumer spending could have a material
adverse effect on the Company's direct customers (OEMs, distributors and IBDs)
and, therefore, on the Company or its prospects. Domestic mountain bike unit
sales through mass merchandisers and IBDs in the first half of 1996 have
declined from the first half of 1995, and industry sources estimate that such
sales will not grow in 1996 as compared to the prior year. Any material decline
in the size of, or prolonged lack of growth in, the overall bicycle market or
the mountain bike segment, or a material decline in the number or business
prospects of OEMs, distributors or IBDs, in general, or the Company's customers,
in particular, could have a material adverse effect on the Company or its
prospects.
DEPENDENCE ON MOUNTAIN BIKE FRONT SUSPENSION PRODUCT LINES
Substantially all of the Company's historical revenues have been
attributable to sales of mountain bike front suspension forks. The Company
believes that most of its sales for the foreseeable future will be of mountain
bike front suspension forks. Such products have been produced in substantial
numbers and widely accepted by the bicycle industry and consumers for less than
five years and there can be no assurance of their continuing popularity. Any
material decline or prolonged lack of growth in the popularity of, or market
demand for, mountain bike front suspension forks, in general, or the Company's
products, in particular, could have a material adverse effect on the Company or
its prospects. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General" and "Business--Products."
SALES CONCENTRATION; DEPENDENCE ON OEMS
In fiscal 1996, approximately 56% of the Company's sales were to the
Company's ten largest customers, certain of which (including Trek) purchase from
the Company as both an OEM customer and a distributor. Sales to Trek accounted
for more than 10% of the Company's net sales in fiscal 1996, substantially all
of which were for OEM use by Trek. At March 31, 1996 and June 30, 1996, the
Company's three OEM customers with the largest accounts receivable balances
accounted for approximately 61.5% and 47.8%, respectively, of the Company's
accounts receivable. The Company has no long-term contracts with any of its
customers and there can be no assurance that the Company's current or future
customers will continue to purchase from the Company. The loss of, substantial
decline in purchases of the Company's products by, or financial insolvency of,
any of the Company's largest customers individually, or a number of the
Company's other customers in the aggregate, could have a material adverse effect
on the Company or its prospects.
While the OEM market is fragmented, according to BMRI, ten leading OEM
brands represent over 75% of bicycle sales dollars generated through domestic
IBDs. Management believes that these OEMs also represent a significant portion
of better quality mountain bikes sold worldwide. All of these leading OEMs are
current customers of the Company and certain of these OEMs are among the
Company's largest customers. Management believes that any material growth in the
Company's business will likely require it to increase sales to, and will result
in additional sales concentration with, the Company's largest OEM customers. In
addition, the Company's customers, including OEMs, may acquire, or be acquired
by, other entities (including the Company's competitors) and there can be no
assurance that the combined entity will continue to purchase any or the same
amount of the Company's products.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations-- Liquidity and Capital Resources," "Business--Industry Overview"
and "--Sales and Distribution."
7
<PAGE>
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS; DIFFICULTY IN FORECASTING OEM
ORDERS
Management believes that the Company's future operating results will
fluctuate on a quarterly basis due to a variety of factors, including seasonal
cycles, weather conditions, the timing and mix of orders and reorders, and the
number and timing of new product introductions. Management anticipates that the
Company's sales will normally be lowest in its first and fourth fiscal quarters,
which end on June 30 and March 31, respectively. Results in such quarters are
particularly sensitive to the timing and size of OEM orders and reorders, which
are difficult to forecast. Any misjudgment by the Company or any of its OEM
customers of the demand for any of its respective products could have a material
adverse effect on the Company or its prospects. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Selected Quarterly
Financial Data; Seasonality," "Business-- Manufacturing" and "--Sales and
Distribution."
RISKS ASSOCIATED WITH RAPID GROWTH
Since its founding in 1989, the Company has experienced rapid and
substantial growth. The Company does not expect to achieve such high rates of
growth in the future. There can be no assurance that the Company will continue
to grow or that it will be able to sustain the level of sales that it has
achieved in the past. Furthermore, there can be no assurance that the Company
will be able to successfully implement its sales growth strategy or that, if
implemented, such a strategy will result in increases to, or maintenance of, the
Company's profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
The Company's rapid and substantial growth has placed, and could continue to
place, a significant strain on its employees and operations. Several members of
the Company's senior management have only recently joined the Company and other
members have only limited relevant prior experience outside of the Company. See
"Management--Directors, Executive Officers and Key Employees." To manage growth
effectively, the Company will be required to continue to implement changes in
its business; expand its operations, facilities and internal controls to handle
increased demand; enhance its information technology systems; and develop, train
and manage an increasing number of management-level and other employees.
Unexpected difficulties encountered during expansion, or management's inability
to respond effectively to or plan for such expansion, could have a material
adverse effect on the Company or its prospects.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The Company's future success will depend, in part, upon its continued
ability to develop and successfully introduce new and/or innovative bicycle
suspension products and other types of bicycle components that will be widely
accepted by the bicycle industry and consumers. There can be no assurance that
the Company will introduce any new products or, if introduced, that any such
products will be commercially successful. Furthermore, successful product
designs can be displaced or rendered obsolete by other product designs
introduced by the Company or its competitors. As a result of these and other
factors, there can be no assurance that the Company will expand the markets it
serves or will successfully maintain or increase its market share through
product innovations. The Company also anticipates that it may from time to time
evaluate acquisition opportunities to expand its product lines, including the
possible acquisition of non-suspension bicycle component product lines. The
Company has no experience in making such acquisitions, and there can be no
assurance that the Company will be able to compete successfully at favorable
prices for available acquisition candidates. The Company also has no significant
experience in developing, manufacturing or marketing non-suspension bicycle
components.
COMPETITION
The markets for bicycle components, in general, and bicycle suspension
products, in particular, are highly competitive. The Company competes with other
bicycle component companies that produce suspension products for sale to OEMs,
distributors and IBDs as well as with OEMs who produce their own line of
suspension products for their own use and for sale through distributors and
IBDs. The Company believes that it currently has the leading market share in
front suspension forks. The Company only recently introduced its rear shock
products for the emerging full suspension market and believes it currently
trails the leading manufacturer of rear shocks. In order to build or retain its
market share, the Company must
8
<PAGE>
continue to successfully compete in areas that influence the purchasing
decisions of OEMs, distributors, IBDs and consumers, including design, price,
quality, technology, distribution, marketing, style, brand image and customer
service. There can be no assurance that any number of bicycle component
manufacturers, OEMs or other companies, including those who are larger and have
greater resources than the Company or who currently do not provide bicycle
suspension products or do so on a limited basis, will not become direct or more
significant competitors of the Company. In addition, OEMs frequently design
their bicycles to meet certain retail price points, and, as a result, may choose
not to use a suspension product or may select a lower priced ROCKSHOX or
competing product in order to incorporate other components in the bicycle's
specifications that the OEM perceives as being desirable to the consumer. The
Company could therefore face competition from existing or new competitors that
introduce and promote suspension products or other bicycle components perceived
by the bicycle industry or consumers to offer price or performance advantages
to, or that otherwise have greater consumer appeal than, the Company's products.
See "Business-- Competition."
LIMITED PROTECTION OF TECHNOLOGY; ALLEGATION OF PATENT INFRINGEMENT
Because much of the technology associated with suspension products is in the
public domain, patent protection is generally available only for particular
features or functions of a product, rather than for any product as a whole.
Management believes that many of the Company's current suspension products
contain some elements that are protected by the Company's patents. Nevertheless,
the Company's competitors currently replicate and may continue to replicate
certain features and functions of the Company's products. There can be no
assurance that current or future patent protection will prevent competitors from
offering competing products, that any issued patents will be upheld, or that
patent protection will be granted in any or all of the countries in which
applications are currently pending or granted on the breadth of the description
of the invention. In addition, due to considerations relating to, among other
things, cost, delay or adverse publicity, there can be no assurance that the
Company will elect to enforce its intellectual property rights.
The Company's competitors have also obtained and may continue to obtain
patents on certain features of their products, which may prevent or discourage
the Company from offering such features on its products, which, in turn, could
result in a competitive disadvantage to the Company. The Company has
occasionally received, and may receive in the future, claims asserting
intellectual property rights owned by third parties that relate to the Company's
products and product features. Although to date the Company has incurred no
material liabilities as a result of any such claims, there can be no assurance
that the Company will not incur material liabilities in the future.
Answer Products ("Answer"), a division of LDI, Ltd., which manufactures
Manitou products, has asserted that it is the exclusive licensee of a U.S.
patent (the "Answer Patent") that Answer asserts covers certain features of the
Company's current JUDY suspension products (the "Features"). However, the
Company has a patent application pending before the U.S. Patent and Trademark
Office (the "Patent Office") that seeks a patent on certain of the same
Features. In the U.S., patent rights belong to the first to invent, and there
can be only one patent issued for a given invention. If an invention is
otherwise patentable to two patent applicants, an "interference" can be declared
by the Patent Office in order to determine which applicant was the first to
invent and therefore entitled to the patent on such invention. The Company is
seeking to have the Patent Office declare such an interference in order to
determine that the Company was the first to invent and therefore entitled to a
patent on the Features. Although the Company believes that it was the first to
invent the Features, there can be no assurance that the Answer Patent (which the
Company believes, if valid, could cover the Features of JUDY products
manufactured for the Company's 1997 (current) model year) will be invalidated.
In addition, Answer (or certain of its related persons) has applied for patents
that may cover certain of the Features in various countries outside of the U.S.
and, in such countries, patent rights generally belong to the first person
filing a patent application.
In an effort to avoid the costs, delays and risks of litigation or an
interference proceeding (including adverse effects on the Company's business),
management of the Company has commenced discussions with Answer regarding the
possible settlement of this dispute. However, the Company and Answer have not
reached any settlement, and there can be no assurance that any agreement
relating to the Features will be reached. On September 26, 1996, Answer filed a
complaint alleging that the Company has infringed the
9
<PAGE>
Answer Patent. However, the Company intends to vigorously defend such suit. See
"Business--Legal Proceedings." Answer has informed the Company that, although it
will consider pursuing all of its legal remedies, it continues to believe that
the best solution to this dispute is a business settlement, not a legal fight.
If Answer ultimately retains the Answer Patent and successfully asserts it
against the Company, or if any other person or entity were to assert a valid
claim of infringement with respect to, or otherwise have enforceable proprietary
rights in, features that the Company includes or desires to include on its
products, and if the Company were unable to negotiate an acceptable licensing or
other arrangement with such person or entity, the Company could, among other
things, be precluded from making or marketing products containing such features
and be required to make significant payments to such person or entity (which
payments would equal at least a reasonable royalty and, in certain
circumstances, could be based on lost profits, in each case together with
interest and court costs; and, in special circumstances, the damage amount could
be trebled and include attorneys' fees), which could have a material adverse
effect on the Company or its prospects. See "Business--Intellectual Property."
DEPENDENCE ON SUPPLIERS; MANUFACTURING RISKS
Although the Company has established relationships with its principal
suppliers and manufacturing sources, the Company does not currently have
long-term contracts with any of its vendors, nor does the Company currently have
multiple vendors for all parts, tooling, supplies or services critical to the
Company's manufacturing processes. The Company's future success will depend, in
part, on its ability to maintain relationships with its current suppliers and
manufacturing sources and to develop relationships with new suppliers. Failure
of a key supplier to meet the Company's product needs on a timely basis, loss of
a key supplier or significant disruption in the Company's production or
distribution activities for any other reason, including an earthquake or other
catastrophic event, could have a material adverse effect on the Company or its
prospects. See "Business--Manufacturing" and "Certain Transactions--Other."
RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS AND MARKET DEMAND
While the Company is currently manufacturing its products only in the United
States, the bicycle industry is, and many of the Company's OEM customers are,
highly dependent on manufacturing in overseas locations, and changes in economic
conditions, currency exchange rates, tariff regulations, "local content" laws or
other trade restrictions or political instability ("International Conditions")
could adversely affect the cost or availability of products sold by or to the
bicycle industry as a whole and the Company's OEM customers in particular, any
of which could have a material adverse effect on the Company or its prospects.
In addition, insufficient international consumer demand for mountain bikes and
related products, including the Company's products, whether due to changes in
International Conditions, consumer preferences or other factors, could have a
material adverse effect on the Company or its prospects.
PRODUCT LIABILITY
Because of the risks inherent in bicycling, in general, and mountain biking,
in particular, and because of the function of the Company's products, the
Company from time to time is a defendant in a number of product liability
lawsuits and expects that this will continue to be the case in the future. These
lawsuits generally seek damages, sometimes in substantial amounts, for personal
injuries sustained as a result of alleged defects in the Company's products.
Although the Company has experienced no material financial loss relating to such
lawsuits and maintains product liability insurance, due to the uncertainty as to
the number of claims or the nature and extent of liability for personal injuries
and changes in the historical or future levels of insurance coverage or the
terms or cost thereof, such insurance may not be adequate or available to cover
product liability claims or the applicable insurer may not be solvent at the
time of any covered loss, any of which could have a material adverse effect on
the Company or its prospects. See "Business--Legal Proceedings."
GOVERNMENT REGULATION; ADVERSE PUBLICITY
Bicycle suspension products are within the jurisdiction of the United States
Consumer Product Safety Commission (the "CPSC") and other Federal, state and
foreign regulatory bodies. In 1996, the CPSC sent a letter to major
manufacturers and importers of mountain bikes as well as several suspension
component
10
<PAGE>
manufacturers, including RockShox, expressing concern about reports of injuries
and recall activity relating to failures of mountain bike suspension forks and
urging manufacturers to participate in the development of voluntary safety
performance standards for such suspension products through the American Society
of Testing and Materials (the "ASTM"). The Company cannot predict whether
standards relating to the Company's products or otherwise affecting the bicycle
suspension industry will be adopted (whether by the CPSC or another Federal,
state or foreign regulatory body) and, if adopted, no assurance can be given
that the implementation of such standards will not have a material adverse
effect on the Company or its prospects.
Adverse publicity relating to mountain bike suspension or mountain biking
generally, or publicity associated with actions by the CPSC or others expressing
concerns about the safety or function of the Company's products, other
suspension products or mountain bikes (whether or not such publicity is
associated with a claim against the Company or results in any action by the
Company or the CPSC), could have an adverse effect on the Company's reputation,
brand image or markets, any of which could have a material adverse effect on the
Company or its prospects.
PRODUCT RECALL; WARRANTY COSTS
Bicycles and bicycle components, including suspension products, are frequent
subjects of product recalls, corrective actions and manufacturers' bulletins.
Since its founding in 1989, the Company has conducted three voluntary corrective
actions, none of which has been financially material to the Company.
Nevertheless, the number of suspension products sold by the Company has
dramatically increased since its founding, new product introductions are
occurring frequently, and the Company's products may have not been used by
riders for a period of time sufficient to determine all of the effects of
prolonged use and the environment on such products. As a result, there can be no
assurance that there will not be recalls, corrective actions or other activity
voluntarily or involuntarily undertaken by the Company or involving the CPSC or
other regulatory bodies on a more frequent basis or at a higher cost than in the
past, any of which could have a material adverse effect on the Company or its
prospects. See "Business--Product Recall."
All of the Company's suspension products are covered by a one-year limited
warranty. The Company maintains an accrued liability on its balance sheet
representing management's estimate of future warranty costs of repair,
replacement or customer accommodation for products sold through the date
thereof. There can be no assurance that such accrued liability may not change in
the future or that future warranty costs for sales made through such date will
not be greater than the amounts accrued by the Company on its consolidated
financial statements, either of which could have a material adverse effect on
the Company or its prospects. See "Business--Product Recall" and Notes 2 and 5
of Notes to Consolidated Financial Statements.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the management and leadership skills of the
members of its senior management team and other key personnel, including certain
members of its product development team. The loss of any such personnel or the
inability to attract, retain and motivate key personnel could have a material
adverse effect on the Company or its prospects. See "Business--Research and
Product Development" and "Management--Directors, Executive Officers and Key
Employees."
CONCENTRATION OF OWNERSHIP
Immediately after the Offering, Stephen Simons and Paul Turner, each of whom
is a director and executive officer of the Company, will each beneficially own
approximately 16.2% of the outstanding shares of the Common Stock (assuming that
the Underwriters' over-allotment option is not exercised). In addition,
immediately after the Offering, persons and entities affiliated with The Jordan
Company will beneficially own an aggregate of approximately 31.8% of the
outstanding shares of the Common Stock (assuming that the Underwriters'
over-allotment option is not exercised). Each of John W. Jordan II and Adam E.
Max is an affiliate of The Jordan Company and a director of the Company. As a
result, Messrs. Simons and Turner and such persons and entities associated with
The Jordan Company may have the ability to strongly influence, and, if voting
together, will control, the election of directors and the results of other
matters submitted to a vote of stockholders. Such concentration of ownership,
together with the anti-takeover effects of certain
11
<PAGE>
provisions in the Delaware General Corporation Law (the "DGCL"), may have the
effect of delaying or preventing a change in control of the Company. See
"Management," "Principal and Selling Stockholders" and "Description of Capital
Stock."
NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price of the Common Stock offered hereby
was determined by negotiations among the Company, the Selling Stockholders and
the Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. The market price for shares of the Common Stock may be
volatile and may fluctuate based upon a number of factors, including, without
limitation, business performance, timing of revenues, news announcements or
changes in general trading market conditions. See "Underwriting" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Financial Data; Seasonality."
FUTURE SALES OF COMMON STOCK; SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have outstanding
13,620,000 shares of Common Stock, assuming no stock options are exercised. Of
these shares, all of the 4,800,000 shares sold in the Offering will be freely
transferable by persons other than "affiliates" (as hereinafter defined) of the
Company, without restriction or further registration under the Securities Act of
1933, as amended (the "Securities Act"). Future sales of substantial amounts of
Common Stock (including shares issued upon the exercise of options that may be
granted pursuant to any employee stock option or other equity plan of the
Company), or the perception that such sales could occur, could have an adverse
effect on the market price of the Common Stock. If such sales or any other
factor should reduce the market price of Common Stock, the Company's ability to
raise additional capital in the equity markets could be adversely affected. The
Company and all of the Selling Stockholders and executive officers of the
Company have agreed, subject to certain exceptions, not to sell, offer to sell,
grant any option (other than pursuant to the Stock Plan) for the sale of, or
otherwise dispose of, any shares of Common Stock or securities convertible into
or exercisable or exchangeable for Common Stock (except for shares offered in
the Offering) for a period of 180 days after the date of this Prospectus without
the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
See "Description of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriting."
DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offering will therefore incur immediate and substantial dilution of $13.44
per share. See "Dilution."
ABSENCE OF DIVIDENDS
The Company does not expect to pay any cash dividends on shares of the
Common Stock in the foreseeable future. See "Dividend Policy."
12
<PAGE>
THE RECAPITALIZATION AND THE MERGER
On March 24, 1995, Stephen Simons, Debra Simons and Paul Turner transferred
all of the outstanding shares of capital stock of the Company's predecessor
("Old RockShox") to RSx Holdings, Inc., a newly formed Delaware corporation
("Holdings"), and RSx Acquisition, Inc., a newly formed Delaware corporation
("Acquisition"). In exchange therefor, Mr. and Mrs. Simons and Mr. Turner
received 50% of the common stock, par value $.01 per share, of Holdings
("Holdings Common Stock"), $6 million aggregate principal amount of 13.5% junior
subordinated notes of Holdings (the "Junior Notes"), 4,000 shares of Series B
Preferred Stock, par value $1.00 per share, of Holdings (the "Series B Preferred
Stock") and approximately $39 million in cash. Holdings then acquired all of the
capital stock of Acquisition and contributed to Acquisition all of Holdings'
shares of capital stock of Old RockShox, whereupon Old RockShox became a wholly
owned subsidiary of Acquisition. Old RockShox was then merged into Acquisition
and Acquisition changed its name to ROCKSHOX, INC. The transactions described in
this paragraph are collectively referred to as the "Recapitalization."
As part of the Recapitalization, (i) the remaining 50% of Holdings Common
Stock, (ii) 3,000 shares of Series A Preferred Stock, par value $1.00 per share,
of Holdings (the "Series A Preferred Stock" and, together with the Series B
Preferred Stock, the "Holdings Preferred Stock") and (iii) $11 million aggregate
principal amount of 13.5% senior subordinated notes of Holdings (the "Senior
Notes") were purchased for an aggregate of approximately $14.5 million by (a)
MCIT PLC, an investment company organized under the laws of England and Wales
("MCIT"), in which affiliates of The Jordan Company have an ownership interest
and which is advised by Jordan/Zalaznick Advisors, Inc. ("JZAI"), an entity
controlled by affiliates of The Jordan Company, and (b) certain persons and
entities affiliated with The Jordan Company .
In order to finance the Recapitalization, Acquisition entered into a credit
agreement (the "Existing Credit Facilities") pursuant to which Acquisition
borrowed $30 million under a term loan, and was permitted to borrow up to $6
million under a bank line of credit.
See "Certain Transactions--The Recapitalization."
Immediately prior to the closing of the Offering, Holdings will be merged
with and into the Company, with the Company as the surviving corporation (the
"Merger"), and each share of Holdings Common Stock will be converted into 88.2
shares of Common Stock of the Company. Unless the context otherwise requires,
all information set forth in this Prospectus has been adjusted to reflect the
consummation of the Merger.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,800,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately $65
million, after deducting the underwriting discount and estimated expenses of the
Offering.
The Company intends to use such net proceeds from the Offering (i) to repay
borrowings plus accrued interest, if any, outstanding under the Existing Credit
Facilities ($26.75 million principal amount at June 30, 1996); (ii) to repay the
$11 million principal amount of the Senior Notes plus accrued interest, if any;
(iii) to repay the $6 million principal amount of the Junior Notes plus accrued
interest, if any; (iv) to redeem all of the outstanding shares of Holdings
Preferred Stock (which had an aggregate redemption value of $7.4 million at June
30, 1996); (v) to make payments totalling approximately $7.3 million to
terminate the bonus arrangement provided for pursuant to the employment
agreements between Holdings and each of Messrs. Simons and Turner (the "Bonus
Plan"); and (vi) for working capital purposes. See "The Recapitalization and the
Merger," "Management--Employment Agreements" and "Certain Transactions--The
Recapitalization."
The Bonus Plan and the Existing Credit Facilities were entered into, and the
Senior Notes, the Junior Notes and the shares of Holdings Preferred Stock were
issued, in connection with the Recapitalization. The borrowings under the
Existing Credit Facilities mature on March 31, 2001 and bear interest at various
spreads over the applicable LIBOR rate or the bank's reference rate, generally
at the Company's option. At June 30, 1996, loans outstanding under the Existing
Credit Facilities bore interest at a blended rate of 8.625%. The Senior Notes
and the Junior Notes each bear interest at 13.5% per annum and mature on April
30, 2005 and May 31, 2006, respectively. The debt outstanding under each of the
Existing Credit Facilities, the Senior Notes and the Junior Notes is prepayable
without interest or premium. The holders of the Series A Preferred Stock are
entitled to receive, at the option of the Board of Directors of Holdings, annual
dividends at the rate of either (i) .05 shares of the Series A Preferred Stock
per share or (ii) $50 per share. The holders of the Series B Preferred Stock are
entitled to receive annual dividends at the rate of $50 per share. Each share of
the Holdings Preferred Stock is redeemable at the option of the Company at any
time and is mandatorily redeemable by the Company on July 31, 2006, in each case
for $1,000 plus all accrued and unpaid dividends thereon.
The Company intends to replace the Existing Credit Facilities with a new
revolving credit facility (the "New Credit Facility") after the consummation of
this Offering. Although the Company has contacted several institutions regarding
the New Credit Facility, the Company has not entered into any letter of intent
or other agreement relating to such facility.
If the Underwriters exercise their over-allotment option, the Company will
not receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company expects that all earnings will be retained for the foreseeable
future for use in the operations of the business; the Board of Directors of
Holdings has not declared a cash dividend on the Holdings Common Stock
subsequent to the Recapitalization, and the Company does not expect to pay cash
dividends on the Common Stock in the foreseeable future. Any future decision
with respect to dividends will depend on earnings, capital needs, restrictions
imposed by lenders or other security holders of the Company and the Company's
operating and financial condition, among other factors. In addition, the Company
is currently prohibited by the terms of the Existing Credit Facilities from
paying cash dividends on the Common Stock, and may in the future enter into loan
or other agreements (including, without limitation, the New Credit Facility) or
issue debt securities or preferred stock that restrict the payment of cash
dividends on the Common Stock.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and current portion of
long-term debt of the Company at June 30, 1996, as adjusted to reflect the sale
of 4,800,000 shares of Common Stock by the Company in the Offering and the
application of the net proceeds therefrom to redeem all of the outstanding
shares of Holdings Preferred Stock; repay the Existing Credit Facilities, the
Senior Notes and the Junior Notes, including write-offs of approximately $2.4
million relating to unamortized debt issuance costs; and terminate the Bonus
Plan, resulting in expenses of approximately $6.7 million. See "Use of
Proceeds." The information below should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto and the Pro
Forma Condensed Consolidated Balance Sheet and Statements of Operations and the
related notes thereto, which are included elsewhere in this Prospectus. See also
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Capital Stock."
<TABLE>
<CAPTION>
JUNE 30, 1996(1)
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)
--------- --------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current portion of long-term debt...................................................... $ 3,375 $ --
--------- -------
--------- -------
Long-term debt, excluding current portion:
Existing Credit Facilities........................................................... $ 23,375 $ --
Senior Notes......................................................................... 11,000 --
Junior Notes......................................................................... 6,000 --
--------- -------
Total long-term debt............................................................... 40,375 --
--------- -------
Mandatorily redeemable preferred stock:
Series A Preferred Stock............................................................. 3,192 --
Series B Preferred Stock............................................................. 4,257 --
--------- -------
Total mandatorily redeemable preferred stock....................................... 7,449 --
--------- -------
Stockholders' equity (deficit):
Common Stock, par value $.01 per share, 9,799,020 shares authorized; 50,000,000
shares authorized, pro forma as adjusted; 8,820,000 shares outstanding; 13,620,000
shares outstanding, pro forma as adjusted (2)....................................... 88 136
Additional paid-in capital........................................................... 412 65,324
Distribution in excess of net book value............................................. (45,422) (45,422)
Retained earnings.................................................................... 6,564 1,156
--------- -------
Total stockholders' equity (deficit)............................................... (38,358) 21,194
--------- -------
Total capitalization............................................................. $ 9,466 $ 21,194
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Gives effect to the Merger, which will occur immediately prior to the
closing of the Offering.
