<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-28822
ROCKSHOX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0396555
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Charcot Avenue, San Jose, California 95131
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (408) 435-7469
NO CHANGE
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
As of August 4, 1998 there were 13,761,147 shares of the registrant's common
stock outstanding.
This quarterly report on Form 10-Q contains 12 pages, of which this is page 1.
1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31, 1998. . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1997 . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1998 and 1997. . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks. . . 10
Part II: Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 11
(a) Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . 11
(b) Reports on Form 8-K
None
</TABLE>
2
<PAGE>
Part I: Item 1.
ROCKSHOX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 6,439 $ 10,554
Trade accounts receivable, net of allowance
of $1,087 and $1,037, respectively. . . . . 5,842 9,230
Inventories . . . . . . . . . . . . . . . . . 13,831 11,581
Prepaid expenses and other current assets . . 819 962
Income tax receivable . . . . . . . . . . . . 949 --
Deferred income taxes . . . . . . . . . . . . 4,539 4,539
--------- ----------
Total current assets. . . . . . . . . . . . 32,419 36,866
Property, plant and equipment, net . . . . . . . . 16,433 15,224
Other assets, net. . . . . . . . . . . . . . . . . 190 169
--------- ----------
Total assets. . . . . . . . . . . . . . . . . $ 49,042 $ 52,259
--------- ----------
--------- ----------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 5,924 $ 5,869
Other accrued liabilities . . . . . . . . . . 8,830 8,625
--------- ----------
Total current liabilities. . . . . . . . 14,754 14,494
Stockholders' equity
Common stock. . . . . . . . . . . . . . . . . 138 138
Additional paid-in capital. . . . . . . . . . 65,929 65,910
Distributions in excess of net book value . . (45,422) (45,422)
Retained earnings . . . . . . . . . . . . . . 13,643 17,139
--------- ----------
Total stockholders' equity . . . . . . . . 34,288 37,765
--------- ----------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . . . $ 49,042 $ 52,259
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
Part I: Item 1.
ROCKSHOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1998 1997
--------------- --------------
<S> <C> <C>
Net sales ............................. $ 13,895 $ 24,706
Cost of sales ......................... 13,661 16,060
--------- ---------
Gross profit ........................ 234 8,646
Selling, general and administrative
expense ............................. 3,929 2,963
Research, development and engineering
expense ............................. 1,298 1,309
--------- ---------
Operating expenses .................. 5,227 4,272
--------- ---------
Income (loss) from operations ..... (4,993) 4,374
Interest income ....................... 138 193
--------- ---------
Income (loss) before income taxes . (4,855) 4,567
Provision for (benefits from) income
taxes ............................... (1,359) 1,667
--------- ---------
Net income (loss) ................. $ (3,496) $ 2,900
--------- ---------
---------
Net income (loss) per share -
basic ........................... $ (0.25) $ 0.21
--------- ---------
--------- ---------
Shares used in per share calculations -
basic ............................... 13,761 13,642
--------- ---------
--------- ---------
Net income (loss) per share -
diluted ............................. $ (0.25) $ 0.21
--------- ---------
--------- ---------
Shares used in per share calculations -
diluted ............................. 13,761 14,105
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
Part I: Item 1.
ROCKSHOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . $ (3,496) $ 2,900
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . 1,555 869
Provision for doubtful accounts. . . . . . . 200 ---
Provision for excess & obsolete
inventories. . . . . . . . . . . . . . . . 498 ---
Changes in operating assets and liabilities:
Trade accounts receivable. . . . . . . . . 3,188 (3,730)
Inventories. . . . . . . . . . . . . . . . (2,748) (1,780)
Prepaid expenses and other current
assets. . . . . . . . . . . . . . . . . . (806) 299
Accounts payable and accrued
liabilities . . . . . . . . . . . . . . . 260 4,853
------------- -----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . (1,349) 3,411
------------- -----------
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . (2,764) (3,884)
Other . . . . . . . . . . . . . . . . . . . . . (21) ---
------------- -----------
Net cash used in investing activities. . (2,785) (3,884)
------------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options . . . . 17 300
Tax benefits from disqualifying dispositions
of common stock. . . . . . . . . . . . . . . . 2 253
------------- -----------
Net cash provided by financing
activities. . . . . . . . . . . . . . 19 553
------------- -----------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . (4,115) 80
Cash and cash equivalents, beginning of period . . 10,554 14,747
------------- -----------
Cash and cash equivalents, end of period . . . . . $ 6,439 $ 14,827
------------- -----------
------------- -----------
Supplemental disclosure of non-cash transactions:
Income taxes paid. . . . . . . . . . . . . . . . $ --- $ 40
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
Part I: Item 1.
ROCKSHOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ROCKSHOX, INC. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending March 31,
1999. The unaudited condensed, consolidated interim financial statements
contained herein should be read in conjunction with the audited consolidated
financial statements and footnotes for the year ended March 31, 1998 included in
the Company's Annual Report on Form 10-K.
2. INVENTORIES
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . $ 9,017 $ 7,023
Finished goods. . . . . . . . . . . . . 4,814 4,558
------------- --------------
$ 13,831 $ 11,581
------------- --------------
------------- --------------
</TABLE>
3. EARNINGS PER SHARE AMOUNTS:
The Company has adopted the provisions of Statement of Financial Accounting
Standards 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.
6
<PAGE>
Part I: Item 1.
ROCKSHOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. EARNINGS PER SHARE AMOUNTS (continued):
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Reconciliation of net income (loss) available to
common stockholders used in basic and diluted per
share calculations:
(In thousands, except per share amounts)
Net income (loss) available to common
stockholders . . . . . . . . . $ (3,496) $ 2,900
--------- --------
--------- --------
Reconciliation of shares used in basic
and diluted per share calculations:
Basic net income (loss) per share:
Weighted average shares of common
stock outstanding . . . . . . . . . 13,761 13,642
--------- --------
Shares used in basic net income (loss)
per share calculation . . . . . . . . . 13,761 13,642
--------- --------
--------- --------
Diluted net income (loss) per share:
Weighted average shares of common
stock outstanding . . . . . . . . . 13,761 13,642
Dilutive effect of stock options . . --- 463
--------- --------
Shares used in diluted net income (loss) per
share calculation . . . . . . . . . 13,761 14,105
--------- --------
--------- --------
Income (loss) per share before extraordinary item -
basic . . . . . . . . . . . . . . $ (0.25) $ 0.21
--------- --------
--------- --------
Income (loss) per share before extraordinary item -
diluted . . . . . . . . . . . . . . $ (0.25) $ 0.21
--------- --------
--------- --------
</TABLE>
4. OPTION REPRICING
During the quarter ended June 30, 1998, the Board of Directors of the
Company approved the cancellation of outstanding stock options for
non-executives with an exercise price ranging from $13.06 to $15.14 per share
and the re-grant of options to purchase an equivalent number of shares at
$4.75 per share. A total of 252,975 options were canceled and re-granted.
5. CONTINGENCIES
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.
7
<PAGE>
Part I: Item 1.
6. RESTRUCTURING CHARGE ACCRUAL
During the fourth quarter of fiscal 1998, the Company announced a
restructuring plan which included a workforce reduction of approximately 40
employees and the consolidation of the Company's facilities. The Company
expects to complete the restructuring during fiscal 1999.
During the first quarter of fiscal 1999, the Company has made payments of
$45,000 against the provision of $1.7 million set aside for this restructuring
program.
7. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, (SFAS 130), "Reporting
Comprehensive Income," which specifies the computation, presentation and
disclosure requirements for comprehensive income. The Company implemented
SFAS 130 during the first quarter of fiscal 1999. There was no impact on the
Company's financial position, results of operations or cash flows.
Comprehensive income and net income are the same.
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). It is effective for
fiscal years beginning after December 15, 1997, and requires interim
reporting in the second year of application.
The Company does not expect any material impact on the financial
statements from this pronouncement.
8
<PAGE>
Part I: Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Net sales. Net sales for the quarter ended June 30, 1998 decreased by
43.8% to $13.9 million from $24.7 million for the corresponding period of the
prior year. For the quarter ended June 30, 1998, OEM sales decreased by 34.7%
to $11.5 million compared to $17.6 million in the corresponding period of the
prior year. This decrease was principally due to volume reductions from certain
domestic and international OEM customer's reflecting soft demand for mountain
bikes, as well as delays in the start up of many OEM customer's 1999 model year.
Sales to the retail accessory market in the quarter ended June 30, 1998
decreased by 66.3% to $2.5 million compared to $7.1 million in the corresponding
period of the prior year due to a continuing softness in the overall domestic
and international mountain biking market.
