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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, 2000
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 26, 2000, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $3,201,199.
As of June 26, 2000, the Registrant had 13,761,147 shares of Common
Stock outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the ROCKSHOX, INC. Proxy Statement to be mailed in connection
with the Registrant's 2000 Annual Meeting of Stockholders to be held on
August 23, 2000, are incorporated by reference in Part III hereof.
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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 2
3
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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, PSYLO, and DELUXE.
PART IX
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 front suspension forks, rear shocks and suspension
seatposts 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 2000 model year, we offered sixteen front suspension forks,
including four new models, five rear shocks, including our SID Dual air model,
and two suspension seat posts.
Approximately 79% of our sales in fiscal 2000 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.
Our principal executive office is located at 401 Charcot Avenue, San Jose,
California, 95131; its telephone number is (408)435-7469.
In March 2000, RockShox, Inc. announced that it will relocate and
consolidate its corporate operations to Colorado Springs, Colorado. The Sales,
Marketing, Research and Development, Information Technology, Finance, and Human
Resources divisions will move from the San Jose area, to a leased location in
Colorado Springs this summer. The Company's manufacturing operations will
remain at its current location in San Jose, and its relocation will be evaluated
over the next year. The Company is currently expects to incur costs associated
with the relocation, but is unable to accurately quantify these costs at this
time.
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
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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.
Each of our products uses aerospace alloys and features adjustable
suspension, a progressive spring rate, structural rigidity and low weight. We
believe that the 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 our suspension products improves the
rider's ability to control the bike, while low weight enhances overall bicycle
performance. Each of our products is covered by a one-year limited
warranty.
Our 2000 models represent our broadest line of product offerings to date.
For the 2000 model year, we offered sixteen front suspension forks, including
six new models, five rear shocks, including our SID Air model, and two
suspension seat posts. For the 2000 model year, all RockShox products have
received a multitude of changes and upgrades aimed at increased performance and
durability.
The following tables summarize our 2000 product offerings of front
forks and rear shocks:
<TABLE>
<CAPTION>
FRONT FORKS
-----------
Suggested
Typical Retail
Retail Price In Date of
Bike Price Accessory Suspension Original
Model Point (1) Market Intended Use Technology Shipment (2)
---------- ------------- ---------- ------------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
JETT $ 250-$400 $ 100 Recreational Coil/MCU May 98
JETT XC $ 300-$450 $ 140 Recreational Elastomer Spring May 96
System
JETT SL $ 350-$475 $ 175 Recreational; Hydracoil May 99
Moderate Terrain System
JETT RACE $ 400-$600 $ 179 Cross-Country; Hydracoil June 99
Moderate Terrain System
JUDY XC $ 350-$600 $ 199 Cross-Country; Hydracoil May 97
FreeRide System
JUDY SL $ 500-$800 $ 249 Cross-Country; Hydracoil September 1994
Extreme Terrain System
JUDY RACE $ 700-1,000 $ 299 Cross-Country; Hydracoil June 1999
Racing System
JUDY XL $ 800-1,300 $ 430 Cross-Country; Hydracoil August 1999
FreeRide System
SID XC $ 1,000-1,500 $ 399 Cross-Country HydraAir June 1997
SID100 $ 1,000-1,600 $ 419 Freeride HydraAir June 1999
SID SL $ 1,500-2,300 $ 539 Cross-Country; Dual Air July 1997
Racing
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SID XL $ 1,500-2,500 $ 699 FreeRide Dual Air July 1997
SID RACE $ 1,800-3,500 $ 599 Cross-country Dual Air July 1999
Racing
BOXXER $ 2,500+ $ 1,099 Pro Downhill Racing HydraCoil November 1997
System
RUBY SL $ 1,200-2,200 $ 225 Road Training Type 2 Spring System June 1997
RUBY Metro $ 300-700 $ 155 Road Training Hydracoil August 1998
System
</TABLE>
<TABLE>
<CAPTION>
REAR SUSPENSION
---------------
Suggested
Typical Retail
Retail Price In Date of
Bike Price Accessory Suspension Original
2000 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
Deluxe Adjust $ 700-$1,500 Not offered Cross-Country; Coil over July 1996
at retail Downhill hydraulic damper
Pro Deluxe $ 2,000+ Not offered Downhill Racing Coil over July 1995
at retail Hydraulic
Damper with oil
reservoir
SID Rear $ 1,200-1,900 Not offered Cross-County Dual Air July 1998
at retail
SID Rear Adjust $ 1,400-$2,000 $ 90 Cross Country Dual Air July 1999
Mountain Post $ 1,000-$2,000 $ 119 Hardtail Seatpost Elastomer May 1998
Road Post $ 1,200-$2,200 $ 119 Road Bicycles Elastomer August 1999
Seatpost
<FN>
(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.
(3) MCU stands for Microcellular Urethane spring.
(4) Type 2 Spring System is a combination of a coil spring, spring rate
adjuster, and MCU inside each fork leg.
(5) Hydracoil system is a single coil spring housed in each fork leg, and is
coupled with an open oil bath damper.
(6) HydraAir system is an air spring housed in each fork leg, coupled
with an open oil bath damper.
</TABLE>
RESEARCH AND DEVELOPMENT
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As of March 31, 2000, our product development activities, were supported
by 25 professionals, including 10 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 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.
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, we establish an interdepartmental team, including
representatives from our engineering, manufacturing, marketing, quality,
sourcing and customer service departments, 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:
- research in the area of product design, materials and manufacturing
processes to reduce the cost and improve the performance of our
current products;
- investigation of potential new products and technologies;
- the introduction of products appropriately priced for a broad segment of
the mountain bike market; and
- 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.
Our company-sponsored research and product development expenditures in
fiscal years 2000, 1999, and 1998 were approximately $3.6 million, $4.9 million
and $4.9 million, respectively.
MANUFACTURING
The manufacturing of our branded products was divided into two locations
for the Model year 2000. The higher price point products, Judy, SID, Boxxer,
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all seat post and rear shock absorbers, were made at the San Jose facility. The
Jett XC product was also made at San Jose, while the lower price point Jett C,
representing approximately 10% of our fiscal 2000 production, was made in Taiwan
pursuant to a strategic relationship that we have developed with one of our
vendors, Spinner, Inc. We have a one year contract with Spinner, Inc. This
contract provides for our annual review and audit of Spinner's operations.
Product assembly at San Jose is carried out on multiple continuous flow
lines, which incorporate Statistical Process Control (SPC) and error proofing
devices for improved product quality. The lines are designed to have a daily
output which can be flexed by changing the station manning, in response to the
seasonal nature of the bicycle market. Most component parts are procured from a
supply base that is being continuously developed to meet our needs for quality,
timely delivery and cost. We established some in-house manufacture of critical
components, achieving a level of vertical integration especially for the
telescoping upper tubes of front forks and the shafts for rear shock absorbers.
We worked to assure quality for surface finish and hardening by nitriding of
steel and anodizing of aluminum, which has contributed to improved durability
and functional consistency for our products.