(2) Does not include approximately 821,320 shares of Common Stock issuable upon
exercise of options currently outstanding under the Stock Plan. See
"Management--1996 Stock Plan."
(3) Pro forma as adjusted to give effect to the Offering and the application of
the net proceeds therefrom as if the Offering had occurred on June 30, 1996,
including write-offs of approximately $2.4 million relating to unamortized
debt issuance costs, expenses of approximately $6.7 million relating to the
termination of the Bonus Plan, payments of approximately $7.4 million to
redeem all of the outstanding shares of Holdings Preferred Stock and $26.75
million, $11.0 million and $6.0 million to repay the Existing Credit
Facilities, the Senior Notes and the Junior Notes, respectively, and the tax
effect of the foregoing. See "Use of Proceeds" and Note 1 of Notes to Pro
Forma Condensed Consolidated Balance Sheet and Statements of Operations.
15
<PAGE>
DILUTION
The negative net tangible book value of the Company at June 30, 1996 was
approximately $(40.7) million, or $(4.62) per share of Common Stock. Negative
net tangible book value per share represented the Company's total tangible
assets less its total liabilities and Holdings Preferred Stock, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale by
the Company of 4,800,000 shares of Common Stock in the Offering and the
application of the net proceeds therefrom, the pro forma net tangible book value
of the Company at June 30, 1996 would have been approximately $21.2 million, or
$1.56 per share. See "Use of Proceeds." This represents an immediate net
tangible book value dilution of $13.44 per share to investors purchasing shares
in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share (1)....................... $ 15.00
Negative net tangible book value at June 30, 1996............... $ (4.62)
Increase attributable to new investors in the Offering.......... 6.18
---------
Pro forma net tangible book value per share after the Offering
(2).............................................................. 1.56
---------
Dilution per share to new investors............................... $ 13.44
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1996 the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders of the Company (the "Existing Stockholders") and the
investors purchasing shares in the Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (3)....................... 8,820,000 64.8% $ 500,000 0.7% $ 0.06
New investors................................... 4,800,000 35.2% $ 72,000,000 99.3% $ 15.00
------------ --------- ------------- ---------
Total......................................... 13,620,000 100.0% $ 72,500,000 100.0%
------------ --------- ------------- ---------
------------ --------- ------------- ---------
</TABLE>
- ------------------------
(1) Before deducting estimated underwriting discount and estimated expenses of
the Offering payable by the Company.
(2) Excludes approximately 821,320 shares of Common Stock issuable upon exercise
of options to be outstanding upon consummation of the Offering pursuant to
the Stock Plan. See "Management--1996 Stock Plan." To the extent that
options are exercised, there will be further dilution to new investors.
(3) If the Underwriters' over-allotment option is exercised in full, the number
of shares held by the Existing Stockholders will be reduced to 8,100,000
shares, or 59.5% of the number of shares to be outstanding after the
Offering.
16
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the fiscal years ended December 31,
1993 and 1994 and March 31, 1996 and the three months ended March 31, 1995 and
the balance sheet data at December 31, 1994 and March 31, 1995 and 1996 are
derived from the Consolidated Financial Statements contained elsewhere herein,
which have been audited by Coopers & Lybrand L.L.P., independent accountants.
See "Experts." The statement of operations data for the years ended December 31,
1991 and 1992, and the balance sheet data at December 31, 1991, 1992 and 1993,
are derived from the Company's consolidated financial statements, which are not
contained herein and, with the exception of the balance sheet at December 31,
1993, are unaudited. The balance sheet data at June 30, 1996 and the statement
of operations data for the three month periods ended June 30, 1995 and 1996 are
derived from the unaudited financial statements of the Company and, in the
opinion of management, include all of the adjustments, consisting of only normal
recurring accruals, necessary for the fair presentation of the financial data
for the periods indicated. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire year. The
selected pro forma statement of operations and balance sheet data set forth
below are for informational purposes only and may not necessarily be indicative
of the results of operations of the Company in the future. The following
selected financial data should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto, the Pro Forma Condensed
Consolidated Balance Sheet and Statements of Operations and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
THREE YEAR ENDED ENDED
MONTHS MARCH 31, 1996 (1) JUNE 30,
YEAR ENDED DECEMBER 31, ENDED ------------------------ ---------
------------------------------------------ MARCH 31, PRO
1991 1992 1993 1994 1995(1) ACTUAL FORMA(2) 1995
--------- --------- --------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER
SHARE DATA):
Net sales................... $ 6,050 $ 16,442 $ 30,941 $ 37,900 $ 14,279 $ 83,509 $ 83,509 $ 18,784
Cost of sales............... 4,017 10,565 20,113 24,477 9,590 54,110 54,110 12,285
--------- --------- --------- --------- ----------- ----------- ----------- ---------
Gross profit................ 2,033 5,877 10,828 13,423 4,689 29,399 29,399 6,499
--------- --------- --------- --------- ----------- ----------- ----------- ---------
Selling, general and
administrative expense..... 1,788 4,703 5,098 4,210 5,404 11,220 10,408 2,634
Research, development and
engineering expense........ 135 838 1,536 2,073 2,223 3,401 2,463 777
--------- --------- --------- --------- ----------- ----------- ----------- ---------
Income (loss) from
operations................. 110 336 4,194 7,140 (2,938) 14,778 16,528 3,088
Interest and other (income)
expense, net............... 21 67 16 6 51 5,650 (136) 1,484
--------- --------- --------- --------- ----------- ----------- ----------- ---------
Income (loss) before income
taxes...................... 89 269 4,178 7,134 (2,989) 9,128 16,664 1,604
Provision for (benefit from)
income taxes............... 9 104 1,521 2,420 (653) 3,464 6,478 610
--------- --------- --------- --------- ----------- ----------- ----------- ---------
Net income (loss)........... $ 80 $ 165 $ 2,657 $ 4,714 $ (2,336) $ 5,664 $ 10,186 $ 994
--------- --------- --------- --------- ----------- ----------- ----------- ---------
--------- --------- --------- --------- ----------- ----------- ----------- ---------
Net income (loss) per share
(3)........................ $ 0.01 $ 0.02 $ 0.29 $ 0.51 $ (0.25) $ 0.57 $ 0.75 $ 0.10
--------- --------- --------- --------- ----------- ----------- ----------- ---------
--------- --------- --------- --------- ----------- ----------- ----------- ---------
Shares used in per share
calculations (3)........... 9,240 9,240 9,240 9,240 9,240 9,240 13,610(4) 9,240
--------- --------- --------- --------- ----------- ----------- ----------- ---------
--------- --------- --------- --------- ----------- ----------- ----------- ---------
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------------------ ------------------------
1991 1992 1993 1994 1995(1) 1996(1)
--------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(IN THOUSANDS):
Working capital
(deficiency)............... $ (29) $ 906 $ 2,226 $ 5,995 $ 1,939 $ 2,327
Total assets................ 2,123 4,081 7,660 13,493 17,679 26,932
Total debt.................. 512 1,146 1,345 998 48,500 44,500
Mandatorily redeemable
preferred stock............ -- -- -- -- 7,000 7,357
Stockholders' equity
(deficit).................. 27 167 2,774 7,188 (44,922) (39,615)
<CAPTION>
1996 1996
ACTUAL PRO FORMA(2)
--------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER
SHARE DATA):
Net sales................... $ 21,378 $ 21,378
Cost of sales............... 13,733 13,733
--------- -------------
Gross profit................ 7,645 7,645
--------- -------------
Selling, general and
administrative expense..... 2,916 2,604
Research, development and
engineering expense........ 1,243 899
--------- -------------
Income (loss) from
operations................. 3,486 4,142
Interest and other (income)
expense, net............... 1,292 (49)
--------- -------------
Income (loss) before income
taxes...................... 2,194 4,191
Provision for (benefit from)
income taxes............... 845 1,644
--------- -------------
Net income (loss)........... $ 1,349 $ 2,547
--------- -------------
--------- -------------
Net income (loss) per share
(3)........................ $ 0.14 $ 0.19
--------- -------------
--------- -------------
Shares used in per share
calculations (3)........... 9,240 13,610(4)
--------- -------------
--------- -------------
AT JUNE 30, 1996
------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(5)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA
(IN THOUSANDS):
Working capital
(deficiency)............... $ 1,797 $ 15,878
Total assets................ 28,665 36,362
Total debt.................. 43,750 --
Mandatorily redeemable
preferred stock............ 7,449 --
Stockholders' equity
(deficit).................. (38,358) 21,194
</TABLE>
(FOOTNOTES ON THE FOLLOWING PAGE)
17
<PAGE>
- ------------------------
(CONTINUED FROM PRIOR PAGE)
(1) In 1995, the Company changed its fiscal year end from December 31 to March
31.
(2) The pro forma statement of operations data for the fiscal year ended March
31, 1996 and the quarter ended June 30, 1996 give effect to the Offering and
the application of the net proceeds therefrom as if the Offering had
occurred at the beginning of the respective periods, and reflect the
reduction of operating expenses of $1.8 million and $0.7 million,
respectively, related to the termination of the Bonus Plan, the reduction of
interest expense of $5.8 million and $1.3 million, respectively, and the tax
effect of the foregoing (but exclude the effect of write-offs of
approximately $2.4 million relating to unamortized debt issuance costs,
expenses of approximately $6.7 million relating to the termination of the
Bonus Plan and the tax effect of the foregoing). See "Use of Proceeds" and
Note 2 of Notes to Pro Forma Condensed Consolidated Balance Sheet and
Statements of Operations.
(3) For an explanation of the determination of the number of shares used in per
share calculations and net income (loss) per share, see Note 2 of Notes to
Consolidated Financial Statements. For the fiscal year ended March 31, 1996
and the quarters ended June 30, 1995 and 1996, net income has been reduced
by accretion for dividends on the Holdings Preferred Stock of $357,000,
$94,000 and $92,000, respectively.
(4) Pro forma computation of net income per share includes 4,370,400 shares of
Common Stock to be issued pursuant to the Offering, net of expenses, the
proceeds from the sale of which the Company intends to use as follows: (a)
$26.75 million to repay borrowings outstanding under the Existing Credit
Facilities, (b) $17.0 million to repay the Senior Notes and the Junior
Notes, (c) $7.4 million to redeem all of the outstanding shares of Holdings
Preferred Stock and (d) $7.3 million to make payments to terminate the Bonus
Plan. Shares to be issued for working capital purposes have been excluded
from the pro forma computation of net income per share. See "Use of
Proceeds" and Note 2 to Pro Forma Condensed Consolidated Balance Sheet and
Statements of Operations.
(5) Pro forma as adjusted to give effect to the Offering and the application of
the net proceeds therefrom as if the Offering had occurred on June 30, 1996,
including write-offs of approximately $2.4 million relating to unamortized
debt issuance costs, expenses of approximately $6.7 million relating to the
termination of the Bonus Plan, payments of approximately $7.4 million to
redeem all of the outstanding shares of Holdings Preferred Stock and $26.75
million, $11.0 million and $6.0 million to repay the Existing Credit
Facilities, the Senior Notes and the Junior Notes, respectively, and the tax
effect of the foregoing. See "Use of Proceeds," "Capitalization" and Note 1
of Notes to Pro Forma Condensed Consolidated Balance Sheet and Statements of
Operations.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the Consolidated Financial Statements and the
related notes thereto, which are included elsewhere in this Prospectus.
GENERAL
RockShox is the worldwide leader in the design, manufacture and marketing of
high performance bicycle suspension products. The Company's sales have grown
rapidly, from approximately $6 million in fiscal 1991 to approximately $83.5
million in fiscal 1996, a compound annual growth rate of approximately 85.5%.
Net sales in the first five months of fiscal 1997 were $38.2 million compared to
$30.7 million in the first five months of fiscal 1996. The Company believes that
its growth has been the result of increasing market acceptance of bicycle
suspension worldwide and, more specifically, growing demand for ROCKSHOX
suspension products.
Substantially all of the Company's historical revenues have been
attributable to sales of mountain bike front suspension forks. The Company's two
principal channels of distribution are: (i) sales to OEMs and (ii) sales to
distributors and IBDs (the "retail accessory market"). A large portion of the
Company's sales are to a small group of OEM customers. See "Risk Factors--Sales
Concentration; Dependence on OEMs."
The Company has substantial international sales, a significant portion of
which include products shipped to Asian manufacturing subcontractors for certain
U.S.-based OEMs. The Company believes that a substantial portion of these
products are ultimately shipped back to the U.S. and sold domestically by OEMs.
The Company recognizes revenue upon shipment of the product and, to date,
product returns have not been material.
The Company's gross margins have remained relatively consistent over the
past several years. While gross margins are generally higher on retail accessory
market sales compared to OEM sales, OEM sales generate much higher unit volume,
which allows the Company an opportunity to capitalize on manufacturing
efficiencies. Research, development and engineering costs are expensed as
incurred.
The Company moved its principal operations from North Carolina to California
in August 1992. In September 1994, the Company consolidated its operations in
its present facilities located in San Jose, California. In 1995, the Company
changed its fiscal year end from December 31 to March 31, which more closely
corresponds to the Company's product model year and business cycle.
In March 1995, the Company consummated the Recapitalization, which resulted
in Stephen Simons, Paul Turner and certain members of their respective families
owning 50% of Holdings Common Stock and MCIT and certain persons and entities
affiliated with The Jordan Company owning the other 50% of Holdings Common
Stock. In order to finance the Recapitalization, the Company incurred
approximately $48.5 million of debt. In connection with the Recapitalization,
the Company incurred the following expenses during the quarter ended March 31,
1995: (i) initial payments under the Bonus Plan of an aggregate of $4.7 million,
of which $2.8 million was included in selling, general and administrative
expense and $1.9 million was included in research, development and engineering
expense, and (ii) $400,000 of expenses related to the Recapitalization, which
were included in selling, general and administrative expense. See "The
Recapitalization and the Merger."
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth operations data as a percentage of net sales
for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED
31, JUNE 30,
---------------------- YEAR ENDED ----------------------
1993 1994 MARCH 31, 1996 1995 1996
---------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 65.0 64.6 64.8 65.4 64.2
Gross margin....................................... 35.0 35.4 35.2 34.6 35.8
Selling, general and administrative expenses....... 16.5 11.1 13.4 14.0 13.6
Research, development and engineering expenses..... 4.9 5.5 4.1 4.1 5.8
Operating income (loss)............................ 13.6 18.8 17.7 16.4 16.3
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 (FIRST QUARTER FISCAL 1997) COMPARED TO
THREE MONTHS ENDED JUNE 30, 1995 (FIRST QUARTER FISCAL 1996)
NET SALES. Net sales increased by approximately 13.8% to $21.4 million in
the first quarter of fiscal 1997 compared to $18.8 million in the first quarter
of fiscal 1996. The increase in net sales was primarily due to the introduction
of the INDY product line as well as increased revenues from the QUADRA product
line, which experienced higher unit volume partially offset by a lower average
sales price. Sales to OEMs increased by approximately 39.3% to $13.3 million (or
approximately 62.3% of net sales) in the first quarter of fiscal 1997 from $9.6
million (or approximately 50.9% of net sales) in the first quarter of fiscal
1996. Net sales to the retail accessory market decreased by approximately 12.6%
to $8.1 million (or approximately 37.7% of net sales) in the first quarter of
fiscal 1997 from $9.2 million (or approximately 49.1% of net sales) in the first
quarter of fiscal 1996 principally due to the timing of shipment of products to
the retail accessory market.
International sales, a significant portion of which included products
shipped to Asian manufacturing subcontractors for certain U.S.-based OEMs,
accounted for approximately 48.4% and 41.7% of net sales in the first quarters
of fiscal 1997 and fiscal 1996, respectively.
GROSS MARGIN. Gross margin (gross profit as a percentage of net sales)
increased to approximately 35.8% for the first quarter of fiscal 1997 compared
to approximately 34.6% for the first quarter of fiscal 1996 principally due to
increased production activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses in the first quarter of fiscal 1997 increased by
approximately 10.7% to $2.9 million compared to the first three months of fiscal
1996, but decreased as a percentage of net sales from approximately 14.0% to
13.6%. This decrease was primarily the result of certain fixed expenses being
allocated over an increased sales base offset by an increase in the amounts
accrued under the Bonus Plan to $375,000 in the first quarter of fiscal 1997
from $265,000 in the first quarter of fiscal 1996. As discussed in "Use of
Proceeds," the Bonus Plan will be terminated upon completion of the Offering. In
the second quarter of fiscal 1997, the Company will incur a one-time pre-tax
charge of approximately $6.7 million in connection with the termination of the
Bonus Plan.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development and
engineering expense increased by approximately 59.9% to $1.2 million (or
approximately 5.8% of net sales) in the first quarter of fiscal 1997 compared to
$800,000 (or approximately 4.1% of net sales) in the first quarter of fiscal
1996 principally due to increases in product development expenses and headcount.
The amounts accrued under the Bonus Plan increased in the first quarter of
fiscal 1997 to $375,000 from $265,000 in the first quarter of fiscal 1996.
INTEREST EXPENSE. The Company incurred interest expense (which included
amortization of capitalized financing costs) of $1.3 million in the first
quarter of fiscal 1997 compared to $1.5 million in the first quarter of fiscal
1996. The decrease was primarily due to lower interest rates and a reduction of
outstanding debt (which was issued in connection with the Recapitalization) in
the first quarter of fiscal 1997 compared to the
20
<PAGE>
first quarter of fiscal 1996. In the second quarter of fiscal 1997, the Company
will incur a one-time pre-tax charge, reflected as an extraordinary item, as a
result of the write-off of capitalized financing costs, of approximately $2.2
million in connection with the planned repayment of such debt.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to
38.5% in the first quarter of fiscal 1997 from 37.9% in the first quarter of
fiscal 1996 primarily due to a higher federal tax rate.
FISCAL YEAR ENDED MARCH 31, 1996 (FISCAL 1996) COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1994 (FISCAL 1994)
NET SALES. Net sales increased by approximately 120.3% to $83.5 million in
fiscal 1996 compared to $37.9 million in fiscal 1994. (Net sales increased by
approximately 97.7% to $83.5 million in fiscal 1996 compared to $42.2 million
for the twelve months ended March 31, 1995.) The increase in net sales was
primarily due to higher unit volume in fiscal 1996 of both the Company's JUDY
product, for which significant shipments began in late fiscal 1994, and QUADRA
product line, which experienced increased demand during fiscal 1996. Sales to
OEMs increased by approximately 133.2% to $57.1 million (or approximately 68.4%
of net sales) in fiscal 1996 from $24.5 million (or approximately 64.6% of net
sales) in fiscal 1994. Net sales to the retail accessory market increased by
approximately 96.8% to $26.4 million (or approximately 31.6% of net sales) in
fiscal 1996 from $13.4 million (or approximately 35.4% of net sales) in fiscal
1994. The Company does not expect to achieve such high rates of growth in the
future. See "Risk Factors--Susceptibility to Changing Economic and Market
Conditions," "--Dependence on Mountain Bike Front Suspension Product Lines" and
"--Risks Associated with Rapid Growth."
International sales, a significant portion of which included products
shipped to Asian manufacturing subcontractors for certain U.S.-based OEMs,
accounted for approximately 48.6% and 49.4% of net sales in fiscal 1996 and
fiscal 1994, respectively.
GROSS MARGIN. Gross margin remained relatively constant at approximately
35.2% in fiscal 1996 compared to approximately 35.4% in fiscal 1994. Increases
in facility expenses and provisions for warranty costs and inventory reserves in
fiscal 1996 were largely offset by a greater absorption of fixed manufacturing
costs due to the higher sales volumes in fiscal 1996 compared to fiscal 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased by approximately 166.5% to $11.2 million (or
approximately 13.4% of net sales) in fiscal 1996 from $4.2 million (or
approximately 11.1% of net sales) in fiscal 1994 principally due to increased
sales and marketing expenses, which related in part to an increase in headcount,
provisions for uncollectible accounts receivable, an officer bonus of $1.1
million under the Bonus Plan in fiscal 1996 compared to discretionary bonuses
paid to certain officers of approximately $800,000 in fiscal 1994 and certain
severance provisions incurred in fiscal 1996.
As discussed in Note 6 of Notes to Consolidated Financial Statements, the
Company incurred officer bonuses of $2.2 million in fiscal 1996 under the Bonus
Plan entered into following the Recapitalization (of which $1.1 million was
included in selling, general and administrative expense as discussed in the
preceding paragraph and $1.1 million was included in research, development and
engineering expense as discussed below). As discussed in "Use of Proceeds," the
Bonus Plan will be terminated upon completion of the Offering. In the second
quarter of fiscal 1997, the Company will incur a one-time pre-tax charge of
approximately $6.7 million in connection with the termination of the Bonus Plan.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development and
engineering expense increased by approximately 64% to $3.4 million (or
approximately 4.1% of net sales) in fiscal 1996 compared to $2.1 million (or
approximately 5.5% of net sales) in fiscal 1994. Research, development and
engineering expense included an officer bonus in fiscal 1996 of $1.1 million
under the Bonus Plan, as discussed above, and a discretionary bonus in fiscal
1994 of approximately $800,000, which was paid to an officer of the Company.
Excluding these bonuses, research, development and engineering expense was
approximately 2.8% and 3.4% of net sales in fiscal 1996 and fiscal 1994,
respectively.
INTEREST EXPENSE. The Company incurred interest expense (which included
amortization of capitalized financing costs) of $5.8 million in fiscal 1996
compared to $21,000 in fiscal 1994. The increase was due to debt issued in
connection with the Recapitalization that occurred in March 1995. In the second
quarter of
21
<PAGE>
fiscal 1997, the Company will incur a one-time pre-tax charge, reflected as an
extraordinary item, as a result of the write-off of capitalized financing costs,
of approximately $2.2 million in connection with the planned repayment of such
debt.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased to
37.9% in fiscal 1996 from 33.9% in fiscal 1994 primarily due to a decrease in
research and development tax credits and higher state income taxes in fiscal
1996 compared to fiscal 1994.
FISCAL YEAR ENDED DECEMBER 31, 1994 (FISCAL 1994) COMPARED TO FISCAL YEAR
ENDED DECEMBER 31, 1993 (FISCAL 1993)
NET SALES. Net sales increased by approximately 22.5% to $37.9 million in
fiscal 1994 compared to $30.9 million in fiscal 1993 primarily due to the
introduction of the Company's JUDY product in late fiscal 1994 and continued
growth in the Company's QUADRA product line. Sales to OEMs increased by
approximately 25.7% to $24.5 million (or approximately 64.6% of net sales) in
fiscal 1994 from $19.5 million (or approximately 62.9% of net sales) in fiscal
1993. Net sales to the retail accessory market increased by approximately 17.1%
to $13.4 million (or approximately 35.4% of net sales) in fiscal 1994 from $11.5
million (or approximately 37.1% of net sales) in fiscal 1993.
International sales accounted for approximately 49.4% and 44.5% of net sales
in fiscal 1994 and fiscal 1993, respectively. This increase resulted principally
from an increase in net sales of products shipped to Asian manufacturing
subcontractors for certain U.S.-based OEMs.
GROSS MARGIN. Gross margin remained relatively constant at approximately
35.4% in fiscal 1994 compared to approximately 35.0% in fiscal 1993. Improvement
in fiscal 1994 gross margin was due to increased sales volume, allowing for
greater manufacturing efficiencies, which was partially offset by increased
customer service and materials costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased by approximately 17.4% to $4.2 million (or
approximately 11.1% of net sales) in fiscal 1994 from $5.1 million (or
approximately 16.5% of net sales) in fiscal 1993. This decrease was principally
due to discretionary bonuses paid to certain officers of approximately $800,000
during fiscal 1994 compared to discretionary bonuses paid to certain officers of
approximately $1.8 million during fiscal 1993, partially offset by an increase
in other marketing expenses in fiscal 1994.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development and
engineering expense increased by approximately 35.0% to $2.1 million (or
approximately 5.5% of net sales) in fiscal 1994 compared to $1.5 million (or
approximately 4.9% of net sales) in fiscal 1993 primarily due to an increase in
headcount. Fiscal 1994 includes discretionary bonuses paid to an officer of the
Company of approximately $800,000 compared to discretionary bonuses paid to
certain officers in fiscal 1993 of approximately $900,000.
INTEREST EXPENSE. Interest expense was $21,000 in fiscal 1994 compared to
$36,000 in fiscal 1993, less than 1% of net sales in both periods.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased to
33.9% in fiscal 1994 from 36.4% in fiscal 1993 principally due to lower state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the past three fiscal years, the Company has satisfied its operating
cash needs, other than expenses relating to the Recapitalization, principally
through cash flow from operations. Net cash provided by operating activities was
$8.5 million during fiscal 1996, which consisted of net income of $5.7 million,
depreciation and amortization of $1.7 million, provisions for doubtful accounts
and excess and obsolete inventory of $3.5 million and increases in accounts
payable and accrued liabilities of $7.6 million offset partially by increases in
deferred income taxes of $2.3 million, accounts receivable of $1.7 million and
inventories of $6.1 million. Currently, the Company does not generally grant
extended payment terms to its OEM or distributor customers, and requires its
retail accessory market customers to pay by credit card or cash on delivery. The
Company may change this policy in the future in response to competitive or other
market conditions. See "Risk Factors -- Sales Concentration; Dependence on
OEMs."
22
<PAGE>
Net cash provided by operating activities was $3.2 million in the first
quarter of fiscal 1997, which consisted of net income of $1.3 million,
depreciation and amortization of $600,000, a decrease in inventory of $700,000
and an increase in accounts payable of $3.6 million offset partially by
decreases in accrued liabilities of $2.0 million and accrued income taxes of
$500,000 and an increase in prepaid expenses of $400,000.
Net cash used in investing activities was $4.0 million during fiscal 1996
and $1.4 million in the first quarter of fiscal 1997, which consisted of
purchases of property, equipment and other assets. The Company expects that its
capital expenditures will increase to approximately $5 million to $7 million in
fiscal 1997.