Gross margin. Gross margin (gross profit as a percentage of net sales) for
the quarter ended June 30, 1998 decreased to 1.7% compared to 35% for the
corresponding period of the prior year. The decrease in gross margin
principally resulted from fixed overhead costs not being fully absorbed due to
lower than anticipated sales and certain start-up expenses associated with the
change over to the 1999 product model year, which occurred during the quarter
ended June 30, 1998. Included within the fixed overhead costs were depreciation
& amortization charges, which increased $674,000 to $1.4 million (or
approximately 9.9% of net sales).
Selling, general and administrative expense. Selling, general and
administrative ("SG&A") expense for the quarter ended June 30, 1998 increased by
32.6% to $3.9 million (or approximately 28.3% of net sales) compared to $3.0
million (or approximately 12% of net sales) in the corresponding period of the
prior year. This increase can be attributed to increases in certain marketing
expenses, increased spending to support the new software implementation and an
increase in the bad debt reserve.
Research, development and engineering expense. Research, development and
engineering ("R&D") expense for the quarter ended June 30, 1998 remained flat at
$1.3 million or approximately 9.3% of net sales, compared to approximately 5.3%
of net sales in the corresponding quarter of the prior year.
Interest income. For the quarter ended June 30, 1998 the Company
recognized interest income of $138,000 compared $193,000 in the corresponding
period of the prior year. The decrease was principally due to lower cash
balances.
Income tax (benefit) expense. The Company's effective tax rate for the
first quarter of fiscal 1999 was a benefit of 28% compared to an expense of
36.5% for the first quarter of fiscal 1998. The change was due to the company
recognizing net operating loss carry backs for which they expect to receive
refunds.
Liquidity and Capital Resources:
For the three months ended June 30, 1998, net cash used in operating
activities was $1.3 million, which consisted of net loss of $3.5 million
increased by non-cash charges for depreciation and amortization of $1.6 million,
partially offset by a net increase in operating assets and liabilities of
$592,000.
Net cash used in investing activities was $2.8 million for the three months
ended June 30, 1998, which consisted of acquisitions of property and equipment.
Net cash provided by financing activities was $19,000, which consisted of
proceeds and tax benefits from the exercise of employee stock options.
9
<PAGE>
Part I: Item 2
At June 30, 1998, the Company had cash and cash equivalents of $6.4 million and
working capital of $17.7 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.
Certain statements made in this document constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other facts that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors are
discussed in detail in the Company's Annual Report on Form 10-K. Given these
uncertainties, prospective and current investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of
any revisions to any of the forward-looking statements contained in the
Annual Report on Form 10-K or this document.
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 is in the process of requesting Year
2000 compliance letters from significant suppliers and plans to request such
letters from significant 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
N/A
Part II: Other Information
Item 1. 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.
10
<PAGE>
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Form of Amended and Restated Certificate of Incorporation of
RockShox, Inc. *
3.2 Form of Amended and Restated Bylaws of RockShox, Inc. *
10.1 Sublease, dated July 9, 1998, between RockShox, Inc. and Media
Arts Group, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
- -------------------------------------------------------------------------------
* Previously filed with the Registration Statement on Form S-1 of RockShox Inc.
(Registration No. 333-8069).
SIGNATURES
11
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKSHOX, INC.
Dated: August 10, 1998 /s/ Gary Patten
-----------------------------
Gary Patten
Chief Financial Officer and
Duly Authorized Officer
12
<PAGE>
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(LONG-FORM TO BE USED WITH PRE-1996 AIR LEASES)
1. PARTIES. This Sublease, dated, for reference purposes only, June
15, 1998, is made by and between ROCKSHOX, INC., a Delaware corporation
("Sublessor") and Media Arts Group, Inc., a Delaware corporation
("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 including all
improvements therein, and commonly known by the street address of 346 Charcot
Avenue, City of San Jose, County of Santa Clara, State of California
consisting of approximately 35,512 square feet of gross leasable area and
more particularly described in the Master Lease (as hereinafter defined)
("PREMISES").
3. TERM.
3.1 TERM. The term of this Sublease shall be for thirty-two
(32) months and twelve (12) days commencing on August 20, 1998, and ending
on April 30, 2001 unless sooner terminated pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Sublessor agrees to use commercially
reasonable efforts to deliver possession of the Premises by the commencement
date. If, despite said efforts, Sublessor is unable to deliver possession as
agreed, Sublessor shall not be subject to any liability therefor, nor shall
such failure affect the validity of this Sublease. Sublessee shall not,
however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within
sixty days after the commencement date. Sublessee may, at its option, by
notice in writing within ten days after the end of such sixty day period,
cancel this Sublease, in which event the Parties shall be discharged from all
obligations hereunder. If such written notice is not received by Sublessor
within said ten day period, Sublessee's right to cancel shall terminate.