As of March 31, 2000, we employed approximately 240 non-unionized
employees, and approximately 80 temporary hires for manufacturing. Additional
temporary employees are recruited as the seasonal nature of the market demand
builds to its peak, typically from June through January. The San Jose factory
operates two working shifts throughout the year on some product lines, and we
add a second shift on others as needed. Extensive training, especially for new
hires, and for critical changes for new product launch, is carried out. We have
formal release of written work instructions, including detailed exploded
drawings to easily show the sequence of assembly. We are also developing
supplemental training with video. We believe that we have significantly
strengthened SPC and error proofing during Model Year 2000, and also enhanced
our incoming material inspection using a digital coordinate measure machine
(CMM) for ease of repeatable and accurate measurement. In-Process Quality
Assurance routinely assesses the daily output of the manufacturing lines, and we
routinely audit functional and durability using our Product Test Center. We
track and reduce the "cost of quality" measurable every month, and actively
document and track all quality concerns for effective Permanent Corrective
Action.
We work closely with our supply base, and depend upon certain key suppliers
to provide key core competencies, such as forgings and castings and molded
polymers that have been optimized for weight, structural integrity, wear and
cost. We have neither long term supply contracts with any vendors, nor multiple
vendors for all of our component parts. At the same time as we have developed a
strategic relationship with Spinner, Inc. ("Spinner") for some low price points
forks assembled in Taiwan, we have started to explore off-shore sources for
parts where reduced cost can be selectively achieved without compromise to
quality, performance, or timely delivery. This contract provides for our annual
review and audit of Spinner's operations. We track all vendors for quality,
delivery and cost reduction opportunities, and we have an active vendor
improvement plan.
We changed to a new ERP system, using Oracle software, in January 1999.
This facilitated our compliance with Y2K computer requirements, and has provided
an improved functionality over our previous management information system. The
Oracle system allows initial model year forecasting, continuously updated as the
production year develops, to drive material planning and procurement. Subsequent
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production control through to eventual shipment release has progressively
improved our delivery record during this first full year of Oracle usage. We
intend to leverage our new ERP system's on-time delivery as we move into Model
Year 2001. We also intend to significantly reduce our overall inventory levels.
We generally require firm purchase orders with a 60 day lead time from OEM
customers, which represent the majority of our orders. We manage our stock
levels over the model year to maximize availability during the peak season, and
minimize overstocking as the model year changes. Our "backlog" of unfulfilled
orders on March 31, 2000 was $6.0 million, compared to $6.2 million on March 31,
1999. We expect to be able to fill the entire backlog during the first quarter
of the current fiscal year.
SALES AND DISTRIBUTION
Our products are primarily sold to OEMs, which incorporate our 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, 2000, approximately 79% of
our total net sales were to OEMs and approximately, 21% were to distributors and
IBDs. OEM customers are important to us, since bicycle suspension has evolved
from an accessory niche component into standard equipment found on higher
quality mountain bikes. The following table demonstrates the historical pattern
in our customer base and product distribution:
Years Ended March 31,
-------------------------------------------------------
(in thousands) 2000 1999 1998
----------------- ------------------ -----------------
% of % of % of
Net Net Net Net Net Net
Sales Sales Sales Sales Sales Sales
-------- ------- -------- ------- --------- ------
OEMs............ $ 55,495 79% $ 73,999 85% $ 77,633 76%
Distributors
and IBDs...... 14,768 21% 12,864 15% 24,570 24%
-------- ------- -------- ------- --------- ------
Total..... $ 70,263 100% $ 86,863 100% $ 102,203 100%
======== ======= ======== ======= ========= ======
Management believes that our products play an important role
in the sale of bikes by OEMs and that OEMs are aware of the influence that our
brand and name have on a consumer's selection of a mountain bike. In addition
to our strong brand name, we believe that OEMs also choose our products for
product innovation, reliability and quality.
We currently sell to over 280 OEM accounts worldwide. A substantial
portion of our sales flow from the export of our products, a significant portion
of which includes products shipped to Asian manufacturing subcontractors for
certain U.S.-based OEMs.
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The sales process for OEM customers generally runs from December through
May, and during this period, we do 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 first quarter of the fiscal year (June quarter) and peaking in
the second and third quarters (July through December). OEM sales slow down in
the fourth quarter 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 our 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 four distributors in the United States, two of whom are
owned by OEM customers, and approximately 64 additional distributors worldwide.
Our 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 generally purchase our
products for resale to IBDs and generally also provide worldwide servicing and
marketing support for all of our products. In the U.S., we generally sell
directly to IBDs product quantities that are too small for third-party
distributors to process.
As of March 31, 2000 we had approximately 35 employees performing sales
and customer service functions. Our principal sales activities are based in the
United States. In addition, we have a sales representative office with 6
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. We also
have one employee based in our Taiwan sales office.
In fiscal 2000, approximately 61% of our sales represented sales to our 10
largest customers, such as Trek Bicycle Corp., Merida, and Giant Bicycles,
several of which purchase product as both an OEM customer and a distributor.
Sales to our largest customer Trek Bicycle Corp. represented 15% of our net
sales in fiscal 2000. At March 31, 2000, our OEM customer with the largest
accounts receivable balances accounted for approximately 23% of our accounts
receivable. As of March 31, 2000, we had no long-term contracts with any
of our customers.
MARKETING
Our management believes that our brand image, in combination with the
performance features of our products, is an important element in a consumer's
decision to purchase our suspension as an accessory product and that our OEM
customers recognize the strength of our brand name as a contributing factor in a
consumer's choice of mountain bikes.
We promote and maintain our brand name in numerous countries 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.
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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 and increases consumer awareness of and
demand for our 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 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 our 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. We believe that
our focus on editorial content has helped maintain high visibility for our 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. We generally provide hang tags and
brochures at cost or for free to distributors and IBDs. We believe that 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. We sell our clothing line to distributors, bicycle shops and directly
to consumers at race events.
Our sales and marketing expenditures totaled approximately $6.2 million,
approximately $5.3 million and approximately $6.2 million in fiscal years 2000,
1999 and 1998, 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 that produce their own line
of suspension products for their own use and for sale through distributors and
IBDs.
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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, Rapid Suspension Technology
USA, Inc., Marzocchi SpA, 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.
Today, Cannondale Corporation is the only major OEM that has its own brand
of suspension products. Cannondale also makes its suspension products available
to the retail accessory market.
In order to build or retain market share, we must continue successfully to
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. We cannot assure you that
any number of bicycle component manufacturers, OEMs or other companies,
including those that are larger and have greater resources than we do 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 product of ours or a competing product in order to
incorporate other components in a bicycle's specifications that the OEM
perceives as being desirable to the consumer. We could 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. These patents specifically cover internal oil damping components,
structural components, adjustment methods, and numerous items specifically
related to bicycle fork and shock performance. None of the patents that we are
currently using to enforce our property rights have an expiration date before
2010. We cannot assure you, however, that our present or future patents will
adequately protect our technologies, or that patents relating to such
technologies will not be successfully challenged or circumvented by competitors.
