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As filed with the Securities and Exchange Commission on June 27, 1997
Registration No. 000-28822
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1997
Commission File Number 0-28822
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ROCKSHOX, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 401 Charcot Avenue 77-0396555
(State or other jurisdiction of San Jose, CA 95131 (I.R.S. Employer Identification
incorporation or organization) (408) 435-7469 Number)
</TABLE>
(Address, including zip code and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common Stock, par value $.01 per share REGISTERED
NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/
As of June 16, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $72,005,677.
As of June 16, 1997, the Registrant had 13,685,164 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the ROCKSHOX, INC. Proxy Statement for the 1997 Annual Meeting
of Stockholders are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 11
4 Submission of Matters to a Vote of Security Holders . . . . . 12
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . 12
6 Selected Financial Data. . . . . . . . . . . . . . . . . . . . 13
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 14
7A Quantitative and Qualitative Disclosures About Market Risk . . 17
8 Financial Statements and Supplementary Data . . . . . . . . . 17
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . 17
PART III
10 Directors and Executive Officers of the Registrant . . . . . . 18
11 Executive Compensation . . . . . . . . . . . . . . . . . . . . 18
12 Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . 18
13 Certain Relationships and Related Transactions . . . . . . . . 18
PART IV
14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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Unless the context indicates otherwise, the "Company" or "RockShox", as
used in this Annual Report on Form 10-K, 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. This annual report on Form
10-K includes references to registered trademarks and brand names of the
Company, including: ROCKSHOX, JUDY, DELUXE, QUADRA AND MAG. This annual
report on Form 10-K also contains references to INDY, which is a trademark of
Indianapolis Motor Speedway Corporation, and is used under license from IMS
Properties Inc.
PART I
ITEM 1. BUSINESS
GENERAL
RockShox is the worldwide leader in the design, manufacture and marketing
of high performance bicycle suspension products. 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.
The Company's sales have grown rapidly, from approximately $6 million in
fiscal 1991 to approximately $106.2 million in fiscal 1997. 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.
During fiscal 1997 RockShox marketed 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 72% of the Company's sales in fiscal 1997 were to original
equipment manufacturers ("OEMs"), including Trek Bicycle Corp. ("Trek"), GT
Bicycles Inc. ("GT") and Specialized Bicycle Components, Inc. ("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 independent
bicycle dealers ("IBDs") worldwide.
The Company was founded by Steve Simons and Paul Turner in 1989 as a North
Carolina corporation and was later reincorporated as a California corporation.
In March 1995, the Company was recapitalized (the "Recapitalization") in a
transaction with MCIT PLC ("MCIT") and certain persons and entities affiliated
with The Jordan Company ("Jordan"), as a result of which Messrs. Simons and
Turner and certain of their respective family members became equal owners in the
Company with MCIT and such affiliates of Jordan.
The Company's principal executive office is located at 401 Charcot Avenue,
San Jose, California; its telephone number is (408) 435-7469.
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 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 and low weight.
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.
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The 1997 models represent the Company's broadest line of product
offerings to date. For the 1997 model year, the Company offered 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
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SUGGESTED
TYPICAL RETAIL PRICE IN WEIGHT FOR DATE OF
RETAIL BIKE ACCESSORY SUSPENSION STANDARD ORIGINAL
1997 MODEL PRICE POINT (1) MARKET INTENDED USE TECHNOLOGY CONFIGURATION SHIPMENT (2)
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<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+ $1,199 Downhill Racing Cartridge 4.2 pounds August 1996
REAR SHOCKS
SUGGESTED
TYPICAL RETAIL PRICE IN WEIGHT FOR DATE OF
RETAIL BIKE ACCESSORY SUSPENSION STANDARD ORIGINAL
1997 MODEL PRICE POINT (1) MARKET INTENDED USE TECHNOLOGY CONFIGURATION SHIPMENT (2)
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<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 Deluxe $1,200-$1,700 $199 Cross-Country; Coil Over 0.71 pounds July 1996
Downhill hydraulic damper
Super Deluxe $1,700+ $289 Cross-Country; Coil Over 0.79 pounds June 1995
Downhill hydraulic damper
with oil reservoir
</TABLE>
(1) The typical retail bike price point represents management's estimate of the
U.S. retail range for OEM mountain bikes that include the indicated product.
(2) Following their introduction, models are generally upgraded and revised
each year.
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RESEARCH AND DEVELOPMENT
As of March 31, 1997, the Company's product development activities, based
in San Jose, California, were supported by 33 professionals, including 10
project engineers, utilizing 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.
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; (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 and disc brakes. 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 such as disc brakes. There can be no assurance that the Company will
introduce any new products or, if introduced, that any such products will be
commercially successful.
Research and product development expenditures in fiscal years 1994, 1996
and 1997 were approximately $2.1 million, $3.4 million and $4.8 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 seven
engineers and seven 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 March 31, 1997, manufacturing included approximately 210
non-unionized employees plus approximately 60 temporary hires brought in
principally 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
5
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the Company's manufacturing processes. 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 1997,
the Company purchased approximately $5.6 million of components from its
largest vendor.
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 March 31, 1997, the Company's backlog was
approximately $9.6 million compared to $9.8 million at March 31, 1996.
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.
SALES AND DISTRIBUTION
The Company's products are primarily sold to OEMs, who incorporate ROCKSHOX
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, 1997,
approximately 72% of the Company's total net sales were to OEMs and
approximately 28% 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:
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Fiscal Year Ended
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December 31, 1994 March 31, 1996 March 31, 1997
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Net Sales % of Net Sales % of Net Sales % of
(in thousands) Net Sales (in thousands) Net Sales (in thousands) Net Sales
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
OEMs . . . . . . . $ 24,482 65% $ 57,103 68% $ 77,000 72%
Distributors and IBDs. . . . 13,418 35% 26,406 32% 29,212 28%
------------------------- ------------------------- -------------------------
Total. . . . . . . . . . $ 37,900 100% $ 83,509 100% $ 106,212 100%
------------------------- ------------------------- -------------------------
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</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. The Company
has substantial export sales, a significant portion of which include products
shipped to Asian manufacturing subcontractors for certain U.S.-based OEMs.
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.
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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 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.
As of March 31, 1997, the Company had approximately 30 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 1997, approximately 55% 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 1997. At March 31, 1997,
the Company's three OEM customers with the largest accounts receivable balances
accounted for approximately 55%, of the Company's accounts receivable. The
Company has no long-term contracts with any of its customers.
MARKETING
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 tradeshows 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 enhances its product development efforts as
well as increasing 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 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' 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 tradeshows. As part of its
retail marketing efforts, the Company markets 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, bicycle shops and directly to consumers at race events.
7
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Sales and Marketing expenditures totaled approximately $1.8 million, $3.7
million and $4.6 million in fiscal years 1994, 1996 and 1997.
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 Products, Inc., a
division of LDI, Ltd., which manufactures Manitou products ("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.
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.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trademarks, trade names,
licensing arrangements, trade secrets, know-how and proprietary technology in
order to secure and protect its intellectual property rights.
The Company believes that, among other things, its brand name ROCKSHOX
offers the Company a significant competitive advantage. In addition, the
Company holds several trademark registrations in the United States and abroad
for the ROCKSHOX mark and other marks in connection with many of the Company's
products, and the Company may file additional applications for U.S. and foreign
trademark protection in the future. There can be no assurance however that
third parties have not or will not adopt or register marks that are the same or
substantially similar to those of the Company, or that such third parties will
not be entitled to use such marks to the exclusion of the Company. Selecting
new trademarks to resolve such situations could involve significant costs,
including the loss of goodwill already gained by the marks previously used.
Several patents have been issued and several patent applications have been
allowed, covering aspects of many of the Company's suspension products in the
U.S. and abroad. The Company intends to continue to seek patent
protection with respect to its technologies. There can be no assurance that the
Company's present or future patents will adequately cover the Company's
technologies, or that patents relating to such technologies will not be
successfully challenged or circumvented by competitors.
The Company intends to enforce vigorously its intellectual property
rights in the event of infringements or misappropriations by third parties,
and may be required to undertake litigation to do so. Any such litigation
could result in substantial cost to and diversion of effort by the Company.
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 in every instance.
8
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The Company has occasionally received, and may receive in the future,
claims asserting infringement by the Company of intellectual property rights
held by third parties. Currently, there are two patents and two
trademark-related disputes involving alleged infringements by the Company.
There can be no assurance that the Company is not infringing the intellectual
property rights held by others, or that the Company will not be required to
defend itself against claimed infringement of the rights of others. Such
disputes may result in substantial cost to and diversion of effort by the
Company, and could have a material adverse effect on the Company or its
prospects.
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.
GOVERNMENT REGULATION
Bicycle suspension products are within the jurisdiction of the Consumer
Product Safety Commission (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 American Society of Testing and Materials
(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
competitors product. The Company cannot predict whether standards relating to
the Company's products or otherwise affecting the bicycle suspension industry
will be 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.
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 bikes 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 materiel adverse effect on the Company or its
prospects.
The Company is subject to federal, state and local environmental laws,
regulations or 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.
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 three voluntary
corrective actions in conjunction with the CPSC. None of these actions has
been financially material to the Company.
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
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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.
EMPLOYEES
As of March 31, 1997, the Company employed approximately 375 full-time
employees. In addition, the Company utilized approximately 60 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.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND FUTURE RESULTS
This report contains various forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. Forward-looking statements may also be in the registrant's
other reports filed under the Securities Exchange Act of 1934, in its press
releases and in other documents. In addition, from time to time, the registrant
through its management may make oral forward-looking statements.
Forward-looking statements generally refer to future plans and performance,
and are identified by the words "believe", "expect", "anticipate", "optimistic".
"intend", "aim", "will" or similar expressions. Readers are cautioned not to
place undue reliance on theses forward-looking statements, which speak only as
of the date of which they are made. The registrant undertakes no obligation to
update publicly or revise any forward-looking statements.
Actual results are uncertain and may be impacted by the following factors.
In particular, certain risks and uncertainties that may impact the accuracy of
the forward-looking statements with respect to, among other things, revenues,
expenses and operating results include, without limitation, cycles of dealer
orders, general economic conditions and changing consumer trends, technological
advances and the number and timing of new product introductions, shipments of
products and componentry from foreign suppliers, the timing of operating and
advertising expenditures and changes in the mix of products ordered by
independent bicycle dealers. As a result, the actual results may differ
materially from those projected in the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
Important factors that could cause actual results to differ materially from
the Company's forward-looking statements, as well as affect the Company's
ability to achieve its financial and other goals, include, but are not limited
to, the following:
- - Any decline in general economic conditions, uncertainties regarding
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, IBDs) and, therefore, on the Company
or its prospects.
- - 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.
- - 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.
- - 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.
- - 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.
- - The Company's lack of introduction of new products, or if introduced, the
lack of commercial success of such products, could have a material adverse
effect on the Company or its prospects.
- - Competition from existing or new competitors of the Company that introduce
and promote suspension products or other bicycle components perceived by
the bicycle industry or consumers to offer price or performance advantages
to other activity or that other wise have greater consumer appeal than
the Company's products could have a material adverse effect on the Company
or its prospectus.
10
<PAGE>
- - No assurance can be given that others will not assert rights in, or
ownership of, and whether such assertions will be successfully rejected
by the Company, patents, trademarks and other proprietary rights of
RockShox. In addition, the laws of certain foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States.
- - 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.
- - Because 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 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.
- - Due to the uncertainty as to the number of product liability 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, the Company's product liability 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.
- - Adverse publicity relating to mountain bike suspension or mountain biking
generally, or publicity associated with actions by the United States
CPSC or others expressing concerns about the safety or function of the
Company's products, other suspension products or mountain bikes, could
have a material adverse effect on the Company or its prospects.
- - There can be no assurance that there will not be product recalls,
corrective actions or other activity voluntarily or involuntarily
undertaken by the Company or involving the CPSC or other regulatory bodies,
any of which could have a material adverse effect on the Company or its
prospects.
- - The loss of any member of the Company's senior management team and other
key personnel, including certain members of its product development team,
or the inability to attract, retain and motivate key personnel, could have
a material adverse effect on the Company or its prospects.
ITEM 2. PROPERTIES
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 leased a 100,000 square foot
manufacturing facility in San Jose, commencing in May 1997 which expires in
2004. 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.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, on September 26, 1996, Answer Products, Inc.
("Answer") filed a compliant 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, and 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'
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' 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.
11
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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. (See Note 8 of Notes to Consolidated Financial Statements).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since September 26, 1996, the Company's common stock has been listed on The
NASDAQ Stock Market under the symbol "RSHX". The following table sets forth,
for the periods indicated, the high and low sales prices of the Company's common
stock, as reported on The NASDAQ Stock Market.
Year Ended March 31, 1997 High Low
------------------------- ---- ---
Second Quarter (from September 26,1996) $16.25 $15.00
Third Quarter . . . . . . . . . . $16.00 $10.62
Fourth Quarter. . . . . . . . . . $19.12 $13.50
On June 16, 1997, the closing sales price per share of the Company's common
stock as reported on The NASDAQ Stock Market was $14.50. On June 16, 1997,
there were approximately 2,100 holders of the Company's common stock.
