<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission File Number: 0-28822
ROCKSHOX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0396555
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Charcot Avenue, San Jose, California 95131
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 435-7469
NO CHANGE
-------------------------------------------------------------
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [ ] NO [ X ]
As of November 12, 1996 there were 13,620,000 shares of the registrant's common
stock outstanding.
This quarterly report on Form 10-Q contains 12 pages, of which this is page 1.
1
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ROCKSHOX, INC.
INDEX
Page
----
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1996 and March 31, 1996 3
Condensed Consolidated Statements of Operations for the three
and six months ended September 30, 1996 and September 30,
1995 4
Condensed Consolidated Statements of Cash Flows for the six
months ended September 30, 1996 and September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II: Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement regarding computation of net income
(loss) per share 12
(b) Reports on Form 8-K
None
2
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Part I: Item 1.
ROCKSHOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
Sept. 30, 1996 March 31, 1996
-------------- --------------
Current assets:
Cash and cash equivalents $ 4,500 $ 1,808
Trade accounts receivable, net 9,092 5,571
Inventories 10,657 8,436
Prepaid income taxes 1,024 ---
Prepaid expenses and other current assets 1,494 397
Deferred income taxes 3,805 3,805
-------- --------
Total current assets 30,572 20,017
Property, plant and equipment, net 6,000 4,313
Capitalized financing costs, net --- 2,513
Other assets, net 105 89
-------- --------
Total assets $ 36,677 $ 26,932
-------- --------
-------- --------
Current liabilities:
Accounts payable $ 8,803 $ 2,263
Accrued incentive compensation payable
to officers 7,330 2,125
Other accrued liabilities 6,023 6,071
Accrued warranty 4,698 4,231
Current portion of long-term bank debt --- 3,000
-------- --------
Total current liabilities 26,854 17,690
Long-term debt, net of current portion 43,000 41,500
-------- --------
Total liabilities 69,854 59,190
Mandatorily redeemable preferred stock 7,541 7,357
Common stock 88 88
Additional paid-in capital 412 412
Distributions in excess of net book value (45,422) (45,422)
Retained earnings 4,204 5,307
-------- --------
Total stockholders' deficit (40,718) (39,615)
Total liabilities and stockholders'
deficit $ 36,677 $ 26,932
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
Part I: Item 1.
ROCKSHOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $28,181 $21,258 $49,559 $40,042
Cost of sales 17,806 13,765 31,539 26,050
------- ------- ------- -------
Gross profit 10,375 7,493 18,020 13,992
Selling, general and
administrative expense 3,125 2,735 6,041 5,369
Research, development,
and engineering expense 921 782 2,164 1,559
Non-recurring charge 6,580 --- 6,580 ---
------- ------- ------- -------
Operating expenses 10,626 3,517 14,785 6,928
------- ------- ------- -------
Operating income (loss) (251) 3,976 3,235 7,064
Interest income 52 45 101 45
Interest expense (1,329) (1,465) (2,670) (2,949)
------- ------- ------- -------
Income (loss) before taxes
and extraordinary item (1,528) 2,556 666 4,160
Income tax benefit (expense) 588 (969) (257) (1,579)
------- ------- ------- -------
Income (loss) before
extraordinary item (940) 1,587 409 2,581
Extraordinary loss from early
extinguishment of debt, (net
of tax benefit of $885) (1,328) --- (1,328) ---
------- ------- ------- -------
Net income (loss) before
accretion (2,268) 1,587 (919) 2,581
Preferred stock accretion (92) (88) (184) (182)
------- ------- ------- -------
Net income (loss) available
to common stockholders $ (2,360) $ 1,499 $ (1,103) $ 2,399
------- ------- ------- -------
------- ------- ------- -------
Income (loss) per share
before extraordinary item $ (0.11) $ 0.16 $0.03 $ 0.26
Extraordinary item, per share (0.15) --- (0.15) ---
------- ------- ------- -------
Net income (loss) per share $ (0.26) $ 0.16 $ (0.12) $ 0.26
------- ------- ------- -------
------- ------- ------- -------
Shares used in per share calculation 9,240 9,240 9,240 9,240
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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Part I: Item 1.
ROCKSHOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
Sept. 30, 1996 Sept. 30, 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (919) $ 2,581
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,616 731
Write-off of capitalized financing costs 2,213 ---
Provision for doubtful accounts --- 1,406
Provisions for excess and obsolete inventory 724 1,115
Deferred income taxes --- (41)
Changes in operating assets and liabilities:
Trade accounts receivable (3,521) (4,447)
Inventories (2,945) (4,465)
Prepaid expenses and other current assets (2,121) 65
Accounts payable and accrued liabilities 12,164 7,133
------- -------
Net cash provided by operating
activities 7,211 4,078
------- -------
Cash flows from investing activities:
Purchases of property and equipment (3,003) (1,081)
Other (16) (21)
------- -------
Net cash used in investing activities (3,019) (1,102)
------- -------
Cash flows from financing activities:
Repayment of short-term borrowings and bank
debt (1,500) (2,500)
Repayment of notes payable to related parties --- (250)
------- -------
Net cash used in financing activities (1,500) (2,750)
------- -------
Net increase in cash and cash equivalents 2,692 226
Cash and cash equivalents, beginning of period 1,808 1,310
------- -------
Cash and cash equivalents, end of period $ 4,500 $ 1,536
------- -------
------- -------
Supplemental disclosure of non-cash transactions:
Accretion for dividends on mandatorily
redeemable preferred stock $ 184 $ 182
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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Part I: Item 1.
ROCKSHOX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
RockShox, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three- and six-month periods ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1997. The unaudited condensed consolidated interim financial
statements contained herein, should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended March 31,
1996 included in the Company's Registration Statement on Form S-1 (333-8069).
2. INVENTORY
The components of inventory are as follows (in thousands):
Sept. 30, 1996 March 31, 1996
-------------- --------------
Raw materials $ 7,470 $ 5,320
Finished goods 3,187 3,116
------------ ------------
$10,657 $ 8,436
------------ ------------
------------ ------------
3. EARNINGS PER SHARE AMOUNTS
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 the Company's initial public offering (the "IPO") 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. All per share data has been
restated to reflect the merger of the Company's former parent into the
Company (the "Merger"), which was effected concurrent with the IPO.
4. SALE OF COMMON STOCK (IPO)
On September 26, 1996, the Company priced an IPO of 4.8 million shares of
common stock, at $15.00 per share. The net proceeds to the Company were
approximately $65 million after deducting the underwriting discount and
offering expenses. From the net proceeds, $43 million was used to repay
debt, $7.5 million was used to redeem all of the Company's outstanding
preferred stock and accrued dividends, and $7.3 million was used to terminate
an incentive bonus plan with the Company's President and Vice President of
Advanced Research. The remaining net proceeds will be used for working
capital purposes.
The IPO closed on October 2, 1996. Because the transaction closed
subsequent to September 30, 1996, the proceeds of the IPO and the application
thereof are not reflected in the balance sheet as of that date. Accordingly,
the following unaudited pro forma balance sheet data give effect to the
receipt of the proceeds of the offering and their use as discussed above as
if the IPO had closed on September 30, 1996. The pro forma
6
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balance sheet is based upon available information and certain assumptions
that the Company believes are reasonable. However, the pro forma balance sheet
is 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.
Pro Forma
Sept. 30, 1996
--------------
(Unaudited)
Current assets $ 37,572
Property, plant and equipment, net 6,000
Other assets, net 105
---------
Total assets $ 43,677
---------
---------
Current liabilities $ 19,524
Long-term debt ---
---------
Total liabilities 19,524
Mandatorily redeemable preferred stock ---
Stockholders' equity 24,153
---------
Total liabilities and stockholders' equity $ 43,677
---------
---------
5. EXTRAORDINARY LOSS AND NON-RECURRING CHARGES
As discussed in Note 4, on September 26, 1996, the Company priced its IPO.
In connection with the IPO, the Company repaid outstanding debt and
terminated its $6 million bank line of credit. In connection with the
extinguishment of this debt, the Company wrote off the unamortized balance of
capitalized financing costs of $2.2 million. This write-off has been
recorded as an extraordinary item as of September 30, 1996. In addition, in
connection with the IPO, the Company terminated an incentive based bonus plan
with the Company's President and Vice President of Advanced Research. The
Company recorded a non-recurring charge for $6.6 million in the three month
period ended September 30, 1996 to reflect the termination of the Bonus Plan.
The Company entered into new employment agreements with the President and
Vice President of Advanced Research that provide maximum annual bonus
payments of $250,000 and $125,000, respectively.
6. LITIGATION
On September 26, 1996, Answer Products, a division of LDI, Ltd. ("Answer")
filed a complaint in Indiana Federal Court alleging that the Company has
infringed a patent held by Answer. On September 27, 1996, the Company filed
suit in Federal Court in San Jose, California seeking a declaration that the
patent held by Answer is invalid and/or not infringed by the Company as well
as costs and attorney fees. While the Company has estimated the cost of
resolving this matter and has accrued such amounts in the accompanying
financial statements, due to the uncertainties surrounding litigation, the
ultimate outcome of this matter is not determinable.