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We believe that 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, we cannot assure you 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 we previously used or are using.
We cannot assure you 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, we cannot assure you 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. We cannot assure you 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
us, 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,
or ASTM. 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 our
products) or favor a competitor's product. We cannot predict whether standards
relating to our products or otherwise affecting the bicycle suspension industry
will be adopted, nor can we assure you that the implementation of such standards
will not have a material adverse effect on us.
13
<PAGE>
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.
PRODUCT RECALL
Bicycles and bicycle components, including suspension products, are
frequent subject to product recalls, corrective actions and manufacturers'
bulletins. Since we were founded in 1989, we have conducted five voluntary
corrective actions. None of these actions has been financially material to us.
The number of suspension products sold by us has dramatically increased
since we were founded 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, we cannot assure you 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 at 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 materially 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, 2000, we employed approximately 343 full-time employees.
In addition, we utilized approximately 80 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 good 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
14
<PAGE>
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. We caution you 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:
-- 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.
-- 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.
-- Unexpected difficulties encountered during relocation, risk of operating
in two cities, or management's inability to respond effectively to,
or plan for such relocation could have a material adverse effect on us.
-- 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.
-- 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.
15
<PAGE>
-- The assertion by any person of rights in, or ownership of, any of our
patents, trademarks or other proprietary rights, unless successfully
defended by us could have a material adverse effect on us. In April
1998, we were notified that Cannondale believes that some of our
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 our 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.
-- Because the bicycle industry is, and many of our OEM customers are, highly
dependent on manufacturing in and selling to 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.
-- 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
at the time of any covered loss, any of which could have a material
adverse effect on us.
-- 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.
-- 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.
-- 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.
-- 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.
-- 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.
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. We are planning on moving the sales office
16
<PAGE>
and headquarters during the month of July 2000, while currently in the process
of negotiating the lease of up to 52,500 square feet in Colorado Springs, CO.
This new location will become the new sales office and headquarters of RockShox,
Inc. The Company does not anticipate significant additional lease expense
associated With the relocation.
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 2000.
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, 2000
-------------------------------
First quarter............................ $1.66 $0.94
Second quarter........................... $1.31 $0.88
Third quarter............................ $2.06 $0.44
Fourth quarter........................... $2.00 $0.95
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
On June 26, 2000, the closing sales price per share of our common stock as
reported on the NASDAQ Stock Market was $.719. On June 26, 2000, there were
approximately 87 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
17
<PAGE>
future earnings for use in our business and, therefore, do not anticipate paying
any cash dividends in the foreseeable future.
We have recently received notice from the Nasdaq Stock Market that, since
our minimum bid price per share has recently been below $1 for over 30
consecutive days, we are not in compliance with the Nasdaq National Market
listing standards regarding minimum bid price. We have until August 28, 2000 to
demonstrate compliance with this requirement (by having the bid price on our
stock equal or exceeding $1 for a minimum of ten consecutive trading days). If
we are unable to meet this requirement or receive a waiver from Nasdaq, our
stock will be delisted and maybe traded on the bulletin board.
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>
Years Ended March 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA):
Net sales $ 70,263 $ 86,863 $ 102,203 $ 106,212 $ 83,509
Cost of sales 62,446 71,000 73,183 67,115 54,110
--------- --------- ----------- ----------- ---------
Gross profit 7,817 15,863 29,020 39,097 29,399
--------- --------- ----------- ----------- ---------
Selling, general and administrative
expenses . . . . . . . . . . . . . . 15,850 14,163 13,363 12,137 11,220
Research, development and
engineering expense. . . . . . . . . 3,594 4,907 4,873 4,801 3,401
Restructuring and non-recurring
charges --- (541) 3,326 6,580 ---
--------- --------- ----------- ----------- ---------
Income (loss) from operations . . (11,627) (2,666) 7,458 15,579 14,778
Interest expense (income) and other
expense, net . . . . . . . . . . . . 45 (277) (606) 2,205 5,650
--------- --------- ----------- ----------- ---------
Income (loss) before income
taxes (11,672) (2,389) 8,064 13,374 9,128
Provisions for (benefit from)
income taxes . . . . . . . . . . . . 789 (669) 2,944 5,149 3,464
--------- --------- ----------- ----------- ---------
Income (loss) before
extraordinary loss . . . . . . . . . . (12,461) (1,720) 5,120 8,225 5,664
Extraordinary loss, net of tax
benefit of $885,000 --- --- --- 1,328 ---
--------- --------- ----------- ----------- ---------
Net income (loss) before
accretion. . . . . . . . . . . . . . . (12,461) (1,720) 5,120 6,897 5,664
Accretion for dividends on
mandatorily redeemable
preferred stock --- --- --- 185 357
--------- --------- ----------- ----------- ---------
Net income (loss) available
to common stockholders. . . . . . . . ($12,461) ($1,720) $ 5,120 $ 6,712 $ 5,307
--------- --------- ----------- ----------- ---------
Income (loss) per share before
extraordinary loss - basic . . . . . ($0.91) ($0.13) $ 0.37 $ 0.71 $ 0.60
Loss per share from extraordinary
item - basic . . . . . . . . . . . . -- -- -- (0.12) --
--------- --------- ----------- ----------- ---------
Net income (loss) per share -
basic ($0.91) ($0.13) $ 0.37 $ 0.59 $ 0.60
--------- --------- ----------- ----------- ---------
Cash dividend per share . . . . . . . . -- -- -- -- --
--------- --------- ----------- ----------- ---------
Shares used in per share
calculation - basic. . . . . . . . . 13,761 13,761 13,717 11,430 8,820
--------- --------- ----------- ----------- ---------
Income (loss) per share before
extraordinary loss - diluted . . . . ($0.91) ($0.13) $ 0.36 $ 0.69 $ 0.60
Loss per share from extraordinary
item - diluted . . . . . . . . . . . -- -- -- (0.11) --
--------- --------- ----------- ----------- ---------
Net income (loss) per share -
diluted . . . . . . . . . . . . . . . ($0.91) ($0.13) $ 0.36 $ 0.58 $ 0.60
--------- --------- ----------- ----------- ---------
Shares used in per share
calculation - diluted. . . . . . . . 13,761 13,761 14,030 11,641 8,820
--------- --------- ----------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital 10,647 20,067 22,372 23,722 2,327
18
<PAGE>
Total assets 35,804 48,765 52,259 45,875 26,932
Total debt --- -- -- -- 44,500
Mandatorily redeemable preferred
stock --- -- -- -- 7,357
Stockholders' equity (deficit) 23,602 36,063 37,765 31,561 39,615)
</TABLE>
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, which we refer to as 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 transfer of title, 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 sales
for the periods indicated.