During the Company's past two fiscal years, the Company's Board of
Directors has not declared a cash dividend on the Company's Common Stock. The
Company currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Company and the related
notes thereto. The following selected financial data should be read in
conjunction with the Company's consolidated financial statements and the
related notes thereto and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months Year
Ended Ended
Year Ended December 31, March 31, March 31,
------------------------------------ ------------- ----------------------
1992 1993 1994 1995 (1) 1996 1997
-------- -------- -------- ------------ -------- --------
STATEMENT OF OPERATIONS DATA (IN
THOUSANDS, EXCEPT PER SHARE DATA):
<S> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . $ 16,442 $ 30,941 $ 37,900 $ 14,279 $ 83,509 $ 106,212
Cost of sales. . . . . . . . . . . 10,565 20,113 24,477 9,590 54,110 67,115
--------- --------- --------- --------- --------- ----------
Gross profit . . . . . . . . . 5,877 10,828 13,423 4,689 29,399 39,097
Selling, general and administrative
expenses . . . . . . . . . . . . 4,703 5,098 4,210 5,404 11,220 12,137
Research, development and
engineering expense. . . . . . . 838 1,536 2,073 2,223 3,401 4,801
Non-recurring charge . . . . . . . --- --- --- --- --- 6,580
--------- --------- --------- --------- --------- ----------
Income (loss) from operations. 336 4,194 7,140 (2,938) 14,778 15,579
Interest and other expense, net. . 67 16 6 51 5,650 2,205
--------- --------- --------- --------- --------- ----------
Income (loss) before income
taxes . . . . . . . . . . . 269 4,178 7,134 (2,989) 9,128 13,374
Provisions for (benefit from)
income taxes . . . . . . . . . . 104 1,521 2,420 (653) 3,464 5,149
--------- --------- --------- --------- --------- ----------
Income (loss) before
extraordinary loss. . . . . 165 2,657 4,714 (2,336) 5,664 8,225
Extraordinary loss, net of tax
benefit of $885,000. . . . . . . --- --- --- --- --- 1,328
--------- --------- --------- --------- --------- ----------
Income (loss) before accretion 165 2,657 4,714 (2,336) 5,664 6,897
Accretion for dividends on
mandatorily redeemable
preferred stock. . . . . . . . . --- --- --- --- 357 185
--------- --------- --------- --------- --------- ----------
Net income (loss) . . . . . $ 165 $ 2,657 $ 4,714 $ (2,336) $ 5,307 $ 6,712
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
Income (loss) per share before
extraordinary loss . . . . . . . $ 0.02 $ 0.29 $ 0.51 $ (0.25) $ 0.57 $ 0.69
Loss per share from extraordinary
item . . . . . . . . . . . . . . --- --- --- --- --- (0.11)
--------- --------- --------- --------- --------- ----------
Net income (loss) per share $ 0.02 $ 0.29 $ 0.51 $ (0.25) $ 0.57 $ 0.58
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
Cash dividend per share. . . . . . $ --- --- $ 0.03 --- --- ---
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
Shares used in per share
calculation. . . . . . . . . . . 9,240 9,240 9,240 9,240 9,240 11,641
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
<CAPTION>
At December 31, At March 31
------------------------------------ ------------------------------------
1992 1993 1994 1995 (1) 1996 1997
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital. . . . . . . . . . $ 906 $ 2,226 $ 5,995 $ 1,939 $ 2,327 $ 23,722
Total assets . . . . . . . . . . . 4,081 7,660 13,493 17,679 26,932 45,875
Total debt . . . . . . . . . . . . 1,146 1,345 998 48,500 44,500 ---
Mandatorily redeemable preferred
stock. . . . . . . . . . . . . --- --- --- 7,000 7,357 ---
Stockholders' equity (deficit) . . 167 2,774 7,188 (44,922) (39,615) 31,561
</TABLE>
(1) In 1995, the Company changed its fiscal year end from December 31 to March
31.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
RockShox is the worldwide leader in the design, manufacture and marketing
of high performance bicycle suspension products. The Company's sales have
grown from approximately $16.4 million in fiscal 1992 to $106.2 million in
fiscal 1997. 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.
The Company has substantial export 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 higher unit volume, which
allows the Company an opportunity to capitalize on manufacturing efficiencies.
Research, development and engineering costs are expensed as incurred.
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 and in
October 1996 the Company completed an Initial Public Offering ("IPO") (see
Note 1 of Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS:
The following table sets forth operations data as a percentage of net sales
for the periods indicated.
Year Ended
Year Ended March 31
December 31, ------------------
1994 1996 1997
-------------- -------- --------
Net Sales . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . 64.6 64.8 63.2
Gross margin. . . . . . . . . . . . . 35.4 35.2 36.8
Selling, general and administrative
expenses . . . . . . . . . . . . . 11.1 13.4 11.4
Research, development and
engineering expenses . . . . . . . 5.5 4.1 4.5
Non-recurring charge. . . . . . . . . --- --- 6.2
Income from operations. . . . . . . . 18.8 17.7 14.7
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<PAGE>
FISCAL YEAR ENDED MARCH 31, 1997 (FISCAL 1997) COMPARED TO FISCAL YEAR
ENDED MARCH 31, 1996 (FISCAL 1996) NET SALES. Net sales for the year
ended March 31, 1997 increased by 27.2% to $106.2 million from $83.5 million
in fiscal 1996. OEM sales increased in fiscal 1997 by 34.8% to $77.0 million
compared to $57.1 million in fiscal 1996. Sales to the retail accessory
market increased by 10.7% to $29.2 million compared to $26.4 million in
fiscal 1996. 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.
Export sales, a significant portion of which included products shipped to
Asian manufacturing subcontractors for certain U.S.-based OEMs, accounted for
approximately 54.6% and 48.6% of net sales in fiscal 1997 and 1996,
respectively.
GROSS MARGIN. Gross margin (gross profit as a percentage of net sales)
for fiscal 1997 increased to 36.8% compared to 35.2% for the prior year. 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 fiscal 1997 increased by 8.2% to $12.1
million (or approximately 11.4% of net sales) compared to $11.2 million (or
approximately 13.4% of net sales) for 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
fiscal 1997 and 1996 included incremental amounts accrued under an incentive
based bonus plan that was terminated as of the Company's IPO of $312,000 and
$812,000, respectively. (See Note 6 of Notes to Consolidated Financial
Statements.)
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development and
engineering ("R&D") expense for fiscal 1997 increased by 41.2% to $4.8
million (or approximately 4.5% of net sales) compared to $3.4 million (or
approximately 4.1% of net sales) for 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 fiscal 1997 and 1996 included incremental amounts accrued under
an incentive based bonus plan that was terminated as of the Company's IPO of
$344,000 and $938,000, respectively. (See Note 6 of Notes to Consolidated
Financial Statements.) Excluding these bonuses, R&D expense was
approximately 4.2% and 2.9% of net sales in fiscal 1997 and fiscal 1996,
respectively.
NON-RECURRING CHARGE. The Company incurred a non-recurring charge during
fiscal 1997 related to the termination of an incentive based bonus plan (the
"Bonus Plan") with the Company's President and Vice President of Advanced
Research upon completion of the Company's IPO. The non-recurring charge totaled
$6.6 million. (See Note 6 of Notes to Consolidated Financial Statements.)
INTEREST EXPENSE. The Company incurred interest expense (which included
amortization of capitalized financing costs) of $2.7 million for fiscal 1997
compared to $5.8 million in fiscal 1996. The decrease was primarily due to
the elimination of all outstanding debt upon the closing of the Company's IPO.
INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 1997
increased to 38.5% compared to 37.9% for fiscal 1996.
INCOME BEFORE EXTRAORDINARY ITEM. Income before extraordinary item for
fiscal 1997 was $8.2 million compared to $5.7 million for the prior year.
Without considering the non-recurring charge, accretion for dividends on
mandatorily redeemable preferred stock and extraordinary item discussed
below, net income for fiscal 1997 would have been approximately $12.2 million
(or $1.03 per share) compared to approximately $5.7 million or ($0.57 per
share) for fiscal 1996.
EXTRAORDINARY ITEM. During fiscal 1997, the Company recognized a
non-recurring 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.
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<PAGE>
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.
Export 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. SG&A 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. (See Note 6 of Notes to Consolidated Financial Statements.)
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. R&D 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. R&D 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, R&D expense was approximately 2.8% and
3.4% of net sales in fiscal 1996 and fiscal 1994, respectively. (See Note 6
of Notes to Consolidated Financial Statements.)
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the past two fiscal years, the Company has satisfied its operating
cash needs, other than expenses related to the Recapitalization, principally
through cash flow from operations. For the year ended March 31, 1997, net
cash provided by operating activities was $7.1 million which was comprised of
the net income of $6.9 million increased by non-cash charges for depreciation
and amortization of $3.5 million and the write-off of capitalized financing
costs of $2.2 million, offset by a net increase in working capital of $5.5
million. Currently, the Company requires most of 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.
Net cash used in investing activities was $6.6 million which principally
consisted of acquisitions of property and equipment. Net cash provided by
financing activities was $12.4 million which represented net proceeds from the
Company's IPO of $64.5 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.
16
<PAGE>
Capital expenditures totaled $6.6 million for fiscal 1997 and $4.1
million for fiscal 1996. As of March 31, 1997 the Company had purchase
commitments of approximately $2.5 million primarily for tooling and machinery
to be used in manufacturing beginning in fiscal 1998, which commitments are
expected to be funded by cash flow from operations.
At March 31, 1997, the Company had cash of $14.7 million and working
capital of $23.7 million. The Company believes that its current cash balances
will be sufficient to provide operating liquidity for at least the next twelve
months.
RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128, which supersedes Accounting Principle Board Opinion No. 15, is
effective for periods, including interim periods, ending after December 15, 1997
and requires that prior periods be restated. The impact of the adoption of SFAS
No. 128 on the financial statements of the Company has not yet been determined.
SELECTED QUARTERLY FINANCIAL DATA; SEASONALITY
The following table presents selected quarterly financial information
(expressed in thousands, except per share data) for the last eight 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 of such quarters.
The operating results for any quarter are not necessarily indicative of the
results for any entire year.
<TABLE>
<CAPTION>
Quarter Ended:
---------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1995 1995 1995 1996 1996 1996 1996 1997
---------- ------------- ------------ --------- --------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . $ 18,784 $ 21,258 $ 23,223 $ 20,244 $ 21,378 $ 28,181 $ 32,143 $ 24,510
Gross profit. . . . . . 6,499 7,493 8,363 7,044 7,645 10,375 12,057 9,020
Operating income (loss) 3,088 3,976 5,337 2,377 3,486 (251) 7,846 4,498
Income (loss) before
extraordinary loss. . 994 1,587 2,445 638 1,349 (940) 4,925 2,891
Net income (loss) . . . 994 1,587 2,445 638 1,349 (2,268) 4,925 2,891
--------- --------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- --------- ---------- --------- ---------
Income (loss) per share
before extraordinary
loss. . . . . . . . . $ 0.10 $ 0.16 $ 0.26 $ 0.06 $ 0.14 $ (0.11) $ 0.35 $ 0.21
Net income (loss) per
share . . . . . . . . $ 0.10 $ 0.16 $ 0.26 $ 0.06 $ 0.14 $ (0.26) $ 0.35 $ 0.21
--------- --------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- --------- ---------- --------- ---------
Shares used in per share
calculations. . . . . 9,240 9,240 9,240 9,240 9,240 9,240 14,026 14,059
</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
Business--Certain factors that May Affect the Company's Business and Future
Results).
INFLATION
The Company does not believe inflation has had a material impact on the
Company in the past, although there can be no assurance that this will be the
case in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" on page 21 for a listing
of the consolidated financial statements submitted as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on August 14,
1997 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on August 14,
1997 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1997 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on August 14,
1997 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on August 14,
1997 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1997 and is incorporated herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) See page 21 for a listing of financial statements submitted as part of
this report.
(2) The financial statements listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this report.
(a) (3) The following exhibits are included in this report:
2. Form of Agreement and Plan of Merger between RSx Holdings, Inc.
and RockShox, Inc. *
3.1 Form of Amended and Restated Certificate of Incorporation of
RockShox, Inc. *
3.2 Form of Amended and Restated Bylaws of RockShox, Inc. *
4 Form of Common Stock Certificate of RockShox, Inc. *
10.1 Management Consulting Agreement, dated as of March 24, 1995,
between TJC Management Corporation and RSx Holdings, Inc. *
10.2 Form of Registration Rights Agreement among RockShox, Inc.,
Stephen Simons, Debra Simons, Paul Turner and other
stockholders named therein. *
10.3 Form of Amended and Restated Employment Agreement between
RockShox, Inc. and Stephen Simons. *
10.4 Form of Amended and Restated Employment Agreement between
RockShox, Inc. and Paul Turner. *
10.5 Noncompetition Agreement, dated March 24, 1995, between RSx
Holdings, Inc. and Stephan Simons. *
10.6 Noncompetition Agreement, dated March 24, 1995, between RSx
Holdings, Inc. and Debra Simons. *
10.7 Noncompetition Agreement, dated March 24, 1995, between RSx
Holdings, Inc. and Paul Turner. *
10.8 Consultant Agreement, dated January 1, 1994 by and between Simons
& Susslin, Inc. and Stephen Simons. *
10.9 Form of Lease, dated as of May 1, 1994 between Charcot Center
Joint Venture and RockShox, Inc. *
10.10 Form of First Amendment to Lease, dated as of August 15, 1994,
between Charcot center Joint Venture and RockShox, Inc. *
10.11 Form of Lease, dated as of October 1, 1995, between Whitecliffe I
Apartments, Ltd. And RockShox, Inc. *
10.12 Form of Indemnity Agreement. *
10.13 Form of Lease, dated as of March 7, 1997, between S. Stephen
Nakashima and RockShox, Inc.
10.14 Amended and Restated RSx Holdings, Inc. 1996 Stock Plan. *
10.15 Agreement, dated as of May 7, 1996, between RockShox, Inc. and
Charles E. Noreen, Jr.
11 Statement regarding computation of net income (loss) per share.
21 List of Subsidiaries of RockShox, Inc. *
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
---------------------------------------------------------------------------
* Previously filed with the Registration Statement on Form S-1 of
ROCKSHOX, INC. (Registration No. 333-8069)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of the Company's fiscal year ended March 31, 1997.
(c) See (a)(3) above for a listing of exhibits included as a part of this
report
19
<PAGE>
ROCKSHOX, INC.
FORM 10-K
ITEMS 8, 14 (a) AND 14 (d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
1. Consolidated Financial Statements
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets at March 31, 1996 and 1997 . . . . . . . 22
Consolidated Statements of Operations for the Year Ended
December 31, 1994, the Three Months Ended March 31,
1995 and the Years Ended March 31, 1996 and 1997. . . . . . . . . 23
Consolidated Statements of Stockholders' Equity (Deficit)
for the Year Ended December 31, 1994 the Three Months
Ended March 31, 1995 and the Years Ended March 31,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1994 the Three Months Ended March 31, 1995
and the Years Ended March 31, 1996 and 1997 . . . . . . . . . . . 25
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 26
2. Consolidated Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts. . . . . . . . . . . 37
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
RockShox, Inc.
We have audited the accompanying consolidated balance sheets of RockShox,
Inc. as of March 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
December 31, 1994, the three month period ended March 31, 1995 and the years
ended March 31, 1996 and 1997. 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 RockShox, Inc.
as of March 31, 1996 and 1997, the consolidated results of their operations and
their cash flows for the year ended December 31, 1994, the three month period
ended March 31, 1995 and the years ended March 31, 1996, and 1997 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 25, 1997
21
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
---------
1996 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 1,808 $ 14,747
Accounts receivable, net of allowance for doubtful accounts $1,432
in 1996 and $1,589 in 1997. . . . . . . . . . . . . . . . . . . . . . 5,571 6,618
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,436 10,800
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 397 1,132
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 3,805 4,739
---------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 20,017 38,036
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . 4,313 7,700
Capitalized financing costs, net . . . . . . . . . . . . . . . . . . . . 2,513 ---
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 139
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,932 $ 45,875
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,769 $ 3,459
Accounts payable to related parties. . . . . . . . . . . . . . . . . . 494 ---
Accrued incentive compensation payable to stockholders . . . . . . . . 2,125 ---
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 10,302 10,855
Current portion of long-term bank debt . . . . . . . . . . . . . . . . 3,000 ---
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 17,690 14,314
Long-term bank debt, net of current portion. . . . . . . . . . . . . . . 24,500 ---
Notes payable to related parties, net of current portion . . . . . . . . 17,000 ---
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 59,190 14,314
---------- ----------
Commitments and contingencies (Note 8).
