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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, 1999
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. [ ]
As of June 15, 1999, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $6,926,023.
As of June 15, 1999, 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 1999 Annual Meeting of Stockholders to be held on
August 24, 1999, are incorporated by reference in Part III hereof.
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<PAGE>
TABLE OF CONTENTS
ITEM DESCRIPTION
- ---- -----------
PART I
1 Business
2 Properties
3 Legal Proceedings
4 Submission of Matters to a Vote of Security Holders
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters
6 Selected Financial Data
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
7A Quantitative and Qualitative Disclosures About Market Risk
8 Financial Statements and Supplementary Data
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
10 Directors and Executive Officers of the Registrant
11 Executive Compensation
12 Security Ownership of Certain Beneficial Owners and Management
13 Certain Relationships and Related Transactions
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
<PAGE>
Unless the context indicates otherwise, when we refer to "we,"
"us," the "Company" or "RockShox," in this Annual Report on Form 10-K,
we are referring to 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 our fiscal
year. In 1995, we changed our fiscal year end from December 31 to March
31. This Annual Report on Form 10-K includes references to our registered
trademarks and brand names, 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
We are a worldwide leader in the design, manufacture and marketing
of high performance bicycle suspension products. Our 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.
For the 1999 model year, we offered fifteen front suspension forks,
including eight new models, four rear shocks, including a new lightweight
air sprung model, and two new suspension seat posts.
Approximately 85% of our sales in fiscal 1999 represented sales to
original equipment manufacturers ("OEMs"), such as Trek Bicycle Corp.
("Trek"), GT Bicycles Inc. ("GT") and Specialized Bicycle Components,
Inc.("Specialized"), which incorporate ROCKSHOX branded components as part
of new, fully-assembled mountain bikes sold worldwide. Our 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 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, rear
shocks, and seatposts based on elastomer technology or hydraulically
damped systems using coil or air springs. Our bicycle suspension systems
incorporate two functional components: a spring and a damper. The spring
function absorbs the impact of rough terrain and returns the suspension
device (fork, shock, or seatpost) to its original position after
compression. The damper also absorbs impact and moderates the movement of
the suspension device 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. The suspension seatpost provides
improved comfort and control for cyclists with bikes that are not equipped
with rear wheel suspension.
Every ROCKSHOX product 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
suspension device to move easily over small bumps, but not "bottom out" over
larger ones. The structural rigidity of ROCKSHOX suspension products improves
the rider's ability to control the bike, while low weight enhances overall
bicycle performance. Every ROCKSHOX product is covered by a one-year limited
warranty.
The 1999 models represent our broadest line of product offerings to
date. For the 1999 model year, we offered fifteen front suspension forks,
including eight new models, four rear shocks, including a new lightweight
air sprung model, and two new suspension seat posts. All of our current
products that were introduced prior to the current product year have
experienced model year modifications or upgrades since they were
originally introduced.
The following tables summarize our 1999 product offerings of front
forks and rear shocks:
FRONT FORKS
<TABLE>
<CAPTION>
Suggested
Typical Retail
Retail Price In Date of
Bike Price Accessory Suspension Original
1999 Model Point (1) Market Intended Use Technology Shipment (2)
- -------------- -------------- ------------- ------------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
JETT C $300-$400 Not offered Recreational Elastomer Spring May 1998
at retail System
JETT T2 $350-$475 $159 Recreational; Type 2 Spring May 1998
Moderate Terrain System
JETT XC $400-$625 $199 Cross-Country; HydraCoil May 1996
Moderate Terrain System
JUDY C $650-$800 Not offered Cross-Country; HydraCoil June 1996
at retail FreeRide System
JUDY XC $500-$800 $299 Cross-Country; HydraCoil September 1994
FreeRide System
JUDY SL $700-$1,000 Not offered Cross-Country; Cartridge September 1994
at retail Extreme Terrain
JUDY 100 $1,000-$1,500 $389 Cross-Country; HydraCoil June 1998
Extreme Terrain
JUDY XL $1,000-$1,500 Not offered Cross-Country; Cartridge September 1994
at retail Extreme Terrain
JUDY XLC $1,000-$1,500 $489 FreeRide HydraCoil September 1997
System
SID XC $800-$1,200 $549 Cross-Country Cartridge June 1997
SID SL $1,300-$1,600 $699 Cross-Country; Cartridge/ Air July 1997
Racing Spring
SID XL $1,500-$1,900 $749 FreeRide Cartridge/ Air July 1997
Spring
BOXXER $2,500+ $1,099 Pro Downhill Racing HydraCoil November 1997
RUBY SL $2,000+ $429 Road Training Type 2 Spring June 1997
System
RUBY Metro $300-$700 $189 Road Training HydraCoil August 1998
System
<CAPTION>
REAR SUSPENSION
Suggested
Typical Retail
Retail Price In Date of
Bike Price Accessory Suspension Original
1999 Model Point (1) Market Intended Use Technology Shipment (2)
- -------------- -------------- ------------- ------------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Deluxe $500-$1,200 Not offered Cross-County; Coil over June 1995
at retail Downhill hydraulic damper
Coupe Deluxe $700-$1,500 $159 Cross-Country; Coil over July 1996
Downhill hydraulic damper
Super Deluxe $2,000+ Not offered Cross-Country; Coil over July 1995
at retail Downhill Racing hydraulic damper
with oil
reservoir
SID Rear $1,200-$1,900 $269 Cross-Country; Cartridge/ Air July 1998
Spring
POST $1,200-$2,200 $119 Hardtail Elastomer May 1998
</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.
RESEARCH AND DEVELOPMENT
As of March 31, 1999, our product development activities, based in
San Jose and Santa Cruz, California, were supported by 28 professionals,
including 12 project engineers, using an array of sophisticated design and
analytical tools. Development for each major product line (e.g., SID,
JUDY, JETT, etc.) is headed by a senior level project engineer with
assistance from other engineers and technicians. In addition, we have an
ongoing advanced technologies program, which investigates new
technologies, materials and processes not utilized for current products.
We maintain a well-equipped test laboratory in San Jose, California
to collect data and test products prior to and after commercial
introduction. The test laboratory is staffed by a test engineer, two
technicians and managed by a Test Lab Supervisor, who conduct a variety of
performance tests, accelerated life tests and analysis on products and
components. In addition, we operate 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 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 our engineering, manufacturing,
marketing, quality, sourcing and customer service departments, is
established at the beginning of every development project. This
interdepartmental approach to product development reduces time to market
while significantly enhancing product quality.
Current areas of focus for product development include, among
others,
o research in the area of product design, materials and manufacturing
current products;
o investigation of potential new products and technologies;
o the introduction of products appropriately priced for a broad segment
of the mountain bike market; and
o the design of new products, including suspension seat posts and
suspension systems for trekking bikes.
Our future success will depend, in part, upon our 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 we will introduce any new products or, if introduced, that any such
products will be commercially successful.
Research and product development expenditures in fiscal years 1999,
1998 and 1997 were approximately $4.9 million, $4.9 million and $4.8
million, respectively.
MANUFACTURING
All manufacturing is done in our 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, we machine and
process 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 9 engineers and 14 technicians. Typically, we
bring certain machining operations in-house 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 our manufacturing
engineers and subcontractors.
As of March 31, 1999, manufacturing included approximately 181
non-unionized employees plus approximately 118 temporary hires. Additional
temporary employees are brought in during the peak building season from
June through January. We operate on two shifts throughout the year on some
product lines, and add 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 our product development test center.
We work closely with a variety of vendors to meet our production
needs, including machine shops, die casters, forging houses, tube
manufacturers and injection molders. Although we have established
relationships with our principal suppliers and manufacturing sources, we
do not currently have long-term contracts with any of our vendors, nor do
we currently have multiple vendors for all parts, tooling, supplies or
services critical to our manufacturing processes. Currently, all of our
major suppliers are based in the U.S. We continually review our vendor
relationships with regard to cost, delivery and quality. During fiscal
1999, we purchased approximately $6.6 million of components from our
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.
Our policy is to generally require firm purchase orders from
OEMs 60 days prior to shipment. As of March 31, 1999, our backlog
was approximately $6.2 million compared to $7.2 million at March 31, 1998.
We expect to fill all of our backlog orders 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.
As part of the vendor improvement program, the Company entered into a
supply agreement with a Taiwanese manufacturer in December 1998, which the
Company believes will lower costs and reduce lead times.
