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As filed with the Securities and Exchange Commission on June 25, 1998
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, 1998
Commission File Number 0-28822
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ROCKSHOX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 401 Charcot Avenue 77-0396555
(State or other jurisdiction of San Jose, CA 95131 (I.R.S. Employer
incorporation or organization) (408) 435-7469 Identification Number)
(Address of principal executive offices, 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. Yes /X/ No / /
As of June 22, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $23,402,083.
As of June 22, 1998, the Registrant had 13,761,147 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the ROCKSHOX, INC. Proxy Statement to be mailed in connection
with the Registrant's 1998 Annual Meeting of Stockholders to be held on
August 20, 1998, are incorporated by reference in Part III hereof.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
<S> <C> <C>
1 Business ................................................................................ 3
2 Properties .............................................................................. 11
3 Legal Proceedings ....................................................................... 11
4 Submission of Matters to a Vote of Security Holders ..................................... 11
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters ................... 11
6 Selected Financial Data ................................................................. 12
7 Management's Discussion and Analysis of Financial Condition and Results of Operations ... 13
7A Quantitative and Qualitative Disclosures About Market Risk............................... 18
8 Financial Statements and Supplementary Data ............................................. 18
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 18
PART III
10 Directors and Executive Officers of the Registrant ...................................... 18
11 Executive Compensation and other information............................................. 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
</TABLE>
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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, JETT, SID and DELUXE. 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 a 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 by 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.
During fiscal 1998, RockShox marketed thirteen front suspension forks
and three rear shocks under its JUDY, INDY, SID, BOXXER, RUBY and DELUXE
product lines.
Approximately 76% of the Company's sales in fiscal 1998 represented
sales to original equipment manufacturers ("OEMs"), such as 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. In October 1996, the Company completed an initial
public offering ("IPO") of 4.8 million shares of common stock.
The Company's principal executive office is located at 401 Charcot
Avenue, San Jose, California, 95131; 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 technology or hydraulically damped systems using coil or
air springs. 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.
The 1998 models represent the Company's broadest line of product
offerings to date. For the 1998 model year, the Company offered thirteen
front suspension forks, including eight new forks, and three rear shocks. 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.
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The following tables summarize the Company's 1998 product offerings of front
forks and rear shocks:
FRONT FORKS
<TABLE>
<CAPTION>
TYPICAL SUGGESTED DATE OF
RETAIL BIKE RETAIL PRICE IN SUSPENSION ORIGINAL
1998 MODEL PRICE POINT (1) ACCESSORY MARKET INTENDED USE TECHNOLOGY SHIPMENT (2)
- ------------- --------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
INDY S $400-$600 $149 Recreational Elastomer Spring April 1997
System
INDY C $500-$800 $199 Recreational; Type 2 Spring April 1996
Moderate Terrain System
INDY XC $700-$1200 $249 Cross-Country; Type 2 Spring May 1996
Moderate Terrain System
INDY SL $900-$1500 $314 Cross-Country; Type 2 Spring June 1996
Moderate Terrain System
JUDY T2 $850-$1,300 $339 Cross-Country; Type 2 Spring May 1997
Moderate Terrain System
JUDY XC $1,000-$2,500 $389 Cross-Country; Cartridge September 1994
Extreme Terrain
JUDY SL $1,400-$3,000 $499 Cross-Country; Cartridge September 1994
Extreme Terrain
JUDY XLC $1,300+ $499 FreeRide Type 3 Spring September 1997
System
JUDY XL $1,600+ $599 FreeRide Cartridge June 1997
SID $2,000+ $699 Pro Cross Country Cartridge/ Air July 1997
Racing Spring
BOXXER $4,500+ $1,099 Pro Downhill Racing HydraCoil November 1997
RUBY SL $2,000+ $489 Road Training Type 2 Spring June 1997
System
RUBY S $1,000+ $369 Road Training Type 2 Spring August 1997
System
REAR SHOCKS
SUGGESTED
TYPICAL RETAIL PRICE IN DATE OF
RETAIL BIKE ACCESSORY SUSPENSION ORIGINAL
1998 MODEL PRICE POINT (1) MARKET INTENDED USE TECHNOLOGY SHIPMENT (2)
- ---------------- --------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Deluxe $1,000-$1,200 Not offered at Cross-County; Coil over June 1995
retail Downhill hydraulic damper
Coupe Deluxe $1,200-$1,700 $189 Cross-Country; Coil over July 1996
Downhill hydraulic damper
Super Deluxe $1,700+ $289 Cross-Country; Coil over July 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) Models are generally upgraded and revised periodically.
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RESEARCH AND DEVELOPMENT
As of March 31, 1998, the Company's product development activities,
based in San Jose, California, were supported by 33 professionals, including
9 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, 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 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. The Company's future success
will depend, in part, upon its continued ability to develop and successfully
introduce new and popular bicycle suspension products and other types of
bicycle components. There can be no assurance that the Company will introduce
any new products or, if introduced, that any such products will be
commercially successful.
Research and product development expenditures in fiscal years 1996,
1997 and 1998 were approximately $3.4 million, $4.8 million and $4.9 million,
respectively.
MANUFACTURING
All manufacturing is done in the Company's San Jose facility 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
machining and processing of some 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 nine engineers and fourteen 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
sub-component 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, 1998, manufacturing included approximately 261
non-unionized employees plus approximately 111 temporary hires. Additional
temporary employees are brought in during the peak building season from June
through January. The Company operates on two shifts throughout the year on
some product lines, and adds a second shift when needed on others. Extensive
training occurs so that supervisors and lead assemblers can manage their own
work areas and monitor product quality. In addition, functional testing and
statistical process control are used to maintain and measure product quality
during the fabrication and assembly processes. Finished products are also
tested in the Company's product development test center.
The Company works closely with a variety of vendors to meet its
production needs, including machine shops, die casters, forging houses, tube
manufacturers and injection molders. Although the Company has established
relationships with its principal suppliers and manufacturing sources, the
Company does not currently have long-term contracts with any of its vendors,
nor does the Company currently have multiple vendors for all parts, tooling,
supplies or services critical to the Company's manufacturing processes.
Currently, all of the Company's major suppliers are based in the U.S. The
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company continually reviews its vendor relationships with regard to cost,
delivery and quality. During fiscal 1998, the Company purchased approximately
$5.0 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 Enterprise Resource Planning Package.
The Company's policy is to generally require firm purchase orders from
OEMs 60 days prior to shipment. As of March 31, 1998, the Company's backlog
was approximately $7.2 million compared to $9.6 million at March 31, 1997.
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, 1998, approximately 76% of the Company's total net sales were to OEMs and
approximately 24% 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 found on better quality
mountain bikes. The following table demonstrates the historical shift in the
Company's customer base and product distribution:
<TABLE>
<CAPTION>
Fiscal Year Ended
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March 31, 1996 March 31, 1997 March 31, 1998
------------------------------- ------------------------------- ------------------------------
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......................... $ 57,103 68% $ 77,000 72% $ 77,633 76%
Distributors and IBDs........ 26,406 32% 29,212 28% 24,570 24%
------------------------------- ------------------------------- -------------------------------
Total.................. $ 83,509 100% $ 106,212 100% $ 102,203 100%
------------------------------- ------------------------------- -------------------------------
------------------------------- ------------------------------- -------------------------------
</TABLE>
Management believes that the Company's products play an important role
in the sale of OEM bikes and that OEMs are aware of the influence that the
ROCKSHOX brand and 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.
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
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approximately 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, 1998 the Company had approximately 29 employees 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 1998, approximately 54% of the Company's sales represented
sales 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 1998. At March 31, 1998, the Company's three OEM customers with the
largest accounts receivable balances accounted for approximately 44%, of the
Company's accounts receivable. As of March 31, 1998, 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
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 contributing factor in the consumer's choice of mountain bikes.
The Company promotes and maintains its brand name globally 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 approximately 20
world-class and over 70 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, JETT, SID and other product lines. The
Company also seeks to increase RockShox' editorial exposure in bicycle print
media by working closely with magazine editors in the U.S. and Europe. 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 and product hang tags 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.
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Sales and marketing expenditures totaled approximately $3.7 million,
$4.6 million and $6.2 million in fiscal years 1996, 1997 and 1998,
respectively.
COMPETITION
The markets for bicycle components, in general, and bicycle suspension
products, in particular, are highly competitive. The Company competes with
other bicycle component companies that produce suspension products for sale
to OEMs, distributors and IBDs as well as with OEMs who produce their own
line of suspension products for their own use and for sale through
distributors and IBDs.
The Company competes with several component companies that manufacture
front suspension products, including, among others, Answer 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 K2 Incorporated ("K2"). The
Company also competes with several component companies that manufacture rear
shocks, including, among others, Fox Factory, Inc., RST, Risse Racing
Technology, Inc., Amp, Marzocchi and Girvin, Inc. 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 Corporation
("Cannondale") and K2 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 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.
Several patents have been issued covering aspects of many of the company's
suspension products in the United States and abroad. There can be no
assurance, however, 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 believes that, among other things, its brand name,
"ROCKSHOX," offers the Company a significant competitive advantage. 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. The Company may file additional applications for U.S. and
foreign trademark protection in the future. However, there can be no
assurance 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.
There can be no assurance that the Company's patents, trademarks, trade
names, licensing arrangements, trade secrets, know-how and proprietary
technology will adequately protect the Company from potential infringement or
misappropriation by third parties. The Company intends to vigorously enforce
its intellectual property rights, 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.
The Company has occasionally received, and may receive in the future,
claims asserting infringement by the Company of intellectual property
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rights held by third parties. In April 1998, RockShox was notified that
Cannodale believes that certain ROCKSHOX suspension forks are covered by one
or more claims of a United Statees patent purportedly owned by Cannondale.
The Company currently is involved in discussions with Cannondale in an
attempt to resolve this matter amicably. See "Certain Factors That May
Affect the Company's Business and Future Results." There can be no assurance
that the Company is not infringing upon 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.
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 sold in the United States are within the
jurisdiction of the United States 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"). Employees of the Company are
participating in the development of these standards by chairing an ASTM task
force on bicycle suspension and front forks. These standards are expected to
be implemented in the future. In anticipation of the standards implementation
by the ASTM, the Company is currently testing its products in the manner
proposed by the ASTM. These standards, if adopted, could increase the
development and manufacturing costs of the Company's products, make the
Company's products less desirable (by, for example, increasing the weight of
the product) or favor a competitor's product. Although 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 considered
substantial restrictions or closures of public trails to biking use, citing
environmental concerns and disputes between mountain bikers and other trail
users (including hikers). Such restrictions or closures, if implemented in a
regional or widespread manner, could lead to a decline in the popularity of
mountain biking, which could have a material adverse effect on the Company or
its prospects.
The Company is subject to federal, state and local environmental laws,
regulations 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
9
<PAGE>
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, 1998, the Company employed approximately 386 full-time
employees. In addition, the Company utilized approximately 111 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 contained 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 these forward-looking
statements, which speak only as of the date of which they are made and may be
affected by numerous factors. Because of these factors, which may affect the
Company's operating results, past financial performance should not be
considered as an indicator of future performance, and investors should not
use historical trends to anticipate results or trends in future periods. The
registrant undertakes no obligation to update publicly or revise any
forward-looking statements.
