S-1/A 1 d520049ds1a.htm FORM S-1/A AMENDMENT NO. 3 Form S-1/A Amendment No. 3
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As filed with the Securities and Exchange Commission on July 29, 2013

Registration No. 333-189841

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Fox Factory Holding Corp.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   3751  

           26-1647258            

(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)

915 Disc Drive

Scotts Valley, CA 95066

831.274.6500

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Larry L. Enterline

Chief Executive Officer

Fox Factory Holding Corp.

915 Disc Drive

Scotts Valley, CA 95066

831.274.6500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Stephen D. Cooke, Esq.

Justin T. Hughes, Esq.

Paul Hastings LLP

695 Town Center Drive

Seventeenth Floor

Costa Mesa, California 92656

714.668.6200

 

David Haugen, Esq.

Fox Factory Holding Corp.

915 Disc Drive

Scotts Valley, California 95066

831.274.6500

 

Kevin P. Kennedy, Esq.

Simpson Thacher & Bartlett LLP

2475 Hanover Street

Palo Alto, California 94304

650.251.5000

Jeffrey T. Hartlin, Esq.

Paul Hastings LLP

1117 S. California Avenue

Palo Alto, California 94304

650.320.1804

   

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨       Accelerated filer    ¨
Non-accelerated filer    x    (Do not check if a smaller reporting company)    Smaller reporting company    ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered(1)

 

Proposed

maximum

aggregate

offering price

per share

 

Proposed

maximum

aggregate

offering price(2)

 

Amount of
registration fee(3)

Common Stock, $0.001 par value per share

  9,857,143   $15.00   $147,857,145   $20,167.71

 

 

(1)   Includes 1,285,714 shares that the underwriters have the option to purchase. See “Underwriting”.
(2)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3)   A filing fee of $16,368 was previously paid in connection with the initial filing of this Registration Statement on July 8, 2013 and an additional $3,799.71 was paid with the filing of Amendment No. 3 of this Registration Statement.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated July 29, 2013

Prospectus

8,571,429 shares

 

LOGO

Fox Factory Holding Corp.

Common stock

This is an initial public offering of common stock by Fox Factory Holding Corp., a Delaware corporation. We are selling 2,857,143 shares of common stock. The selling stockholders identified in this prospectus are selling 5,714,286 shares of common stock. We will not receive any of the proceeds from the sale of the shares by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The estimated initial public offering price is between $13.00 and $15.00 per share.

We have applied to have our shares of common stock listed on the Nasdaq Global Select Market, subject to notice of issuance, under the symbol “FOXF.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, as such, will be subject to reduced public company reporting requirements.

 

      Per share      Total  

Initial public offering price

   $                    $                    

Underwriting discounts and commissions(1)

   $         $     

Proceeds to us, before expenses

   $         $     

Proceeds to selling stockholders, before expenses

   $         $     

 

(1)   We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting”.

Delivery of the shares of common stock is expected to be made on or about     , 2013. The selling stockholders identified in this prospectus have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions as set forth above, up to an additional 1,285,714 shares of our common stock. We will not receive any of the proceeds from the sale of shares by these selling stockholders if the underwriters exercise their option to purchase additional shares of common stock.

Investing in our common stock involves substantial risk. Please read “Risk factors” beginning on page 19.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

Baird

 

William Blair

 

Piper Jaffray

Stifel      SunTrust Robinson Humphrey   
BB&T Capital Markets      CJS Securities   

            , 2013


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LOGO


Table of Contents

Table of contents

 

Prospectus

  
     Page  

Prospectus summary

     1   

Risk factors

     19   

Special note regarding forward-looking statements

     42   

Use of proceeds

     44   

Dividend policy

     45   

Capitalization

     46   

Dilution

     48   

Selected consolidated financial data

     50   

Management’s discussion and analysis of financial condition and results of operations

     53   

Business

     81   

Management

     95   

Executive compensation

     104   

Certain relationships and related party transactions

     114   

Principal and selling stockholders

     120   

Description of capital stock

     122   

Shares eligible for future sale

     128   

Material U.S. federal income tax consequences to non-U.S. holders

     131   

Underwriting

     135   

Legal matters

     141   

Experts

     141   

Additional information

     141   

Index to consolidated financial statements

     F-1   

 

 

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than as contained in this prospectus or in any free writing prospectuses we have prepared. We do not, and the selling stockholders and underwriters do not, take responsibility for, and provide no assurance as to, the reliability of any information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of the common stock.

 

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Prospectus summary

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, the terms “FOX,” the “company,” “we,” “us,” and “our” in this prospectus refer to Fox Factory Holding Corp. and its wholly-owned operating subsidiary, Fox Factory, Inc., on a consolidated basis, and this “offering” refers to the offering contemplated in this prospectus.

Our company

We are a designer, manufacturer and marketer of high-performance suspension products used primarily on mountain bikes, side-by-side vehicles, or Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, or ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. Through our products we enhance ride dynamics, which we define as the interplay between the rider, the vehicle and the terrain, by improving performance and control. Our brand is associated with high-performance and technologically advanced products, by which we generally mean products that provide users with improved control and a smoother ride while riding over rough terrain in varied environments. We believe that the performance of our products has been demonstrated by, and our brand benefits from, the success of professional athletes who use our products in elite competitive events, such as the Union Cycliste Internationale Mountain Bike World Cup and the X Games. We believe the exposure our products receive when used by successful professional athletes positively influences the purchasing habits of enthusiasts and other consumers seeking high-performance products. We believe that our strategic focus on the performance and racing segments in our markets influences many aspiring and enthusiast consumers who we believe seek to emulate the performance of professional and other elite athletes. We believe our products are generally sold at premium prices, which to us means manufacturer suggested retail sale prices that are generally in the upper quartile of their respective product categories.

We design our products for, and market our products to, some of the world’s leading original equipment manufacturers, or OEMs, in our markets, and to consumers through the aftermarket channel. Many of our OEM customers, including Scott, Specialized and Trek in mountain bikes and BRP, Ford and Polaris in powered vehicles, are among the market leaders in their respective product categories, and help shape, as well as respond to, consumer trends in their respective categories. In addition, consumers select our products in the aftermarket channel where we market through a global network of dealers and distributors. We currently sell to more than 150 OEMs and distribute our products to more than 2,300 retail dealers and distributors worldwide. In 2012, 81% of our sales resulted from sales to OEM customers and 19% resulted from sales to dealers and distributors for resale in the aftermarket channel.

We have experienced strong sales and profit growth during the past few years. Our sales increased from approximately $45.7 million for the three months ended March 31, 2012 to

 

 

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$54.9 million for the three months ended March 31, 2013. Over the same period, our net income increased from $2.6 million to $3.5 million, and our adjusted EBITDA increased from approximately $6.4 million to $8.8 million. Our sales increased from approximately $131.7 million in 2008 to $235.9 million in 2012. Over the same period, our net income increased from approximately $3.8 million to $14.2 million. Our Adjusted EBITDA increased from approximately $26.8 million in 2010 to $36.0 million in 2012. See “Summary consolidated financial data—Non-GAAP financial measures” for the definition of Adjusted EBITDA and a reconciliation from net income to Adjusted EBITDA.

Market opportunity

We participate in the large global markets for mountain bikes and powered vehicles used by recreational and professional users. Today, our products for powered vehicles are used primarily on Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles.

We focus on premium priced products within each of these categories, which we consider to be the high-end segment because of their higher retail sale prices, where we believe consumers have a preference for well-designed, performance-oriented equipment. We believe that suspension systems are critical to the performance of the mountain bikes and powered vehicles in the product categories in which we focus and that technical features, component performance, product design, durability, reliability and brand recognition strongly influence the purchasing decisions of consumers. Over the past decade, there have been significant technological advances in materials and features that have increased product functionality and performance, allowing our suspension products to be adapted for use in additional end-markets and in the mountain bike and powered vehicle categories.

We believe the high-end segments in which we participate are well positioned for growth due to several factors, including:

 

 

increasing average retail sales prices, which we believe are driven by differentiated and feature-rich products with advanced technologies;

 

 

continuing product cycle innovation, which we have observed often motivates consumers to upgrade and purchase new products for enhanced performance;

 

 

branded auto OEMs introducing on-road vehicles with off-road capabilities, such as the Ford F-150 SVT Raptor; and

 

 

increased sales opportunities for high-end mountain bikes and powered vehicles in international markets.

As vehicles in our end-markets evolve and grow more capable, suspension products and components have become, and we believe will continue to become, increasingly more important for improved performance and control. Additionally, we believe there are opportunities to continue to leverage our technical know-how in suspension products to provide solutions beyond our current end-markets.

 

 

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Our competitive strengths

Broad offering of high-performance products across multiple consumer markets

Our suspension products enhance ride dynamics across multiple consumer markets. Through the use of adjustable suspension, position sensitive damping, multiple air spring technologies, lightweight and rigid materials, and other technologies and methods, our products improve the performance and control of the vehicles used by our consumers. We believe our reputation for high-performance products is reinforced by the successful finishes in world class competitive events by athletes incorporating our products in their vehicles, including the following examples in 2012:

 

 

three out of four Union Cycliste Internationale World Cup Mountain Bike Series titles;

 

 

World Off Road Championship Series Side x Side Production 1000 Class Championship;

 

 

American Motorcyclist Association, or AMA, Pro ATV Championship and first place finishes in 10 out of 10 races;

 

 

International Series of Champions National Pro Open Championship for snowmobiles and first place finishes in 16 out of 16 races; and

 

 

two out of two overall Pro 2 Championships and first place finishes in 21 out of 29 Pro 2 races in the TORC and LOORRS off-road short course racing series.

Premium brand with strong consumer loyalty

We believe that we have developed a reputation for high-performance products and that we have established a premium brand, as our high-performance suspension products are generally sold at premium prices. Our logo is prominently displayed on our products used on mountain bikes and powered vehicles sold by our OEM customers, which helps further reinforce our brand image. To support our brand, we introduce new products that we believe feature innovative technologies designed to improve vehicle performance and enhance our brand loyalty with consumers. For instance, according to a 2012 independent survey conducted by Bike Germany Magazine, a leading European mountain bike magazine, FOX was voted as the best brand for suspension forks and 81.7% of FOX consumers surveyed stated that they would buy a FOX suspension fork again, and in a 2011 Audience Survey by Vital MTB, a popular mountain bike website: (i) of the 44.5% of survey respondents that stated they would buy a mountain bike suspension fork within 12 months, 41.0% of these respondents, the highest percentage of all brands included, stated that they would buy a FOX suspension fork; and (ii) of the 22.4% of survey respondents that stated they would buy a rear mountain bike shock within 12 months, 42.2% of these respondents, again the highest percentage of all brands included, stated that they would buy a FOX rear shock.

Track record of innovation and new product introductions

Innovation, including new product development, is a key component of our growth strategy. Due to our experience in suspension engineering and design in multiple markets and with a variety of

 

 

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vehicles, we are able to bring unique ride dynamics solutions to our customers, often developed for use in one market and ultimately deployed across multiple markets. For example, our success in the high-end ATV category led to the wide-spread adoption of our suspension technology in the Side-by-Side market, which became our second largest product category by sales in 2012. Our innovative product development and speed to market are supported by:

 

 

our racing culture, including on-site technical race support of professional athletes, which provides us with unique real-time insights as to the evolving ride dynamic needs of those participating in world-class events;

 

 

ongoing research and development through a team of more than 20 full-time engineers and numerous other technicians and employees who spend at least part of their time testing and using our products and helping develop engineering-based solutions to enhance our product offerings;

 

 

feedback from professional athletes, race teams, enthusiasts and other consumers seeking to improve the performance and control of their vehicles through our products;

 

 

strategic and collaborative relationships with OEM customers, which furthers our ability to extend technologies and applications across end-markets; and

 

 

our integrated manufacturing facilities and performance testing center, which allow us to quickly move from concept to product.

During 2012, we launched more than 20 new products and generated more than 70% of our sales from products introduced by us during the last three years, such as the:

 

 

Podium RC3, which provides external adjustment that allows the shock to easily be tuned for different rider skill, terrain, and racing type without having to be disassembled;

 

 

Float X Evol, which allows the rider to tune the spring characteristics of the shock via an air pump without having to remove the shock;

 

 

ECS Shock, which has an external cooling system that significantly lowers shock temperatures, allowing powered vehicles to operate at higher speeds for extended periods without sacrificing driver control, particularly in extreme environments; and

 

 

Float iCD, which provides riders the ability to adjust modes for different skills, terrains and activity levels on mountain bikes, resulting in increased utilization of the modes and an overall more efficient ride dynamics experience.

Strategic brand for OEMs, dealers and distributors

Through our strategic relationships, we are often sought out by our OEM customers and work closely with them to develop and design new products and product enhancements. We believe our collaborative approach and product development processes strengthen our relationships with our OEM customers. We believe consumers value our branded suspension products when selecting high-performance mountain bikes and powered vehicles, and as a result, OEMs purchase and incorporate our products in their mountain bikes and powered vehicles in order to increase the sales of their premium priced products. In addition, we believe the inclusion of our

 

 

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products on high-end mountain bikes and powered vehicles reinforces our premium brand image, which helps to drive our sales in the aftermarket channel where dealers and distributors sell our products to consumers.

Experienced management team

We have an experienced senior management team led by Larry L. Enterline, our Chief Executive Officer. Collectively, our eight member senior management team has an average tenure at FOX of approximately eight years per person. In addition, many members of our management team and many of our employees are avid users of our products, which further extends their knowledge of, and expertise in, our products and end-markets. We are able to attract and retain highly-trained and specialized employees who enhance our company culture and serve as strong brand advocates.

Our strategy

Our goal is to expand our leadership position as a designer, manufacturer and marketer of high-performance products designed to enhance ride dynamics. We intend to focus on the following key strategies in pursuit of this goal:

Continue to develop new and innovative products in current end-markets

We intend to continue to develop and introduce new and innovative products in our current end-markets to improve ride dynamics for our consumers. For example, our patented position sensitive damping systems provide terrain optimized ride characteristics across many of our product lines. We believe that high-performance and control are important to a large portion of our consumer base and that our frequent introduction of products with innovative and improved technologies increases both OEM and aftermarket demand as consumers seek out components for their vehicles that can deliver these characteristics. We also believe evolving market trends, such as changing mountain bike wheel sizes and increasing adoption rates of Side-by-Side vehicles, should increase demand for vehicles in our end-markets, which, in turn, should increase demand for our suspension products.

Leverage technology and brand to expand into new categories and end-markets

We believe that we have developed a reputation as a leader in ride dynamics, and that our reputation combined with our ability to improve the performance of vehicles by incorporating high-performance suspension products, results in us often being approached by OEM product development teams, athletes and others looking to improve the performance of their vehicles, including in end-markets in which we have not previously offered productsWe believe that our ride dynamics technologies have applications in end-markets in which we do not currently participate in a meaningful way, and we intend to selectively develop products for and forge relationships with customers in additional markets. These markets may include military, recreational vehicles (RVs), on-road motorcycles, commercial trucks and “performance street” cars. We also intend to evaluate selective potential acquisition opportunities for high-performance products and technologies that we believe will help us extend our ride dynamics platform.

 

 

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Increase our aftermarket penetration

We currently have a broad aftermarket distribution network of more than 2,300 retail dealers and distributors worldwide. We intend to further penetrate the aftermarket channel by selectively adding dealers and distributors in certain geographic markets, increasing our internal sales force and strategically expanding aftermarket-specific products and services to existing vehicle platforms.

Accelerate international growth

While a significant percentage of our current sales are to OEMs and dealers and distributors located outside the United States, we believe international expansion represents a significant opportunity for us and we intend to selectively increase infrastructure investments and focus on identified geographic regions. We believe that rising consumer discretionary income in a number of developing markets and increasing consumer preferences for premium, high-performance mountain bikes and powered vehicles, should contribute to increasing demand for our products. We intend to leverage our brand recognition to capitalize on these trends by increasing our sales to both OEMs and dealers and distributors globally, particularly in markets where we perceive significant opportunities. Our areas of greatest interest include Asia-Pacific (including China, South Korea and Australia) and South America (particularly Brazil, Argentina and Chile).

Improve operating and supply chain efficiencies

We intend to improve operating margins in the medium term by enhancing our design and production processes to increase efficiencies, reducing new product time to market and lowering production costs. Specifically, we have begun the process of moving a majority of the manufacturing of our mountain bike products to Taiwan and intend to complete this process in 2015. We believe this transition to Taiwan, once completed, will shorten production lead times to our mountain bike OEM customers, improve supply chain efficiencies and reduce manufacturing costs.

Risks related to our business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk factors,” which you should read carefully before making a decision to invest in our common stock. Some of these risks include:

 

 

we may not be able to continue to enhance existing products and develop and market new products that respond to consumer needs and preferences and achieve market acceptance;

 

 

we face intense competition across all product lines and may be unable to effectively compete against our competitors, which would harm our business and operating results;

 

 

our suspension products, and the products into which they are incorporated, are discretionary purchases and may be adversely impacted by changes in the economy and economic conditions that impact consumer spending;

 

 

if we are unable to maintain our premium brand image, our business may suffer;

 

 

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our dependence on the demand for high-end mountain bikes and their suspension components to maintain and foster sales;

 

 

our dependence upon the expansion of the market for powered vehicles that require high-performance suspension systems to continue our growth in this product category;

 

 

a disruption in our operations or manufacturing facilities, including any disruption in connection with the transition of a majority of the manufacturing of our mountain bike products to Taiwan, would adversely affect our business, financial condition and results of operations;

 

 

we depend on the continuing efforts of our senior management and skilled engineers, and our business may be severely disrupted and adversely impacted if we lose their services;

 

 

we depend on a relatively small number of customers for a substantial portion of our sales; and

 

 

the trading price of our common stock may be volatile, a market for our securities may not develop or be maintained and our stock price may decline.

Our history

Robert C. Fox, Jr. began developing suspension products in 1974 when, having participated in motocross racing, he sought to create a racing suspension shock that performed better than existing coil spring shocks. Working in a friend’s garage, Mr. Fox created the “Fox AirShox.” The product was successful, and went into production in 1975. The next year, in 1976, Fox AirShox were used by the rider who won the AMA 500cc National Motocross Championship.

Sales of Fox AirShox grew rapidly and, in 1978, our operating subsidiary, Fox Factory, Inc., was incorporated in California. From 1978 to 1983, FOX suspension users won numerous major races including 500cc Grand Prix races (motocross), Baja 1000 races (off-road), AMA SuperBike races (motorcycle road racing), and the Indianapolis 500 race (auto racing), generating greater market awareness of the FOX brand among enthusiasts.