Years Ended March 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 88.9% 81.7% 71.6%
Gross profit............................... 11.1% 18.3% 28.4%
Selling, general and administrative expense... 22.5% 16.3% 13.0%
Research, development and engineering expense. 5.1% 5.6% 4.8%
Restructuring and non-recurring charges....... 0.0% (0.6%) 3.3%
Income(loss)from operations............... (16.5%) (3.1%) 7.3%
FISCAL YEAR ENDED MARCH 31, 2000 (FISCAL 2000) COMPARED TO FISCAL YEAR ENDED
MARCH 31, 1999 (FISCAL 1999)
NET SALES. Net sales for the year ended March 31, 2000 decreased by 19.1%
to approximately $70.3 million compared to approximately $86.9 million for the
year ended March 31, 1999. OEM sales decreased in fiscal 2000 by 25% to
approximately $55.5 million compared to approximately $74.0 million in fiscal
1999. Aftermarket sales increased by 12.7% to approximately $14.8 million
compared to approximately $12.9 million in fiscal 1999. We believe that the
decrease in OEM sales is primarily due to increased competition in the mountain
bike suspension market and delay in start up of OEM customers 2000 model year.
Export sales, a significant portion of which included products shipped to
Asian manufacturing subcontractors for certain U.S.-based OEMs, accounted for
19
<PAGE>
approximately 70.1% and approximately 64.5% of net sales in fiscal 2000 and
1999, respectively.
GROSS MARGIN. Gross margin (gross profit as a percentage of net sales) for
fiscal 2000, decreased to 11.1% compared to approximately 18.3% in fiscal 1999.
We believe that the decrease in gross margin was primarily due to fixed overhead
costs not being fully absorbed due to lower than anticipated sales,
manufacturing inefficiencies and provisions for excess and obsolete inventory in
fiscal 2000. Partially offsetting these costs was an increase in IBD sales as a
percentage of total sales compared to fiscal 1999. IBD sales generally have a
higher gross margin than OEM sales due to discounts given to OEM customers.
Also in fiscal year 2000, RockShox incurred a charge of $2,900,000 relating to a
writedown of inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative ("SG&A") expenses for fiscal 2000 increased by approximately
11.9% to approximately $15.9 million (or approximately 22.5% of net sales) from
14.2 million or 16.3% of net sales for the prior year. The year-to-year
increase over the same period last year is primarily a result of approximately
$450,000 for disposals of fixed assets, $150,000 for severance charges, and
$500,000 for changes in senior management.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE. Research, development and
engineering ("R&D") expense for fiscal 2000 decreased approximately 26.8% to
approximately $3.6 million (or approximately 5.1% of net sales) from 4.9 million
or 5.6% of net sales for the prior year. Year to year, R&D remained relatively
constant as a percentage of net sales.
INTEREST INCOME/EXPENSE. For the year ended March 31, 2000, the Company had
interest expense of approximately $45,000. For the year ended March 31, 1999,
the Company had interest income of approximately $277,000. The decrease of
interest income and increase of interest expense is due to lower cash balances
from lower revenue during fiscal 2000 compared to the prior year.
INCOME TAX BENEFIT/EXPENSE. Our effective tax rate for fiscal 2000 was a
6.8% expense compared to a 28.0% benefit for fiscal 1999. The increase in the
effective tax rate was primarily due to the change in the valuation allowance,
partially offset by the reversal of previously recorded tax liability under the
statute of limitations.
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
approximately 15.0% to approximately $86.9 million compared to approximately
$102.2 million for the year ended March 31, 1998. OEM sales decreased in fiscal
1999 by approximately 4.6% to approximately $74.0 million compared to
approximately $77.6 million in fiscal 1998. Sales to the retail accessory market
(IBDs) decreased by approximately 47.6% to approximately $12.9 million in fiscal
1999 compared to approximately $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
20
<PAGE>
approximately 64.5% and approximately 62.1% of net sales in fiscal 1999 and
1998, respectively.
GROSS MARGIN. Gross margin for fiscal 1999, decreased to approximately 18.3%
compared to approximately 28.4% in fiscal 1998. We believe that 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. SG&A expense for fiscal 1999
increased by approximately 6.0% to approximately $14.2 million (or approximately
16.3% of net sales) compared to approximately $13.4 million (or approximately
13.0% of net sales) for the prior year. We believe that 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 approximately
$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. R&D expense for fiscal 1999
remained constant at approximately $4.9 million which represented approximately
5.6% of net sales in fiscal 1999 compared to approximately 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 approximately $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 approximately $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
approximately $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.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended March 31, 2000, net cash provided by operating activities
was approximately $1.5 million which was comprised of the net loss of
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<PAGE>
approximately $12.5 million decreased by non-cash charges for depreciation and
amortization of approximately $5.0 million, offset by $9.0 million in
adjustments to net cash provided by operating activities. Accounts receivable at
March 31, 2000 decreased to approximately $12.6 million net of allowance for
doubtful accounts compared to approximately $15.1 million at March 31, 1999. The
decrease in accounts receivable was due to decreased sales volume in the fourth
quarter of fiscal 2000 as compared to the same period last year, offset by
extending longer payment terms to some of our largest customers. Inventories at
March 31, 2000 decreased to approximately $5.6 million net of inventory reserves
compared to approximately $9.2 million at March 31, 1999. The decrease in
inventory was primarily due to write-offs of excess and obsolete inventory.
Net cash used in investing activities was approximately $2.4 million which
principally consisted of acquisitions of property and equipment. There was no
net cash provided by financing activities during the year.
Capital expenditures totaled approximately $2.4 million for fiscal 2000 and
approximately $6.6 million for fiscal 1999. The decrease in capital expenditures
principally related to purchases of manufacturing equipment in fiscal 1999 that
allowed us to bring in-house certain manufacturing processes previously
performed by subcontractors, and which did not recur in fiscal 2000. As of March
31, 2000, we had purchase commitments of approximately $1.5 million primarily
for tooling and machinery to be used in manufacturing beginning in fiscal 2001,
which commitments are expected to be funded by cash flow from operations or
available cash balances.
On December 10, 1999 our existing credit agreement expired and we entered
into a new credit agreement, which provides for borrowings up to $5.0 million at
an interest rate at a base rate (as defined therein) plus 0.375%, and which
expires in December 2001. Any outstanding amounts under the facility are
collateralized by our accounts receivable, inventory, equipment and intangibles.
There were no outstanding borrowings against the new credit facility as of March
31, 2000.
At March 31, 2000, we had cash of approximately $2.8 million and working
capital of approximately $10.6 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 FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. FAS 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. In July 1999, the Financial Accounting Standards Board
issued FAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of FAS No. 133," or FAS No. 137. FAS No. 137
defers the effective date of FAS No. 133 until the beginning of fiscal quarters
or years after June 15, 2000. We will adopt FAS 137 in the fiscal year ended
March 31, 2001. We do not expect that adoption of FAS 137 will have a material
impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, or SAB 101, "Revenue Recognition in Financial Statements"
22
<PAGE>
and in March 2000 issued SAB 101A "Amendment: Revenue Recognition in Financial
Statements." SAB 101 and 101A are effective for the Company in the fourth
quarter of the fiscal year ending March 31, 2001. We do not currently expect
that adoption of SAB 101 will have a material impact on our financial position
or results of operations.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25." This interpretation
has provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation did not and will not have a material impact on
our financial position or results of operations.