SALES AND DISTRIBUTION
Our 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, 1999, approximately 85% of our total net sales were to OEMs and
approximately 15% were to distributors and IBDs. OEM customers have become
increasingly important to us as bicycle suspension has evolved from an
accessory niche component into standard equipment found on higher quality
mountain bikes. The following table demonstrates the historical shift in
our customer base and product distribution:
Years Ended March 31,
--------------------------------------------------------
(in thousands) 1999 1998 1997
------------------ ------------------ ------------------
% of % of % of
Net Net Net Net Net Net
Sales Sales Sales Sales Sales Sales
--------- -------- --------- -------- --------- --------
OEMs............ $73,999 85% $77,633 76% $77,000 72%
Distributors
and IBDs...... 12,864 15% 24,570 24% 29,212 28%
--------- -------- --------- -------- --------- --------
Total..... $ 86,863 100% $102,203 100% $106,212 100%
========= ======== ========= ======== ========= ========
Management believes that our 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 our strong brand name, we believe that OEMs
also choose ROCKSHOX for product innovation, reliability and quality.
We currently sell to over 240 OEM accounts worldwide. We have
substantial export sales, a significant portion of which includes 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 our product line for the coming model year.
Typically, we learn between April and June if our 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 mostly 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 our
fiscal year and are principally comprised of OEM reorders, which we
believe 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 our fiscal
year (August and September) and sales to dealers peaking during the
following March and April. We currently have 4 distributors in the
United States, all of whom are owned by OEM customers, and approximately
60 additional distributors worldwide. Management believes that sales of
our products through OEM-owned distributors are an important revenue
source for OEMs and further strengthen our relationships with our major
customers. Distributors purchase ROCKSHOX products for resale to IBDs and
also provide worldwide servicing and marketing support for all of our
products. In the U.S., we generally sell directly to IBDs product
quantities too small for third-party distributors to handle.
As of March 31, 1999 we had approximately 41 employees in sales and
customer service functions. Our principal sales activities are based in
San Jose, California. In addition, we have a sales representative office
with 3 contract employees based in Bern, Switzerland. Our 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 1999, approximately 62% of our sales represented sales to
our 10 largest customers, several of which purchase product as both an OEM
customer and a distributor. Sales to two customers accounted for 17% and
16% of our net sales in fiscal 1999. At March 31, 1999, our 3 OEM
customers with the largest accounts receivable balances accounted for
approximately 44% of our accounts receivable. As of March 31, 1999, we had
no long-term contracts with any of our customers.
MARKETING
Management believes that our brand image, in combination with
the performance features of our products, is an important element in the
consumer's decision to purchase ROCKSHOX suspension as an accessory
product and that our OEM customers recognize the strength of the ROCKSHOX
brand name as a contributing factor in the consumer's choice of mountain
bikes.
We promote and maintain our 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. Our marketing department oversees all aspects of the
promotion of our products and brand name.
The principal user of our products is the mountain bike enthusiast
between 19 and 34 years of age. To appeal to this market, we emphasize the
high performance features of our products as well as our affinity with the
mountain biking culture. The goal of our 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 our research and product development efforts as
well as our marketing strategy. We believe that the association of
our products with successful racers enhances our product development
efforts as well as increases consumer awareness of and demand for ROCKSHOX
suspension products. We currently co-sponsor approximately 20 world-class
and over 70 junior and amateur race teams, many of which also have
affiliations with OEMs. Our sponsorship agreements with racing teams
generally are for a one-year term, and provide for a retainer plus
contingent performance payments. We also provide free product and
technical support for sponsored racers, including access to our 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 us and use our products on terms we deem acceptable, or that
we will be able to attract new mountain bike racing teams to use our
products in the future.
We advertise our products in a variety of U.S. and international
consumer and trade bicycle publications, including BICYCLING, BIKE,
CATALYST COMMUNICATIONS, SUPER SALE AND CYCLING GUIDE, DIRT RAG, MBG
GUIDE, MOUNTAIN BIKE, MOUNTAIN BIKE ACTION, MOUNTAIN BIKING, OBSERVED
TRIALS, VELO NEWS and BICYCLE RETAILER, as well as on the World Wide Web.
Our goal is to expand awareness of the ROCKSHOX brand name and to support
product line segmentation with advertising campaigns built around the SID,
JUDY, JETT, and other product lines. We also seek to increase ROCKSHOX's
editorial exposure in bicycle print media by working closely with magazine
editors in the U.S. and Europe. Our focus on editorial content has helped
maintain high visibility for the ROCKSHOX brand name and our products.
We currently support our 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 our products. Materials are
generally provided at cost or for free to distributors and IBDs. We also
maintain a strong presence at national and international tradeshows. As
part of our retail marketing efforts, we market a line of mountain bike
lifestyle clothing. 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.
Sales and marketing expenditures totaled approximately $5.3 million,
$6.2 million and $4.6 million in fiscal years 1999, 1998 and 1997,
respectively.
COMPETITION
The markets for bicycle components, in general, and bicycle
suspension products, in particular, are highly competitive. We compete
with other bicycle component companies that produce suspension products
for sale to OEMs, distributors and IBDs as well as with bicycle OEMs who
produce their own line of suspension products for their own use and for
sale through distributors and IBDs.
We compete 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"), and SR Suntour USA, Inc. We also compete with several
component companies that manufacture rear shocks, including, among others,
Fox Factory, Inc., RST, Risse Racing Technology, Inc., Amp, Marzocchi and
Girvin, Inc. We believe that we currently have 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") is the only major OEM that has its own brand of
suspension products, although Cannondale uses ROCKSHOX products on certain
bike models. Cannondale also makes its suspension products available to
the retail accessory market.
In order to build or retain its market share, we 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 us 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 us. 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. We 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, our products.
INTELLECTUAL PROPERTY
We rely on a combination of patents, trademarks, trade
names, licensing arrangements, trade secrets, know-how and proprietary
technology in order to secure and protect our intellectual property
rights. Several patents have been issued covering aspects of many of our
suspension products in the United States and abroad. None of the patents
that we are currently using to enforce our property rights have an
expiration date before 2010. There can be no assurance, however, that our
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.
We believe that, among other things, our brand name, "ROCKSHOX,"
offers us a significant competitive advantage. We hold several trademark
registrations in the United States and abroad for the ROCKSHOX mark and
other marks in connection with many of our products. We 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 our marks, or that such third parties will not be entitled to
use such marks to our exclusion. 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 our patents, trademarks, trade
names, licensing arrangements, trade secrets, know-how and proprietary
technology will adequately protect us from potential infringement or
misappropriation by third parties. We intend to vigorously enforce
our 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 us. In addition, due to considerations
relating to, among other things, cost, delay or adverse publicity, there
can be no assurance that we will elect to enforce our intellectual
property rights in every instance.
We have occasionally received, and may receive in the future,
claims asserting infringement by us of intellectual property
rights held by third parties. In April 1998, we were 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. In December 1998, the United States Patent and Trademark
Office ("PTO") granted the Company's request to reexamine the Cannondale
patent based on material prior art not cited by Cannondale to the PTO
during the initial prosecution of the patent. The reexamination
proceedings are ongoing. See "Certain Factors That May Affect the
Company's Business and Future Results." There can be no assurance that we
are not infringing upon intellectual property rights held by others, or
that we will not be required to defend ourselves against claimed
infringement of the rights of others, as such claims may arise in the
ordinary course of business. Such disputes may result in substantial cost
to and diversion of effort by us, and could have a material adverse
effect on us.
ENVIRONMENTAL MATTERS
We are 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.
Our manufacturing operations routinely involve the handling of chemicals
and wastes, some of which are or may be regulated as hazardous substances.
We have not incurred, and do not expect to incur, any significant
expenditures or liabilities for environmental matters. As a result, we
believe that our environmental obligations will not have a material
adverse effect on our 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"). Our employees are
participating in developing 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, we are currently testing our products in the manner proposed
by the ASTM. These standards, if adopted, could increase the development
and manufacturing costs of our products, make our products less desirable
(by, for example, increasing the weight of the product) or favor a
competitor's product. Although we cannot predict whether standards
relating to our 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 us or our 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 us or our prospects.
We are subject to federal, state and local environmental laws,
regulations or ordinances. We have not incurred, and do not expect
to incur, any significant expenditures or liabilities for environmental
matters. As a result, we believe that our environmental obligations
will not have a material adverse effect on us or our prospects.
PRODUCT RECALL
Bicycles and bicycle components, including suspension products, are
frequent subjects of product recalls, corrective actions and
manufacturers' bulletins. Since our founding in 1989, we have conducted
one voluntary corrective action without CPSC involvement and four
voluntary corrective actions in conjunction with the CPSC. None of these
actions has been financially material to us.
The number of suspension products sold by us has dramatically
increased since our founding in 1989, new product introductions are
occurring frequently, and our 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 us or involving
the CPSC or other regulatory bodies on a more frequent basis or a 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 us or our
prospects.
SEASONALITY
See "Selected Quarterly Financial Data; Seasonality" under Item 7
for a discussion regarding seasonality.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 12 to the Notes to the Consolidated Financial Statements
for a discussion regarding our foreign operations.
