<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 December 31, 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 [X] NO [ ]
As of February 10, 1997 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
<PAGE>
INDEX
Page
------
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1996 and March 31, 1996 3
Condensed Consolidated Statements of Operations
for the three and nine months ended December 31,
1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1996 and
December 31, 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 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)
Dec. 31, 1996 March 31, 1996
------------- --------------
Current assets:
Cash and cash equivalents $ 14,428 $ 1,808
Trade accounts receivable, net of allowance
of $1,590 and $1,432, respectively 7,780 5,571
Inventories 10,696 8,436
Prepaid expenses and other current assets 692 397
Deferred income taxes 3,785 3,805
-------- --------
Total current assets 37,381 20,017
Property, plant and equipment, net 6,664 4,313
Capitalized financing costs, net -- 2,513
Other assets, net 105 89
-------- --------
Total assets $ 44,150 $ 26,932
-------- --------
-------- --------
Current liabilities:
Accounts payable $ 5,182 $ 2,263
Accrued incentive compensation payable
to officers -- 2,125
Other accrued liabilities 5,390 6,071
Accrued warranty 4,802 4,231
Current portion of long-term debt --- 3,000
-------- --------
Total current liabilities 15,374 17,690
Long-term debt, net of current portion -- 41,500
-------- --------
Total liabilities 15,374 59,190
Mandatorily redeemable preferred stock -- 7,357
Common stock 136 88
Additional paid-in capital 64,933 412
Distributions in excess of net book value (45,422) (45,422)
Retained earnings 9,129 5,307
-------- -------
Total stockholders' equity (deficit) 28,776 (39,615)
Total liabilities and stockholders'
equity (deficit) $ 44,150 $ 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>
Three Months Ended Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 32,143 $ 23,223 $ 81,702 $ 63,265
Cost of sales 20,086 14,860 51,625 40,910
-------- -------- -------- --------
Gross profit 12,057 8,363 30,077 22,355
Selling, general and
administrative expense 2,856 2,218 8,897 7,587
Research, development
and engineering expense 1,355 808 3,519 2,367
Non-recurring charge -- -- 6,580 --
-------- -------- -------- --------
Operating expenses 4,211 3,026 18,996 9,954
-------- -------- -------- --------
Operating income 7,846 5,337 11,081 12,401
Interest income 187 58 288 103
Interest expense (27) (1,467) (2,697) (4,416)
-------- -------- -------- --------
Income before taxes
and extraordinary item 8,006 3,928 8,672 8,088
Income tax expense (3,081) (1,483) (3,337) (3,062)
-------- -------- -------- --------
Income before
extraordinary item 4,925 2,445 5,335 5,026
Extraordinary loss from early
extinguishment of debt (net
of tax benefit of $885) -- -- (1,328) --
-------- -------- -------- --------
Net income before
accretion 4,925 2,445 4,007 5,026
Preferred stock accretion -- (88) (185) (270)
-------- -------- -------- --------
Net income available
to common stockholders $ 4,925 $ 2,357 $ 3,822 $ 4,756
-------- -------- -------- --------
-------- -------- -------- --------
Income per share
before extraordinary item $ 0.35 $ 0.26 $ 0.48 $ 0.51
Extraordinary item, per share -- -- (0.13) --
-------- -------- -------- --------
Net income per share $ 0.35 $ 0.26 $ 0.35 $ 0.51
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share
calculation 14,026 9,240 10,835 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>
Nine Months Ended Nine Months Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,007 $ 5,026
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 2,425 1,229
Write-off of capitalized financing costs 2,213 --
Provision for doubtful accounts 159 1,406
Provisions for excess and obsolete inventory 514 1,886
Deferred income taxes 20 (1,889)
Changes in operating assets and liabilities:
Trade accounts receivable (2,368) (2,844)
Inventories (2,774) (7,666)
Prepaid expenses and other current assets (295) 165
Accrued incentive compensation to officers (2,125) --
Accounts payable and accrued
liabilities 2,808 8,347
-------- --------
Net cash provided by operating
activities 4,584 5,660
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (4,476) (2,143)
Other (16) (21)
-------- --------
Net cash used in investing activities (4,492) (2,164)
-------- --------
Cash flows from financing activities:
Proceeds from initial public offering, net
of expenses 64,569 --
Repayment of manditorily redeemable preferred
stock (7,541) --
Repayment of short-term borrowings and bank
debt (27,500) (3,125)
Repayment of notes payable to related parties (17,000) (250)
-------- --------
Net cash provided by (used in) financing
activities 12,528 (3,375)
-------- --------
Net increase in cash and cash equivalents 12,620 121
Cash and cash equivalents, beginning of period 1,808 1,310
-------- --------
Cash and cash equivalents, end of period $ 14,428 $ 1,431
-------- --------
-------- --------
Supplemental disclosure of non-cash transactions:
Accretion for dividends on mandatorily
redeemable preferred stock $ 185 $ 270
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
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 nine-month periods
ended December 31, 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):
Dec. 31, 1996 March 31, 1996
------------- --------------
Raw materials $ 7,387 $ 5,320
Finished goods 3,309 3,116
-------- -------
$ 10,696 $ 8,436
-------- -------
-------- -------
3. EARNINGS PER SHARE AMOUNTS
Net income 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") are also included in the
calculation as if the shares had been outstanding for all periods presented
using the treasury stock method. For periods subsequent to the IPO, the
Company has used the treasury stock method to compute earnings per share.