Except as otherwise provided, if possession is not tendered to Sublessee when
required and Sublessee does not terminate this Sublease, as aforesaid, any
period of rent abatement that Sublessee would otherwise have enjoyed shall
run from the date of delivery of possession and continue for a period equal
to what Sublessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts or omissions of Sublessee. If
possession is not delivered within 120 days after the commencement date, this
Sublease shall automatically terminate unless the Parties agree, in writing,
to the contrary.
4. RENT.
4.1 BASE RENT. Sublessee shall pay to Sublessor as Base Rent for
the Premises equal monthly payments of $21,307.20 in advance, on the first
day of each month of the term hereof; provided, however, that Sublessee shall
pay Sublessor upon the execution hereof $21,307.20 as Base Rent for the
period August 20, 1998, through September 19, 1998, and on September 1, 1998,
shall pay the Base Rent for the period September 20, 1998, through September
30, 1998, of $7,812.64. Base Rent for any period during the term hereof which
is for less than one month shall be a pro rata portion of the monthly
installment.
4.2 RENT DEFINED. All monetary obligations of Sublessee to
Sublessor under the terms of this Sublease (except for the Security Deposit)
are deemed to be rent ("RENT"). 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 $21,307.20 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 became 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 days after written demand
therefore forward to Sublessor an amount sufficient to restore said Deposit
to the full amount provided for herein 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 therefore been applied by Sublessor, shall be returned, without
payment of interest 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 AGREED USE. The Premises shall be used and occupied only for
uses permitted by the Master Lease, and for no other purpose.
Page 1 of 4
- -COPYRIGHT-1997 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION FORM SBL-1-3/97
<PAGE>
6.3 ACCEPTANCE OF PREMISES AND LESSEE. Sublessee acknowledges that:
(a) It has been advised to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance
with legal requirements, and their suitability for Sublessee's intended use,
(b) Sublessee has made such investigation as it deems necessary
with reference to such matters and assumes all responsibility therefor as the
same relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has
made any oral or written representations or warranties with respect to any
matters other than as expressly set forth in this Sublease, and without
reference to the Master Lease.
In addition, Sublessor acknowledges that:
(a) Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability to occupy
the Premises, and
(b) it is Sublessor's sole responsibility to investigate the
financial capacity and/or suitability of all proposed tenants.
7. MASTER LEASE
7.1 Sublessor is the lessee of the Premises by virtue of a
lease, hereinafter the "MASTER LEASE", a copy of which is attached hereto
marked Exhibit 1, dated March 26, 1996, together with Summary of Basic Lease
Terms and Exhibits A, E, F, H, I, and J attached thereto, and First Addendum
to Lease dated March 26, 1996, wherein AMB Property, L.P., a Delaware limited
partnership (successor in interest to AMB Property, L.P., a Delaware limited
partnership) is the lessor, hereinafter 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.
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 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 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.
Page 2 of 4
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<PAGE>
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, prior to July 15, 1998, Master Lessor
signs a consent to this Subletting.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent shall 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
anyone 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 anyone 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 Rent nor any Security Deposit paid by Sublessee, nor shall Master
Lessor be liable for any other Defaults of the Sublessor under the Sublease.
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.
11. ATTORNEY'S FEES. If any party 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.
12. ADDITIONAL PROVISIONS. [If there are no additional provisions, draw
a line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.] The Rider attached
hereto and of even date herewith is incorporated herein by reference.
Page 3 of 4
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<PAGE>
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
Executed at: San Jose CA ROCKSHOX, INC., a Delaware corporation
----------------- ----------------------------------------------
on: 7-9-98 By /s/ Charles E. Noreen CFO
-------------------------- --------------------------------------------
Address: 401 Chercot Ave By
--------------------- --------------------------------------------
"Sublessor" (Corporate Seal)
Executed at: MEDIA ARTS GROUP, INC., a Delaware corporation
----------------- ----------------------------------------------
on: By /s/ [Bud Peterson] CEO
-------------------------- --------------------------------------------
Address: By
--------------------- --------------------------------------------
"Sublessor" (Corporate Seal)
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,
700 SO. FLOWER ST., SUITE 600, LOS ANGELES, CA 90017. (213) 687-8777.
Page 4 of 4
- -COPYRIGHT-1997 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION FORM SBL-1-3/97
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<PAGE>
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