Important factors that could affect the Company's ability to achieve
its financial and other goals and cause actual results to differ materially
from the Company's forward-looking statements 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 or substantial decline in purchases of the Company's products
by, or the 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 failure to introduce sufficient technological advances or
lack of timely introduction of sufficient 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 that introduce and promote
suspension products or other bicycle components perceived by the bicycle
industry or consumers to offer price or performance advantages to or that
otherwise have greater consumer appeal than the Company's products could
have a material adverse effect on the Company or its prospects.
-- The assertion by any person of rights in, or ownership of, any patents,
trademarks or other proprietary rights of RockShox, unless successfully
rejected by the Company could have a material adverse effect on the
Company or its prospects. In April 1998, RockShox was notified that
Cannondale believes that certain ROCKSHOX suspension forks are covered by
one or more claims of a United States patent purportedly owned by
Cannondale. The Company currently is involved in discussions with
Cannondale in an attempt to resolve this matter amicably. 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.
10
<PAGE>
- -- The failure of a key supplier to meet the Company's product needs on a
timely basis, the loss of a key supplier or any 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 to 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.
- -- Product recalls, corrective actions or other activity voluntarily or
involuntarily undertaken by the Company or involving the CPSC or other
regulatory bodies 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 56,000
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, 36,000 and 158,000 square feet in the San Jose area pursuant to
leases that expire in 2000, 2001 and 2004, respectively. The 15,000
square-foot facility is not currently being used by the Company, and has been
subleased in its entirety until the end of the lease term. The Company also
leases one smaller facility. The Company believes that its existing
facilities are adequate to meet its existing requirements, but is attempting
to relocate certain facilities in order to consolidate its premises.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain 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. See "Certain Factors That May Affect the Company's Business and
Future Results."
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 1998.
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.
<TABLE>
<CAPTION>
Year ended March 31, 1998 High Low
------------------------- ---- ---
<S> <C> <C>
First quarter............................ $17.50 $13.50
Second quarter........................... $17.63 $11.88
Third quarter............................ $14.88 $ 6.81
Fourth quarter........................... $ 9.13 $ 6.88
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Year ended March 31, 1997 High Low
------------------------- ---- ---
<S> <C> <C>
Second Quarter (from September 26, 1996). $16.25 $15.00
Third Quarter............................ $16.00 $10.62
Fourth Quarter........................... $19.12 $13.50
</TABLE>
On June 22, 1998, the closing sales price per share of the Company's
common stock as reported on The NASDAQ Stock Market was $3.44. On June 22,
1998, there were approximately 1,950 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.
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>
Year Three Months Year
Ended Ended Ended
December 31, March 31, March 31,
--------------------- ----------- ---------------------------------
1993 1994 1995 (1) 1996 1997 1998
--------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA):
Net sales ............................ $ 30,941 $ 37,900 $ 14,279 $ 83,509 $ 106,212 $ 102,203
Cost of sales ........................ 20,113 24,477 9,590 54,110 67,115 73,183
--------- --------- --------- --------- --------- ---------
Gross profit ...................... 10,828 13,423 4,689 29,399 39,097 29,020
Selling, general and administrative
expenses .......................... 5,098 4,210 5,404 11,220 12,137 13,363
Research, development and
engineering expense ............... 1,536 2,073 2,223 3,401 4,801 4,873
Restructuring and non-recurring
charge ............................ --- --- --- --- 6,580 3,326
--------- --------- --------- --------- --------- ---------
Income (loss) from operations .. 4,194 7,140 (2,938) 14,778 15,579 7,458
Interest expense (income) and other
expense, net ...................... 16 6 51 5,650 2,205 (606)
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes ........................ 4,178 7,134 (2,989) 9,128 13,374 8,064
Provisions for (benefit from)
income taxes ...................... 1,521 2,420 (653) 3,464 5,149 2,944
--------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary loss ........... 2,657 4,714 (2,336) 5,664 8,225 5,120
Extraordinary loss, net of tax
benefit of $885,000 ............... --- --- --- --- 1,328 ---
--------- --------- --------- --------- --------- ---------
Net income (loss) before
accretion .................... 2,657 4,714 (2,336) 5,664 6,897 5,120
Accretion for dividends on
mandatorily redeemable
preferred stock ................... --- --- --- 357 185 ---
--------- --------- --------- --------- --------- ---------
Net income (loss) available to
common stockholders .......... $ 2,657 $ 4,714 $ (2,336) $ 5,307 $ 6,712 $ 5,120
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED):
<TABLE>
<CAPTION>
Year Three Months Year
Ended Ended Ended
December 31, March 31, March 31,
--------------------- ----------- ---------------------------------
1993 1994 1995 (1) 1996 1997 1998
--------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) per share before
extraordinary loss - basic...... $ 0.30 $ 0.53 $ (0.26) $ 0.60 $ 0.71 $ 0.37
Loss per share from extraordinary
item - basic.................... --- --- --- --- (0.12) ---
------- -------- -------- ------- ------- ------
Net income (loss) per share -
basic..................... $ 0.30 $ 0.53 $ (0.26) $ 0.60 $ 0.59 $ 0.37
------- -------- -------- ------- ------- ------
------- -------- -------- ------- ------- ------
Cash dividend per share............ --- $ 0.03 --- --- --- ---
------- -------- -------- ------- ------- ------
------- -------- -------- ------- ------- ------
Shares used in per share
calculation - basic............. 8,820 8,820 8,820 8,820 11,430 13,717
------- -------- -------- ------- ------- ------
------- -------- -------- ------- ------- ------
Income (loss) per share before
extraordinary loss - diluted.... $ 0.30 $ 0.53 $ (0.26) $ 0.60 $ 0.69 $ 0.36
Loss per share from extraordinary
item - diluted.................. --- --- --- --- (0.11) ---
------- -------- -------- ------- ------- ------
Net income (loss) per share -
diluted................... $ 0.30 $ 0.53 $ (0.26) $ 0.60 $ 0.58 $ 0.36
------- -------- -------- ------- ------- ------
------- -------- -------- ------- ------- ------
Shares used in per share
calculation - diluted........... 8,820 8,820 8,820 8,820 11,641 14,030
------- -------- -------- ------- ------- ------
------- -------- -------- ------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
At December 31, At March 31,
--------------------------------- --------------------------------
1993 1994 1995 (1) 1996 1997 1998
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital ................... $ 2,226 $ 5,995 $ 1,939 $ 2,327 $ 23,722 $ 22,372
Total assets ...................... 7,660 13,493 17,679 26,932 45,875 52,259
Total debt ........................ 1,345 998 48,500 44,500 --- ---
Mandatorily redeemable preferred
stock ............................ --- --- 7,000 7,357 --- ---
Stockholders' equity (deficit)..... 2,774 7,188 (44,922) (39,615) 31,561 37,765
</TABLE>
(1) In 1995, the Company changed its fiscal year end from December 31 to
March 31.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
RockShox is a worldwide leader in the design, manufacture and marketing
of high performance bicycle 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 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.
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<PAGE>
RESULTS OF OPERATIONS:
The following table sets forth operations data as a percentage of net sales
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
March 31,
1996 1997 1998
------------ ------------- --------
<S> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0%
Cost of sales................................... 64.8 63.2 71.6
Gross margin.................................... 35.2 36.8 28.4
Selling, general and administrative expenses.... 13.4 11.4 13.0
Research, development and engineering expenses.. 4.1 4.5 4.8
Restructuring and non-recurring charges......... --- 6.2 3.3
Income from operations.......................... 17.7 14.7 7.3
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1998 (FISCAL 1998) COMPARED TO FISCAL YEAR ENDED
MARCH 31, 1997 (FISCAL 1997)
NET SALES. Net sales for the year ended March 31, 1998 decreased by 3.8%
to $102.2 million compared to $106.2 million for the year ended March 31,
1997. OEM sales increased in fiscal 1998 by 1% to $77.6 million compared to
$77.0 million in fiscal 1997. Sales increases with certain OEM customers were
substantially offset by a significant decline from two large domestic OEM
customer. OEM sales were impacted by a soft domestic mountain bike market.
Sales to the retail accessory market decreased by 15.9% to $24.6 million in
fiscal 1998 compared to $29.2 million in fiscal 1997. The decrease was
principally due to soft domestic sales to distributors and dealers.
Export sales, a significant portion of which included products shipped to
Asian manufacturing subcontractors for certain U.S.-based OEMs, accounted for
approximately 62.1% and 54.6% of net sales in fiscal 1998 and 1997,
respectively.
GROSS MARGIN. Gross margin (gross profit as a percentage of net sales)
for fiscal 1998, decreased to 28.4% compared to 36.8% in fiscal 1997. The
decrease in gross margin was primarily due to fixed overhead costs not being
fully absorbed due to lower than anticipated sales, a $1.4 million write-down
of inventory during the fourth quarter of fiscal 1998 and certain
manufacturing inefficiencies encountered in fiscal 1998. In addition, fiscal
1997 had a higher percentage of aftermarket sales compared to fiscal 1998.
Aftermarket sales generally have a higher gross margin than OEM sales due to
discounts given to OEM customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative ("SG&A") expense for fiscal 1998 increased by 10.1% to $13.4
million (or approximately 13.0% of net sales) compared to $12.1 million (or
approximately 11.4% of net sales) for the prior year. The increase was
principally due to increased sales and marketing expenses including
international and domestic race support and sponsorship costs, and moving
costs of $402,000 associated with the closing of two of the Company's smaller
facilities located in San Jose, California and moving to a single, larger
facility in December 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development and
engineering ("R&D") expense for fiscal 1998 increased by 1.5% to $4.9 million
(or approximately 4.8% of net sales) compared to $4.8 million (or
approximately 4.5% of net sales) for fiscal 1997. The increase in R&D expense
was principally due to increased engineering headcount and related expenses.
RESTRUCTURING AND NON-RECURRING CHARGES. During the fourth quarter of
fiscal 1998, the Company incurred a restructuring charge of approximately
$2.7 million. The restructuring costs of $600,000 consisted of costs related
to a planned headcount reduction of approximately 40 employees, estimated
losses associated with vacating certain of the Company's leasehold premises,
the write-off of associated leasehold improvements and furniture and fixtures
no longer being used, totaling $1.6 million, and an impairment charge of
$445,000 relating to property and equipment used for production of certain
discontinued products. In addition, the Company entered into a settlement and
cross-licensing agreement with Answer Products and has recognized a charge of
$637,000 which includes associated settlement and legal costs. In the
14
<PAGE>
second quarter of fiscal 1997, the Company incurred a non-recurring charge of
$6.6 million related to the termination of an incentive-based bonus plan (the
"Bonus Plan") with the Company's former President and Vice President of
Advanced Research upon completion of the Company's IPO.