Under this method the weighted average number of common shares outstanding
during the period is added to the weighted average of all dilutive common
equivalent shares outstanding during the period. 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
$64.6 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 were used for working capital purposes.
6
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5. EXTRAORDINARY LOSS AND NON-RECURRING CHARGES
As discussed in Note 4, in September 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. The write-off was recorded as an
extraordinary item. In addition, in connection with the IPO, the Company
terminated an incentive based bonus plan (the "Bonus Plan") with the
Company's President and Vice President of Advanced Research. The Company
recorded a non-recurring charge of $6.6 million in the nine month period
ended December 31, 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, Inc., 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, among
other things, a declaration that the patent held by Answer is invalid and/or
not infringed by the Company. On December 29, 1996 the Indiana complaint was
transferred to Federal Court in San Jose for consolidation with the Company's
case against Answer. Discovery in these cases is ongoing. 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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Net sales. Net sales for the quarter ended December 31, 1996 increased
by 38.4% to $32.1 million from $23.2 million for the corresponding period of
the prior year. Net sales for the nine months ended December 31, 1996
increased by 29.1% to $81.7 million from $63.3 million for the corresponding
period of the prior year. For the quarter ended December 31, 1996, OEM sales
increased by 36% to $22.4 million compared to $16.5 million in the
corresponding period of the prior year. For the nine months ended December
31, 1996, OEM sales increased by 43% to $59.4 million from $41.7 million in
the corresponding period of the prior year. These increases were principally
due to demand for the Company's updated 1997 Judy line and new Indy line of
mid-priced forks, both of which began shipping during the first quarter of
the 1997 fiscal year. Sales to the retail accessory market increased in the
quarter ended December 31, 1996 to $9.7 million compared to $6.7 million in
the corresponding period of the prior year due to the timing of shipments.
For the nine months ended December 31, 1996 sales to the retail accessory
market increased slightly to $22.3 million from $21.6 million in the prior
year.
Gross margin. Gross margin (gross profit as a percentage of net sales)
for the quarter ended December 31, 1996 increased to 37.5% compared to 36.0%
for the corresponding period of the prior year. Gross margin for the first
nine months of the current fiscal year increased to 36.8% compared to 35.3%
for the nine months ended December 31, 1995. The increase in gross margin
was principally due to lower manufacturing costs resulting from the Company
bringing in-house certain previously subcontracted manufacturing processes
and an increased sales base for overhead absorption.
Selling, general and administrative expense. Selling, general and
administrative ("SG&A") expense for the quarter ended December 31, 1996
increased by 28.8% to $2.9 million (or approximately 8.9% of net sales)
compared to $2.2 million (or approximately 9.6% of net sales) in the
corresponding period of the prior year. SG&A expense for the nine months
ended December 31, 1996 increased by 17.3% to $8.9 million (or approximately
10.9% of net sales) compared to $7.6 million (or approximately 12.0% of net
sales) for the first nine months of fiscal 1996. The decrease of SG&A
expense as a percent of net sales was principally due to certain fixed
expenses being allocated over an increased sales base. SG&A expense for the
quarter ended December 31, 1995 included amounts accrued under an incentive
based bonus plan of $265,000.
Research, development and engineering expense. Research, development
and engineering (R&D) expense for the quarter ended December 31, 1996
increased by 67.7% to $1.4 million (or approximately 4.2% of net sales)
compared to $808,000 (or approximately 3.5% of net sales) in the
corresponding quarter of the prior year. R&D expense for the nine months
ended December 31, 1996 increased by 48.7% to $3.5 million (or approximately
4.3% of net sales) compared to $2.4 million (or approximately 3.7% of net
sales) for the same period of fiscal 1996. The increase in R&D expense was
principally due to increased engineering headcount and certain other
development expenses incurred in fiscal 1997 for new products. R&D expense
for the quarter ended December 31, 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 nine months ended December 31, 1996 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.