In March 1995, the Company effected the Recapitalization. See "The
Recapitalization and the Merger." Net cash used by financing activities was $4.0
million during fiscal 1996, which consisted of a $2.5 million reduction in
long-term debt, a $1.3 million payment to satisfy all revolving loans under the
Existing Credit Facilities and a $250,000 repayment of a note held by a
stockholder. At June 30, 1996, the Company had working capital of $1.8 million
and had available a $6.0 million line of credit. The Company intends to replace
the Existing Credit Facilities with the New Credit Facility after consummation
of the Offering. Although the Company has contacted several institutions
regarding the New Credit Facility, the Company has not entered into any letter
of intent or other agreement relating to such facility. See "Use of Proceeds."
The Existing Credit Facilities contain covenants, the most restrictive of
which requires the maintenance of various financial ratios and, among other
things, restricts additional borrowings and the sale of assets. In addition, the
Existing Credit Facilities restrict the ability of the Company to pay cash
dividends on its capital stock.
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), which requires the Company to review
for impairment of long-lived assets and, in certain situations, recognize an
impairment loss. SFAS No. 121 will become effective for the Company's fiscal
year ending March 31, 1997. The Company has studied the implications of SFAS No.
121 and, based on its initial evaluation, does not expect SFAS No. 121 to have a
material impact on the Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
which established a fair value-based method of accounting for stock-based
compensation plans. The Company is currently following the requirements of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company plans to adopt SFAS No. 123 utilizing the disclosure
alternative during fiscal 1997.
SELECTED QUARTERLY FINANCIAL DATA; SEASONALITY
The following table presents selected quarterly financial information for
the last nine fiscal quarters. This information has been prepared by the Company
on a basis consistent with the Company's audited financial statements and
includes all adjustments, consisting of normal recurring adjustments, that
management considers necessary for a fair presentation of the results for such
quarters. The operating results for any quarter are not necessarily indicative
of the results for any entire year.
23
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED:
----------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1995 1995 1995 1995
----------- --------------- ------------- ----------- ----------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $ 6,853 $ 7,568 $ 13,543 $ 14,279 $ 18,784 $ 21,258 $ 23,223
Gross margin.............. 2,281 2,596 4,752 4,689 6,420 7,493 8,363
Operating income (loss)... 768 767 3,103 (2,938) 3,087 3,976 5,337
Net income (loss)......... 500 513 2,053 (2,336) 990 1,587 2,445
----------- ------ ------------- ----------- ----------- ------- -------------
----------- ------ ------------- ----------- ----------- ------- -------------
Net income (loss) per
share.................... $ 0.05 $ 0.06 $ 0.22 $ (0.25) $ 0.10 $ 0.16 $ 0.26
----------- ------ ------------- ----------- ----------- ------- -------------
----------- ------ ------------- ----------- ----------- ------- -------------
Shares used in per share
calculations............. 9,240 9,240 9,240 9,240 9,240 9,240 9,240
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
----------- -----------
<S> <C> <C>
Net sales................. $ 20,244 $ 21,378
Gross margin.............. 7,123 7,645
Operating income (loss)... 2,378 3,486
Net income (loss)......... 642 1,349
----------- -----------
----------- -----------
Net income (loss) per
share.................... $ 0.06 $ 0.14
----------- -----------
----------- -----------
Shares used in per share
calculations............. 9,240 9,240
</TABLE>
Because of the Company's rapid and substantial growth, historical quarterly
operating results do not reflect management's expectations of future quarterly
operating results. Management believes that future operating results will
fluctuate on a quarterly basis due to a variety of factors, including seasonal
cycles associated with the bicycle industry; the effects of weather conditions
on consumer purchases; the timing of orders from OEMs, distributors and IBDs;
the number and timing of new product introductions; and changes in the mix of
products ordered and re-ordered by OEMs, distributors and IBDs. Management
anticipates that the Company's sales will normally be lowest in its first and
fourth fiscal quarters, which end on June 30 and March 31, respectively. See
"Risk Factors--Quarterly Fluctuations in Operating Results; Difficulty in
Forecasting OEM Orders."
24
<PAGE>
BUSINESS
RockShox is the worldwide leader in the design, manufacture and marketing of
high performance bicycle suspension products. In a 1995 BICYCLING MAGAZINE
readers' survey, 45% of the respondents who owned a suspension fork owned a
RockShox manufactured product--more than twice the share of the next leading
manufacturer--and more than 65% of the respondents who planned to purchase a
suspension fork within the next two years planned to purchase a ROCKSHOX
suspension fork.
The Company's sales have grown rapidly, from approximately $6 million in
fiscal 1991 to approximately $83.5 million in fiscal 1996, a compound annual
growth rate of approximately 85.5%. The Company believes that its growth has
been the result of increasing market acceptance of bicycle suspension worldwide
and, more specifically, growing demand for ROCKSHOX suspension products. The
Company believes that significant opportunities for growth continue to exist
worldwide. Although the number of mountain bikes sold with suspension has been
rapidly increasing, suspension was included on only 17% of all mountain bike
units sold domestically by IBDs in 1995. The Company believes that the market
penetration of suspension-equipped mountain bikes is even lower internationally.
RockShox currently markets ten front suspension forks and three rear shocks
under its JUDY, INDY, QUADRA, MAG and DELUXE product lines. The Company's
products have been repeatedly recognized by the bicycle industry for their
innovative design and superior performance. As evidence of the advanced design
and technical benefits of its products, ROCKSHOX suspension was used by more
than half of the mountain bike racers competing in the 1996 Olympic Games in
Atlanta.
Approximately two-thirds of the Company's sales are to OEMs, including Trek,
GT and Specialized, who incorporate ROCKSHOX branded components as part of new,
fully-assembled mountain bikes sold worldwide. The Company's products are also
sold as an accessory component to consumers through a network of over 10,000
IBDs worldwide.
OPERATING STRATEGIES
The Company believes that it currently has the leading market share in front
suspension forks and is a major participant in the developing market for rear
shocks. The Company has established and continues to enhance its position as the
worldwide leader in the design, manufacture and marketing of high performance
bicycle suspension products through the following operating strategies:
- INNOVATIVE PRODUCT DEVELOPMENT. Management believes that no other company
has been as successful as RockShox in bringing to market a series of new
and innovative mountain bike suspension products. From the original
oil-damped RS1 fork introduced in 1989 to the new generation of the
monococque (one-piece) casted forks, RockShox has remained a leader in the
growing mountain bike suspension market. In the current model year, the
Company has introduced six new products, including the INDY product line,
and has incorporated design improvements in a number of its more seasoned
product offerings. The Company supports its research and development
efforts with a team of 14 product development professionals, sophisticated
computer-based design tools and an advanced product testing center. The
Company expects to spend in excess of $3 million on research and product
development in its current fiscal year.
- WIDELY RECOGNIZED BRAND NAME AND DISTINCTIVE IMAGE. The Company has one of
the most widely recognized brand names in the bicycle industry and is
closely identified with the mountain biking culture. Every front
suspension fork sold by the Company today, including components sold as
part of OEM mountain bikes, prominently displays the ROCKSHOX brand name.
The Company promotes its brand name and image through focused marketing
programs, including sponsorship of mountain bike race teams and creative
advertising in a variety of U.S. and international bicycle publications.
The Company's brand name and products receive further promotion through
inclusion in many OEM advertisements and frequent editorial references in
cycling publications.
- STRONG RELATIONSHIPS WITH OEMS AND IBDS. The Company has become an
increasingly important supplier to mountain bike OEMs worldwide, and is
currently the primary supplier of front suspension forks to eight out of
the ten leading OEMs selling through domestic IBDs. The Company's products
25
<PAGE>
are currently included on more than 60% (or 460) of the mountain bike
models sold with suspension in the U.S., according to MOUNTAIN BIKE
MAGAZINE'S 1996 annual industry survey. Management believes that its OEM
customers recognize the strength of the ROCKSHOX name as a deciding factor
in the consumer's choice of mountain bikes. The Company supports its OEM
customer relationships with joint product development and global
distribution and service. The Company's products, both as part of an OEM
mountain bike or as an accessory item, are sold to consumers through a
network of over 10,000 IBDs worldwide. Management believes that ROCKSHOX
is the leading brand of suspension product sold by IBDs, and that IBD
enthusiasm for ROCKSHOX has contributed to consumer acceptance of the
Company's suspension products. The Company maintains its strong position
among IBDs with a variety of programs, ranging from unique point-of-sale
materials to worldwide warranty support.
- PRODUCT LINE EXPANSION AND BRAND SEGMENTATION. The Company has
successfully expanded the market for mountain bike suspension by extending
its product line and segmenting its brands to address a growing range of
price points and performance needs. In 1992, the Company offered only two
suspension forks and participated in a narrow market segment represented
by mountain bikes that retailed for over $1,000. Today, RockShox offers
ten front suspension forks under four different product lines and has
effectively expanded the primary market for its products to mountain bikes
that retail from $600 to more than $2,500. The Company believes its broad
and segmented product lines enable RockShox to leverage its design and
manufacturing capabilities to meet the cost and performance needs of its
customers at various price points while maintaining brand name integrity.
- INCREASINGLY EFFICIENT DESIGN AND MANUFACTURING PROCESSES. The Company
constantly seeks increased productivity in its product development and
manufacturing activities. Continuing improvements in product design as
well as the Company's ability to bring critical manufacturing processes
in-house have generated significant operating efficiencies. As a result,
the Company has been able to expand the target market for its products by
introducing more moderately-priced suspension products without
experiencing a material change in its overall gross margin. Management
believes that the Company's emphasis on design and manufacturing
improvements will continue to be a critical factor in RockShox's ability
to expand the market for its products.
GROWTH STRATEGIES
The Company has developed the following growth strategies to capitalize on
its strong brand name, successful products and operating capabilities:
- CAPITALIZE ON THE ONGOING GROWTH OF HIGH-END MOUNTAIN BIKE SEGMENT. The
Company believes that the high-end of the mountain bike market will
continue to grow at a faster rate than the overall bicycle market,
creating the opportunity for increased sales of suspension products.
According to BMRI, unit sales of mountain bikes in the U.S. by IBDs with a
retail price of $600 or more grew at a compound annual rate of
approximately 40% from 1992 to 1995, and this segment of the market is
expected to continue to grow in the coming year. Furthermore, bicycle
suspension manufacturers, led by RockShox, have achieved significant
market penetration (in excess of 80%) among these higher priced mountain
bikes. The Company believes that it is well positioned to capitalize on
the anticipated growth of the high-end mountain bike market based on its
existing market penetration and leadership, widely recognized brand name,
innovative and high quality products, and strong OEM relationships.
- PURSUE FAST GROWING FULL SUSPENSION MARKET. According to MOUNTAIN BIKE
MAGAZINE, the number of mountain bike models available in the U.S. with
full suspension has grown from 39 in 1992 to 213 in 1996. The Company
recently introduced its DELUXE line of rear shocks, which complements its
front suspension forks and allows the Company to participate fully in the
growing demand for full suspension mountain bikes. Since it is generally
not possible to retrofit a mountain bike with rear suspension, management
believes that consumer interest in full suspension should generate
incremental
26
<PAGE>
demand for new mountain bikes, which, in turn, should lead to additional
sales of the Company's well-established front suspension forks as well as
provide a growing market for its newly introduced rear shocks.
- EXPAND INTO THE HIGHER-VOLUME, MID-PRICED MOUNTAIN BIKE SEGMENT. Most of
the Company's products are included on higher-priced mountain bikes that
retail for $600 or more. According to BMRI, approximately 17% of all
mountain bike units sold in the U.S. by IBDs during 1995 were priced at
$600 or above, and 80% of these units included suspension. In contrast,
approximately 83% of mountain bikes sold by IBDs in 1995 were priced under
$600 and, while suspension is becoming more common on such bikes, less
than 15% included suspension. Management believes that the demand for
suspension on mountain bikes priced below $600 is potentially significant
and growing rapidly. The Company intends to continue to broaden its
product line within its existing distribution channels to capture more of
this high-volume, mid-priced mountain bike market. The Company recently
repositioned, and is already experiencing success with, its QUADRA
suspension fork, which is priced to be incorporated on OEM mountain bikes
that retail for as low as $475.
- LEVERAGE BRAND NAME IN NEW PRODUCT CATEGORIES. Management believes that
the performance and comfort of suspension can be applied to bicycles other
than mountain bikes. The Company is currently designing new suspension
forks for other types of bicycles, including road and trekking bikes, and
expects to introduce a new road fork on a limited basis in fiscal 1997.
The Company also anticipates that it may develop new products and from
time to time evaluate acquisition opportunities to expand its product
lines, including the possible development or acquisition of non-suspension
bicycle component product lines. See "Risk Factors--Dependence on New
Product Introductions."
INDUSTRY OVERVIEW
BICYCLING. BMRI estimates that approximately 12 million bicycles (excluding
juvenile bikes) were sold in the United States in 1995, representing
approximately $2.2 billion of retail sales. Although unit sales of bicycles in
the U.S. have increased less than 7% since 1993, the average retail price per
bicycle during this same time period has increased more than 26% to $183. The
Company believes the average retail price per bicycle has increased in recent
years as consumers have "traded-up" to purchase new bicycles with more advanced
performance features, including suspension.
Limited information is available regarding the sale of bicycles in
international markets; however, management believes that approximately 114
million bicycles were produced worldwide in 1995. The Company also believes the
two largest international bicycle markets are Western Europe and Japan, and that
approximately 18 million and 8.5 million bicycles, respectively, were sold
therein in 1994.
Bicycles are sold through two primary retail channels: mass merchandise
retailers and IBDs. According to BMRI, in the United States, mass merchandise
retailers typically sell lower priced bicycles that retail for under $400 (the
average price per bicycle sold by mass merchandise retailers in 1995 was $105)
with minimal service. In contrast, IBDs typically sell higher quality, higher
priced bicycles with full service and sales support. IBD retail prices can
exceed $2,500 with an average price in 1995 of $349. IBDs (including general
sporting goods stores), which accounted for 27% of U.S. unit sales and 48% of
U.S. bicycle retail dollars in 1993, are increasingly becoming the preferred
channel for bicycle purchases, and, in 1995, accounted for 32% of U.S. unit
sales and 61% of U.S. bicycle retail dollars.
IBDs sell new, fully-assembled OEM bicycles as well as a wide range of
bicycle performance accessories and products. Leading OEMs selling through IBDs
include Trek, Schwinn Cycling and Fitness, Inc., Specialized, Cannondale
Corporation ("Cannondale") and GT, all of which are customers of the Company.
Whether included as part of an OEM's fully-assembled mountain bike or as an
aftermarket accessory, ROCKSHOX suspension products are only available to
consumers through IBDs.
MOUNTAIN BIKES. BMRI estimates that approximately eight million mountain
bikes were sold in the United States in 1995, representing approximately $1.6
billion of retail sales. As a percentage of all bicycles sold in the U.S., sales
of mountain bikes have increased from approximately 54% of units in 1992 to
approximately 67% of units in 1995 and from approximately 58% of retail dollars
in 1992 to approximately
27
<PAGE>
72% of retail dollars in 1995. In addition, management believes the
international popularity of mountain biking is growing and mountain bikes now
represent a significant share of the international bicycle market. The growth in
popularity of mountain bikes is attributable, in part, to the superior comfort
of mountain bikes as compared to road bicycles as well as the dramatically
increased terrain available for mountain biking versus other types of cycling.
According to BMRI, over 2.1 million mountain bikes were sold by IBDs in the
U.S. in 1995 at an average price of $425. According to BMRI, during the same
period another four to five million mountain bike units were sold by IBDs in
Western Europe. Management believes that there has been a general trend of
increasing sales and increasing average selling price for high-end mountain
bikes, which has benefitted IBDs worldwide over the past several years.
The growth of the high performance segment of the mountain bike market has
been a major factor in the overall strength of IBD mountain bike sales
worldwide. BMRI estimates that unit sales of mountain bikes in the U.S. by IBDs
with a retail price of $600 or more grew at a compound annual rate of
approximately 40% from 1992 to 1995, and management believes a similar trend has
occurred over the same period in the international market. The recent popularity
of the more expensive mountain bikes is due in large part to innovations such as
lighter frames and suspension, which attract both first-time buyers and
consumers "trading-up" to obtain more advanced performance features.
Despite recent growth, high priced mountain bikes still represent a small
part of the overall mountain bike market as measured by units. Most mountain
bikes sold by domestic IBDs retail for under $600 per unit as follows:
<TABLE>
<CAPTION>
1995 U.S. IBD
MOUNTAIN BIKE SALES
------------------------------
UNITS
RETAIL PRICE POINT (IN THOUSANDS) % OF TOTAL
- ------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
$600 and over...................................................... 360 17%
$599 and under..................................................... 1,760 83%
----- ---
Total.......................................................... 2,120 100%
----- ---
----- ---
</TABLE>
-------------------------------
Source: BMRI
SUSPENSION. According to BMRI, approximately 360,000 suspension-equipped
mountain bikes were sold by IBDs in the United States in 1995. Also according to
BMRI, the average retail price of a suspension-equipped mountain bike sold in
1995 through domestic IBDs was $925, and over 80% of all mountain bikes sold
domestically for $600 or more included suspension as standard equipment. The
significant market penetration of suspension at the high-end of the mountain
bike market reflects the industry's success in developing suspension products
for performance-oriented mountain bike enthusiasts and racers. Management
believes that an opportunity is now emerging to design suspension products for
the broader, mid-priced market. Since 1992, an increasing number of mountain
bike models priced below $600 are being sold with suspension, as demonstrated
below:
<TABLE>
<CAPTION>
NUMBER OF MODELS
DESIGNED BY OEMS WITH
SUSPENSION AVAILABLE IN
THE U.S.
------------------------
RETAIL PRICE POINT 1992 1996
- --------------------------------------------------------- ----- -----
<S> <C> <C>
$600 or more............................................. 84 608
$599 or less............................................. 0 56
--
---
Total................................................ 84 664
--
--
---
---
</TABLE>
-------------------------------
Source: MOUNTAIN BIKE MAGAZINE
28
<PAGE>
Today, less than 15% of mountain bikes sold for under $600 in the U.S. by IBDs
include suspension, but management expects market penetration in this price
segment to increase dramatically over the next several years following the
pattern established at the high-end of the mountain bike market.
In addition, full-suspension bike models, which have both a front suspension
fork and a rear shock, are becoming increasingly common. According to MOUNTAIN
BIKE MAGAZINE, mountain bike models available in the U.S. with full suspension
have increased from 39 in 1992 to 213 in 1996. Management expects full
suspension to gain increased market share and achieve substantial market
penetration, first on mountain bikes priced above $1,000 and, eventually, on
mountain bikes at lower price points.
While suspension has grown in popularity in recent years, a number of
manufacturers of suspension products have withdrawn from the market. These
former manufacturers of suspension products were primarily mountain bike OEMs
who produced suspension products under their own brand name for their own use.
Management believes these OEMs, including Trek and Scott U.S.A. Inc. ("Scott
U.S.A."), withdrew from the suspension market because they could not develop the
necessary technical proficiency, cost efficiency or brand name recognition to
compete with other suspension manufacturers.
CORPORATE HISTORY
RockShox was founded by Steve Simons and Paul Turner in 1989. Their interest
in suspension technology preceded the founding of RockShox by many years, and
can be traced back to their independent experiences as designers of high
performance products in the motorcycle industry.
In 1974, Mr. Simons founded a company that specialized in the design and
production of advanced motorcycle suspension products, including the manufacture
of motorcycle front forks. Through this venture, Mr. Simons obtained patents on
two of his suspension fork designs, and became known for his technical and
manufacturing expertise relating to motorcycle suspension. During this same
period, Mr. Turner worked for the Honda motocross team and, subsequently, became
an independent consultant in the motorcycle industry.
In 1988, Mr. Turner, who had become increasingly interested in mountain bike
competition, approached Mr. Simons with a prototype of a mountain bike
suspension fork for which Mr. Turner needed production advice. Messrs. Simons
and Turner took this prototype and created a commercially-viable bicycle
component ready for production. This suspension fork, the RS1, was introduced at
a bicycle trade show in January 1989. Several months later, RockShox was
incorporated in North Carolina. The original stockholders of RockShox included
Messrs. Simons and Turner as well as Dia-Compe, Inc. ("Dia-Compe"), a U.S.
subsidiary of a Japanese bicycle parts manufacturer, which provided start-up
capital, manufacturing facilities and administrative support for the venture.
In July 1992, Dia-Compe was divested by its parent and, in turn, sold its
interest in RockShox to Mr. Simons and his wife, Debra Simons. The Company then
moved its principal operations from North Carolina to California. In September
1994, the Company consolidated its operations into its present facilities
located in San Jose, California.
Recognizing both the opportunities and challenges of managing and operating
a high-growth company, Messrs. Simons and Turner decided to seek a partner to
support their efforts and strengthen the Company's management team. In March
1995, the Company was recapitalized in a transaction with MCIT and certain
persons and entities affiliated with The Jordan Company. As a result thereof,
Messrs. Simons and Turner and certain members of their respective families
became equal owners in the Company with MCIT and such affiliates of The Jordan
Company. See "The Recapitalization and the Merger." In addition, the Company has
recently made several significant additions to its management group. See
"Management--Directors, Executive Officers and Key Employees."
PRODUCTS
ROCKSHOX suspension products are generally designed to enhance riding
performance and comfort, and include front suspension forks and rear shocks
based on elastomer, hydraulic and spring coil technologies. The Company's
bicycle suspension systems incorporate two functional components: a spring and a
damper. The spring function absorbs the impact of rough terrain and returns the
fork to its original position after
29
<PAGE>
compression. The damper also absorbs impact and moderates the movement of the
fork as it returns to its original position. As a result, suspension provides
better wheel contact with the riding surface, especially on off-road or nonpaved
surfaces, enabling the cyclist to ride with more speed, comfort and control.
Every ROCKSHOX fork uses aerospace alloys and features adjustable
suspension, a progressive spring rate, structural rigidity, low weight and
durable construction. Adjustable suspension allows the rider to fine-tune the
fork's performance to accommodate weight, skill level and performance
objectives. Key to any suspension system is the spring rate, which allows the
front suspension fork to move easily over small bumps but not "bottom out" over
larger ones. The structural rigidity of ROCKSHOX suspension forks improves the
rider's ability to control the bike, while low weight enhances overall bicycle
performance. Every ROCKSHOX fork is covered by a one-year limited warranty.
The 1997 models represent the Company's broadest line of product offerings
to date. For the 1997 model year, the Company has ten front suspension forks,
including five new forks, and three rear shocks, including one new rear shock.
All of the Company's products that were introduced prior to the current product
year have experienced model year modifications or upgrades since they were
originally introduced.
The following tables summarize the Company's 1997 product offerings of front
forks and rear shocks:
FRONT FORKS
<TABLE>
<CAPTION>
TYPICAL
RETAIL BIKE SUGGESTED WEIGHT FOR DATE OF
PRICE RETAIL PRICE IN SUSPENSION STANDARD ORIGINAL
1997 MODEL POINT(1) ACCESSORY MARKET INTENDED USE TECHNOLOGY CONFIGURATION SHIPMENT(2)
- ----------- ------------- ---------------- ---------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
QUADRA 5 $475-$800 Not offered at Recreational; Elastomer 3.2 pounds May 1994
retail Light Terrain
INDY C $500-$850 $199 Recreational; Coil/Solid 3.25 pounds April 1996
Moderate Terrain Urethane
INDY XC $600-$1,200 $239 Cross-Country; Coil/Multicellular 3.1 pounds May 1996
Moderate Terrain Urethane ("MCU")
INDY SL $900-$2,000 $359 Cross-Country; Coil/MCU 2.7 pounds June 1996
Moderate Terrain
MAG 21 $850-$1,200 $299 Cross-Country; Air/Oil 3.0 pounds September 1992
Moderate Terrain
JUDY C $900-$2,000 Not offered at Cross-Country; Cartridge 3.25 pounds July 1996
retail Extreme Terrain
JUDY XC $1,100-$2,500 $409 Cross-Country; Cartridge 2.95 pounds September 1994
Extreme Terrain
JUDY DH $1,500+ $549 Downhill Racing Cartridge 3.5 pounds September 1994
JUDY SL $1,600+ $649 Cross-Country; Cartridge 2.7 pounds September 1994
Extreme Terrain
JUDY DHO $2,000+ $1,000 Downhill Racing Cartridge 4.2 pounds Fall 1996
REAR SHOCKS
<CAPTION>
TYPICAL
RETAIL BIKE SUGGESTED WEIGHT FOR DATE OF
PRICE RETAIL PRICE IN SUSPENSION STANDARD ORIGINAL
1997 MODEL POINT(1) ACCESSORY MARKET INTENDED USE TECHNOLOGY CONFIGURATION SHIPMENT(2)
- ----------- ------------- ---------------- ---------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
DELUXE $1,000-$1,200 Not offered at Cross-Country/ Coil over 0.71 pounds June 1995
retail Downhill hydraulic damper
COUPE $1,200-$1,700 $199 Cross-Country/ Coil over 0.71 pounds July 1996
DELUXE Downhill hydraulic damper
SUPER $1,700+ $289 Cross-Country/ Coil over 0.79 pounds June 1995
DELUXE Downhill hydraulic damper
with oil reservoir
</TABLE>
- ------------------------------
(1) The typical retail bike price point represents management's estimate of the
retail price range for OEM mountain bikes that include the indicated
product.
(2) Following their introduction, models are generally upgraded and revised
each year.
30
<PAGE>
The following describes the Company's 1997 model year product offerings:
QUADRA
The QUADRA product line has been offered by the Company since 1992 and, in
1995, BICYCLING MAGAZINE recognized the QUADRA 21R as the "best value" in front
suspension forks. Building on this reputation for providing suspension
performance at a moderate price, the Company repositioned the line to capture
more of the mid-priced OEM mountain bike market. As a result, the line includes
only one offering in 1997, the QUADRA 5, which is targeted at recreational and
mid-performance cyclists. The QUADRA 5 utilizes an elastomeric damper to provide
reliable performance and has low maintenance requirements. The fork is not
currently available as a retail accessory, and has been targeted for inclusion
on OEM mountain bikes that retail between $475 and $800.