INTEREST INCOME (EXPENSE). For the year ended March 31, 1998, the Company
had interest income of $606,000. For the year ended March 31, 1997 the
Company incurred net interest expense of $2.2 million (which included the
amortization of capitalized financing costs). The change was principally due
to the elimination of the Company's outstanding debt upon the closing of the
Company's IPO in October 1996.
INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 1998 was
36.5% compared to 38.5% for fiscal 1997. The decrease was principally due to
certain capital investment tax credits and a lower state tax rate.
EXTRAORDINARY ITEM. During fiscal 1997, the Company recognized a one-time
pre-tax charge, reflected as an extraordinary item, from the write-off of
capitalized financing costs, totaling approximately $2.2 million before
income taxes, in connection with the repayment of all of the Company's
outstanding debt that occurred in October 1996 upon the closing of the
Company's IPO.
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 the Company began shipping
during the first quarter of fiscal 1997.
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 fiscal 1996. 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 in
October 1996 of $312,000 and $812,000, respectively. (See Note 7 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 7 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.
RESTRUCTURING AND NON-RECURRING CHARGES. The Company incurred a
non-recurring charge during fiscal 1997 related to the termination of the
Bonus Plan with the Company's former President and Vice President of Advanced
Research upon completion of the Company's IPO. The non-recurring charge
totaled $6.6 million. (See Note 7 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 for fiscal 1996. The decrease was primarily due to
the elimination of all outstanding debt upon the closing of the Company's IPO.
15
<PAGE>
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 fiscal 1996.
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 $1.05 per share) compared to approximately $5.7 million or ($0.65 per
share) for fiscal 1996.
EXTRAORDINARY ITEM. During fiscal 1997, the Company recognized a one-time
pre-tax charge, reflected as an extraordinary item, from the write-off of
capitalized financing costs, totaling approximately $2.2 million before
income taxes, in connection with the repayment of all of the Company's
outstanding debt that occurred in October 1996 upon the closing of the
Company's IPO.
LIQUIDITY AND CAPITAL RESOURCES
During the past two fiscal years, the Company has satisfied its operating
cash needs principally through cash flow from operations. For the year ended
March 31, 1998, net cash provided by operating activities was $7.8 million
which was comprised of the net income of $5.1 million increased by non-cash
charges for depreciation and amortization of $4.7 million, offset by a net
increase in working capital of $2.1 million. Accounts receivable at March 31,
1998 increased to $9.2 million net of allowance for doubtful accounts
compared to $6.6 million at March 31, 1997. The increase in accounts
receivable was due to extending longer payment terms to some of the Company's
largest customers as well as granting open credit terms to some foreign
customers.
Net cash used in investing activities was $13.0 million which principally
consisted of acquisitions of property and equipment. Net cash provided by
financing activities was $1.1 million which represented net proceeds from the
exercise of stock options and the tax benefits associated with the
disqualifying disposition of such common stock.
Capital expenditures totaled $13.0 million for fiscal 1998 and $6.6
million for fiscal 1997. The increase in capital expenditures principally
related to purchases of manufacturing equipment in fiscal 1998 that allows
the Company to bring in-house certain manufacturing processes previously
performed by subcontractors. As of March 31, 1998, the Company had purchase
commitments of approximately $1.5 million primarily for tooling and machinery
to be used in manufacturing beginning in fiscal 1999, which commitments are
expected to be funded by cash flow from operations or available cash balances.
At March 31, 1998, the Company had cash of $10.6 million and working
capital of $22.4 million. The Company believes that its current cash balances
and or financing sources available will be sufficient to provide operating
liquidity for at least the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income ("SFAS 130"). This statement establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses and
gains and losses) in a full set of financial statements and becomes effective
for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 changes
current practice under SFAS 14, "Financial Reporting for Segments of an
Enterprise," by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires
interim reporting of segment information. It is effective for fiscal years
beginning after December 15, 1997.
The Company does not expect any material impact on the financial
statements from these pronouncements.
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
16
<PAGE>
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
1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............. $ 21,378 $ 28,181 $ 32,143 $ 24,510 $ 24,706 $ 28,878 $ 26,575 $ 22,044
Gross profit .......... 7,645 10,375 12,057 9,020 8,646 9,802 7,467 3,105
Operating income (loss) 3,486 (251) 7,846 4,498 4,374 5,269 2,683 (4,868)
Income (loss) before
extraordinary loss.... 1,349 (940) 4,925 2,891 2,900 3,471 1,811 (3,062)
Net income (loss) ..... $ 1,349 $ (2,268) $ 4,925 $ 2,891 $ 2,900 $ 3,471 $ 1,811 $ (3,062)
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) per share
before extraordinary
loss - basic.......... $ 0.15 $ (0.11) $ 0.36 $ 0.21 $ 0.21 $ 0.25 $ 0.13 $ (0.22)
Net income (loss) per
share - basic......... $ 0.15 $ (0.26) $ 0.36 $ 0.21 $ 0.21 $ 0.25 $ 0.13 $ (0.22)
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Shares used in per share
calculations - basic... 8,820 8,820 13,620 13,620 13,642 13,710 13,757 13,757
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) per share
before extraordinary
loss - diluted........ $ 0.15 $ (0.11) $ 0.35 $ 0.21 $ 0.21 $ 0.25 $ 0.13 $ (0.22)
Net income (loss)
per share - diluted... $ 0.15 $ (0.26) $ 0.35 $ 0.21 $ 0.21 $ 0.25 $ 0.13 $ (0.22)
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Shares used in per share
calculations -
diluted ............. 8,820 8,820 14,026 14,059 14,105 14,060 13,998 13,757
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
Because of the Company's fluctuation in sales, 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.
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.
IMPACT OF THE YEAR 2000
During the fiscal year, the Company decided to replace its current
management information systems. The system conversion is expected to occur
during the 1999 fiscal year and will allow the Company to become Year 2000
compliant. The estimated cost of the system conversion is approximately $1.5
million. However, there can be no assurance that software incompatibility
with the Year 2000 on the part of the Company or any of its significant
suppliers will not cause an interruption of operations or other limitations
of system functionality, or that the Company will not incur substantial costs
to avoid such occurrences. The Company does not currently have any
information concerning the Year 2000 compliance status of its suppliers and
customers. In the event that any of the Company's significant suppliers or
customers does not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be adversely affected.
INTRODUCTION OF THE EURO
The European Economic and Monetary Union and the introduction of a new
currency (the "Euro") will begin in Europe on January 1, 1999. The new
currency enables the European Union ("EU") to blend the economies of EU's
member states into one large market with unrestricted and unencumbered trade
across borders. The change of currencies in Europe may affect the Company's
business operations in Europe as well as having systems and accounting issues
for the Company. The Company is currently evaluating the impact of the Euro,
if any, on the Company's financial position, results of operations and cash
flows.
17
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
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 20,
1998 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1998 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 20,
1998 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1998 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 20,
1998 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1998 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 20,
1998 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 1998 and is incorporated herein by reference.
18
<PAGE>
PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<S> <C>
(a)(1) See page 21 for a listing of financial statements submitted as part of this report.
(a)(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, dated October 2, 1996,
between RockShox, Inc. and Paul Turner. *
10.4 Noncompetition Agreement, dated March 24, 1995, between RSx Holdings,
Inc. and Stephen Simons. *
10.5 Noncompetition Agreement, dated March 24, 1995, between RSx Holdings,
Inc. and Debra Simons. *
10.6 Noncompetition Agreement, dated March 24, 1995, between RSx Holdings,
Inc. and Paul Turner. *
10.7 Consultant Agreement, dated January 1, 1994 by and between Simons &
Susslin, Inc. and Stephen Simons. *
10.8 Form of Lease, dated as of May 1, 1994 between Charcot Center Joint
Venture and RockShox, Inc. *
10.9 Form of First Amendment to Lease, dated as of August 15, 1994, between
Charcot Center Joint Venture and RockShox, Inc. *
10.10 Form of Lease, dated as of October 1, 1995, between Whitecliffe I
Apartments, Ltd. and RockShox, Inc. *
10.11 Form of Indemnity Agreement. *
10.12 Form of Lease, dated as of March 7, 1997, between S. Stephen Nakashima
and RockShox, Inc. **
10.13 Amended and Restated RSx Holdings, Inc. 1996 Stock Plan. *
10.14 Letter Agreement, dated as of May 7, 1996, between RockShox, Inc. and
Charles E. Noreen, Jr. **
10.15 Form of First Amendment to Standard Industrial/Commercial Multi-Tenant
Lease-modified net, dated November 4, 1997, between S. Stephen Nakashima
and Sally S. Nakashima and RockShox, Inc. ***
10.16 Employment Agreement, dated November 1, 1997, between RockShox, Inc. and
George Napier. ***
10.17 Standard Industrial Sublease, dated December 8, 1997, between RockShox,
Inc. and First American Records Management, Inc.
10.18 RockShox, Inc. 1998 Stock Option Plan.
21 List of Subsidiaries of RockShox, Inc. *
23 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule restated for fiscal year end 1997, 2nd and 3rd
quarters of fiscal 1997 and 1st and 2nd quarters of fiscal 1998.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<S> <C>
27.3 Financial Data Schedule restated for the 3rd quarter of fiscal 1998.
</TABLE>
- --------------------------------------------------------------------------------
* Previously filed with the Registration Statement on Form S-1 of
ROCKSHOX, INC. (Registration No. 333-8069).
** Previously filed with Form 10-K of RockShox, Inc. for the year ended
March 31, 1997.
*** Previously filed with Form 10-Q of RockShox, Inc. for the quarter ended
December 31, 1997.
(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, 1998.
(c) See (a)(3) above for a listing of exhibits included as a part of this
report.
20
<PAGE>
ROCKSHOX, INC.
FORM 10-K
ITEMS 8, 14 (a) AND 14 (d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
<S> <C>
1. Consolidated Financial Statements
Report of Independent Accountants......................................................... 22
Consolidated Balance Sheets at March 31, 1997 and 1998 ................................... 23
Consolidated Statements of Operations for the Years Ended March 31, 1996, 1997 and 1998... 24
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
March 31, 1996, 1997 and 1998......................................................... 25
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1997 and 1998... 26
Notes to Consolidated Financial Statements................................................ 27
2. Consolidated Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts............................................. 38
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ROCKSHOX, INC.