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.
Quarter Ended
----------------------------------------------------
March 31, December 31, September 30, June 30,
2000 1999 1999 1999
---------- ------------ ------------- -----------
(in thousands, except per share amounts)
Net sales ............... $ 19,278 $ 25,500 $ 15,961 $ 9,524
Gross profit (loss)...... 397 5,510 2,887 (977)
Operating income (loss).. (4,686) 1,115 (1,167) (6,889)
Net income (loss) ....... (4,757) (1,628) (1,123) (4,953)
Net income (loss) per
share - basic........... ($0.35) ($0.12) ($0.08) ($0.36)
========== ============ ============= ===========
Shares used in per share
calculations - basic.... 13,761 13,761 13,761 13,761
========== ============ ============= ===========
Net income (loss)
per share - diluted..... ($0.35) ($0.12) ($0.08) ($0.36)
========== ============ ============= ===========
Shares used in per
share calculations -
diluted ................ 13,761 13,761 13,761 13,761
========== ============ ============= ===========
23
<PAGE>
March 31, December 31, September 30, June 30,
1999 1998 1998 1998
---------- ------------ ------------- ----------
(in thousands, except per share amounts)
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
========== ============ ============= ==========
Because of our fluctuation in sales, historical quarterly operating
results do not necessarily 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,
-- 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
We have successfully implemented our Enterprise Resource Planning system and
were in Year 2000 compliance with all internal financial systems prior to the
Year 2000. We have not encountered any substantial issues related to Year 2000
in regards to customers and suppliers, service providers and contractors.
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
24
<PAGE>
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, 2000. We
are exposed to financial market risks, including changes in interest rates and
foreign currency exchange rates. We believe that an increase in interest rates
would not significantly affect our net loss. Virtually 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 30 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
In September 1999, the Board of Directors, at the recommendation of the
Audit Committee, terminated the engagement of PricewaterhouseCoopers LLP as the
Company's certifying accountants.
The report of PricewaterhouseCoopers LLP on the Company's financial
statements for either the last two fiscal years did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
During the last two most recent fiscal years and subsequent interim periods
preceding the date of termination of the engagement of PricewaterhouseCoopers
LLP, the Company was not in disagreement with PricewaterhouseCoopers on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP would have caused
PricewaterhouseCoopers LLP to make reference to the subject matter of the
disagreement in connection with this report.
The required letter from PricewaterhouseCoopers with respect to the above
statements made by the Company is filed as an exhibit hereto.
Also in September 1999, the Board of Directors , at the recommendation of
the Audit Committee, engaged Ernst & Young LLP as the Company's certifying
accountants. The Company had not consulted with Ernst & Young LLP during its
two most recent fiscal years or during any subsequent interim period prior to
its engagement regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit option that
might be rendered on the Company's financial statements.
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 22, 2000
to be filed with the Securities and Exchange Commission within 120 days
after March 31, 2000 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
25
<PAGE>
The information required by this item will be contained in our
Proxy Statement for our Annual Meeting of Stockholders to be held on August 22,
2000 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 2000 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 22,
2000 to be filed with the Securities and Exchange Commission within 120 days
after March 31, 2000 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 22, 2000
to be filed with the Securities and Exchange Commission within 120 days after
March 31, 2000 and is incorporated herein by reference.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See page 30 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)
27
<PAGE>
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)
10.24 Credit agreement, dated December 10, 1999, between RockShox, Inc. and
the Wells Fargo Business Credit. (8)
10.25 Employment agreement, dated December 23, 1999, between RockShox, Inc.
and Bryan Kelln. (8)
21 List of Subsidiaries of RockShox, Inc. (1)
23 Consent of Ernst & Young LLP.
23.1 Report of PricewaterhouseCoopers LLP on Financial Statement Schedule.
23.2 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).
28
<PAGE>
(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.
(8) Previously filed with Form 10-K of RockShox, Inc. for the year ended
March 31, 1999.
(9) Previously filed with Form 10-Q of RockShox, Inc. for the year ended
June 30, 1999.
(10) Previously filed with Form 10-Q of RockShox, Inc. for the year ended
September 30, 1999.
(11) Previously filed with Form 10-Q of RockShox, Inc. for the quarter ended
December 31, 1999.
(a) Reports on Form 8-K
(b) 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.
29
<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 Ernst & Young LLP, Independent Auditors..... 31
Report of PricewaterhouseCoopers LLP, Independent Auditors... 32
Consolidated Balance Sheets at March 31, 2000 and 1999....... 33
Consolidated Statements of Operations for the Years Ended
March 31, 2000, 1999 and 1998............................ 34
Consolidated Statements of Stockholders' Equity for
the Three Years Ended March 31, 2000..................... 35
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000, 1999 and 1998............................ 36
Notes to Consolidated Financial Statements................... 38
2. Consolidated Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts................ 59
30
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Stockholders and Board of Directors
RockShox, Inc.
We have audited the accompanying consolidated balance sheet of RockShox, Inc. as
of March 31, 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows the year then ended. 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 audit. The consolidated financial statements of RockShox, Inc. for the year
ended March 31, 1999 and 1998 were audited by other auditors whose report dated
April 27, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2000 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of RockShox, Inc.