As FOX grew, we applied many of the same core suspension technologies developed for motocross racing to other categories. For example, in 1987 we started selling high-performance suspension products for snowmobiles. By 1991, we began supplying the mountain bike industry with rear shocks and we entered the ATV and other off-road vehicle markets in the mid-1990s. Starting in 2001, we began offering front fork suspension products for mountain bikes.

Fox Factory Holding Corp., the registrant of this offering, is the holding company of Fox Factory, Inc. Fox Factory Holding Corp. was incorporated in Delaware on December 28, 2007 by Compass Group Diversified Holdings LLC, or our Sponsor. Our Sponsor purchased a controlling interest in us on January 4, 2008.

For clarification, we are not affiliated with Fox Head, Inc., or Fox Head, an action sports apparel company, although we have entered into an agreement with Fox Head clarifying the parties’ respective use of ”Fox” tradenames and service marks.

 

 

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Our Sponsor

Our Sponsor, Compass Group Diversified Holdings LLC, acquires and manages a diversified group of leading middle-market businesses headquartered in North America. Our Sponsor’s parent, Compass Diversified Holdings, is listed on the New York Stock Exchange, or NYSE, under the symbol “CODI.” As of March 31, 2013, in addition to us, our Sponsor owned a controlling interest in the following businesses: (i) Compass AC Holdings, Inc., or Advanced Circuits, a provider of prototype, quick-turn and volume production rigid printed circuit boards; (ii) American Furniture Manufacturing, Inc., a leading domestic manufacturer of upholstered furniture for the promotional segment of the marketplace; (iii) Arnold Magnetic Technologies Holdings Corporation, a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets; (iv) CamelBak Products, LLC, a designer and manufacturer of personal hydration products for outdoor, recreation and military use; (v) The ERGO Baby Carrier, Inc., a premier designer, marketer and distributor of baby wearing products, a premium line of stroller travel systems and related accessories; (vi) Liberty Safe and Security Products, Inc., a designer, manufacturer and marketer of premium home and gun safes in North America; and (vii) Anodyne Medical Device, Inc., rebranded as Tridien, a leading designer and manufacturer of powered and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home health care markets.

Our Sponsor is a selling stockholder in this offering, and upon completion of this offering, is expected to own approximately 56.8% of our outstanding common stock.

Recapitalization

In June 2012, we engaged in a recapitalization involving our debt, stock options and various share purchases. In connection with our recapitalization, we entered into an amendment to our credit facility with our Sponsor, which we refer to as our Existing Credit Facility, which, among other changes, provided for a $60.0 million term loan and increased the revolver commitment under that facility by $2.0 million to a total commitment of $30.0 million. Borrowings under our Existing Credit Facility in large part enabled us to fund a $67.0 million cash dividend to our stockholders as part of the recapitalization. The recapitalization also included other transactions, including various transactions involving our stock options and purchases and sales of shares of our stock among us, our sponsor and certain of our executives and directors. Concurrently with the closing of this offering, we intend to use the net proceeds that we will receive from this offering to repay our then outstanding indebtedness under our Existing Credit Facility and enter into a new credit facility with a third party lender, which we refer to as the New Credit Facility. The consummation of this offering is conditioned on the closing of the New Credit Facility. To the extent the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness then outstanding under our Existing Credit Facility, we intend to use borrowings under our New Credit Facility to pay any remaining balance outstanding under our Existing Credit Facility. We intend to terminate the Existing Credit Facility upon the consummation of this offering. See “Use of proceeds,” “Management’s discussion and analysis of financial condition and results of operations” and “Related party transactions—Recapitalization.”

 

 

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Recent developments

Set forth below is selected preliminary, unaudited consolidated financial data as of June 30, 2013 and for the three months ended June 30, 2013. The financial data are unaudited and have been prepared by, and are the responsibility of, our management. Our financial statements for this period have not yet been completed and are not yet available. For instance, we have not finished our closing procedures for the quarter, completed allocations within our operating expenses for the period, or prepared notes to our financial information. In addition, our independent registered public accounting firm, Grant Thornton LLP, has not completed its review of our financial information for this period in accordance with PCAOB standards. We anticipate that our financial statements as of, and for the period ended June 30, 2013, will not be available until the week of August 19, 2013 and will be included in our first periodic report filed with the Securities and Exchange Commission following this offering.

Grant Thornton LLP has not audited, or performed a review under PCAOB standards of, or compiled the financial data below, and does not express an opinion or any other form of assurance with respect thereto. This summary is not meant to be a comprehensive presentation of our unaudited consolidated financial position as of June 30, 2013 and results of operations for the three months then ended. Our actual results may change from those set forth below as a result of the completion of our consolidated financial statements, financial adjustments and other developments that may arise between now and the time the financial results for this period are finalized.

Preliminary Second Quarter Results

Our sales for the three months ended June 30, 2013 are expected to be approximately $70.3 million, or an expected increase of approximately $9.6 million, or 15.8%, compared to sales of $60.7 million for the corresponding period in 2012. We estimate that sales of mountain bike and powered vehicle products increased approximately 17.7% and 12.3%, respectively, for the three months ended June 30, 2013 compared to the corresponding prior year period. Sales growth was primarily driven by sales to OEMs, which we estimate increased $7.2 million to $54.5 million during the three months ended June 30, 2013 compared to $47.3 million for the same period in 2012. The increase in sales to OEMs was largely driven by increased specification, or spec, with our OEM customers. The remaining increase in sales reflects increased sales to aftermarket customers in the three-months ended June 30, 2013 compared to the same period in 2012. The increase in sales to aftermarket customers is due to higher end user demand for our products.

Cost of sales for the three months ended June 30, 2013 are expected to be approximately $50.0 million or an expected increase of approximately $5.7 million, or 12.8%, compared to cost of sales of $44.3 million for the corresponding period in 2012. The increase in cost of sales was primarily due to increased sales during the three months ended June 30, 2013 compared to the same period in 2012. For the three months ended June 30, 2013, we expect that our gross profit expressed as a percentage of sales was 29.0% for the three months ended June 30, 2013 compared to 27.1% for the same period in 2012. We attribute the improvement in our gross profit margin primarily to our cost initiatives designed to improve our operating efficiencies.

Operating expenses for the three months ended June 30, 2013 are expected to be approximately $10.2 million, or an expected increase of approximately $0.6 million, or 6.7%, over the same

 

 

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period in 2012. The increase of total operating expenses was primarily attributable to supporting our increased sales for the period. Within operating expenses, amortization of purchased intangible assets was approximately $1.3 million for each of the three months ended June 30, 2013 and the comparable prior year period.

Income from operations for the three months ended June 30, 2013 is expected to be $10.1 million, compared to income from operations of $6.9 million in the corresponding period in 2012. The expected increase in income from operations was primarily the result of the increase in gross profit partially offset by increases in operating expenses, as described above.

Our net income for the three months ended June 30, 2013 is expected to be approximately $5.7 million compared to net income of $4.3 million for the three months ended June 30, 2012.

Other Financial Data

As of June 30, 2013, our outstanding borrowings under our Existing Credit Facility with our Sponsor were $65.5 million compared to $52.9 million as of March 31, 2013. Our borrowings under our Existing Credit Facility increased during the current period due to our increased level of business during the three months ended June 30, 2013 and the somewhat seasonal nature of our business.

As of June 30, 2013, our total assets are expected to be approximately $174.5 million. Within total assets, as of June 30, 2013 our accounts receivable, goodwill, and identifiable assets are expected to be $40.4 million, $31.4 million and $102.7 million, respectively. Our depreciation and amortization for the three months ended June 30, 2013 is expected to be $1.9 million.

Non-GAAP financial measures

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in United States, or GAAP. See “Summary consolidated financial data—Non-GAAP financial measures” for a definition of Adjusted EBITDA, as well as reasons why management believes the inclusion of Adjusted EBITDA is appropriate. The following table presents a reconciliation of expected Adjusted EBITDA to our expected net income, the most comparable GAAP measure, for the three months ended June 30, 2013.

 

      For the three months  ended
June 30, 2013

(unaudited)
 
(in thousands)   

Reconciliation of net income to Adjusted EBITDA

  

Net income

   $ 5,721   

Interest expense

     997   

Other (income) expense, net(1)

     51   

Provision for income taxes

     3,374   

Depreciation and amortization

     1,928   

Stock-based compensation(2)

     426   

Management fee paid(3)

     125   
  

 

 

 

Adjusted EBITDA

   $ 12,622   
  

 

 

 
  

 

 

 
    

 

 

 

 

(1)   Other (income) expense, net includes gain or loss on the disposal of fixed assets, foreign currency transaction gain or loss, forgiveness of indebtedness under our loan with the Redevelopment Agency of the City of Watsonville, and other miscellaneous items.

 

 

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(2)   Represents non-cash, stock-based compensation (before tax effect).

 

(3)   Represents management fees paid to an affiliate of our Sponsor pursuant to a management services agreement that will terminate on the consummation of this offering. Such fees are paid by us quarterly in arrears and other than paying any accrued but unpaid fees for the quarter during which this offering closes, no separate termination fee will be due under this agreement when it is terminated.

Corporate information

Our principal executive offices are located at 915 Disc Drive, Scotts Valley, CA 95066, and our telephone number is (831) 274-6500. Our website address is www.ridefox.com. In addition, we maintain a Facebook page at www.facebook.com/fox, a YouTube channel at www.youtube.com/foxracingshox1, a Vimeo page at www.vimeo.com/foxracingshox and a Twitter feed at www.twitter.com/foxracingshox. Information contained on, or that can be accessed through, our website, Facebook page, YouTube channel, Vimeo page or Twitter feed does not constitute part of this prospectus and inclusions of our website address, Facebook page address, YouTube channel address, Vimeo page address and Twitter feed address in this prospectus are inactive textual references only.

We have a number of registered marks, including, without limitation, FOX®, FOX RACING SHOX® and REDEFINE YOUR LIMITS® in several jurisdictions, including the United States, and we have also applied to register a number of other marks in various jurisdictions. This prospectus includes trademarks and trade names of other companies. All trademarks and trade names appearing in this prospectus are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Emerging growth company status

We are an “emerging growth company,” as that term is defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we qualify as an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that do not qualify as emerging growth companies, including, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations relating to executive compensation and exemptions from the requirements of holding advisory “say-on-pay,” “say-when-on-pay” and “golden parachute” executive compensation votes.

Under the JOBS Act, we will remain an emerging growth company until the earliest of:

 

 

the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;

 

 

the last day of the fiscal year following the fifth anniversary of the completion of this offering;

 

 

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or

 

 

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the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act (i.e., the first day of the fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, and (ii) been public for at least 12 months).

The JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

 

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The offering

 

Common stock offered by us

2,857,143 shares

 

Common stock offered by the selling stockholders

5,714,286 shares

 

Underwriters option to purchase additional shares

The underwriters have an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 1,285,714 shares from the selling stockholders.

 

Common stock to be outstanding after this offering

36,317,087 shares

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $33.8 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial public offering price of $14.00 per share, which is the midpoint of the initial public offering price range listed on the cover page of this prospectus. We will not receive any proceeds from the sale of shares by the selling stockholders.

 

  We currently intend to use the net proceeds that we will receive from this offering to repay the then outstanding indebtedness under our Existing Credit Facility. To the extent the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness then outstanding under our Existing Credit Facility, we intend to use borrowings under our New Credit Facility to pay any remaining balance outstanding under the Existing Credit Facility. To the extent we receive net proceeds from this offering in excess of the then outstanding indebtedness under our Existing Credit Facility, we intend to use such excess net proceeds for working capital and other general corporate purposes. See “Use of proceeds.”

 

Directed share program

The underwriters have reserved for sale, at the initial public offering price, up to approximately 5% of the shares of common stock being sold in this offering to certain of our business associates, officers, directors and certain of their family members. We will offer these shares to the extent permitted under applicable regulations in the United States and in various countries. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares.

 

 

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Concentration of ownership

Upon completion of this offering, our executive officers and directors, and their affiliates, will beneficially own, in the aggregate, approximately 13.5% of our outstanding shares of common stock, and our Sponsor will own approximately 56.8% of our outstanding shares of common stock.

 

Dividend policy

Currently, we do not anticipate paying cash dividends.

 

Proposed Nasdaq Global Select Market symbol

“FOXF”

The number of shares of common stock that will be outstanding after this offering is based on 33,459,944 shares outstanding as of March 31, 2013, and excludes:

 

 

2,511,175 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of March 31, 2013, with a weighted average exercise price of $4.88 per share; and

 

 

3,631,709 shares of common stock reserved for issuance under our 2013 Omnibus Plan.

Except as otherwise indicated, all information in this prospectus assumes:

 

 

the filing and effectiveness of our Amended and Restated Certificate of Incorporation in Delaware and the adoption of our Amended and Restated Bylaws, each of which will occur immediately prior to the completion of this offering; and

 

 

no exercise by the underwriters of their option to purchase up to an additional 1,285,714 shares of common stock from the selling stockholders in this offering.

All share numbers presented in this prospectus give effect to the 46.45-for-1 forward split of our common stock effected on July 25, 2013.

 

 

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Summary consolidated financial data

The following table sets forth our summary consolidated financial data as of the dates and for the periods indicated. We have derived the summary statements of income data for the years ended December 31, 2010, 2011 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. The summary statements of income for the three months ended March 31, 2012 and 2013, and the selected consolidated balance sheet data as of March 31, 2013 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments necessary for the fair presentation of the financial information set forth in those statements.

The historical results presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period may not necessarily be indicative of the results for the full year. The following summaries of our consolidated financial data for the periods presented should be read in conjunction with “Risk factors,” “Selected consolidated financial data,” “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes, which are included elsewhere in this prospectus.

 

      For the years ended
December 31,
   

For the three months

ended March 31,

 
  

 

 

 
(in thousands, except per share data)    2010     2011     2012     2012     2013  
                       (unaudited)  

 

 

Sales

   $ 170,983      $ 197,739      $ 235,869      $ 45,671      $ 54,878   

Cost of sales(1)

     122,373        140,849        173,040        32,572        39,163   
  

 

 

 

Gross profit

     48,610        56,890        62,829        13,099        15,715   

Operating expenses:

          

Sales and marketing(1)

     10,293        11,748        12,570        3,177        3,284   

Research and development(1)

     7,321        9,750        9,727        2,376        2,355   

General and administrative(1)

     6,202        7,588        9,063        1,951        2,673   

Amortization of purchased intangibles

     5,217        5,217        5,315        1,304        1,341   
  

 

 

 

Total operating expenses

     29,033        34,303        36,675        8,808        9,653   
  

 

 

 

Income from operations

     19,577        22,587        26,154        4,291        6,062   

Other expense, net:

          

Interest expense

     (2,637     (1,982     (3,486     (233     (957

Other income (expense), net

     39        (13     (277     (46     34   
  

 

 

 

Total other expense, net

     (2,598     (1,995     (3,763     (279     (923
  

 

 

 

Income before income taxes

     16,979        20,592        22,391        4,012        5,139   

Provision for income taxes

     6,210        7,054        8,181        1,373        1,590   
  

 

 

 

Net income

   $ 10,769      $ 13,538      $ 14,210      $ 2,639      $ 3,549   
  

 

 

 

Earnings per share (actual and pro forma):

          

Basic

   $ 0.36      $ 0.45      $ 0.44      $ 0.09      $ 0.11   

Diluted

   $ 0.34      $ 0.42      $ 0.44      $ 0.08      $ 0.10   

Weighted average common shares used to compute net income per share (actual and pro forma):

          

Basic

     30,118        30,030        32,059        30,334        33,460   

Diluted

     31,828        32,295        32,515        32,562        34,149   

Supplemental pro forma net income per share (unaudited)(2)

       $ 0.38        $ 0.10   

Dividends per share

       $ 2.00        $   

 

 

 

 

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(1)   Includes stock-based compensation (excluding tax effect) as follows:

 

      For the years ended
December 31,
     For the three months
ended March 31,
 
  

 

 

 

(in thousands)

   2010      2011      2012      2012      2013  
                          (unaudited)  

 

 

Cost of sales

   $       $       $       $       $   

Sales and marketing

     40         78         160         33         33   

Research and development

     12         12         29         3         17   

General and administrative

     472         940         1,959         267         652   
  

 

 

 

Total

   $ 524       $ 1,030       $ 2,148       $ 303       $ 702   
  

 

 

 

 

 
(2)   Unaudited supplemental pro forma net income per share has been presented in accordance with the SEC Staff Accounting Bulletin Topic 1.B.3, or SAB 1.B.3. As outlined in SAB 1.B.3, the special dividend paid in June 2012 was in excess of the net income for the twelve-months ended March 31, 2013 of $15.1 million. Accordingly, under SAB 1.B.3, the company has included all shares, for which proceeds accrue to the company, issued under this offering in the shares used to calculate supplemental pro forma net income per share.

The following table presents our summary consolidated balance sheet data as of March 31, 2013 and is presented:

 

 

on an actual basis; and

 

 

on a pro forma, as adjusted basis: (i) reflecting the filing of our Amended and Restated Certificate of Incorporation immediately prior to the consummation of this offering; (ii) the sale of 2,857,143 shares of common stock by us in this offering at an estimated initial offering price of $14.00 per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (iii) the application of such proceeds to repay a majority of the then outstanding indebtedness under our Existing Credit Facility concurrently with the closing of this offering.

 

As of March 31, 2013

(in thousands)

   Actual      Pro forma, as
adjusted
(unaudited)
 

 

 

Consolidated balance sheet data(1):

     

Cash and cash equivalents

   $ 136       $ 136   

Inventory

     42,734         42,734   

Working capital

     23,786         23,528   

Property and equipment, net

     12,105         12,105   

Total assets

     147,429         147,121   

Total debt, including current portion

     52,850         19,050   

Total stockholders’ equity

   $ 33,828       $ 67,628   

 

 

 

(1)   A $1.00 increase in the assumed initial public offering price of $14.00 per share would decrease total debt, including current portion, and would increase total stockholders’ equity by $2.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. A $1.00 decrease in the assumed initial offering price of $14.00 per share would increase total debt, including current portion, and would decrease total stockholders’ equity by $2.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. An increase of 100,000 shares in the number of shares sold in this offering by us would decrease total debt, including current portion, and would increase total stockholders’ equity from this offering by $1.3 million, assuming an initial public offering price of $14.00 per share and after deducting estimated underwriting discounts and commissions payable by us. A decrease of 100,000 shares in the number of shares sold in this offering by us would increase total debt, including current portion, and would decrease total stockholders’ equity from this offering by $1.3 million, assuming an initial public offering price of $14.00 per share and after deducting estimated underwriting discounts and commissions payable by us.