We have audited the accompanying consolidated balance sheets of ROCKSHOX,
INC. and Subsidiaries as of March 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended March 31, 1998. 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, 1997 and 1998, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 24, 1998
22
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 14,747 $ 10,554
Accounts receivable, net of allowance for
doubtful accounts $1,589 in 1997 and $1,037
in 1998............................................ 6,618 9,230
Inventories............................................ 10,800 11,581
Prepaid expenses and other current assets.............. 1,132 962
Deferred income taxes.................................. 4,739 4,539
-------- --------
Total current assets................................ 38,036 36,866
Property and equipment, net............................... 7,700 15,224
Other assets.............................................. 139 169
-------- --------
Total assets........................................ $ 45,875 $ 52,259
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 3,459 $ 5,869
Accrued liabilities.................................... 10,855 8,625
-------- --------
Total current liabilities........................... 14,314 14,494
Commitments and contingencies (Note 8)
Preferred stock, $0.01 par value:
Authorized: 10,000,000 shares
Issued and outstanding: none in 1997 and 1998
Common stock, $0.01 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 13,620,000 shares in
1997 and 13,757,231 in 1998............................ 136 138
Additional paid-in capital................................ 64,828 65,910
Distributions in excess of net book value................. (45,422) (45,422)
Retained earnings......................................... 12,019 17,139
-------- --------
Total stockholders' equity.......................... 31,561 37,765
-------- --------
Total liabilities and stockholders' equity.......... $ 45,875 $ 52,259
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
1996 1997 1998
------------ ---------- ----------
<S> <C> <C> <C>
Net sales................................................. $83,509 $106,212 $102,203
Cost of sales............................................. 54,110 67,115 73,183
------- -------- --------
Gross profit.......................................... 29,399 39,097 29,020
Selling, general and administrative expense............... 11,220 12,137 13,363
Research, development and engineering expense............. 3,401 4,801 4,873
Restructuring and non-recurring charges................... --- 6,580 3,326
------- -------- --------
Operating expenses..................................... 14,621 23,518 21,562
------- -------- --------
Income from operations.............................. 14,778 15,579 7,458
Interest income........................................... 136 492 606
Interest expense.......................................... (5,786) (2,697) ---
------- -------- --------
Income before income taxes............................. 9,128 13,374 8,064
Provision for income taxes................................ 3,464 5,149 2,944
------- -------- --------
Income before extraordinary loss....................... 5,664 8,225 5,120
Extraordinary loss from early extinguishment of debt,
net of tax benefit of $885,000......................... --- 1,328 ---
------- -------- --------
Net income before accretion....................... 5,664 6,897 5,120
Accretion for dividends on mandatorily redeemable
preferred stock........................................ 357 185 ---
------- -------- --------
Net income available to common stockholders....... $ 5,307 $ 6,712 $ 5,120
------- -------- --------
------- -------- --------
Income per share before extraordinary item - basic........ $ 0.60 $ 0.71 $ 0.37
Loss per share from extraordinary item - basic............ --- (0.12) ---
------- -------- --------
Net income per share - basic.......................... $ 0.60 $ 0.59 $ 0.37
------- -------- --------
------- -------- --------
Shares used in per share calculations - basic............. 8,820 11,430 13,717
------- -------- --------
------- -------- --------
Income per share before extraordinary item - diluted...... $ 0.60 $ 0.69 $ 0.36
Loss per share from extraordinary item - diluted ......... --- (0.11) ---
------- -------- --------
Net income per share - diluted......................... $ 0. 60 $ 0.58 $ 0.36
------- -------- --------
------- -------- --------
Shares used in per share calculations - diluted........... 8,820 11,641 14,030
------- -------- --------
------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
24
<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, 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
Proceeds from exercise of
stock options ............. 137 2 606 --- --- 608
Tax benefits from
disqualifying dispositions
of common stock........... --- --- 476 --- --- 476
Net income .................. --- --- --- --- 5,120 5,120
------ ---- ------- -------- ------- --------
Balances, March 31, 1998........ 13,757 $138 $65,910 $(45,422) $17,139 $ 37,765
------ ---- ------- -------- ------- --------
------ ---- ------- -------- ------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE>
ROCKSHOX. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 5,664 $ 6,897 $ 5,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and non-recurring charges............... --- --- 3,326
Depreciation and amortization......................... 1,746 3,467 4,706
Write-off of capitalized financing costs.............. --- 2,213 ---
Loss on disposal of fixed assets...................... --- --- 782
Provision for doubtful accounts....................... 1,518 175 (489)
Provision for excess and obsolete inventories......... 2,009 825 2,408
Deferred income taxes................................. (2,298) (934) 200
Changes in operating assets and liabilities:
Accounts receivable................................... (1,699) (1,222) (2,123)
Inventories........................................... (6,095) (3,189) (3,189)
Prepaid expenses and other current assets............. 86 (735) 170
Accounts payable and accrued liabilities.............. 7,589 (376) (3,146)
------- -------- --------
Net cash provided by operating activities............ 8,520 7,121 7,765
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment.................... (4,074) (6,554) (13,012)
Other................................................. 52 (50) (30)
------- -------- --------
Net cash used in investing activities................ (4,022) (6,604) (13,042)
------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options .............. --- --- 608
Tax benefits from disqualifying dispositions of common
stock................................................ --- --- 476
Proceeds from Initial Public Offering, net of expenses --- 64,464 ---
Repayment of mandatorily redeemable preferred stock.. --- (7,542) ---
Repayment of short-term borrowings and bank debt...... (3,750) (27,500) ---
Repayment of notes payable to related parties......... (250) (17,000) ---
------- -------- --------
Net cash provided by (used in) financing activities.. (4,000) 12,422 1,084
------- -------- --------
Net increase (decrease) in cash and cash equivalents 498 12,939 (4,193)
Cash and cash equivalents, beginning of period........... 1,310 1,808 14,747
------- -------- --------
Cash and cash equivalents, end of period................. $ 1,808 $ 14,747 $ 10,554
------- -------- --------
------- -------- --------
Supplemental disclosure of cash flow information:
Income taxes paid..................................... $ 4,180 $ 5,065 $ 2,478
Interest paid......................................... 4,939 3,599 ---
Accretion for dividends on mandatorily redeemable
preferred stock...................................... 357 185 ---
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND EQUITY TRANSACTIONS:
NATURE OF OPERATIONS:
ROCKSHOX, INC. ("the Company") designs, manufactures and markets high
performance bicycle suspension products. During the fiscal year ended March
31, 1998, the Company marketed thirteen front suspension forks and three rear
shocks under its JUDY, INDY, SID, BOXXER, RUBY and DELUXE product lines. The
Company's products are primarily sold to bicycle manufacturers ("OEMs"), who
incorporate ROCKSHOX branded components as part of new, fully assembled
mountain bikes sold worldwide, and directly to independent bicycle dealers
("IBDs") and through distributors (together with IBDs, "the retail accessory
market"). For the years ended March 31, 1996, 1997 and 1998 approximately
68%, 72% and 76% respectively, of the Company's total net sales were to OEMs.
For the years ended March 31, 1996 1997 and 1998 approximately 32%, 28% and
24% respectively, of the Company's total net sales were to the retail
accessory market.
INITIAL PUBLIC OFFERING:
In October 1996, the Company completed an initial public offering
("IPO") 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 Holdings' (defined below) 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.
Immediately prior to the IPO, the Company merged (the "Merger") with
and into its parent company, RSx Holdings, Inc. ("Holdings"), and each share
of common stock of 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.
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.
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.
27
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 1998.
CONCENTRATIONS OF CREDIT RISK AND CONCENTRATION OF REVENUE:
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, 1998, two OEM customers
accounted for 26% and 11% of accounts receivable. For the years ended March
31, 1996, 1997 and 1998, revenues from one individual customer were $14,950,
$21,262 and $16,032, respectively.
CASH AND 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 at market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and are depreciated over
their estimated useful lives using the straight line method. 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.
Leasehold improvements are amortized over the length of the lease or their
estimated useful life, whichever is less. 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.
<TABLE>
<CAPTION>
Depreciable life
----------------
<S> <C>
Computer equipment,
furniture and fixtures.................. 3-7 years
Machinery and equipment................... 3-10 years
Tooling................................... 1-2 years
Leasehold improvements.................... up to 7 years
</TABLE>
LONG-LIVED ASSETS:
The Company periodically evaluates the recoverability of long-lived
assets. The Company recognizes an impairment charge when the future
undiscounted cash flows from each asset is estimated to be insufficient to
recover its related carrying value.
CAPITALIZED FINANCING COSTS AND EXTRAORDINARY ITEM:
As discussed in Note 1, in October 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
28
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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, 1996 and 1997 was $690,000 and
$300,000, respectively. There was no amortization expense for the year ended
March 31, 1998.
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 $1,089,000, $1,590,000 and $1,922,000 for the years ended March
31, 1996, 1997 and 1998, respectively.
INCOME TAXES:
The Company's provisions for income taxes comprises its estimated tax
liability currently payable and the change in its deferred income taxes.
Deferred tax assets and liabilities are determined based on differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the period in which the differences are
expected to affect taxable income.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This
statement establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses and gains and losses) in a full
set of financial statements and becomes effective for fiscal years beginning
after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 changes
current practice under SFAS 14, "Financial Reporting for Segments of an
Enterprise," by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires
interim reporting of segment information. It is effective for fiscal years
beginning after December 15, 1997.
The Company does not expect any material impact on the financial
statements from these pronouncements.
EARNINGS PER SHARE:
The Company has adopted the provisions of SFAS No. 128, Earnings Per
Share ("SFAS 128") effective December 31, 1997. SFAS 128 requires the
presentation of basic and diluted earnings per share ("EPS"). Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for that period. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist of
incremental common shares issuable upon exercise of stock options and
warrants for all periods. All prior period net income (loss) amounts have
been restated to comply with SFAS 128.
29
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK BASED COMPENSATION
The Company accounts for employee stock options under APB Opinion No.
25, "Accounting for Stock Issued to Employees," and provides pro forma
disclosure in Note 9 to the financial statements as if the measurement
provisions of SFAS No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation," had been adopted.
3. RESTRUCTURING AND NON-RECURRING CHARGES:
Restructuring and non-recurring charges comprise the following (IN
THOUSANDS):
<TABLE>
<CAPTION>
1997 1998
------- ------
<S> <C> <C>
Restructuring plan .................... --- $2,244
Settlement of legal dispute ........... --- 637
Write down of equipment ............... --- 445
Termination of incentive bonus plan.... $6,580 ---
------ ------
$6,580 $3,326
------ ------
------ ------
</TABLE>
During the fourth quarter of fiscal 1998, the Company announced a
restructuring plan which included a work force reduction of approximately 40
employees and the consolidation of the Company's facilities. The program is
primarily aimed at focusing the Company's business processes, attaining cost
efficiencies and increasing manufacturing flexibility. The restructuring
charge includes a provision of $600,000 for severance costs. No severance
benefits had been charged against the related accrual as of March 31, 1998,
and severance costs are anticipated to be paid primarily during fiscal 1999.
In connection with the restructuring plan the Company also recorded a charge
of $1,644,000 which includes the estimated losses associated with vacating
certain of the Company's leasehold premises, the write-off of associated
leasehold improvements and furniture and fixtures no longer being used. The
Company expects to complete the restructuring plan during fiscal 1999.
During fiscal 1998, the Company entered into a settlement and
cross-licensing agreement with Answer Products and has recognized a charge of
$637,000 which includes associated settlement and legal costs.
The Company recognized an impairment charge of $445,000 relating to
property and equipment used for the production of certain discontinued
products. The Company recognizes an impairment charge when the future
undiscounted cash flows of each asset are estimated to be insufficient to
recover its related carrying value. As such, the carrying values of these
assets were written down to the Company's estimates of fair value. Fair value
was based on sales of similar assets, or other estimates of fair value such
as estimated future cash flows. The Company does not anticipate significant
proceeds from disposal. None of the assets affected by this action are
currently held for sale.