at March 31, 2000, and the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California
April 24, 2000
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
RockShox, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of RockShox,
Inc. and its subsidiaries at March 31, 1999, and the results of their operations
and their cash flows for each of the two years in the period ended March 31,
1999 in conformity with accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in the United States,
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
32
<PAGE>
<TABLE>
<CAPTION>
ROCKSHOX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31,
---------------------
2000 1999
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 2,832 $ 3,755
Accounts receivable, net of allowance for
doubtful accounts $1,132 in 2000 and $700
in 1999......................................... 12,623 15,112
Inventories......................................... 5,614 9,174
Prepaid expenses and other current assets........... 380 666
Deferred income taxes............................... 1,400 4,062
---------- ---------
Total current assets............................. 22,849 32,769
Property and equipment, net............................ 12,567 15,807
Loan to related party.................................. 200 --
Other assets........................................... 188 189
---------- ---------
Total assets..................................... $ 35,804 $ 48,765
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... 6,207 $ 5,266
Accrued liabilities................................. 5,995 7,436
---------- ---------
Total current liabilities........................ 12,202 12,702
Commitments and contingencies (Note 8)
Preferred stock, $0.01 par value:
Authorized: 10,000,000 shares
Issued and outstanding: none in 2000 and 1999...... -- --
Common stock, $0.01 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 13,761,147 shares in
2000 and 1999....................................... 138 138
Additional paid-in capital............................. 65,928 65,928
Distributions in excess of net book value.............. (45,422) (45,422)
Retained earnings...................................... 2,958 15,419
---------- ---------
Total stockholders' equity....................... 23,602 36,063
---------- ---------
Total liabilities and stockholders' equity....... $ 35,804 $ 48,765
========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
33
<PAGE>
<TABLE>
<CAPTION>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended March 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net sales..................................... $70,263 $ 86,863 $102,203
Cost of sales................................. 62,446 71,000 73,183
---------- ---------- ----------
Gross profit............................... 7,817 15,863 29,020
---------- ---------- ----------
Selling, general and administrative expense... 15,850 14,163 13,363
Research, development and engineering expense. 3,594 4,907 4,873
Restructuring and non-recurring............... -- (541) 3,326
---------- ---------- ----------
Operating expenses......................... 19,444 18,529 21,562
---------- ---------- ----------
Income(loss)from operations................ (11,627) (2,666) 7,458
Interest income............................... -- 277 606
Interest expense.............................. (45) -- --
---------- ---------- ----------
Income(loss)before income taxes........... (11,672) (2,389) 8,064
Provision for (benefit from)income taxes..... 789 (669) 2,944
---------- ---------- ----------
Net income(loss)available to common
stockholders............................. ($12,461) ($1,720) $5,120
========== ========== ==========
Net income (loss)per share - basic............ ($0.91) ($0.13) $0.37
Shares used in per share calculations - basic. 13,761 13,761 13,717
========== ========== ==========
Net income(loss) per share - diluted.......... ($0.91) ($0.13) $0.36
========== ========== ==========
Shares used in per share calculations -
diluted..................................... 13,761 13,761 14,030
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
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, 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 and comprehensive
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 and comprehensive
loss...................... -- -- -- -- (1,720) (1,720)
-------- -------- --------- ---------- --------- ---------
Balances, March 31, 1999....... 13,761 138 65,928 (45,422) 15,419 36,063
Net loss and comprehensive
loss...................... -- -- -- -- (12,461) (12,461)
-------- -------- --------- ---------- --------- ---------
Balances, March 31, 2000...... 13,761 $138 $65,928 ($45,422) $ 2,958 $23,602
======== ======== ========= ========== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
ROCKSHOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended March 31,
-----------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... ($12,461) ($1,720) $5,120
Adjustments to reconcile net income/(loss) to
Net cash provided by (used in) operating
activities:
Restructuring and non-recurring charges.... -- (541) 3,326
Depreciation .............................. 4,951 5,783 4,706
Loss on disposal of fixed assets........... 531 -- 782
Provision for doubtful accounts............ 500 226 (489)
Provision for excess and obsolete
inventories.............................. 2,200 3,041 2,408
Deferred income taxes...................... 2,662 477 200
Changes in operating assets and liabilities:
Accounts receivable........................ 1,989 (6,108) (2,123)
Inventories................................ 1,360 (634) (3,189)
Prepaid expenses and other current assets.. 287 296 170
Accounts payable and accrued liabilities... (500) (958) (3,146)
--------- --------- ---------
Net cash provided by (used in)
operating activities..................... 1,519 (138) 7,765
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment......... (2,442) (6,643) (13,012)
Proceeds from disposal of fixed assets..... 200 (36) (30)
Loan to related party...................... (200) -- --
--------- --------- ---------
Net cash used in investing activities..... (2,442) (6,679) (13,042)
--------- --------- ---------
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 short-term borrowings........ 4,000 2,000 --
Repayment of short-term borrowings and
bank debt.................................. (4,000) (2,000) --
--------- --------- ---------
Net cash provided by financing activities. -- 18 1,084
--------- --------- ---------
Net decrease in cash and cash
equivalents............................ (923) (6,799) (4,193)
Cash and cash equivalents, beginning of
period...................................... 3,755 10,554 14,747
--------- --------- ---------
Cash and cash equivalents, end of period...... $2,832 $ 3,755 $10,554
========= ========= =========
36
<PAGE>
Supplemental disclosure of cash flow
information:
Income taxes paid.......................... -- -- $2,478
Interest paid.............................. $45 $21 --
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
37
<PAGE>
ROCKSHOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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, 2000, 1999 and 1998 approximately 79%, 85% and 76% respectively, of the
Company's total net sales were to OEMs. For the years ended March 31, 2000, 1999
and 1998 approximately 21%, 15% and 24% respectively, of the Company's total net
sales were to the retail accessory market.
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.
38
<PAGE>
The company manufactures product in the United States, in addition the
company sub-contracts certain low end product manufactured in Taiwan. 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.
CONCENTRATIONS OF CREDIT RISK AND 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.
The Company performs ongoing credit evaluations, generally does not
require collateral of its customers and maintains allowances for potential
credit losses. At March 31, 2000, one OEM customer accounted for 23% of accounts
receivable. At March 31, 1999, one OEM customer accounted for 30% of accounts
receivable. For the year ended March 31, 2000, one customer accounted for 15% of
the Company's revenues. For the year ended March 31, 1999 two customers
accounted for 17% and 16% of the Company's revenue. For the year ended March
31, 1998, one customer accounted for 16% of the Company's revenues.
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.
39
<PAGE>
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.
REVENUE RECOGNITION:
The Company recognizes revenue, net of allowances for estimated returns,
when title transfers, upon shipment of product, and when collectibility is
reasonably assured.
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 $1,871,000, $1,701,000 and $1,922,000 for the years ended March 31, 2000,
1999 and 1998, respectively.
INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured based upon differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes using enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
40
<PAGE>
COMPREHENSIVE INCOME:
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" 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 for the years ended
March 31, 2000 and 1999. 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 FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. FAS 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. In July 1999, the Financial Accounting Standards Board
issued FAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of FAS No. 133," or FAS No. 137. FAS No. 137
defers the effective date of FAS No. 133 until the beginning of fiscal quarters
or years after June 15, 2000. The Company will adopt FAS 137 in the fiscal year
ended March 31, 2001. The Company does not expect that adoption of FAS 137 will
have a material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, or SAB 101, "Revenue Recognition in Financial Statements"
and in June 2000 issued SAB 101B "Amendment: Revenue Recognition in Financial
Statements." The Company will adopt SAB 101 and 101A in the fourth quarter of
the fiscal year ended March 31, 2001. The Company does not currently expect
that adoption of SAB 101 and 101A will have a material impact on the Company's
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25." This interpretation
has provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation did not and will not have a material impact on
the Company's financial position or results of operations.
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.
41
<PAGE>
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,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Restructuring plan .................. -- ($221) $2,244
Settlement of legal dispute ......... -- -- 637
Write down of equipment ............. -- (320) 445
---------- ---------- ----------
-- ($541) $3,326
========== ========== ==========
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
charged to cost of goods sold $1,429,000 of inventory relating to discontinued
products.
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.