 

 

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Non-GAAP financial measures

Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. We define Adjusted EBITDA as net income adjusted for interest expense, other income (expense), net, provision for income taxes, depreciation and amortization, stock-based compensation and the management fee payable to an affiliate of our Sponsor (which fee will be discontinued upon completion of this offering). Below, we have provided a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other measure of financial performance calculated and presented in accordance with GAAP.

We include Adjusted EBITDA in this prospectus because we believe it allows investors to understand and evaluate our core operating performance and trends. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business.

Our use of Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

 

 

Adjusted EBITDA does not include the impact of equity-based compensation;

 

 

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;

 

 

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

 

Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

 

Adjusted EBITDA does not include other income or expense such as gain or loss on the disposal of fixed assets, foreign currency transaction gain or loss and other miscellaneous items;

 

 

Adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us;

 

 

Adjusted EBITDA does not reflect the cash fees which we paid to our Sponsor; and

 

 

other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces its usefulness as a comparative measure.

In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results.

 

 

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The following table presents a reconciliation of Adjusted EBITDA to our net income, the most comparable GAAP measure, for each of the periods indicated:

 

      For the years ended December 31,      For the three months
ended March 31,
 
  

 

 

 
(in thousands)    2010     2011      2012      2012      2013  

 

 

Reconciliation of net income to Adjusted EBITDA

             

Net income

   $ 10,769      $ 13,538       $ 14,210       $ 2,639       $ 3,549   

Interest expense

     2,637        1,982         3,486         233         957   

Other (income) expense, net(1)

     (39     13         277         46         (34

Provision for income taxes

     6,210        7,054         8,181         1,373         1,590   

Depreciation and amortization

     6,150        6,598         7,204         1,713         1,885   

Stock-based compensation(2)

     524        1,030         2,148         303         702   

Management fee paid(3)

     500        500         500         125         125   
  

 

 

 

Adjusted EBITDA

   $ 26,751      $ 30,715       $ 36,006       $ 6,432       $ 8,774   
  

 

 

 

 

 

 

(1)   Other (income) expense, net includes gain or loss on the disposal of fixed assets, foreign currency transaction gain or loss, forgiveness of indebtedness under our loan with the Redevelopment Agency of the City of Watsonville, and other miscellaneous items.

 

(2)   Represents non-cash, stock-based compensation (before tax effect).

 

(3)   Represents management fees paid to an affiliate of our Sponsor pursuant to a management services agreement that will terminate on the consummation of this offering. Such fees are paid by us quarterly in arrears and other than paying any accrued but unpaid fees for the quarter during which this offering closes, no separate termination fee will be due under this agreement when it is terminated.

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks related to our business

If we are unable to continue to enhance existing products and develop and market new products that respond to consumer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products, and our business and financial results could suffer.

Our growth strategy involves the continuous development of innovative high-performance products. For instance, during 2012, we generated more than 70% of our sales from products that we introduced during the last three years. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers and the end users of our products, unless we can continue to enhance existing products and develop new, innovative products in the global markets in which we compete. In addition, we must continuously compete not only for end users who purchase our products through the dealers and distributors who are our customers, but also for the OEMs which incorporate our products into their mountain bikes and powered vehicles. These OEMs regularly evaluate our products against those of our competitors to determine if they are allowing the OEMs to achieve higher sales and market share on a cost-effective basis. Should one or more of our OEM customers determine that they could achieve overall better financial results by incorporating a competitors’ new or existing product, they would likely do so, which could harm our business, financial condition or results of operations.

Product development requires significant financial, technological and other resources. While we expended approximately $7.3 million, $9.8 million and $9.7 million for our research and development efforts in 2010, 2011 and 2012, respectively, there can be no assurance that this level of investment in research and development will be sufficient in the future to maintain our competitive advantage in product innovation, which could cause our business, financial condition or results of operations to suffer.

Product improvements and new product introductions require significant planning, design, development and testing at the technological, product and manufacturing process levels, and we may experience unanticipated delays in our introduction of product improvements or new products. Our competitors’ new products may beat our products to market, be more effective and/or less expensive than our products, obtain better market acceptance or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations. In addition, one of our competitors could develop an unforeseen and entirely new product or technology that renders our products less desirable or obsolete, which could negatively affect our business, financial condition or results of operations.

 

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We face intense competition in all product lines, including from some competitors that may have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact our business and operating results.

The suspension industry is highly competitive. We compete with a number of other manufacturers that produce and sell suspension products to OEMs and aftermarket dealers and distributors, including OEMs that produce their own line of suspension products for their own use. Our continued success depends on our ability to continue to compete effectively against our competitors, some of which have significantly greater financial, marketing and other resources than we have. Also, several of our competitors offer broader product lines to OEMs, which they may sell in connection with suspension products as part of a package offering. In the future, our competitors may be able to maintain and grow brand strength and market share more effectively or quickly than we do by anticipating the course of market developments more accurately than we do, developing products that are superior to our products, creating manufacturing or distribution capabilities that are superior to ours, producing similar products at a lower cost than we can or adapting more quickly than we do to new technologies or evolving regulatory, industry or customer requirements, among other possibilities. In addition, we may encounter increased competition if our current competitors broaden their product offerings by beginning to produce additional types of suspension products or through competitor consolidations. We could also face competition from well-capitalized entrants into the high-performance suspension product market, as well as aggressive pricing tactics by other manufacturers trying to gain market share. As a result, our products may not be able to compete successfully with our competitors’ products, which could negatively affect our business, financial condition or results of operations.

Our business is sensitive to economic conditions that impact consumer spending. Our suspension products, and the mountain bikes and powered vehicles into which they are incorporated, are discretionary purchases and may be adversely impacted by changes in the economy.

Our business depends substantially on global economic and market conditions. In particular, we believe that currently a significant majority of the end users of our products live in the United States and countries in Europe. These areas are either in the process of recovering from recession or, in some cases, are still struggling with recession, disruption in banking and/or financial systems, economic weakness and uncertainty. In addition, our products are recreational in nature and are generally discretionary purchases by consumers. Consumers are usually more willing to make discretionary purchases during periods of favorable general economic conditions and high consumer confidence. Discretionary spending may also be affected by many other factors, including interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions. During periods of unfavorable economic conditions, or periods when other negative market factors exist, consumer discretionary spending is typically reduced, which in turn could reduce our product sales and have a negative effect on our business, financial condition or results of operations.

There could also be a number of secondary effects resulting from an economic downturn, such as insolvency of our suppliers resulting in product delays, an inability of our OEM and distributor and dealer customers to obtain credit to finance purchases of our products, customers delaying payment to us for the purchase of our products due to financial hardship or an increase in bad debt expense. Any of these effects could negatively affect our business, financial condition or results of operations.

 

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If we are unable to maintain our premium brand image, our business may suffer.

Our products are selected by both OEMs and dealers and distributors in part because of the premium brand reputation we hold with them and our end users. Therefore, our success depends on our ability to maintain and build our brand image. We have focused on building our brand through producing products that we believe are innovative, high in performance and highly reliable. In addition, our brand benefits from our strong relationships with our OEM customers and dealers and distributors and through marketing programs aimed at mountain bike and powered vehicle enthusiasts in various media and other channels. For example, we sponsor a number of professional athletes and professional race teams. In order to continue to enhance our brand image, we will need to maintain our position in the suspension products industry and continue to provide high quality products and services. Also, we will need to continue to invest in sponsorships, marketing and public relations.

There can be no assurance, however, that we will be able to maintain or enhance the strength of our brand in the future. Our brand could be adversely impacted by, among other things:

 

 

failure to develop new products that are innovative, high-performance and reliable;

 

 

internal product quality control issues;

 

 

product quality issues on the mountain bikes and powered vehicles on which our products are installed;

 

 

product recalls;

 

 

high profile component failures (such as a component failure during a race on a mountain bike ridden by an athlete that we sponsor);

 

 

negative publicity regarding our sponsored athletes;

 

 

high profile injury or death to one of our sponsored athletes;

 

 

inconsistent uses of our brand and our other intellectual property assets, as well as failure to protect our intellectual property; and

 

 

changes in consumer trends and perceptions.

Any adverse impact on our brand could in turn negatively affect our business, financial condition or results of operations.

A significant portion of our sales are highly dependent on the demand for high-end mountain bikes and their suspension components and a material decline in the demand for these bikes or their suspension components could have a material adverse effect on our business or results of operations.

During 2012, approximately 67% of our sales were generated from the sale of suspension products for high-end mountain bikes. Part of our success has been attributable to the growth in the high-end mountain bike industry, including increases in average retail sales prices, as better-performing product designs and technologies have been incorporated into these products. If the popularity of high-end or premium priced mountain bikes does not increase or declines, the number of mountain bike enthusiasts seeking such mountain bikes or premium priced suspension products for their mountain bikes does not increase or declines, or the average price point of

 

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these bikes declines, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected. In addition, if current mountain bike enthusiasts stop purchasing our products due to changes in preferences, we may fail to achieve future growth or our sales could be decreased, and our business, financial condition or results of operations could be negatively affected.

Our growth in the powered vehicle category is dependent upon our continued ability to expand our product sales into powered vehicles that require high-performance suspension and the continued expansion of the market for these powered vehicles.

Our growth in the powered vehicle category is in part attributable to the expansion of the market for powered vehicles that require high-performance suspension products. Such market growth includes the creation of new classes of vehicles that need our products, such as Side-by-Sides, and our ability to create products for these vehicles. In the event these markets stopped expanding or contracted, or we were unsuccessful in creating new products for these markets or other competitors successfully enter into these markets, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected.

A disruption in the operations of our manufacturing facilities, including any disruption in connection with moving a majority of the manufacturing of our mountain bike products to Taiwan, could have a negative effect on our business, financial condition or results of operations.

During 2012, the sale of mountain bike suspension products accounted for approximately 67% of our sales. We recently began to transfer a majority of the manufacturing of our mountain bike products to Taiwan. We contemplate that this transition will continue through 2015, at which time we anticipate that virtually all of the manufacturing of our mountain bike products will be completed in Taiwan. During our transition process, we will incur some duplication of facilities, equipment and personnel, the amount of which could vary materially from our projections. Also, the transition process could cause manufacturing problems and give rise to execution risks, including disruptions to employees, negative impact on employee morale and retention, delays in recognizing efficiencies or increased costs of manufacturing, and adverse impacts on our product quality and delivery times. In addition, we could encounter unforeseen difficulties resulting from the distance and time zone differences between our main operations in California and our new Taiwan manufacturing facility. Should any of these problems occur, our business, financial condition or results of operations could be negatively affected.

Equipment failures, delays in deliveries or catastrophic loss at any of our facilities could lead to production or service disruptions, curtailments or shutdowns. In the event of a stoppage in production or a slowdown in production due to high employee turnover or a labor dispute at any of our facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times to our customers could be severely affected. If there was a manufacturing disruption in any of our manufacturing facilities, we might be unable to meet product delivery requirements and our business, financial condition or results of operations could be negatively affected, even if the disruption was covered in whole or in part by our business interruption insurance. Any significant delay in deliveries to our customers could lead to increased returns or cancellations, expose us to damage claims from our customers or damage our brand and, in turn, negatively affect our business, financial condition or results of operations.

 

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Our business depends substantially on the continuing efforts of our senior management, and our business may be severely disrupted if we lose their services.

We are heavily dependent upon the contributions, talent and leadership of our senior management team, particularly our Chief Executive Officer, Larry L. Enterline. We do not have a “key person” life insurance policy on Mr. Enterline or any other key employees. We believe that the top eight members of our senior management team are key to establishing our focus and executing our corporate strategies as they have extensive knowledge of our systems and processes. Given our senior management team’s knowledge of the suspension products industry and the limited number of direct competitors in the industry, we believe that it could be difficult to find replacements should any of the members of our senior management team leave. Our inability to find suitable replacements for any of the members of our senior management team could negatively affect our business, financial condition or results of operations.

We depend on skilled engineers to develop and create our products, and the failure to attract and retain such individuals could adversely affect our business.

We rely on skilled and well-trained engineers for the design and production of our products, as well as in our research and development functions. Competition for such individuals is intense, particularly in Silicon Valley near where our headquarters are located. Our inability to attract or retain qualified employees in our design, production or research and development functions or elsewhere in our company could result in diminished quality of our product and delinquent production schedules, impede our ability to develop new products and harm our business, financial condition or results of operations.

We may not be able to sustain our past growth or successfully implement our growth strategy, which may have a negative effect on our business, financial condition or results of operations.

We grew our sales from approximately $171.0 million in 2010 to approximately $235.9 million in 2012. This growth rate may be unsustainable. Our future growth will depend upon various factors, including the strength of our brand image, our ability to continue to produce innovative suspension products, consumer acceptance of our products, competitive conditions in the marketplace, the growth in emerging markets for products requiring high-end suspension products and, in general, the continued growth of the high-end mountain bike and powered vehicle markets into which we sell our products. Our beliefs regarding the future growth of markets for high-end suspension products are based largely on qualitative judgments and limited sources and may not be reliable. If we are unable to sustain our past growth or successfully implement our growth strategy, our business, financial condition or results of operations could be negatively affected.

The professional athletes and race teams who use our products are an important aspect of our brand image. The loss of the support of professional athletes for our products or the inability to attract new professional athletes may harm our business.

If our products are not used by current or future professional athletes and race teams, our brand could lose value and our sales could decline. While our sponsorship agreements typically restrict our sponsored athletes and race teams from promoting, endorsing or using competitors’ products that compete directly within our product categories during the term of the sponsorship agreements, we do not typically have long-term contracts with any of the athletes or race teams whom we sponsor.

 

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If we are unable to maintain our current relationships with these professional athletes and race teams, if these professional athletes and race teams are no longer popular, if our sponsored athletes and race teams fail to have success or if we are unable to continue to attract the endorsement of new professional athletes and race teams in the future, the value of our brand and our sales could decline.

We depend on our relationships with dealers and distributors and their ability to sell and service our products. Any disruption in these relationships could harm our sales.

We sell our aftermarket products to dealers and distributors, and we depend on their willingness and ability to market and sell our products to consumers and provide customer and product service as needed. We also rely on our dealers and distributors to be knowledgeable about our products and their features. If we are not able to educate our dealers and distributors so that they may effectively sell our products as part of a positive buying experience, or if they fail to implement effective retail sales initiatives, focus selling efforts on our competitors’ products, reduce the quantity of our products that they sell or reduce their operations due to financial difficulties or otherwise, our brand and business could suffer.

We do not control our dealers or distributors and many of our contracts allow these entities to offer our competitors’ products. Our competitors may incentivize our dealers and distributors to favor their products. In addition, we do not have long-term contracts with a majority of our dealers and distributors, and our dealers and distributors are not obligated to purchase specified amounts of our products. In fact, the majority of our dealers and distributors buy from us on a purchase order basis. Consequently, with little or no notice, many of these dealers and distributors may terminate their relationships with us or materially reduce their purchases of our products. If we were to lose one or more of our dealers or distributors, we would need to obtain a new dealer or distributor to cover the particular location or product line, which may not be possible on favorable terms or at all. Alternatively, we could use our own sales force to replace such a dealer or distributor, but expanding our sales force into new locations takes a significant amount of time and resources and may not be successful. Further, many of our international distribution contracts contain exclusivity arrangements, which may prevent us from replacing or supplementing our current distributors under certain circumstances.

We are a supplier in the high-end mountain bike and powered vehicles markets, and our business is dependent in large part on the orders we receive from our OEM customers and from their success.

As a supplier to OEM customers, we are dependent in large part on the success of the business of our OEM customers. Model year changes by our OEM customers may adversely impact our sales or cause our sales to vary from quarter to quarter. In addition, losses in market share individually or a decline in the overall market of our OEM customers or the discontinuance by our OEM customers of their products which incorporate our products could negatively impact our business, financial condition or results of operations. For example, if our mountain bike producing OEM customers reduce production of their high-end mountain bikes, their orders to us for our products would in turn be reduced, which could negatively affect our business, financial condition or results of operations.

 

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A relatively small number of customers account for a substantial portion of our sales. The loss of all or a substantial portion of our sales to any of these customers or the loss of market share by these customers could have a material adverse impact on us and our results of operations.

Sales attributable to our 10 largest OEM customers, which can vary from year to year, collectively accounted for approximately 54%, 53% and 56% of our sales in 2010, 2011 and 2012, respectively. The loss of all or a substantial portion of our sales to any of these OEM customers or the loss of market share by these customers could have a material adverse impact on our business, financial condition or results of operations.

Although we refer to the branded mountain bike OEMs that use our products throughout this document as “our customers,” “our OEM customers” or “our mountain bike OEM customers,” branded mountain bike OEMs often use contract manufacturers to manufacture and assemble their bikes. As a result, even though we typically negotiate price and volume requirements directly with our mountain bike OEM customers, it is the contract manufacturers that usually place the purchase orders with us and are responsible for paying us (rather than the branded mountain bike OEMs). Giant is an OEM and contract manufacturer used by certain of our mountain bike OEM customers. Sales to Giant accounted for approximately 16%, 12% and 13% of our sales in 2010, 2011 and 2012, respectively. In the event Giant were to experience manufacturing or other problems, or were to fail to pay us, it could have a material adverse impact on our business, financial condition or results of operations.

Currency exchange rate fluctuations could result in decreased gross margins.

Foreign currency fluctuations could in the future have an adverse effect on our business, financial condition or results of operations. We sell our products inside and outside of the United States in U.S. Dollars. As the majority of our expenses are also in U.S. Dollars, we are somewhat insulated from currency fluctuations. However, some of the OEMs purchasing products from us sell their products in Europe and other foreign markets using the Euro and other foreign currencies. As a result, as the U.S. Dollar appreciates against these foreign currencies, our products will become relatively more expensive for these OEMs. Accordingly, competitive products that our OEM customers can purchase in other currencies may become more attractive and we could lose sales as these OEMs seek to replace our products with cheaper alternatives. In addition, should the U.S. Dollar depreciate significantly, this could have the effect of decreasing our gross margins and adversely impact our business, financial condition or results of operations. Furthermore, as we transfer a majority of our manufacturing operations for our mountain bike products to Taiwan, we anticipate that a growing percentage of our expenses will be denominated in the New Taiwan Dollar. Should the New Taiwan Dollar appreciate against the U.S. Dollar, this could have the effect of decreasing our gross margins.

Our sales could be adversely impacted by the disruption or cessation of sales by other bike component manufacturers or if other mountain bike component manufacturers enter into the suspension market.

Most of the mountain bikes incorporating our suspension products also utilize products and components manufactured by other mountain bike component manufacturers. If such component manufacturers were to cease selling their products and components on a stand-alone basis, their sales are disrupted, or their competitive market position or reputation is diminished, customers could migrate to competitors that sell both suspension and other complementary mountain bike products which we do not sell. Moreover, such mountain bike component

 

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manufacturers could begin manufacturing mountain bike suspension products or bundle their bike components with suspension products manufactured by competitors. If any of the foregoing were to occur, our sales could decrease and our business, financial condition or results of operations could suffer.