Also during the fourth quarter of fiscal 1998, the Company wrote-off
and charged to cost of goods sold $1,429,000 of inventory relating to
discontinued products.
The non-recurring charges and costs associated with the restructuring
plan are based on management's estimates and are therefore subject to risks
and uncertainties. As a result, the Company believes that it is reasonably
possible that these estimates may be revised in the near term.
As discussed in Note 7, during fiscal 1997, the Company recorded a
non-recurring charge of approximately $6.6 million related to the termination
of an incentive based bonus plan with the Company's former President and Vice
President of Advanced R&D.
4. INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1998
------- -------
<S> <C> <C>
Raw materials ... $ 6,357 $ 7,023
Finished goods .. 4,443 4,558
------- -------
$10,800 $11,581
------- -------
------- -------
</TABLE>
30
<PAGE>
4. INVENTORIES (IN THOUSANDS) (CONTINUED):
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.
5. PROPERTY AND EQUIPMENT, NET (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1998
------- -------
<S> <C> <C>
Computer equipment,
furniture and fixtures.................. $ 2,838 $ 3,959
Machinery and equipment................... 3,107 6,884
Tooling................................... 4,055 7,312
Leasehold improvements.................... 273 277
------- -------
10,273 18,432
Less: accumulated
depreciation and
amortization............................ (3,818) (8,102)
Construction in progress.................. 1,245 4,894
------- -------
$ 7,700 $15,224
------- -------
------- -------
</TABLE>
Depreciation and amortization expense on property and equipment
for the years ended March 31, 1996, 1997 and 1998 was $1,056,000,
$3,167,000 and $4,706,000, respectively.
6. ACCRUED LIABILITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1997 1998
------- -------
<S> <C> <C>
Accrued payroll and benefits.............. $ 2,200 $1,310
Accrued income taxes payable.............. 667 413
Accrued warranty.......................... 4,725 2,751
Accrued non-recurring charges............. --- 1,668
Other..................................... 3,263 2,483
------- ------
$10,855 $8,625
------- ------
------- ------
</TABLE>
The Company had $4,725,000 and $2,751,000 in accrued warranty costs at
March 31, 1997 and March 31, 1998, 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.
7. RELATED PARTY TRANSACTIONS:
CONSULTING AND EMPLOYMENT AGREEMENTS:
Prior to the IPO, the Company had entered into annual employment
agreements (the "Employment Agreements" or the "Bonus Plan") with the
Company's former President and its Vice President of Advanced Research, and a
management consulting agreement (the "Consulting Agreement") with The Jordan
Company ("Jordan"), whose principals are stockholders of the Company.
The Company's former President and its Vice President of Advanced
Research, both of whom are stockholders, entered into employment agreements
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 the former President and
the Vice President of Advanced Research, as the case may be. Each Employment
Agreement could be terminated by the Company for cause (as
31
<PAGE>
7. RELATED PARTY TRANSACTIONS (CONTINUED):
defined therein) or by the former President and the Vice President of
Advanced Research, as the case may be, for good reason (as defined therein).
Pursuant to his respective Employment Agreement, each of the former President
and the Vice President of Advanced Research (i) received initial payments of
$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 the former President and the Vice
President of Advanced Research (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 the
former President and the Vice President of Advanced Research 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 the former President and the Vice President of
Advanced Research, as the case may be, has been an employee of the Company
for the entire fiscal year, the Company will pay to the former President and
the Vice President of Advanced Research 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 the Company's former
President, 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. During
fiscal 1998, no incentive compensation was earned under the Amended
Employment Agreements.
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, certain subordinated notes
payable to stockholders were repaid in October 1996. Each of the subordinated
notes bore interest at 13.5% per annum, with the interest payable
semi-annually.
INVENTORY PURCHASES:
For the years ended March 31, 1996, 1997 and 1998, the Company paid
$8,529,000, $2,915,000 and $1,813,000, respectively, to a supplier of raw
materials. Prior to March 18, 1994, the former 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 is entitled to receive certain
payments through 2002.
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 responsible for
maintenance costs, including real property taxes, utilities and other costs.
Also, certain of these leases contain renewal options.
Total rent expense for these leases for the years ended March 31, 1996,
1997 and 1998 was $520,000, $876,000 and $1,593,000, respectively.
32
<PAGE>
8. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Following is a summary, by fiscal year, of future minimum lease payments under
operating leases at March 31, 1998 (IN THOUSANDS):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999............................................... $1,647
2000............................................... 1,700
2001............................................... 1,505
2002............................................... 1,051
2003............................................... 1,077
Thereafter......................................... 1,202
------
Total minimum lease payments....................... $8,182
------
------
</TABLE>
LEGAL PROCEEDINGS:
The Company is involved in certain legal matters in the ordinary course
of business including the alleged infringement of a competitor's patent. 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.
9. STOCKHOLDERS' EQUITY:
STOCK OPTION PLAN:
In May 1996, the Company adopted the Amended and Restated RSx Holdings,
Inc. 1996 Stock Plan (such plan, as amended, the "1996 Stock Plan"). The 1996
Stock Plan provides for the issuance of up to a maximum of 979,020 shares of
common stock pursuant to awards under the 1996 Stock Plan. The Company has
reserved 979,020 shares of common stock for issuance under the 1996 Stock
Plan. Under the 1996 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. In August 1997, the Company increased the number of
shares issuable under the 1996 Stock Plan to a maximum of 1,279,020 shares of
common stock pursuant to award under the 1996 Stock Plan.
In February 1998, the Company's Board of Directors adopted the
ROCKSHOX, INC. 1998 Stock Option Plan (the "1998 Stock Plan," and, together
with the 1996 Stock Plan, the "Plans"). The 1998 Stock Plan provides for the
issuance of up to a maximum of 300,000 shares of common stock pursuant to
awards under the 1998 Stock Plan. Under the 1998 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.
Under the Company's stock option plans, options become exercisable at
dates and in amounts as specified by the Board of Directors and expire
generally ten years from the date of grant. Options are generally granted to
employees at prices not less than fair market value on the date of grant and
become exercisable over a period of between three to five years. The
following is a summary of activity of the Plans for fiscal 1997 and fiscal
1998:
<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 $7.51
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
Options reserved 600,000
Options granted (531,450) 531,450 $7.13-$14.93 4,548,448 $8.56
Options exercised --- (137,236) $4.39-$4.69 (607,466) $4.41
Options canceled 81,142 (81,142) $4.39-$15 (1,111,447) $13.72
-------- --------- -----------
Balances, March 31, 1998 290,171 1,151,613 $4.39-$15 $ 9,066,591 $7.87
-------- --------- -----------
-------- --------- -----------
</TABLE>
33
<PAGE>
9. STOCKHOLDERS' EQUITY (CONTINUED):
At March 31, 1997 and 1998, 227,618 and 254,134 outstanding options were
exercisable under the Plans, at weighted average exercise prices of $5.04 and
$6.80, respectively.
As discussed in Note 2, the Company continues to account for the Plans
in accordance with APB 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 1998
------ ------
<S> <C> <C>
Net income available to common stockholders - as reported......................... $6,712 $5,120
Net income available to common stockholders - pro forma........................... $6,221 $4,517
Net income available to common stockholders - per share - basic as reported....... $ 0.59 $ 0.37
Net income available to common stockholders - per share - diluted as reported..... $ 0.58 $ 0.36
Net income available to common stockholders - per share - basic pro forma......... $ 0.54 $ 0.33
Net income available to common stockholders - per share - diluted pro forma....... $ 0.53 $ 0.33
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Income before extraordinary item - as reported.................................... $8,225 $5,120
Income before extraordinary item - pro forma...................................... $7,734 $4,517
Income before extraordinary item - per share - basic as reported.................. $ 0.71 $ 0.37
Income before extraordinary item - per share - diluted as reported................ $ 0.69 $ 0.36
Income before extraordinary item - per share - basic pro forma.................... $ 0.68 $ 0.33
Income before extraordinary item - per share - diluted pro forma.................. $ 0.66 $ 0.33
</TABLE>
The above pro-forma 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, 1998 and 1997 were $2.2 million and $1.9 million and $4.16
and $2.27, 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:
<TABLE>
<CAPTION>
1997 1998
---------- -------------
<S> <C> <C>
Risk-free interest rate......................... 6.08%-6.27% 5.47%-6.52%
Expected life................................... 3.5 3.5
Expected dividends.............................. --- ---
Expected volatility............................. 0-58% 57%
</TABLE>
The risk-free interest rate was calculated in accordance with the grant.
The options outstanding and currently exercisable by exercise price at
March 31, 1998 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 (Years) Price Exercisable Price
- ------------- ----------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$4.39-$4.69 451,248 7.59 $ 4.42 196,064 $ 4.42
$7.13-$7.44 426,000 9.90 7.29 0 ---
$13.13-$13.75 53,050 9.05 13.35 5,840 13.49
$14.93 53,250 9.05 14.93 6,300 14.93
$15.00 168,065 6.91 15.00 45,930 15.00
--------- -------
1,151,613 8.28 7.87 254,134 6.80
</TABLE>
34
<PAGE>
10. INCOME TAXES:
The components of the provision for income taxes, all of which arise from
domestic income, are summarized as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
Year
Ended
March 31,
--------------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Current:
State......................... $ 1,127 $ 1,133 $ 140
Federal....................... 4,635 4,950 2,604
------- ------- -------
5,762 6,083 2,744
Deferred:
State......................... (281) (121) 10
Federal....................... (2,017) (813) 190
------- ------- -------
(2,298) (934) 200
------- ------- -------
$ 3,464 $ 5,149 $ 2,944
------- ------- -------
------- ------- -------
</TABLE>
The principal items accounting for the difference between income taxes
computed at the U.S. statutory rate and the provision for income taxes reflected
in the statements of operations are as follows:
<TABLE>
<CAPTION>
Year
Ended
March 31,
--------------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
United States statutory rate............ 35.0% 35.0% 34.0%
Foreign Sales Corporation tax
benefit ............................. (2.5) (2.5) (3.1)
States taxes, net of federal
benefit ............................. 5.1 5.0 3.1
Other .................................. 0.3 1.0 2.5
---- ----- ----
37.9% 38.5% 36.5%
---- ----- ----
---- ----- ----
</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):
<TABLE>
<CAPTION>
March 31,
----------------------
1997 1998
------ ------
<S> <C> <C>
Allowance for doubtful accounts..................... $ 581 $ 375
Allowance for excess and obsolete inventory......... 979 1,082
Accrued warranty.................................... 1,728 995
Accrued liabilities................................. 691 704
Restructuring ...................................... --- 604
Other............................................... 760 779
------ ------
Net deferred tax asset........................... $4,739 $4,539
------ ------
------ ------
</TABLE>
No valuation allowance has been recorded as management believes the net
deferred tax asset will be realized in future periods through carryback to
prior years when the Company paid income taxes or through estimated future
taxable income. The amount of the deferred tax asset that is realizable could
be reduced in the near term if actual results differ significantly from
estimates of future taxable income.