INDY
The INDY line was introduced for the 1997 bicycle model year. The INDY
series is comprised of three suspension forks: the INDY C, the INDY XC and the
INDY SL. These forks are targeted at cyclists who spend between $500 and $2,000
on a mountain bike. All three INDY forks utilize a combination spring
coil/urethane elastomer system that allows for a responsive ride while
maintaining a relatively low fork weight for its price range. Management
believes that INDY technology and design delivers significant performance at a
moderate price. The INDY product line retails to consumers from approximately
$199 for the INDY C to approximately $359 for the INDY SL.
MAG
The MAG line is targeted at high-performance and professional cyclists who
spend more than $850 on a mountain bike. The MAG line utilizes an air/oil
hydraulic damper and uses RockShox's exclusive "Static Lockout" to minimize
energy absorption and fork contraction during pedaling. The MAG 21 is the only
fork currently sold under the MAG line. The MAG 10, MAG 21 SL and MAG 21 SL/TI
forks previously in this line were superseded in the 1995 model year by the Judy
line.
JUDY
In 1994, the Company introduced the Judy line, which was recognized at such
time by VELO NEWS as the "Best Technical Development of the Year" in the bicycle
industry. The JUDY product line is based on an adjustable hydraulic damper unit
in which the damping mechanism is sealed in a replaceable cartridge. For 1997,
the JUDY line consists of five forks: the JUDY C, the JUDY XC, the JUDY SL, the
JUDY DH and the JUDY DHO. The JUDY C, a recent addition to the JUDY product
line, can be purchased only by OEMs and is currently not available as a retail
accessory. The JUDY XC retails for approximately $409 and is targeted at racing
and other performance enthusiasts. The JUDY SL weighs only 2.7 pounds, retails
for approximately $649 and is designed for cyclists who demand premium
performance with minimum weight and who spend in excess of $1,600 on a mountain
bike. The JUDY DH retails for approximately $549 and is a more rigid, heavy-duty
fork, specifically designed to meet the demanding requirements of the downhill
racer. The JUDY DHO is the Company's newest downhill racing fork and is expected
to retail for approximately $1,000.
DELUXE REAR SHOCKS
In the 1996 model year, the Company introduced the DELUXE line, its first
rear suspension products to be incorporated on full suspension bicycles. The
DELUXE series has been expanded for the 1997 model year, and consists of three
rear shocks: the DELUXE, the COUPE DELUXE and the SUPER DELUXE. All three rear
shocks feature oil damped, nitrogen charged suspension technology, and allow the
Company to target a variety of performance levels in the emerging full
suspension mountain bike market. The Company's rear shocks retail from
approximately $199 for the COUPE DELUXE to approximately $289 for the SUPER
DELUXE.
31
<PAGE>
PRODUCT AWARDS
Management believes that improvements in RockShox's existing suspension
products and the development of new product designs and technologies are
necessary for the Company's continued success and growth. The Company is
generally recognized as an industry leader in product development and design,
and has won numerous awards for its products, including the following:
<TABLE>
<CAPTION>
YEAR MAGAZINE PRODUCT AWARD
- --------- ------------------------ -------------- ----------------------------------------------------------------
<S> <C> <C> <C>
1989 BICYCLING GUIDE MAGAZINE RS1 "Best of 1989"
1993 MOUNTAIN BIKE QUADRA 21R "Best Product Tried This Year"
ROCKSHOX forks "Cycling Product Most Likely to Top Your Wish List This
Year"
1994 VELO NEWS JUDY "Best Technical Development of the Year"
1995 BICYCLING MAGAZINE QUADRA 21R "Best Value Fork"
BUYERS GUIDE JUDY XC "Best Overall Fork"
1995 MOUNTAIN BIKE JUDY SL "Favorite Suspension Fork"
JUDY SL "Cycling Product Most Likely to Top Your Wish List This
Year"
1995 AUGUST BIKE MAGAZINE MAG 21 "Winner: Most Durable Fork"
(Germany)
</TABLE>
RESEARCH AND PRODUCT DEVELOPMENT
Management believes that the Company's commitment to product innovation,
research and development is one of the most significant in the bicycle
suspension industry. As of June 30, 1996, the Company's product development
activities, based in San Jose, California, were supported by 14 professionals,
including nine project engineers, who utilize an array of sophisticated design
and analytical tools. Development for each major product line (e.g., JUDY, INDY,
etc.) is headed by a senior level project engineer with assistance from at least
one other project engineer. In addition, the Company has an ongoing advanced
materials/ technologies program led by its engineering manager, which
investigates and applies materials and processes not currently used in the
manufacture of current products.
The Company maintains a testing center in San Jose, California to collect
data and test designs prior to commercial introduction. The testing center is
staffed by two technicians and managed by a senior project engineer, who perform
various fatigue, impact and cycle tests on components and assembled prototypes
during the design process. In addition, the Company operates a field test site
in Santa Cruz, California to provide in-use data on new products. Management
believes that these testing facilities and procedures allow the Company to
design superior suspension products and provide a competitive advantage with
regard to product quality and safety.
The product development process usually begins one to two years prior to the
expected commercial introduction of a new product, and generally focuses on
having a product ready for distribution at the start of the applicable model
year. In addition, short-term projects involving annual upgrades of existing
products and improvements to manufacturing processes occur regularly. New
product ideas come from a variety of sources, including mountain bike race
teams, OEMs, consumers and the Company's employees. Products are developed using
design and engineering software tools that provide full parametric
three-dimensional modeling and finite element analysis, allowing for computer
optimization of structures and greatly reducing the time required to develop and
prototype designs. Currently, an interdepartmental team, including
representatives from the Company's engineering, manufacturing, and, in certain
cases, sales and marketing departments, is established at the beginning of every
development project. Management believes this interdepartmental approach to
product development reduces the time necessary to bring a successful product to
market.
Current areas of focus for product development include, among others, (i)
research in the area of new materials and processes to reduce the cost and
improve the performance of the Company's current products;
32
<PAGE>
(ii) the continuation of the development of rear suspension products; (iii) the
introduction of products appropriately priced for the mid-priced segment of the
mountain bike market; and (iv) the design of new products, including suspension
systems for road and trekking bikes. The Company's future success will depend,
in part, upon its continued ability to develop and successfully introduce new
and popular bicycle suspension products and other types of bicycle components.
There can be no assurance that the Company will introduce any new products or,
if introduced, that any such products will be commercially successful. See "Risk
Factors--Dependence on New Product Introductions."
Research and product development expenditures in fiscal years 1993, 1994 and
1996 were approximately $1.5 million, $2.1 million and $3.4 million,
respectively.
MANUFACTURING
All manufacturing is done in the Company's San Jose facilities on multiple,
continuous flow assembly lines. These lines are computer-controlled and are
comprised of a combination of automated and manual assembly stations supported
by satellite subassembly operations. The assembly lines are designed for
efficiency and can potentially produce a complete suspension fork every 20
seconds. In addition to assembly activities, the Company does some machining of
parts on-site. Management reviews manufacturing processes available through
sub-contractors to determine if opportunities exist to re-engineer such
processes and to bring them in-house. To this end, the manufacturing department
has its own engineering function, which is currently carried out by four
engineers and six technicians. Typically, RockShox brings certain machining
operations into the Company on the basis of cost, quality control, lead-time and
the critical nature of the subcomponent in achieving production efficiencies.
Such in-house machining is generally performed on specialized equipment designed
and built by the Company's manufacturing engineers and subcontractors.
As of June 30, 1996, manufacturing included approximately 220 non-unionized
employees plus approximately 100 temporary hires brought in during the peak
building season from June through January. The Company generally operates on a
single shift, adding a second shift when needed. Extensive training occurs so
supervisors and lead assemblers can manage their own work areas and monitor
product quality. In addition, computerized testing and statistical process
control are used to maintain and measure product quality during the assembly
process. Finished products are also tested in the Company's product development
test center.
The Company works closely with a variety of vendors to meet its production
needs, including machine shops, die casters, forging houses, tube manufacturers
and injection molders. Although the Company has established relationships with
its principal suppliers and manufacturing sources, the Company does not
currently have long-term contracts with any of its vendors, nor does the Company
currently have multiple vendors for all parts, tooling, supplies or services
critical to the Company's manufacturing processes. See "Risk Factors--Dependence
on Suppliers; Manufacturing Risks." Currently, all of the Company's major
suppliers are based in the U.S. The Company continually reviews its vendor
relationships with regard to cost, delivery and quality. During fiscal 1996, the
Company purchased approximately $8.5 million of components from its largest
vendor. See "Certain Transactions--Other."
Production planning starts with a general forecast several months before the
beginning of the model/ fiscal year. This general forecast is then turned into a
more complete, time-phased forecast by customer and suspension product, which
guides initial planning for parts and labor requirements. As the year
progresses, the forecast is constantly reviewed and compared with actual
customer orders. Manufacturing inventory levels are currently managed through an
Integrated ERP (Enterprise Resource Planning) Package.
The Company's policy is to require firm purchase orders from OEMs 60 days
prior to shipment, which generally allows the Company to manufacture product
against a known backlog. As of June 30, 1996, the Company's backlog was
approximately $21.9 million. Substantially all of the Company's backlog orders
are expected to be filled within 90 days, although there can be no assurance
that all such backlog orders will be filled within that time period, if at all.
The backlog of orders at any given time is affected by a number of factors,
including seasonality, availability of parts and the scheduling of manufacturing
and shipment of products. Accordingly, the backlog of orders for a particular
period is not necessarily meaningful and may not be indicative of future sales
activity or product popularity.
33
<PAGE>
See "Risk Factors--Sales Concentration; Dependence on OEMs," "--Quarterly
Fluctuations in Operating Results; Difficulty in Forecasting OEM Orders" and
"--Dependence on Suppliers; Manufacturing Risks"
SALES AND DISTRIBUTION
The Company's products are primarily sold to OEMs, who incorporate ROCKSHOX
branded components as part of new, fully-assembled mountain bikes sold
worldwide, and through distributors or, in some cases, directly to IBDs, each of
whom serve the retail accessory market. For the fiscal year ended March 31,
1996, approximately 68% of the Company's total net sales were to OEMs and
approximately 32% were to distributors and IBDs. OEM customers have become
increasingly important to the Company as bicycle suspension has evolved from an
accessory niche component into standard equipment on better quality mountain
bikes. The following table demonstrates the historical shift in the Company's
customer base and product distribution:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994 MARCH 31, 1996
---------------------------- ---------------------------- ----------------------------
NET SALES NET SALES NET SALES
(IN % OF (IN % OF (IN % OF
THOUSANDS) NET SALES THOUSANDS) NET SALES THOUSANDS) NET SALES
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OEMs...................................... $ 19,479 63% $ 24,482 65% $ 57,103 68%
Distributors and IBDs..................... 11,462 37% 13,418 35% 26,406 32%
------------- --- ------------- --- ------------- ---
Total................................. $ 30,941 100% $ 37,900 100% $ 83,509 100%
------------- --- ------------- --- ------------- ---
------------- --- ------------- --- ------------- ---
</TABLE>
Management believes that the Company's products play an important role in
the sale of OEM bikes and that OEMs are aware of the influence that the ROCKSHOX
brand name has on a consumer's selection of a mountain bike. Every front
suspension fork sold today to OEMs prominently displays the ROCKSHOX name. In
addition to its strong brand name, the Company believes that OEMs also choose
ROCKSHOX for product innovation, reliability and quality. The Company further
solidifies its OEM relationships by providing a high level of customer service,
ranging from early stage engineering and design support to worldwide
distribution and aftermarket service for its products.
The Company currently sells to over 150 OEM accounts worldwide. While the
OEM market is fragmented, according to BMRI, ten leading OEM brands represent
over 75% of bicycle sales dollars generated through domestic IBDs. Management
believes that these OEMs also represent a significant portion of better quality
mountain bikes sold worldwide. All of these leading OEMs are customers of the
Company and eight of the ten rely on RockShox as their primary supplier of front
suspension forks. The Company has substantial international sales, a significant
portion of which include products shipped to Asian manufacturing subcontractors
for certain U.S.-based OEMs. See "Risk Factors--Sales Concentration; Dependence
on OEMs," "--Risks Associated with International Business and Market Demand,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Industry Overview."
The sales process for OEM customers begins in January and February with
presentations of the Company's product line for the coming model year.
Typically, the Company learns between April and June if its products have been
specified on various OEM bike models and of OEM volume expectations per model,
although such estimates are subject to significant adjustment throughout the
year. Shipments are then made directly to OEMs or to their subcontractors
(typically bicycle frame manufacturers located in Asia) beginning in the
April-June quarter and peaking in the July-September quarter. OEM sales slow
down in the second half of the Company's fiscal year and are principally
comprised of OEM reorders, which the Company believes primarily reflect the
popularity and sell-through rates of various OEM mountain bikes that incorporate
ROCKSHOX components. See "Risk Factors -- Quarterly Fluctuations in Operating
Results; Difficulty in Forecasting OEM Orders."
Sales to distributors and IBDs generally trail the OEM process, with sales
to distributors at their highest during the middle of the Company's fiscal year
(August and September) and sales to dealers peaking during the following March
and April. The Company currently has five distributors in the United States, all
of
34
<PAGE>
whom are owned by OEM customers, and 40 additional distributors worldwide.
Management believes that sales of the Company's products through OEM-owned
distributors are an important revenue source for OEMs and further strengthen the
Company's relationships with its major customers. Distributors purchase ROCKSHOX
products for resale to IBDs and also provide worldwide servicing and marketing
support for all of the Company's products. In the U.S., the Company generally
sells directly to IBDs product quantities too small for third-party distributors
to handle. Direct sales to IBDs in the United States were approximately $4.7
million in fiscal 1996.
As of June 30, 1996, the Company had approximately 35 people in sales and
customer service functions. The Company's principal sales activities are based
in San Jose, California. In addition, the Company has an independent sales
representative based in Bern, Switzerland. The Company's customer service
activities include a warranty program managed by an in-house technical support
department in the U.S. and a distributor network of technicians outside the U.S.
In fiscal 1996, approximately 56% of the Company's sales were to the
Company's ten largest customers, certain of which (including Trek) purchase from
the Company as both an OEM customer and a distributor. Sales to Trek accounted
for more than 10% of the Company's net sales in fiscal 1996, substantially all
of which were for OEM use by Trek. The Company received an award from Trek as a
"key supplier of the year" in 1995. At March 31, 1996 and June 30, 1996, the
Company's three OEM customers with the largest accounts receivable balances
accounted for approximately 61.5% and 47.8%, respectively, of the Company's
accounts receivable. The Company has no long-term contracts with any of its
customers. See "Risk Factors-- Sales Concentration; Dependence on OEMs."
MARKETING
ROCKSHOX has one of the most widely recognized brand names in the bicycle
industry. Management believes that the Company's brand image, in combination
with the performance features of its products, is an important element in the
consumer's decision to purchase ROCKSHOX suspension as an accessory product and
that its OEM customers recognize the strength of the ROCKSHOX brand name as a
deciding factor in the consumer's choice of mountain bikes.
The Company promotes and maintains its brand name through focused marketing
efforts such as sponsorship of mountain bike racing teams, magazine advertising
and editorial programs, IBD packaging and point of sale materials, participation
in trade shows and promotional clothing and merchandise. The Company's marketing
department oversees all aspects of the promotion of the Company's products and
brand name.
The principal user of the Company's products is the mountain bike enthusiast
between 19 and 34 years of age. To appeal to this market, the Company emphasizes
the high performance features of its products as well as its affinity with the
mountain biking culture. The goal of the Company's marketing efforts is to
communicate both technical information and an offbeat and irreverent image.
The sponsorship of mountain bike racing teams and racers is an important
part of the Company's research and product development efforts as well as its
marketing strategy. The Company believes that the association of its products
with successful racers increases its knowledge of the requirements of
professional racers as well as consumer awareness of and demand for RockShox
suspension products. The Company currently co-sponsors 20 world-class and over
50 junior and amateur race teams, many of which also have affiliations with
OEMs. The Company's sponsorship agreements with racing teams generally are for a
one-year term, and provide for a retainer plus contingent performance payments.
The Company also provides free product and technical support for sponsored
racers, including access to RockShox's technical service trucks that attend many
of the major races in the U.S. and Europe. There can be no assurance that such
racing teams will continue to be sponsored by the Company and use the Company's
products on terms the Company deems acceptable, or that the Company will be able
to attract new mountain bike racing teams to use its products in the future.
The Company's products are advertised in a variety of U.S. and international
consumer and trade bicycle publications, including BICYCLING, MOUNTAIN BIKE,
MOUNTAIN BIKE ACTION, VELO NEWS and BICYCLE
35
<PAGE>
RETAILER, as well as on the World Wide Web. The Company's goal is to expand
awareness of the ROCKSHOX brand name and to support product line segmentation
with advertising campaigns built around the JUDY, INDY, DELUXE and other product
lines. The Company also seeks to increase RockShox's editorial exposure in
bicycle print media by working closely with magazine editors. The Company's
focus on editorial content has helped maintain high visibility for the ROCKSHOX
brand name and the Company's products.
The Company currently supports its brand name in the retail bike market by
supplying unique packaging and point of sale displays to IBDs, as well as by
providing brochures that are designed to help explain the technical performance
features of its products. Materials are generally provided at cost or for free
to distributors and IBDs. The Company also maintains a strong presence at
national and international trade shows. As part of its retail marketing efforts,
the Company recently introduced a line of mountain bike lifestyle clothing known
as ROCKSHOX GARB. The clothing line includes t-shirts, cotton jerseys, jackets,
vests and hats and is sold to distributors, bicycles shops and directly to
consumers at race events. The Company believes that ROCKSHOX GARB provides
another avenue to promote the ROCKSHOX brand name and the Company's products.
Sales and marketing expenditures totaled approximately $2.7 million, $1.8
million and $3.7 million in fiscal years 1993, 1994 and 1996, respectively.
COMPETITION
The markets for bicycle components, in general, and bicycle suspension
products, in particular, are highly competitive. The Company competes with other
bicycle component companies that produce suspension products for sale to OEMs,
distributors and IBDs as well as with OEMs who produce their own line of
suspension products for their own use and for sale through distributors and
IBDs.
The Company competes with several component companies that manufacture front
suspension products, including, among others, Answer, Rapid Suspension
Technology USA, Inc. ("RST"), Marzocchi SpA ("Marzocchi"), SR Suntour USA, Inc.,
Amp Research Corp. ("Amp") and Girvin, Inc. ("Girvin"), which is a subsidiary of
K2 Incorporated ("K2"). The Company also competes with several component
companies that manufacture rear shocks, including, among others, Fox Factory,
Inc. ("Fox"), RST, Risse Racing Technology, Inc., Amp, Marzocchi and Girvin. The
Company believes that it currently has the leading market share in front
suspension forks. The Company only recently introduced its rear shock products
for the emerging full suspension market and believes it currently trails Fox,
the leading manufacturer of rear shocks.
Over the past few years, Trek and Scott U.S.A. have discontinued their own
lines of suspension products and have been specifying ROCKSHOX products on many
of their mountain bike models. Today, Cannondale and K2, through its Girvin
subsidiary, are the only major OEMs that have their own brand of suspension
products, although Cannondale does use ROCKSHOX products on certain bike models.
Both of these OEMs also make their suspension products available to the retail
accessory market. In addition, Answer has introduced its own bicycle with
Manitou-branded front and rear shocks.
In order to build or retain its market share, the Company must continue to
successfully compete in areas that influence the purchasing decisions of OEMs,
distributors, IBDs and consumers, including design, price, quality, technology,
distribution, marketing, style, brand image and customer service. There can be
no assurance that any number of bicycle component manufacturers, OEMs or other
companies, including those who are larger and have greater resources than the
Company and who currently do not provide bicycle suspension products or do so on
a limited basis, will not become direct or more significant competitors of the
Company. In addition, OEMs frequently design their bicycles to meet certain
retail price points, and, as a result, may choose not to use a suspension
product or may select a lower priced ROCKSHOX or competing product in order to
incorporate other components in the bicycle's specifications that the OEM
perceives as being desirable to the consumer. The Company could therefore face
competition from existing or new competitors that introduce and promote
suspension products or other bicycle components perceived by the bicycle
industry or consumers to offer price or performance advantages to, or otherwise
have greater consumer appeal than, the Company's products.
See "Risk Factors--Competition."
36
<PAGE>
INTELLECTUAL PROPERTY
Because much of the technology associated with suspension products is in the
public domain, patent protection is generally available only for particular
features or functions of a product, rather than for any product as a whole.
Management believes that many of the Company's current suspension products
contain some elements that are protected by the Company's patents. Nevertheless,
the Company's competitors currently replicate and may continue to replicate
certain features and functions of the Company's products. There can be no
assurance that current or future patent protection will prevent competitors from
offering competing products, that any issued patents will be upheld, or that
patent protection will be granted in any or all of the countries in which
applications are currently pending or granted on the breadth of the description
of the invention. In addition, due to considerations relating to, among other
things, cost, delay or adverse publicity, there can be no assurance that the
Company will elect to enforce its intellectual property rights.
The Company currently holds patents on its fork brace and hydraulic valving
in certain European countries and the United States, and it is attempting to
have patents granted thereon in Canada, Japan and Taiwan. The Company also holds
patents in the United States covering its removable cartridge technology and
rear shock suspension and has applied for a patent covering its hydraulically
damped spring shock absorbing fork technology. The Company is seeking
corresponding patent protection in Canada, Japan, Taiwan and certain European
countries. The Company also has trademark registrations for its name and the
name of its products in the United States and both registrations and
applications in Canada and certain South American and Pacific Rim countries.
Although the Company believes that patents are useful in maintaining the
Company's competitive position, it considers other factors, such as the
Company's brand name, ability to design innovative products, technical and
manufacturing expertise and customer service to be its primary competitive
advantages.
The Company's competitors have also obtained and may continue to obtain
patents on certain features of their products, which may prevent or discourage
the Company from offering such features on its products, which, in turn, could
result in a competitive disadvantage to the Company. The Company has
occasionally received, and may receive in the future, claims asserting
intellectual property rights owned by third parties that relate to the Company's
products and product features. Although to date the Company has incurred no
material liabilities as a result of any such claims, there can be no assurance
that the Company will not incur material liabilities in the future.
Answer has asserted that it is the exclusive licensee of the Answer Patent
that Answer asserts covers certain Features of the Company's current JUDY
suspension products. However, the Company has a patent application pending
before the Patent Office that seeks a patent on certain of the same Features. In
the U.S., patent rights belong to the first to invent, and there can be only one
patent issued for a given invention. If an invention is otherwise patentable to
two patent applicants, an "interference" can be declared by the Patent Office in
order to determine which applicant was the first to invent and therefore
entitled to the patent on such invention. The Company is seeking to have the
Patent Office declare such an interference in order to determine that the
Company was the first to invent and therefore entitled to a patent on the
Features. Although the Company believes that it was the first to invent the
Features, there can be no assurance that the Answer Patent (which the Company
believes, if valid, could cover the Features of JUDY products manufactured for
the Company's 1997 (current) model year will be invalidated. In addition, Answer
(or certain of its related persons) has applied for patents that may cover
certain of the Features in various countries outside the U.S., and, in such
countries, patent rights generally belong to the first person filing a patent
application.
In an effort to avoid the costs, delays and risks of litigation or an
interference proceeding (including adverse effects on the Company's business),
management of the Company has commenced discussions with Answer regarding the
possible settlement of this dispute. However, the Company and Answer have not
reached any settlement, and there can be no assurance that any agreement
relating to the Features will be reached. On September 26, 1996, Answer filed a
lawsuit alleging that the Company has infringed the Answer Patent. However, the
Company intends to vigorously defend such suit. See "Legal Proceedings." Answer
has informed the Company that, although it will consider pursuing all of its
legal remedies, it continues to believe that the best solution to this dispute
is a business settlement, not a legal fight.
37
<PAGE>
If Answer ultimately retains the Answer Patent and successfully asserts it
against the Company, or if any other person or entity were to assert a valid
claim of infringement with respect to, or otherwise have enforceable proprietary
rights in, features that the Company includes or desires to include on its
products, and if the Company were unable to negotiate an acceptable licensing or
other arrangement with such person or entity, the Company could, among other
things, be precluded from making or marketing products containing such features
and be required to make significant payments to such person or entity (which
payments would equal at least a reasonable royalty and, in certain
circumstances, could be based on lost profits, in each case together with
interest and court costs; and, in special circumstances, the damage amount could
be trebled and include attorneys' fees), which could have a material adverse
effect on the Company or its prospects.
See "Risk Factors--Limited Protection of Technology; Allegation of Patent
Infringement."
FACILITIES
The Company's headquarters are located in an approximately 55,000 square
foot building in San Jose, California, pursuant to a lease that expires in 2000.
The Company leases three other facilities of approximately 15,000, 26,000 and
36,000 square feet in the San Jose area, pursuant to leases that expire in 1997,
2000 and 2001, respectively. The Company also leases several smaller facilities.
The Company believes that its existing facilities are adequate to meet its
existing requirements. The Company expects that it will need additional space or
to relocate if its sales continue to grow.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage, transportation, treatment and disposal of solid
and hazardous wastes) or (ii) impose liability for cleaning up or remediating
contaminated property (or the costs therefor), including damages from, spills,
disposals or other releases of hazardous substances or wastes, in certain
circumstances without regard to fault. The Company's manufacturing operations
routinely involve the handling of chemicals and wastes, some of which are or may
be regulated as hazardous substances. The Company has not incurred, and does not
expect to incur, any significant expenditures or liabilities for environmental
matters. As a result, the Company believes that its environmental obligations
will not have a material adverse effect on its operations or financial position.
LEGAL PROCEEDINGS
Because of the risks inherent in bicycling, in general, and mountain biking,
in particular, and because of the function of the Company's products, the
Company from time to time is a defendant in a number of product liability
lawsuits and expects that this will continue to be the case in the future. These
lawsuits generally seek damages, sometimes in substantial amounts, for personal
injuries sustained as a result of alleged defects in the Company's products.