8
<PAGE>
Interest expense. The Company incurred interest expense (which included
amortization of capitalized financing costs) of $2.7 million for the nine
months ended December 31, 1996 compared to $4.4 million in the corresponding
period of fiscal 1996. The decrease was due to lower interest rates and
lower average outstanding debt balance in fiscal 1997 compared to fiscal 1996
and the elimination of all outstanding debt upon the closing of the
Company's IPO.
Income tax expense. The Company's effective tax rate for the third
quarter of fiscal 1997 was 38.5% compared to 37.8% for the third quarter of
fiscal 1996. The increase was primarily due to a higher federal tax rate.
Net income before extraordinary item. Net income before extraordinary
item for the three months ended December 31, 1996 was $4.9 million compared
to $2.4 million in the corresponding period of the prior year. For the nine
months ended December 31, 1996, net income before extraordinary item was $5.3
million compared to $5.0 million in the corresponding period of the prior
year. Without considering the non-recurring charge and extraordinary item
discussed below, net income for the nine months ended December 31, 1996 would
have been approximately $9.3 million (or 84 cents per share) compared to $5.0
million (or 51 cents per share) for the corresponding period of the prior year.
Extraordinary item. In the nine months ended December 31, 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 upon the closing of the Company's IPO.
Liquidity and Capital Resources:
For the nine months ended December 31, 1996, net cash provided by
operating activities was $4.6 million which was comprised of the net income
of $4.0 million increased by non-cash charges for depreciation and
amortization of $2.4 million, the write-off of capitalized financing costs of
$2.2 million, offset by a net decrease in working capital of $4.0 million.
Net cash used in investing activities was $4.5 million for the first
nine months of fiscal 1997, which principally consisted of acquisitions of
property and equipment. Net cash provided by financing activities was $12.5
million which represented net proceeds from the Company's IPO of $64.6
million offset by repayment of all of the Company's debt totaling $44.5
million and the redemption of all of the Company's preferred stock for $7.5
million.
At December 31, 1996, the Company had cash of $14.4 million and working
capital of $22.0 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: Other Information.
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 December 30, 1996, the Indiana Action was transferred to Federal
Court in San Jose for consolidation with the California Action. Discovery in
these cases is ongoing.
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement regarding computation of net income
per share
(b) Reports on Form 8-K
None
10
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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 Feb. 13, 1997 /s/ Charles E. Noreen
---------------------
Charles E. Noreen
Chief Financial Officer
11
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Item 6. Exhibit 11
ROCKSHOX, INC.
Statement regarding computation of net income per share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
12/31/96 12/31/95 12/31/96 12/31/95
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares of common stock 13,620 8,820 10,420 8,820
Dilutive effect of stock options 406 420 415 420
--------- -------- -------- --------
Shares used in per share calculations 14,026 9,240 10,835 9,240
Income before extraordinary item $ 4,925 $ 2,445 $ 5,335 $ 5,026
Extraordinary loss, net of tax benefit -- -- (1,328) --
Accretion for dividends on mandatorily
redeemable preferred stock -- (88) (185) (270)
--------- -------- -------- --------
Net income available to common
stockholders $ 4,925 $ 2,357 $ 3,822 $ 4,756
--------- -------- -------- --------
--------- -------- -------- --------
Income before extraordinary item,
per share $ 0.35 $ 0.26 $ 0.48 $ 0.51
Extraordinary item per share -- -- $ (0.13) --
Net income per share $ 0.35 $ 0.26 $ 0.35 $ 0.51
</TABLE>
The difference in per share amounts computed under both the primary and fully
diluted basis is not material.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,428
<SECURITIES> 0
<RECEIVABLES> 9,370
<ALLOWANCES> 1,590
<INVENTORY> 10,696
<CURRENT-ASSETS> 37,381
<PP&E> 10,073
<DEPRECIATION> 3,409
<TOTAL-ASSETS> 44,150
<CURRENT-LIABILITIES> 15,374
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 28,640
<TOTAL-LIABILITY-AND-EQUITY> 44,150
<SALES> 81,702
<TOTAL-REVENUES> 81,702
<CGS> 51,625
<TOTAL-COSTS> 18,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,697
<INCOME-PRETAX> 8,672
<INCOME-TAX> 3,337
<INCOME-CONTINUING> 5,335
<DISCONTINUED> 0
<EXTRAORDINARY> 1,328
<CHANGES> 0
<NET-INCOME> 4,007
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