35
<PAGE>
11. 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 March 31, 1996. For the years ended March 31, 1997 and 1998,
Company contributions amounted to approximately $16,000 and $84,000,
respectively (IN thousands).
12. 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 OEMs of products shipped
to their overseas manufacturing subcontractors), all of which are denominated
in U.S. dollars (IN THOUSANDS):
<TABLE>
<CAPTION>
Year Ended
March 31,
----------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Asia ......... $22,813 $31,013 $34,055
Europe ....... 13,708 21,179 25,100
Other ........ 4,091 5,846 4,372
------- ------- -------
$40,612 $58,038 $63,527
------- ------- -------
------- ------- -------
</TABLE>
36
<PAGE>
13. EARNINGS PER SHARE:
A reconciliation of the numerator and denominator of basic and
diluted EPS is provided as follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS).
<TABLE>
<CAPTION>
Year
Ended
March 31,
------------------------------------------
1996 1997 1998
------ -------- -------
<S> <C> <C> <C>
Weighted average shares of common stock outstanding............ 8,820 11,430 13,717
------ -------- -------
Shares used in basic net income per share calculation.......... 8,820 11,430 13,717
------ -------- -------
------ -------- -------
Weighted average shares of common stock outstanding............ 8,820 11,430 13,717
Diluted effect of stock options................................ --- 211 313
------ -------- -------
Shares used in diluted net income per share calculation........ 8,820 11,641 14,030
------ -------- -------
------ -------- -------
Reconciliation of net income available to stockholders used
in basic and diluted per share calculations:
Income before extraordinary item............................... $5,664 $ 8,225 $ 5,120
Accretion for dividends on mandatorily redeemable
preferred stock............................................. 357 185 ---
------ -------- -------
Income before extraordinary loss available to
common stockholders....................................... 5,307 8,040 5,120
Extraordinary loss from early extinguishment of debt
(net of tax benefit of $885)................................ --- (1,328) ---
------ -------- -------
Net income available to common stockholders.............. $5,307 $ 6,712 $ 5,120
------ -------- -------
------ -------- -------
Income per share before extraordinary item - basic............. $ 0.60 $ 0.71 $ 0.37
Loss per share from extraordinary item - basic................. --- (0.12) ---
------ -------- -------
Net income per share - basic............................... $ 0.60 $ 0.59 $ 0.37
------ -------- -------
------ -------- -------
Income per share before extraordinary item - diluted........... $ 0.60 $ 0.69 $ 0.36
Loss per share from extraordinary item - diluted............... --- (0.11) ---
------ -------- -------
Net income per share - diluted.............................. $ 0.60 $ 0.58 $ 0.36
------ -------- -------
------ -------- -------
</TABLE>
As of March 31, 1997 and 1998, options to purchase 252,394 shares and
286,192 shares were not included in the earnings per share calculation as the
effect was anti-dilutive.
37
<PAGE>
SCHEDULE II
ROCKSHOX, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(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 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
As of March 31, 1998:
Allowance for excess and
obsolete inventory ..... 2,676 2,408 (2,095) 2,989
Allowance for doubtful
accounts ............... 1,589 (489) (63) 1,037
</TABLE>
38
<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 25, 1998 By: /s/ CHARLES E. NOREEN, Jr.
---------------------------------
Charles E. Noreen, Jr.
Vice President, Finance and
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.
<TABLE>
<S> <C> <C>
By: /s/ GEORGE NAPIER Chief Executive Officer, President and June 25, 1998
--------------------------------- Director
George Napier (Principal Executive Officer)
By: Chairman of the Board and Director
---------------------------------
Stephen W. Simons
By: /s/ CHARLES E. NOREEN, JR. Vice President, Finance June 25, 1998
--------------------------------- Chief Financial Officer and Secretary
Charles E. Noreen, Jr. (Principal Financial and Accounting
Officer)
By: /s/ PAUL H. TURNER Director June 25, 1998
---------------------------------
Paul H. Turner
By: /s/ JOHN W. JORDAN II Director June 25, 1998
---------------------------------
John W. Jordan II
By: Director
---------------------------------
Adam E. Max
By: /s/ MICHAEL R. GAULKE Director June 25, 1998
---------------------------------
Michael R. Gaulke
By: Director
---------------------------------
Edward Post
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders of
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 24, 1998
40
<PAGE>
STANDARD INDUSTRIAL SUBLEASE
American Industrial Real Estate Association
1. PARTIES. This Sublease, dated, for reference purposes only, December 8,
1997, is made by and between ROCKSHOX, Inc., a Delaware Corporation (herein
called "Sublessor") and First American Records Management, Inc., a Delaware
corporation (herein called "Sublessee")
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, those certain premises situated in the County of
Santa Clara State of California, commonly known as 2250 Zanker Road, Suite H,
San Jose, CA 95131 containing approximately 15,043 square feet of warehouse
space and more particularly described in the Master Lease (as hereinafter
defined).
Said premises are hereinafter called the "Premises".
3. TERM.
3.1 TERM. The term of this Sublease shall be for thirty-one (31) months
commencing on January 1, 1998 and ending on July 31, 2000 unless sooner
terminated pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to Sublessee
on said date. Sublessor shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Sublease or the obligations of
Sublessee hereunder or extend the term hereof, but in such case Sublessee
shall not be obligated to pay rent until possession of the Premises tendered
to Sublessee; provided, however, that if Sublessor shall not have delivered
possession of the Premises within 30 days from said commencement date.
Sublessee may, at Sublessee's option, by notice in writing to Sublessor within
ten (10) days thereafter, cancel this Sublease, in which event the parties
shall be discharged from all obligations thereunder. If Sublessee occupies the
Premises prior to said commencement date, such occupancy shall be subject to
all provisions hereof, such occupancy shall not advance the termination date
and Sublessee shall pay rent for such period at the initial monthly rates set
forth below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $8,274, in advance, on the first day of each month of the
term hereof. Sublessee shall pay Sublessor upon the execution hereof $8,274
as rent for first month. Rent shall increase for the remainder of the term
hereof to $8,575 commencing February 1, 1999. Sublessee shall also pay all
Additional Rents as such term is defined in the Master Lease. Rent for any
period during the term hereof which is for less than one month shall be a
prorata portion of the monthly installment. Rent shall be payable in lawful
money of the United States to Sublessor at the address stated herein or to
such other persons or at such other places as Sublessor may designate in
writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $8,270 as security for Sublessee's faithful performance of Sublessee's
obligations hereunder. If Sublessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this
Sublease. Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit. Sublessee shall within ten (10) days after written
demand therefore deposit cash with Sublessor in an amount sufficient to
restore said deposit to the full amount hereinabove stated and Sublessee's
failure to do so shall be a material breach of this Sublease. Sublessor shall
not be required to keep said deposit separate from its general accounts. If
Sublessee performs all of Sublessee's obligations hereunder, said deposit, or
so much thereof as has not theretofore been applied by Sublessor, shall be
returned, without payment of interest or other increment for its use to
Sublessee (or at Sublessor's option, to the last assignee, if any, of
Sublessee's interest hereunder) at the expiration of the term hereof, and
after Sublessee has vacated the Premises. No trust relationship is created
herein between Sublessor and Sublessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for general
warehousing for storage of, non-hazardous, legal items in accordance with the
Master Lease and for no other purposes.
6.2 COMPLIANCE WITH LAW.
(a) Sublessor warrants to Sublessee that to Sublessor's actual
knowledge the Premises, in its existing state, but without regard to the use
for which Sublessee will use the Premises, does not violate any applicable
building code regulation or ordinance at the time that this Sublease is
executed in the event that it is determined that this warranty has been
violated, then it shall be the obligation of the Sublessor, after written
notice from Sublessee, to promptly, at Sublessor's sole cost and expense,
rectify any such violation. In the event that Sublessee does not give to
Sublessor written notice of the violation of this warranty within 60 calendar
days shall from the commencement of the term of this Sublease, it shall be
conclusively deemed that such violation did not exist and the correction of the
same shall be the obligation of the Sublessee.
(b) Except as provided in paragraph 6.2(a). Sublessee shall, at
Sublessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by
Sublessee of the Premises. Sublessee shall not use or permit the use of the
Premises in any manner that will tend to create waste or nuisance or, if
there shall be more than one tenant of the building containing the Premises,
which shall tend to disturb such other tenants.
6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a)
Sublessee hereby accepts the Premises in their condition existing as of the
date of the execution hereof, subject to all applicable zoning, municipal,
county, federal and state laws, ordinances, and regulations governing and
regulating the use of the Premises, and accepts this Sublease subject
thereto and to all matters disclosed thereby and by any exhibits attached
hereto. Sublessee acknowledges that neither Sublessor nor Sublessor's agents
have made any representation or warranty as to the suitability of the
Premises for the conduct of Sublessee's business or any other representation
or warranty not expressly made by Sublessor to Sublessee in writing in this
Sublease, and without reference.*
7. MASTER LEASE
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exibit 1, dated July 26, 1995, and Amendment thereto dated
January 14, 1997, wherein ROCKSHOX, Inc. is the lessee and Northwestern
Mutual Life Insurance Company is the lessor, hereinafter referred to as the
"Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions
of the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this
Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the
Master Lease the word "Lessee" is used it shall be deemed to mean the
Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with,
for the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom. None.
- -----------------------------
* to the Master Lease.
(c) American Industrial Real Estate Association 1978
<PAGE>
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations.''
The obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the ""Sublessor's Remaining Obligations.''
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, and costs arising out of Sublessee's failure to comply with
or perform Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless of and from all liability, judgments, costs, damages, claims or
demands arising out of Sublessor's failure to comply with or perform
Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that to Sublessor's actual knowledge, no default
exists on the part of any party to the Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to terms of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the rents
accruing under this Sublease. However, if Sublessor shall default in the
performance of its obligations to Master Lessor then Master Lessor may, at
its option, receive and collect, directly from Sublessee, all rent owing and
from the Sublessee be deemed liable to Sublessee for any failure of the
Sublessor to perform and comply with Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee,
upon receipt of any written notice from the Master Lessor stating that a
default exists in the performance of Sublessor's obligations under the Master
Lease, to pay to Master Lessor the rents due and to become due under the
Sublease. Sublessor agrees that Sublessee shall have the right to rely upon
any such statement and request from Master Lessor, and the Sublessee shall pay
such rents to Master Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Sublessor to the contrary and Sublessor shall have no right or claim against
Sublessee for any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
the prior written consent of Master Lessor and Sublessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain
the consent of Master Lessor to any subletting by Sublessor then, this
Sublease shall not be effective unless Master Lessor signs this Sublease
thereby giving its consent to this Subletting.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations
or alter the primary liability of Sublessor to pay the rent and perform and
comply with all of the obligations of Sublessor to be performed under the
Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or
any one else liable under the Master Lease shall not be deemed a waiver by
Master Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors
or any one else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(f) In the event that Sublessor shall default in its
obligations under the Master Lease, then Master Lessor at its option and
without being obligated to do so may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obligations of
Sublessor under this Sublease from the time of the exercise of said option to
termination of this Sublease but Master Lessor shall not be liable for any
prepaid rents nor any security deposit paid by Sublessee, nor shall Master
Lessor be liable for any other defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor at the end of this document
shall constitute its consent to the terms of this Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations
to be performed by Sublessor or Master Lessor and that the Master Lease is in
full force and effect.