Mandatorily redeemable preferred stock issued to stockholders, $1.00 par
value:
Authorized: 9,132 shares in 1996 and none in 1997;
Issued and outstanding: 7,000 shares in 1996 and none in 1997;
Redemption and liquidation value of $7,357 in 1996 and none in 1997. . 7,357 ---
---------- ----------
Preferred stock, $0.01 par value:
Authorized: 10,000,000 shares
Issued and outstanding: none in 1996 and 1997 . . . . . . . . . . . . --- ---
Common stock, $0.01 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 8,820,000 shares in 1996 and 13,620,000
shares in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 136
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 412 64,828
Distributions in excess of net book value. . . . . . . . . . . . . . . . (45,422) (45,422)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,307 12,019
---------- ----------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . (39,615) 31,561
---------- ----------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity (deficit) . . . . . . . . . . . . . . . . . . . $ 26,932 $ 45,875
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . $ 37,900 $ 14,279 $ 83,509 $ 106,212
Cost of sales. . . . . . . . 24,477 9,590 54,110 67,115
----------- ----------- ----------- -----------
Gross profit . . . . . . . 13,423 4,689 29,399 39,097
----------- ----------- ----------- -----------
Selling, general and
administrative expense. . . 4,210 5,404 11,220 12,137
Research, development and
engineering expense. . . . 2,073 2,223 3,401 4,801
Non-recurring charge . . . . --- --- --- 6,580
----------- ----------- ----------- -----------
Operating expenses . . . . 6,283 7,627 14,621 23,518
----------- ----------- ----------- -----------
Income (loss) from
operations . . . . . . . 7,140 (2,938) 14,778 15,579
Interest income. . . . . . . 15 7 136 492
Interest expense . . . . . . (21) (58) (5,786) (2,697)
----------- ----------- ----------- -----------
Income (loss) before
income taxes . . . . . . 7,134 (2,989) 9,128 13,374
Provision for (benefit from)
income taxes . . . . . . . 2,420 (653) 3,464 5,149
----------- ----------- ----------- -----------
Income (loss) before
extraordinary loss . . . 4,714 (2,336) 5,664 8,225
Extraordinary loss from early
extinguishment of debt, net of
tax benefit of $885,000. . --- --- --- 1,328
----------- ----------- ----------- -----------
Net income (loss) before
accretion . . . . . . 4,714 (2,336) 5,664 6,897
Accretion for dividends on
mandatorily redeemable
preferred stock. . . . . . --- --- 357 185
----------- ----------- ----------- -----------
Net income (loss)
available to common
stockholders. . . . . $ 4,714 $ (2,336) $ 5,307 $ 6,712
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) per share before
extraordinary item . . . . $ 0.51 $ (0.25) $ 0.57 $ 0.69
Loss per share from
extraordinary item . . . . --- --- --- (0.11)
----------- ----------- ----------- -----------
Net income (loss) per
share . . . . . . . . $ 0.51 $ (0.25) $ 0.57 $ 0.58
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash dividend per share. . . $ 0.03 --- --- ---
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in per share
calculations . . . . . . . 9,240 9,240 9,240 11,641
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
ROCKSHOX, INC.
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, 1994 . . . . . . . 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
Issuance of common stock. . . . . . . 8,820 1 $ 499 --- --- 500
Recapitalization and
distributions to stockholders . . . (8,820) 86 (87) $(45,422) (4,851) (50,274)
Net loss. . . . . . . . . . . . . . . --- --- --- --- (2,336) (2,336)
---------- ---------- ---------- ---------- ---------- ----------
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)
Issuance of common stock in
initial public offering . . . . . . 4,800 48 64,416 --- --- 64,464
Accretion for dividends on
mandatorily redeemable
preferred stock . . . . . . . . . . --- --- --- --- (185) (185)
Net income. . . . . . . . . . . . . . --- --- --- --- 6,897 6,897
---------- ---------- ---------- ---------- ---------- ----------
Balances, March 31, 1997. . . . . . . . 13,620 $ 136 $ 64,828 $ (45,422) $12,019 $31,561
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
ROCKSHOX. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR THREE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . $ 4,714 $ (2,336) $ 5,664 $ 6,897
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . 193 78 1,746 3,467
Write-off of capitalized financing costs. . . . . . . --- --- --- 2,213
Provision for doubtful accounts . . . . . . . . . . . --- 32 1,518 175
Provision for excess and obsolete inventories . . . . 69 --- 2,009 825
Deferred income taxes . . . . . . . . . . . . . . . . (388) (1,010) (2,298) (934)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . (2,874) 617 (1,699) (1,222)
Inventories . . . . . . . . . . . . . . . . . . . . . (803) (291) (6,095) (3,189)
Prepaid expenses and other current assets . . . . . . (268) (68) 86 (735)
Accounts payable and accrued liabilities. . . . . . . 1,738 1,835 7,589 (376)
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 2,381 (1,143) 8,520 7,121
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . (890) (409) (4,074) (6,554)
Other . . . . . . . . . . . . . . . . . . . . . . . . (1) 129 52 (50)
---------- ---------- ---------- ----------
Net cash used in investing activities. . . . . . . . (891) (280) (4,022) (6,604)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from Initial Public Offering, net of expenses --- --- --- 64,464
Repayment of mandatorily redeemable preferred
stock. . . . . . . . . . . . . . . . . . . . . . . . --- --- --- (7,542)
Proceeds from issuance of bank debt . . . . . . . . . --- 31,250 --- ---
Repayment of short-term borrowings and bank debt. . . --- --- (3,750) (27,500)
Payment of financing costs. . . . . . . . . . . . . . --- (3,203) --- ---
Repayment of notes payable to related parties. . . . (1,345) (998) (250) (17,000)
Issuance of notes payable to related parties . . . . 998 11,250 --- ---
Proceeds from issuance of mandatorily redeemable
preferred stock . . . . . . . . . . . . . . . . . --- 3,000 --- ---
Payment of dividends. . . . . . . . . . . . . . . . . (300) --- --- ---
Proceeds from issuance of common stock. . . . . . . . --- 500 --- ---
Distributions related to reorganization . . . . . . . --- (40,274) --- ---
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities. (647) 1,525 (4,000) 12,422
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents . . . . 843 102 498 12,939
Cash and cash equivalents, beginning of period . . . . . 365 1,208 1,310 1,808
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period. . . . . $ 1,208 $ 1,310 $ 1,808 $ 14,747
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental disclosure of cash flow information:
Income taxes paid . . . . . . . . . . . . . . . . . . $3,232 --- $4,180 $5,065
Interest paid . . . . . . . . . . . . . . . . . . . . 21 $ 21 4,939 3,599
Non-cash distributions in excess of net book value -
mandatorily redeemable preferred stock . . . . . . . --- 4,000 --- ---
Non-cash distributions in excess of net book value -
junior subordinated notes. . . . . . . . . . . . . . --- 6,000 --- ---
Accretion for dividends on mandatorily redeemable
preferred stock . . . . . . . . . . . . . . . . . . --- --- 357 185
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
ROCKSHOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND EQUITY TRANSACTIONS:
NATURE OF OPERATIONS:
The Company designs, manufactures and markets high performance bicycle
suspension products. During the fiscal year ended March 31, 1997, the
Company marketed front suspension forks and 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 year ended
December 31, 1994, the three months ended March 31, 1995, the years ended
March 31, 1996 and 1997, approximately 65%, 62%, 68%, and 72% respectively,
of the Company's total net sales were to OEMs. For the year ended December
31, 1994, the three months ended March 31, 1995, the years ended March 31,
1996 and 1997, approximately 35%, 38%, 32%, and 28% respectively, of the
Company's total net sales were to the retail accessory market.
RECAPITALIZATION AND INITIAL PUBLIC OFFERING:
In October 1996, ROCKSHOX, INC., a Delaware corporation ("the Company")
merged (the "Merger") with and into its parent company RSx Holdings, Inc.
("Holdings") and each share of common stock of RSx Holdings was converted into
88.2 shares of common stock of the Company. All share and per share data in the
accompanying financial statements have been retroactively restated to reflect
the Merger.
Holdings 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 the Company, 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 Holdings and RSx Acquisition Inc.
("Acquisition"). In exchange therefore, 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
Holdings ("junior notes"), $4,000,000 of non-convertible mandatorily redeemable
Series B preferred stock of Holdings ("Series B Preferred Stock"), 50% of the
common stock of Holdings and $1,225,000 paid to third parties for fees and
expenses on behalf of the Old RockShox stockholders. 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, MCIT PLC, an investment company organized
under the laws of England and Wales ("MCIT"), and certain persons and entities
affiliated with The Jordan Company ("Jordan") purchased the remaining 50% of the
common stock of Holdings, $11,000,000 aggregate principal amount of senior
subordinated notes payable of Holdings (senior notes and, together with the
junior notes, subordinated notes) and $3,000,000 of non-convertible mandatorily
redeemable Series A preferred stock of Holdings ("Series A Preferred Stock" and,
together with the Series B Preferred Stock, "the 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 was 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' net assets of $4,852,000 on the date of the
Recapitalization by $45,422,000. This amount has been recorded within
stockholders' equity as distributions in excess of net book value.
On September 26, 1996, the Company priced an of 4.8 million shares of
common stock, at $15.00 per share. The net proceeds to the Company were
approximately $64.5 million after deducting the underwriting discount and
offering expenses. From the net proceeds, $43 million was used to repay all
of the Company's debt, $7.5 million was used to redeem all of Holding's
outstanding Preferred Stock and accrued dividends, and $7.3 million was used
to terminate an incentive bonus plan ("Bonus Plan") with the Company's
President and Vice President of Advanced Research. The bonus termination
fee, less accrued bonus payments, has been disclosed as a non-recurring
charge in the fiscal 1997 Statement of Operations. The remaining net
proceeds were used for working capital purposes.
26
<PAGE>
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 suspension products and, therefore, any
material decline or prolonged lack of growth in the popularity of, or market
demand for, mountain bike suspension forks or rear shocks, 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.
CARRYING VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments that potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable and cash and
cash equivalents. The carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate their estimated
fair values based on information available as of March 31, 1997 and 1996.
CONCENTRATION OF CREDIT RISK:
The Company performs ongoing credit evaluations, generally does not require
collateral of its customers and maintains allowances for potential credit
losses. At March 31, 1997, three OEM customers accounted for 32%, 13% and 10%
of accounts receivable. At March 31, 1996, three OEM customers accounted for
32%, 16% and 13% of accounts receivable. (See Note 13 for concentrations of
revenue.)
27
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
CASH EQUIVALENTS:
The Company considers all investments purchased with original or
remaining maturities of three months or less at the date of purchase to be
cash equivalents. Substantially all cash balances are held in two financial
institutions domiciled in the United States.
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 AND EXTRAORDINARY ITEM:
As discussed in Note 1, on September 26, 1996, the Company completed its
IPO. In connection with the IPO the Company repaid all outstanding debt and
terminated a $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 as an extraordinary item, net of
income tax benefit, in the accompanying Statement of Operations.
Capitalized financing costs associated with the issuance of the bank debt
and subordinated notes were 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 years
ended March 31, 1997 and 1996 was $300,000 and $690,000, respectively. There
was no amortization expense for the year ended December 31, 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
accommodation 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 $594,000, $342,000, $1,089,000 and $1,590,000 for the year ended December
31, 1994, the three months ended March 31, 1995 and the years ended March 31,
1996 and 1997, respectively.
INCOME TAXES:
The Company's provisions 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
28
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS 128, which supersedes Accounting Principle Board Opinion No. 15, is
effective for periods, including interim periods, ending after December 15, 1997
and requires that prior periods be restated. The impact of the adoption of SFAS
No. 128 on the financial statements of the Company has not yet been determined.
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 the Company's 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 which was
effected concurrent with the IPO.
STOCK BASED COMPENSATION:
The Company accounts for its stock option plan in accordance with
provisions of the Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." In 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." SFAS
No. 123 established a fair value based method of accounting for stock-based
compensation plans and is effective for fiscal years beginning after December
15, 1995. The Company is continuing to account for its employee stock plan
in accordance with the provisions of APB 25, and has provided pro forma
disclosure in Note 10 as if the measurement provisions of SFAS No. 123 had
been adopted.
RECLASSIFICATIONS:
Certain amounts in the prior periods' financial statements have been
reclassified to conform to the fiscal 1997 presentation. These
reclassifications did not change previously reported stockholders' equity
(deficit) or net income (loss).
3.INVENTORIES (IN THOUSANDS):
MARCH 31,
-----------------------
1996 1997
----------- -----------
Raw materials . . . . . . . . . $ 5,320 $ 6,357
Finished goods. . . . . . . . . 3,116 4,443
----------- -----------
$ 8,436 $ 10,800
----------- -----------
----------- -----------
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.
29
<PAGE>
4. PROPERTY AND EQUIPMENT, NET (IN THOUSANDS):
MARCH 31,
-----------------------
1996 1997
----------- -----------
Computer equipment,
furniture and fixtures . . . . $ 1,553 $ 2,838
Machinery and equipment. . . . . 1,627 3,107
Tooling. . . . . . . . . . . . . 1,243 4,055
Leasehold improvements . . . . . 251 273
----------- -----------
4,674 10,273
Less: accumulated
depreciation and amortization . (1,493) (3,818)
----------- -----------
Construction in progress . . . . 1,132 1,245
----------- -----------
$ 4,313 $ 7,700
----------- -----------
Depreciation and amortization expense on property and equipment for the
year ended December 31, 1994, the three months ended March 31, 1995 and the
years ended March 31, 1996 and 1997 was $193,000, $78,000, $1,056,000 and
$3,167,000, respectively.