Although the Company has experienced no material financial loss relating to such
lawsuits and maintains product liability insurance, due to the uncertainty as to
the number of claims or the nature and extent of liability for personal injuries
and changes in the historical or future levels of insurance coverage or the
terms or cost thereof, such insurance may not be adequate or available to cover
product liability claims or the applicable insurer may not be solvent at the
time of any covered loss, any of which could have a material adverse effect on
the Company or its prospects.
On September 26, 1996, Answer filed a complaint (the "Complaint") against
the Company in U.S. District Court, Southern District of Indiana, Indianapolis
division, alleging that the manufacture and sale of certain of the Company's
products infringes the Answer Patent. The Complaint seeks, among other things,
(i) an injunction against the Company and its affiliates from manufacturing and
selling products that allegedly infringe the Answer Patent, (ii) an order
directing the Company and its affiliates to destroy all equipment used in the
manufacture of products that allegedly infringe the Answer Patent, (iii) treble
the amount of monetary damages, costs, and prejudgment interest and (iv)
reasonable attorneys' fees. The Company intends to vigorously defend such suit.
However, if such suit is decided adversely to the Company, it could have a
material adverse effect on the Company and its prospects.
38
<PAGE>
See "Risk Factors--Product Liability," "--Limited Protection of Technology;
Allegation of Patent Infringement" and "Intellectual Property."
The Company may from time to time be a party to various other claims,
complaints and other legal action that arise in the normal course of business.
The Company believes that the outcome of its current legal proceedings,
individually or in the aggregate, will not have a material adverse effect on the
Company or its prospects.
GOVERNMENT REGULATION
Bicycle suspension products are within the jurisdiction of the CPSC and
other Federal, state and foreign regulatory bodies. Under CPSC regulations, a
manufacturer of consumer goods is obligated to notify the CPSC if, among other
things, the manufacturer becomes aware that one of its products has a defect
that could create a substantial risk of injury. If the manufacturer has not
already undertaken to do so, the CPSC may require a manufacturer to recall a
product, which may involve product repair, replacement or refund.
In 1996, the CPSC sent a letter to major manufacturers and importers of
mountain bikes as well as several suspension component manufacturers, including
RockShox, expressing concern about reports of injuries and recall activity
relating to failures of mountain bike suspension forks and urging manufacturers
to participate in the development of voluntary safety performance standards for
such suspension products through the ASTM. While an employee of the Company is
participating in the development of these standards by chairing an ASTM task
force on bicycle suspension, such standards, if adopted, could increase the
development and manufacturing costs of the Company's products, make the
Company's products less desirable (by, for example, increasing the weight of the
product) or favor a competitor's product. The Company cannot predict whether
standards relating to the Company's products or otherwise affecting the bicycle
suspension industry will be adopted (whether by the CPSC or another Federal,
state or foreign regulatory body) and, if adopted, no assurance can be given
that the implementation of such standards will not have a material adverse
effect on the Company or its prospects.
Adverse publicity relating to mountain bike suspension or mountain biking
generally, or publicity associated with actions by the CPSC or others expressing
concerns about the safety or function of the Company's products, other
suspension products or mountain bikes (whether or not such publicity is
associated with a claim against the Company or results in any action by the
Company or the CPSC), could have an adverse effect on the Company's reputation,
brand image or markets, any of which could have a material adverse effect on the
Company or its prospects.
Several local, state and Federal authorities have recently considered
substantial restrictions or closures of public trails to biking use, citing
environmental concerns and disputes between mountain bikers and other trail
users (including hikers). Such restrictions or closures, if implemented in a
regional or widespread manner, could lead to a decline in the popularity of
mountain biking, which could have a material adverse effect on the Company or
its prospects.
The Company is subject to Federal, state and local environmental laws,
regulations and ordinances. The Company has not incurred, and does not expect to
incur, any significant expenditures or liabilities for environmental matters. As
a result, the Company believes that its environmental obligations will not have
a material adverse effect on the Company or its prospects.
See "Risk Factors--Government Regulation; Adverse Publicity."
PRODUCT RECALL
Bicycles and bicycle components, including suspension products, are frequent
subjects of product recalls, corrective actions and manufacturers' bulletins.
Since its founding in 1989, the Company has conducted one voluntary corrective
action without CPSC involvement and two voluntary corrective actions in
conjunction with the CPSC. None of these actions has been financially material
to the Company.
39
<PAGE>
The Company's first voluntary corrective action was conducted without CPSC
involvement and involved braces on the MAG 20 and MAG 30 forks, which were
manufactured prior to 1992. In response to reports of fork brace breakage on
some mountain bike models, the Company instituted the corrective action in early
1992 and offered to replace the braces. The cost of this voluntary corrective
action was immaterial.
The second voluntary corrective action involved approximately 21,000 MAG 20
and MAG 30 suspension forks, which were manufactured between October 1991 and
June 1992. The Company received notice of two incidents involving minor injuries
and concluded, after investigation, that some fork crowns did not meet the
Company's standards. After reviewing the progress of such corrective action, in
March 1996, the CPSC ceased monitoring the situation and closed its
investigation, although it reserved the right to reopen the investigation if it
determined that the public had not been adequately protected by such corrective
action. The Company estimates that the cost of this voluntary corrective action
will be approximately $150,000, which amount has been provided for on the
Company's financial statements to date.
The third voluntary corrective action involved molded plastic top caps used
on approximately 180,000 QUADRA 5, QUADRA 21R and QUADRA 21 forks manufactured
between January 1995 and August 1995. The Company received reports of top caps
coming loose and popping up. Although no reports of serious injury were
received, the Company decided to provide replacement top caps. In January 1996,
the CPSC indicated that the nature and degree of risk of injury presented by
such products did not necessitate action by the CPSC. The Company estimates that
the cost of this voluntary corrective action will be approximately $300,000,
which amount has been provided for on the Company's financial statements to
date.
The number of suspension products sold by the Company has dramatically
increased since the Company's founding in 1989, new product introductions are
occurring frequently, and the Company's products may not have been used by
riders for a period of time sufficient to determine all of the effects of
prolonged use and the environment on such products. As a result, there can be no
assurance that there will not be recalls, corrective actions or other activity
voluntarily or involuntarily undertaken by the Company or involving the CPSC or
other regulatory bodies on a more frequent basis or at a higher cost than in the
past, involving past, current or future products, including those products
previously subject to voluntary corrective action, any of which could have a
material adverse effect on the Company or its prospects.
See "Risk Factors--Product Recall; Warranty Costs" and Notes 2 and 5 of
Notes to Consolidated Financial Statements.
EMPLOYEES
As of June 30, 1996, the Company employed approximately 300 full-time
employees. In addition, the Company utilizes approximately 100 occasional
personnel in its assembly operations to meet production demand. The Company is
not a party to any labor agreements and none of its employees is represented by
a labor union. The Company considers its relationship with its employees to be
excellent and has never experienced a work stoppage.
40
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning the directors,
executive officers and other key employees of the Company. Shortly after
consummation of the Offering, the Company intends to appoint two directors who
are neither officers nor employees of the Company, The Jordan Company or their
respective affiliates ("Independent Directors").
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- -------------------------------
<S> <C> <C>
John W. Jordan II 48 Chairman of the Board of
Directors
Stephen W. Simons 42 President and Director
Paul Turner 37 Vice President of Advanced
Research and Director
Charles E. Noreen Jr. 35 Chief Financial Officer
Robert Kaswen 49 Executive Vice President of
Operations
Elizabeth Bradley 37 Director of Sales and Marketing
Adam E. Max 38 Vice President and Director
</TABLE>
Mr. Jordan has served as Chairman of the Board of Directors of the Company
since March 1995. Mr. Jordan will resign as Chairman of the Board of Directors
prior to the consummation of the Offering, and will continue to serve as a
director of the Company. Mr. Jordan has been the managing partner of The Jordan
Company, a private merchant banking firm that he founded, since February 1982.
Mr. Jordan is also a director of Jordan Industries, Inc., American Safety Razor
Company, Jackson Products, Inc., Carmike Cinemas, Inc., Welcome Home, Inc.,
Apparel Ventures, Inc. and other private companies.
Mr. Simons is a co-founder of the Company, has been a director since its
inception in 1989 and became President in 1992. In addition to executive
functions, he oversees product manufacturing and sales. Prior to founding the
Company, Mr. Simons founded SIMONS, which developed suspension modifications and
complete motorcycle front forks. Mr. Simons also founded Simons Precision, a
precision manufacturer of parts for motorcycles. Simons Precision is now known
as Simons & Susslin, Inc. and is wholly owned by persons who are not affiliated
with either the Company or Mr. Simons. See "Certain Transactions."
Mr. Turner is a co-founder of the Company, has been a director since its
inception in 1989 and became Vice President in 1992. In addition to executive
functions, Mr. Turner often represents the Company at industry and public
events, and participates in certain marketing decisions. Prior to founding the
Company in 1989, Mr. Turner worked with Honda Motor Company and founded Paul
Turner Racing. Mr. Turner is generally regarded as a pioneer in bicycle
suspension and is well known throughout the mountain bike industry.
Mr. Noreen has been the Chief Financial Officer of the Company since May
1996. Prior to such time, Mr. Noreen was an audit manager and then a partner in
the San Jose, California office of the accounting firm of Coopers & Lybrand
L.L.P., which he joined in 1983.
Mr. Kaswen joined the Company in September 1992 and became Executive Vice
President of Operations in April 1996. Since joining the Company, Mr. Kaswen has
progressively assumed responsibility for engineering, production, materials
management, quality assurance and service warranty functions. From May 1990 to
September 1992, Mr. Kaswen was the Director of Professional Services for
Relevant Business Systems, Inc., a supplier of software for manufacturing
companies.
Ms. Bradley joined RockShox in May 1996 as Director of Sales and Marketing.
From 1989 until joining the Company, Ms. Bradley was an Executive Vice
President, Marketing and Strategic Planning of Giro Sport Design, Inc., a
manufacturer of performance bicycle helmets. Ms. Bradley was the Marketing
Director of a division of Saturday's Group from 1988 to 1989 and an account
executive at Chiat/Day Advertising from 1983 to 1986.
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<PAGE>
Mr. Max has served as a director and officer of the Company since March
1995. Mr. Max will resign as an officer of the Company prior to the consummation
of the Offering. Mr. Max is a principal of The Jordan Company, which he joined
in April 1986. Mr. Max is also a director of a number of private companies.
BOARD OF DIRECTORS
The Company's Board of Directors is currently comprised of Messrs. Simons,
Turner, Jordan and Max, each of which was nominated to the Board of Directors
pursuant to the Stockholders Agreement (as defined below), which required the
stockholders named therein to vote for such nominees. Such provisions will
terminate immediately following the consummation of the Offering. See "Risk
Factors--Concentration of Ownership" and "Certain Transactions--Stockholders
Agreement." Shortly following the consummation of the Offering, the Company
intends to appoint two Independent Directors.
Upon the appointment of the Independent Directors, the Board of Directors
intends to establish an Audit Committee and a Compensation Committee. The Audit
Committee will be responsible for recommending to the Board of Directors the
engagement of the independent auditors of the Company and reviewing with the
independent auditors the scope and results of the audits, the internal
accounting controls of the Company, audit practices and the professional
services furnished by the independent auditors. The Compensation Committee will
be responsible for reviewing and approving all compensation and for
administering the Stock Plan.
The DGCL provides that a company may indemnify its directors and officers as
to certain liabilities. The Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws provide for the indemnification of
its directors and officers to the fullest extent permitted by law, and the
Company intends to enter into separate indemnification agreements with each of
its directors and officers and to purchase directors' and officers' liability
insurance. The effect of such provisions and actions are to indemnify, to the
fullest extent permitted by law, the directors and officers of the Company
against all costs, expenses and liabilities incurred by them in connection with
any action, suit or proceeding in which they are involved by reason of their
affiliation with the Company.
COMPENSATION OF DIRECTORS
Pursuant to the Stockholders Agreement, each director of the Company
receives $7,500 per year. After the consummation of the Offering, directors who
are employees of the Company will receive no compensation for serving on the
Board. It is expected that directors who are not employees of the Company will
receive $20,000 per year. All directors will be reimbursed for expenses incurred
in connection with attendance at Board or Committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
President (who serves as its chief executive officer) and to each of its other
most highly compensated executive officers whose salary and bonus exceeded
$100,000 in fiscal 1996.
42
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------- ALL OTHER
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1) ($) ($) ($)
- -------------------------------------------- ----------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Stephen W. Simons 1996 $ 250,000 $ 1,062,500(2) $ 7,556(3)
President
Paul Turner 1996 250,000 1,062,500(2) 7,556(3)
Vice President of Advanced Research
Robert Kaswen 1996 105,000 110,000(4) 56
Executive Vice President
of Operations
Robert Hood 1996 132,500 0 33
Treasurer-Chief Operating Officer
and Chief Financial Officer (5)
</TABLE>
- ------------------------
(1) The information provided is for the Company's 1996 fiscal year.
(2) Represents the bonus earned for fiscal year 1996 under the Bonus Plan, which
was paid in fiscal year 1997.
(3) Includes $7,500 paid to each director of the Company pursuant to the
Stockholders Agreement.
(4) Includes $100,000, which was paid in fiscal year 1997.
(5) Mr. Hood resigned from the Company on February 16, 1996. Salary does not
include severance payments totalling $200,000 made or to be made to Mr. Hood
in fiscal years 1996 and 1997 pursuant to a severance agreement, dated
February 28, 1996, between Mr. Hood and the Company, or $44,444 paid in
consideration of Mr. Hood's release of the Company from certain claims.
EMPLOYMENT AGREEMENTS
Each of Stephen W. Simons and Paul Turner entered into an employment
agreement with the Company, dated as of March 24, 1995 (each, an "Employment
Agreement"). Each Employment Agreement was for an initial one-year term and
automatically renews for additional one-year terms, not to exceed four one-year
renewal terms in total, at the election of Messrs. Simons or Turner, as the case
may be. Each Employment Agreement may be terminated by the Company for cause (as
defined therein) or by Messrs. Simons or Turner, as the case may be, for good
reason (as defined therein). Pursuant to his respective Employment Agreement,
each of Messrs. Simons and Turner (i) received initial payments of $2,820,000
and $1,880,000, respectively, (ii) receives an annual salary of $250,000 and
certain perquisites and (iii) is entitled to receive an annual payment under the
Bonus Plan based upon the Company's operating results up to a maximum payment of
$1.5 million for any one fiscal year during the period commencing April 1, 1995
and ending March 31, 2000, but not to exceed an aggregate of $5 million during
such period. Each of Messrs. Simons and Turner earned approximately $1.1 million
pursuant to the Bonus Plan for the 1996 fiscal year.
Effective simultaneously with the closing of the Offering, the Company
intends to enter into amended and restated employment agreements with each of
Messrs. Simons and Turner (each, an "Amended Employment Agreement"). Each
Amended Employment Agreement will be substantially similar to the Employment
Agreements, except that pursuant to the Amended Employment Agreements the Bonus
Plan will be terminated and, in consideration thereof, the Company will pay to
each of Messrs. Simons and Turner approximately $3.7 million. Each Amended
Employment Agreement will also provide that, for each fiscal year commencing
April 1, 1996 during the term of the Amended Employment Agreement in which
Messrs. Simons or Turner, as the case may be, has been an employee of the
Company for the entire fiscal year, the
43
<PAGE>
Company will pay to Messrs. Simons or Turner a cash bonus of an amount not to
exceed 100% and 50%, respectively, of his annual salary based upon an evaluation
of his duties and, in the case of Mr. Simons, upon the performance of the
Company during such fiscal year.
1996 STOCK PLAN
In May 1996, Holdings' Board of Directors adopted, and Holdings'
stockholders approved, the Stock Plan and, in September 1996, Holdings' Board of
Directors adopted, and Holdings' stockholders approved, amendments thereto. In
connection with the Merger, the Board of Directors of the Company approved the
assumption by the Company of Holdings' obligations under the Stock Plan and the
conversion of each option to purchase shares of Holdings Common Stock into an
option to purchase 88.2 shares of Common Stock of the Company at an exercise
price determined by dividing the exercise price of such existing option by 88.2.
The Stock Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company upon the establishment
thereof. See "Board of Directors."
The Stock Plan provides for the issuance of up to a maximum of 979,020
shares of Common Stock pursuant to awards under the Stock Plan, subject to
adjustment to protect against dilution in the event of certain changes in the
Company's capitalization. The Stock Plan provides for the granting of "incentive
stock options" within the meaning of section 422 of the Internal Revenue Code of
1986, as amended, options not intended to qualify as incentive stock options
("nonstatutory stock options") and rights to purchase Common Stock ("stock
purchase rights" and, together with incentive stock options and nonstatutory
stock options, "Stock Rights") to employees and directors of, and consultants
to, the Company or any parent or subsidiary thereof.
Options are rights to purchase the number of shares of Common Stock at the
option price (and upon such other conditions) specified in the applicable option
agreement. Stock purchase rights (which may be issued alone, in addition to, or
in tandem with other awards under the Stock Plan, or cash awards made outside of
the Stock Plan) entitle the holder to purchase shares of Common Stock on such
terms and conditions as are set forth in the Rights Notice (as defined in the
Stock Plan) and the stock purchase agreement provided in connection with the
award. Under the Stock Plan, incentive stock options may be granted only to
employees of the Company or any parent or subsidiary thereof, and nonstatutory
stock options and stock purchase rights may be granted to employees and
directors of, and consultants to, the Company or any parent or subsidiary
thereof.
The exercise price of options will be determined by the Committee; PROVIDED,
that (i) an incentive stock option may not be granted with an exercise price
less than the Fair Market Value (as defined in the Stock Plan) of the Common
Stock on the date of grant, (ii) an option granted to an optionee who, at the
time of such grant, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any parent, subsidiary or
predecessor of the Company may not have an exercise price less than 110% of the
Fair Market Value of the Common Stock as of the date of grant and (iii) a
nonstatutory stock option may not be granted with an exercise price less than
85% of the Fair Market Value of the Common Stock on the date of grant. The Stock
Plan provides that the form of consideration to be paid for the shares of the
Common Stock to be issued upon exercise of options will be determined by the
Committee, and may consist of cash or a surrender of shares of the Common Stock
having a Fair Market Value with an aggregate value on the date of surrender
equal to the purchase price of the shares as to which such option will be
exercised, a combination thereof or such other consideration and method of
payment for the issuance of shares of Common Stock as is permitted under
applicable law. The Stock Plan also provides that the value of shares of Common
Stock surrendered to effect a purchase will be the Fair Market Value of such
shares, and requires that such shares be held by the optionee for a period of at
least six months prior to surrender.
Unless otherwise provided in the option agreement, each option will become
exercisable for 20% of the total number of shares of the Common Stock subject to
such option each year. All options expire no more than ten years after the date
of grant, other than those incentive stock options granted to an optionee who,
at the time of such grant, owns stock representing more than 10% of the voting
power of all classes of stock of the Company or any parent or subsidiary
thereof, which will expire no more than five years from the date of grant. The
Committee may at any time offer to buy a Stock Right previously granted, based
on such terms
44
<PAGE>
and conditions as the Committee establishes and communicates to the optionee.
Unless the Committee grants Stock Rights that are transferable, or amends
outstanding Stock Rights so that they become transferable, Stock Rights may not
be sold, pledged, assigned, hypothecated, transferred, gifted or disposed of in
any manner other than by will or by the laws of descent or distribution and may
be exercised during the life of the optionee only by such optionee. The Stock
Plan also provides that if requested by the Company or any representative of the
underwriters in connection with the first two registration statements of the
Company to become effective under the Securities Act that include securities to
be sold on behalf of the Company to the public in underwritten public offerings,
holders of Stock Rights may not exercise Stock Rights or sell or otherwise
transfer the shares acquired upon exercise of Stock Rights during the 180-day
periods following the effective date of such registration statements.
The Stock Plan provides that in the event of (i) a reorganization, merger or
consolidation of the Company with one or more corporations, as a result of which
the Company is not the surviving corporation, (ii) a sale of all or
substantially all of the assets of the Company to another corporation, (iii) a
transaction (or a series of related transactions) in which there is a change in
the beneficial ownership, directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power or value of the Company's
then outstanding equity securities or (iv) the dissolution or liquidation of the
Company, the Stock Plan and any Stock Rights outstanding thereunder will
terminate unless provision is made in connection with such transaction for the
(a) assumption of such Stock Rights or (b) substitution for such Stock Rights of
new incentive awards covering the stock of a successor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to number and kind of
shares and prices. The Committee may also provide, in any option agreement
entered into in connection with the Stock Plan, that all or a portion of
unvested options accelerate upon a transaction specified in clause (i) or (iii)
of the preceding sentence, subject to such terms and conditions as may be
approved by the Committee.
In addition, the Committee may at any time amend, alter, suspend or
discontinue the Stock Plan, but, except as provided in the Stock Plan, any such
amendment or termination will not adversely affect Stock Rights already granted,
even if not vested at the date of such amendment or termination, and such Stock
Rights will remain in full force and effect as if the Stock Plan had not been
amended or terminated, unless mutually agreed otherwise in writing by the
optionee and the Committee. The Stock Plan will expire in May 2006, unless
terminated earlier as described in the preceding paragraph.
In May 1996, 11 employees were granted options to purchase an aggregate of
596,320 shares of Common Stock pursuant to the Stock Plan, including a grant to
Mr. Kaswen of 146,853 options. In addition, certain employees of, and
consultants to, the Company have been granted options to purchase an aggregate
of 225,000 shares of Common Stock pursuant to the Stock Plan at the initial
public offering price of the Common Stock in the Offering. None of the stock
options granted under the Stock Plan have been exercised. No options were
outstanding as of March 31, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during its 1996 fiscal
year. The Board of Directors determined officers' compensation during the 1996
fiscal year. During such fiscal year, the Company engaged in certain
transactions with certain of its directors and certain entities affiliated with
certain of such directors. See "Certain Transactions."
CERTAIN TRANSACTIONS
The following summarizes various transactions between the Company and
certain of its directors or executive officers or entities affiliated with such
persons. The Company believes that each such transaction was, and that any
future transaction will be, approved in accordance with the DGCL.
THE RECAPITALIZATION
On March 24, 1995, Holdings issued shares of Holdings Common Stock as
follows: each of Messrs. Simons and Turner, 25,000 shares; MCIT, 23,810 shares;
and certain persons and entities then affiliated with The Jordan Company, 26,190
shares. Holdings also issued 3,000 shares of Series A Preferred Stock to MCIT.
45
<PAGE>
In addition, Holdings issued shares of Series B Preferred Stock as follows:
Stephen Simons, 1,200 shares; Stephen and Debra Simons, 1,200 shares; and Paul
Turner, 1,600 shares. Holdings also issued $6 million aggregate principal amount
of the Junior Notes to Stephen and Debra Simons and Paul Turner and $11 million
aggregate principal amount of the Senior Notes to MCIT. See "The
Recapitalization and the Merger."
CONSULTING AGREEMENT. On March 24, 1995, the Company entered into a
management consulting agreement (the "Consulting Agreement") with TJC Management
Corporation ("TJCMC"), an affiliate of The Jordan Company, pursuant to which
TJCMC was retained to render consulting services to the Company. Pursuant to the
Consulting Agreement, TJCMC is entitled to (i) a quarterly fee of $62,500; (ii)
an investment banking and sponsorship fee of 2% of the aggregate consideration
paid (including non-competition and similar payments, but net of transaction
expenses) in connection with an initial public offering of Common Stock, the
sale of all or substantially all of the Common Stock or substantially all of the
assets of the Company to a company other than an affiliate, or the purchase by
the Company of all the equity or substantially all of the assets of a company
(other than an affiliate), and (iii) a financial consulting fee of 1% of the
amount obtained or made available pursuant to any financing. The fees payable
under clauses (ii) and (iii) of the preceding sentence are payable with respect
to a transaction only if TJCMC is retained to render services in connection
therewith. Pursuant to the Consulting Agreement, TJCMC received a fee of $1.0
million in March 1995 in connection with the consummation of the
Recapitalization. The Board of Directors of the Company has agreed to pay TJCMC
a fee of $1.0 million in connection with the consummation of the Offering in
lieu of any fees payable under clause (ii) above. The Consulting Agreement also
provides that if TJCMC renders services outside the ordinary course of business,
TJCMC is entitled to an additional amount equal to the value of such services.
Also pursuant to the Consulting Agreement, TJCMC and certain of its affiliates
are indemnified from certain liabilities related to services performed pursuant
to the Consulting Agreement and TJCMC is entitled to reimbursement of reasonable
out-of-pocket expenses. The term of the Consulting Agreement generally continues
until April 1, 2000.
NONCOMPETITION AGREEMENTS. Each of Stephen Simons, Debra Simons and Paul
Turner has entered into a noncompetition agreement, dated March 24, 1995,
pursuant to which each such person agreed, among other things, that until March
24, 1998 he or she will not directly or indirectly engage in, assist or have any
active interest in a business located anywhere in the contiguous United States
that (i) competes with the Company or (ii) sells to, supplies, provides goods or
services to, purchases from or does business in any manner with the Company.
Each such person also agreed that until three years from and after the date such
person ceases to be employed by the Company, he or she will not directly or
indirectly (a) divert or attempt to divert from the Company any business with
any customer or account with which he or she had any contact or association,
which was under his or her supervision, or the identity of which was learned by
him or her as a result of his or her employment with the Company, (b) solicit
any person transacting business with the Company to terminate its relationship
or association with the Company, or to represent, distribute or sell services or
products in competition with the services or products of the Company, or (c)
solicit any employee of the Company to leave its employ. Mrs. Simons resigned as
an officer of the Company on August 1, 1995 and, therefore, the provisions of
the preceding sentence will terminate on August 1, 1998 with respect to Mrs.
Simons.
EMPLOYMENT AGREEMENTS. Each of Stephen Simons and Paul Turner has entered
into an Employment Agreement, which is described in "Management--Employment
Agreements."
STOCKHOLDERS AGREEMENT.