We have been and may become subject to intellectual property disputes that could cause us to incur significant costs or pay significant damages or that could prohibit us from selling our products.

As we develop new products or attempt to utilize our brands in connection with new products, we seek to avoid infringing the valid patents and other intellectual property rights of our competitors. However, from time to time, third parties have alleged, or may allege in the future, that our products and/or trademarks infringe upon their proprietary rights. We will evaluate any such claims and, where appropriate, may obtain or seek to obtain licenses or other business arrangements. To date, there have been no significant interruptions in our business as a result of any claims of infringement, and we do not hold patent infringement insurance. Any claim, regardless of its merit, could be expensive, time consuming to defend and distract management from our business. Moreover, if our products or brands are found to infringe third-party intellectual property rights, we may be unable to obtain a license to use such technology or associated intellectual property rights on acceptable terms. A court determination that our brands, products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes or preclude our ability to use certain brands. In most circumstances, we are not indemnified for our use of a licensor’s intellectual property, if such intellectual property is found to be infringing. Any of the foregoing results could cause us to, and we could incur substantial costs to, redesign our products or defend legal actions and such costs could negatively affect our business, financial condition or results of operations.

If we are unable to enforce our intellectual property rights, our reputation and sales could be adversely affected.

Intellectual property is an important component of our business. As of March 31, 2013, we had 37 patents and had approximately 82 patents pending on file in the U.S. and European Patent offices. Additionally, we have registered or have applied for trademarks and service marks with the United States Patent and Trademark Office and a number of foreign countries, including the marks FOX®, FOX RACING SHOX® and REDEFINE YOUR LIMITS®, to be utilized with certain goods and services. When appropriate, we may from time to time assert our rights against those who infringe on our patents, trademarks and trade dress. We may not, however, be successful in enforcing our patents or asserting trademark, trade name or trade dress protection with respect to our brand names and our product designs, and third parties may seek to oppose or challenge our patents or trademark registrations. Further, these legal efforts may not be successful in reducing sales of suspension products by those infringing. In addition, our pending patent applications may not result in the issuance of patents, and even issued patents may be contested, circumvented or invalidated and may not provide us with proprietary protection or competitive advantages. If our efforts to protect our intellectual property are unsuccessful, or if a third party misappropriates our rights, this may adversely affect our business, financial condition or results of operations. Additionally, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States, and it may be more difficult for us to successfully challenge

 

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the use of our proprietary rights by other parties in these countries. Furthermore, other competitors may be able to successfully produce products which imitate certain of our products without infringing upon any of our patents, trademarks or trade dress. The failure to prevent or limit infringements and imitations, could have a permanent negative impact on the pricing of our products or reduce our product sales and product margins, even if we are ultimately successful in limiting the distribution of a product that infringes our rights, which in turn may affect our business, financial condition or results of operations.

While we enter into non-disclosure agreements with employees, OEMs, distributors and others to protect our confidential information and trade secrets, we may be unable to prevent such parties from breaching these agreements with us and using our intellectual property in an unauthorized manner. If our efforts to protect our intellectual property are unsuccessful, or if a third party misappropriates our rights this may adversely affect our business. Defending our intellectual property rights can be very expensive and time consuming, and there is no assurance that we will be successful.

Our international operations are exposed to risks associated with conducting business globally.

As a result of our international presence, we are exposed to increased risks inherent in conducting business outside of the United States. In addition to foreign currency risks, these risks include:

 

 

increased difficulty in protecting our intellectual property rights and trade secrets;

 

 

changes in tax laws and the interpretation of those laws;

 

 

exposure to local economic conditions;

 

 

unexpected government action or changes in legal or regulatory requirements;

 

 

geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war and other political uncertainty;

 

 

changes in tariffs, quotas, trade barriers and other similar restrictions on sales;

 

 

the effects of any anti-American sentiments on our brands or sales of our products;

 

 

increased difficulty in ensuring compliance by employees, agents and contractors with our policies as well as with the laws of multiple jurisdictions, including but not limited to the U.S. Foreign Corrupt Practices Act, local international environmental, health and safety laws, and increasingly complex regulations relating to the conduct of international commerce;

 

 

increased difficulty in controlling and monitoring foreign operations from the United States, including increased difficulty in identifying and recruiting qualified personnel for our foreign operations; and

 

 

increased difficulty in staffing and managing foreign operations or international sales.

An adverse change in any of these conditions could have a negative effect upon our business, financial condition or results of operations.

 

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If we inaccurately forecast demand for our products, we may manufacture insufficient or excess quantities or our manufacturing costs could increase, which could adversely affect our business.

We plan our manufacturing capacity based upon the forecasted demand for our products. In the OEM channel, our forecasts are based in large part on the number of our product specifications on new mountain bikes and powered vehicles and on projections from our OEM customers. In the aftermarket channel, our forecasts are based partially on discussions with our dealers and distributors as well as our own assessment of markets. For example, due to increased demand for our products beyond what was forecasted, our 2012 production exceeded our budgeted production, which resulted in increased expedited freight costs. In addition, if we incorrectly forecast demand we may incur capacity issues in our manufacturing plant and supply chain, increased material costs, increased freight costs and additional overtime, all of which in turn adversely impact our cost of sales and our gross margin. The current continuing economic weakness and uncertainty in the United States, Europe and other countries has made, and may continue to make, accurate forecasting particularly challenging.

In the future, if actual demand for our products exceeds forecasted demand, the margins on our incremental sales in excess of anticipated sales may be lower due to temporary higher costs, which could result in a decrease in our overall margins. While we generally manufacture our products upon receipt of customer orders, if actual demand is less than the forecasted demand for our products and we have already manufactured the products or committed to purchase materials in support of forecasted demand, we could be forced to hold excess inventories. In short, either excess or insufficient production due to inaccurate forecasting could have a negative effect on our business, financial condition or results of operations.

Product recalls, and significant product repair and/or replacement due to product warranty costs and claims have had, and in the future could have, a material adverse impact on our business.

Unless otherwise required by law, we generally provide a limited warranty for our products for a one or two year period beginning on: (i) in the case of OEM sales, the date the mountain bike or powered vehicle is purchased from an authorized OEM where our product is incorporated as original equipment on the purchased mountain bike or powered vehicle; or (ii) in the case of aftermarket sales, the date the product is originally purchased from an authorized dealer. From time to time, our customers may negotiate for longer or different warranty coverage. In the ordinary course of business, we incur warranty costs and reserve against such costs in our financial statements. However, there is risk that we could experience higher than expected warranty costs or become aware of an underperforming product. For example, during calendar year 2012, we experienced warranty costs in connection with certain dampers contained in our suspension products that went beyond the normal warranty amounts for which we have typically reserved, causing us to increase our reserves by approximately $1.8 million. We also experienced other related costs in 2012 estimated to be approximately $1.0 million. Future unforeseen product warranty issues could be expensive and could adversely affect our brand image, relationships with our sponsored athletes and race teams and have a negative effect on our business, financial condition or results of operations.

Some of our competitors’ products have been subject to recalls, and in the future, we may be required to or voluntarily participate in recalls involving our products or components if any prove to be defective. In addition to the direct costs of any claim or product recall, any such claim or recall could adversely affect our brand image and have a negative effect on our business, financial condition or results of operations.

 

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An adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition.

The use of our products by consumers, often under extreme conditions, exposes us to risks associated with product liability claims. If our products are defective or used incorrectly by our customers, bodily injury, property damage or other injury, including death, may result and could give rise to product liability claims against us, which could adversely affect our brand image or reputation. We have encountered product liability claims in the past and carry product liability insurance to help protect us against the costs of such claims, although our insurance may not be sufficient to cover all losses. Any losses that we may suffer from any liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, financial condition or results of operations.

Our New Credit Facility will place operating restrictions on us and create default risks.

We intend to enter into our New Credit Facility with third party lenders concurrently with the closing of this offering. The New Credit Facility will contain covenants that place restrictions on our operating activities. These covenants, among other things, will limit our ability to:

 

 

pay dividends and make distributions or redeem our stock;

 

 

incur additional indebtedness or permit additional encumbrances on our assets; and

 

 

make acquisitions or complete mergers or sales of assets, or engage in new businesses.

These restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may have a material adverse effect on our business, financial condition or results of operations.

If we are unable to comply with the covenants contained in our New Credit Facility, it could constitute an event of default and our lenders could declare all borrowings outstanding, together with accrued and unpaid interest, to be immediately due and payable. If we are unable to repay or otherwise refinance these borrowings when due, our lenders could sell the collateral securing our credit facilities, which constitutes substantially all of our assets.

Our outstanding indebtedness under our secured credit facility bears interest at a variable rate, which makes us more vulnerable to increases in interest rates and could cause our interest expense to increase and decrease cash available for operations and other purposes.

As of June 30, 2013, we had $65.5 million of indebtedness, bearing interest at a variable rate, outstanding under our Existing Credit Facility as compared to $52.9 million of indebtedness as of March 31, 2013. Recent interest rates in the United States have been at historically low levels, and any increase in these rates would increase our interest expense and reduce our funds available for operations and other purposes. Although from time to time we may enter into agreements to hedge a portion of our interest rate exposure, these agreements may be costly and may not protect against all interest rate fluctuations. Accordingly, we may experience material increases in our interest expense as a result of increases in interest rate levels generally. Based on the $65.5 million of variable interest rate indebtedness that was outstanding as of June 30, 2013, a hypothetical 100 basis point increase or decrease in the interest rate on our variable rate debt would have resulted in an approximately $0.6 million change to our interest expense for fiscal 2012. Concurrently with the closing of this offering, we intend to enter into our New Credit

 

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Facility, which is expected to consist of a $60.0 million revolving line of credit, a $5.0 million sublimit for swingline loans and a $10.0 million sublimit for the issuance of letters of credit. Subject to the satisfaction of certain conditions precedent, we have the ability to increase the aggregate revolving loan commitments under the New Credit Facility by an aggregate amount of up to $50.0 million, subject to the agreement of any existing lenders and/or any additional lenders who are providing such increased commitments. Borrowings under the New Credit Facility will bear interest on a variable rate which will increase and decrease based upon changes in the underlying interest rate and/or our leverage ratio. Any such increases in the interest rate or increases of our borrowings under the New Credit Facility will increase our interest expense.

We may be adversely affected by negative publicity relating to our CEO’s participation as a witness in an SEC action unrelated to our company and the diversion of his attention while participating in such SEC action.

Between 2006 and April 2010, our CEO, Larry L. Enterline, acted as the Chief Executive Officer of COMSYS IT Partners, Inc., a public company. During his tenure at COMSYS, COMSYS was acquired by Manpower, Inc. The Securities and Exchange Commission, or the SEC, has brought an action alleging that a long time personal friend of Mr. Enterline’s, Larry Schvacho, engaged in insider trading of COMSYS’s stock based on material non-public information he wrongfully misappropriated from Mr. Enterline about the transaction with Manpower in advance of that transaction being publicly announced in February 2010. The SEC’s civil suit against Mr. Schvacho was filed on July 24, 2012.

Mr. Enterline has not been named as a defendant in the SEC’s suit nor has he been accused of any wrongdoing by the SEC. Mr. Enterline has been identified as a witness in the SEC’s case against Mr. Schvacho and has been deposed in connection with that case. The deadline for completion of all discovery in the SEC’s case against Mr. Schvacho was May 15, 2013. The Court has established a timetable for the briefing of dispositive motions that might resolve the SEC’s claims against Mr. Schvacho without a trial. If no such motions are filed by July 26, 2013, counsel for the SEC and Mr. Schvacho are required to file papers that will prepare the case for trial. No trial date for the SEC’s action against Mr. Schvacho has yet been set. If and when the SEC’s case against Mr. Schvacho proceeds to trial, Mr. Enterline would likely be subpoenaed to give testimony at that trial. If this occurs, Mr. Enterline’s participation in the trial as a witness could be time consuming and could divert some of his attention and effort from our business. In addition, there could be adverse publicity associated with the trial of Mr. Schvacho that could draw public attention to Mr. Enterline. This adverse publicity could adversely affect our business, financial condition or results of operations.

We are subject to certain risks in our manufacturing and in the testing of our products.

As of March 31, 2013, we employed approximately 545 full-time employees worldwide, a large percentage of which work at our manufacturing facilities. Our business involves complex manufacturing processes that can be dangerous to our employees. Although we employ safety procedures in the design and operation of our facilities, there is a risk that an accident or death could occur in one of our facilities. Also, prior to the introduction of new products, our employees test the products under rigorous conditions, which involve the risk of injury or death. Any accident could result in manufacturing or product delays, which could negatively affect our business, financial condition or results of operations. The outcome of litigation is difficult to assess or quantify and the cost to defend litigation can be significant. As a result, the costs to defend any action or the potential liability resulting from any such accident or death or arising

 

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out of any other litigation, and any negative publicity associated therewith, could have a negative effect on our business, financial condition or results of operations.

We are subject to extensive United States federal and state, foreign and international safety, environmental, employment practices and other government regulations that may require us to incur expenses or modify product offerings in order to maintain compliance with such regulation, which could have a negative effect on our business and results of operations.

We are subject to extensive laws and regulations relating to safety, environmental, employment practices, including wage and hour, wrongful termination and discrimination, and other laws and regulations promulgated by the United States federal and state governments, as well as foreign and international regulatory authorities. Complying with such laws and regulations, and defending against allegations of our failure to comply (including meritless allegations), can be expensive and time consuming. In addition, we are subject to risks of litigation by employees and others which might involve allegations of illegal, unfair or inconsistent employment practices, including wage and hour violations and employment discrimination, misclassification of independent contractors as employees, wrongful termination and other concerns. Although we believe that our products, policies and processes comply with applicable safety, environmental, employment and other standards and related regulations, future regulations may require additional safety standards that would require additional expenses and/or modification of product offerings in order to maintain such compliance. Failure to comply with applicable regulations could result in fines, increased expenses to modify our products and harm to our reputation, all of which could have an adverse effect on our business, financial condition or results of operations.

Moreover, certain of our customer contracts require us to comply with the standards of voluntary standard-setting organizations, such as the United States Consumer Product Safety Commission and European Committee for Standardization (CEN). Failure to comply with the voluntary requirements of such organizations could result in the loss of certain customer contracts, which could have an adverse effect on our business, financial condition or results of operations.

We are subject to environmental laws and regulation and potential exposure for environmental costs and liabilities.

Our operations, facilities and properties are subject to a variety of foreign, federal, state and local laws and regulations relating to health, safety and the protection of the environment. These environmental laws and regulations include those relating to the use, generation, storage, handling, transportation, treatment and disposal of solid and hazardous materials and wastes, emissions to air, discharges to waters and the investigation and remediation of contamination. Many of these laws impose strict, retroactive, joint and several liability upon owners and operators of properties, including with respect to environmental matters that occurred prior to the time the party became an owner or operator. In addition, we may have liability with respect to third party sites to which we send waste for disposal. Failure to comply with such laws and regulations can result in significant fines, penalties, costs, liabilities or restrictions on operations that could negatively affect our business, financial condition or results of operations. From time to time, we have been involved in administrative or legal proceedings relating to environmental, health or safety matters and have in the past incurred expenditures relating to such matters.

We believe that our operations are in substantial compliance with applicable environmental laws and regulations. However, additional environmental issues relating to presently known or

 

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unknown matters could give rise to currently unanticipated investigation, assessment or expenditures. Compliance with more stringent laws or regulations, as well as different interpretations of existing laws, more vigorous enforcement by regulators or unanticipated events, could require additional expenditures that may materially affect our business, financial condition or results of operations.

Federal, state, local, foreign and international laws and regulations relating to land-use, noise and air pollution may have a negative impact on our future sales and results of operations.

The products in our powered vehicles line are used in vehicles which are subject to numerous federal, state, local, foreign and international laws and regulations relating to noise and air-pollution. Powered vehicles, and even mountain bikes, have also become subject to laws and regulations prohibiting their use on certain lands and trails. For example, in San Mateo County, California, mountain bikes are not allowed on county trails, and ATV and Side-by-Side riding is not allowed in Zion National Park, among many other national and state parks. In addition, recreational snowmobiling has been restricted in some national parks and federal lands in Canada, the United States and other countries. If more of these laws and regulations are passed and the users of our products lose convenient locations to ride their mountain bikes and powered vehicles, our sales could decrease and our business, financial condition or results of operations could suffer.

Fuel shortages, or high prices for fuel, could have a negative effect on the use of powered vehicles that use our products.

Gasoline or diesel fuel is required for the operation of the powered vehicles that use our products. There can be no assurance that the supply of these fuels will continue uninterrupted, that rationing will not be imposed or that the price of or tax on these petroleum products will not significantly increase in the future. Shortages of gasoline and diesel fuel and substantial increases in the price of fuel could have a material adverse effect on our powered vehicle product category in the future, which could have a negative effect on our business, financial condition or results of operations.

We do not control our suppliers or OEMs, or require them to comply with a formal code of conduct, and actions that they might take could harm our reputation and sales.

We do not control our suppliers or OEMs or their labor, environmental or other practices. A violation of labor, environmental or other laws by our suppliers or OEMs, or a failure of these parties to follow generally accepted ethical business practices, could create negative publicity and harm our reputation. In addition, we may be required to seek alternative suppliers or OEMs if these violations or failures were to occur. We do not inspect or audit compliance by our suppliers or OEMs with these laws or practices, and we do not require our suppliers or OEMs or licensees to comply with a formal code of conduct. Other consumer products companies have faced significant criticism for the actions of their suppliers and OEMs, and we could face such problems ourselves. Any of these events could reduce demand for our products, harm our ability to meet demand or harm our reputation, brand image, business, financial condition or results of operations.

We depend on a limited number of suppliers for our materials and component parts for some of our products, and the loss of any of these suppliers or an increase in cost of raw materials could harm our business.

We depend on a limited number of suppliers for certain components. If our current suppliers, in particular the minority of those which are “single-source” suppliers, are unable to timely fulfill

 

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orders, or if we are required to transition to other suppliers, we could experience significant production delays or disruption to our business. We define a single-source supplier as a supplier from which we purchase all of a particular raw material or input used in our manufacturing operations, although other suppliers are available from which to purchase the same raw material or input or an equivalent substitute. We do not maintain long term supply contracts with any of our suppliers and instead purchase these components on a purchase order basis. As a result, we cannot force any supplier to sell us the necessary components we use in creating our products and we could face significant supply disruptions should they refuse to do so. In connection with the transfer of a majority of the manufacturing of our mountain bike products to Taiwan, we could experience difficulties locating new qualified suppliers geographically located closer to these facilities. Furthermore, such new suppliers could experience difficulties in providing us with some or all of the materials we require, which could result in disruptions in our manufacturing operations. If we experience difficulties with our suppliers or manufacturing delays caused by our suppliers, whether in connection with our manufacturing operations in the United States or in Taiwan, our business, financial condition and results of operations could be materially and adversely impacted.