5. ACCRUED LIABILITIES (IN THOUSANDS):
MARCH 31,
-----------------------
1996 1997
----------- -----------
Accrued payroll and benefits $ 1,401 $ 2,200
Accrued income taxes
payable. . . . . . . . . . . 1,823 667
Accrued warranty . . . . . . . 4,231 4,725
Accrued interest payable . . . 902 ---
Other. . . . . . . . . . . . . 1,945 3,263
----------- -----------
$ 10,302 $ 10,855
----------- -----------
----------- -----------
The Company had $4,231,000 and $4,725,000 in accrued warranty costs at
March 31,1996 and March 31, 1997, 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"
or the "Bonus Plan") with the Company's President and Vice President of Advanced
Research, and a management consulting agreement (the "Consulting Agreement")
with an affiliate of Jordan. These agreements were substantially terminated in
connection with the Company's IPO.
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 renewed 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 could 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
30
<PAGE>
6. RELATED PARTY TRANSACTIONS (CONTINUED):
$2,820,000 and $1,880,000, respectively, (ii) received an annual salary of
$250,000 and certain perquisites and (iii) was 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. 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 included in selling, general and administrative
expense and $1,062,500 was included in research and development expense in the
statement of operations.
Effective simultaneously with the closing of the IPO, the Company
terminated the Employment Agreements, entered into amended and restated
employment agreements with each of Messrs. Simons and Turner (each, an "Amended
Employment Agreement") and recorded a non-recurring charge of approximately $6.6
million related to the termination of the Employment Agreements in fiscal 1997.
The Amended Employment Agreements are substantially similar to the Employment
Agreements, except that pursuant to the Amended Employment Agreements the Bonus
Plan was terminated and, in consideration thereof, the Company paid to each of
Messrs. Simons and Turner approximately $3.7 million. Each Amended Employment
Agreement also provides that, for each fiscal year commencing April 1, 1996
during the term of the Amended Employment Agreement in which Messrs. Simons and
Turner, as the case may be, has been an employee of the Company for the entire
fiscal year, the 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 of
$250,000, based upon an evaluation of his duties and, in the case of Mr. Simons,
upon the performance of the Company during the fiscal year. Aggregate incentive
compensation earned under the Amended Employment Agreement was $375,000 in
fiscal 1997, of which $250,000 was included in selling, general and
administrative expense and $125,000 was included in 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. In connection with the Consulting Agreement, the
Company paid $1,000,000 to an affiliate of Jordan for services rendered in
connection with the IPO in October 1996.
NOTES PAYABLE:
In conjunction with the Company's IPO, the subordinated notes payable to
stockholders were repaid in October 1996. (See Note 1.) Each of the
subordinated notes bore interest at 13.5% per annum, with the interest payable
semi-annually.
INVENTORY PURCHASES:
For the year ended December 31, 1994, the three months ended March 31, 1995
and the years ended March 31, 1996 and 1997, the Company paid $3,118,000,
$1,271,000, $8,529,000 and $2,915,000 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.
7. BANK DEBT:
In conjunction with the Company's IPO, the outstanding obligation was
repaid in full on October 2, 1996. The term loan bore interest at a floating
rate that changed depending on certain ratios, subject to a maximum annual
borrowing rate, as defined in the agreement (8.56% at March 31, 1996).
8. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
The Company leases its manufacturing and sales facilities and certain of
its equipment under noncancelable operating leases that expire at various times
through 2004. 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
31
<PAGE>
8. COMMITMENTS AND CONTINGENCIES (CONTINUED):
responsible for maintenance costs, including real property taxes, utilities and
other cost. Also, certain of these leases contain renewal options.
Total rent expense for these leases for the year ended December 31, 1994,
the three months ended March 31, 1995, the years ended March 31, 1996 and 1997
was $292,000, $97,000, $520,000 and $876,000, respectively.
Following is a summary, by fiscal year, of future minimum lease payments under
operating leases at March 31, 1997 (IN THOUSANDS):
Fiscal Year Total
-----------
1998 . . . . . . . . . . . . . . . . . . $ 1,496
1999 . . . . . . . . . . . . . . . . . . 1,587
2000 . . . . . . . . . . . . . . . . . . 1,624
2001 . . . . . . . . . . . . . . . . . . 1,353
2002 . . . . . . . . . . . . . . . . . . 670
Thereafter . . . . . . . . . . . . . . . 1,452
-----------
Total minimum lease payments . . . . . . $ 8,182
-----------
-----------
LEGAL PROCEEDINGS
On September 26, 1996, Answer Products, Inc. ("Answer"), filed a compliant
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, and 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'
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' 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. 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.
In addition, the Company is involved in certain trademark and employment
related legal matters in the ordinary course of business. No provision for
any liability that may result upon the resolution of these matters has been
made in the accompanying financial statements nor is the amount or range of
possible loss, if any, reasonably estimable. While the Company has accrued
certain amounts for the estimated costs associated with defending these
matters, there can be no assurance that the Answer complaint or other third
party assertions will be resolved without costly litigation, in a manner that
is not adverse to the Company's financial position or results of operations,
or without requiring royalty payments in the future which may adversely
impact gross margins.
9. MANDATORILY REDEEMABLE PREFERRED STOCK ISSUED TO STOCKHOLDERS:
In connection with the Recapitalization in March 1995, Holdings issued
3,000 shares of Series A Preferred Stock and 4,000 shares of Series B
Preferred Stock to Stockholders, both at a price of $1,000 per share. All of
such Preferred Stock, together with accrued dividends, was redeemed for
$7,542,000 from a portion of the proceeds of the IPO in October 1996.
32
<PAGE>
10. STOCKHOLDERS' EQUITY:
STOCK OPTION PLAN:
In May 1996, Holding's Board of Directors adopted and Holding's
stockholders approved the Amended and Restated RSx Holdings Inc. 1996 Stock
Plan (such plan, as amended, "the Stock Plan"). The Stock Plan was assumed
by the Company in the Merger. 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 non-statutory 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 is determined by 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 non-statutory 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. The following
is a summary of activity of the Stock Plan for fiscal 1997:
<TABLE>
<CAPTION>
SHARES NUMBER WEIGHTED
AVAILABLE OF EXERCISE AVERAGE
OUTSTANDING OPTIONS FOR GRANT SHARES PRICE TOTAL PRICE
- ------------------- ----------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Options reserved 979,020
Options granted (846,291) 846,291 $4.39-$15 $6,353,306 $7.05
Options canceled 7,750 (7,750) $15 (116,250) $15.00
------------ ----------- ----------- -------------- ---------
Balances,
March 31, 1997 140,479 838,541 $4.39-$15 $6,237,056 $7.44
</TABLE>
At March 31, 1997, 227,618 outstanding options were exercisable under
the Plan.
As discussed in Note 2, the Company continues to account for the Stock Plan
in accordance with ABP 25. Consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been adjusted to the
pro forma amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Net income available to common stockholders - as reported $6,712
Net income available to common stockholders - pro forma $6,221
Net income available to common stockholders - per share - as reported $0.58
Net income available to common stockholders- per share - pro forma $0.54
1997
------------
Income before extraordinary item - as reported $8,225
Income before extraordinary item - pro forma $7,734
Income before extraordinary item - per share - as reported $0.69
Income before extraordinary item - per share - pro forma $0.65
</TABLE>
33
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED):
The above pro-form disclosures are not necessarily representative of the
effects on reported net income for future years. The aggregate fair value
and weighted average fair value per share of options granted in the years
ended March 31, 1997 and 1996 were $1.9 million and none and $2.27 and none,
respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes model with the following weighted average
assumptions:
1997
-------------
Risk-free interest rate . . . . . . 6.08%-6.27%
Expected life . . . . . . . . . . . 3.5
Expected dividends. . . . . . . . . ---
Expected volatility . . . . . . . . 0-58%
The risk-free interest rate was calculated in accordance with the grant.
The options outstanding and currently exercisable by exercise price at March 31,
1997 were as follows:
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
------------------------------ -----------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- ----------------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$4.39-$4.69 596,316 8.70 $ 4.43 214,038 $ 4.41
$13.75 28,950 9.75 $ 13.75 50 $ 13.75
$15.00 213,275 8.09 $ 15.00 13,530 $ 15.00
----------- ----------- ----------- ------------ -----------
838,541 8.32 $ 7.44 227,618 $ 5.04
11. 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):
Year
Year Three Months Ended
Ended Ended March 31,
December 31, March 31, --------------------------
1994 1995 1996 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
State . . . . . . . . . . $ 558 $ 45 $ 1,127 $ 1,133
Federal . . . . . . . . . 2,250 312 4,635 4,950
----------- ---------- ----------- -----------
2,808 357 5,762 6,083
----------- ---------- ----------- -----------
Deferred:
State . . . . . . . . . . (48) (150) (281) (121)
Federal . . . . . . . . . (340) (860) (2,017) (813)
----------- ---------- ----------- -----------
(388) (1,010) (2,298) (934)
----------- ---------- ----------- -----------
$ 2,420 $ (653) $ 3,464 $ 5,149
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
34
<PAGE>
11. INCOME TAXES (CONTINUED):
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
Year Three Months Ended
Ended Ended March 31,
December 31, March 31, --------------------------
1994 1995 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States statutory rate. . . 34.0% (34.0)% 35.0% 35.0%
States taxes, net of federal
benefit . . . . . . . . . . . . 4.6 (5.0) 5.1 5.0%
Other . . . . . . . . . . . . . . (4.7) 17.2 (2.2) (1.5)%
---------- ---------- ---------- ----------
33.9% (21.8)% 37.9% 38.5%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows (IN THOUSANDS):
March 31,
-----------------------
1996 1997
----------- -----------
Allowance for doubtful accounts . . . . . . . $ 681 $ 581
Allowance for excess and obsolete inventory . 685 979
Accrued warranty. . . . . . . . . . . . . . . 1,545 1,728
Accrued liabilities . . . . . . . . . . . . . 105 691
Other.. . . . . . . . . . . . . . . . . . . . 789 760
----------- -----------
Net deferred tax asset. . . . . . . . . . . $ 3,805 $ 4,739
----------- -----------
----------- -----------
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.
12. EMPLOYEE BENEFIT PLAN:
The Company has established a defined contribution retirement 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 year ended
December 31, 1994, the three months ended March 31, 1995 or the year ended March
31, 1996. For the year ended March 31, 1997 Company contributions amounted to
approximately $42,000.
13. BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION:
The Company currently operates in one industry segment, 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)
Year
Year Three Months Ended
Ended Ended March 31,
December 31, March 31, -----------------------
1994 1995 1996 1997
----------- ---------- ---------- -----------
Asia. . . . . . . . $ 10,563 $ 2,800 $ 22,813 $ 31,013
Europe. . . . . . . 6,096 1,961 13,708 21,179
Other . . . . . . . 2,072 964 4,091 5,846
----------- ---------- ---------- -----------
$ 18,731 $ 5,725 $ 40,612 $ 58,038
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
35
<PAGE>
13. BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED):
Revenues from individual customers in excess of 10% of net sales were as follows
(IN THOUSANDS, EXCEPT PERCENT DATA):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended Year Ended
December 31, 1994 March 31, 1995 March 31, 1996 March 31, 1997
----------------------- ----------------------- ----------------------- -----------------------
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 20.0% $21,262
B . . . . . . . . . --- --- 12.2% 1,737 --- --- --- ---
</TABLE>
36
<PAGE>
SCHEDULE II
ROCKSHOX, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994, THREE MONTHS ENDED MARCH 31, 1995
AND THE YEARS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND AND AT END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS PERIOD
- ----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
As of December 31, 1994
Allowance for excess and
obsolete inventory ................. $ --- $69 $ (32) $ 37
Allowance for doubtful
accounts ........................... 16 --- -- 16
As of March 31, 1995
Allowance for excess and
obsolete inventory ................. 37 --- --- 37
Allowance for doubtful
accounts ........................... 16 32 (7) 41
As of March 31, 1996
Allowance for excess and
obsolete inventory ................. 37 2,009 (37) 2,009
Allowance for doubtful
accounts ........................... 41 1,518 (127) 1,432
As of March 31, 1997
Allowance for excess and
obsolete inventory ................. 2,009 825 (158) 2,676
Allowance for doubtful
accounts ........................... 1,432 175 (18) 1,589
</TABLE>
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ROCKSHOX, INC.
Date: June 26, 1997 By: /s/ Charles E. Noreen, Jr.
-------------------------------
Charles E. Noreen, Jr.
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
By:/s/ Stephen W. Simons Director, Chairman of the June 26, 1997
------------------------ Board, and President
Stephen W. Simons (Principal Executive Officer)
By: /s/ Charles E. Noreen, Jr. Chief Financial Officer and June 26, 1997
--------------------------- Secretary (Principal Financial
Charles E. Noreen, Jr. and Accounting Officer)
By: /s/ Paul H. Turner Director June 22, 1997
------------------------
Paul H. Turner
By: /s/ John W. Jordan II Director June 19, 1997
------------------------
John W. Jordan II
By: /s/ Adam E. Max Director June 23, 1997
------------------------
Adam E. Max
By: /s/ Michael R. Gaulke Director June 21, 1997
------------------------
Michael R. Gaulke
By: /s/ George Napier Director June 23, 1997
------------------------
George Napier
38
<PAGE>
FORM OF
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, March 7, 1997, is made by and between S. Stephen Nakashima ("LESSOR") and
RockShox, Inc., a Delaware corporation ("LESSEE"), collectively the "PARTIES, or
individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 1989 Little Orchard Street, located in
the City of San Jose, County of Santa Clara, State of California, with zip code
95125, as outlined on Exhibit A attached hereto ("PREMISES"). The "BUILDING" is
that certain approximately 100,800 square foot building containing the Premises
and consisting of approximately 158,200 square feet.
In addition to Lessee's rights to use and occupy the Premises as hereunder
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, and shall have rights
to the roof, exterior walls or utility raceways of the Building for use in
accordance with Lessee's business conducted at the Premises, but shall have no
rights to any other tenant's premises in the Industrial Center. The Premises,
the Building, the Common Areas, the land upon which they are located, along with
all other buildings and improvements thereon, are herein collectively referred
to as the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: 190 unreserved vehicle parking spaces ("UNRESERVED
PARKING SPACES"); and -0- reserved vehicle parking spaces "RESERVED PARKING
SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: 7 years and 0 months ("ORIGINAL TERM") commencing May 1,
1997 ("COMMENCEMENT DATE") and ending April 30, 2004 ('EXPIRATION DATE").
(Also see Paragraph 3.)
1.4 EARLY POSSESSION: Permitted upon the execution of this Lease
by Lessor and Lessee, but only for the installation, set-up, and testing of
Lessee's equipment, and the preparation of the Premises for Lessee's
business. ("EARLY POSSESSION DATE"). (Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $ see pp 50 of Add per month ("BASE RENT"), payable
on the 1st day of each month commencing __________ (See also Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum N/A , attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $49,392 as Base Rent for the
period of the first month
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: Sixty-four
percent (64% ("LESSEE'S SHARE") as determined by [ ] prorata square footage
of the Premises as compared to the total square footage of the Building or
[ ]other criteria described in Addendum ___.