EMPLOYEES
As of March 31, 1999, we employed approximately 416 full-time
employees. In addition, we utilized approximately 131 occasional
personnel in our assembly operations to meet production demand. We are
not a party to any labor agreements and none of our employees is
represented by a labor union. We consider our relationship with our
employees to be excellent and have 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 our other reports filed under the Securities Exchange Act of
1934, in our press releases and in other documents. In addition, from time
to time, we through our 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", the negative thereof
and 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 our 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. We undertake no obligation to update
publicly or revise any forward-looking statements.
Important factors that could affect our ability to achieve
financial and other goals and cause actual results to differ materially
from our 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 our
direct customers (OEMs, distributors, IBDs) and, therefore, on us or
our 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 our products, in particular, could have a material
adverse effect on us or our prospects.
-- The loss of or substantial decline in purchases of our products
by, or the financial insolvency of, any of our largest customers
individually, or a number of our other customers in the aggregate,
could have a material adverse effect on us or our prospects.
-- Any misjudgment by us or any of our OEM customers of the demand
for any of its respective products could have a material adverse
effect on us or our 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 us or our
prospects.
-- Our 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 us or our 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
our products could have a material adverse effect on us or our
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 us could have a material adverse effect on
us or our prospects. In April 1998, we were 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. In December 1998, the United States Patent and
Trademark Office ("PTO") granted the Company's request to reexamine
the Cannondale patent based on material prior art not cited by
Cannondale to the PTO during the initial prosecution of the patent.
The reexamination proceedings are ongoing. 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.
-- The failure of a key supplier to meet our product needs on a
timely basis, the loss of a key supplier or any significant
disruption in our production or distribution activities for any
other reason, including an earthquake or other catastrophic event,
could have a material adverse effect on us or our prospects.
-- Because the bicycle industry is, and many of our 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 our OEM customers in particular, any of which could
have a material adverse effect on us or our 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, our 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 us or our
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 our products, other suspension products or mountain
bikes, could have a material adverse effect on us or our prospects.
-- Product recalls, corrective actions or other activity voluntarily or
involuntarily undertaken by us or involving the CPSC or other
regulatory bodies could have a material adverse effect on us or
our prospects.
-- The loss of any member of our senior management team and other
key personnel, including certain members of our product development
team, or the inability to attract, retain and motivate key
personnel, could have a material adverse effect on us or our
prospects.
ITEM 2. PROPERTIES
Our headquarters are located in an approximately 56,000
square foot building in San Jose, California, pursuant to a lease that
expires in 2000. Approximately 25,000 square feet of the headquarters
building has been sub-let to a third party for the remainder of the Master
Lease. We lease two other facilities of approximately 15,000 and 158,000
square feet in the San Jose area pursuant to leases that expire in 2000
and 2004, respectively. The 15,000 square-foot facility is not currently
being used by us, and has been subleased in its entirety until the end of
the lease term. We also lease one smaller facility. We believe that our
existing facilities are adequate to meet our existing requirements, but
are attempting to relocate certain facilities in order to consolidate our
premises.
ITEM 3. LEGAL PROCEEDINGS
We are 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. 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 1999.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since September 26, 1996, our 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 our common
stock, as reported on The NASDAQ Stock Market.
High Low
--------- ---------
Year ended March 31, 1999
-------------------------------
First quarter............................ $7.53 $3.00
Second quarter........................... $4.38 $2.63
Third quarter............................ $3.88 $1.50
Fourth quarter........................... $2.75 $0.62
Year ended March 31, 1998
-------------------------------
First quarter............................ $17.50 $13.50
Second quarter........................... $17.63 $11.88
Third quarter............................ $14.88 $6.81
Fourth quarter........................... $9.13 $6.88
On June 15, 1999, the closing sales price per share of our
common stock as reported on The NASDAQ Stock Market was $1.00. On June 15,
1999, there were approximately 83 holders of our common stock.
During our past three fiscal years, our Board of Directors has not
declared a cash dividend on our common stock. We currently intend to
retain future earnings for use in our business and, therefore, do not
anticipate paying any cash dividends in the foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from
our audited consolidated financial statements and the related notes
thereto. The following selected financial data should be read in
conjunction with our consolidated financial statements and the related
notes thereto and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Year
Years Ended March 31, Months Ended
------------------------------------------- March 31, December 31,
1999 1998 1997 1996 1995(1) 1994
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA):
Net sales ............................ $86,863 $102,203 $106,212 $83,509 $14,279 $37,900
Cost of sales ........................ 71,000 73,183 67,115 54,110 9,590 24,477
---------- ---------- ---------- ---------- ---------- -----------
Gross profit ...................... 15,863 29,020 39,097 29,399 4,689 13,423
---------- ---------- ---------- ---------- ---------- -----------
Selling, general and administrative
expenses .......................... 14,163 13,363 12,137 11,220 5,404 4,210
Research, development and
engineering expense ............... 4,907 4,873 4,801 3,401 2,223 2,073
Restructuring and non-recurring
charge ............................ (541) 3,326 6,580 --- --- ---
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from operations .. (2,666) 7,458 15,579 14,778 (2,938) 7,140
Interest expense (income) and other
expense, net ...................... (277) (606) 2,205 5,650 51 6
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes ........................ (2,389) 8,064 13,374 9,128 (2,989) 7,134
Provisions for (benefit from)
income taxes ...................... (669) 2,944 5,149 3,464 (653) 2,420
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
extraordinary loss ........... (1,720) 5,120 8,225 5,664 (2,336) 4,714
Extraordinary loss, net of tax
benefit of $885,000 ............... -- -- 1,328 --- --- ---
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) before
accretion .................... (1,720) 5,120 6,897 5,664 (2,336) 4,714
Accretion for dividends on
mandatorily redeemable
preferred stock ................... -- -- 185 357 -- --
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) available
to common stockholders ...... ($1,720) $5,120 $6,712 $5,307 ($2,336) $4,714
========== ========== ========== ========== ========== ===========
Income (loss) per share before
extraordinary loss - basic......... ($0.13) $0.37 $0.71 $0.60 ($0.26) $0.53
Loss per share from extraordinary
item - basic....................... -- -- (0.12) -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) per share -
basic........................ ($0.13) $0.37 $0.59 $0.60 ($0.26) $0.53
========== ========== ========== ========== ========== ===========
Cash dividend per share............... -- -- -- -- -- $0.03
========== ========== ========== ========== ========== ===========
Shares used in per share
calculation - basic................ 13,761 13,717 11,430 8,820 8,820 8,820
========== ========== ========== ========== ========== ===========
Income (loss) per share before
extraordinary loss - diluted....... ($0.13) $0.36 $0.69 $0.60 ($0.26) $0.53
Loss per share from extraordinary
item - diluted..................... -- -- (0.11) -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) per share -
diluted...................... ($0.13) $0.36 $0.58 $0.60 ($0.26) $0.53
========== ========== ========== ========== ========== ===========
Shares used in per share
calculation - diluted.............. 13,761 14,030 11,641 8,820 8,820 8,820
========== ========== ========== ========== ========== ===========
<CAPTION>
At March 31, At
------------------------------------------------------ December 31,
1998 1998 1997 1996 1995(1) 1994
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital ................... $20,067 $22,372 $23,722 $2,327 $1,939 $5,995
Total assets ...................... 48,765 52,259 45,875 26,932 17,679 13,493
Total debt ........................ -- -- -- 44,500 48,500 998
Mandatorily redeemable preferred
stock ............................ -- -- -- 7,357 7,000 --
Stockholders' equity (deficit)..... 36,063 37,765 31,561 (39,615) (44,922) 7,188
</TABLE>
(1) In 1995, the Company changed its fiscal year end from December 31 to
March 31.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We are a worldwide leader in the design, manufacture and marketing
of high performance bicycle suspension products. Substantially all of our
historical revenues have been attributable to sales of mountain bike front
suspension forks. Our 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 our sales are to a small group of
OEM customers.
We have substantial export sales, a significant portion of which
include products shipped to Asian manufacturing subcontractors for certain
U.S.-based OEMs. We believe that a substantial portion of these
products are ultimately shipped back to the U.S. and sold domestically by
OEMs. We recognize revenue upon shipment of the product and, to
date, product returns have not been material.
Our gross margins are generally higher on retail accessory market
sales compared to OEM sales, OEM sales generate higher unit volume, which
allows us an opportunity to capitalize on manufacturing efficiencies.
Research, development and engineering costs are expensed as incurred.