In addition, we purchase various raw materials in order to manufacture our products. The main commodity items purchased for production include aluminum, magnesium and steel. Historically, price fluctuations for these components and raw materials have not had a material impact on our business. In the future, however, if we experience material increases in the price of components or raw materials and are unable to pass on those increases to our customers, or there are shortages in the availability of such component parts or raw materials, it could negatively affect our business, financial condition or results of operations.

In addition to our various single-source suppliers, we also rely on one “sole-source” supplier, Miyaki Corporation, or Miyaki. We define a sole-source supplier as a supplier of a raw material or input for which there is no other supplier of the same product or an equivalent substitute. Miyaki is the exclusive producer of the Kashima coating for our suspension component tubes. As part of our agreement with Miyaki, we have been granted the exclusive right to use the trademark “KASHIMACOAT” on products comprising the aluminum finished parts for suspension components (e.g., tubes) and on related sales and marketing material worldwide, subject to certain exclusions. Although we believe we could obtain other coatings of comparable utility from other sources if necessary, we could no longer obtain this specific Kashima coating or use the trademark “KASHIMACOAT” if Miyaki were to stop supplying us with this coating. The need to replace the Kashima coating could temporarily disrupt our business and harm our business, financial condition or results of operations.

The transition of a majority of the manufacturing of our mountain bike products to Taiwan may negatively impact our brand image and consumer loyalty, which in turn could have a material adverse impact on our business and results of operations.

As we transition the majority of the manufacturing of our mountain bike products to Taiwan, no assurances can be given that consumers may not be adversely influenced by the fact that such products will no longer be manufactured in the United States or that consumers and OEM customers may not otherwise perceive that the quality of our products is lowered as a result of the fact that they will be manufactured overseas. Such perceptions could adversely impact our business, financial condition or results of operations.

 

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Federal health care reform legislation could increase our expenses and adversely impact our results of operations.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the U.S. These health care reform laws require employers such as us to provide health insurance for all qualifying employees or pay penalties for not providing coverage. We are unable at this time to accurately predict the impact that these laws will have on our future health care benefit and insurance premium costs and also on our costs for temporary employees that we obtain through agencies. If these costs increase and we are unable to raise the prices we charge our customers to cover these increased expenses, such increases in costs could adversely impact our business, financial condition or results of operations.

We rely on increasingly complex information systems for management of our manufacturing, distribution, sales and other functions. If our information systems fail to perform these functions adequately or if we experience an interruption in our operations, our business could suffer.

All of our major operations, including manufacturing, distribution, sales and accounting, are dependent upon our complex information systems. Our information systems are vulnerable to damage or interruption from, among other things:

 

 

earthquake, fire, flood, hurricane and other natural disasters;

 

 

power loss, computer systems failure, internet and telecommunications or data network failure; and

 

 

hackers, computer viruses, software bugs or glitches.

Any damage or significant disruption in the operation of such systems or the failure of our information systems to perform as expected could disrupt our operations, reduce our efficiency, delay our fulfillment of customer orders or require significant unanticipated expenditures to correct, and thereby have a negative effect on our business, financial condition or results of operations.

We may grow in the future through acquisitions. Growth by acquisitions involves risks and we may not be able to effectively integrate businesses we acquire or we may not be able to identify or consummate any future acquisitions on favorable terms, or at all.

Although we have not traditionally made acquisitions, we intend to selectively evaluate acquisitions in the future. Any acquisitions that we might make are subject to various risks and uncertainties and could have a negative impact on our business, financial condition or results of operations. These risks include the inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be spread out in different geographic regions), the inability to achieve anticipated cost savings or operating synergies, and the risk we may not be able to effectively manage our operations at an increased scale of operations resulting from such acquisitions. In the event we do complete acquisitions in the future, such acquisitions could affect our cash flows and net income as we expend funds, increase indebtedness and incur additional expenses in connection with pursuing acquisitions. We may also issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. We may not be able to identify or consummate any future acquisitions on favorable terms, or at all.

 

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Our operating results are subject to quarterly variations in our sales, which could make our operating results difficult to predict and could adversely affect the price of our common stock.

We have experienced, and expect to continue to experience, substantial quarterly variations in our sales and net income. Our quarterly results of operations fluctuate, in some cases significantly, as a result of a variety of other factors, including, among other things:

 

 

the timing of new product releases or other significant announcements by us or our competitors;

 

 

new advertising initiatives;

 

 

fluctuations in raw materials and component costs; and

 

 

changes in our practices with respect to building inventory.

As a result of these quarterly fluctuations, comparisons of our operating results between different quarters within a single year are not necessarily meaningful and may not be accurate indicators of our future performance. Any quarterly fluctuations that we report in the future may differ from the expectations of market analysts and investors, which could cause the price of our common stock to fluctuate significantly. We also believe that the seasonal nature of our business may have been overshadowed over each of the past few years due to the rapid growth in sales we have experienced during the same period.

Our beliefs regarding the future growth of the high-performance suspension product market are supported by qualitative data and limited sources and may not be reliable. A reduction or lack of continued growth in the popularity of high-end mountain bikes or powered vehicles or in the number of consumers who are willing to pay premium prices for well-designed performance-oriented equipment in the markets in which we sell our products could adversely affect our product sales and profits, financial condition or results of operations.

We generate virtually all of our revenues from sales of high-performance suspension products. Our beliefs regarding the outlook of the high-performance suspension product market come from qualitative data and limited sources, which may not be reliable. If our beliefs regarding the opportunities in the market for our products are incorrect or the number of consumers who we believe are willing to pay premium prices for well-designed performance-oriented equipment in the markets in which we sell our products does not increase, or declines, we may fail to achieve future growth and our business, financial condition or results of operations could be negatively affected.

Risks related to this offering and ownership of our common stock

The trading price of our common stock may be volatile, and you might not be able to sell your shares at or above the initial public offering price.

Our common stock has no prior trading history. The trading price of our common stock could be volatile, and you could lose all or part of your investment in our common stock. Factors affecting the trading price of our common stock could include:

 

 

variations in our operating results or those of our competitors;

 

 

new product or other significant announcements by us or our competitors;

 

 

changes in our product mix;

 

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changes in consumer preferences;

 

 

fluctuations in currency exchange rates;

 

 

the gain or loss of significant customers;

 

 

recruitment or departure of key personnel;

 

 

changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;

 

 

changes in general economic conditions as well as conditions affecting our industry in particular;

 

 

sales of our common stock by us, our significant stockholders or our directors or executive officers; and

 

 

the expiration of contractual lock-up agreements.

In addition, in recent years, the stock market has experienced significant price fluctuations. Fluctuations in the stock market generally or with respect to companies in our industry could cause the trading price of our common stock to fluctuate for reasons unrelated to our business, operating results or financial condition. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. A suit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert management’s attention.

A market for our securities may not develop or be maintained and our stock price may decline after this offering.

Prior to this offering, there has been no public market for shares of our common stock. An active public trading market for our common stock may not develop or, if it develops, may not be maintained, after this offering. Our company, the selling stockholders and the representatives of the underwriters will negotiate to determine the initial public offering price, and the initial public offering price does not necessarily reflect the price at which investors will be willing to buy and sell our shares following this offering. The initial public offering price may be higher than the trading price of our common stock following this offering. As a result, you could lose all or part of your investment.

Future sales of our shares, or the perception that such sales may occur, could cause our stock price to decline.

If our existing stockholders sell substantial amounts of our common stock in the public market, or are perceived by the public market as intending to sell, the trading price of our common stock could decline below the initial public offering price. Based on shares outstanding as of March 31, 2013, upon completion of this offering, we will have 36,317,087 shares of common stock outstanding after this offering. Of these shares, 8,571,429 shares of common stock will be freely tradable, without restriction, in the public market. Our executive officers, directors and the holders of substantially all of our shares of common stock have entered into contractual lock-up agreements with the underwriters pursuant to which they have agreed, subject to certain exceptions, not to sell or otherwise transfer any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of the final prospectus for this offering.

 

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Upon the expiration of the contractual lock-up agreements pertaining to this offering, up to an additional 27,745,658 shares will be eligible for sale in the public market, 25,544,967 of which are held by directors, executive officers and other affiliates and will be subject to volume and manner of sale limitations under Rule 144 under the Securities Act. Certain of our existing stockholders have demand and piggyback rights to require us to register with the SEC up to 27,745,658 shares of our common stock. See “Description of capital stock—Registration rights” for more information. If we register any of these shares of common stock, those stockholders would be able to sell those shares freely in the public market.

In addition, the shares that are either subject to outstanding options or that may be granted in the future under our equity incentive plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the contractual lock-up agreements and Rules 144 and 701 under the Securities Act.

The following table shows when the 36,317,087 shares of our common stock that will be outstanding when this offering is complete will be eligible for sale in the public market:

 

      Shares eligible for sale  
Date available for sale into public market   

Number

of

shares

    

Percentage

of

outstanding

shares

 

 

 

On the date of this prospectus

     8,571,429         23.6%   

At various times beginning 181 days or more after the date of this prospectus

     27,745,658         76.4%   

 

 

After this offering, we intend to register the shares of our common stock that we have issued or may issue under our equity plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to any vesting or contractual lock-up agreements.

In addition, our Amended and Restated Certificate of Incorporation to be effective immediately prior to the completion of this offering authorizes us to issue 90,000,000 shares of common stock, of which 36,317,087 shares will be outstanding after this offering.

If any of these additional shares described are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. For additional information, see “Shares eligible for future sale.”

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding advisory “say-on-pay” and “say-when-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of this offering;

 

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(iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.

We cannot predict if investors will find our common stock less attractive to the extent we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If securities and industry analysts do not commence and continue coverage of our company, the trading price for our stock would suffer. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business or our industry, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Our Sponsor and our directors and officers and insiders will continue to have substantial control over us after this offering and will be able to influence corporate matters.

Upon completion of this offering, Compass Group Diversified Holdings LLC, or our Sponsor, will beneficially own approximately 56.8% of our outstanding common stock (or approximately 53.9% if the underwriters exercise their option to purchase additional shares from the selling stockholders in full), and our other directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 13.5% of our outstanding common stock (or approximately 13.0% if the underwriters exercise their option to purchase additional shares from the selling stockholders in full). As a result, these stockholders will be able to exercise significant influence and, in the case of our Sponsor, control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation, and approval of any merger, consolidation, or sale of all, or substantially all, of our assets or other significant corporate transactions. In addition, our Sponsor will have input on all matters before our board of directors as our director Elias Sabo is affiliated with our Sponsor. Our Sponsor may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other stockholders. So long as our Sponsor or any of its affiliates continue to indirectly own a significant amount of our outstanding common stock, even if such amount drops below 50%, they will continue to be able to significantly influence our decisions.

In addition, our Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that may compete directly or indirectly with us. Our Sponsor may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us. For information regarding the ownership of our outstanding stock by our Sponsor and our executive officers and directors and their affiliates, see “Principal and selling stockholders.”

 

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We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include eventual compliance with Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the Nasdaq Stock Market LLC, or Nasdaq. In addition, our management team will also have to adapt to the requirements of being a public company. We expect complying with these rules and regulations will substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly.

The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, prospects, financial condition and operating results.

As a public company, we also expect that it may be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

If you purchase shares of our common stock in this offering, you will experience immediate dilution and additional dilution in the future.

If you purchase shares of our common stock in this offering, you will experience immediate dilution in net tangible book value of $13.89 per share because the price that you pay will be substantially greater than the net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our common stock. In addition, you will experience additional dilution upon the exercise of options to purchase common stock under our equity incentive plans. See “Dilution.”

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company.

Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, or our Charter Documents, as well as Delaware law, contain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, these provisions:

 

 

authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to discourage a takeover attempt;

 

 

establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

 

 

require that directors be removed from office only for cause;

 

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provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;

 

 

from and after the date that our Sponsor and its affiliates no longer collectively beneficially own (as determined pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly, at least a majority of the voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors, or the Trigger Date, prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders;

 

 

provide that special meetings of our stockholders may be called only by our board of directors, our Chairperson of the board of directors, our Lead Director (if we do not have a Chairperson or the Chairperson is disabled), our Chief Executive Officer or our President (in the absence of a Chief Executive Officer) or, until the Trigger Date, our Sponsor;

 

 

from and after the Trigger Date, require supermajority stockholder voting for our stockholders to effect certain amendments to our Charter Documents; and

 

 

establish advance notice requirements for nominations for elections to our board of directors or for proposing other matters that can be acted upon by stockholders at stockholder meetings.

In addition, we will be subject to Section 203 of the General Corporation Law of the State of Delaware, or DGCL, which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with a stockholder owning 15% or more of such corporation’s outstanding voting stock for a period of three years following the date on which such stockholder became an “interested” stockholder. In order for us to consummate a business combination with an interested stockholder within three years of the date on which the stockholder became interested, either (i) the business combination or the transaction that resulted in the stockholder becoming interested must be approved by our board of directors prior to the date the stockholder became interested, (ii) the interested stockholder must own at least 85% of our outstanding voting stock at the time the transaction commences (excluding voting stock owned by directors who are also officers and certain employee stock plans) or (iii) the business combination must be approved by our board of directors and authorized by at least two-thirds of our stockholders (excluding the interested stockholder) at a special or annual meeting (not by written consent). This provision could have the effect of delaying or preventing a change in control, whether or not it is desired by or beneficial to our stockholders. Any delay or prevention of a change in control transaction or changes in our board of directors and management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares of our common stock. For more information regarding these and other provisions, see “Description of capital stock—Anti-takeover provisions.”

Our Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Amended and Restated Certificate of Incorporation provides that, with certain limited exceptions, unless we consent in writing to the selection of an alternative forum, the Court of

 

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Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of our company owed to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our Charter Documents, (iv) any action to interpret, apply, enforce or determine the validity of our Charter Documents, or (v) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “likely,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

 

our ability to develop new and innovative products in our current end-markets;

 

 

our ability to leverage our technologies and brand to expand into new categories and end-markets;

 

 

our ability to increase our aftermarket penetration;

 

 

our ability to accelerate international growth;

 

 

our ability to improve operating and supply chain efficiencies;

 

 

our future financial performance, including our sales, cost of sales, gross profit or gross margins, operating expenses, ability to generate positive cash flow and ability to maintain our profitability;

 

 

our ability to maintain our premium brand image and high-performance products;

 

 

our ability to maintain relationships with the professional athletes and race teams we sponsor;

 

 

our transition of the majority of our mountain bike manufacturing operations to Taiwan and our expectations related to such transition;

 

 

our ability to selectively add additional dealers and distributors in certain geographic markets;

 

 

the growth of the markets in which we compete, our expectations regarding consumer preferences and our ability to respond to changes in consumer preferences;

 

 

changes in demand for high-end suspension and ride dynamics products;

 

 

our ability to successfully identify, evaluate and manage potential acquisitions and to benefit from such acquisitions; and

 

 

future economic or market conditions.

We caution you that the forward-looking statements highlighted above do not encompass all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors

 

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described in the section titled “Risk factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

This prospectus also contains statistical data, estimates, and forecasts that are based on independent industry publications or other publicly available information, as well as other information based on our internal sources. Although we believe that the third-party sources referred to in this prospectus are reliable, neither we nor the underwriters have independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, their estimates in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under the section titled “Risk factors” and elsewhere in this prospectus.

 

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Use of proceeds

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $33.8 million, assuming an initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease the net proceeds that we receive from this offering, after deducting estimated underwriting discounts and commissions payable by us, by approximately $2.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase or decrease of 100,000 shares of common stock sold in this offering by us would increase or decrease the net proceeds that we receive from this offering, after deducting estimated underwriting discounts and commissions payable by us, by approximately $1.3 million, assuming an initial public offering price of $14.00 per share.

We intend to use the net proceeds that we will receive from this offering to repay a majority of the then outstanding indebtedness under our Existing Credit Facility. To the extent that the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness then outstanding under our Existing Credit Facility, we intend to use borrowings under our New Credit Facility to pay any remaining balance outstanding under the Existing Credit Facility. Assuming we receive $33.8 million of net proceeds from this offering and the amount of our indebtedness which is outstanding under our Existing Credit Facility at the consummation of this offering is the same as the outstanding indebtedness at June 30, 2013, then we would expect to borrow $31.7 million from the revolver under our New Credit Facility in order to repay the full amount of the indebtedness of our Existing Credit Facility. Our Existing Credit Facility is with our Sponsor who will therefore receive all such repayments. We intend to terminate the Existing Credit Facility upon the consummation of this offering. As of June 30, 2013, $65.5 million of indebtedness was outstanding under our Existing Credit Facility and the interest rate on such outstanding balance was 5.9%. The outstanding balance under our Existing Credit Facility matures on June 18, 2018. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Credit facility.” We have used borrowings under our Existing Credit Facility for working capital purposes, capital expenditures and to fund the cash dividend we paid in connection with our June 2012 recapitalization. To the extent we receive net proceeds from this offering in excess of the then outstanding indebtedness under our Existing Credit Facility, we intend to use such excess net proceeds for working capital and other general corporate purposes.

 

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Dividend policy

In June 2012, in connection with our recapitalization, we paid a cash dividend to our stockholders equal to an aggregate of $67.0 million. See “Certain relationships and related party transactions—Recapitalization” for additional information. We did not declare or pay any dividends in the years ended December 31, 2010 and 2011 or during the three months ended March 31, 2013. Although we declared a cash dividend on our common stock in June 2012 in connection with our recapitalization, we intend to retain any future earnings upon completion of this offering and do not expect to pay any dividends in the foreseeable future. In addition, our New Credit Facility will contain covenants limiting our ability to pay dividends to our stockholders. See “Management’s discussion and analysis of financial condition and results of operations—Credit facility.” Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and any other factors that our board of directors may deem relevant.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2013 and is presented:

 

 

on an actual basis; and

 

 

on a pro forma, as adjusted basis, reflecting: (i) the filing of our Amended and Restated Certificate of Incorporation immediately prior to the consummation of this offering; (ii) the sale of 2,857,143 shares of common stock by us in this offering at an assumed initial offering price of $14.00 per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (iii) the application of such proceeds to repay a majority of the then outstanding indebtedness under our Existing Credit Facility concurrently with the closing of this offering.