1.7 SECURITY DEPOSIT: $59,070.00 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Manufacturing, warehousing and distribution of
mechanical parts, and office space related thereto ("PERMITTED USE"). (Also
see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
<PAGE>
1.10(a) REAL ESTATE BROKERS. The Following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] BT Commercial represents Lessor exclusively ("LESSOR'S BROKER");
[X] Grubb & Ellis Company represents Lessee exclusively ("LESSEE'S BROKER"); or
[ ] N/A represents both Lessor and Lessee ("DUAL AGENCY"). (Also see
Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum of $ N/A ) for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 GUARANTOR: The obligations of the Lessee under this Lease are
to be guaranteed by None
("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs 49 through 54, and Exhibits A through B, all
of which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee. and Lessee
hereby leased from Lessor, the Premises, for term, at the rental, and upon
all of the terms, covenants and conditions set forth in this Lease. Unless
otherwise provided herein, any statement of square footage set forth in this
Lease, or that may have been used in calculating rental and/or Common Area
Operating Expenses, is an approximation which Lessor and Lessee agree is
reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b))
based thereon is not subject to revision whether or not the actual square
footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to
Lessee clean and free of debris on the Commencement Date and without any duty
of inquiry, but to its actual knowledge, Lessor warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, are in good operating condition as of
the date hereof on the Commencement Date. If a non-compliance with said
warranty exists as of the Commencement Date, Lessor shall, except as
otherwise provided in this Lease, promptly after receipt of written notice
from Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If Lessee does not give
Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense. See pp.
53 of Addendum.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING
CODE. Lessor warrants that any improvements (other than those constructed by
Lessee or at Lessee's direction) on or in the Premises which have been
constructed or installed by Lessor or with Lessor's consent or at Lessor's
direction shall comply with all applicable covenants or restrictions of
record and applicable building codes, regulations and ordinances in effect on
the Commencement Date. Lessor further warrants to Lessee that Lessor has no
knowledge of any claim having been made by any governmental agency that a
violation or violations of applicable building codes, regulations, or
ordinances exist with regard to the Premises as of the Commencement Date.
Said warranties shall not apply to any Alterations or Utility Installations
(defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises
do not comply with said warranties, Lessor shall, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
given following the Commencement Date and setting forth with specificity the
nature and extent of such non-compliance, take such action, at Lessor's
expense, as may be reasonable or appropriate to rectify the non-compliance.
Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted
for the Premises under Applicable Laws (as defined in Paragraph 2.4).
2
<PAGE>
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and
fire sprinkler systems, security, environmental aspects, seismic and
earthquake requirements, and compliance with the Americans with Disabilities
Act and applicable zoning, municipal, county, state and federal laws,
ordinances and regulations and any covenants or restrictions of record
(collectively, "Applicable Laws") and the present and future suitability of
the Premises for Lessee's intended use; (b) that Lessee has made such
investigation as it deems necessary with reference to such matters, is
satisfied with reference thereto, and except as provided herein assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any
of Lessor's agents, has made any oral or written representations or
warranties with respect to said matters other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor
in this Paragraph 2 shall be of no force or effect if immediately prior to
the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any noncompliance of the Premises with said warranties.
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas reasonably designated from time
to time by Lessor for parking. Lessee shall not use more parking spaces than
said number. Said parking spaces shall be used for parking by vehicles no
larger than full-size passenger automobiles or pick-up trucks, herein called
"PERMITTED SIZE VEHICLES." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as reasonably directed by Lessor in the
Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also
see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong
to or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those reasonably designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may
have, to remove or tow away the vehicle involved and charge the cost to
Lessee, which cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease,
provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "Common Areas" is defined
as all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center and interior utility raceways within
the Premises that are provided and designated by the Lessor from time to time
in a reasonable manner for the general non-exclusive use of Lessor, Lessee
and other lessees of the Industrial Center and their respective employees,
suppliers, shippers, customers. contractors and invitees, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to
Lessee, for the benefit of Lessee and its employees, suppliers, shippers,
contractors, customers and invitees, during the term of this Lease, the
non-exclusive right to use, in common with others entitled to such use, the
Common Areas as they exist from time to time, subject to any rights, powers,
and privileges reserved by Lessor under the terms hereof or under the terms
of any rules and regulations or restrictions governing the use of the
Industrial Center. Under no circumstances shall the right herein granted to
use the Common Areas be deemed to include the right to store any property,
temporarily or permanently, in the Common Areas. Any such storage shall be
permitted only by the prior written consent of Lessor or Lessor's designated
agent, which consent may be revoked at any time. In the event that any
unauthorized storage shall occur then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
3
<PAGE>
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time,
to establish, modify, amend and enforce reasonable Rules and Regulations with
respect thereto in accordance with Paragraph 40. Lessee agrees to abide by
and conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees of the Industrial Center;
provided, however that Lessor shall use its best efforts to enforce said
rules arid regulations.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in
Lessor's reasonable discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas, walkways and utility
raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may. in the exercise of sound business judgment, deem to be
appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after
the Early Possession Date but prior to the Commencement Date, the obligation
to pay Base Rent shall be abated for the period of such early occupancy. All
other terms of this Lease, however, (including but not limited to the
obligations to pay Lessee's Share of Common Area Operating Expenses and to
carry the insurance required by Paragraph 8) shall be in effect during such
period. Any such early possession shall not affect nor advance the
Expiration Date of the Original Term.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in lawful
money of the United States, without offset or deduction, on or before the day
on which it is due under the terms of this Lease. Base Rent and all other
rent and charges for any period during the term hereof which is for less than
one full month shall be prorated based upon the actual number of days of the
month involved. Payment of Base Rent and other charges shall be made to
Lessor at its address stated herein or to such other persons or at such other
addresses as Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as
hereinafter defined, during each calendar year of the term of this Lease, in
accordance with the following provisions:
4
<PAGE>
(a) "COMMON AREA OPERATING EXPENSES" are defined, for
purposes of this Lease, as all reasonable costs incurred by Lessor relating
to the ownership and operation of the Industrial Center as determined by
using generally accepted accounting principles consistently applied
including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas,
loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers. irrigation systems,
Common Area lighting facilities, fences and gates, elevators and root.
(bb) Exterior signs and any tenant directories
for the Industrial Center and not for any specific tenant.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal and on-site property management and
security services.
(iv) Real Property Taxes (as defined in Paragraph 10.2) to
be paid by Lessor for the Building and the Common Areas under Paragraph 10
hereof.
(v) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vi) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(vii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
Notwithstanding anything to the contrary in the definition thereof, Common Area
Operating Expenses shall not include the following:
1. Any ground lease rental;
2. Costs incurred by Lessor for the repair of damage to the Industrial
Center, to the extent that Lessor is reimbursed by insurance proceeds;
3. Costs, including permit, license and inspection costs, incurred with
respect to the installation of tenant or other occupants' improvements
in the Industrial Center or incurred in renovating or otherwise
improving, decorating, painting or redecorating vacant space for
tenants or other occupants of the Industrial Center;
4. Depreciation, amortization and interest payments;
5. Marketing costs;
6. Expenses in connection with services or other benefits which are not
offered to Lessee or for which Lessee is charged for directly but
which are provided to another tenant or occupant of the Industrial
Center;
5
<PAGE>
7. Costs incurred by Lessor due to the violation by Lessor or any tenant
of the terms and conditions of any lease of space in the Industrial
Center;
8. Overhead and profit increment paid to Lessor or to subsidiaries or
affiliates of Industrial Center for goods and/or services in or to the
Industrial Center to the extent the same exceeds the costs of such
goods and/or services rendered by unaffiliated third parties on a
competitive basis;
9. Interest, principal, points and fees on debts or amortization on any
mortgage or mortgages or any other debt instrument encumbering the
Industrial Center or any part thereof;
10. Lessor's general overhead and general and administrative expenses not
specifically related to the Industrial Center;
11. Advertising and promotional expenditures, and costs of signs in or on
the Building identifying the owner of the Industrial Center or other
tenant's signs;
12. Costs in excess of 10,000.00 during the term of this Lease incurred in
connection with upgrading the Industrial Center to comply with life,
fire and safety codes, ordinances, statutes, or other laws (other than
ADA or as a result of Lessee's occupancy of the Premises) in effect
prior to the Commencement Date, including penalties or damages
incurred due to such non-compliance;
13. Tax penalties incurred as a result of Lessor's negligence, inability
or unwillingness to make payments and/or to file any tax or
informational returns when due;
14. Costs arising from the negligence or fault of other tenants of the
Industrial Center or Lessor or its agents, or any vendors,
contractors, or providers of materials or services selected, hired or
engaged by Lessor or its agents;
15. Costs arising from Lessor's charitable or political contributions;
16. Costs for sculpture, paintings or other objects of art;
17. Costs arising from claims, disputes or potential disputes with tenants
of the Industrial Center arising out of their lease(s) with Lessor;
18. Lessor's income, franchise, estate and gift taxes;
19. Costs incurred in removing and storing the property of former tenants
or occupants of the Building;
20. Replacement reserves, and reserves for bad debts or lost rent or any
similar charge;
21. Costs of items considered capital repairs, replacements, improvements,
and equipment under generally accepted accounting principles
consistently applied ("Capital Items"), except for the cost of Capital
Items which benefit all the tenants at the Industrial Center,
amortized over the useful life of such Capital items;
22. The entertainment expenses and travel expenses of Lessor, its
employees, agents, partners and affiliates; and
23. Except-for a management fee not to exceed two and one-half percent
(2.5%), Lessor further agrees that Lessor will not collect or be
entitled to collect Common Area Operating Expenses from all of its
tenants in an amount which is in excess of one hundred percent (100%)
of the Common Area Operating Expenses actually paid by Lessor in
connection with the operation of the Industrial Center, and that
Lessor shall make no profit from Lessor's collection of Common Area
Operating Expenses.
6
<PAGE>
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation. repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, snail be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be reasonably estimated by Lessor from time to time of Lessee's Share
of annual Common Area Operating Expenses and the same shall be payable monthly
or quarterly, as Lessor shall designate, during each 12-month period of the
Lease term, on the same day as the Base Rent is due hereunder. Lessor shall
deliver to Lessee within sixty (60) days after the expiration of each calendar
year (and within sixty (60) days after the Expiration Date for the last calendar
year of the Term of this Lease) a reasonably detailed statement showing Lessee's
Share of the actual Common Area Operating Expenses incurred during the preceding
year or portion thereof. If Lessee's payments under this Paragraph 4.2(d)
during said preceding period exceed Lessee's Share as indicated on said
statement, Lessee shall be credited the amount of such overpayment against
Lessee's Share of Common Area Operating Expenses next becoming due, and shall be
refunded said amount if applicable to the last calendar year of this lease. If
Lessee's payments under this Paragraph 4.2(d) during said preceding year were
less than Lessee's Share as indicated on said statement, Lessee shall pay to
Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
(e) INSPECTION OF RECORDS OF COMMON AREA OPERATING EXPENSES. If
Lessee disputes the amount of Common Area Operating Expenses set forth in any
Lessor statement of the same, and Lessee gives Lessor written notice of such
dispute within ninety (90) days after receiving such statement, Lessee, after
reasonable advance written notice to Lessor and at reasonable times, may inspect
and photocopy Lessor's records regarding Common Area Operating Expenses for the
relevant period being disputed by Lessee. If, within thirty (30) days after
such inspection, Lessee still disputes such Common Area Operating Expenses, a
certification as to the proper amount shall be made by an independent certified
public accountant mutually selected by Lessor and Lessee. The cost of the
public accountant shall be paid by Lessee unless such public accountant
concludes that the Common Area Operating Expenses set forth in the statement
were overstated by more than seven percent (7%), in which case the cost of the
public accountant shall be paid by Lessor. Lessee shall pay to Lessor any
additional Common Area Operating Expenses that the public accountant concludes
is due Lessor, and conversely, Lessor shall refund to Lessee any additional
Common Area Operating Expenses that the public accountant concludes should be
refunded to Lessee. Lessee's payment or Lessor's refund, as the case may be,
shall be made within ten (10) days after notice of the final determination by
the public accountant. Lessor shall be required to maintain records of all
Common Area Operating Expenses set forth in each statement delivered to Lessee
for one (1) year period following Lessor's delivery of the applicable statement.
The payment by Lessee of any amounts pursuant to the Lease shall not preclude
Lessee from disputing, in accordance with this Paragraph 4.2(e), the correctness
of any statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, within ten (10) days of
receipt of written notice advising Lessee with specificity of its failure to pay
such amount, this Lease (as defined in Paragraph 13.1), Lessor may use, apply or
retain all or any portion of said Security Deposit for the payment of any amount
due Lessor or to reimburse or compensate Lessor for any liability, cost,
expense, loss or damage (including attorneys' fees) which Lessor may suffer or
incur by reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written request
therefore deposit monies with Lessor sufficient to restore said Security Deposit
to the full amount required by this
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Lease. Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein), that portion of the Security Deposit not used
or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor,
no part of the Security Deposit shall be considered to be held in trust, to bear
interest or other increment for its use, or to be prepayment for any monies to
be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, or consistent therewith for no other purpose. Lessee shall
not use or permit the use of the Premises in a manner that is unlawful, creates
waste or a nuisance, or that disturbs owners and/or occupants of, or causes
damage to the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall
within five (5) business days after such request give a written notification of
same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES. The term "Hazardous Substance" as used in this
Lease shall mean any product, substance, chemical, material or waste whose
presence, nature, quantity and/or intensity of existence, use, manufacture,
disposal, transportation, spill, release or effect, either by itself or in
combination with other materials expected to be on the Premises is either: (i)
regulated by any governmental authority, or (ii) subjects Lessor to liability to
any governmental agency or third party under any applicable statute. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without
compliance in a timely manner (at Lessee's sole cost and expense) with all
Applicable Environmental Law (as defined in Paragraph 6.3). "Reportable Use"
shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or disposal
of a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority. Reportable Use shall also include Lessee's use of a
Hazardous Substance with respect to which any Applicable Environmental Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. During the term of the Lease, Lessee shall keep and
maintain the Premises in compliance with Applicable Environmental Law. During
the term of this Lease, Lessee shall not use, generate, manufacture, store or
dispose of on, under, or about the Premises or transport to or from the Leased
Premises any Hazardous Substances except in compliance with Applicable
Environmental Law. Lessee will be storing, handling and mixing on the Premises
the Hazardous Substances itemized in Exhibit B; provided further that the list
of Hazardous Substances in Exhibit B is not exclusive, and Lessee may substitute
appropriate Hazardous Substances with notice to but without consent of Lessor as
technology or Applicable Environmental Law requires or allows. Lessee shall
surrender the Premises to Lessor upon the expiration or earlier termination of
this Lease free of debris, waste and Hazardous Substances used, stored or
disposed of by Lessee or its agents, employees, contractors or invitees, and in
a condition which complies with all Applicable Environmental Law. Lessee may
also, without Lessor's prior consent, but in compliance with all Applicable
Environmental Law, use any ordinary and customary materials reasonably required
to be used by Lessee in the normal course of Lessee's business permitted on the
Premises.