RESULTS OF OPERATIONS:
The following table sets forth operations data as a percentage of net
sale for the periods indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 81.7% 71.6% 63.2%
Gross profit............................... 18.3% 28.4% 36.8%
Selling, general and administrative expense... 16.3% 13.1% 11.4%
Research, development and engineering expense. 5.6% 4.8% 4.5%
Restructuring and non-recurring charges....... -0.6% 3.3% 6.2%
Income (loss) from operations.............. -3.1% 7.3% 14.7%
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1999 (FISCAL 1999) COMPARED TO FISCAL YEAR
ENDED MARCH 31, 1998 (FISCAL 1998)
NET SALES. Net sales for the year ended March 31, 1999 decreased by
15.0% to $86.9 million compared to $102.2 million for the year ended March
31, 1998. OEM sales decreased in fiscal 1999 by 4.6% to $74.0 million
compared to $77.6 million in fiscal 1998. Sales to the retail accessory
market (IBDs) decreased by 47.6% to $12.9 million in fiscal 1999 compared
to $24.6 million in fiscal 1998. These decreases reflect continued
softness in the overall domestic and international mountain biking market.
Export sales, a significant portion of which included products shipped
to Asian manufacturing subcontractors for certain U.S.-based OEMs,
accounted for approximately 64.5% and 62.1% of net sales in fiscal 1999
and 1998, respectively.
GROSS MARGIN. Gross margin (gross profit as a percentage of net sales)
for fiscal 1999, decreased to 18.3% compared to 28.4% in fiscal 1998. The
decrease in gross margin was primarily due to fixed overhead costs not
being fully absorbed due to lower than anticipated sales, manufacturing
inefficiencies encountered during fiscal 1999, and provisions for excess
and obsolete inventory in fiscal 1999. In addition, fiscal 1998 had a
higher percentage of IBD sales compared to fiscal 1999. IBD 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 1999 increased by 6.0% to $14.2
million (or approximately 16.3% of net sales) compared to $13.4 million
(or approximately 13.0% of net sales) for the prior year. The year-to-year
increase over the same period last year is primarily a result of lower
than expected sales, new software, and recruiting of some members of
senior management. SG&A expense for fiscal 1998 included moving costs of
$402,000 associated with the closing of two of our facilities and moving
to a single larger facility in December 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development
and engineering ("R&D") expense for fiscal 1999 remained constant at $4.9
million which represented approximately 5.6% of net sales in fiscal 1999
compared to 4.8% of net sales in fiscal 1998. The increase in R&D expense
as a percentage of sales was principally due to lower sales during fiscal
1999 as compared to the prior year.
RESTRUCTURING AND NON-RECURRING CHARGES. During the fourth quarter of
fiscal 1998, we incurred a restructuring charge of approximately $2.7
million. 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 our 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. During the fourth quarter of the fiscal year ended
March 31, 1999, we reversed $541,000, primarily due to lower than expected
severance costs and equipment write-downs. This reversal represents the
unused portion of the $2.7 million set aside during fiscal 1998 for the
restructuring program.
INTEREST INCOME. For the years ended March 31, 1999 and 1998, the
Company had interest income of $277,000 and $606,000, respectively. The
decrease was primarily attributed to lower cash balances from lower
revenue during fiscal 1999 as compared to the prior year.
INCOME TAX BENEFIT/EXPENSE. Our effective tax rate for fiscal 1999 was a
28.0% benefit compared to a 36.5% expense for fiscal 1998. The decrease in
the effective tax rate was primarily due to the operating loss recorded by
us in fiscal 1999 and was also due to certain capital investment tax
credits.
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 customers. 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 IBD sales compared to
fiscal 1998. IBD 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 our
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, we 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 our 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, we entered into a settlement and
cross-licensing agreement with Answer Products and have recognized a
charge of $637,000 which includes associated settlement and legal costs.
In th second quarter of fiscal 1997, we incurred a non-recurring charge of
$6.6 million related to the termination of an incentive-based bonus plan
(the "Bonus Plan") with our former President and former Vice President of
Advanced Research upon completion of the Company's IPO.
In addition, we entered into a settlement agreement with Answer
Products and have recognized a charge of $637,000 which includes
associated settlement and legal costs. In the second quarter of fiscal
1997, we incurred a non-recurring charge of $6.6 million related to the
termination of an incentive-based bonus plan (the "Bonus Plan") with the
former President and former Vice President of Advanced Research upon
completion of the Company's IPO.
INTEREST INCOME (EXPENSE). For the year ended March 31, 1998, we
had interest income of $606,000. For the year ended March 31, 1997, we
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 our outstanding debt upon the closing of the
Company's IPO in October 1996.
INCOME TAX EXPENSE. Our 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, we 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 our outstanding
debt that occurred in October 1996 upon the closing of the Company's IPO.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 1999, net cash used in operating
activities was $138,000 which was comprised of the net loss of $1.7
million decreased by non-cash charges for depreciation and amortization of
$5.8 million, offset by a net increase in working capital of $4.2 million.
Accounts receivable at March 31, 1999 increased to $15.1 million net of
allowance for doubtful accounts compared to $9.2 million at March 31,
1998. The increase in accounts receivable was due to increased sales
volume in the fourth quarter of fiscal 1999 as compared to the same period
last year, extending longer payment terms to some of our largest
customers, and granting open credit terms to some foreign customers.
Inventories at March 31, 1999 decreased to $9.2 million net of inventory
reserves compared to $11.6 million at March 31, 1998. The decrease in
inventory was due to improved materials and supply chain management, as
well as write-offs of excess and obsolete inventory.
Net cash used in investing activities was $6.7 million which
principally consisted of acquisitions of property and equipment. Net cash
provided by financing activities was $18,000 which represented net
proceeds from the exercise of stock options.
Capital expenditures totaled $6.6 million for fiscal 1999 and $13.0
million for fiscal 1998. The decrease in capital expenditures principally
related to purchases of manufacturing equipment in fiscal 1998 that
allowed us to bring in-house certain manufacturing processes previously
performed by subcontractors. As of March 31, 1999, we had purchase
commitments of approximately $5.7 million primarily for tooling and
machinery to be used in manufacturing beginning in fiscal 2000, which
commitments are expected to be funded by cash flow from operations or
available cash balances.
On September 28, 1998, we entered into a bridge loan note agreement
providing for borrowing up to $4.0 million. On October 1, 1998, $2.0
million was borrowed against the note, of which $1.0 million was repaid on
October 30, 1998, and the remaining $1.0 million was repaid by December
11, 1998. On that date, we entered into a new credit agreement providing
for borrowing up to $5.0 million against this credit facility, which
expires on December 10, 1999. Any outstanding amounts under the facility
are collateralized by our accounts receivables, inventory, equipment and
intangibles. There were no outstanding borrowings against the new credit
facility as of March 31, 1999.
At March 31, 1999, we had cash of $3.8 million and working
capital of $20.1 million. We believe that our 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 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, or SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the balance sheet, and that the corresponding
gains or losses be reported as a component of comprehensive income. SFAS
133 will be effective for fiscal years beginning after June 15, 1999.
Currently, we do no hold derivative instruments or engage in hedging
activities.
In March 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position 98-1, or SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 requires companies to capitalize certain costs of computer software
developed or obtained for internal use, provided that these costs are not
research and development. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. We are evaluating the requirements of
SOP 98-1 and the effects, if any, on our current policies on accounting
for software costs.
In April 1998, AcSEC released Statement of Position 98-5, or SOP 98-5,
"Accounting for Costs of Start-Up Activities". SOP 98-5 requires the
costs of start-up activities to be expensed as incurred. Start-up
activities are defined as those one-time activities related to opening a
new facility, introducing a new product or service, conducting business in
a new territory, conducting business with a new class of customer,
initiating a new process in an existing facility, or commencing some new
operation. SOP 98-5 is effective for our fiscal year 2000, and the
adoption of SOP 98-5 will not have a material impact on our consolidated
financial statements.
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. We have prepared this information on a basis
consistent with our audited financial statements and it includes all
adjustments, consisting of normal recurring adjustments, that we consider
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
-------------------------------------------------
March 31, December 31, September 30, June 30,
1999 1998 1998 1998
----------- ------------ ------------ -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales ............... $23,633 $24,525 $24,810 $13,895
Gross profit ............ 5,493 4,757 5,379 234
Operating income (loss).. 719 1,285 323 (4,993)
Net income (loss) ....... $550 $946 $280 ($3,496)
Net income (loss) per
share - basic........... $0.04 $0.07 $0.02 ($0.25)
=========== ============ ============ ===========
Shares used in per share
calculations - basic.... 13,761 13,761 13,761 13,761
=========== ============ ============ ===========
Net income (loss)
per share - diluted..... $0.04 $0.07 $0.02 ($0.25)
=========== ============ ============ ===========
Shares used in per
share calculations -
diluted ................ 13,765 13,778 13,761 13,761
=========== ============ ============ ===========
<CAPTION>
March 31, December 31, September 30, June 30,
1998 1997 1997 1997
----------- ------------ ------------ -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales ............... $22,044 $26,575 $28,878 $24,706
Gross profit ............ 3,105 7,467 9,802 8,646
Operating income (loss).. (4,868) 2,683 5,269 4,374
Net income (loss) ....... ($3,062) $1,811 $3,471 $2,900
=========== ============ ============ ===========
Net income (loss) per
share - basic........... ($0.22) $0.13 $0.25 $0.21
=========== ============ ============ ===========
Shares used in per share
calculations - basic.... 13,757 13,757 13,710 13,642
=========== ============ ============ ===========
Net income (loss)
per share - diluted..... ($0.22) $0.13 $0.25 $0.21
=========== ============ ============ ===========
Shares used in per share
calculations -
diluted ................ 13,757 13,998 14,060 14,105
=========== ============ ============ ===========
</TABLE>
Because of our 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 our sales will normally
be lowest in our first and fourth fiscal quarters, which end on June 30
and March 31, respectively.