4. INVENTORIES (IN THOUSANDS):
March 31,
---------------------
2000 1999
---------- ----------
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<PAGE>
Raw materials .................. $3,779 $6,048
Finished goods ................. 1,835 3,126
---------- ----------
$5,614 $ 9,174
========== ==========
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,
---------------------
2000 1999
---------- ----------
Computer equipment,
furniture and fixtures............ $6,045 $ 5,512
Machinery and equipment............. 12,685 10,710
Tooling............................. 9,610 8,633
Leasehold improvements.............. 1,460 1,184
---------- ----------
29,800 26,039
Less: accumulated depreciation
and amortization.................. (18,035) (13,278)
Construction in progress............ 802 3,046
---------- ----------
$12,567 $15,807
========== ==========
Depreciation and amortization expense on property and equipment
for the years ended March 31, 2000, 1999 and 1998 was $4,951,000, $5,783,000 and
$4,706,000, respectively.
6. ACCRUED LIABILITIES (IN THOUSANDS):
March 31,
---------------------
2000 1999
---------- ----------
Accrued payroll and benefits...... $1,525 $ 634
Accrued warranty.................. 1,861 2,495
Accrued rebates................... 768 1,500
Other............................. 1,841 2,807
---------- ----------
$6,991 $7,436
========== ==========
The Company had $1,861,000 and $2,495,000 in accrued warranty costs at
March 31, 2000 and March 31, 1999, 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
43
<PAGE>
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:
LOAN TO RELATED PARTY:
Pursuant to his employment contract, on January 24, 2000 the Company granted
President and Chief Executive Officer Bryan Kelln a $200,000 interest-free loan
for a three year period. Forgiveness of the loan from fiscal year to fiscal
year is at the discretion of the Board of Directors, based on performance of the
Company.
CONSULTING AND EMPLOYMENT AGREEMENTS:
Prior to the Initial Public Offering, the Company had entered into annual
employment agreements (the "Employment Agreements") 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, (each, an "Employment Agreement"). Each Employment Agreement
had an initial one-year term and automatically renewed for additional one-year
terms, with the final term ending March 31, 2000, 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 (as
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 received an annual salary of
$250,000.
Each Employment Agreement also provides that, for each fiscal year, during
the term of the 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. During fiscal 2000, 1999, and 1998, no incentive compensation was
earned under the Amended Employment Agreements. Effective July 31, 1998, the
Former Vice President of Advanced Research ceased to be an executive of the
Company and his employment agreement was terminated. The former President has
served as the Chairman of the Board of Directors since 1996, and served as
President until November, 1997. He is currently serving as the Chief Technical
Officer.
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.
44
<PAGE>
INVENTORY PURCHASES:
For the years ended March 31, 2000, 1999 and 1998, the Company paid
$1,622,000, $1,796,000 and $1,813,000, respectively, to a supplier of raw
materials. Prior to March 18, 1994, the former President of the Company owned
50% of the common stock of this supplier. The 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, 2000,
1999 and 1998 was $1,490,000, $1,555,000 and $1,593,000, respectively.
The Company has entered into two sublease agreements which expire in March
2001. For fiscal 2001, sublease income will be approximately $449,000.
Following is a summary, by fiscal year, of future minimum lease payments under
operating leases at March 31, 2000 (in THOUSANDS):
Operating
Lease
Fiscal Year Payments
----------
2001............................... $1,518
2002............................... 1,039
2003............................... 1,071
2004............................... 1,103
2005............................... 93
Thereafter......................... --
----------
Total minimum lease payments....... $4,824
==========
As of March 31, 2000, the Company had purchase commitments of approximately $1.5
million primarily for tooling and machinery to be used in manufacturing
beginning in fiscal 2001.
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
45
<PAGE>
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 1,279,020 shares of
common stock pursuant to awards 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 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 generally expire
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:
Shares Number Weighted
Available of Average
Outstanding Options for Grant Shares Exercise Price Price
-------------------------- --------- ---------- ------------------ ---------
Balances, March 31, 1997.. 140,479 838,541 $4.39 - $15.00 $7.44
Options reserved.......... 600,000 -- -- --
Options granted........... (531,450) 531,450 $7.13 - $14.93 $8.56
Options exercised......... -- (137,236) $4.39 - $ 4.69 $4.41
Options cancelled......... 81,142 (81,142) $4.39 - $15.00 $13.72
--------- ---------- ---------
Balances, March 31, 1998.. 290,171 1,151,613 $4.39 - $15.00 $7.87
Options granted........... (623,524) 623,524 $1.88 - $7.13 $3.87
Options exercised......... -- (3,916) $4.39 $4.39
Options cancelled......... 571,152 (571,152) $1.88 - $15.14 $8.98
--------- ---------- ---------
Balances, March 31, 1999.. 237,799 1,200,069 $1.88 - $15.14 $5.28
Options granted........... (625,001) 625,001 $1.02 - $ 1.78 $1.71
Options exercised......... -- -- -- --
Options cancelled......... 906,384 (906,384) $1.02 - $15.00 $5.39
--------- ---------- --------------- ---------
Balances, March 31, 2000 519,182 918,686 $1.02 - $15.14 $2.74
========= ========== =============== =========
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<PAGE>
At March 31, 2000, the Company has reserved 918,686 shares of common stock for
future issuance related to stock options outstanding, and 519,182 shares of
common stock for future issuance related to stock options available for grant
under the 1996 and 1998 Stock Plans.
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, 2000, 1999, and 1998, 99,596, 350,014, and 254,134 outstanding
options were exercisable under the Plans, at weighted average exercise prices of
$4.89, $5.57, and $6.80, respectively.