VOTING AND RESTRICTIONS ON TRANSFER. The Company, Stephen Simons, Debra
Simons, Paul Turner, MCIT and certain persons and entities affiliated with The
Jordan Company (collectively, the "Stockholder Parties") have entered into a
subscription and stockholders agreement, dated March 24, 1995 (the "Stockholders
Agreement"), pursuant to which each Stockholder Party agreed to vote all shares
of Common Stock owned by such Stockholder Party to maintain a Board of Directors
consisting of four members, two nominated by Messrs. Simons and Turner and two
nominated by the Stockholder Parties other than
46
<PAGE>
Messrs. Simons and Turner and Debra Simons. The Stockholders Agreement also
imposes certain restrictions on transferability of the shares of Common Stock
owned by the Stockholder Parties. Such voting provisions and restrictions on
transfer will terminate upon the consummation of the Offering.
REGISTRATION RIGHTS. The Stockholders Agreement also provides MCIT with the
right, subject to certain exceptions, to include its shares of Common Stock in a
registration statement proposed to be filed by the Company in connection with
any public offering. MCIT has agreed to waive such right in connection with the
Offering and such provision will terminate upon the consummation thereof.
Also pursuant to the Stockholders Agreement, at any time after the
consummation of the Offering (i) if either Messrs. Simons or Turner is no longer
employed by the Company, any Stockholder Party holding at least 10% of the
outstanding shares of the Common Stock has the right (a "demand registration
right") to cause the Company to register its shares of the Common Stock under
the Securities Act, subject to certain exceptions, and (ii) the Stockholder
Parties have the right (an "incidental registration right") with respect to
8,820,000 shares of Common Stock, if the Company proposes to register any shares
of the Common Stock under the Securities Act for sale to the public (other than
pursuant to a registration statement on Forms S-4 or S-8, or any successor
forms), to require the Company to use its best efforts to cause a requested
amount of their shares of Common Stock to be covered by such registration
statement, subject to reduction pursuant to a specified formula if the managing
underwriter determines that such inclusion would adversely affect the marketing
of the shares of Common Stock to be sold by the Company. Pursuant to the
Stockholders Agreement, the Company is required to pay all registration expenses
in connection with each demand and incidental registration and has agreed to
indemnify the Stockholder Parties against, and provide contribution with respect
to, certain liabilities under the Securities Act.
Effective simultaneously with the closing of the Offering, the Company
intends to enter into a Registration Rights Agreement with certain of the
Stockholder Parties, which will replace and supersede the Stockholders Agreement
(the "Registration Rights Agreement"). Pursuant to the Registration Rights
Agreement, the Stockholder Parties will have demand registration rights to
require the Company to register the number of shares requested to be so
registered until such time as such shares of Common Stock (i) are effectively
registered under the Securities Act and disposed of in accordance with a
registration statement covering such shares, (ii) are saleable by the holder
thereof pursuant to Rule 144(k) under the Securities Act or (iii) are
distributed for resale pursuant to Rule 144 under the Securities Act
("Registrable Securities"). The Registration Rights Agreement will also provide
that, subject to certain exceptions, in no event will the number of demand
registrations exceed two for all holders of Registrable Securities. In addition,
the Registration Rights Agreement will provide that the Stockholder Parties will
have incidental registration rights if the Company proposes to file a
registration statement under the Securities Act with respect to an offering of
Common Stock (other than a registration statement on Form S-4 or Form S-8 or any
successor form thereto or filed solely in connection with an exchange offer or
an offering made solely to employees of the Company) to require the Company to
include in each such registration all Registrable Securities as each Stockholder
Party may request in accordance with the terms of the Registration Rights
Agreement. In the event of any registration effected thereunder, the
Registration Rights Agreement will contain certain customary provisions relating
to holdback and indemnification arrangements. The Registration Rights Agreement
will also provide that all reasonable fees and expenses incident to the
performance thereof or compliance therewith by the Company will be borne by the
Company.
The Stockholder Parties have agreed to waive their demand and incidental
registration rights for a period of 180 days after the date of this Prospectus.
See "Principal and Selling Stockholders" and "Shares Eligible for Future Sale."
MCIT PLEDGE AGREEMENT. Holdings and MCIT entered into a pledge agreement
(the "MCIT Pledge Agreement") pursuant to which Holdings pledged to MCIT, as
agent for all holders of the Senior Notes, a continuing security interest in and
to all issued and outstanding shares of capital stock of Acquisition, including
all payments and rights with respect thereto and all proceeds thereof. The MCIT
Pledge Agreement will be terminated upon the repayment of the Senior Notes. See
"Use of Proceeds."
47
<PAGE>
OTHER
Simons & Susslin, Inc. ("Susslin") entered into a consultant agreement (the
"Susslin Agreement") with Stephen Simons on January 1, 1994. In March 1994, Mr.
Simons sold his entire ownership interest in Susslin, which equalled 50% of its
common stock, to the other stockholder thereof. The Company purchased
approximately $3.6 million, $3.1 million and $8.5 million of components from
Susslin in fiscal years 1993, 1994 and 1996, respectively. Management believes
that purchases from Susslin during the 1997 fiscal year will be substantially
less than those during the 1996 fiscal year. Mr. Simons provides consulting
services to Susslin pursuant to the Susslin Agreement for business, sales and
marketing activities, in consideration of which Susslin pays Mr. Simons a fee
equal to 3% of Susslin's net sales (as defined therein). The Susslin Agreement
terminates on December 31, 2002; PROVIDED, that the Susslin Agreement (i) will
be automatically renewed for two years, if the total of all consulting fees paid
to Mr. Simons pursuant to the Susslin Agreement are less than $1,000,000 on
December 31, 2002, (ii) will automatically terminate when the total of all
consulting fees paid to Mr. Simons pursuant to the Susslin Agreement equal
$1,700,000 and (iii) may be terminated by Mr. Simons at any time upon 30 days'
written notice. As of June 30, 1996, Susslin had paid to Mr. Simons an aggregate
of $579,238 pursuant to the Susslin Agreement.
At the end of each of fiscal 1993 and fiscal 1994, the Company paid bonuses
to members of senior management. In order to preserve cash flow, each such
member of senior management who was also a stockholder of the Company loaned the
bonus amount back to the Company. The Company repaid each loan during the next
fiscal year. No amounts remain outstanding from any of these loans.
On November 10, 1995, Peter Turner, the brother of Paul Turner, entered into
an employment agreement with the Company (the "Peter Turner Agreement") pursuant
to which Peter Turner serves as the Company's manager of product development
engineering. Immediately prior to joining the Company, Peter Turner was employed
as Senior Engineer and Manufacturing Manager at Cobe Cardiovascular, Inc. based
in Arvada, Colorado. The Peter Turner Agreement provides that Peter Turner is
entitled to receive, among other things, (i) a salary of $110,000 per year for
the first two years of his employment, after which time he will be eligible for
his first compensation review, and a cost of living adjustment for each of the
first three years of his employment with the Company, (ii) the right to
participate in an annual bonus program and receive a guaranteed bonus of at
least $30,000 on December 31, 1996 for the first year of employment with the
Company, (iii) a one-time relocation allowance of $25,000, (iv) a secured
interest-free bridge loan in the principal amount of $150,000, which was repaid
to the Company in January 1996 upon the sale of Peter Turner's Colorado home,
and (v) mortgage assistance in the amount of $1,600 per month for up to six
months.
In November 1993, Christine Feeter, the former wife of Paul Turner, resigned
as Vice President-Marketing of the Company and, in connection therewith,
received as severance $100,000 and the continuation of health insurance coverage
for one year. In March 1995, the Company and Ms. Feeter entered into agreements
pursuant to which, among other things, Ms. Feeter received $310,000 from the
Company in consideration of her release of the Company from certain claims.
Immediately prior to the Recapitalization, Ms. Feeter sold her entire ownership
interest in the Company to Paul Turner.
For certain additional related transactions, see "Use of Proceeds" and
"Management."
48
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of September 16, 1996 and as adjusted to give
effect to the Offering by (i) each beneficial owner of more than 5% of Common
Stock, (ii) each of the Company's directors, (iii) each of the Company's
executive officers named in the table under "Management--Executive
Compensation," (iv) all directors and executive officers of the Company as a
group and (v) each Selling Stockholder. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect of such shares, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING (1) THE OFFERING (1)
---------------------- ----------------------
NAME NUMBER PERCENT NUMBER PERCENT
------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Stephen W. Simons (2)............................................. 2,205,000 25.0 2,205,000 16.2
Paul Turner (3)................................................... 2,205,000 25.0 2,205,000 16.2
John W. Jordan II (4)............................................. 327,308 3.7 327,308 2.4
Adam E. Max (5)................................................... 210,004 2.4 210,004 1.5
Robert Kaswen (6)................................................. 29,370 * 29,370 *
MCIT PLC (7)...................................................... 2,100,042 23.8 2,100,042 15.4
Leucadia Investors, Inc. (8)...................................... 525,010 6.0 525,010 3.9
All directors and executive officers as a group (6 persons) (9)... 4,991,376 56.3 4,991,376 36.5
</TABLE>
- ------------------------
* Less than 1%.
(1) Gives effect to the Merger, which will occur immediately prior to the
closing of the Offering. See "The Recapitalization and the Merger."
(2) Includes 1,757,306 shares held by The Simons Revocable Trust, of which Mr.
Simons and Debra Simons, Mr. Simons' wife, are trustees. Also includes
213,003 shares held by each of the Debra W. Simons Grantor Retained Annuity
Trust and the Stephen W. Simons Grantor Retained Annuity Trust, of which in
each case Mr. and Mrs. Simons are two of four trustees. Also includes 21,688
shares held by The Simons Children Irrevocable Trusts, of which Mrs. Simons
is one of three trustees and as to which shares Mr. Simons disclaims
beneficial ownership. If the Underwriters' over-allotment option is
exercised in full, each of the Debra W. Simons Grantor Retained Annuity
Trust and the Stephen W. Simons Grantor Retained Annuity Trust will
beneficially own 123,003 shares of the Common Stock, or approximately .9% of
the total number of shares of the Common Stock outstanding after the
Offering, and Mr. Simons will beneficially own an aggregate of 2,025,000
shares of the Common Stock, or approximately 14.9% of the total number of
shares of the Common Stock outstanding after the Offering.
(3) Includes 551,250 shares held by Turner Family LP, a Colorado limited
partnership (the "Turner Partnership"). Mr. Turner is the sole general
partner of the Turner Partnership, and a trust, the trustees of which are
persons other than Mr. Turner and the beneficiaries of which are certain
family members of Mr. Turner, is the sole limited partner of the Turner
Partnership holding a 40% interest in the Turner Partnership. Mr. Turner
disclaims beneficial ownership of the 220,500 shares representing the
trust's interest in the Turner Partnership. If the Underwriters'
over-allotment option is exercised in full, the Turner Partnership will
beneficially own 371,250 shares of the Common Stock, or approximately 2.7%
of the total number of shares of the Common Stock outstanding after the
Offering, and Mr. Turner will beneficially own an aggregate of 2,025,000
shares of the Common Stock, or approximately 14.9% of the total number of
shares of the Common Stock outstanding after the Offering.
(4) Includes 327,308 shares held by the John W. Jordan II Revocable Trust, of
which Mr. Jordan is trustee. Excludes 2,100,042 shares held by MCIT, which
is advised by JZAI, an entity controlled by Mr. Jordan and certain other
persons. Mr. Jordan is a partner of The Jordan Company, an entity with which
49
<PAGE>
Mr. Max and Leucadia Investors, Inc. ("Leucadia"), a New York corporation
and a wholly owned subsidiary of Leucadia National Corp., are also
affiliated. Mr. Jordan's address is c/o The Jordan Company, 9 West 57th
Street, New York, New York 10019.
(5) Mr. Max is a principal of The Jordan Company, an entity with which Mr.
Jordan and Leucadia are also affiliated. Mr. Max's address is c/o The Jordan
Company, 9 West 57th Street, New York, New York 10019.
(6) Includes 29,370 shares with respect to which Mr. Kaswen has the right to
acquire beneficial ownership by virtue of currently exercisable stock
options and options that become exercisable within 60 days of August 30,
1996.
(7) If the Underwriters' over-allotment option is exercised in full, MCIT will
beneficially own 1,740,042 shares of the Common Stock, or approximately
12.8% of the total number of shares of the Common Stock outstanding after
the Offering. MCIT is advised by JZAI, an entity controlled by Mr. Jordan
and certain other persons. The principal address of MCIT is c/o
Jordan/Zalaznick Advisers, Inc., 9 West 57th Street, New York, New York
10019.
(8) Leucadia is an affiliate of The Jordan Company, an entity with which Messrs.
Jordan and Max are also affiliated. The principal address of Leucadia is 315
Park Avenue South, New York, New York 10010.
(9) Includes 44,064 shares with respect to which all directors and executive
officers have the right to acquire beneficial ownership by virtue of
currently exercisable stock options and options that become exercisable
within 60 days of September 16, 1996. If the Underwriters' over-allotment
option is exercised in full, all directors and executive officers will
beneficially own an aggregate of 4,631,376 shares of the Common Stock, or
approximately 33.9% of the total number of shares of the Common Stock
outstanding after the Offering.
SELLING STOCKHOLDERS EXERCISE OF OVER-ALLOTMENT OPTION
If the Underwriters' over-allotment option is exercised in full, the Selling
Stockholders will be selling an aggregate of 720,000 shares of Common Stock. The
number of shares being sold, and, if sold, the number of shares and percentage
of outstanding shares beneficially owned after the Offering, by the following
entities will be as follows: MCIT--360,000 shares to be sold, 1,740,042 shares
(approximately 12.8%) beneficially owned after the Offering; each of the Debra
W. Simons Grantor Retained Annuity Trust and the Stephen W. Simons Grantor
Retained Annuity Trust--90,000 shares to be sold, 123,003 shares (approximately
.9%) beneficially owned after the Offering; and the Turner Partnership--180,000
shares to be sold, 371,250 shares (approximately 2.7%) beneficially owned after
the Offering. If all such shares are sold, each of Messrs. Simons and Turner
will beneficially own 2,025,000 shares of the Common Stock, or approximately
14.9% of the total number of shares of the Common Stock outstanding after the
Offering. See the "Principal and Selling Stockholders" table above, which
indicates the number of shares beneficially owned by each of these individuals
and entities after the Merger and prior to the Offering, and
"Management--Directors, Executive Officers and Key Employees" and "Certain
Transactions," which indicate certain relationships between these individuals
and entities and the Company.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
(the "Certificate") and Amended and Restated Bylaws (the "Bylaws") is a summary
and is qualified in its entirety by the provisions of the Certificate and the
Bylaws, forms of which have been filed as exhibits to the Company's Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The authorized capital stock of the Company includes 50,000,000 shares of
Common Stock, par value $.01 per share, of which 13,620,000 shares will be
outstanding upon the consummation of the Offering. Holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of
50
<PAGE>
the stockholders, including the election of directors. The Certificate does not
provide for cumulative voting in the election of directors. Accordingly, holders
of a majority of shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. See "Risk
Factors--Concentration of Ownership." Subject to preferences that may be
applicable to any Preferred Stock outstanding at the time, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets of the Company remaining after payment of the Company's
liabilities and the liquidation preference, if any, of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, subscription or
redemption rights. As of the date hereof, the Common Stock is held of record by
approximately 20 stockholders. The transfer agent with respect to the Common
Stock is American Stock Transfer & Trust Company.
PREFERRED STOCK
Pursuant to the Certificate, the Company is authorized to issue 10,000,000
shares of Preferred Stock, which may be issued from time to time in one or more
classes or series or both upon authorization by the Company's Board of
Directors. The Board of Directors, without further approval of the stockholders,
is authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each class or
series of the Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a third party to gain control of the Company, discourage bids for Common
Stock at a premium or otherwise adversely affect the market price of Common
Stock. The Company is not aware of any plans by a third party to seek control of
the Company.
Upon the redemption of the Holdings Preferred Stock, which will be
substantially concurrent with the completion of the Offering, no shares of
Preferred Stock will be outstanding and the Company has no current plans to
issue any shares of Preferred Stock. See "Use of Proceeds."
DELAWARE LAW
Upon the consummation of this Offering, the Company will be subject to the
provisions of Section 203 of the DGCL. In general, this statute prohibits a
publicly held Delaware corporation from engaging under certain circumstances in
a "business combination" (as defined below) with an "interested stockholder" (as
defined below) for a period of three years after the date of the transaction in
which such stockholder became an interested stockholder, unless (i) prior to the
date at which the stockholder became an interested stockholder the Board of
Directors approved either the business combination or the transaction which
resulted in the person becoming an interested stockholder, (ii) the stockholder
owned more than 85% of the outstanding voting stock of the corporation
(excluding shares held by directors who are officers or held in certain employee
stock plans) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, or (iii) the business
combination is approved by the Board of Directors and by two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent) held on or subsequent to the date of the business combination. An
"interested stockholder" is a person who (a) owns 15% or more of the
corporation's voting stock or (b) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the prior three years. Section 203 defines a
"business combination" to include, without limitation, mergers, consolidations,
stock sales and asset based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
13,620,000 shares of Common Stock assuming no stock options will have been
exercised. Of these shares, all of the 4,800,000 shares sold in the Offering
will be freely transferable by persons other than "affiliates" of the Company,
without restriction
51
<PAGE>
or further registration under the Securities Act. The remaining 8,820,000 shares
of Common Stock will be "restricted securities" within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including the exemptions contained in Rule 144 or 701. The Stockholder Parties
will have rights to demand or participate in future registration shares of
Common Stock under the Securities Act initially with respect to 8,820,000 shares
of Common Stock. See "Certain Transactions--The Recapitalization."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares for at
least two years, including an "affiliate" of the Company (as that term is
defined under the Securities Act), is entitled to sell, within any three-month
period, that number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume of the then outstanding shares during the four calendar weeks preceding
each such sale. A person (or persons whose shares are aggregated) who is not
deemed an "affiliate" of the Company and who has beneficially owned shares for
at least three years is entitled to sell such shares under Rule 144 without
regard to the volume limitations described above. Affiliates, including members
of the Board of Directors and senior management, continue to be subject to such
limitations.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors before the date the Company becomes
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons, including the Stock Plan.
Securities issued in reliance on Rule 701 are restricted securities and,
beginning 90 days after the date of this Prospectus, may be sold by persons
other than affiliates subject only to the manner of sale provisions of Rule 144
and by affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements. Such securities will be subject, however, to any
lock-up agreements related to such securities.
The Company and all stockholders and executive officers of the Company have
agreed, subject to certain exceptions, not to sell, offer to sell, grant any
option (other than pursuant to the Stock Plan) for the sale of or otherwise
dispose of any shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock (except for shares offered in the
Offering) for a period of 180 days after the date of this Prospectus without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. See
"Underwriting."
Prior to the Offering, there has been no public market for the Common Stock.
No predictions can be made as to the effect, if any, that public sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of Common Stock in
the public market (including shares issued upon the exercise of options that may
be granted pursuant to any employee stock option or other equity plan of the
Company), or the perception that such sales could occur, could have an adverse
effect on the market price. If such sales reduce the market price of Common
Stock, the Company's ability to raise additional capital in the equity markets
could be adversely affected. See "Risk Factors--No Prior Public Market and
Possible Volatility of Stock Price" and "--Future Sales of Common Stock; Shares
Eligible for Future Sale."
The Company intends to file a registration statement under the Securities
Act covering 979,020 shares of Common Stock available for issuance under the
Stock Plan. See "Management--1996 Stock Plan." Such registration statement
relating to the Stock Plan is expected to be filed soon after the date of this
Prospectus and will automatically become effective upon filing. As of the date
of this Prospectus, 821,320 shares are subject to outstanding options under the
Stock Plan.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Robertson, Stephens &
Company LLC and Jefferies & Company, Inc. are acting as representatives (the
"Representatives"), severally has agreed to purchase the aggregate number of
shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................................... 985,000
Robertson, Stephens & Company LLC.......................................................... 985,000
Jefferies & Company, Inc................................................................... 985,000
Alex. Brown & Sons Incorporated............................................................ 90,000
Dean Witter Reynolds Inc................................................................... 90,000
A.G. Edwards & Sons, Inc................................................................... 90,000
EVEREN Securities, Inc..................................................................... 90,000
Hambrecht & Quist LLC...................................................................... 90,000
Lazard Freres & Co. LLC.................................................................... 90,000
Montgomery Securities...................................................................... 90,000
Oppenheimer & Co., Inc..................................................................... 90,000
PaineWebber Incorporated................................................................... 90,000
Prudential Securities Incorporated......................................................... 90,000
Salomon Brothers Inc....................................................................... 90,000
Smith Barney Inc........................................................................... 90,000
William Blair & Company, L.L.C............................................................. 45,000
Burnham Securities Inc..................................................................... 45,000
Dain Bosworth Incorporated................................................................. 45,000
Dominick & Dominick, Incorporated.......................................................... 45,000
Fahnestock & Co. Inc....................................................................... 45,000
Hanifen, Imhoff Inc........................................................................ 45,000
Janney Montgomery Scott Inc................................................................ 45,000
Johnson Rice & Company L.L.C............................................................... 45,000
Legg Mason Wood Walker, Incorporated....................................................... 45,000
Needham & Company, Inc..................................................................... 45,000
Prime Charter LTD.......................................................................... 45,000
Ragen MacKenzie Incorporated............................................................... 45,000
Rauscher Pierce Refsnes, Inc............................................................... 45,000
Raymond James & Associates, Inc............................................................ 45,000
The Robinson-Humphrey Company, Inc......................................................... 45,000
Sutro & Co. Incorporated................................................................... 45,000
Wheat, First Securities, Inc............................................................... 45,000
----------
Total............................................................................ 4,800,000
----------
----------
</TABLE>
In the Purchase Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of Common
Stock being sold pursuant to such agreement if any of the shares of Common Stock
being sold pursuant to such agreement are purchased. Under certain
circumstances, the commitments of non-defaulting Underwriters may be increased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $.63 per share of
Common
53
<PAGE>
Stock, and that the Underwriters may allow, and such dealers may reallow, a
discount not in excess of $.10 per share of Common Stock on sales to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
At the request of the Company, the Underwriters have reserved up to 480,000
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
The Selling Stockholders have granted to the Underwriters an option to
purchase up to an aggregate of 720,000 shares of Common Stock at the initial
public offering price, less the underwriting discount. Such option, which will
expire 30 days after the date of this Prospectus, may be exercised solely to
cover over-allotments. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of the option shares
that the number of shares to be purchased initially by that Underwriter is of
the 4,800,000 shares of Common Stock purchased by the Underwriters.
The Company and all stockholders and executive officers of the Company have
agreed, subject to certain exceptions, not to sell, offer to sell, grant any
option (other than pursuant to the Stock Plan) for the sale of or otherwise
dispose of any shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock (except for shares offered in the
Offering) for a period of 180 days after the date of this Prospectus without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price was determined by negotiations
among the Company, the Selling Stockholders and the Representatives. Among the
factors considered in such negotiations, in addition to prevailing market
conditions, were current market valuations of publicly traded companies that the
Company, the Selling Stockholders and the Underwriters believe to be reasonably
comparable to the Company, an assessment of the Company's results of operations
in recent periods, estimates of the business potential and earnings prospects of
the Company, the current state of the Company's industry and the economies of
the Company's principal markets as a whole. The initial public offering price
set forth on the cover of the Prospectus should not, however, be considered an
indication of the actual value of the Common Stock. Such price is subject to
change as a result of market conditions and other factors. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the Offering
at or above the initial public offering price. See "Risk Factors--Future Sales
of Common Stock; Shares Eligible for Future Sale" and "-- No Prior Public Market
and Possible Volatility of Stock Price." The Common Stock has been approved for
quotation on The Nasdaq Stock Market under the symbol "RSHX," subject to
commencement of the Offering.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock have been passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom, Los Angeles,
California, and have been passed upon for the Underwriters by Latham & Watkins,
San Francisco, California. Skadden, Arps, Slate, Meagher & Flom has from time to
time represented certain of the Underwriters in connection with unrelated legal
matters.
54
<PAGE>
EXPERTS
The consolidated financial statements of RSx Holdings, Inc. and Subsidiaries
as of December 31, 1994 and March 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 1993 and 1994, the three month period
ended March 31, 1995 and the year ended March 31, 1996 that appear in this
Prospectus, and the related financial statement schedule that is included in the
Registration Statement, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as stated in their reports appearing herein and in the
Registration Statement, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company or the
Common Stock, reference is made to the Registration Statement and the schedules
and exhibits filed as a part thereof. Statements contained in this Prospectus
regarding the contents of any contract or any other document are not necessarily
complete and, in each instance, reference is hereby made to the copy of such
contract or other document filed as an exhibit to such Registration Statement.
The Registration Statement, including exhibits thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will
be also be available for inspection and copying at the regional offices of the
Commission located at Room 1400, 75 Park Place, New York, New York 10007 and at
Northwest Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois
60661. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission also maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and with quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Prospectus, including, without limita-tion, statements containing the words
"believes," "anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: international, national and local general economic
and market conditions; demographic changes; the size and growth of the overall
bicycle market or the mountain bike segment thereof; the ability of the Company
to sustain, manage or forecast its growth; the popularity of mountain biking and
suspension products; the size, timing and mix of purchases of the Company's
products; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; dependence on OEMs; liability and other claims
asserted against the Company; competition; the loss of significant customers or
suppliers; fluctuations and difficulty in forecasting operating results; changes
in business strategy or development plans; business disruptions; product
recalls; warranty costs; the ability to attract and retain qualified personnel;
the ability to protect technology; ownership of Common Stock; volatility of
stock price; the use of proceeds from the Offering; retention of earnings; and
other factors referenced in this Prospectus. Certain of these factors are
discussed in more detail elsewhere in this Prospectus, including, without
limitation, under the captions "Risk Factors," "Use of Proceeds," "Dividend
55
<PAGE>
Policy," "Capitalization," "Dilution," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and "Principal and Selling Stockholders." GIVEN THESE UNCERTAINTIES,
PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-
LOOKING STATEMENTS. The Company disclaims any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained or incorporated by reference herein to
reflect future events or developments.