INFLATION
We do 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
As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable
to process accurately certain data before, during or after the year 2000
(the "Year 2000"). As a result, business entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This is commonly known as the Year 2000 issue. The
Year 2000 issue can arise at any point in our supply, manufacturing,
processing, distribution, and financial chains.
We have identified our Year 2000 risk in three categories: internal
enterprise resource planning software; other internal software and
imbedded chip technology; and external noncompliance by customers and
suppliers, service providers and contractors.
Internal enterprise resource planning software. During the current fiscal
year, we replaced our legacy information system with an Enterprise
Resource Planning system which our software vendor (Oracle) has indicated
is Year 2000 compliant. We expect to be in full Year 2000 compliance with
internal financial systems before the Year 2000. The cost of this system
conversion was approximately $2.1 million, of which $1.5 million was
capitalized. All other internal systems have been evaluated and have been
deemed Year 2000 compliant. However, if the Oracle software and other
internal software are found not to be Year 2000 compliant, the Year 2000
could have a material impact on our operations. Internal enterprise
software failures may result in loss of revenues, or an interruption in,
or a failure of, certain normal business activities or operations.
Other internal software and imbedded chip technology. Over the last three
years, our information technology group has ensured that all system
upgrades, software purchases and replacements have been Year 2000
compliant. The costs associated with these upgrades, software purchases
and replacements are part of the normal course of business. We have
identified most of the Year 2000 compliance issues with regard to other
internal software and imbedded chip technology, such as manufacturing
equipment, all desktop systems and security equipment. For those issues
identified, contingency plans have been developed and implementation and
testing is in process by the Information Technologies Department.
Implementation includes the replacement of software and hardware with
upgraded Year 2000 compliant versions and is expected to be completed by
June 30, 1999. If we are unable to achieve Year 2000 compliance for other
internal software, the Year 2000 could have a material adverse effect on
our operations. Failure to complete the implementation may result in loss
of revenues, or an interruption in, or a failure of, certain normal
business activities or operations.
External noncompliance by customers and suppliers, service providers and
contractors. We (specifically procurement) are in the process of
identifying and contacting our critical suppliers to determine the extent
of their plans and progress in addressing the Year 2000 problem.
Responses to date have indicated that the majority of vendors are Year
2000 compliant. To the extent that responses to Year 2000 readiness are
unsatisfactory, we intend to change suppliers, service providers and
contractors to those that have demonstrated readiness; however, we cannot
be assured that we will be successful in finding such alternative
suppliers, service providers and contractors. We have sent approximately
300 formal letters requesting information concerning the Year 2000
compliance status of our top customers. To date, essentially all
significant customers have replied, indicating in writing that they expect
to be Year 2000 compliant on a timely basis. In the event that any of
our significant customers or suppliers do not successfully and timely
achieve Year 2000 compliance, and we are unable to replace them with new
customers or alternative suppliers who have demonstrated Year 2000
readiness, our business or operations could be adversely affected. These
effects could lead to, but are not limited to, loss of revenues, loss of
suppliers and customers, or failure to deliver products.
Worst-case scenarios of our failure to solve the Year 2000 compliance
issues could include: substantial purchasing costs to develop
alternative methods of managing our business and replace noncompliant
equipment, temporary slowdowns or cessations of certain manufacturing
operations, delays in delivery or distribution of products, delays in the
receipt of supplies, invoice and collection errors, and inventory and
supply obsolescence. We are in the process of developing our contingency
plan to address each of the three critical business risks outlined
herein. These plans may include shifting from replacement to remediation
activities for IT systems, replacing electronic applications with manual
processes, developing emergency backup and recovery procedures, investing
in safety stocks of key raw materials and finished goods and other
measures considered appropriate by management. These contingency plans
will be continually refined as additional information becomes available.
Spending necessary for Year 2000 readiness is substantially complete
as of March 31, 1999.
INTRODUCTION OF THE EURO
The European Economic and Monetary Union and the introduction of a
new currency (the "Euro") began 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 our
business operations in Europe as well as having systems and accounting
issues for the Company. We do not anticipate a material impact of the Euro
on our financial position, results of operations and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provision of Financial Reporting Release No. 48,
"Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity
Instruments". We had no holdings of derivative financial or commodity
instruments at March 31, 1999. We are exposed to financial market risks,
including changes in interest rates and foreign currency exchange rates.
An increase in interest rates would not significantly affect our net loss.
All of our revenue and capital spending is transacted in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" on page 31 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.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in our
Proxy Statement for our Annual Meeting of Stockholders to be held on
August 24, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in our
Proxy Statement for our Annual Meeting of Stockholders to be held on
August 24, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 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 our
Proxy Statement for our Annual Meeting of Stockholders to be held on
August 24, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in our
Proxy Statement for our Annual Meeting of Stockholders to be held on
August 24, 1999 to be filed with the Securities and Exchange Commission
within 120 days after March 31, 1999 and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See page 31 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. (1)
3.1 Form of Amended and Restated Certificate of Incorporation of
RockShox, Inc. (1)
3.2 Form of Amended and Restated Bylaws of RockShox, Inc. (1)
4 Form of Common Stock Certificate of RockShox, Inc. (1)
10.1 Management Consulting Agreement, dated as of March 24, 1995,
between TJC Management Corporation and RSx Holdings, Inc. (1)
10.2 Form of Registration Rights Agreement among RockShox, Inc.,
Stephen Simons, Debra Simons, Paul Turner and other
stockholders named therein. (1)
10.3 Form of Amended and Restated Employment Agreement, dated October
2, 1996, between RockShox, Inc. and Paul Turner. (1)
10.4 Noncompetition Agreement, dated March 24, 1995, between RSx
Holdings, Inc. and Stephen Simons. (1)
10.5 Noncompetition Agreement, dated March 24, 1995, between RSx
Holdings, Inc. and Debra Simons. (1)
10.6 Noncompetition Agreement, dated March 24, 1995, between RSx
Holdings, Inc. and Paul Turner. (1)
10.7 Consultant Agreement, dated January 1, 1994 by and between
Simons & Susslin, Inc. and Stephen Simons. (1)
10.8 Form of Lease, dated as of May 1, 1994 between Charcot Center
Joint Venture and RockShox, Inc. (1)
10.9 Form of First Amendment to Lease, dated as of August 15, 1994,
between Charcot Center Joint Venture and RockShox, Inc. (1)
10.10 Form of Lease, dated as of October 1, 1995, between Whitecliffe I
Apartments, Ltd. and RockShox, Inc. (1)
10.11 Form of Indemnity Agreement. (1)
10.12 Form of Lease, dated as of March 7, 1997, between S. Stephen
Nakashima and RockShox, Inc. (2)
10.13 Amended and Restated RSx Holdings, Inc. 1996 Stock Plan. (1)
10.14 Letter Agreement, dated as of May 7, 1996, between RockShox, Inc.
and Charles E. Noreen, Jr. (2)
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. (3)
10.16 Employment Agreement, dated November 1, 1997, between RockShox,
Inc. and George Napier. (3)
10.17 Standard Industrial Sublease, dated December 8, 1997, between
RockShox, Inc. and First American Records Management, Inc.(4)
10.18 RockShox, Inc. 1998 Stock Option Plan.(4)
10.19 Sublease, dated July 9, 1998, between RockShox, Inc. and Media
Arts Group, Inc. (5)
10.20 Employment Agreement, dated June 17, 1998, between RockShox, Inc.
and Gary Patten (6)
10.21 Bridge Loan Note, dated September 28, 1998, between RockShox,
Inc. and the First National Bank of Chicago. (6)
10.22 Amended and Restated Incentive Stock Option Agreement Under the
RockShox, Inc. 1996 Stock Plan, dated September 21, 1998,
between RockShox, Inc. and Robert Kaswan. (6)
10.23 Credit Agreement, dated December 11, 1998, between RockShox, Inc.
and the First National Bank of Chicago. (7)
21 List of Subsidiaries of RockShox, Inc. (1)
23 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule.