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(b) EACH PARTY'S DUTY TO INFORM THE OTHER OF CERTAIN CONDITIONS
RELATING TO HAZARDOUS SUBSTANCES. During the term of the Lease, if either
Lessor or Lessee knows, or has reasonable cause to believe, that a Hazardous
Substance, or a condition involving or resulting from same, has come to be
located in, on, under or about the Premises, other than in compliance with
Applicable Environmental Law, that party (the "Knowledgeable Party") shall
promptly give written notice of such fact to the other party to the Lease (the
"Other Party"). The Knowledgeable Party shall also promptly give the Other
Party a copy of any non-privileged statement, report, notice, claim, action or
proceeding given to or received in connection therewith.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, and employees, and the Premises, harmless from and
against any and all loss of rents, and/or damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, permits and attorney's and
consultant's fees and costs arising out of or involving any Hazardous Substance
or storage tank brought onto the Premises by or for Lessee or under Lessee's
control. The indemnifying party's obligations under this Paragraph 6 shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by the indemnified
party, and the cost of investigation (including consultant's and attorney's fees
and costs), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release the indemnifying party from its
obligations under this Lease with respect to Hazardous Substances or storage
tanks, unless specifically so agreed by the indemnified party in writing at the
time of such agreement, either by reference to such matters, or by execution of
a general release of all matters known and unknown.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease,- Lessee shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Environmental Law", which term
is used in this Lease to include all laws, rules, regulations, ordinances,
directives and permits, solely relating to Lessee's use of the Premises
(including but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release or
any Hazardous Substance or storage tank), now in effect or which may hereafter
come into effect during the term of the Lease. Lessee shall, within fifteen
(15) days after receipt of Lessor's reasonable written request and explanation
therefor, provide Lessor with copies of relevant non-privileged documents and
information, including but not limited to permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with any
Applicable Environmental Law specified by Lessor, and shall promptly upon
receipt, notify Lessor in writing (with copies of any relevant and
non-privileged documents involved) of any actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee during
the term of the Lease to comply with any Applicable Environmental Law pertaining
to Hazardous Substances at the Premises. Notwithstanding this Section 6.3,
Lessor shall, at its sole cost and expense, be responsible for any required
compliance (including but not limited to investigation, cleanup, remediation or
monitoring) arising out of any Hazardous Substances contamination at the
Premises (including, without limitation, soil and groundwater conditions) not
caused by Lessee's operations.
6.4 INSPECTION; COMPLIANCE. Lessor and the holders of any deed of trust
encumbering the Premises ("Lenders") shall have the right to enter the Premises
at any time, in the case of an emergency, and otherwise at reasonable times upon
two (2) days advance written notice, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Environmental Law, and to employ experts and/or consultants in
connection therewith and/or to advise Lessor with respect to Lessee's
activities, including but not limited to the installation, operation, use,
monitoring, maintenance, or removal of any Hazardous Substance or storage tank
on or from the Premises. The costs and expenses of any such inspections shall
be paid by the party requesting same, unless a related Breach of this Lease,
violation of Applicable Environmental Law, or a material contamination, caused
(and then only to the extent the same is caused) by Lessee is found to exist, or
unless the inspection is requested or ordered by a governmental authority as the
result of any such violation or material contamination by Lessee (and then only
to the extent the same is caused by Lessee). In any case, Lessee shall upon
request reimburse Lessor for the reasonable costs' and expenses of such
inspections.
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6.5 LESSOR'S REPRESENTATIONS AND WARRANTIES. Lessor represents and
warrants that Lessor has not received and is not aware of any communication
(written or oral) from any governmental authority, person or entity alleging or
threatening that the Premises are not in full compliance with any Applicable
Law, or alleging any potential liability based on or resulting from the actual
or threatened presence or release into the environment of any Hazardous
Substances on or from the Industrial Center.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
non-structural part thereof in good order, condition and repair (whether or not
such portion of the Premises requiring repair, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire hose connection if within the Premises, fixtures, interior
non-bearing walls, interior surfaces of exterior walls, ceilings, floors,
windows, doors, plate glass and skylights, but excluding any items which are the
responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping
the Premises in good order, condition and repair, shall exercise and perform
good maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition, and state of
repair. If, pursuant to Lessee's obligations under Paragraph 7.1 or elsewhere
in this Lease, Lessee is required to repair portions of the Premises and such
repair would constitute a capital improvement to the Premises (a "Capital
Repair"), then Lessee shall be responsible only for the proportion of the cost
of such Capital Repair as the remaining term hereof at the time such Capital
Repair is completed bears to the useful life of such Capital Repair, and Lessor
shall, upon written demand with evidence of the costs thereof, promptly
reimburse Lessee for the balance of the cost of such Capital Repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the reasonable cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense.
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7.3 UTILITY INSTALLATIONS, TRADE FIXTURES. ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises as of the date hereof, or
installed by Lessor. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment which can be removed without doing material damage to the Premises
including, without limitation, utility installations installed by Lessee. The
term "ALTERATIONS" shall mean any modification of the improvements on the
Premises which are provided by Lessor under the terms of this Lease, other than
Utility Installations or Trade Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR
UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations
made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make nor cause to be made any structural Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural alterations and Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible from
the outside of the Premises, do not involve puncturing, relocating or removing
the roof or any existing walls, or changing or interfering with the fire
sprinkler or fire detection systems
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such cc.tested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, upon the expiration or earlier termination of this
Lease, elect in writing to Lessee to be the owner of all or any specified part
of the Lessee-Owned Alterations and Utility Installations. Unless otherwise
instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and
Utility Installations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon the Premises and be
surrendered with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may by
written notice to Lessee thirty (30) days prior to the expiration or earlier
termination of this Lease require that any or all Lessee-Owned Alterations or
Utility Installa-
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tions be removed by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by Lessor.
Lessor may require the removal this at any time of all or any part of any
Alterations or Utility Installations made without the required consent of
Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, clean
and free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease.
Except as otherwise agreed or specified herein, the Premises, as surrendered,
shall include the Alterations and Utility Installations. The obligation of
Lessee shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixture, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement. or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements. Lessee's Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee subject to its
obligation to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY. RockShox Insurance Agent Reviewing
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or Expiration
Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor; whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor and keep in force during the
term of this Lease a policy or policies in the name of Lessor, with loss payable
to Lessor and to any Lender(s), insuring against loss or damage to the Premises.
Such insurance shall be for full replacement cost, as the same shall exist from
time to time, or any reasonably greater amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is
available.and commercially reasonable, Lessor's policy or policies shall insure
against all risks of direct physical loss or damage (except the perils of flood
and/or earthquake unless required by Lender),
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including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that
in the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall not include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES; LIMIT ON PREMIUMS. Throughout the Term of
this Lease, Lessee shall pay for any increase in the premiums for the property
insurance on the Building and for the Common Areas or other buildings in the
Industrial Center if said increase is caused by Lessee's acts, omissions, use,
or occupancy of the Premises, provided further, that under no circumstances
shall Lessee's Share of all the insurance premiums of the Building and for the
Common Areas or other buildings in the Industrial Center exceed $39,000 for any
calendar year of the Term of this Lease, or a proportional amount thereof for
any partial lease year.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessees cost shall maintain insurance coverage on all of Lessee's personal
property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations
in, on, or about the Premises similar in coverage to that carried by Lessor as
the Insuring Party under Paragraph 8.3(a). Such insurance shall be full
replacement cost coverage with a deductible not to exceed $10,000 per
occurrence. Until this Lease is terminated, the proceeds from any such
insurance shall be used by Lessee first for the replacement of personal property
and the restoration of Trade Fixtures and Lessee-owned Alterations and Utility
Installations. Upon request from Lessor, Lessee shall provide Lessor with
written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be reasonably required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to this Paragraph 8. Lessee shall cause to be
delivered to Lessor, within seven (7) days after the earlier of the Early
Possession Date or the Commencement Date, certified copies of, or certificates
evidencing the existence and amounts of, the insurance required under Paragraph
8.2(a) and 8.4. No such policy shall be cancelable or subject to modification
except after ten (10) days' prior written notice to Lessor. Lessee shall at
least ten (10) days prior to the expiration of such policies, furnish Lessor
with evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may thereafter order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for
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loss or damage to their property arising out of or incident to the perils
required to be insured against under Paragraph 8. The effect of such releases
and waivers of the right to recover damages shall not be limited by the amount
of insurance carried or required, or by any deductibles applicable thereto.
Lessor and Lessee agree to have their respective insurance companies issuing
property damage insurance waive any right to subrogation that such companies may
have against Lessor or Lessee, as the case may be, so long as the insurance is
not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence, willful misconduct and/or
breach of any provision hereof, Lessee shall indemnify, protect, defend and
hold harmless the Premises, Lessor and its agents, Lessor's master or ground
lessor, partners and Lenders, from and against any and all claims, loss of rents
and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys'
and consultants' fees, expenses and/or liabilities arising out of, involving, or
in connection with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees, and out of any Default or Breach by Lessee
in the performance in a timely manner of any obligation on Lessee's part to be
performed under this Lease. The foregoing shall include, but not be limited to,
the defense or pursuit of any claim or any action or proceeding involved
therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduce to judgment. In case any action or proceeding be
brought against Lessor by reason of any of the foregoing matters, Lessee upon
notice from Lessor shall defend the same at Lessee's expense by counsel
reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such
defense. Lessor need not have first paid any such claim in order to be so
indemnified. Notwithstanding anything to the contrary contained in Paragraphs
8.7 or 8.8 or elsewhere in this Lease, Lessor shall indemnify, defend, protect,
and hold harmless the Premises, Lessee, and its agents from and against all
claims, damages, costs, liens, judgments, penalties, loss of permits, attorney's
and consultants fees and costs, expenses and liabilities, arising from or in
connection with any injury or loss to any person or property which: (i) occurs
at the Premises and is caused by the negligence or willful misconduct of Lessor
or any agent, employee, or invitee of Lessor; or (ii) arises out of or in
connection with any default or breach by Lessor of the terms, covenants, or
conditions of this Lease. No indemnity provision hereunder shall relieve any
insurance carrier of its obligations under any policy provided by it in
connection with this Lease or the Premises.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except to the extent of Lessor's
negligence, willful misconduct, or default under or breach of any term,
covenant, or condition of this Lease, or as otherwise expressly provided herein,
Lessor shall not be liable for injury or damage to the person or goods, wares,
merchandise or other property of Lessee, Lessee's employees, contractors,
invitees, customers, or any other person in or about the Premises, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures, or from any other cause, whether said injury or damage
results from conditions arising upon the Premises or upon other portions of the
Building of which the Premises are a part, from other sources or places, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is accessible or not. Lessor shall not be liable for any
damages arising from any act or neglect of any other lessee of Lessor nor from
the failure by Lessor to enforce the provisions of any other lease in the
Industrial Center provided that Lessor uses its best efforts to do so.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee Owned Alterations and
Utility Installations and Trade
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Fixtures) immediately prior to such damage or destruction. In addition, damage
or destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage
limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the contamination by, a Hazardous Substance
as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and subject to paragraph
9.6(b) below this Lease shall continue in full force and effect. In the event,
however, that there is a shortage of insurance proceeds and such shortage is due
to the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of written notice of
such shortage and request therefor. If Lessor receives said funds or adequate
assurance thereof within said ten (10) day period, Lessor shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If Lessor does not receive such funds or assurance within said period,
Lessor may nevertheless elect by written notice to see within ten (10) days
thereafter to make such restoration and repair as is commercially reasonable
with Lessor paying any shortage in proceeds, in which case subject to paragraph
9.6(b) below this Lease shall remain in full force and effect. If Lessor does
not receive such funds or assurance within such ten (10) day period, and if
Lessor does not so elect to restore and repair, then this Lease shall terminate
sixty (60) days following the occurrence of the damage or destruction. Unless
otherwise agreed, Lessee shall in no event have any right to reimbursement from
Lessor for any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake shall be
subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there
may be some insurance coverage, but the net proceeds of any such insurance shall
be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
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9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or damage or
destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by the
wilful act of Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, either party may,
at its option, terminate this Lease effective sixty (60) days following the date
of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired. Except for abatement
of Base Rent, Common Area Operating Expenses and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and except as provided herein, Lessee shall have no claim against Lessor
for any damage suffered by reason of any such damage, destruction, repair,
remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall apply for the necessary
permits and licenses to repair or restore the Premises within thirty (30) days
after such obligation shall accrue, or shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, or if the damages to the Premises are
not reasonably susceptible to complete repair and restoration within one hundred
fifty (150) days of the occurrence of such damage, Lessee may, at any time prior
to the commencement of such repair or restoration, give written notice to Lessor
and to any Lenders of which Lessee has actual written notice of Lessee's
election to terminate this Lease. "COMMENCE" as used in this Paragraph 9.6
shall mean the beginning of the actual work on the Premises, whichever occurs
first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect; provided,
however, that if such Hazardous Substance Condition is not susceptible of
complete remediation within one hundred fifty (150) days of its occurrence, then
Lessee shall have the right to terminate this Lease upon written notice to
Lessor, or (ii) if the estimated cost to investigate and remediate such
condition exceeds twelve (12) times the then monthly Base Rent or $100,000
whichever is greater, give written notice to Lessee within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor elects
to give such notice of Lessor's intention to terminate this Lease. Lessee shall
have the right within ten 10) days after the receipt of such notice to give
written notice to Lessor of
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Lessees commitment to pay for the excess costs of (a) investigation and
remediation of such Hazardous Substance Condition to the extent required by
Applicable Requirements, over (b) an amount equal to twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater. Lessee shall provide
Lessor with the funds required of Lessee or satisfactory assurance thereof
within thirty (30) days following said commitment by Lessee. In such event this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such investigation and remediation as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the required funds or assurance thereof within the time period specified above,
this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extend it is inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, or paragraph 4.2, any such amounts shall
be included in the calculation of Common Area Operating Expenses in accordance
with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "Real Property
Taxes" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any improvement bond or bonds, levy or
tax (other than inheritance, personal income or estate taxes) imposed upon the
Industrial Center by any authority having the direct or indirect power to tax,
including any city, state or federal government, or any school, agricultural,
sanitary, fire, street, drainage, or other improvement district thereof, levied
against any legal or equitable interest of Lessor in the Industrial Center or
any portion thereof. The term "Real Property Taxes" shall also include any tax,
fee, levy, assessment or charge, or any increase therein, imposed by reason of
events occurring, or changes in Applicable Law taking effect, during the term of
this Lease, including but not limited to a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this Lease,
or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any
calendar year, the Real Property Taxes for any real estate tax year shall be
included in the calculation of Real Property Taxes for such calendar year based
upon the number of days which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive. Lessor represents and warrants to Lessee that it
has provided Lessee with a true and complete copy of the 1996-1997 tax
assessment for the Industrial Center.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of
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Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon.