7
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Part I: Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Net sales. Net sales for the quarter ended September 30, 1996 increased
by 32.6% to $28.2 million from $21.3 million for the corresponding period of
the prior year. Net sales for the six months ended September 30, 1996
increased by 23.8% to $49.6 million from $40.0 million for the corresponding
period of the prior year. For the quarter ended September 30, 1996, OEM
sales increased by 52% to $23.6 million compared to $15.6 million in the
corresponding period of the prior year. The increase was principally due to
strong demand for the Company's updated 1997 Judy line that began shipping in
June 1996 and for the Company's new Indy line of mid-priced forks that also
began shipping during the first quarter of the 1997 fiscal year. Sales to
the retail accessory market decreased in the second quarter to $4.5 million
compared to $5.7 million in the corresponding period of the prior year due to
the timing of shipments.
Gross margin. Gross margin (gross profit as a percentage of net sales)
for the quarter ended September 30, 1996 increased to 36.8% compared to 35.2%
for the corresponding period of the prior year. Gross margin for the first
six months of the current fiscal year increased to 36.4% compared to 34.9%
for the six months ended September 30, 1995. The increase in gross margin
was principally due to increased production activity.
Selling, general and administrative expense. Selling, general and
administrative ("SG&A") expenses for the quarter ended September 30, 1996
increased by 14.3% to $3.1 million compared to $2.7 million in the
corresponding period of the prior year. SG&A expenses decreased as a
percentage of net sales to 11.1% compared to 12.9% for the corresponding
quarter of the prior year. SG&A expenses for the six months ended September
30, 1996 increased 12.5% to $6.0 million compared to $5.4 million for the
first six months of fiscal 1996. SG&A expenses decreased as a percentage of
net sales to 12.2% compared to 13.4% for the corresponding six months of
fiscal 1996. The decrease of SG&A as a percent of net sales was principally
due to certain fixed expenses being allocated over an increased sales base.
In addition, the quarter ended September 30, 1995 included amounts accrued
under an incentive based bonus plan of $265,000.
Research, development and engineering expense. Research, development and
engineering ("R&D") expenses for the quarter ended September 30, 1996
increased by 17.8% to $921,000 (or approximately 3.3% of net sales) compared
to $782,000 (or approximately 3.7% of net sales) in the corresponding quarter
of the prior year. R&D expenses for the six months ended September 30, 1996
increased by 38.8% to $2.2 million (or approximately 4.4% of net sales)
compared to $1.6 million (or approximately 3.9% of net sales) for the same
period of fiscal 1996. The increase in R&D expenses was principally due to
increased engineering headcount. The quarter ended September 30, 1995
included amounts accrued under an incentive based bonus plan of $265,000.
Non-recurring charge. As previously disclosed, the Company incurred a
non-recurring charge in the second quarter of fiscal 1997 related to the
termination of an incentive based bonus plan with the Company's President and
Vice President of Advance Research. The non-recurring charge totaled $6.6
million.
Interest expense. The Company incurred interest expense (which included
amortization of capitalized financing costs) of $1.3 million in the second
quarter of fiscal 1997 compared to $1.5 million in the second quarter of
fiscal 1996. For the six months ended September 30, 1996, interest expense
was $2.7 million compared to $2.9 million in the corresponding six months of
fiscal 1996. These decreases were primarily due to lower interest rates and a
reduction of outstanding debt in the second quarter of fiscal 1997
8
<PAGE>
compared to the second quarter of fiscal 1996. The Company repaid all of its
outstanding debt on October 2, 1996 upon the closing of the Company's IPO.
Provision for income taxes. The Company's effective tax rate for the
second quarter of fiscal 1997 was 38.5% compared to 37.9% for the second
quarter of fiscal 1996. The increase is primarily due to a higher federal
tax rate.
Net income (loss) before extraordinary item. Net loss before extraordinary
item for the three months ended September 30, 1996 was $940,000 compared to
net income of $1.6 million in the corresponding period of the prior year.
For the six months ended September 30, 1996, net income before extraordinary
item was $409,000 compared to $2.6 million in the corresponding period of the
prior year. The loss in the three month period ended September 30, 1996 was
due to the non-recurring charge related to the Company's IPO. Without
considering the non-recurring charge and extraordinary item discussed below,
net income for the quarter ended September 30, 1996 would have been
approximately $3.0 million (or 32 cents per share) compared to $1.6 million
(or 16 cents per share) in the corresponding period of the prior year, and
net income for the six-months ended September 30, 1996, would have been
approximately $4.4 million (or 45 cents per share) compared to $2.6 million
(or 26 cents per share) for the first six months of fiscal 1996.
Extraordinary item. In the quarter ended September 30, 1996, the Company
recognized a one-time pre-tax charge, reflected as an extraordinary item,
from the write-off of capitalized financing costs, totaling approximately
$2.2 million, in connection with the repayment of all of the Company's
outstanding debt that occurred on October 2, 1996 upon the closing of the
Company's IPO.
Liquidity and Capital Resources:
For the six months ended September 30, 1996, net cash provided by
operating activities was $7.2 million which was comprised of the net loss of
$919,000 offset by non-cash charges for depreciation and amortization of $1.6
million, the write-off of capitalized financing costs of $2.2 million,
and a decrease in working capital of $4.3 million.