- -----------------
(1) Previously filed with the Registration Statement on Form S-1 of
ROCKSHOX, INC. (Registration No. 333-8069).
(2) Previously filed with Form 10-K of RockShox, Inc. for the year
ended March 31, 1997.
(3) Previously filed with Form 10-Q of RockShox, Inc. for the quarter
ended December 31, 1997.
(4) Previously filed with Form 10-K of RockShox, Inc. for the year
ended March 31, 1998.
(5) Previously filed with Form 10-Q of RockShox, Inc. for the quarter
ended June 30, 1998.
(6) Previously filed with Form 10-Q of RockShox, Inc. for the quarter
ended September 30, 1998.
(7) Previously filed with Form 10-Q of RockShox, Inc. for the quarter
ended December 31, 1998.
(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, 1999.
(c) See (a)(3) above for a listing of exhibits included as a part of
this report.
<PAGE>
ROCKSHOX, INC.
FORM 10-K
ITEMS 8, 14 (a) AND 14 (d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
1. Consolidated Financial Statements
Report of Independent Accountants 32
Consolidated Balance Sheets at March 31, 1999 and 1998 33
Consolidated Statements of Operations for the Years Ended
March 31, 1999, 1998 and 1997 34
Consolidated Statements of Stockholders' Equity (Deficit)
for the Three Years Ended March 31, 1999 36
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997 37
Notes to Consolidated Financial Statements 39
2. Consolidated Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts 55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
RockShox, Inc.
San Jose, California
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of RockShox, Inc. and its subsidiaries at March 31,
1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended March 31, 1999, in
conformity with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards, which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 27, 1999
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $3,755 $10,554
Accounts receivable, net of allowance for
doubtful accounts $700 in 1999 and $1,037
in 1998......................................... 15,112 9,230
Inventories......................................... 9,174 11,581
Prepaid expenses and other current assets........... 666 962
Deferred income taxes............................... 4,062 4,539
---------- ----------
Total current assets............................. 32,769 36,866
Property and equipment, net............................ 15,807 15,224
Other assets........................................... 189 169
---------- ----------
Total assets..................................... $48,765 $52,259
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $5,266 $5,869
Accrued liabilities................................. 7,436 8,625
---------- ----------
Total current liabilities........................ 12,702 14,494
Commitments and contingencies (Note 8)
Preferred stock, $0.01 par value:
Authorized: 10,000,000 shares
Issued and outstanding: none in 1999 and 1998 -- --
Common stock, $0.01 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 13,761,147 shares in
1999 and 13,757,231 in 1998......................... 138 138
Additional paid-in capital............................. 65,928 65,910
Distributions in excess of net book value.............. (45,422) (45,422)
Retained earnings...................................... 15,419 17,139
---------- ----------
Total stockholders' equity....................... 36,063 37,765
---------- ----------
Total liabilities and stockholders' equity....... $48,765 $52,259
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales..................................... $86,863 $102,203 $106,212
Cost of sales................................. 71,000 73,183 67,115
---------- ---------- ----------
Gross profit............................... 15,863 29,020 39,097
---------- ---------- ----------
Selling, general and administrative expense... 14,163 13,363 12,137
Research, development and engineering expense. 4,907 4,873 4,801
Restructuring and non-recurring charges....... (541) 3,326 6,580
---------- ---------- ----------
Operating expenses......................... 18,529 21,562 23,518
---------- ---------- ----------
Income (loss) from operations.............. (2,666) 7,458 15,579
Interest income............................... 277 606 492
Interest expense.............................. -- -- (2,697)
---------- ---------- ----------
Income (loss) before income taxes.......... (2,389) 8,064 13,374
Provision for (benefit from) income taxes..... (669) 2,944 5,149
---------- ---------- ----------
Income (loss) before extraordinary loss.... (1,720) 5,120 8,225
Extraordinary loss from early extinguishment
of debt, net of tax benefit of $885,000.... -- -- 1,328
---------- ---------- ----------
Net income (loss) before accretion......... (1,720) 5,120 6,897
Accretion for dividends on mandatorily
redeemable preferred stock.................. -- -- 185
---------- ---------- ----------
Net income (loss) available to common
stockholders............................. ($1,720) $5,120 $6,712
========== ========== ==========
Income (loss) per share before extraordinary
item - basic............................... ($0.13) $0.37 $0.71
Loss per share from extraordinary
item - basic............................... -- -- (0.12)
---------- ---------- ----------
Net income (loss) per share - basic........ ($0.13) $0.37 $0.59
========== ========== ==========
Shares used in per share calculations -
basic....................................... 13,761 13,717 11,430
========== ========== ==========
Income (loss) per share before extraordinary
item - diluted............................. ($0.13) $0.36 $0.69
Loss per share from extraordinary
item - diluted............................. -- -- (0.11)
---------- ---------- ----------
Net income (loss) per share - diluted...... ($0.13) $0.36 $0.58
========== ========== ==========
Shares used in per share calculations -
diluted..................................... 13,761 14,030 11,641
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Distribu-
tions
Addi- in Excess
Common Stock tional of Net
----------------- Paid-In Book Retained
Shares Amount Capital Value Earnings Total
-------- -------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
Proceeds from exercise of
stock options ............. 4 -- 17 -- -- 17
Tax benefits from
disqualifying dispositions
of common stock............ -- -- 1 -- -- 1
Net loss..................... -- -- -- -- (1,720) (1,720)
-------- -------- --------- ---------- --------- ---------
Balances, March 31, 1999...... 13,761 $138 $65,928 ($45,422) $15,419 $36,063
======== ======== ========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. ($1,720) $5,120 $6,897
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring and non-recurring charges.... (541) 3,326 --
Depreciation and amortization.............. 5,783 4,706 3,467
Write-off of capitalized financing costs... -- -- 2,213
Loss on disposal of fixed assets........... -- 782 --
Provision for doubtful accounts............ 226 (489) 175
Provision for excess and obsolete
inventories.............................. 3,041 2,408 825
Deferred income taxes...................... 477 200 (934)
Changes in operating assets and liabilities:
Accounts receivable........................ (6,108) (2,123) (1,222)
Inventories................................ (634) (3,189) (3,189)
Prepaid expenses and other current assets.. 296 170 (735)
Accounts payable and accrued liabilities... (958) (3,146) (376)
--------- --------- ---------
Net cash provided by (used in)
operating activities.................... (138) 7,765 7,121
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment......... (6,643) (13,012) (6,554)
Other...................................... (36) (30) (50)
--------- --------- ---------
Net cash used in investing activities..... (6,679) (13,042) (6,604)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options ... 17 608 --
Tax benefits from disqualifying
dispositions of common stock.............. 1 476 --
Proceeds from Initial Public Offering,
net of expenses........................... -- -- 64,464
Repayment of mandatorily redeemable
preferred stock........................... -- -- (7,542)
Proceeds from short-term borrowings........ 2,000 -- --
Repayment of short-term borrowings and
bank debt................................. (2,000) -- (27,500)
Repayment of notes payable to related
parties................................... -- -- (17,000)
--------- --------- ---------
Net cash provided by
financing activities.................... 18 1,084 12,422
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents....................... (6,799) (4,193) 12,939
Cash and cash equivalents, beginning of
period...................................... 10,554 14,747 1,808
--------- --------- ---------
Cash and cash equivalents, end of period...... $3,755 $10,554 $14,747
========= ========= =========
Supplemental disclosure of cash flow
information:
Income taxes paid.......................... -- $2,478 $5,065
Interest paid.............................. $21 -- $3,599
Accretion for dividends on mandatorily
redeemable preferred stock.............. -- -- $185
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
ROCKSHOX, INC.
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. 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, 1999, 1998 and 1997
approximately 85%, 76% and 72% respectively, of the Company's total net
sales were to OEMs. For the years ended March 31, 1999, 1998 and 1997
approximately 15%, 24% and 28% 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.
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, 1999 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, 1998, two OEM customers accounted
for 26% and 11% of accounts receivable. At March 31, 1999, one OEM
customer accounted for 30% of accounts receivable. For the year ended
March 31, 1999, two customers accounted for 17% and 16% of the Company's
revenues. For the years ended March 31, 1998 and 1997, one customer
accounted for 16% and 20% of the Company's revenues, 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.
Depreciable
life
----------
Computer equipment,
furniture and fixtures.................. 3-7 years
Machinery and equipment................... 3-10 years
Tooling................................... 1-2 years
Leasehold improvements.................... up to 7 years
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 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 year ended March 31, 1997 was $300,000.
There was no amortization expense for the years ended March 31, 1999 and
1998, respectively.
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 $1,701,000, $1,922,000 and $1,590,000 for the
years ended March 31, 1999, 1998 and 1997, 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.