The information in this table should be read in conjunction with “Use of proceeds,” “Selected consolidated financial data,” and “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

As of March 31, 2013

(in thousands, except share and per share data)

   Actual    

Pro forma, as

adjusted(1)

(unaudited)

 

 

 

Cash and cash equivalents

   $ 136      $ 136   
  

 

 

 
  

 

 

 

Long-term debt, less current portion

   $ 49,850      $ 16,050   

Stockholders’ equity:

    

Preferred stock, $0.001 par value per share; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma, as adjusted

              

Common stock, $0.001 par value per share: 69,675,000 shares authorized, actual; 33,459,944 shares issued and outstanding, actual; 90,000,000 shares authorized, 36,317,087 shares issued and outstanding, pro forma, as adjusted

     33        36   

Additional paid-in capital

     49,871        83,668   

Accumulated other comprehensive income

     (6     (6

Accumulated deficit

     (16,070     (16,070
  

 

 

 

Total stockholders’ equity

     33,828        67,628   
  

 

 

 

Total capitalization

   $ 83,678      $ 83,678   
  

 

 

 
  

 

 

 

 

 

 

(1)   A $1.00 increase in the assumed initial public offering price of $14.00 per share would decrease long-term debt, less current portion, and would increase additional paid-in capital, total stockholders’ equity and total capitalization by $2.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. A $1.00 decrease in the assumed initial offering price of $14.00 per share would increase long-term debt, less current portion payable by us, and would decrease additional paid-in capital, total stockholders’ equity and total capitalization by $2.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. An increase of 100,000 shares in the number of shares sold in this offering by us would decrease long-term debt, less current portion, and would increase additional paid-in capital, total stockholders’ equity and total capitalization from this offering by $1.3 million, assuming an initial public offering price of $14.00 per share and after deducting estimated underwriting discounts and commissions payable by us. A decrease of 100,000 shares in the number of shares sold in this offering by us would increase long-term debt, less current portion, and would decrease additional paid-in capital, total stockholders’ equity and total capitalization from this offering by $1.3 million, assuming an initial public offering price of $14.00 per share and after deducting estimated underwriting discounts and commissions payable by us.

 

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The number of shares of our common stock to be outstanding following this offering is based on 33,459,944 shares of common stock outstanding as of March 31, 2013, and excludes:

 

 

2,511,175 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of March 31, 2013, with a weighted average exercise price of $4.88 per share; and

 

 

3,631,709 shares of common stock reserved for issuance under our 2013 Omnibus Plan.

See “Executive compensation—Equity-based incentive plans.”

 

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Dilution

Our net tangible book value as of March 31, 2013, was $(29.9) million, or approximately $(0.89) per share of our common stock. Net tangible book value per share represents the amount of our total tangible assets, reduced by the amount of our total liabilities, and divided by the total number of shares of our common stock outstanding.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by new investors in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the pro forma adjustments described above in “Capitalization” and receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and reflecting the application of the net proceeds to us from this offering to repay approximately $33.8 million of the outstanding indebtedness under our Existing Credit Facility, our pro forma, as adjusted net tangible book value as of March 31, 2013, would have been $3.9 million, or $0.11 per share. This represents an immediate increase in pro forma, as adjusted net tangible book value of $1.00 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $13.89 per share to new investors in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

           $ 14.00   

Net tangible book value per share as of March 31, 2013

   $ (0.89  

Increase in pro forma, as adjusted net tangible book value per share attributable to new investors in this offering

     1.00     
  

 

 

   

Pro forma, as adjusted net tangible book value per share after giving effect to this offering

       0.11   
    

 

 

 

Dilution per share to new investors in this offering

     $ 13.89   
    

 

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the range of the initial offering price listed on the cover page of this prospectus, would increase or decrease our pro forma, as adjusted net tangible book value per share after giving effect to this offering by $0.07 and increase or decrease dilution per share to new investors in this offering by $0.93, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

An increase or decrease of 100,000 shares sold in this offering by us would increase or decrease our pro forma, as adjusted net tangible book value per share after giving effect to this offering by $0.04, and increase or decrease dilution per share to new investors in this offering by $0.04, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range of the initial offering price listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions payable by us.

 

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The following table presents on a pro forma, as adjusted basis as of March 31, 2013, after giving effect to the differences between the existing stockholders and the new investors in this offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share. The table below assumes an initial public offering price of $14.00 per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, and excludes estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

      Shares purchased     Total consideration     Average
price
per
share
 
       Number        Percent     Amount        Percent    
                  (in thousands)               

 

 

Existing stockholders

     33,459,944         92.1   $ 38,986         49.4   $ 1.17   

New investors in this offering(1)

     2,857,143         7.9        40,000         50.6        14.00   

 

 

Totals

     36,317,087         100.0   $ 78,986         100   $ 2.17   

 

 

 

 

 

(1)   Does not reflect shares purchased by new investors from the selling stockholders.

A $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors in this offering and the total consideration paid by all stockholders by $2.9 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease the total consideration paid by new investors in this offering and the total consideration paid by all stockholders by $1.4 million, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus.

Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 27,745,658, or approximately 76.4% of the total shares of common stock outstanding after our initial public offering, and will increase the number of shares held by new investors to 8,571,429, or approximately 23.6% of the total shares of common stock outstanding after our initial public offering.

If the underwriters’ option to purchase additional shares is exercised in full, our existing stockholders would own 72.9% and new investors in this offering would own 27.1% of the total number of shares of our common stock outstanding after this offering.

The tables and calculations above assume no exercise of outstanding options. As of March 31, 2013, there were 2,511,175 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of approximately $4.88 per share. To the extent outstanding options are exercised, there will be further dilution to new investors purchasing common stock in this offering. See “Description of capital stock” and “Executive compensation—Equity-based incentive plans.”

 

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Selected consolidated financial data

The following selected consolidated statements of income data for each of the years ended December 31, 2010, 2011 and 2012, and the consolidated balance sheet data as of December 31, 2011 and 2012, have been derived from our audited consolidated financial statements which are included elsewhere in this prospectus. The selected consolidated statements of income data for each of the years ended December 31, 2008 and 2009, and the selected consolidated balance sheet data as of December 31, 2008, 2009 and 2010, have been derived from our audited consolidated financial statements which are not included in this prospectus. The selected consolidated statements of income for the three months ended March 31, 2012 and 2013 and the selected consolidated balance sheet data as of March 31, 2013, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments necessary for the fair presentation of the financial information set forth in those statements.

The historical results presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period may not necessarily be indicative of the results for the full year. You should read the selected consolidated financial and operating data for the periods presented in conjunction with “Risk factors,” “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes, which are included elsewhere in this prospectus.

 

     For the years ended December 31,     For the three months
ended March 31,
 
 

 

 

 
(in thousands, except per
share data)
  2008     2009     2010     2011     2012     2012     2013  
                                  (unaudited)  

 

 

Sales

  $ 131,734      $ 121,519      $ 170,983      $ 197,739      $ 235,869      $ 45,671      $ 54,878   

Cost of sales(1)

    95,860        87,038        122,373        140,849        173,040        32,572        39,163   
 

 

 

 

Gross profit

    35,874        34,481        48,610        56,890        62,829        13,099        15,715   

Operating expenses:

             

Sales and marketing(1)

    8,667        8,269        10,293        11,748        12,570        3,177        3,284   

Research and development(1)

    4,804        5,545        7,321        9,750        9,727        2,376        2,355   

General and administrative(1)

    6,195        4,792        6,202        7,588        9,063        1,951        2,673   

Amortization of purchased intangibles

    5,500        5,217        5,217        5,217        5,315        1,304        1,341   
 

 

 

 

Total operating expenses

    25,166        23,823        29,033        34,303        36,675        8,808        9,653   
 

 

 

 

Income from operations

    10,708        10,658        19,577        22,587        26,154        4,291        6,062   

Other expense, net:

             

Interest expense

    (4,871     (3,089     (2,637     (1,982     (3,486     (233     (957

Other income (expense), net

    14        44        39        (13     (277     (46     34   
 

 

 

 

Total other expense, net

    (4,857     (3,045     (2,598     (1,995     (3,763     (279     (923
 

 

 

 

Income before income taxes

    5,851        7,613        16,979        20,592        22,391        4,012        5,139   

 

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     For the years ended December 31,    

For the three months

ended March 31,

 
 

 

 

 
(in thousands, except per
share data)
  2008     2009     2010     2011     2012     2012     2013  
                                  (unaudited)  

 

 

Provision for income taxes

    2,015        2,585        6,210        7,054        8,181        1,373        1,590   
 

 

 

 

Net income

  $ 3,836      $ 5,028      $ 10,769      $ 13,538      $ 14,210      $ 2,639      $ 3,549   
 

 

 

 

Earnings per share (actual):

             

Basic

  $ 0.13      $ 0.17      $ 0.36      $ 0.45      $ 0.44      $ 0.09      $ 0.11   

Diluted

  $ 0.12      $ 0.16      $ 0.34      $ 0.42      $ 0.44      $ 0.08      $ 0.10   

Weighted average common shares used to compute net income per share (actual):

             

Basic

    30,013        30,123        30,118        30,030        32,059        30,334        33,460   

Diluted

    30,916        31,286        31,828        32,295        32,515        32,562        34,149   

Supplemental pro forma net income per share (unaudited)(2)

          $ 0.38        $ 0.10   

Dividends per share

  $      $      $      $      $ 2.00      $      $   

 

 

 

(1)   Includes stock-based compensation (excluding tax effect) as follows:

 

     

For the years ended December 31,

     For the three months
ended March 31,
 
  

 

 

    

 

 

    

 

 

 

(in thousands)

   2008      2009      2010      2011      2012      2012      2013  
                                        (unaudited)  

 

 

Cost of sales

   $       $       $       $       $       $       $   

Sales and marketing

     27         27         40         78         160         33         33   

Research and development

     12         12         12         12         29         3         17   

General and administrative

     264         385         472         940         1,959         267         652   
  

 

 

    

 

 

    

 

 

 

Total

     304         425       $ 524       $ 1,030       $ 2,148       $ 303       $ 702   
  

 

 

    

 

 

    

 

 

 

 

    

 

 

    

 

 

 

 

(2)   Unaudited supplemental pro forma net income per share has been presented in accordance with the SEC Staff Accounting Bulletin Topic 1.B.3, or SAB 1.B.3. As outlined in SAB 1.B.3, the special dividend paid in June 2012 was in excess of the net income for the twelve-months ended March 31, 2013 of $15.1 million. Accordingly, under SAB 1.B.3, the company has included all shares, for which proceeds accrue to the company, issued under this offering in the shares used to calculate supplemental pro forma net income per share.

 

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Our consolidated balance sheet data is as follows:

 

      As of December 31,     As of March 31,  
  

 

 

   

 

 

 
     2011      2012     2013  
(in thousands)                 (unaudited)  

 

 

Consolidated balance sheet data:

       

Cash and cash equivalents

   $ 114       $ 15       $ 136   

Inventory

     29,531         34,255        42,734   

Working capital

     23,108         25,142        23,786   

Property and equipment, net

     9,005         11,789        12,105   

Total assets

     129,956         142,120        147,429   

Total debt, including current portion

     15,293         59,250 (1)      52,850   

Total stockholders’ equity

   $ 67,295       $ 29,584 (2)    $ 33,828   

 

 

 

(1)   In June 2012, we engaged in a recapitalization involving our debt, stock options and share purchases. In connection with the recapitalization, we amended our Existing Credit Facility. Concurrently with the closing of this offering, we intend to use the net proceeds that we receive from this offering to repay our then outstanding indebtedness under our Existing Credit Facility. To the extent the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness then outstanding under our Existing Credit Facility, we intend to use borrowings under our New Credit Facility to pay any remaining balance outstanding under our Existing Credit Facility in full. We intend to terminate the Existing Credit Facility upon the consummation of this offering. See “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and “Related party transactions—Recapitalization.”
(2)   In June 2012, we paid a $67.0 million cash dividend as part of our recapitalization. See “Related party transactions—Recapitalization.”

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected consolidated financial data” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the “Risk factors” and “Special note regarding forwarding-looking statements” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a designer, manufacturer and marketer of high-performance suspension products used primarily on mountain bikes, side-by-side vehicles, or Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, or ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. We currently sell to over 150 OEMs and distribute our products to more than 2,300 retail dealers and distributors worldwide. In each of the years ended December 31, 2010, 2011 and 2012, approximately 78%, 80% and 81%, respectively, of our sales were attributable to sales made to our OEM customers. The remaining sales were to our aftermarket customers. Virtually all of our sales are from sales of our products; miscellaneous sources of revenue such as royalty income and service related repair work and the associated sale of components represented less than 1% of our sales in each of the years ended December 31, 2010, 2011 and 2012.

We have determined that we operate in one reportable segment, which is the manufacturing, sale and service of ride dynamics products. Our products fall into the following two categories:

 

 

mountain bikes; and

 

 

powered vehicles, including Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles.

A significant portion of our sales are dependent on the demand for high-end or premium priced mountain bikes and their suspension components. In each of the years ended December 31, 2010, 2011 and 2012, approximately 75%, 69% and 67%, respectively, of our sales were attributable to sales of suspension products for mountain bikes and approximately 25%, 31% and 33%, respectively, of our sales were attributable to sales of suspension products for powered vehicles.

Our domestic sales totaled $53.5 million, $65.8 million and $84.3 million, or 31%, 33% and 36% of our total sales in 2010, 2011 and 2012, respectively. Our international sales totaled $117.4 million, $132.0 million and $151.6 million, or 69%, 67% and 64% of our total sales in each of the years ended December 31, 2010, 2011 and 2012, respectively. Sales attributable to countries outside the United States are based on shipment location. Our international sales, however, do not necessarily reflect the location of the end users of our products as many of our products are incorporated into mountain bikes that are assembled at international locations and then shipped back to the United States. We estimate, based on our internal projections, that approximately one-third of the end users of our products are located outside the United States.

 

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In January 2008, our Sponsor acquired a controlling equity interest in us. Our Sponsor acquires and manages a diversified group of leading middle-market businesses headquartered in North America. Our Sponsor’s parent, Compass Diversified Holdings, is listed on the New York Stock Exchange, or NYSE, under the symbol “CODI.” In connection with our Sponsor’s acquisition of a controlling interest in us, we entered into the Existing Credit Facility with our Sponsor and a management services agreement, as amended, or the Management Services Agreement, with Compass Group Management LLC, or CGM, a Delaware limited liability company and the manager of Compass Diversified Holdings. As a subsidiary of a public company listed on the NYSE, we have implemented certain corporate governance practices and adhere to a variety of reporting requirements and accounting rules as they relate to Compass Diversified Holdings. Following the completion of this offering, however, we will be required to implement additional corporate governance practices and to adhere to additional reporting requirements and compliance with these and other obligations as a public company will require significant time and resources from management, require the hiring of additional personnel, and will increase our legal, insurance, and financial costs. Following the completion of this offering, the Management Services Agreement with CGM, under which we paid $0.5 million in management fees in each of the years ended December 31, 2010, 2011 and 2012, will be terminated. We pay such fees quarterly in arrears and other than paying any accrued but unpaid fees for the quarter during which this offering closes, no separate termination fee will be due under this agreement when it is terminated. We expect the elimination of such management fees following the completion of this offering to offset a portion of the additional significant legal, insurance and financial costs we will incur as a result of becoming a public company.

In June 2012, we engaged in a recapitalization involving our debt, stock options and various share purchases. In connection with our recapitalization, we entered into an amendment to our Existing Credit Facility with our Sponsor, which, among other changes, provided for a $60.0 million term loan and increased the revolver commitment under that facility by $2.0 million to a total commitment of $30.0 million. Borrowings under our Existing Credit Facility in large part enabled us to fund a $67.0 million cash dividend to our stockholders as part of the recapitalization. The recapitalization also included other transactions, including various transactions involving stock options and the purchase and sale of shares among us, our Sponsor and certain of our executives and directors. Concurrently with the closing of this offering, we intend to use the net proceeds that we will receive from this offering to repay the then outstanding indebtedness under our Existing Credit Facility. To the extent the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness then outstanding under our Existing Credit Facility, we intend to use borrowings under our New Credit Facility to pay any remaining balance outstanding under the Existing Credit Facility. As of March 31, 2013, the outstanding borrowings under our Existing Credit Facility were $52.9 million. The New Credit Facility is expected to consist of a $60.0 million revolving line of credit, including a $5.0 million sublimit for swingline loans and a $10.0 million sublimit for the issuance of letters of credit. In connection with the termination of the Existing Credit Facility, we expect to have a non-cash charge of approximately $1.6 million related to our unamortized loan origination costs. See “—Liquidity and capital resources” and “Related party transactions—Recapitalization.”

Opportunities, challenges and risks

We intend to focus on generating sales of our high-performance suspension products through OEMs and in the aftermarket channel. To do this, we intend to continue to develop and introduce new and innovative products in our current end-markets and we intend to selectively develop products for applications and end-markets in which we do not currently participate.

 

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Currently, virtually all of our sales are dependent on the demand for high-performance suspension products. While we have recently introduced a new non-suspension product (our adjustable seat post for mountain bikes), this product comprised less than 1% of our sales in 2012. We may not achieve the desired level of sales for this product or for other new products that we introduce in the future.

Our aftermarket distribution network currently consists of more than 2,300 retail dealers and distributors worldwide. To further penetrate the aftermarket channel, we intend to selectively add additional dealers and distributors in certain geographic markets, expand our internal sales force and strategically increase the number of aftermarket specific products and services which we offer for existing vehicle platforms. In addition, we believe international expansion represents a significant opportunity for us and we intend to selectively increase infrastructure investments and focus on identified geographic regions.

As a supplier to OEM customers, we are largely dependent on the success of the business of our OEM customers. Model year changes by our OEM customers may adversely impact our sales or cause our sales to vary from quarter to quarter. Losses in market share or a decline in the overall market of our OEM customers or the discontinuance by our OEM customers of their products which incorporate our products could negatively impact our business and our results of operations.

We have begun the process of transitioning a majority of the manufacturing of our mountain bike products to our facility in Taiwan and we contemplate that this transition will continue through 2015. We anticipate that this transition, when completed, will enable us to shorten production lead times to our mountain bike OEM customers, improve supply chain efficiencies and reduce our manufacturing costs. We also believe that this transition, once completed, will improve operating margins in the medium to long term. However, in the short term during this transition process we expect to incur some duplication of facilities, equipment and personnel which will increase our costs and could vary materially from our projections. In addition, this transition process could also cause manufacturing problems and give rise to execution risks which could negatively impact our business, financial condition or results of operations.

From time to time we have experienced, and may continue to experience, warranty costs and claims relating to our products. In the ordinary course of business we reserve against such costs and claims in our financial statements. There is a risk, however, that in the future we will experience higher than expected warranty costs and claims, as well as other related costs.