Lessor shall cause electricity to be separately metered and separately billed to
the Premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall be a Default
curable after notice per Paragraph 13.1 and if not so cured, a Breach without
the necessity of any further notice and grace period. If a Breach, Lessor
hall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent
for the Premises to the greater of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten percent
(110%) of the Base Rent then in effect. Pending determination of the new
fair market rental value, if disputed by Lessee, Lessee shall pay the amount
set forth in Lessor's Notice, with any overpayment credited against the next
installment(s) of Base Rent coming due, and any underpayment for the period
retroactively to the effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the event of such
Breach and rental adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment
to the then fair market value as reasonably determined by Lessor (without the
Lease being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and in
good condition) or one hundred ten percent (110%) of the price previously in
effect, (ii) any index-oriented rental or price adjustment formulas contained
in this Lease shall be adjusted to require that the base index be determined
with reference to the index applicable to the time of such adjustment, and
(iii) any fixed rental adjustments scheduled during the remainder of the
Lease term shall be increased in the same ratio as the new rental bears to
the Base Rent in effect immediately prior to the adjustment specified in
Lessor's Notice.
(c) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or equitable relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder; nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
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(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent sublettings
and assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable under this Lease or the
sublease and without obtaining their consent, and such action shall not
relieve such persons from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises, if
any, together with a non-refundable deposit of 1,000 as reasonable
consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) Notwithstanding anything to the contrary contained in
Paragraph 12 or elsewhere in this Lease, Lessor's consent shall not be
required, and Lessee may freely assign, sublease or transfer this Lease or
any of Lessee's interest herein or in the Premises, to any entity controlled
by, under common control with, or controlling Lessee.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all
or a portion of the Premises heretofore or hereafter made by Lessee, and
Lessor may collect such rent and income and apply same toward Lessee's
obligations under this Lease; provided, however, that until a Breach (as
defined in Paragraph 13.1) shall occur in the performance of Lessee's
obligations under this Lease, Lessee may, except as otherwise provided in
this Lease, receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of the foregoing provision or any
other assignment of such sublease to Lessor, nor by reason of the collection
of the rents from a sublessee, be deemed liable to the sublessee for any
failure of Lessee to perform and comply with any of Lessee's obligations to
such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement and
request from Lessor and shall pay such rents and other charges to Lessor
without any obligation or right to inquire as to whether such Breach exists
and notwithstanding any notice from or claim from Lessee to the contrary.
Lessee shall have no right or claim against such sublessee, or, until the
Breach has been cured, against Lessor, for any such rents and other charges
so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration
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of such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) No sublessee under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without Lessor's
prior written consent.
(d) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance or surety bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property in each case where such failure
continues for a period of seven (7) days following written notice thereof by
or on behalf of Lessor to Lessee.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(c) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(d) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attach-
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ment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(e) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(f) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within twenty (20) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at its
option (but without obligation to do so), perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
this Lease by Lessee (as defined in Paragraph 13.1), with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Lessor shall have the right to recover
in such proceeding the unpaid rent and damages as are recoverable therein, or
Lessor may reserve the right to recover all or any part thereof in a separate
suit for such rent and/or damages. If a notice and grace period required under
Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1(b),(c) or (d). In such case, the applicable grace period
under the unlawful detainer statue shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two (2) such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
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(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after
Lessee's Breach and recover the rent as it becomes due, provided Lessee has
the right to sublet or assign, subject only to reasonable limitations.
Lessor and Lessee agree that the limitations on assignment and subletting in
this Lease are reasonable. Acts of maintenance or preservation, efforts to
relet the Premises, or the appointment of a receiver to protect the Lessor's
interest under this Lease, shall not constitute a termination of the Lessee's
right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for free or abated rent or other charges applicable to the Premises,
or for the giving or paying Lessor to or for Lessee of any cash or other
bonus, inducement or consideration for Lessee's entering into this Lease, all
of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provision of this Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be imposed
upon Lessor by the terms of any ground lease, mortgage or deed of trust
covering the Premises. Accordingly, if any installment of rent or other sum
due from Lessee shall not be received by Lessor or Lessor's designee within
ten (10) days after such amount shall be due, then, after written notice to
Lessee, and failure to pay within the time period provided therefor in
paragraph 13.1(b) above, Lessee shall pay to Lessor a late charge equal to
three percent (3%) of such overdue amount for the first occurrence in a
calendar year, and six percent (6%) of such overdue amount thereafter. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or
not collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable
quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the
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part so taken as of the date condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of the floor area of the
Premises, or more than twenty-five percent (25%) of the portion of the Common
Areas designated for Lessee's parking, is taken by condemnation, or the
condemnation will materially interfere with Lessee's use or enjoyment of the
Premises, or ability to make reasonable economic use thereof, Lessee may, at
Lessee's option, to be exercised in writing within twenty (20) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within twenty (20) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the Premises and Lessee's share of the Common Area
Operating Expenses shall be appropriately adjusted. No reduction of Base Rent
shall occur if the condemnation does not apply to any portion of the Premises.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease
is not terminated by reason of such condemnation, Lessor shall to the extent of
its net severance damages received, over and above Lessee's Share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed all Lessor's obligations under this Lease.
Each Broker shall be an intended third party beneficiary of the provisions of
Paragraph 1.10 and of this Paragraph 15 the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.3 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any
person, firm, broker or finder other than as named in Paragraph 1.10(a) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and that no broker or other person, firm or
entity other than said named Broker(s) is entitled to any commission or
finder's fee in connection with said transaction. Lessee and Lessor do each
hereby agree to indemnify, protect, defend and hold the other harmless from
and against liability for compensation or charges which may be claimed by any
such unnamed broker, finder or other similar party by reason of any dealings
or actions of the indemnifying Party, including any costs, expenses, and/or
attorneys' fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "Responding Party") shall
within ten (10) days after written notice from the other Party (the
"Requesting Party") execute, acknowledge and deliver to the Requesting Party
a reasonable estoppel statement in writing, plus such additional information,
confirmation and/or statements as may be reasonably requested by the
Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance,
or sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's publicly reported financial statements. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
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17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit)
any unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the day of delivery to Lessee of written notice that such amount is
overdue, shall bear interest from the date due at the prime rate charged by the
largest state chartered bank in the state in which the Premises are located plus
four percent (4%) per annum, but not exceeding the maximum rate allowed by law,
in addition to the potential late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party
beneficiary of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by certified or registered mail
or U.S. Postal Service Express Mail or other reputable overnight delivery
service with postage prepaid, or by facsimile transmission during normal
business hours, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Parry's address for delivery or mailing
of notice purposes. Either Party may by written notice to the other specify
a different address for notice purposes, except that upon Lessee's taking
possession of the Premises, the Premises shall constitute Lessee's address
for the purpose of mailing or delivering notices to Lessee. A copy of all
notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card. Notices delivered by United States Express Mail or overnight
courier that guarantees next day delivery shall be deemed given on the date of
delivery shown on the signed receipt. If any notice is transmitted by facsimile
transmission or similar means, the same shall be deemed served or delivered upon
telephone or facsimile confirmation of receipt of the transmission thereof,
provided a copy is also delivered as described above. If notice is received on
a Saturday or a Sunday or a legal holiday, it shall be deemed received on the
next business day.
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24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. No waiver
by Lessee of the default or breach of any term, covenant, or condition hereof by
Lessor shall be deemed a waiver of any other term, covenant, or condition
hereof, or of any subsequent default or breach by Lessor of the same or any
other term, covenant, or condition hereof. Lessor's consent to, or approval of,
any such act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to, or approval of, any subsequent or similar act by Lessee, or be
construed as the basis of an estoppel to enforce the provision or provisions of
this Lease requiring such consent. Regardless of Lessor's knowledge of a
Default or Breach at the time of accepting rent, the acceptance of rent by
Lessor shall not be a waiver of any Default or Breach by Lessee of any provision
hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account
of moneys or damages due Lessor, notwithstanding any qualifying statements or
conditions made by Lessee in connection therewith, which such statements and/or
conditions shall be of no force or effect whatsoever unless specifically agreed
to in writing by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased one hundred twenty-five
percent (125%) of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination, (the "Base Month") for ninety
(90) days after such date, and to one hundred fifty percent (150%) of the Base
Rent applicable during the Base Month thereafter. Nothing contained herein
shall be construed as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. Subject to paragraph 30.3 below, this Lease and
any Option granted hereby shall be subject and subordinate to any ground
lease, mortgage, deed of trust, or other hypothecation or security device
(collectively, "Security Device"), now or hereafter placed by Lessor upon the
real property of which the Premises are a part, to any and all advances made
on the security thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof. Lessee agrees that the Lenders holding
any such Security Device shall have no duty, liability or obligation to
perform any of the obligations of Lessor under this Lease, but that in the
event of Lessor's default with respect to any such obligation, Lessee will
give any Lender whose name and address have been furnished Lessee in writing
for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If
any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the
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event of such foreclosure, such new owner shall not: (i) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership, (ii) be subject to any offsets or defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease
and attornment to any future owner of the Premises shall be subject to receiving
written, recordable assurance, informed substance reasonably satisfactory to
Lessee (a "nondisturbance agreement") from the Lender that Lessee's possession
and this Lease, in options to extend the term hereof, will not be disturbed so
long as Lessee is not in Breach hereof and attorns to the record owner of the
Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document
any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees and costs. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorneys' fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorneys' fees reasonably incurred. Lessor shall be entitled to reasonable
attorneys' fees, costs and expenses incurred in preparation and service of
notices of Default and consultations in connection therewith, whether or not a
legal action is subsequently commenced in connection with such Default or
resulting Breach. Broker(s) shall be intended third party beneficiaries of this
Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times upon two (2) days prior written
notice for the purpose of showing the same to prospective purchasers, lenders,
or lessees, and making such alterations, repairs, improvements or additions to
the Premises or to the Building, as Lessor may reasonably deem necessary.
Lessor may at any time place on or about the Premises or Building any ordinary
"For Sale" signs and Lessor may at any time during the last one hundred eighty
(180) days of the term hereof place on or about the Premises any ordinary "For
Lease" signs. All such activities of Lessor shall be without abatement of rent
or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign
on the Premises by or for Lessee shall be subject to the provisions of Paragraph
7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by
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Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses
(including but not limited to architects', attorneys', engineers' and other
consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent pertaining to this Lease or the
Premises, including but not limited to consents to an assignment or a
subletting, shall be paid by Lessee to Lessor upon receipt of an invoice and
supporting documentation therefor. In addition to the deposit described in
Paragraph 12.2(e), Lessor may, as a condition to considering any such request
by Lessee, require that Lessee deposit with Lessor an amount of money (in
addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering
and responding to Lessee's request. Any unused portion of said deposit shall
be refunded to Lessee without interest. Lessor's consent to any act,
assignment of this Lease or subletting of the Premises by Lessee shall not
constitute an acknowledgment that no Default or Breach by Lessee of this
Lease exists, nor shall such consent be deemed a waiver of any then existing
Default or Breach, except as may be otherwise specifically stated in writing
by Lessor at the time of such consent.
(b) All express conditions to Lessors consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular matter for which consent
is being given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this
Lease per Paragraph 1.11, the form of the guaranty to be executed by each
such Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the
same obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or
refuses, upon reasonable request by Lessor to give: (a) evidence of the due
execution of the guaranty called for by this Lease, including the authority
of the Guarantor (and of the party signing on Guarantor's behalf) to obligate
such Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to
27
<PAGE>
lease the Premises or the right of first offer to lease the Premises or the
right of first refusal to lease other property of Lessor or the right of first
offer to lease other property of Lessor; (c) the right to purchase the Premises,
or the right of first refusal to purchase the Premises, or the right of first
offer to purchase the Premises, or the right to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor, or
the right of first offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph
1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised
by any person or entity other than said original Lessee while the original
Lessee is in full and actual possession of the Premises and without the
intention of thereafter assigning or subletting. The Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of
this Lease or separately or apart therefrom, and no Option may be separated
from this Lease in any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised
unless the prior Options to extend or renew this Lease have been validly
exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of separate Defaults
under Paragraph 13.1 during the twelve (12) month period immediately
preceding the exercise of the Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant, with
the consent of Lessee, not to be unreasonably withheld delayed, such easements,
rights of way, utility raceways, and dedications that Lessor deems necessary,
and to cause the recordation of parcel maps and restrictions, so long as such
easements, rights of way, utility raceways, dedications, maps and restrictions
do not unreasonably interfere with the use of the Premises by Lessee. Lessee
agrees to sign any documents reasonably requested by Lessor to effectuate any
such easement rights, dedication, map or restrictions.
28
<PAGE>
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder. Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
29
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA,
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: San Jose, CA Executed at: San Jose, CA
----------------------- -----------------
on: March 11, 1997 on: March 11, 1997
-------------------------------- --------------------------
By LESSOR: By LESSEE:
By:
-------------------------------- -------------------------------
- ------------------------------------- -------------------------------
Name Printed: S. Stephen Nakashima Name Printed: RockShox, Inc.
---------------------- ----------------
Title: Title: President
----------------------------- -----------------------
By: By:
-------------------------------- --------------------------
Name Printed: Name Printed:
---------------------- ----------------
Title: Title:
----------------------------- -----------------------
Address: 440 South Winchester Blvd. Address: 401 Charcot Ave.