COMPREHENSIVE INCOME:
In fiscal 1999, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
("SFAS 130") and has restated all prior periods to comply with the
statement. 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. There was no impact
on the Company's financial position, results of operations or cash flows
as a result of adoption for the years ended March 31, 1999, 1998, and
1997, respectively. Comprehensive income and net income are the same.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, or SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair
value in the balance sheet, and that the corresponding gains or losses be
reported as a component of comprehensive income. SFAS 133 will be
effective for fiscal years beginning after June 15, 1999. Currently, we
do no hold derivative instruments or engage in hedging activities.
In March 1998, the Accounting Standards Executive Committee, or
AcSEC, released Statement of Position 98-1, or SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
SOP 98-1 requires companies to capitalize certain costs of computer
software developed or obtained for internal use, provided that these
costs are not research and development. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. We are evaluating the
requirements of SOP 98-1 and the effects, if any, on our current
policies on accounting for software costs.
In April 1998, AcSEC released Statement of Position 98-5, or SOP 98-
5, "Accounting for Costs of Start-Up Activities". SOP 98-5 requires
the costs of start-up activities to be expensed as incurred. Start-up
activities are defined as those one-time activities related to opening a
new facility, introducing a new product or service, conducting business
in a new territory, conducting business with a new class of customer,
initiating a new process in an existing facility, or commencing some new
operation. SOP 98-5 is effective for our fiscal year 2000, and the
adoption of SOP 98-5 will not have a material impact on our consolidated
financial statements.
EARNINGS PER SHARE:
Basic and diluted earnings per share ("EPS")are computed in accordance
with SFAS 128, "Earnings Per Share". Basic EPS is computed by dividing
income (loss) 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.
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:
Restructuring and non-recurring comprise the following (IN
THOUSANDS):
Years Ended March 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Restructuring plan .................. ($221) $2,244 $ --
Settlement of legal dispute ......... -- 637 --
Write down of equipment ............. (320) 445 --
Termination of incentive bonus plan.. -- -- 6,580
---------- ---------- ----------
($541) $3,326 $6,580
========== ========== ==========
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 was primarily aimed at focusing the Company's business processes,
attaining cost efficiencies and increasing manufacturing flexibility. The
restructuring charge included a provision of $600,000 for severance
costs. In connection with the restructuring plan the Company also
recorded a charge of $1,644,000 which included 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 also recognized an impairment charge of
$445,000 relating to property and equipment used for the production of
certain discontinued products. During the fourth quarter of the fiscal
year ended March 31, 1999, the Company reversed $541,000, primarily due
to lower than expected severance costs and equipment write-downs. This
reversal represents the unused portion of the $2.7 million recorded
during fiscal 1998 for the restructuring program.
During fiscal 1998, the Company entered into a settlement
agreement with Answer Products and has recognized a charge of $637,000
which includes associated settlement and legal costs.
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.
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 Research.
4. INVENTORIES (IN THOUSANDS):
March 31,
---------------------
1999 1998
---------- ----------
Raw materials .................. $6,048 $7,023
Finished goods ................. 3,126 4,558
---------- ----------
$9,174 $11,581
========== ==========
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):
March 31,
---------------------
1999 1998
---------- ----------
Computer equipment,
furniture and fixtures............ $5,512 $3,959
Machinery and equipment............. 10,710 6,884
Tooling............................. 8,633 7,312
Leasehold improvements.............. 1,184 277
---------- ----------
26,039 18,432
Less: accumulated depreciation
and amortization.................. (13,278) (8,102)
Construction in progress............ 3,046 4,894
---------- ----------
$15,807 $15,224
========== ==========
Depreciation and amortization expense on property and equipment
for the years ended March 31, 1999, 1998 and 1997 was $5,783,000,
$4,706,000 and $3,467,000, respectively.
6. ACCRUED LIABILITIES (IN THOUSANDS):
March 31,
---------------------
1999 1998
---------- ----------
Accrued payroll and benefits...... $634 $1,310
Accrued income taxes payable...... -- 413
Accrued warranty.................. 2,495 2,751
Accrued non-recurring charges..... -- 1,668
Accrued rebates................... 1,500 --
Other............................. 2,807 2,483
---------- ----------
$7,436 $8,625
========== ==========
The Company had $2,495,000 and $2,751,000 in accrued warranty
costs at March 31, 1999 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 former 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 former 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 former Vice President of Advanced Research,
as the case may be. Each Employment Agreement could be terminated by the
Company for cause (a defined therein) or by the former President and the
former 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 former 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 former
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 former 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 former 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
former 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 1999 and 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, 1999, 1998 and 1997, the Company
paid $1,796,000, $1,813,000 and $2,915,000, 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 former
President sold such stock on March 18, 1994. The former President
provides consulting services to this supplier, in consideration of which
the former 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,
1999, 1998 and 1997 was $1,555,000, $1,593,000 and $876,000, respectively.
The Company has entered into two sublease agreements which expire
in 2000. For fiscal 2000, sublease income will be approximately
$442,000.
Following is a summary, by fiscal year, of future minimum lease payments
under operating leases at March 31, 1999 (IN THOUSANDS):
Fiscal Year
------------
2000............................... $1,701
2001............................... 1,446
2002............................... 673
2003............................... 687
2004............................... 707
Thereafter......................... 1,723
----------
Total minimum lease payments....... $6,937
==========
As of March 31, 1999, the Company had purchase commitments of
approximately $5.7 million primarily for tooling and machinery to be
used in manufacturing beginning in fiscal 2000.
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. Accordingly, the ultimate resolution of these
matters may have a material adverse effect on the Company's financial
position, results of operations and cash flows.
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"), which was subsequently
approved by the Company's stockholders in August 1998. 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:
<TABLE>
<CAPTION>
Shares Number Weighted
Available of Average
Outstanding Options for Grant Shares Exercise Price Total Price
- -------------------------- --------- ---------- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Options reserved.......... 979,020 -- -- -- --
Options granted........... (846,291) 846,291 $4.39 - $15.00 $6,353,306 $7.51
Options canceled.......... 7,750 (7,750) $15.00 (116,250) $15.00
--------- ---------- -----------
Balances, March 31, 1997.. 140,479 838,541 $4.39 - $15.00 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 - $15.00 (1,111,447) $13.72
--------- ---------- -----------
Balances, March 31, 1998.. 290,171 1,151,613 $4.39 - $15.00 9,066,591 $7.87
Options granted........... (623,524) 623,524 $1.88 - $7.13 2,411,765 $3.87
Options exercised......... -- (3,916) $4.39 (17,191) $4.39
Options canceled.......... 571,152 (571,152) $1.88 - $15.14 (5,129,431) $8.98
--------- ---------- -----------
Balances, March 31, 1999.. 237,799 1,200,069 $1.88 - $15.14 $6,331,734 $5.28
========= ========== ===========
</TABLE>
During the quarter ended June 30, 1998, the Board of Directors of the
Company approved the cancellation of the majority of outstanding stock
options held by mid- and lower-level employees 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.