56
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Operations.................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................................................ F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Pro Forma Condensed Consolidated Balance Sheet............................................................. F-21
Pro Forma Condensed Consolidated Statement of Operations................................................... F-22
Pro Forma Condensed Consolidated Statement of Operations................................................... F-23
Notes to Pro Forma Condensed Consolidated Balance Sheet and Statements of Operations....................... F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
RSx Holdings, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of RSx
Holdings, Inc. and Subsidiaries as of December 31, 1994 and March 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended December 31, 1993 and 1994,
the three month period ended March 31, 1995 and the year ended March 31, 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 RSx Holdings,
Inc. and Subsidiaries as of December 31, 1994 and March 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for the years
ended December 31, 1993 and 1994, the three month period ended March 31, 1995
and the year ended March 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
May 21, 1996, except for Note 14,
as to which the date is September 25, 1996
F-2
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ------------------
1994 1995 1996
------------ -------- -------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 1,208 $ 1,310 $ 1,808 $ 2,914
Trade accounts receivable, net of allowance for
doubtful accounts of $16 in 1994, $41 in 1995,
$1,432 in 1996 and $1,421 at June 30, 1996..... 6,039 5,390 5,571 5,736
Inventories..................................... 4,059 4,350 8,436 7,762
Prepaid expenses and other current assets....... 415 483 397 779
Deferred income taxes........................... 538 1,507 3,805 3,805
------------ -------- -------- -----------
Total current assets.......................... 12,259 13,040 20,017 20,996
Property and equipment, net....................... 1,116 1,295 4,313 5,211
Capitalized financing costs, net.................. 3,203 2,513 2,353
Other assets, net................................. 118 141 89 105
------------ -------- -------- -----------
Total assets................................ $13,493 $ 17,679 $ 26,932 $ 28,665
------------ -------- -------- -----------
------------ -------- -------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable.......................... $ 3,908 $ 3,069 $ 1,769 $ 5,590
Accounts payable to related party............... 418 733 494 254
Accrued incentive compensation payable to
officers....................................... -- -- 2,125 750
Accrued liabilities............................. 940 3,299 10,302 9,230
Bank line of credit............................. -- 1,250 -- --
Current portion of notes payable to related
parties........................................ 998 250 -- --
Current portion of long-term bank debt.......... -- 2,500 3,000 3,375
------------ -------- -------- -----------
Total current liabilities..................... 6,264 11,101 17,690 19,199
Deferred income taxes............................. 41 -- --
Long-term bank debt, net of current portion....... -- 27,500 24,500 23,375
Notes payable to related parties, net of current
portion.......................................... -- 17,000 17,000 17,000
------------ -------- -------- -----------
Total liabilities............................. 6,305 55,601 59,190 59,574
------------ -------- -------- -----------
Commitments and contingencies (Notes 5 and 8).
Mandatorily redeemable preferred stock issued to
stockholders, $1.00 par value:
Authorized: no shares in 1994 and 9,132 shares
in 1995 and 1996;
Issued and outstanding: no shares in 1994 and
7,000 shares in 1995 and 1996; Redemption and
liquidation value of $7,000 in 1995 and $7,357
in 1996........................................ -- 7,000 7,357 7,449
------------ -------- -------- -----------
Common stock, $0.01 par value:
Authorized: 8,820,000 shares in 1994, 1995 and
1996
and 9,799,020 shares at June 30, 1996;
Issued and outstanding: 8,820,000 shares in
1994, 1995, 1996 and at June 30, 1996.......... 1 88 88 88
Additional paid-in capital........................ -- 412 412 412
Distributions in excess of net book value......... -- (45,422) (45,422) (45,422)
Retained earnings................................. 7,187 5,307 6,564
------------ -------- -------- -----------
Total stockholders' equity (deficit).......... 7,188 (44,922) (39,615) (38,358)
------------ -------- -------- -----------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity
(deficit).................................. $13,493 $ 17,679 $ 26,932 $ 28,665
------------ -------- -------- -----------
------------ -------- -------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS YEAR THREE MONTHS
DECEMBER 31, ENDED MARCH 31, ENDED ENDED JUNE 30,
---------------- ---------------- MARCH 31, ----------------
1993 1994 1994 1995 1996 1995 1996
------- ------- ------- ------- --------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales......................................... $30,941 $37,900 $ 9,936 $14,279 $83,509 $18,784 $21,378
Cost of sales..................................... 20,113 24,477 6,142 9,590 54,110 12,285 13,733
------- ------- ------- ------- --------- ------- -------
Gross profit.................................. 10,828 13,423 3,794 4,689 29,399 6,499 7,645
------- ------- ------- ------- --------- ------- -------
Selling, general and administrative expense....... 5,098 4,210 887 5,404 11,220 2,634 2,916
Research, development and engineering expense..... 1,536 2,073 405 2,223 3,401 777 1,243
------- ------- ------- ------- --------- ------- -------
6,634 6,283 1,292 7,627 14,621 3,411 4,159
------- ------- ------- ------- --------- ------- -------
Income (loss) from operations................. 4,194 7,140 2,502 (2,938) 14,778 3,088 3,486
Interest income................................... 20 15 7 136 -- 49
Interest expense.................................. (36) (21) (9) (58) (5,786) (1,484) (1,341)
------- ------- ------- ------- --------- ------- -------
Income (loss) before income taxes............. 4,178 7,134 2,493 (2,989) 9,128 1,604 2,194
Provision for (benefit from) income taxes......... 1,521 2,420 845 (653) 3,464 610 845
------- ------- ------- ------- --------- ------- -------
Net income (loss)........................... $ 2,657 $ 4,714 $ 1,648 $(2,336) $ 5,664 $ 994 $ 1,349
------- ------- ------- ------- --------- ------- -------
------- ------- ------- ------- --------- ------- -------
Net income (loss)................................. $ 2,657 $ 4,714 $ 1,648 $(2,336) $ 5,664 994 1,349
Accretion for dividends on mandatorily redeemable
preferred stock.................................. -- -- -- -- 357 94 92
------- ------- ------- ------- --------- ------- -------
Net income (loss) available to common
stockholders..................................... $ 2,657 $ 4,714 $ 1,648 $(2,336) $ 5,307 $ 900 $ 1,257
------- ------- ------- ------- --------- ------- -------
------- ------- ------- ------- --------- ------- -------
Net income (loss) per share....................... $ 0.29 $ 0.51 $ 0.18 $ (0.25) $ 0.57 $ 0.10 $ 0.14
------- ------- ------- ------- --------- ------- -------
------- ------- ------- ------- --------- ------- -------
Shares used in per share calculations............. 9,240 9,240 9,240 9,240 9,240 9,240 9,240
------- ------- ------- ------- --------- ------- -------
------- ------- ------- ------- --------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DISTRIBUTIONS
COMMON STOCK ADDITIONAL IN EXCESS OF
-------------- PAID-IN NET BOOK RETAINED
SHARES AMOUNT CAPITAL VALUE EARNINGS TOTAL
------ ------ ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1993............... 8,820 $ 1 -- -- $ 166 $ 167
Dividends declared.................... -- -- -- -- (50) (50)
Net income............................ -- -- -- -- 2,657 2,657
------ ------ ----- ------------- -------- --------
Balances, December 31, 1993............. 8,820 1 -- -- 2,773 2,774
Dividends declared.................... -- -- -- -- (300) (300)
Net income............................ -- -- -- -- 4,714 4,714
------ ------ ----- ------------- -------- --------
Balances, December 31, 1994............. 8,820 1 -- -- 7,187 7,188
Net loss.............................. -- -- -- -- (2,336) (2,336)
Issuance of common stock.............. 8,820 1 $499 -- -- 500
Recapitalization and distributions to
stockholders......................... (8,820) 86 (87) $(45,422) (4,851) (50,274)
------ ------ ----- ------------- -------- --------
Balances, March 31, 1995................ 8,820 88 412 (45,422) -- (44,922)
Accretion for dividends on mandatorily
redeemable preferred stock........... -- -- -- -- (357) (357)
Net income............................ -- -- -- -- 5,664 5,664
------ ------ ----- ------------- -------- --------
Balances, March 31, 1996................ 8,820 88 412 (45,422) 5,307 (39,615)
Accretion for dividends on mandatorily
redeemable preferred stock........... -- -- -- -- (92) (92)
Net income............................ -- -- -- -- 1,349 1,349
------ ------ ----- ------------- -------- --------
Balances, June 30, 1996 (unaudited)..... 8,820 $88 $412 $(45,422) $ 6,564 $(38,358)
------ ------ ----- ------------- -------- --------
------ ------ ----- ------------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS YEAR THREE MONTHS ENDED
DECEMBER 31, ENDED MARCH 31, ENDED JUNE 30,
-------------------- -------------------- MARCH 31, --------------------
1993 1994 1994 1995 1996 1995 1996
--------- --------- --------- --------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ 2,657 $ 4,714 $ 1,648 $ (2,336) $ 5,664 $ 994 $ 1,349
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.............. 127 193 34 78 1,746 287 616
Provision for doubtful accounts............ -- -- -- 32 1,518 901 --
Provision for excess and obsolete
inventories............................... -- 69 -- -- 2,009 920 --
Deferred income taxes...................... (57) (388) -- (1,010) (2,298) (41) --
Changes in operating assets and
liabilities:
Trade accounts receivable................ (1,927) (2,874) 13 617 (1,699) (1,179) (164)
Inventories.............................. (1,237) (803) 849 (291) (6,095) (1,848) 674
Prepaid expenses and other current
assets.................................. (60) (268) (490) (68) 86 238 (382)
Trade accounts payable and accrued
liabilities............................. 793 1,738 (484) 1,835 7,589 2,846 1,133
--------- --------- --------- --------- ----------- --------- ---------
Net cash provided by (used in)
operating activities.................. 296 2,381 1,570 (1,143) 8,520 3,118 3,226
--------- --------- --------- --------- ----------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........... (275) (890) (135) (409) (4,074) (586) (1,354)
Other........................................ 2 (1) 1 129 52 -- (16)
--------- --------- --------- --------- ----------- --------- ---------
Net cash used in investing
activities............................ (273) (891) (134) (280) (4,022) (586) (1,370)
--------- --------- --------- --------- ----------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of bank debt.......... -- -- -- 31,250 -- -- --
Repayment of short-term borrowings and
bank debt................................... (20) -- -- -- (3,750) (1,875) (750)
Payment of financing costs................... -- -- -- (3,203) -- -- --
Repayment of notes payable to related
parties..................................... (1,581) (1,345) (170) (998) (250) (250) --
Issuance of notes payable to related
parties..................................... 1,770 998 -- 11,250 -- -- --
Proceeds from issuance of mandatorily
redeemable preferred stock.................. -- -- -- 3,000 -- -- --
Payment of dividends......................... (20) (300) -- -- -- -- --
Proceeds from issuance of common stock....... -- -- -- 500 -- -- --
Distributions related to reorganization...... -- -- -- (40,274) -- -- --
--------- --------- --------- --------- ----------- --------- ---------
Net cash provided by (used in)
financing activities.................. 149 (647) (170) 1,525 (4,000) (2,125) (750)
--------- --------- --------- --------- ----------- --------- ---------
Net increase in cash and cash equivalents...... 172 843 1,266 102 498 407 1,106
Cash and cash equivalents, beginning of
period........................................ 193 365 365 1,208 1,310 1,310 1,808
--------- --------- --------- --------- ----------- --------- ---------
Cash and cash equivalents, end of period....... $ 365 $ 1,208 $ 1,631 $ 1,310 $ 1,808 $ 1,717 $ 2,914
--------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- ----------- --------- ---------
Supplemental disclosure of cash flow
information:
Income taxes paid............................ $ 1,298 $ 3,232 -- -- $ 4,180 $ 25 $ 1,292
Interest paid................................ 5 21 -- $ 21 4,939 588 1,741
Dividends declared but not paid.............. 30 -- -- -- -- -- --
Noncash distributions in excess of net book
value--Mandatorily redeemable preferred
stock....................................... -- -- -- 4,000 -- -- --
Noncash distributions in excess of net book
value--Junior subordinated notes............ -- -- -- 6,000 -- -- --
Accretion for dividends on mandatorily
redeemable preferred stock.................. -- -- -- -- 357 94 92
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. RECAPITALIZATION AND NATURE OF OPERATIONS:
RECAPITALIZATION:
RSx Holdings, Inc. (the Company) was formed in March 1995 as a holding
company which acquired all of the outstanding shares of capital stock of
RockShox, Inc., a California corporation (Old RockShox) and the predecessor of
ROCKSHOX, INC., a Delaware corporation (RockShox), in a series of transactions
that occurred on March 24, 1995. On March 24, 1995, the stockholders of Old
RockShox transferred all of the outstanding shares of capital stock of Old
RockShox to the Company and RSx Acquisition, Inc. (Acquisition). In exchange
therefor, the stockholders of Old RockShox received consideration of
$50,274,000, which consisted of $39,049,000 of cash, $6,000,000 aggregate
principal amount of junior subordinated notes payable of the Company (junior
notes), $4,000,000 of non-convertible mandatorily redeemable Series B preferred
stock of the Company (Series B Preferred Stock), 50% of the common stock of the
Company and $1,225,000 paid to third parties for fees and expenses on behalf of
the Old RockShox stockholders. The Company then acquired all of the capital
stock of Acquisition and contributed to Acquisition all of the Company's shares
of capital stock of Old RockShox, whereupon Old RockShox became a wholly owned
subsidiary of Acquisition. Old RockShox was then merged into Acquisition and
Acquisition changed its name to ROCKSHOX, INC. The transactions described in
this paragraph are collectively referred to as the Recapitalization.
As part of the Recapitalization, MCIT PLC and certain persons and entities
affiliated with The Jordan Company (Jordan) purchased the remaining 50% of the
common stock of the Company, $11,000,000 aggregate principal amount of senior
subordinated notes payable of the Company (senior notes and, together with the
junior notes, subordinated notes) and $3,000,000 of non-convertible mandatorily
redeemable Series A preferred stock of the Company (Series A Preferred Stock)
for an aggregate purchase price of approximately $14,500,000. Acquisition also
entered into a $36,000,000 bank credit facility in connection with the
Recapitalization pursuant to which Acquisition borrowed $30,000,000 under a term
loan, and was permitted to borrow up to $6,000,000 under a bank line of credit.
The transaction has been accounted for as a recapitalization and
accordingly, no change in the accounting basis of Old RockShox assets has been
made in the accompanying consolidated financial statements. The amount of
consideration paid and securities issued to the stockholders of Old RockShox of
$50,274,000 exceeded Old RockShox's net assets of $4,852,000 on the date of the
Recapitalization by $45,422,000. This amount has been recorded within the equity
section as distributions in excess of net book value.
NATURE OF OPERATIONS:
The Company designs, manufactures and markets high performance bicycle
suspension products. The Company currently markets ten front suspension forks
and three rear shocks under its JUDY, INDY, QUADRA, MAG and DELUXE product
lines. The Company's products are primarily sold to bicycle manufacturers
(OEMs), who incorporate ROCKSHOX branded components as part of new, fully
assembled mountain bikes sold worldwide, and directly to independent bicycle
dealers (IBDs) and through distributors (together with IBDs, the retail
accessory market). For the years ended December 31, 1993 and 1994, the three
months ended March 31, 1995, the year ended March 31, 1996 and the three months
ended June 30, 1996, approximately 63%, 65%, 62%, 68% and 62%, respectively, of
the Company's total net sales were to OEMs. For the years ended December 31,
1993 and 1994, the three months ended March 31, 1995, the year ended March 31,
1996 and the three months ended June 30, 1996, approximately 37%, 35%, 38%, 32%
and 38%, respectively, of the Company's total net sales were to the retail
accessory market.
F-7
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions and amounts
have been eliminated.
FISCAL YEAR END:
Effective March 31, 1995, the Company changed its fiscal year end from
December 31 to March 31 to more closely correspond with the Company's product
model year and business cycle.
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 reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES:
Substantially all of the Company's historical revenues have been
attributable to sales of mountain bike front suspension forks and, therefore,
any material decline or prolonged lack of growth in the popularity of, or market
demand for, mountain bike suspension forks, in general, or the Company's
products, in particular, could have a material adverse effect on the Company or
its prospects. The markets for bicycle components, in general, and bicycle
suspension products, in particular, are highly competitive. In order to build or
retain its market share, the Company must continue to successfully compete in
the areas that influence the purchasing decisions of OEMs, distributors, IBDs
and consumers, including design, price, quality, technology, distribution,
marketing, style, brand image and customer service.
The Company does not currently have long-term contracts with any of its
vendors, nor does the Company currently have multiple vendors for all parts,
tooling, supplies or services critical to the Company's manufacturing processes.
Failure of a key supplier to meet the Company's product needs on a timely basis,
loss of a key supplier or significant disruption in the Company's production or
distribution activities for any other reason, including an earthquake or other
catastrophic event, could have a material adverse effect on the Company or its
prospects.
While the Company is currently manufacturing its products only in the United
States, the bicycle industry is, and many of the Company's OEM customers are,
highly dependent on manufacturing in overseas locations. Changes in economic
conditions, currency exchange rates, tariff regulations, local content laws or
other trade restrictions or political instability (International Conditions)
could adversely affect the cost or availability of products sold by or to the
bicycle industry as a whole and the Company's OEM customers in particular, any
of which could have a material adverse effect on the Company or its prospects.
In addition, insufficient international consumer demand for mountain bikes and
related products, including the Company's products, whether due to changes in
International Conditions, consumer preferences or other factors, could have a
material adverse effect on the Company or its prospects.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable and cash and
cash equivalents.
F-8
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company performs ongoing credit evaluations, generally does not require
collateral of its customers and maintains allowances for potential credit
losses. At March 31, 1996, three OEM customers accounted for 32.3%, 16.3% and
12.9% of accounts receivable. At March 31, 1995, two OEM customers accounted for
16.1% and 9.8% of accounts receivable. At December 31, 1994, two OEM customers
accounted for 21.3% and 14.3% of accounts receivable. (See Note 13 for
concentrations of revenue.)
Substantially all cash balances are held in two financial institutions
domiciled in the United States.
CASH EQUIVALENTS:
The Company considers all investments purchased with original or remaining
maturities of less than three months at the date of purchase to be cash
equivalents.
INVENTORIES:
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives of one to seven years using the straight line method.
Leasehold improvements are amortized over the length of the lease or estimated
useful life, whichever is less. Major additions and betterments are capitalized,
while replacements, maintenance and repairs that do not improve or extend the
life of the assets are charged to expense. In the period assets are retired or
otherwise disposed of, the costs and related accumulated depreciation and
amortization are removed from the accounts, and any gain or loss on disposal is
included in results of operations.
CAPITALIZED FINANCING COSTS:
Capitalized financing costs associated with the issuance of the bank debt
and subordinated notes are being amortized over the terms of the related debt
using the straight-line method for the line of credit and the interest method
for the term loan and subordinated notes. Amortization expense for the year
ended March 31, 1996 was $690,000. There was no amortization expense for the
years ended December 31, 1993 and 1994 and the amount was immaterial for the
three month period ended March 31, 1995.
REVENUE RECOGNITION:
The Company recognizes revenue, net of allowances for estimated returns,
upon shipment of product.
RESEARCH, DEVELOPMENT AND ENGINEERING:
Research, development and engineering expenses are charged to operations as
incurred.
WARRANTY:
All of the Company's suspension products are covered by a one-year limited
warranty. Estimated future costs of repair, replacement or customer accomodation
are accrued and charged to cost of sales based upon estimates of future product
returns and repair costs derived from historical product sales information and
analyses of historical data. In estimating the level of accrual, the Company's
management makes assumptions relating to the level of product returns and costs
of repair. Management reviews the adequacy of these assumptions based on
historical experience.
ADVERTISING COSTS:
Advertising costs are charged to operations as incurred. Advertising costs
were $523,000, $594,000, $342,000 and $1,089,000 for the years ended December
31, 1993 and 1994, the three months ended March 31, 1995 and the year ended
March 31, 1996, respectively.
F-9
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES:
The Company's provision for (benefit from) income taxes comprises its
estimated tax liability currently payable and the change in its deferred income
taxes. Deferred tax assets and liabilities are determined based on differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the period in which the differences are expected
to affect taxable income.
RECENT ACCOUNTING PRONOUNCEMENTS:
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" (SFAS 121), which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 will
become effective for the Company's 1997 fiscal year. The Company has studied the
implications of SFAS No. 121 and, based on its initial evaluation, does not
expect SFAS 121 to have a material impact on the Company's financial condition
or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
established a fair value based method of accounting for stock-based compensation
plans. The Company is currently following the requirements of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company plans to adopt SFAS 123 during fiscal 1997 utilizing the disclosure
alternative.
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number of
common shares outstanding during the period and, pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, all common and common
equivalent shares issued during the twelve months preceding the filing date of
RockShox's initial public offering (the Offering) have been included in the
calculation of the number of shares used to determine net income (loss) per
share as if the shares had been outstanding for all periods presented using the
treasury stock method.
INTERIM FINANCIAL DATA (UNAUDITED):
The unaudited financial statements for the three months ended March 31,
1994, June 30, 1995 and June 30, 1996 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and results of operations in accordance with
generally accepted accounting principles.
RECLASSIFICATIONS:
Certain amounts in the prior periods' financial statements have been
reclassified to conform to the fiscal 1996 presentation. These reclassifications
did not change previously reported stockholders' equity (deficit) or net income
(loss).
F-10
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
3. INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, --------------------
1994 1995 1996
------------- --------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Raw materials............................................ $ 3,493 $ 2,719 $ 5,320 $ 5,889
Finished goods........................................... 566 1,631 3,116 1,873
------ --------- --------- -----------
$ 4,059 $ 4,350 $ 8,436 $ 7,762
------ --------- --------- -----------
------ --------- --------- -----------
</TABLE>
Any misjudgment by the Company or any of its OEM customers of the demand for
any of its respective products may cause the Company's excess and obsolete
inventory to exceed estimated allowances for such inventory.
4. PROPERTY AND EQUIPMENT, NET (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, --------------------
1994 1995 1996
------------- --------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and fixtures.................................. $ 708 $ 777 $ 1,553 $ 2,049
Machinery and equipment................................. 493 669 2,870 3,425
Leasehold improvements.................................. 121 141 251 230
------ --------- --------- -----------
1,322 1,587 4,674 5,704
Less accumulated depreciation and amortization.......... (359) (437) (1,493) (1,672)
------ --------- --------- -----------
963 1,150 3,181 4,032
Construction in progress................................ 153 145 1,132 1,179
------ --------- --------- -----------
$ 1,116 $ 1,295 $ 4,313 $ 5,211
------ --------- --------- -----------
------ --------- --------- -----------
</TABLE>
Depreciation and amortization expense on property and equipment for the
years ended December 31, 1993 and 1994, the three months ended March 31, 1995
and the year ended March 31, 1996 was $127,000, $193,000, $78,000 and
$1,056,000, respectively.
5. ACCRUED LIABILITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, --------------------
1994 1995 1996
------------- --------- --------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accrued payroll and benefits........................... $ 524 $ 396 $ 1,401 $ 1,169
Accrued income taxes payable........................... 507 1,823 1,357
Accrued warranty....................................... 50 300 4,231 4,731
Accrued interest payable............................... 55 902 321
Accrued reorganization costs........................... 995
Other.................................................. 366 1,046 1,945 1,652
------ --------- --------- -----------
$ 940 $ 3,299 $ 10,302 $ 9,230
------ --------- --------- -----------
------ --------- --------- -----------
</TABLE>
F-11
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
5. ACCRUED LIABILITIES (IN THOUSANDS): (CONTINUED)
The Company had $4,231,000 and $4,731,000 in accrued warranty costs at March
31 and June 30, 1996, respectively. There can be no assurance that such accrued
liabilities may not change in the future or that future warranty costs for sales
made through such dates will not be greater than the amounts accrued by the
Company on its consolidated financial statements, either of which could have a
material adverse effect on the Company or its prospects. No provision for these
possible excess warranty costs has been recorded in the accompanying financial
statements.
6. RELATED PARTY TRANSACTIONS:
CONSULTING AND EMPLOYMENT AGREEMENTS:
In connection with the Recapitalization on March 24, 1995 (see Note 1), the
Company entered into annual employment agreements (the Employment Agreements)
with the Company's President and Vice President of Advanced Research, and a
management consulting agreement (the Consulting Agreement) with an affiliate of
Jordan.
The Employment Agreements are dated as of March 24, 1995, were initially for
one-year terms and automatically renew for additional one-year terms, not to
exceed four one-year renewal terms in total, at the election of the applicable
officer. Under the terms of the Employment Agreements, initial payments of an
aggregate of $4,700,000 were made, of which $2,820,000 was charged to selling,
general and administrative expense and $1,880,000 was charged to research and
development expense in the statement of operations for the three month period
ended March 31, 1995. The Employment Agreements provide for aggregate annual
salaries of $500,000 plus certain additional incentive compensation pursuant to
a bonus plan (the Bonus Plan). The payments under the Bonus Plan are based upon
the Company's operating results up to maximum aggregate payments of $3,000,000
for any one fiscal year during the period commencing April 1, 1995 and ending
March 31, 2000, but not to exceed an aggregate of $10,000,000 during such
period, for the Company's President and Vice President of Advanced Research.
Aggregate incentive compensation earned under the Bonus Plan was $2,125,000 for
the fiscal year ended March 31, 1996, of which $1,062,500 was charged to
selling, general and administrative expense and $1,062,500 was charged to
research and development expense in the statement of operations.
The Consulting Agreement is dated as of March 24, 1995 and generally
continues until April 1, 2000. Under the terms of the Consulting Agreement, an
affiliate of Jordan is entitled to a quarterly consulting fee of $62,500,
potential fees relating to certain future transactions and reimbursement for any
reasonable expenses.
NOTES PAYABLE:
In connection with the Recapitalization, the Company issued $11,000,000
aggregate principal amount of senior notes to MCIT PLC and $6,000,000 aggregate
principal amount of junior notes to certain stockholders of the Company (see
Note 1). Each of the subordinated notes bear interest at 13.5% per annum, with
the interest payable semi-annually. Principal payments begin in 2003, with the
final installments on the senior notes and the junior notes due in 2005 and
2006, respectively.
The senior notes include provisions to accelerate payment based upon default
or violation of restrictive covenants contained in the Company's bank debt
agreement (see Note 7). The agreement pursuant to which the senior notes were
issued contains a covenant that requires the Company to maintain a certain
financial ratio and prohibits the payment of any dividend or distribution on
account of any class of the Company's capital stock, except a dividend payable
solely in shares of that class of stock, or a dividend payable to holders of
Series A and B Preferred Stock provided sufficient funds are available.