Net cash used in investing activities was $3.0 million for the first six
months of fiscal 1997 compared to $1.1 million for the same period in fiscal
1996, which principally consisted of acquisitions of property and equipment.
Net cash used by financing activities was $1.5 million which was comprised of
scheduled payments on the Company's bank debt. All of the Company's debt was
repaid upon the closing of the IPO on October 2, 1996.
At September 30, 1996, the Company had working capital of $3.7 million.
Subsequent to the end of the quarter, the Company completed its IPO, and on a
pro forma basis, had working capital of $18.0 million. The Company believes
that its current cash balances will be sufficient to provide operating
liquidity for at least the next twelve months.
Certain statements made in this document 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 facts 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 are discussed in
detail in the Registration Statement on Form S-1 (333-8069) relating to the
Company's IPO. 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 in the prospectus or this document.
9
<PAGE>
Part II: Item 1.
Legal Proceedings
As previously reported, on September 26, 1996, Answer Products, Inc.
(""Answer'') filed a complaint naming RockShox as the defendant in an action
in the United States District Court for the Southern District of Indiana
entitled Answer Products, Inc. v. RockShox, Inc. (the "Indiana Action").
Answer's complaint in the Indiana Action alleges that certain RockShox
suspension forks infringe a patent that was issued in 1995 and is exclusively
licensed to Answer. The complaint seeks preliminary and permanent injunctive
relief, destruction of the equipment used to make the allegedly infringing
forks, an accounting, compensatory damages, treble damages, attorney' fees,
interest and costs. The Company believes, after consultation with patent
counsel, that it has meritorious defenses to Answer's claims in the Indiana
Action.
On September 27, 1996, RockShox commenced an action against Answer in the
United States District Court for the Northern District of California entitled
RockShox, Inc. v. Answer Products, Inc. (the "California Action"). RockShox's
complaint in the California Action seeks a declaratory judgment that the
patent at issue in the Indiana Action is invalid, unenforceable and not
infringed by RockShox, as well as preliminary and permanent injunctions
against Answer, compensatory damages, attorneys' fees and costs. On October
21, 1996, Answer filed an answer to RockShox's complaint denying that
RockShox was entitled to the relief requested in the California Action and
requesting that the court declare the patent valid and infringed.
On October 29, 1996, RockShox filed a motion to tranfer the Indiana Action
to the United States District Court for the Northern District of
California for consolidation with the California Action.
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement regarding computation
of net income (loss) per share
(b) Reports on Form 8-K
None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKSHOX, INC.
Dated Nov. 13, 1996 /s/ Charles E. Noreen
--------------------------------------
Charles E. Noreen
Chief Financial Officer
11
<PAGE>
Part II: Item 6.
Exhibit 11
ROCKSHOX, INC.
Statement regarding computation of net income (loss) per share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares of common stock 8,820 8,820 8,820 8,820
Stock options pursuant to SAB No. 83 420 420 420 420
------- ------- ------- -------
Shares used in per share calculations 9,240 9,240 9,240 9,240
Income (loss) before extraordinary item $ (940) $ 1,587 $ 409 $ 2,581
Extraordinary loss, net of tax benefit (1,328) --- (1,328) ---
Accretion for dividends on mandatorily
redeemable preferred stock (92) (88) (184) (182)
------- ------- ------- -------
Net income (loss) available to common
stockholders $(2,360) $ 1,499 $(1,103) $ 2,399
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) before extraordinary item,
per share $ (0.11) $ 0.16 $ 0.03 $ 0.26
Extraordinary item per share $ (0.15) --- $ (0.15) ---
Net income (loss) per share $ (0.26) $ 0.16 $ (0.12) $ 0.26
</TABLE>
There is no difference in per shares amounts computed under both the primary
and fully diluted basis.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,500
<SECURITIES> 0
<RECEIVABLES> 10,516
<ALLOWANCES> 1,421
<INVENTORY> 10,657
<CURRENT-ASSETS> 30,572
<PP&E> 8,532
<DEPRECIATION> 2,532
<TOTAL-ASSETS> 36,677
<CURRENT-LIABILITIES> 26,854
<BONDS> 0
7,541
0
<COMMON> 88
<OTHER-SE> (40,806)
<TOTAL-LIABILITY-AND-EQUITY> 36,677
<SALES> 49,559
<TOTAL-REVENUES> 49,559
<CGS> 31,539
<TOTAL-COSTS> 14,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,670
<INCOME-PRETAX> 666
<INCOME-TAX> 257
<INCOME-CONTINUING> 409
<DISCONTINUED> 0
<EXTRAORDINARY> 1,328
<CHANGES> 0
<NET-INCOME> (919)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