9.6 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall
have the right to cure any default of Sublessor described in any notice of
default within ten days after service of such notice of default on Sublessee.
If such default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to
Cushman & Wakefield (agent for Sublessee) a licensed real estate broker,
(herein called ""Broker''), the sum of $7,500 for brokerage services rendered
by Broker to Sublessor in this transaction.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action on trial and appeal, shall be entitled to
his reasonable attorney's fees and costs to be paid by the losing party as
fixed by the Court. The provision of this paragraph shall inure to the
benefit of the Broker named herein who seeks to enforce a right hereunder.
<PAGE>
12. ADDITIONAL PROVISIONS. [If there are no additional provisions draw a
line from this point to the next printed word after the space left herein. If
there are additional provisions place the same here.]
The Rider attached hereto is incorporated herein by reference.
RIDER TO STANDARD INDUSTRIAL SUBLEASE
DATED DECEMBER 8, 1997
Notwithstanding anything to the contrary contained in this Sublease or
in the Master Lease:
1. Any installment of rent or any other charge payable to Sublessor
shall be subject to paragraph 3.03 of the Master Lease.
2. No tenant improvements shall be constructed at the Premises for
Sublessee, but Sublessor shall repair any material damages for which Sublessee
is responsible under the Master Lease at no cost to the Sublessee on or
before January 31, 1998, so long as Sublessee provides Sublessor reasonable
access to the Premises to perform such work. Such repair shall be performed
in such a manner as to minimize any interruption or interference with
Sublessee's possession of the Premises or Sublessee's business operations.
Sublessor represents and warrants that it will deliver the Premises to
Sublessee with the heating, ventilation, electrical, plumbing, lighting,
sprinkler, and door systems in operating condition. Sublessor represents and
warrants that all repairs shall be carried out in a workmanlike manner and
will conform to industry standards for such repairs and such repairs shall be
in compliance with all state and local laws or ordinances and that Sublessor
has secured Lessor's written permission and complied with each of the
requirements of Section 11 of the Master Lease.
3. Prior to taking possession of the Premises, Sublessee shall obtain
and provide copes to Sublessor of policies of insurance with respect to its
sublease and use of the Premises, all in form and substance, and issued by
companies, as Sublessor shall reasonably require.
4. Sublessor shall have no obligation or liability to Sublessee, to
repair, rebuild, or replace the Premises or otherwise, upon any damage or
destruction to, or condemnation of, all or any part of the Premises or the
property of which the Premises are a part. To the extent of any rental
abatement, rent shall be abated under this Sublease.
5. Sublessee must vacate the Premises at the expiration or earlier
termination of the Sublease, and shall have no right to continue possession
thereof unless Sublessor shall have first been released (to Sublessor's
satisfaction) from all liability under the Master Lease and the Sublease.
6. As between Sublessor and Sublessee, Section 33.01 and 3.04 of the
Master Lease and Special Provisions 44 and 45 of the Master Lease, shall not
apply. Sublessor and Sublessee agree that rent includes all payments for
existing improvements.
7. Prior to the Commencement Date, but after providing to Sublessor
the policies of insurance provided in paragraph 3 above, Sublessee shall be
permitted to store files at the Premises in an area mutually agreed upon by
Sublessor and Sublessee, without payment of rent or Additional Rent. Sublessee
hereby agrees to indemnify, defend, and hold Sublessor and Master Lessor
harmless from and against any and all liability, judgments, costs, damages,
claims, and demands, including reasonable attorney's fees and costs arising
out of such activity.
IF THIS SUBLEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION RELATING THERETO.
Executed at ROCKSHOX, INC., a Delaware corporation
---------------------- ------------------------------------------
on By [illegible]
------------------------------- ----------------------------------------
address Title: CFO
-------------------------- ------------------------------------
- --------------------------------- "Sublessor" (Corporate Seal)
Executed at First American Records Management, Inc.,
--------------------- ------------------------------------------
on a Delaware corporation
------------------------------- By /s/ David Gesinger
address ----------------------------------------
-------------------------- David Gesinger, VP
- ---------------------------------- By David Gesinger VP
---------------------------------------
"Sublessee (Corporate Seal)
Executed at
---------------------- ------------------------------------------
on By
------------------------------- ----------------------------------------
address By
-------------------------- ----------------------------------------
- --------------------------------- "Master Lessor" (Corporate Seal)
Executed at
---------------------- ------------------------------------------
on
------------------------------- ------------------------------------------
address
-------------------------- ------------------------------------------
- --------------------------------- "Guarantors"
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.
<PAGE>
ROCKSHOX, INC.
1998 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <S>
SECTION 1 PURPOSE OF PLAN; DEFINITIONS. . . . . . . . . . . . . . . . . . A-1
SECTION 2 ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . A-3
SECTION 3 STOCK SUBJECT TO PLAN . . . . . . . . . . . . . . . . . . . . . . A-4
SECTION 4 ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5
SECTION 5 STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . A-5
SECTION 6 AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . A-7
SECTION 7 UNFUNDED STATUS OF PLAN . . . . . . . . . . . . . . . . . . . . . A-8
SECTION 8 GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . A-8
SECTION 9 EFFECTIVE DATE OF PLAN. . . . . . . . . . . . . . . . . . . . . . A-9
SECTION 10 TERM OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
</TABLE>
<PAGE>
ROCKSHOX, INC.
1998 STOCK OPTION PLAN
SECTION 1
PURPOSE OF PLAN; DEFINITIONS
1.1 PURPOSE. The purpose of the Plan is to reinforce the
long-term commitment to the Company's success of those officers (including
officers who are directors of the Company), other employees, independent
directors, consultants and advisors of the Company who are or will be
responsible for such success; to facilitate the ownership of the Company's
stock by such individuals, thereby reinforcing the identity of their
interests with those of the Company's stockholders; and to assist the Company
in attracting and retaining officers and other employees, directors,
consultants and advisors with experience and ability. The Plan was originally
approved by the Board in February 1998, and certain grants of Stock Options
were made at such time. However, the Company subsequently determined that it
was in the best interests of the Company, its employees, non-employee
directors and consultants to attain shareholder approval of the Plan so that
(i) the Plan would meet the requirements under Section 162(m) of the Code and
(ii) Incentive Stock Options may be granted under the Plan.
1.2 DEFINITIONS. Wherever the masculine gender is used it shall
include the feminine, and where a singular pronoun is used, it shall include
the plural, unless the context clearly indicates otherwise. For purposes of
the Plan, the following terms shall be defined as set forth below:
(a) "ADMINISTRATOR" means the Board, or if the Board does not
administer the Plan, the Committee in accordance with Section 2.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as
amended from time to time, or any successor thereto.
(d) "COMMITTEE" means the Compensation Committee of the Board
other than directors who are not Non-Employee Directors, including such
additional individuals as the Board shall designate in order to fulfill the
Non-
1
<PAGE>
Employee Director requirement of Section 162(m) of the Code and Rule 16b-3 as
promulgated by the Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934 (the "Act"), and as such Section
and Rule may be amended from time to time, or any successor definition
adopted by the Commission, or any other Committee the Board may subsequently
appoint to administer the Plan. The Committee shall be composed entirely of
individuals who are Non-Employee Directors. If at any time the Board shall
not administer the Plan, then the functions of the Board specified in the
Plan shall be exercised by the Committee.
(e) "COMPANY" means ROCKSHOX, Inc., a Delaware corporation
(or any successor corporation).
(f) "EFFECTIVE DATE" shall mean the date provided pursuant to
Section 12.
(g) "ELIGIBLE PERSON" means any person eligible to
participate in the Plan pursuant to Section 4.
(h) "FAIR MARKET VALUE" means, as of any given date, with
respect to any awards granted hereunder (A) the closing price of a share of
the Company's Stock on the principal exchange on which shares of the
Company's Stock are then trading, if any, on the trading day previous to such
date, or, if shares were not traded on the trading day previous to such date,
then on the next preceding trading day during which a sale occurred; or (B)
if such Stock is not traded on an exchange but is quoted on Nasdaq or a
successor quotation system, (1) the last sales price (if the Company's Stock
is then listed as a National Market Issue under the Nasdaq National Market
System) or (2) the mean between the closing representative bid and asked
prices (in all other cases) for the Company's Stock on the trading day
previous to such date as reported by Nasdaq or such successor quotation
system; or (C) if such Stock is not publicly traded on an exchange and not
quoted on Nasdaq or a successor quotation system, the mean between the
closing bid and asked prices for the Company's Stock, on the day previous to
such date, as determined in good faith by the Committee; or (D) if the
Company's Stock is not publicly traded, the fair market value established by
the Committee acting in good faith.
2
<PAGE>
(i) "INCENTIVE STOCK OPTION" means any Stock Option intended
to be designated as an "incentive stock option" within the meaning of Section
422 of the Code.
(j) "NON-EMPLOYEE DIRECTOR" shall have the meaning set forth
in Section 162(m) of the Code and Rule 16b-3 of the Act, and as such Section
and Rule may be amended from time to time, or any successor definition
adopted by the Commission.
(k) "NON-QUALIFIED STOCK OPTION" means any Stock Option that
is not an incentive stock option within the meaning of Section 422 of the
Code.
(l) "PARTICIPANT" means any Eligible Person selected by the
Administrator, pursuant to the Administrator's authority in Section 2 below,
to receive grants of Stock Options.
(m) "PLAN" means the ROCKSHOX, INC. 1998 Stock Option Plan.
(n) "STOCK" means the Common Stock of the Company, par value
$.01 per share.
(o) "STOCK OPTION" means any option to purchase shares of
Stock granted pursuant to Section 5.
SECTION 2
ADMINISTRATION
2.1 ADMINISTRATOR. The Plan shall be administered by the Board or
by the Committee, which shall be appointed by the Board and which shall serve
at the pleasure of the Board, in accordance with the requirements of Section
162(m) of the Code (but only to the extent necessary to maintain
qualification of the Plan under Section 162(m) of the Code) and, to the
extent applicable, Rule 16b-3 of the Act.
3
<PAGE>
2.2 DUTIES AND POWERS OF ADMINISTRATOR. The Administrator shall
have the power and authority to grant Stock Options to Eligible Persons,
consultants and advisors to the Company, pursuant to the terms of the Plan.
In particular, the Administrator shall have the authority:
(a) to select those employees, advisors, consultants,
officers and directors of the Company who shall be Eligible Persons;
(b) to determine whether and to what extent Stock Options are
to be granted hereunder to Eligible Persons;
(c) to determine the number of shares to be covered by each
such award granted hereunder;
(d) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(e) to determine the terms and conditions, not inconsistent
with the terms of the Plan, which shall govern all written instruments
evidencing the Stock Options; (f) to accelerate the date or
dates of exercise of any award granted hereunder;
(g) to reduce the exercise price of any Stock Option to the
then Fair Market Value, if the Fair Market Value of the Stock covered by such
Stock Option has declined since the date the Stock Option was granted; and
(h) in its discretion, to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable; to interpret the terms and provisions of
the Plan and any award issued under the Plan (and any agreements relating
thereto); and to otherwise supervise the administration of the Plan.