As discussed in Note 2, the Company continues to account for the Plans
in accordance with APB 25. Consistent with the provisions of SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicated below (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
Years Ended March 31,
-----------------------------
2000 1999 1998
--------- --------- ---------
Net income(loss)available to common stockholders -
as reported................................... ($12,461) ($1,720) $5,120
Net income(loss)available to common stockholders -
pro forma...................................... ($13,317) ($3,428) $4,517
Net income(loss) per share - basic as reported... ($0.91) ($0.13) $0.37
Net income(loss) per share - diluted as reported. ($0.91) ($0.13) $0.36
Net income(loss) per share - basic pro forma..... ($0.97) ($0.25) $0.33
Net income(loss) per share - diluted pro forma... ($0.97) ($0.25) $0.33
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, 2000, 1999 and 1998 were $424,000, $1.7 million and $2.2 million and
$1.44, $3.69, and $4.16, 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:
Years Ended March 31,
-----------------------------------
2000 1999 1998
----------- ----------- -----------
Risk-free interest rate................... 6% 4.34%-5.58% 5.47%-6.52%
Expected life............................. 3.5 3.5 3.5
Dividend rate............................. -- -- --
Expected volatility....................... 109% 125% 57%
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<PAGE>
The options outstanding and currently exercisable by exercise price at March 31,
2000 were as follows:
Options Currently
Options Outstanding Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
------------------- ----------- ----------- --------- ----------- ---------
$1.02 - $1.41 51,000 9.49 $1.21 -- $ --
$1.78 - $2.28 621,501 9.65 1.83 22,625 2.14
$3.84 - $4.75 202,010 8.22 4.50 57,786 4.51
$7.13 - $7.44 32,000 7.97 7.15 14,000 7.15
$13.06 - $15.14 12,175 7.02 15.02 5,185 15.02
----------- -----------
918,686 9.23 $2.74 99,596 $4.89
=========== ===========
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):
Years Ended March 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Current:
State......................... $ -- $ -- $140
Federal....................... (1,873) (1,146) 2,604
---------- ---------- ----------
(1,873) (1,146) 2,744
---------- ---------- ----------
Deferred:
State......................... ( 346) 153 10
Federal....................... (3,967) 324 190
--------- ---------- ----------
(4,313) 477 200
Change in valuation allowance 6,975 -- --
---------- ---------- ----------
2,662 477 200
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<PAGE>
---------- ---------- ----------
$ 789 ( $669) $2,944
========== ========== ==========
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:
Years Ended March 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
United States statutory rate............ (34.0%) (34.0%) 34.0%
Foreign Sales Corporation tax
benefit ............................ -- -- (3.1%)
States taxes, net of federal
benefit ............................ (2.0%) 4.9% 3.1%
Reversal of tax liability under statute
of limitations...................... (14.4%) -- --
Change in valuation allowance........... 59.8% -- --
Other .................................. (2.6%) 1.1% 2.5%
---------- ---------- ----------
6.8% (28.0%) 36.5%
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. 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,
--------------------
2000 1999
Deferred tax assets: --------- ---------
Allowance for doubtful accounts................... $ 396 $ 340
Allowance for excess and obsolete inventory....... 1,461 1,122
Accrued warranty.................................. 671 848
Accrued liabilities............................... 1,000 1,025
Net operating loss carryovers..................... 4,928 --
Other............................................. -- 727
--------- ---------
Total deferred tax asset.......................... 8,456 4,062
Valuation allowance............................... (6,975) --
Deferred tax liabilities.......................... (81) --
--------- ---------
Net deferred tax asset............................ $1,400 $4,062
========= =========
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<PAGE>
Deferred tax assets have been offset by a valuation allowance due to risks and
uncertainties surrounding the Company's ability to generate future taxable
income, except no valuation allowance has been established to the extent net
operating losses can be carried back and utilized against prior year taxable
income. The valuation allowance increased by $6,975,000 in the year ended March
31, 2000.
At March 31, 2000, the Company has net operating loss carryovers for federal
income tax purposes of approximately $13,590,000, approximately $5,263,000 of
which can be carried back and utilized in a prior year. The remaining
$8,327,000 of federal net operating loss carryforwards will expire in tax year
2020. The Company has net operating loss carryforwards for state income tax
purposes of approximately $6,240,000, which expire in tax years 2004 and 2005.
Because of the "change in ownership" provisions of the Internal Revenue Code of
1986, a portion of the Company's net operating loss carryforwards may be subject
to an annual limitation regarding their utilization against taxable income in
future periods. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce future
income tax liabilities.
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, 2000, 1999, and 1998, Company
contributions amounted to approximately $94,000, $87,000, and $84,000,
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. Substantially, 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,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Asia ................................. $26,881 $32,176 $34,055
Europe ............................... 23,475 25,165 25,100
United States......................... 17,364 27,604 38,676
Other ................................ 2,543 1,918 4,372
---------- ---------- ----------
$70,263 $86,863 $102,203
========== ========== ==========
13. EARNINGS PER SHARE:
50
<PAGE>
A reconciliation of the numerator and denominator of basic and diluted
EPS is provided as follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS).
Years Ended March 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Weighted average shares of common stock
outstanding................................. 13,761 13,761 13,717
---------- ---------- ----------
Shares used in basic net income(loss)per share
calculation................................. 13,761 13,761 13,717
========== ========== ==========
Weighted average shares of common stock
outstanding................................. 13,761 13,761 13,717
Diluted effect of stock options............... -- -- 313
---------- ---------- ----------
Shares used in diluted net income(loss) per share
calculation................................. 13,761 13,761 14,030
========== ========== ==========
Reconciliation of net income(loss)available to
stockholders used in basic and diluted per
share calculations:
Income(loss).................................. ($12,461) ($1,720) $5,120
---------- ---------- ----------
Net income(loss) available to common
stockholders........................... ($12,461) ($1,720) $5,120
========== ========== ==========
Net income(loss)per share - basic........ ($0.91) ($0.13) $0.37
========== ========== ==========
Net income(loss)per share - diluted....... ($0.91) ($0.13) $0.36
========== ========== ==========
As of March 31, 2000, 1999, and 1998 options to purchase 918,686,
1,200,069, and 286,192 shares, respectively, were not included in the earnings
per share calculation as the effect was anti-dilutive.
14. LINE OF CREDIT:
On December 10, 1999, the Company entered into a new credit agreement
providing for borrowing up to $5.0 million. Any outstanding amounts are
collateralized primarily by the Company's accounts receivables, inventory,
equipment and intangibles, and bearing interest at prime rate plus 0.375%
annually. There were no outstanding borrowings against the credit facility as
of March 31, 2000.
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. Any outstanding
51
<PAGE>
amounts under the facility were collateralized by the Company's accounts
receivables, inventory, equipment and intangibles. There were no outstanding
borrowings against the credit facility as of March 31, 1999 and loan note
agreement was terminated in December 1999.
52
<PAGE>
SCHEDULE II
ROCKSHOX, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(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, 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
As of March 31, 2000:
Allowance for excess and
obsolete inventory ..... 3,309 2,835 (2,207) $3,937
Allowance for doubtful
accounts ............... 700 500 (68) 1,132
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<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 28, 2000 By: /s/ Chris Birkett
---------------------------------
Chris Birkett
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.
Signature Title Date
----------------------------- ---------------------------------- -------------
By: /s/ Bryan Kelln Chief Executive Officer, President June 28, 2000
-------------------------- and Director
Bryan Kelln (Principal Executive Officer)
By: /s/ STEPHEN W. SIMONS Chairman of the Board and Director June 28, 2000
--------------------------
Stephen W. Simons
By: /s/ Chris Birkett Vice President, Chief Financial June 28, 2000
-------------------------- Officer and Secretary
Chris Birkett Principal Financial and
Accounting Officer)
By: /s/ JOHN W. JORDAN II Director June 28, 2000
--------------------------
John W. Jordan II
By: /s/ ADAM E. MAX Director June 28, 2000
--------------------------
Adam E. Max
By: /s/ MICHAEL R. GAULKE Director June 28, 2000
--------------------------
Michael R. Gaulke
By: /S/ EDWARD POST Director June 28, 2000
--------------------------
Edward Post
54
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
We have audited the consolidated financial statements of RockShox, Inc. as of
March 31, 2000 and for the year then ended, and have issued our report thereon
dated April 24, 2000 (included elsewhere in this Form 10-K). Our audit also
included the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. The consolidated
financial statements and the financial statement schedule of RockShox, Inc. for
the years ended March 31, 1999 and 1998 were audited by other auditors whose
report dated April 27, 1999 and April 24, 1998, expressed an unqualified opinion
on those statements and schedule.
In our opinion, the 2000 financial statement schedule referred to above, when
considered in relation to the basic 2000 financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Francisco, California
April 24, 2000
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