F-12
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. RELATED PARTY TRANSACTIONS: (CONTINUED)
The Company and MCIT PLC entered into a pledge agreement pursuant to which
the Company pledged to MCIT PLC, as agent for all holders of senior notes, a
continuing security interest in and to all issued and outstanding shares of
capital stock of Acquisition, including all payments and rights with respect
thereto and all proceeds thereof.
At March 31, 1995, the Company had a noncollateralized note payable of
$250,000 to a stockholder due June 24, 1995. The Company repaid this note during
fiscal 1996.
INVENTORY PURCHASES:
For the years ended December 31, 1993 and 1994, the three months ended March
31, 1995 and the year ended March 31, 1996, the Company paid $3,595,000,
$3,118,000, $1,271,000 and $8,529,000, respectively, to a supplier of raw
materials. Prior to March 18, 1994, the President of the Company owned 50% of
the common stock of this supplier. The President sold such stock on March 18,
1994. The President provides consulting services to this supplier, in
consideration of which the President receives payments of approximately 3% of
this supplier's net sales (as defined), generally through 2002.
STOCKHOLDERS AGREEMENT:
The Company, Stephen Simons, Debra Simons, Paul Turner, MCIT PLC and certain
persons and entities affiliated with Jordan (collectively, the Stockholder
Parties) have entered into a subscription and stockholders agreement, dated
March 24, 1995 (the Stockholders Agreement), pursuant to which each Stockholder
Party agreed to vote all shares of common stock of the Company owned by such
Stockholder Party to maintain a Board of Directors consisting of four members,
two nominated by Stephen Simons and Paul Turner and two nominated by the
Stockholder Parties other than Messrs. Simons and Turner and Debra Simons. The
Stockholders Agreement also imposes certain restrictions on transferability of
the shares of common stock of the Company owned by the Stockholder Parties. Such
voting provisions and restrictions on transfer will terminate upon the
consummation of the Offering. The Stockholders Agreement also provides MCIT PLC
with the right, subject to certain exceptions, to include its shares of common
stock of the Company in a registration statement proposed to be filed by
RockShox in connection with any public offering. MCIT has agreed to waive such
right in connection with the Offering and such provision will terminate upon the
consummation thereof.
7. BANK DEBT:
The Company's wholly owned subsidiary, RockShox, has a bank line of credit,
subject to renewal on March 31, 2001, under which it may borrow up to
$6,000,000. At March 31, 1996, no borrowings were outstanding under the bank
line of credit. Borrowings under the bank line of credit are guaranteed by the
Company.
F-13
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
7. BANK DEBT: (CONTINUED)
In connection with the Recapitalization (see Note 1), Acquisition entered
into a bank term loan of $30,000,000, pursuant to which escalating quarterly
installment payments began on June 30, 1995 with the final installment due on
March 31, 2001. The annual principal maturities during the years ending March
31, are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
1997....................................................................... $ 3,000
1998....................................................................... 4,500
1999....................................................................... 5,600
2000....................................................................... 6,800
2001....................................................................... 7,600
---------
$ 27,500
---------
---------
</TABLE>
Both the bank line of credit and the term loan are collateralized by the
assets of the Company and bear interest at a floating rate that changes
depending on the Company's leverage ratio, subject to a maximum annual borrowing
rate, as defined in the agreement (8.56% at March 31, 1996). Interest is payable
quarterly. The credit agreement contains covenants, the more restrictive of
which requires the maintenance of various financial ratios and, among other
things, restricts additional borrowings and the sale of assets. In addition, the
credit agreement restricts the ability of RockShox to pay a dividend or other
distribution on account of any shares of any class of capital stock of Rockshox,
except a dividend payable solely in shares of that class of stock or in any
junior class of stock to the holders of that class.
The credit agreement contains certain prepayment requirements relating to
the cash flows of RockShox, sale of certain assets and additional issuance of
debt. The Company is required to make a mandatory prepayment on June 30
following the end of the fiscal year, beginning June 30, 1996, based on a
percentage of excess cash flow, as defined in the agreement. At March 31, 1996,
the Company was not required to make any prepayment under the excess cash flow
requirements.
8. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
The Company leases its plant and sales facilities and certain of its
equipment under noncancelable operating leases that expire at various times
through 2001. Certain of these leases require escalating monthly payments and,
therefore, periodic rent expense is being recognized on a straight-line basis.
Under these leases, the Company is responsible for maintenance costs, including
real property taxes, utilities and other costs. Also, certain of these leases
contain renewal options.
Total rent expense for these leases for the years ended December 31, 1993
and 1994, the three months ended March 31, 1995, the year ended March 31, 1996
and the three months ended June 30, 1996 was $163,000, $292,000, $97,000,
$520,000 and $229,000, respectively. Following is a summary, by fiscal year, of
future minimum lease payments under operating leases at June 30, 1996 (IN
THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR EQUIPMENT BUILDING TOTAL
- ------------------------------------------------------------------------ ------------- ----------- ---------
<S> <C> <C> <C>
1997.................................................................... $ 64 $ 904 $ 968
1998.................................................................... 64 863 927
1999.................................................................... 64 862 926
2000.................................................................... 64 878 942
2001.................................................................... 64 633 697
----- ----------- ---------
Total minimum lease payments............................................ $ 320 $ 4,140 $ 4,460
----- ----------- ---------
----- ----------- ---------
</TABLE>
F-14
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
CONTINGENCIES:
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. Management believes that the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
9. MANDATORILY REDEEMABLE PREFERRED STOCK ISSUED TO STOCKHOLDERS:
In connection with the Recapitalization, the Company issued 3,000 shares of
Series A Preferred Stock and 4,000 shares of Series B Preferred Stock, both at a
price of $1,000 per share. The rights, preferences and privileges of holders of
the Series A Preferred Stock and Series B Preferred Stock are as follows:
DIVIDENDS:
Holders of Series A Preferred Stock are entitled to receive, at the option
of the Board of Directors, either stock dividends at an annual rate of 5% per
share or cash dividends at an annual rate of $50 per share. Stock dividends
accrue if no cash dividends are declared. Holders of Series B Preferred Stock
are entitled to receive cash dividends at an annual rate of $50 per share.
Dividends are cumulative and accrue from the date of issuance whether or not
earned or declared.
REDEMPTION:
The Company has the option to redeem the Series A Preferred Stock and the
Series B Preferred Stock at any time for $1,000 per share plus accrued but
unpaid dividends thereon (the Redemption Price). All shares of Series A
Preferred Stock and Series B Preferred Stock must be redeemed by the Company by
payment of the Redemption Price on July 31, 2006 or earlier, in connection with
a merger, consolidation or sale of substantially all the Company's assets, in
each case if the Company's common stockholders hold a minority of the voting
stock of the corporation that survived the merger or consolidation or that
purchased substantially all of the Company's assets. Payment of any optional or
mandatory redemption amounts cannot be made if such payment results in any
default under the Company's debt obligations. Holders of Series A Preferred
Stock will receive payment of the Redemption Price before any redemption of
Series B Preferred Stock.
F-15
<PAGE>
RSx HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 1996 and for the three months ended
March 31, 1994, June 30, 1995 and 1996 is unaudited)
9. MANDATORILY REDEEMABLE PREFERRED STOCK ISSUED TO STOCKHOLDERS: (CONTINUED)
The mandatory redemption requirements include cumulative unpaid dividends.
Assuming no liquidity event, and no payment of dividends, the mandatory
redemption requirements total $12,184,000, all payable in 2006.
LIQUIDATION:
In the event of any liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, holders of Series A Preferred Stock have a
liquidation preference over holders of Series B Preferred Stock and common stock
of $1,000 per share plus all accrued but unpaid dividends thereon. Holders of
Series B Preferred Stock have a liquidation preference over holders of common
stock of $1,000 per share plus all accrued but unpaid dividends thereon.
10. INCOME TAXES:
The components of the provision for (benefit from) income taxes, all of
which arise from domestic income, are summarized as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED THREE
DECEMBER 31, MONTHS YEAR ENDED
-------------------- ENDED MARCH MARCH 31,
1993 1994 31, 1995 1996
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
State...................................................... $ 378 $ 558 $ 45 $ 1,127
Federal.................................................... 1,200 2,250 312 4,635
--------- --------- ----------- -----------
1,578 2,808 357 5,762
--------- --------- ----------- -----------
Deferred:
State...................................................... (10) (48) (150) (281)
Federal.................................................... (47) (340) (860) (2,017)
--------- --------- ----------- -----------
(57) (388) (1,010) (2,298)
--------- --------- ----------- -----------
$ 1,521 $ 2,420 $ (653) $ 3,464
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The principal items accounting for the difference between income taxes
computed at the U.S. statutory rate and the provision for (benefit from) income
taxes reflected in the statements of operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED
------------------------ ENDED MARCH MARCH 31,
1993 1994 31, 1995 1996
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
United States statutory rate............................... 34.0% 34.0% (34.0)% 35.0%
States taxes, net of federal benefit....................... 6.1 4.6 (5.0) 5.1
Other...................................................... (3.7) (4.7) 17.2 (2.2)
----- ----- ----- -----
36.4% 33.9% (21.8)% 37.9%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
F-16
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
10. INCOME TAXES: (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and liability are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, --------------------
1994 1995 1996
--------------- --------- ---------
<S> <C> <C> <C>
Net operating losses.................................................. $ 1,350
Allowance for doubtful accounts....................................... $ 6 9 $ 681
Allowance for excess and obsolete inventory........................... 19 685
Accrued liabilities................................................... 128 73 1,650
Other................................................................. 344 75 789
----- --------- ---------
Net deferred tax asset............................................ $ 497 $ 1,507 $ 3,805
----- --------- ---------
----- --------- ---------
</TABLE>
No valuation allowance has been recorded as management believes the net
deferred tax asset will be realized in future periods through carryback to prior
years when the Company paid income taxes or through estimated future taxable
income. The amount of the deferred tax asset that is realizable could be reduced
in the near term if actual results differ significantly from estimates of future
taxable income.
11. EMPLOYEE BENEFIT PLAN:
The Company has established a defined contribution plan that is intended to
qualify under Section 401 of the Internal Revenue Code (the Plan). The Plan
covers substantially all officers and employees of the Company. Company
contributions to the Plan are determined at the discretion of the Board of
Directors. No Company contributions were made to the Plan for the years ended
December 31, 1993 and 1994, the three months ended March 31, 1995 or the year
ended March 31, 1996.
12. FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE:
The following methods and assumptions were used in estimating the fair
values of financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amounts for cash and cash equivalents approximate their
estimated fair values because of the short maturity of those financial
instruments.
MANDATORILY REDEEMABLE PREFERRED STOCK AND NOTES PAYABLE TO RELATED
PARTIES:
No estimates of the fair values of these financial instruments with
related parties could be made without incurring excessive costs (see Note
6).
LONG-TERM DEBT:
Based on rates currently available to the Company for debt with similar
terms and remaining maturities, the carrying amounts for long-term debt
approximate their estimated fair value.
F-17
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION:
The Company currently operates in one industry segment, the suspension class
of the bicycle industry, for financial reporting purposes. Summarized below are
the Company's export sales (including sales to domestic OEM's of products
shipped to their overseas manufacturing subcontractors), all of which are
denominated in U.S. dollars: (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, THREE MONTHS
-------------------- ENDED YEAR ENDED
1993 1994 MARCH 31, 1995 MARCH 31, 1996
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Asia........................................ $ 7,234 $ 10,563 $ 2,800 $ 22,813
Europe...................................... 4,698 6,096 1,961 13,708
Other....................................... 1,838 2,072 964 4,091
--------- --------- ------ -------
$ 13,770 $ 18,731 $ 5,725 $ 40,612
--------- --------- ------ -------
--------- --------- ------ -------
</TABLE>
Revenues from individual customers in excess of 10% of net sales were as
follows (IN THOUSANDS, EXCEPT PERCENT DATA):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------- THREE MONTHS ENDED
YEAR ENDED
1993 1994 MARCH 31, 1995 MARCH 31, 1996
---------------------- ---------------------- ---------------------- ----------------------
CUSTOMER PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
- ------------------------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A........................ 10.7% $ 4,061 14.5% $ 2,073 17.9% $ 14,950
B........................ 17.5% $ 5,419 12.2% $ 1,737
</TABLE>
14. SUBSEQUENT EVENTS:
In May 1996, the Company's Board of Directors adopted and the Company's
stockholders approved the 1996 Stock Plan (such plan, as amended, the Stock
Plan). The Stock Plan provides for the issuance of up to a maximum of 979,020
shares of common stock pursuant to awards under the Stock Plan. The Company has
reserved 979,020 shares of common stock for issuance under the Stock Plan. Under
the Stock Plan, incentive stock options may be granted only to employees of the
Company or any parent or subsidiary thereof, and nonstatutory stock options and
stock purchase rights may be granted to employees and directors of, and
consultants to, the Company or any parent or subsidiary thereof.
The exercise price of options will be determined by the compensation
committee of the Board of Directors of RockShox upon the establishment thereof,
provided that (i) an incentive stock option may not be granted with an exercise
price less than the fair market value (as defined in the Stock Plan) of the
common stock on the date of grant, (ii) an option granted to an optionee who, at
the time of such grant, owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any parent,
subsidiary or predecessor of the Company may not have an exercise price less
than 110% of the fair market value of the common stock as of the date of grant
and (iii) a nonstatutory stock option may not be granted with an exercise price
less than 85% of the fair market value of the common stock on the date of grant.
Unless otherwise provided in the option agreement, each option will become
exercisable for 20% of the total number of shares of common stock subject to
such option each year. Options expire no more than ten years after the date of
grant, other than incentive stock options granted to an optionee who, at the
time of such grant, owns stock representing more than 10% of the voting power of
all classes of stock of the Company or any parent or subsidiary of the Company,
which will expire no more than five years from the date of grant.
F-18
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994, JUNE 30, 1995 AND 1996 IS UNAUDITED)
14. SUBSEQUENT EVENTS: (CONTINUED)
During May 1996, certain employees were granted stock options to purchase an
aggregate of 596,320 shares of common stock pursuant to the Stock Plan at
exercise prices of $4.39 and $4.69 per share. At June 30, 1996, options to
purchase 119,264 shares of common stock were exercisable.
In June 1996, the Board of Directors approved an increase in the number of
authorized shares of common stock to 9,799,020.
During August 1996, the Board of Directors and stockholders of the Company
approved the transactions contemplated by the Agreement of Merger between the
Company and RockShox pursuant to which, among other things, the Company will be
merged with and into RockShox (the Merger) and each share of common stock of the
Company will be converted into 88.2 shares of common stock of RockShox (the
Exchange Ratio). All share and per share data in the accompanying financial
statements have been retroactively restated to reflect the Merger and the
Exchange Ratio.
During September 1996, the Company's Board of Directors adopted and the
Company's stockholders approved amendments to the Stock Plan. Also during
September 1996, certain employees of, and consultants to, the Company were
granted options to purchase an aggregate of 225,000 shares of common stock
pursuant to the Stock Plan at the initial public offering price of the common
stock of RockShox in the Offering.
F-19
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AND STATEMENTS OF OPERATIONS
(UNAUDITED)
The accompanying unaudited pro forma condensed consolidated balance sheet as
of June 30, 1996 and statements of operations for the year ended March 31, 1996
and the three month period ended June 30, 1996 give effect to certain
transactions which will take place upon the closing of the Offering as if the
transactions had taken place as of June 30, 1996 in the case of the pro forma
condensed consolidated balance sheet and, April 1, 1995 and April 1, 1996 in the
case of the respective pro forma condensed consolidated statement of operations.
The pro forma condensed consolidated balance sheet and statements of
operations are not necessarily indicative of future operations or the actual
results that would have occurred had the transactions occurred on the date of
such balance sheet or at the beginning of the period presented in such
statements of operations. The pro forma information and related adjustments are
based upon available information and upon certain assumptions which the Company
believes are reasonable. The pro forma condensed consolidated balance sheet and
statements of operations should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto contained elsewhere herein.
F-20
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
JUNE 30, ADJUSTMENTS JUNE 30,
1996 (NOTE 1) 1996
---------- ---------------------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 2,914 $ 2,914
Trade accounts receivable, net................................. 5,736 5,736
Inventories.................................................... 7,762 7,762
Prepaid expenses and other current assets...................... 779 779
Deferred income taxes.......................................... 3,805 $ 3,606(e) 7,411
---------- -------- ----------
Total current assets......................................... 20,996 3,606 24,602
Property and equipment, net.................................... 5,211 5,211
Capitalized financing costs, net............................... 2,353 $ (2,353)(c) --
Other assets, net.............................................. 105 105
---------- -------- ----------
Total assets............................................. $ 28,665 $ 1,253 $ 29,918
---------- -------- ----------
---------- -------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable......................................... $ 5,590 -- $ 5,590
Accounts payable to related party.............................. 254 -- 254
Accrued incentive compensation payable to officers............. 750 (656)(d) 94
Accrued liabilities............................................ 9,230 -- 9,230
Current portion of long-term bank debt......................... 3,375 $ (3,375)(b) --
---------- -------- ----------
Total current liabilities.................................... 19,199 (4,031) 15,168
Long-term bank debt, net of current portion...................... 23,375 (23,375)(b) --
Notes payable to related parties, net of current portion......... 17,000 (17,000)(b) --
---------- -------- ----------
Total liabilities.......................................... 59,574 (44,406) 15,168
---------- -------- ----------
Mandatorily redeemable preferred stock........................... 7,449 (7,449)(b) --
---------- -------- ----------
Common stock, $0.01 par value,
Authorized: 9,799,020 shares actual,
50,000,000 shares pro forma;
Issued and outstanding: 8,820,000 shares actual,
13,190,400 shares pro forma................................... 88 47(a) 135
Additional paid-in capital....................................... 412 58,469(a) 58,881
Distributions in excess of net book value........................ (45,422) -- (45,422)
Retained earnings................................................ 6,564 (5,408)(c)(d)(e) 1,156
---------- -------- ----------
Total stockholders' equity (deficit)....................... (38,358) 53,108 14,750
---------- -------- ----------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' equity (deficit)...................... $ 28,665 $ 1,253 $ 29,918
---------- -------- ----------
---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated balance sheet and statements of operations.
F-21
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS PRO FORMA THREE MONTHS
ENDED JUNE ADJUSTMENTS ENDED JUNE
30, 1996 (NOTE 2) 30, 1996
------------ ----------- ------------
<S> <C> <C> <C>
Net sales............................................................. $21,378 -- $21,378
Cost of sales......................................................... 13,733 -- 13,733
------------ ------------
Gross profit...................................................... 7,645 -- 7,645
------------ ------------
Selling, general and administrative expense........................... 2,916 (312)(f) 2,604
Research, development and engineering expense......................... 1,243 (344)(f) 899
------------ ----------- ------------
4,159 (656) 3,503
------------ ----------- ------------
Income from operations............................................ 3,486 656 4,142
Interest income....................................................... 49 -- 49
Interest expense...................................................... (1,341) 1,341(g) --
------------ ----------- ------------
Income before income taxes........................................ 2,194 1,997 4,191
Provision for income taxes............................................ 845 799(i) 1,644
------------ ----------- ------------
Net income........................................................ $ 1,349 $1,198 $ 2,547
------------ ----------- ------------
------------ ----------- ------------
Net income............................................................ $ 1,349 $1,198 $ 2,547
Accretion for dividends on mandatorily redeemable preferred stock..... 92 (92)(h) --
------------ ----------- ------------
Net income available to common stockholders........................... $ 1,257 $1,290 $ 2,547
------------ ----------- ------------
------------ ----------- ------------
Net income per share.................................................. $ 0.14 $ 0.19
------------ ------------
------------ ------------
Shares used in per share computation.................................. 9,240 4,370(j) 13,610
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated balance sheet and statements of operations.
F-22
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR PRO FORMA
ENDED PRO FORMA YEAR ENDED
MARCH 31, ADJUSTMENTS MARCH 31,
1996 (NOTE 2) 1996
---------- -------------- ----------
<S> <C> <C> <C>
Net sales....................................................................... $ 83,509 -- $ 83,509
Cost of sales................................................................... 54,110 -- 54,110
---------- ----------
Gross profit................................................................ 29,399 -- 29,399
---------- ----------
Selling, general and administrative expense..................................... 11,220 (812)(f) 10,408
Research, development and engineering expense................................... 3,401 (938)(f) 2,463
---------- -------------- ----------
14,621 (1,750) 12,871
---------- -------------- ----------
Income from operations...................................................... 14,778 1,750 16,528
Interest income................................................................. 136 -- 136
Interest expense................................................................ (5,786) 5,786(g) --
---------- -------------- ----------
Income before income taxes.................................................. 9,128 7,536 16,664
Provision for income taxes...................................................... 3,464 3,014(i) 6,478
---------- -------------- ----------
Net income.................................................................. $ 5,664 $ 4,522 $ 10,186
---------- -------------- ----------
---------- -------------- ----------
Net income...................................................................... $ 5,664 $ 4,522 $ 10,186
Accretion for dividends on mandatorily redeemable preferred stock............... 357 (357)(h) --
---------- -------------- ----------
Net income available to common stockholders..................................... $ 5,307 $ 4,879 $ 10,186
---------- -------------- ----------
---------- -------------- ----------
Net income per share............................................................ $ 0.57 $ 0.75
---------- ----------
---------- ----------
Shares used in per share computation............................................ 9,240 4,370(j) 13,610
---------- -------------- ----------
---------- -------------- ----------
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated balance sheet and statements of operations.
F-23
<PAGE>
RSX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AND STATEMENTS OF OPERATIONS
(UNAUDITED)
1. PRO FORMA ADJUSTMENTS TO THE CONDENSED CONSOLIDATED BALANCE SHEET:
To reflect (i) the estimated net proceeds from the Offering, (ii) payment
with the proceeds from the Offering of the Company's borrowings of long-term
bank debt and subordinated notes, (iii) the redemption of the Series A and
Series B Preferred Stock, (iv) the payment of an aggregate of $7,317,000 to the
Company's President and Vice President of Advanced Research to terminate the
Bonus Plan, (v) the reduction in accrued compensation payable under the Bonus
Plan, (vi) the charge-off of capitalized financing costs related to the bank
debt (vii) the income tax effect of the forgoing, and (viii) the effect of the
Merger on the number of authorized shares of common stock, certain pro forma
adjustments have been made to the accompanying pro forma condensed consolidated
balance sheet, as if the Offering was consummated on June 30, 1996, as follows:
(a) Issuance of 4,370,400 shares of common stock at $15 per share
pursuant to the Offering, net of expenses, to fund payments of $26,750,000
and $17,000,000 to repay bank debt and subordinated notes, respectively,
$7,449,000 to redeem the Series A and Series B Preferred Stock and
$7,317,000 to terminate the Bonus Plan.
(b) Use of proceeds to repay bank debt and subordinated notes to related
parties of $26,750,000 and $17,000,000, respectively, and to redeem the
Series A and Series B Preferred Stock of $7,449,000. (See Note 6 of Notes to
Consolidated Financial Statements.)
(c) Charge-off of capitalized financing costs of $2,353,000 related to
the bank debt.
(d) Charge of $6,661,000, representing a payment of $7,317,000 less a
reduction in accrued incentive compensation payable of $656,000 as described
in adjustment (f) to terminate the Bonus Plan with the Company's President
and Vice President of Advanced Research.
(e) Records the tax impact of the tax benefit realized from the
deductible portion of adjustments (c) and (d) at a 40% incremental tax rate.
2. PRO FORMA ADJUSTMENTS TO THE CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS:
To reflect (i) the elimination of interest expense from the repayment of the
bank debt and subordinated notes, (ii) the elimination of dividends payable to
the holders of the Series A and Series B Preferred Stock (iii) the reduction in
selling, general and administrative expenses, and research, development and
engineering expenses, in each case resulting from the termination of the Bonus
Plan, and (iv) the income tax effect of the forgoing, certain pro forma
adjustments have been made to the accompanying pro forma condensed consolidated
statements of operations, as if the Offering was consummated on the first day of
the period presented, as follows:
(f) Reduces the bonus expense recorded and payable pursuant to the Bonus
Plan under the Employment Agreements with the Company's President and Vice
President of Advanced Research, in excess of the maximum of $250,000 and
$125,000, per year respectively, that will be payable to each of these
individuals under the employment agreements that will become effective upon
consummation of the Offering.
(g) Records the elimination of interest expense resulting from repaying
the long-term bank debt and subordinated notes, and from the elimination of
amortization of the deferred financing costs.
(h) Records the elimination of dividends resulting from the redemption
of Series A and Series B Preferred Stock.
(i) Records the tax impact of the increase in the provision for income
taxes resulting from the decrease in tax deductible expenses in adjustments
(f) and (g) at a 40% incremental tax rate.
(j) Records the effect on shares used in per share computation as a
result of 4,370,400 shares of common stock issued, net of expenses, to repay
bank debt and subordinated notes, redeem Series A and Series B Preferred
Stock and to terminate the Bonus Plan.
The pro forma condensed consolidated statements of operations do not reflect
the charge of $2,353,000 related to the deferred financing cost or the expense
of $6,661,000 related to the termination of the Bonus Plan, both of which will
reduce net income in the quarter the Offering is consummated because of the
nonrecurring nature of each of these items.
F-24
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
The Recapitalization and the Merger............ 13
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 19
Business....................................... 25
Management..................................... 41
Certain Transactions........................... 45
Principal and Selling Stockholders............. 49
Description of Capital Stock................... 50
Shares Eligible for Future Sale................ 51
Underwriting................................... 53
Legal Matters.................................. 54
Experts........................................ 55
Additional Information......................... 55
Special Note Regarding Forward-Looking
Statements.................................... 55
Index to Consolidated Financial Statements and
Pro Forma Condensed Consolidated Balance Sheet
and Statements of Operations.................. F-1
</TABLE>
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UNTIL OCTOBER 21, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
4,800,000 SHARES
[LOGO]
ROCKSHOX, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
ROBERTSON, STEPHENS & COMPANY
JEFFERIES & COMPANY, INC.
SEPTEMBER 26, 1996
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