We intend to evaluate selective potential acquisition opportunities for high-performance products and technologies that we believe will help us extend our ride dynamics product platform. Any acquisitions that we might make are subject to various risks and uncertainties and could have a negative impact on our results of operations.

Basis of presentation

Sales are comprised of:

Sales from:

 

 

Product sales: consists of sales of products sold primarily to our OEM and aftermarket customers. We recognize revenue when products are shipped, title has transferred, collection

 

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of the receivable is probable, persuasive evidence of an arrangement exists, and the sales price to our customers is fixed or determinable;

 

 

Service sales: consists of sales of service related repair work and the associated sale of products. We recognize revenue when service products are shipped, title has transferred, collection of the receivable is probable, persuasive evidence of an arrangement exists, and the sales price to our customers is fixed or determinable;

 

 

Royalty income: consists of licensing fees and royalties earned by us from contractual relationships we have with third parties that allow them to use our intellectual property in return for fees. We recognize royalty income when collection of the receivable is probable, persuasive evidence of an arrangement exists, and generally upon the reporting of royalties by the licensee; and

 

 

Shipping and handling fees: we include shipping and handling fees billed to customers in sales.

Net of:

 

 

Sales returns allowances: consists of an estimate of our sales returns. This allowance is based upon estimates of the projected returns in future periods based on our experience with returns recorded in previous periods; and

 

 

Rebates: consists of incentives we provide to customers based on sales of eligible products.

We attribute our past growth in sales predominantly to increases in the number of units sold to our OEM customers in both our mountain bike and powered vehicle product categories. To a lesser degree, increases in our average sales prices have also contributed to our past sales growth, as we have introduced innovations to and improved the functionality of many of our products, which enabled us, in many cases, to increase our sale prices for such products.

Cost of sales

The cost of sales includes the cost of manufactured products (raw materials consumed, the cost to procure materials, labor costs, including wages, and employee benefits, and factory overhead to produce finished good products), including:

 

 

the cost to inspect and repair products;

 

 

shipping costs associated with inbound freight. These costs are capitalized as part of inventory and included in cost of sales as the inventory is sold;

 

 

royalty expenses, including payments to certain parties for our use of licensed technology incorporated into our products;

 

 

freight expense incurred for certain shipments to customers, excluding customers who pay for their own freight;

 

 

warranty costs associated with the repair or replacement of products under warranty; and

 

 

reductions in the cost of inventory to its net realizable value, if required, for estimated excess, obsolescence or impaired balances.

 

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Gross profit/gross margin

Our gross profit equals our sales minus cost of sales. Our gross margin measures our gross profit as a percentage of sales.

Our gross margins fluctuate based on product, customer and channel mix as certain of our products are sold at higher gross margins than others. Generally, we earn higher gross margins on our products sold to the aftermarket channel and we typically earn lower gross margins on the products we sell to OEMs. In the near term, we anticipate our gross margins will be generally in line with our historical results. We anticipate that the improvements we are pursuing from our cost initiatives, which are designed to improve our operating efficiencies, will be offset in the short term by duplicative costs we expect to incur as a result of our planned transition of a majority of the manufacturing of our mountain bike products to our operations in Taiwan. In the medium to long term, we anticipate that this transition should benefit our gross margins.

Operating expenses

Our operating expenses consist of the following:

 

 

sales and marketing;

 

 

research and development;

 

 

general and administrative; and

 

 

amortization of purchased intangibles.

Our sales and marketing expenses include costs related to our sales, customer service and marketing personnel, including their wages, employee benefits and related stock-based compensation, and occupancy related expenses. Other significant sales and marketing expenses include race support and sponsorships of events and athletes, advertising and promotions related to trade shows, travel and entertainment, and promotional materials, products and our sales offices costs.

Our research and development expenses consist primarily of salaries and personnel costs, including wages, employee benefits and related stock-based compensation for our engineering, research and development teams, occupancy related expenses, fees for third party consultants, service fees, and expenses for prototype tooling and materials, travel, and supplies. We expense research and development costs as incurred and such costs are included as research and development expenses on our consolidated statements of income and comprehensive income.

Our general and administrative expenses include costs related to our executive, finance, information technology, human resources and administrative personnel, including wages, employee benefits and related stock-based compensation expenses. We record professional and contract service expenses, occupancy related expenses associated with corporate locations and equipment, and legal expenses in general and administrative expenses. Currently we pay annual management fees of $0.5 million to CGM, which are paid quarterly in arrears and are included as part of general and administrative expenses. These fees will discontinue upon the closing of this offering. We expect the elimination of these management fees following the completion of this offering will offset a portion of the additional legal, insurance, and accounting costs we expect to incur related to compliance and other public company expenses.

 

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Our amortization of intangibles includes amortization over their respective useful lives of our purchased intangible assets, such as customer lists and our core technology. Our intangible assets, the substantial majority of which were established as a result of our Sponsor’s acquisition of us in 2008, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. No impairments on intangible assets were identified in the years ended December 31, 2010, 2011 and 2012, respectively.

In the near term, we anticipate that our general and administrative expenses will increase both in terms of absolute dollars and when expressed as a percentage of sales as we incur additional expenses, including those associated with becoming a public company. In the long term, we generally anticipate that our sales and marketing, and research and development expenses will increase in terms of absolute dollars, but we anticipate these expenses, excluding stock-based compensation expenses, should remain relatively constant when expressed as a percentage of our sales. We can give no assurance that these expectations will be realized.

Income from operations

We define income from operations as gross profit less our operating expenses. We use income from operations as an indicator of the profitability of our business and our ability to manage costs.

Other expense, net

Other expense, net consists of interest expense and other income (expense), net. Interest expense consists of interest charged to us under our credit facility. In connection with the closing of this offering, we intend to enter into our New Credit Facility. See “—Liquidity and capital resources.”

Other income (expense), net consists of gains and losses on the disposal of fixed assets, foreign currency transaction gains and losses, forgiveness of indebtedness under our loan with the Redevelopment Agency of the City of Watsonville, and other miscellaneous items.

In connection with the termination of the Existing Credit Facility at the closing of this offering, we expect to have a non-cash charge of approximately $1.6 million related to our unamortized loan origination costs.

Income taxes

We are subject to income taxes in the United States and various other foreign jurisdictions in which we do business. Some of these foreign jurisdictions have higher statutory tax rates than those in the United States, and certain of our international earnings are also taxable in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and absorption of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities and changes in tax laws. In addition, we are subject to examination of our income tax returns by the U.S. Internal Revenue Service, or IRS, and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax liabilities and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax liabilities and income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

 

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Under U.S. generally accepted accounting principles, or GAAP, an uncertain income tax position will not be recognized unless it has a greater than 50% likelihood (i.e., more-likely-than-not) of being sustained and then, measured only to the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. We established liabilities for uncertain tax positions and deferred taxes associated with the deductibility of certain amortization and depreciation expenses. The liability for uncertain income tax positions represents the amount of tax we would be required to pay if certain tax deductions previously claimed on tax returns were not allowed upon examination by the taxing authorities. The liability for deferred taxes represents additional taxes that would be payable in future periods because of the potential non-deductibility of future amortization and depreciation expenses.

As of December 31, 2012, our balance sheet reflected a liability for unrecognized tax benefits of $7.3 million. The unrecognized tax benefits are primarily due to the uncertainty of the deductibility of amortization and depreciation expenses which were incurred as a result of our Sponsor’s acquisition of us in 2008. In addition, as of December 31, 2012, our balance sheet reflected a related deferred tax liability of $15.2 million based on the difference between the financial statement and tax basis of certain assets, which represents the amount of tax we would be required to pay in the future based on the current enacted tax rates if the tax deductions associated with this amortization and depreciation were not claimed and allowed on our income tax returns. This deferred tax liability will decrease each year we expense the associated amortization and depreciation for accounting purposes. However, this reduction is not anticipated to be associated with actual cash payments. We expect to decrease our liability for unrecognized tax benefits and recognize a reduction in income tax expense (and an increase in net income) because of the expiration of statutes of limitations in the amount of approximately $1.5 million in the third quarter of 2013. However, reductions in the related deferred tax liability will over time be associated with offsetting increases to our liability for unrecognized tax benefits. We generally expect to recognize a reduction in income tax expense (and an increase in net income) through the expiration of statutes of limitations in the amount of approximately $1.4 to $1.5 million in each third quarter from 2014 through 2027 and approximately $0.1 to $0.3 million in each fourth quarter from 2014 through 2028. These annual reductions in our income tax expense will cease if it is determined upon examination of the tax authorities that the deductions are not valid and the liabilities for the uncertain income tax position and the associated deferred tax liability will have to be settled for cash. If we subsequently determine that we have met the more-likely-than-not threshold that these deductions will be sustained, the balance of the liability for unrecognized tax benefits that would be recognized as a reduction of income tax expense, except for approximately $1.0 million, which would increase the deferred tax liability to the extent of taxes associated with tax amortization of intangibles with indeterminate lives, and the related unamortized deferred tax liabilities will be recognized as a one-time income tax benefit.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of December 31, 2012, we did not have any valuation allowances recorded as we expect to fully utilize all of our deferred tax assets and we did not have any net operating loss or tax credit carry-forwards. For the years ended December 31, 2010, 2011 and 2012, we had effective tax rates of 36.6%, 34.3% and 36.5%, respectively. We anticipate that our effective tax rate in 2013

 

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will be slightly less than our effective tax rate for 2012 and that in the medium term our effective annual tax rates should be approximately 34% to 36%, however our actual effective annual tax rates will vary based on several factors, including the geographic mix of our sales, changes in future tax rates, and the treatment of the unrecognized tax benefits mentioned above.

Results of operations

The table below summarizes our results of operations for the fiscal years ended December 31, 2010, 2011 and 2012 and for the three months ended March 31, 2012 and 2013.

 

     Years Ended December 31,    

Three Months Ended

March 31,

 
 

 

 

 
(in thousands)   2010     2011     2012     2012     2013  
                      (unaudited)  

 

 

Sales

  $ 170,983      $ 197,739      $ 235,869      $ 45,671      $ 54,878   

Cost of sales

    122,373        140,849        173,040        32,572        39,163   
 

 

 

 

Gross profit

    48,610        56,890        62,829        13,099        15,715   

Operating expenses:

         

Sales and marketing

    10,293        11,748        12,570        3,177        3,284   

Research and development

    7,321        9,750        9,727        2,376        2,355   

General and administrative

    6,202        7,588        9,063        1,951        2,673   

Amortization of purchased intangibles

    5,217        5,217        5,315        1,304        1,341   
 

 

 

 

Total operating expenses

    29,033        34,303        36,675        8,808        9,653   
 

 

 

 

Income from operations

    19,577        22,587        26,154        4,291        6,062   

Other expense, net:

         

Interest expense

    (2,637     (1,982     (3,486     (233     (957

Other income (expense), net

    39        (13     (277     (46     34   
 

 

 

 

Total other expense, net

    (2,598     (1,995     (3,763     (279     (923
 

 

 

 

Income before income taxes

    16,979        20,592        22,391        4,012        5,139   

Provision for income taxes

    6,210        7,054        8,181        1,373        1,590   
 

 

 

 

Net income

  $ 10,769      $ 13,538      $ 14,210      $ 2,639      $ 3,549   
 

 

 

 

 

 

 

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The following table sets forth our gross profit as well as our operating and other income and expenses and other information for the periods presented, expressed as a percentage of total revenues.

 

      Years Ended December 31,     Three Months Ended
March 31,
  

 

 

     2010     2011     2012     2012     2013      
                       (unaudited)      

 

Sales

     100.0     100.0     100.0     100.0     100.0  

Cost of sales

     71.6        71.2        73.4        71.3        71.4     
  

 

 

Gross profit

     28.4        28.8        26.6        28.7        28.6     

Operating expenses:

            

Sales and marketing

     6.0        6.0        5.3        7.0        6.0     

Research and development

     4.3        4.9        4.1        5.2        4.3     

General and administrative

     3.6        3.8        3.8        4.3        4.9     

Amortization of purchased intangibles

     3.1        2.6        2.3        2.8        2.4     
  

 

 

Total operating expenses

     17.0        17.3        15.5        19.3        17.6     
  

 

 

Income from operations

     11.4        11.5        11.1        9.4        11.0     

Other expense, net:

            

Interest expense

     (1.5     (1.0     (1.6     (0.5     (1.7  

Other income (expense), net

     *        *        *        (0.1     0.1     
  

 

 

Total other expense, net

     (1.5     (1.0     (1.6     (0.6     (1.6  
  

 

 

Income before income taxes

     9.9        10.5        9.5        8.8        9.4     

Provision for income taxes

     3.6        3.6        3.5        3.0        2.9     
  

 

 

Net income

     6.3     6.9     6.0     5.8     6.5  
  

 

 

 

 

*   Represents less than 0.1%

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Sales

Sales for the three months ended March 31, 2013 increased approximately $9.2 million, or 20.2%, compared to the same period in 2012. Sales of mountain bike and powered vehicle products increased 16.1% and 27.8%, respectively, for the three months ended March 31, 2013 compared to the comparable prior year period. Sales growth was primarily driven by sales to OEMs which increased $7.7 million to $43.7 million during the three months ended March 31, 2013 compared to $36.0 million for the same period in 2012. The increase in sales to OEMs was largely driven by increased specification, or spec, positions with our OEM customers. The remaining increase in sales totaling $1.5 million reflects increased sales to aftermarket customers in the three months ended March 31, 2013 compared to the same period in 2012. The increase in sales to aftermarket customers is due to higher end user demand for our products.

Cost of sales

Cost of sales for the year three months ended March 31, 2013 increased approximately $6.6 million, or 20.2% compared to the same period in 2012. The increase in cost of sales was due to increased sales during the three months ended March 31, 2013 when compared to the same period in 2012. For the three months ended March 31, 2013 our gross margin was 28.6% compared to 28.7% for the same period in 2012.

 

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Operating expenses

Operating expenses for the three months ended March 31, 2013 increased approximately $0.8 million, or 9.6%, over the same period in 2012. When expressed as a percentage of sales, operating expenses declined to 17.6% of sales for the three months ended March 31, 2013 compared to 19.3% of sales in the same period in 2012.

Within operating expenses, our sales and marketing expenses increased in the three months ended March 31, 2013 by $0.1 million to $3.3 million from $3.2 million in the same period in 2012 primarily due to increases of personnel related expenditures for new hires of approximately $0.2 million, which was partially offset by a $0.1 million reduction in other marketing related expenses.

Our research and development expenses were essentially unchanged in the three months ended March 31, 2013 compared to the same period in 2012 as increases in personnel related expenses for additional employees of approximately $0.1 million were offset by a reduction of approximately $0.1 million in project and prototype expenses.

Our general and administrative expenses increased in the three months ended March 31, 2013 by $0.7 million to $2.7 million from $2.0 million in the same period in 2012. The increase was primarily due to an increase of $0.4 million in stock compensation expenses and an increase of $0.3 million in other non-personnel general and administrative expenses.

Amortization of purchased intangible assets increased slightly due to the acquisition of intellectual property.

Income from operations

Income from operations for the three months ended March 31, 2013 increased approximately $1.8 million, or 41.3%, compared to income from operations in the same period in 2012. The increase in income from operations was primarily the result of our increase in gross profit of $2.6 million, partially offset by our increases in general and administrative and sales and marketing expenses in total of $0.8 million.

Other expense, net

Other expense, net for the three months ended March 31, 2013 increased by approximately $0.6 million to $0.9 million in the three months ended March 31, 2013 compared to $0.3 million in the same period in 2012. Within Other expense, net, interest expense increased in the three months ended March 31, 2013 by $0.7 million due primarily to increased average borrowings under our existing credit facility. Other income (expense), net for the three months ended March 31, 2013 was effectively unchanged from the same period in 2012.

Income tax expense

Income tax expense for the three months ended March 31, 2013 increased by approximately $0.2 million to $1.6 million compared to income tax expense of $1.4 million in the same period in 2012. Effective tax rates were 30.9% and 34.2% for the three months ended March 31, 2013 and 2012, respectively. The decrease in the effective tax rates for the three months ended March 31, 2013 was primarily caused by retroactive extension of the R&D tax credit as a result of a recent change in tax law.

 

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Net income

As a result of the factors discussed above, our net income increased $0.9 million, or 34.5%, to $3.5 million in the three months ended March 31, 2013 from $2.6 million for the same period in 2012.

Year ended December 31, 2012 compared to year ended December 31, 2011

Sales

Sales for the year ended December 31, 2012 increased approximately $38.1 million, or 19.3%, compared to 2011. Sales of mountain bike and powered vehicle products increased 16.2% and 26.1%, respectively, in 2012 compared to 2011. Sales growth was primarily driven by sales to OEMs which increased $32.0 million to $189.9 million during the year ended December 31, 2012 compared to $157.9 million for the same period in 2011. The increase in sales to OEMs was largely driven by increased specification, or spec, positions with our OEM customers and, to a lesser degree, by increased sales on vehicle models where our products had previously been specified in prior years. The remaining increase in sales totaling $6.1 million reflects increased sales to aftermarket customers in the year ended December 31, 2012 compared to 2011. The increase in sales to aftermarket customers is due to higher end user demand for our products.

Cost of sales

Cost of sales for the year ended December 31, 2012 increased approximately $32.2 million, or 22.9% compared to 2011. The increase in cost of sales in absolute dollars was primarily due to increased sales during 2012 when compared to the prior year. For the year ended December 31, 2012 our gross margin was 26.6% compared to 28.8% for the same period in 2011. Several factors contributed to the 2.2% decrease in gross margin in 2012, including an aggregate of $2.8 million in the year for higher warranty related costs for upgrades to our dampers contained in our suspension products, which costs included a $1.8 million increase in our warranty reserve to replace these dampers and approximately $1.0 million in other warranty related costs. In addition, due to increases in customer orders above the amounts forecasted, we incurred $1.7 million of incremental expedited in-bound freight costs related to products sold to customers. The other material factors contributing to the margin decrease in 2012 included increased overhead costs of approximately $0.9 million associated with consolidating our Watsonville operations and increased costs of approximately $1.1 million associated with expanding our operations in Taiwan.

Operating expenses

Operating expenses for the year ended December 31, 2012 increased approximately $2.4 million, or 6.9%, over 2011. When expressed as a percentage of sales, operating expenses declined to 15.5% of sales for the year ended December 31, 2012 compared to 17.3% of sales in 2011.

Within operating expenses, our sales and marketing expenses increased in 2012 by $0.8 million to $12.6 million from $11.7 million in 2011 primarily due to increases of personnel related expenditures for new hires of approximately $0.6 million, and increased expenditures for marketing and business travel and supplies, equipment and services of approximately $0.2 million.