2.3 MAJORITY RULE. The Committee shall act by a majority of its
members in attendance at a meeting at which a quorum is present or by a
memorandum or other written instrument signed by all members of the Committee.
4
<PAGE>
2.4 INDEMNIFICATION. To the fullest extent permitted by law, each
of the members of the Board and the Committee and each of the directors,
officers and employees of the Company, shall be held harmless and be
indemnified by the Company for any liability, loss (including amounts paid in
settlement), damages or expenses (including reasonable attorneys' fees)
suffered by virtue of any determinations, acts or failures to act, or alleged
acts or failures to act, in connection with the administration of this Plan
so long as such person is not determined by a final adjudication to be guilty
of willful misconduct with respect to such determination, action or failure
to act.
SECTION 3
STOCK SUBJECT TO PLAN
3.1 NUMBER OF AND SOURCE OF SHARES. The total number of shares of
Stock reserved and available for issuance under the Plan shall be 300,000.
Such shares may consist, in whole or in part, of authorized and unissued
shares or treasury shares. The aggregate number of shares of Stock as to
which Stock Options may be granted to any individual during any calendar year
may not, subject to adjustment as provided in this Section 3, exceed 100% of
the shares of Stock reserved for the purposes of the Plan in accordance with
the provisions of this Section 3.
3.2 UNREALIZED AWARDS. To the extent that a Stock Option expires
or is otherwise terminated without being exercised such shares shall again be
available for issuance in connection with future awards under the Plan. If
any shares of Stock otherwise issuable under the Plan have been pledged as
collateral for indebtedness incurred by a Participant in connection with the
realization of any award hereunder, and such shares are returned to the
Company in satisfaction of such indebtedness, such shares shall again be
available for issuance in connection with future awards under the Plan.
3.3 ADJUSTMENT OF AWARDS. In the event of any merger,
reorganization, consolidation, recapitalization, stock dividend or other
change in corporate structure affecting the Stock, a substitution or
adjustment shall be made in (i) the kind and aggregate number of shares
reserved for issuance under the Plan and (ii) the kind, number and option
price of shares subject to outstanding Stock Options granted under the Plan,
as may be determined by the Administrator, in its sole
5
<PAGE>
discretion. Such other substitutions or adjustments shall be made respecting
awards hereunder as may be determined by the Administrator, in its sole
discretion. In connection with any event described in this paragraph, the
Administrator may provide, in its discretion, for the cancellation of any
outstanding awards and payment in cash or other property in exchange therefor.
SECTION 4
ELIGIBILITY
Officers (including officers who are directors of the Company),
other key employees of, independent directors, consultants and advisors to
the Company, who are responsible for or contribute to the management, growth
and/or profitability of the business of the Company, shall be eligible to be
granted Stock Options. The Participants under the Plan shall be selected from
time to time by the Administrator, in its sole discretion, from among the
Eligible Persons recommended by the senior management of the Company, and the
Administrator shall determine, in its sole discretion, the number of shares
covered by each award.
SECTION 5
STOCK OPTIONS
5.1 OPTION AWARDS. Any Stock Option granted under the Plan shall
be in such form as the Administrator may from time to time approve, and the
provisions of Stock Option awards need not be the same with respect to each
optionee. Recipients of Stock Options shall enter into a subscription and/or
award agreement with the Company, in such form as the Administrator shall
determine, which agreement shall set forth, among other things, the exercise
price of the option, the term of award agreement and provisions regarding
exercisability of the option granted thereunder.
The Stock Options granted under the Plan may be of two types:
(i) Non-Qualified Stock Options and (ii) Incentive Stock Options. More
than one option may be granted to the same optionee and be outstanding
concurrently hereunder.
Stock Options granted under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions as the Administrator shall deem desirable:
6
<PAGE>
5.2 The Administrator shall have the authority to grant any
officer or employee of the Company (including directors who are also officers
of the Company) Incentive Stock Options, or both types of Stock Options.
Directors who are not officers of the Company, consultants and advisors may
only be granted Non-Qualified Stock Options. To the extent that any Stock
Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option. More than one option may be granted to
the same optionee and be outstanding concurrently hereunder.
5.3 OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Administrator in its sole
discretion at the time of grant but shall not, in the case of Incentive Stock
Options, be less than 100% of the Fair Market Value of the Stock on such date
and shall not, in any event, be less than the par value (if any) of the
Stock. If an employee owns or is deemed to own (by reason of the attribution
rules applicable under Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company and an Incentive
Stock Option is granted to such employee, the option price of such Incentive
Stock Option (to the extent required by the Code at the time of grant) shall
be no less than 110% of the Fair Market Value of the Stock on the date such
Incentive Stock Option is granted.
5.4 OPTION TERM. The term of each Stock Option shall be fixed by
the Administrator, but no Stock Option shall be exercisable more than ten
years after the date such Stock Option is granted; PROVIDED, HOWEVER, that if
an employee owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) more than 10% of the combined voting power of all
classes of stock of the Company and an Incentive Stock Option is granted to
such employee, the term of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no more than five years
from the date of grant.
5.5 EXERCISABILITY. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined
by the Administrator at or after grant. The Administrator may provide, in
its discretion, that any Stock Option shall be exercisable only in
installments, and the Administrator may waive such installment exercise
provisions at any time in whole or in part based on such factors as the
Administrator may determine, in its sole discretion, including but not
limited to in connection with any "change in control" of the Company, as
defined in any stock option agreement.
7
<PAGE>
5.6 METHOD OF EXERCISE. Subject to Section 5.4 above, Stock
Options may be exercised in whole or in part at any time during the option
period, by giving written notice of exercise to the Company specifying the
number of shares to be purchased, accompanied by payment in full of the
purchase price in cash or its equivalent as determined by the Administrator.
As determined by the Administrator, in its sole discretion, payment in whole
or in part may also be made in the form of unrestricted Stock already owned
by the optionee having a Fair Market Value with an aggregate value on the
date of surrender equal to the purchase price of the shares as to which the
Stock Option shall be exercised. An optionee shall generally have the rights
to dividends and any other rights of a stockholder with respect to the Stock
subject to the option only after the optionee has given written notice of
exercise and has paid in full for such shares.
5.7 The Administrator may require the voluntary surrender of all
or a portion of any Stock Option granted under the Plan as a condition
precedent to the grant of a new Stock Option. Subject to the provisions of
the Plan, such new Stock Option shall be exercisable at the price, during
such period and on such other terms and conditions as are specified by the
Administrator at the time the new Stock Option is granted. Consistent with
the provisions of Section 162(m), to the extent applicable, upon their
surrender, Stock Options shall be canceled and the shares previously subject
to such canceled Stock Options shall again be available for grants of Stock
Options and other awards hereunder.
5.8 NON-TRANSFERABILITY OF OPTIONS. Unless otherwise determined
by the Administrator, no Stock Option shall be transferable by the optionee,
and all Stock Options shall be exercisable, during the optionee's lifetime,
only by the optionee.
5.9 TERMINATION OF EMPLOYMENT OR SERVICE. If an optionee's
employment with or service as a director, consultant or advisor to the
Company terminates by reason of death, Disability or for any other reason,
the Stock Option may thereafter be exercised to the extent provided in the
applicable subscription or award agreement, or as otherwise determined by the
Administrator.
5.10 ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent that
the aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of shares of Stock with respect to which Incentive
Stock Options granted to an Optionee under this Plan and all other option
plans of the Company become exercisable for the first time by the Optionee
during any calendar year
8
<PAGE>
exceeds $100,000, such Stock Options shall be treated as Non-Qualified Stock
Options. The option price per share of Stock purchasable under a Stock Option
shall be determined by the Administrator in its sole discretion at the time
of grant.
SECTION 6
AMENDMENT AND TERMINATION
The Board may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair the
rights of a Participant under any award theretofore granted without such
Participant's consent, or that without the approval of the stockholders (as
described below) would:
(i) except as provided in Section 3, increase the
total number of shares of Stock reserved for the purpose of the
Plan;
(ii) change the class of directors, officers,
employees, consultants and advisors eligible to participate in the
Plan; or
(iii) extend the maximum option period under paragraph
(2) of Section 5 of the Plan.
Notwithstanding the foregoing, stockholder approval under this
Section 8 shall only be required at such time and under such circumstances as
stockholder approval would be required under Section 162(m) of the Code or
other applicable law, rule or regulation with respect to any material
amendment to any employee benefit plan of the Company.
The Administrator may amend the terms of any award theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without his or her
consent.
9
<PAGE>
SECTION 7
UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant by
the Company, nothing contained herein shall give any such Participant any
rights that are greater than those of a general creditor of the Company.
SECTION 8
GENERAL PROVISIONS
8.1 The Administrator may require each person purchasing shares
pursuant to a Stock Option to represent to and agree with the Company in
writing that such person is acquiring the shares without a view to
distribution thereof. The certificates for such shares may include any legend
which the Administrator deems appropriate to reflect any restrictions on
transfer.
All certificates for shares of Stock delivered under the Plan shall
be subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Stock is
then listed, and any applicable federal or state securities law, and the
Administrator may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
8.2 Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may
be either generally applicable or applicable only in specific cases. The
adoption of the Plan shall not confer upon any employee, consultant or
advisor of the Company any right to continued employment with the Company, as
the case may be, nor shall it interfere in any way with the right of the
Company to terminate the employment or service of any of its employees,
consultants or advisors at any time.
8.3 Each Participant shall, no later than the date as of which the
value of an award first becomes includible in the gross income of the
Participant for federal income tax purposes, pay to the Company, or make
arrangements
10
<PAGE>
satisfactory to the Administrator regarding payment of, any Federal, state,
or local taxes of any kind required by law to be withheld with respect to the
award. The obligations of the Company under the Plan shall be conditional on
the making of such payments or arrangements, and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Participant.
8.4 No member of the Board or the Administrator, nor any officer
or employee of the Company acting on behalf of the Board or the
Administrator, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Administrator and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted
by law, be fully indemnified and protected by the Company in respect of any
such action, determination or interpretation.
SECTION 9
EFFECTIVE DATE OF PLAN
The Plan will become effective (the "Effective Date") on August 20,
1998, the date the Company's stockholders formally approve the Plan.
SECTION 10
TERM OF PLAN
No Stock Option shall be granted pursuant to the Plan on or after
the tenth anniversary of the Effective Date, but awards theretofore granted
may extend beyond that date.
11
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (File Nos. 333-12945 and 333-47353) of ROCKSHOX, INC. of our report
dated April 24, 1998 on our audits of the consolidated financial statements and
the financial statement schedule of ROCKSHOX, Inc. as of March 31, 1997 and 1998
and for the three years in the period ended March 31, 1998, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
June 24, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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