Ste. 200 San Jose, CA 95131
San Jose, CA 95125
--------------------------- ---------------------
Telephone: ( ) Telephone: ( )
----- ------------------ ----- ------------
Facsimile: ( ) Facsimile: ( )
----- ------------------ ----- ------------
30
<PAGE>
with a copy to: Skadden, Arps, Slate, Meagher & Flom, LLP
300 S. Grand Avenue, Suite 3400
Los Angeles, CA 90071
Attn: Michael A. Woronoff, Esquire
BROKER BROKER:
Executed at: Executed at:
----------------------- -----------------
on: on:
-------------------------------- --------------------------
By: By:
-------------------------------- --------------------------
Name Printed: BT Commercial Name Printed: Grubb & Ellis Company
---------------------- ----------------
Title: Title:
----------------------------- -----------------------
Address: 1995 Northfirst St. Ste. 200 Address: 224 Airport Parkway
San Jose, CA 95112 Suite 150
San Jose, CA 95110
--------------------------- ---------------------
Telephone: (408) 436-8000 Telephone: (408) 452-5900
----- ------------------ ----- ------------
Facsimile: (408) 436-3699 Facsimile: (408) 437-0499
----- ------------------ ----- ------------
NOTE: These forms are often modified to meet changing requirements of law
and needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213)
687-8777.
31
<PAGE>
THIS IS AN ADDENDUM TO THE STANDARD INDUSTRIAL/COMMERCIAL/MULTI-TENANT
LEASE-MODIFIED NET DATED FEBRUARY 19, 1997 WHEREIN S. STEPHEN NAKASHIMA IS
REFERRED TO AS LESSOR AND ROCK SHOX, INC. IS REFERRED TO AS LESSEE FOR THE
PROPERTY COMMONLY KNOWN AS 1989 LITTLE ORCHARD STREET, SAN JOSE, CALIFORNIA.
49. RELOCATION OF EXISTING TENANT:
Lessee is aware that a portion of the proposed leased Premises is currently
occupied by Pinnacle Manufacturing Professionals ("Tenant"). The Lessor
represents and warrants to Lessee that it has the ability to relocate the
Tenant within the Industrial Center in accordance with the terms of the
existing lease. The relocation of the existing Tenant is scheduled to be
completed by May 1, 1997.
This Lease shall be subject to the relocation of the existing Tenant.
Lessor shall not be responsible or liable to the Lessee for any delay
caused by relocating the existing Tenant. Notwithstanding the foregoing,
if the Lessor cannot deliver the Premises by May 1, 1997, the Lessor agrees
to use its best efforts and work with the Lessee and the existing Tenant to
provide 20,000 - 30,000 square feet of floor space for fit up and testing
of manufacturing equipment. The Lessor shall not be obligated to deliver
the 20,000 - 30,000 square feet if no accommodation can be reached between
the parties. If the Lessee occupies any space prior to the commencement
date of the Lease, Lessee shall pay all costs and expenses of using such
space except Base Rent. In addition, the Lessee agrees that unless caused
by Lessor's negligence or willful misconduct, the Lessor shall not be
responsible for any damage or loss to Lessee's equipment or business if
occurring while the Lessee occupies the temporary space. If Lessor cannot
deliver possession of all the Premises to Lessee by May 30, 1997, Lessor
agrees that Lessee may, at Lessee's option, by written notice to Lessor,
cancel this Lease at any time before accepting possession of the Premises,
in which event the Parties shall be discharged from all obligations
hereunder.
50. RENT:
May 1, 1997 to April 30, 1998 $.49 per square foot
May 1, 1998 to April 30, 1999 $.505 per square foot
May 1, 1999 to April 30, 2000 $.520 per square foot
May 1, 2000 to April 30, 2001 $.536 per square foot
May 1, 2001 to April 30, 2002 $.552 per square foot
May 1, 2002 to April 30, 2003 $.569 per square foot
May 1, 2003 to April 30, 2004 $.586 per square foot
51. TENANT IMPROVEMENTS:
Lessor shall deliver approximately 100,800 square feet of space at the
front of 1989 Little Orchard Street in San Jose. The configuration and
location of the space are fully depicted on Exhibit "A".
Lessor agrees to provide separately metered power to Premises before the
Commencement Date, and to re-roof the premises during initial year of the
Lease in accordance with Exhibit "C" attached hereto.
The Lessor shall also deliver the existing interior and exterior of the
leased Premises in compliance with ADA (as hereinafter defined) as required
by the City of San Jose, or shall reimburse Lessee for the reasonable costs
thereof if Lessee performs such work, not to exceed $22,420.00. However,
if the Lessee makes improvements to the Premises that trigger additional
ADA compliance, then the Lessee shall be responsible for all costs
associated with those required improvements.
32
<PAGE>
52. OVERHEAD CRANES:
Lessor and Lessee agree that the Lessee shall be allowed to use the
overhead cranes within the leased Premises at no additional charge and that
Lessee shall move three (3) additional cranes located in adjacent premises
into the Premises as soon as possible. Lessee agrees to maintain, repair
or replace the cranes as needed during the term of the Lease. Lessee shall
hold the Lessor harmless and defend Lessor from any liability or damages to
person or property caused by Lessee's operation of said overhead cranes.
The Lessee further agrees that the overhead cranes are being provided
without any warranties or representations of any kind from the Lessor or
its agents, including but not limited to the operational condition, the
functionality, the capacity, and the safety of the cranes.
53. CONDITION OF PREMISES:
Except as provided elsewhere in this Lease, the Lessee agrees to take
possession of the Premises in its current "as-is" condition.
54. HAZARDOUS MATERIALS:
Lessor shall make available to Lessee any and all available environmental
information in Landlord's possession or information of which Lessor has
constructive knowledge thereof. Upon the expiration or earlier termination
of this Lease, Lessee shall provide Lessor with a current phase I
environmental study of the Premises, and if recommended by the phase I
environmental study, a phase II environmental study of the Premises.
55. ACKNOWLEDGEMENT
Lessor and Lessee (the Parties) further agree and acknowledge the
following:
Broker makes no representation or warranties with respect to the physical
and environmental condition of the Premises, including subsurface
conditions. Broker has no specific expertise with respect to making an
environmental assessment of the Premises, including matters relating to the
disposal of hazardous or toxic substances or waste, environmental problems
which may be posed by the Premises being within a Special Studies Zone as
designed under the Alquist-Priolo Special Studies Zone Act (Earthquake
zones), Sections 2621-2630, inclusive, of the California Public Resources
Code or a HUD Flood Zone, as set forth in the U.S. Department of Housing
and Urban Development "Special Flood Zone Area Maps", as applicable.
Broker has not made an independent investigation of the Premises or
determination with respect to the physical and environmental condition of
the Premises, including without limitation, the existence or nonexistence
of any underground tanks, pumps, piping, toxic or hazardous substances on
the Premises. Likewise no investigation has been made to ensure compliance
with the American Disabilities Act ("ADA"). This act may require a variety
of changes to a facility, depending on its use, including potential removal
of barriers to access by disabled persons and provision of auxiliary aids
and services for hearing, vision or speech impaired persons. Broker urges
all parties to obtain independent legal and technical advice with respect
to the physical and environmental condition as well as the ADA compliance
of the Premises. The parties each agree that it will rely solely on its
own investigation and/or that of a licensed professional specializing in
these areas, and not of Broker.
Broker does not represent and warrant the accuracy of completeness of all
documents and information ("Report") reviewed or received by any of the
parties in connection with this transaction, including financial reports,
structural, geological, or engineering studies, and plans and
specifications. The parties further agree to indemnify and hold broker
harmless from any and all claims, demands, judgments, liabilities, causes
of action, damages, and costs and expenses, including reasonable attorneys'
fees, arising from or in connection with any inaccuracy of the Reports.
33
<PAGE>
The parties waive the benefits of California Civil Code Section 1542 and
release Broker from any and all liabilities arising out of or in connection
with the physical and environmental condition of the Premises, including,
without limitation, the existence of any hazardous or toxic materials and
ADA compliance.
If requested by Lessee, Lessor shall use its best efforts for thirty (30) days
after the date of such request to obtain a nondisturbance, subordination, and
attornment agreement from Lessee's current lender, Sumitomo, in the form
provided to Lessor by Lessee.
LESSOR: LESSEE:
S. STEPHEN NAKASHIMA ROCK SHOX, INC.
By: By:
-------------------------------- -------------------------
Date: March 11, 1997 Date: March 11, 1997
------------------------------ -----------------------
34
<PAGE>
Exhibit 10.15
[letterhead]
May 7, 1996
Charles Noreen
Dear Charlie;
RockShox Inc., is happy to offer you the regular full-time position of Chief
Financial Officer. You will report directly to me and be part of the Senior
Management Team, led by Bob Kaswen. Your anticipated date of hire will be
June 3, 1996. The first 90 days of your employment will be an introductory
period.
SALARY AND BONUS
Your salary will be $12,083.33 per month, ($145,000 per year), paid
bi-weekly. As a member of RockShox key management team, you will participate
in an annual bonus program which will provide for a bonus based on a
combination of company performance and your performance against objectives.
There is potential for this bonus to reach $36,250. You will receive this
bonus on a pro-rata basis for the first fiscal year. In addition, a one time
bonus of $25,000 will be earned on September 30, 1996, or upon your
successfully contributing to the company's initial public offering, whichever
date occurs first. It is our expectation that you will help us develop a
performance bonus program (based upon corporate objectives set by the Board
of Directors) for all the senior managers, including yourself, at 25% of
salary.
EQUITY
In addition we will grant you options to purchase 833 shares of RockShox
Holdings. Terms for vesting and the price of the options are subject to
finalization of our program, filing with the State and other regulatory
approvals. We will be happy to discuss vesting and the economic potential of
the options with you. If there is a sale or merger of the entire Company, you
will be entitled to immediate vesting of any options granted to date.
SEPARATION OF EMPLOYMENT
If during the first 36 months of your employment, you should be terminated,
(1) due to a sale or merger of the entire Company, for any reason other than
your voluntary separation or cause (2) or the Company moves out of the Bay
Area, at the company's discretion, be entitled to 6 months notice during
which time you will remain employed by the Company and be expected to work at
the Company until you find other employment or be paid your monthly salary on
a month by month basis until you are employed (not to exceed 6 months from
notice date).
OTHER BENEFITS
You will be eligible to participate in RockShox benefit programs including
personal time off (PTO), holidays, medical/dental insurance, long term
disability insurance, life insurance, the 125 Flexible Benefits Plan and the
401k Plan. In addition you will accrue vacation each pay period at a rate
equal to 3 weeks per year, beginning with your first pay day.
<PAGE>
[letterhead]
Charles Noreen - Page 2
Medical/dental, life and long-term disability insurance and the 125 Flexible
Benefits Plan are effective on the first of the month following your hire
date. Participation in the 401k Plan can begin with the first enrollment
period following 90 days of employment. You will become eligible for PTO and
holiday pay after your introductory period. Vacation time will be available
for use after you have completed 6 months of employment.
Upon acceptance of this position, you will receive an Employee Handbook and
Hire Packet. Please complete all appropriate forms and bring them with you to
the new hire orientation meeting which will be scheduled during your first
week with RockShox.
For purposes of the Federal Immigration Law, you will be required to show
proof of your identity and eligibility for employment in the United States.
We will be asking for these documents at your orientation meeting.
If you have any questions regarding benefits, which documents are required or
forms to be completed, please feel free to contact Elizabeth Borst in the
Human Resource Department at (408) 232-7499.
I have also enclosed a RockShox Employee Confidentiality Agreement. This
Agreement, along with this offer letter set forth the terms of your
employment with the company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or
amended except by written agreement, signed by the Company and by you.
This offer is valid until May 14, 1996.
To indicate your acceptance of this offer, please sign and date the
Confidentiality Agreement and this letter and return them to me in the
enclosed envelope. A duplicate offer letter is enclosed for your records.
We eagerly anticipate your joining our RockShox team.
Sincerely,
/s/ Stephen W. Simons
- ----------------------
Steve Simons
President
Accepted By: /s/ Charles E. Noreen Expected Start Date To be arranged
--------------------- --------------
<PAGE>
EXHIBIT 11
ROCKSHOX, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Three Months Year Year
Ended Ended Ended Ended
December 31, March 31, March 31, March 31,
1994 1995 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares . . . . . . . . 8,820 8,820 8,820 11,220
Dilutive effect of stock options. . . . 420 420 420 421
---------- ---------- ---------- ----------
Shares used in per share calculations . 9,240 9,240 9,240 11,641
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) before extraordinary loss $ 4,714 $ (2,336) $ 5,664 $ 8,225
Accretion for dividends on mandatorily
redeemable preferred stock. . . . . . --- --- (357) (185)
---------- ---------- ---------- ----------
Net income (loss) before extraordinary
loss available to common stockholders 4,714 (2,336) 5,307 8,040
Extraordinary loss, net of tax benefit. --- --- --- (1,328)
---------- ---------- ---------- ----------
Net income (loss) available to common
stockholders . . . . . . . . . . . . $ 4,714 $ (2,336) $ 5,307 $ 6,712
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) before extraordinary loss,
per share. . . . . . . . . . . . . . $ 0.51 $ (0.25) $ 0.57 $ 0.69
Extraordinary loss per share. . . . . . --- --- --- (0.11)
---------- ---------- ---------- ----------
Net income (loss) per share. . . . . . . $ 0.51 $ (0.25) $ 0.57 $ 0.58
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders
RockShox, Inc.
Our report on the consolidated financial statements of RockShox, Inc. is
included on page 21 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 20 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 25, 1997
41
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 of RockShox, Inc. of our report dated April 25, 1997 on our audits
of the consolidated financial statements and the financial statement schedule of
RockShox, Inc. as of March 31, 1996 and 1997 and for the year ended December 31,
1994, the three month period ended March 31, 1995 and the years ended March 31,
1996 and 1997.
COOPERS & LYBRAND L.L.P.
San Jose, California
June 25, 1997
42
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 14,747
<SECURITIES> 0
<RECEIVABLES> 8,207
<ALLOWANCES> 1,589
<INVENTORY> 10,800
<CURRENT-ASSETS> 38,036
<PP&E> 11,518
<DEPRECIATION> 3,818
<TOTAL-ASSETS> 45,875
<CURRENT-LIABILITIES> 14,314
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 31,425
<TOTAL-LIABILITY-AND-EQUITY> 45,875
<SALES> 106,212
<TOTAL-REVENUES> 106,212
<CGS> 67,115
<TOTAL-COSTS> 23,343
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 2,697
<INCOME-PRETAX> 13,374
<INCOME-TAX> 5,149
<INCOME-CONTINUING> 8,225
<DISCONTINUED> 0
<EXTRAORDINARY> 1,328
<CHANGES> 0
<NET-INCOME> 6,897
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