At March 31, 1999, 1998, and 1997, 350,014, 254,134, and 227,618
outstanding options were exercisable under the Plans, at weighted
average exercise prices of $5.57, $6.80, and $5.04 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 (loss) and net income (loss)per share
would have been adjusted to the pro forma amounts indicated below (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) available to common
stockholders - as reported..................... ($1,720) $5,120 $6,712
Net income (loss) available to common
stockholders - pro forma....................... ($3,428) $4,517 $6,221
Net income (loss) available to common
stockholders - per share - basic as reported... ($0.13) $0.37 $0.59
Net income (loss) available to common
stockholders - per share - diluted as reported. ($0.13) $0.36 $0.58
Net income (loss) available to common
stockholders - per share - basic pro forma..... $0.25 $0.33 $0.54
Net income (loss) available to common
stockholders - per share - diluted pro forma... ($0.25) $0.33 $0.53
Income (loss) before extraordinary
item - as reported............................. ($1,720) $5,120 $8,225
Income (loss) before extraordinary
item - pro forma............................... ($3,428) $4,517 $7,734
Income (loss) before extraordinary
item - per share - basic as reported........... ($0.13) $0.37 $0.71
Income (loss) before extraordinary
item - per share - diluted as reported......... ($0.13) $0.36 $0.69
Income (loss) before extraordinary
item - per share - basic pro forma............. $0.25 $0.33 $0.68
Income (loss) before extraordinary
item - per share - diluted pro forma........... $0.25 $0.33 $0.66
</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, 1999, 1998 and 1997 were $1.7 million, $2.2
million and $1.9 million and $3.69, $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>
Years Ended March 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate................... 4.34%-5.58% 5.47%-6.52% 6.08%-6.27%
Expected life............................. 3.5 3.5 3.5
Expected dividends........................ -- -- --
Expected volatility....................... 125% 57% 0-58%
</TABLE>
The options outstanding and currently exercisable by exercise
price at March 31, 1999 were as follows:
<TABLE>
<CAPTION>
Options Currently
Options Oustanding Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.88 - $3.94 305,250 9.45 $3.33 0 $0.00
$4.39 - $4.75 450,904 8.08 4.39 207,024 4.39
$7.13 - $7.44 432,000 2.42 7.13 140,320 7.13
$13.06 - $15.14 11,915 8.03 15.02 2,670 15.02
----------- -----------
1,200,069 6.38 $5.28 350,014 $5.57
=========== ===========
</TABLE>
10. INCOME TAXES:
The components of the provision for(benefit from)income taxes, all
of which arise from domestic income, are summarized as follows (IN
THOUSANDS):
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
State......................... $ -- $140 $1,133
Federal....................... (1,146) 2,604 4,950
---------- ---------- ----------
(1,146) 2,744 6,083
---------- ---------- ----------
Deferred:
State......................... 153 10 (121)
Federal....................... 324 190 (813)
---------- ---------- ----------
477 200 (934)
---------- ---------- ----------
($669) $2,944 $5,149
========== ========== ==========
</TABLE>
The principal items accounting for the difference between
income taxes computed at the U.S. statutory rate and the provision
for (benefit from)income taxes reflected in the statements of
operations are as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
United States statutory rate............ -34.0% 34.0% 35.0%
Foreign Sales Corporation tax
benefit ............................. -- -3.1% -2.5%
States taxes, net of federal
benefit ............................. 4.9% 3.1% 5.0%
Other .................................. 1.1% 2.5% 1.0%
---------- ---------- ----------
-28.0% 36.5% 38.5%
========== ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows (IN
THOUSANDS):
March 31,
--------------------
1999 1998
---------- ---------
Allowance for doubtful accounts................... $340 $375
Allowance for excess and obsolete inventory....... 1,122 1,082
Accrued warranty.................................. 848 995
Accrued liabilities............................... 1,025 704
Restructuring .................................... -- 604
Other............................................. 727 779
---------- ---------
Net deferred tax asset......................... $4,062 $4,539
========== ==========
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. Management
evaluates on a quarterly basis the recoverability of the deferred tax
assets. At such time as it is determined that it is more likely than not
that the deferred tax assets are not realizable, a valuation allowance
will be provided.
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. For the years
ended March 31, 1999, 1998, and 1997 Company contributions amounted to
approximately $87,000, $84,000, and $16,000, respectively.
12. BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION:
The Company currently operates in one industry segment, the
bicycle industry, for financial reporting purposes, and uses one measure
of profitability for its business. The Company markets its products to
customers in the United States, Europe and Asia. All long lived assets
are maintained in the United States. Revenue information by geographic
area, all of which are denominated in U.S. dollars, are as follows (IN
THOUSANDS):
Years Ended March 31,
-------------------------------
1999 1998 1997
---------- ---------- ---------
Asia ................................. $32,176 $34,055 $31,013
Europe ............................... $25,165 25,100 21,179
United States......................... $27,604 38,676 48,174
Other ................................ $1,918 4,372 5,846
---------- ---------- ---------
$86,863 $102,203 $106,212
========== ========== =========
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>
Years Ended March 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares of common stock
outstanding................................. 13,761 13,717 11,430
---------- ---------- ----------
Shares used in basic net income per share
calculation................................. 13,761 13,717 11,430
========== ========== ==========
Weighted average shares of common stock
outstanding................................. 13,761 13,717 11,430
Diluted effect of stock options............... -- 313 211
---------- ---------- ----------
Shares used in diluted net income per share
calculation................................. 13,761 14,030 11,641
========== ========== ==========
Reconciliation of net income available to
stockholders used in basic and diluted per
share calculations:
Income (loss) before extraordinary item....... ($1,720) $5,120 $8,225
Accretion for dividends on mandatorily
redeemable preferred stock.................. -- -- 185
---------- ---------- ----------
Income (loss) before extraordinary loss
available to common stockholders........ (1,720) 5,120 8,410
Extraordinary loss from early extinguishment
of debt (net of tax benefit of $885)........ -- -- (1,328)
---------- ---------- ----------
Net income (loss) available to common
stockholders........................... ($1,720) $5,120 $6,712
========== ========== ==========
Income (loss) per share before
extraordinary item - basic.................. ($0.13) $0.37 $0.71
Loss per share from extraordinary item -
basic....................................... -- -- (0.12)
---------- ---------- ----------
Net income (loss) per share - basic....... ($0.13) $0.37 $0.59
========== ========== ==========
Income (loss) per share before
extraordinary item - diluted................ ($0.13) $0.36 $0.69
Loss per share from extraordinary item -
diluted..................................... -- -- (0.11)
---------- ---------- ----------
Net income (loss) per share - diluted..... ($0.13) $0.36 $0.58
========== ========== ==========
</TABLE>
As of March 31, 1999 and 1998, options to purchase 1,200,069
shares and 286,192 shares were not included in the earnings per share
calculation as the effect was anti-dilutive.
14. LINE OF CREDIT:
On September 28, 1998, the Company entered into a bridge loan note
agreement providing for borrowing up to $4.0 million. On October 1,
1998, $2.0 million was borrowed against the note of which $1.0 million
was repaid on October 30, 1998, and the remaining $1.0 million was
repaid by December 11, 1998. On that date, the Company entered into a
new credit agreement providing for borrowing up to $5.0 million against
this credit facility, bearing interest at the higher of (i) the
corporate base rate of interest announced by the lender from time to
time, changing when and as said corporate base rate changes and (ii) the
sum of the federal funds effective rate (as published by the Federal
Reserve Bank of New York) for such day plus 1/2%., which expires on
December 10, 1999. Any outstanding amounts under the facility are
collateralized by the Company's accounts receivables, inventory,
equipment and intangibles. There were no outstanding borrowings against
the new credit facility as of March 31, 1999.
<PAGE>
SCHEDULE II
ROCKSHOX, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS)
Deduc-
Balance at Charged tions
Beginning to Costs and Balance at
of and Write End of
Description Period Expenses Offs Period
- ----------------------------- ---------- ---------- ---------- ----------
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
As of March 31, 1999:
Allowance for excess and
obsolete inventory ..... 2,989 3,041 (2,721) $3,309
Allowance for doubtful
accounts ............... 1,037 226 (563) 700
<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 18, 1999 By: /s/ GARY PATTEN
---------------------------------
Gary Patten
Executive Vice President,
Chief Financial Officer and
Secretary
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>
<CAPTION>
Signature Title Date
- ----------------------------- ---------------------------------- -------------
<S> <C> <C>
By: /s/ GEORGE NAPIER Chief Executive Officer, President June 18, 1999
-------------------------- and Director
George Napier (Principal Executive Officer)
By: /s/ STEPHEN W. SIMONS Chairman of the Board and Director June 18, 1999
--------------------------
Stephen W. Simons
By: /s/ GARY PATTEN Executive Vice President, June 18, 1999
-------------------------- Chief Financial Officer and
Gary Patten Secretary
(Principal Financial and
Accounting Officer)
By: /s/ PAUL H. TURNER Director June 18, 1999
--------------------------
Paul H. Turner
By: /s/ JOHN W. JORDAN II Director June 18, 1999
--------------------------
John W. Jordan II
By: /s/ ADAM E. MAX Director June 18, 1999
--------------------------
Adam E. Max
By: /s/ MICHAEL R. GAULKE Director June 18, 1999
--------------------------
Michael R. Gaulke
By: /s/ EDWARD POST Director June 18, 1999
--------------------------
Edward Post
</TABLE>
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Stockholders and Board of Directors of
RockShox, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated April 27, 1999, appearing on page F-1 of this Form 10-K
also included an audit of the financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, CA
April 27, 1999
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-12945 and 333-47253) of RockShox, Inc.
of our reports dated April 27, 1999 relating to the financial statements
and financial statement schedule, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
June 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in the
Company's Form 10-K for the year ended March 31, 1999 and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 3,755
<SECURITIES> 0
<RECEIVABLES> 15,812
<ALLOWANCES> 700
<INVENTORY> 9,174
<CURRENT-ASSETS> 32,769
<PP&E> 29,085
<DEPRECIATION> 13,278
<TOTAL-ASSETS> 48,765
<CURRENT-LIABILITIES> 12,702
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 35,925
<TOTAL-LIABILITY-AND-EQUITY> 48,765
<SALES> 86,863
<TOTAL-REVENUES> 86,863
<CGS> 71,000
<TOTAL-COSTS> 71,000
<OTHER-EXPENSES> 18,529
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,389)
<INCOME-TAX> (669)
<INCOME-CONTINUING> (1,720)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,720)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