Our research and development expenses were essentially unchanged in 2012 compared to 2011 as increases in personnel related expenses for additional employees of approximately $0.2 million

 

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and additional expenses for projects and prototypes and other expenses of approximately $0.3 million were offset by a reduction of approximately $0.5 million in third party consulting fees.

Our general and administrative expenses increased in 2012 by $1.5 million to $9.1 million from $7.6 million in 2011, primarily due to increased levels of personnel related expenses of approximately $1.4 million, which was primarily due to stock compensation expenses of approximately $1.0 million. In addition, there were increases in general corporate overhead in 2012 of approximately $0.1 million.

Amortization of purchased intangible assets increased by $0.1 million due to the acquisition of intellectual property.

Income from operations

Income from operations for the year ended December 31, 2012 increased approximately $3.6 million, or 15.8%, compared to income from operations in 2011. The increase in income from operations was primarily the result of our increased sales in 2012 compared to 2011, which was partially offset by the increases in cost of sales and operating expenses described above.

Other expense, net

Other expense, net for the year ended December 31, 2012 increased by approximately $1.8 million to $3.8 million in 2012 compared to $2.0 million of other expense, net in 2011. Within other income (expense), interest expense increased in 2012 by $1.5 million due primarily to increased average borrowings under our Existing Credit Facility. In addition, other expenses, net increased in 2012 by $0.3 million primarily due to a loss on the disposal of assets which were no longer needed.

Income tax expense

Income tax expense for the year ended December 31, 2012 increased by approximately $1.1 million to $8.2 million compared to income tax expense of $7.1 million in 2011. Effective tax rates were 36.5% and 34.3% for 2012 and 2011, respectively. The increase in the effective tax rates for 2012 was primarily caused by the December 31, 2011 expiration of the ability to generate additional federal research and development credit. As of December 31, 2012, this credit had lapsed, although it has been subsequently extended.

Net income

As a result of the factors discussed above, our net income increased $0.7 million, or 5.2%, to $14.2 million in 2012 from $13.5 million for 2011.

Year ended December 31, 2011 compared to year ended December 31, 2010

Sales

Sales for the year ended December 31, 2011 increased approximately $26.8 million, or 15.6%, compared to 2010. Sales of mountain bike and powered vehicle products increased 6.2% and 43.7%, respectively, in 2011 compared to 2010. The increases in sales was primarily driven by sales to OEMs which increased $23.7 million to $157.9 million for the year ended December 31, 2011 compared to $134.2 million in 2010. The increase in sales to OEMs was largely driven by increased

 

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spec positions with our OEM customers and, to a lesser degree, by increased sales on vehicle models where our products had previously been specified in prior years. The remaining increase in sales totaling $3.1 million reflects increased sales to aftermarket customers in 2011 compared to the prior year. The increase in sales to aftermarket customers was due to higher end user demand for our products.

Cost of sales

Cost of sales for the year ended December 31, 2011 increased approximately $18.5 million, or 15.1%, compared to the corresponding period in 2010. The increase in cost of sales in absolute dollars is primarily attributable to the increase in sales for the period. For the year ended December 31, 2011 our gross margin was 28.8% compared to 28.4% for 2010. The 0.4% increase in gross margin during the year ended December 31, 2011 was primarily attributable to efficiencies achieved in connection with the increased production volume during 2011. These gains were partially offset by an unfavorable product and customer mix compared to 2010, increased raw material commodity costs and unfavorable foreign exchange rates.

Operating expenses

Operating expenses for the year ended December 31, 2011 increased approximately $5.3 million over the corresponding period in 2010. When expressed as a percentage of sales, operating expenses were 17.3% of sales for the year ended December 31, 2011 compared to 17.0% of sales in 2010.

Within operating expenses, our sales and marketing expenses increased in 2011 by $1.4 million to $11.7 million from $10.3 million in 2010 primarily due to increases of personnel related expenditures of approximately $0.6 million, which increases were primarily a result of the hiring of additional personnel. In addition, expenses for marketing and related travel increased by approximately $0.5 million and for supplies, equipment, services and other related expenses increased by approximately $0.3 million in 2011 compared to 2010.

Our research and development expenses increased in 2011 by $2.5 million to $9.8 million from $7.3 million in 2010. The increase in research and development expenses was primarily as a result of increased employee costs related to additional employees of approximately $1.2 million and increases in supplies, equipment and services costs of approximately $0.3 million, expenses for research and development related projects and prototypes of approximately $0.6 million and other related expenses of approximately $0.4 million in 2011 when compared to 2010.

Our general and administrative expenses increased in 2011 by $1.4 million to $7.6 million from $6.2 million in 2010. The increase in general and administrative expenses was primarily due to increased personnel related expenses of approximately $0.9 million, including $0.5 million of stock compensation expenses, and increases in other general and administrative expenses of approximately $0.5 million in 2011 when compared to 2010.

Amortization of purchased intangible assets remained the same in 2011 compared to 2010.

Income from operations

Income from operations for the year ended December 31, 2011 increased approximately $3.0 million, or 15.4%, compared to income from operations in 2010, based principally on the increase in sales, offset in part by the increases in selling, general and administrative costs, as described above.

 

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Other expense, net

Other expense, net for the year ended December 31, 2011 decreased by approximately $0.6 million to $2.0 million from $2.6 million in 2010. The decrease in other expense, net was due primarily to decreased interest expense in 2011 of $0.8 million compared to 2010 as result of less average borrowings outstanding under our Existing Credit Facility, which decrease was partially offset by an increase of other expenses of $0.2 million.

Income tax expense

Income tax expense for 2011 increased by approximate $0.9 million to $7.1 million compared to income tax expense of $6.2 million in 2010. Effective tax rates were 34.3% and 36.6% for 2011 and 2010, respectively. The decline in the effective tax rates for 2011 was primarily caused by a one-time adjustment in 2010 for a change in the effective tax rate applied to our deferred tax liabilities from 34% to 35%.

Net income

As a result of the factors discussed above net income increased $2.7 million, or 25.7%, to $13.5 million in 2011 from $10.8 million in 2010.

 

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Quarterly Results of Operations

The following tables set forth our unaudited quarterly consolidated statements of operations data and our unaudited statement of operations data as a percentage of total revenue for each of the five quarters in the period ended March 31, 2013. The unaudited quarterly consolidated statements of operation data were prepared on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly financial information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of the results to be expected for any future period, and the results for any interim period may not necessarily indicative of the results of operations for a full year.

 

      Three Months Ended  
(in thousands, except per share data)    Mar 31,
2012
    Jun 30,
2012
    Sep 30,
2012
    Dec 31,
2012
    Mar 31,
2013
 

 

 

Sales

   $ 45,671      $ 60,721      $ 72,864      $ 56,613      $ 54,878   

Cost of sales

     32,572        44,275        52,745        43,448        39,163   
  

 

 

 

Gross profit

     13,099        16,446        20,119        13,165        15,715   

Operating expenses:

          

Sales and marketing

     3,177        2,961        3,150        3,282        3,284   

Research and development

     2,376        2,393        2,427        2,531        2,355   

General and administrative

     1,951        2,895        2,223        1,994        2,673   

Amortization of purchased intangibles

     1,304        1,329        1,341        1,341        1,341   
  

 

 

 

Total operating expenses

     8,808        9,578        9,141        9,148        9,653   
  

 

 

 

Income from operations

     4,291        6,868        10,978        4,017        6,062   

Other expense, net:

          

Interest expense

     (233     (637     (1,424     (1,192     (957

Other income (expense), net

     (46     (255     14        10        34   
  

 

 

 

Total other expense, net

     (279     (892     (1,410     (1,182     (923
  

 

 

 

Income before income taxes

     4,012        5,976        9,568        2,835        5,139   

Provision for income taxes

     1,373        1,659        4,099        1,050        1,590   
  

 

 

 

Net income

   $ 2,639      $ 4,317      $ 5,469      $ 1,785      $ 3,549   
  

 

 

 

Earnings per share

          

Basic

   $ 0.09      $ 0.14      $ 0.16      $ 0.05      $ 0.11   

Diluted

   $ 0.08      $ 0.14      $ 0.16      $ 0.05      $ 0.10   

Weighted-average shares used to compute earnings per share:

          

Basic

     30,334        30,946        33,465        33,463        33,460   

Diluted

     32,562        31,153        33,718        33,962        34,149   

 

 

 

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      Three Months Ended
(as a percentage of revenue)    Mar 31,
2012
    Jun 30,
2012
    Sep 30,
2012
    Dec 31,
2012
    Mar 31,
2013
     

 

Sales

     100.0     100.0     100.0     100.0     100.0  

Cost of sales

     71.3        72.9        72.4        76.7        71.4     
  

 

 

Gross profit

     28.7        27.1        27.6        23.3        28.6     

Operating expenses:

            

Sales and marketing

     7.0        4.9        4.3        5.8        6.0     

Research and development

     5.2        3.9        3.3        4.5        4.3     

General and administrative

     4.3        4.8        3.1        3.5        4.9     

Amortization of purchased intangibles

     2.9        2.2        1.8        2.4        2.4     
  

 

 

Total operating expenses

     19.3        15.8        12.5        16.2        17.6     
  

 

 

Income from operations

     9.4        11.3        15.1        7.1        11.0     

Other expense, net:

            

Interest expense

     (0.5     (1.0     (2.0     (2.1     (1.7  

Other income (expense), net

     (0.1     (0.4     0.0        0.0        0.1     
  

 

 

Total other expense, net

     (0.6     (1.5     (1.9     (2.1     (1.6  
  

 

 

Income before income taxes

     8.8        9.8        13.1        5.0        9.4     

Provision for income taxes

     3.0        2.7        5.6        1.8        2.9     
  

 

 

Net income

     5.8     7.1     7.5     3.2     6.5  
  

 

 

 

Liquidity and capital resources

Our primary cash needs are to support inventory purchases, working capital and capital expenditures. Historically, we have generally financed these needs with operating cash flows and borrowings under our Existing Credit Facility. These sources of liquidity may be impacted by fluctuations in various matters, including demand for our products, investments made by us in our plant and equipment and other capital expenditures, and expenditures on general infrastructure and intellectual technology. A summary of our operating, investing and financing activities are shown in the following table:

 

      Years ended December 31,     Three Months Ended
March 31,
 
  

 

 

 
(in thousands)    2010     2011     2012     2012     2013  

 

 

Net cash provided by operating activities

   $ 10,208      $ 21,038      $ 17,367      $ 5,734      $ 7,374   

Net cash used in investing activities

     (2,418     (3,056     (5,761     (1,454     (853

Net cash used in financing activities

     (7,614     (18,370     (11,705     (4,288     (6,400
  

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 176      $ (388   $ (99   $ (8   $ 121   
  

 

 

 

 

 

We expect that proceeds, cash on hand, cash flow from operations and availability under our New Credit Facility will be sufficient to fund our operations for at least the next 18 months from the date of this prospectus.

 

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Net cash provided by operating activities

Cash provided by operating activities primarily consists of net income, adjusted for certain non-cash items including provision for allowances for accounts receivable (including product returns and cash discounts), depreciation and amortization, stock-based compensation, deferred income taxes, amortization of loan costs and the effect of changes in working capital and other activities.

In the three months ended March 31, 2013, cash provided by operating activities was $7.4 million and consisted of net income of $3.5 million plus non-cash items totaling $2.6 million plus changes in operating assets and liabilities and other adjustments totaling $1.2 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $1.9 million and stock-based compensation of $0.7 million. Cash provided in operating assets and liabilities consisted primarily of an increase in accounts payable of $8.2 million, a decrease in accounts receivable of $2.3 million, and a decrease in income taxes receivable and other assets of $1.5 million, partially offset by an increase in inventory of $8.5 million and a decrease in accrued expenses of $2.3 million.

In the three months ended March 31, 2012, cash provided by operating activities was $5.7 million and consisted of net income of $2.6 million plus non-cash items totaling $1.1 million plus changes in operating assets and liabilities and other adjustments totaling $1.9 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $1.7 million and stock-based compensation of $0.3 million, partially offset by the excess tax benefit from the exercise of stock options of $0.8 million and a deferred income tax benefit of $0.1 million. Cash provided in operating assets and liabilities consisted primarily of an increase in accounts payable of $5.6 million, a decrease in accounts receivable of $1.9 million, a decrease in income taxes receivable and other assets of $1.4 million, and an increase in deferred rent of $0.6 million, partially offset by an increase in inventory of $4.7 million, a decrease in accrued expenses of $2.7 million and an increase in other current assets of $0.2 million.

In 2012, cash provided by operating activities was $17.4 million and consisted of net income of $14.2 million plus non-cash items totaling $0.8 million plus changes in operating assets and liabilities and other adjustments totaling $2.4 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $7.2 million, stock-based compensation of $2.1 million and loss on sale of assets of $0.3 million, partially offset by the excess tax benefit from the exercise of stock options of $5.8 million and a deferred income tax benefit of $3.2 million. Cash used in operating assets and liabilities consisted primarily of an increase in accounts receivable of $7.0 million as a result of increased sales volume, an increase in other current assets of $0.5 million, and an increase in inventory of $4.7 million related to increased sales and components for new products, partially offset by an increase in accounts payable of $3.0 million, an increase in accrued expenses of $2.8 million, in each case primarily related to the increase in sales, and an increase in income taxes receivable and other assets of $8.2 million.

In 2011, cash provided by operating activities was $21.0 million and consisted of net income of $13.5 million plus non-cash items totaling $5.3 million plus changes in operating assets and liabilities and other adjustments totaling $2.2 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $6.6 million and stock-based compensation of $1.0 million, partially offset by a deferred income tax benefit of $2.4 million. Cash used in operating assets and liabilities consisted primarily of increases in accounts receivable of $1.1 million, other current assets of $0.8 million and an increase in inventory of $1.5 million,

 

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partially offset by an increase in accounts payable of $0.6 million, an increase in accrued expenses of $2.1 million and an increase in income taxes receivable and other assets of $2.7 million.

In 2010, cash provided by operating activities was $10.2 million and consisted of net income of $10.8 million plus non-cash items totaling $6.7 million minus changes in operating assets and liabilities and other adjustments totaling $7.3 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $6.2 million and stock-based compensation of $0.5 million, partially offset by a deferred income tax benefit of $1.4 million. Cash used in operating assets and liabilities consisted primarily of an increase in accounts receivable of $2.0 million and inventory of $11.1 million, partially offset by a decrease in other current assets of $0.3 million and an increase in accounts payable of $3.9 million, an increase in accrued expenses of $2.0 million and an increase in income taxes receivable and other assets of $0.6 million.

Net cash used in investing activities

Cash used in investing activities primarily relates to purchases by us of property and equipment and investments in our manufacturing and general infrastructure.

In the three months ended March 31, 2012 and 2013, cash used by investing activities was $1.5 million and $0.9 million, respectively, which consisted of purchases of property and equipment.

In 2010, 2011 and 2012, cash used in investing activities was $2.4 million, $3.1 million and $5.8 million, respectively. In 2012, cash used in investing activities consisted primarily of purchases of property and equipment of $4.9 million, and an acquisition of an intangible asset consisting of patents related to bicycle suspension technology for $0.8 million. In 2010 and 2011, cash used in investing activities consisted primarily of purchases of property and equipment. We estimate that our capital expenditures for 2013 will be approximately $4.0 million to $5.0 million, primarily related to investments in our manufacturing and general infrastructure and expenditures for our operations in Taiwan.

Net cash used in financing activities

In the three months ended March 31, 2012 and 2013, net cash used by financing activities was $4.3 million and $6.4 million, respectively, which consisted primarily of payments to repay indebtedness under our Existing Credit Facility. In the three months ended March 31, 2012, we had an excess tax benefit from exercise of stock options of $0.8 million.

Net cash used by financing activities was $11.7 million in 2012 compared to $18.4 million in 2011. The decrease in net cash used by financing activities was partially attributable to our recapitalization in 2012. In 2010, net cash used by financing activities was $7.6 million and was primarily related to payments of debt and the repurchase of common stock.

Credit facility

Our Existing Credit Facility consists of a term loan and a revolving facility of up to $30.0 million. As of March 31, 2013, the outstanding borrowings under our Existing Credit Facility were $52.9 million, compared to $59.3 million as of December 31, 2012. The total borrowings as of March 31, 2013 consisted of $5.1 million outstanding under the revolving line of credit and approximately $47.8 million under the term loan. As of March 31, 2013, we had $24.9 million available to borrow pursuant to the revolving portion of the Existing Credit Facility. Concurrently with the closing of this offering, we intend to use the net proceeds that we receive from this offering to repay the then outstanding indebtedness under our Existing Credit Facility. To the

 

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extent that the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness then outstanding under our Existing Credit Facility, we intend to use borrowings under our New Credit Facility to pay any remaining balance outstanding under the Existing Credit Facility. In connection with the termination of the Existing Credit Facility, we expect to incur a non-cash charge of approximately $1.6 million related to our unamortized loan origination costs.

Concurrently with the closing of this offering we intend to enter into the New Credit Facility with SunTrust Bank and the lenders identified therein. The consummation of this offering is conditioned on the closing of the New Credit Facility. The New Credit Facility is expected to consist of a $60.0 million revolving line of credit, including a $5.0 million sublimit for swingline loans, and a $10.0 million sublimit for the issuance of standby letters of credit. The maximum amount we will be permitted to borrow under the revolving line of credit will be subject to certain borrowing limitations. Subject to the satisfaction of certain conditions precedent, we have the ability to increase the aggregate revolving loan commitments under the New Credit Facility by an aggregate amount of up to $50.0 million, subject to the agreement of any existing lenders and/or any additional lenders who are providing such increased commitments. When we enter into the New Credit Facility, we will borrow any amounts under the revolving line of credit to pay any remaining borrowings then outstanding under the Existing Credit Facility and the Existing Credit Facility will be terminated. Amounts borrowed under the New Credit Facility will bear interest at a rate based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.50% to 2.50%, or a note based on the prime rate offered by SunTrust Bank plus a margin ranging from 0.50% to 1.50%.

The New Credit Facility will be secured, subject to permitted liens and other agreed upon exceptions, by a first-priority lien on and perfected security interest in substantially all of our and our subsidiary’s assets including accounts receivable and a pledge of the equity in our operating subsidiary. In addition, we expect the New Credit Facility will require that we satisfy a maximum total leverage ratio and a fixed charge coverage ratio. We expect that the New Credit Facility will contain customary representations and warranties and customary events of default, as well as certain affirmative and negative covenants, including restrictions on: indebtedness; liens; mergers, consolidations and acquisitions; sales of assets; engaging in business other than our current business and those reasonably related thereto; investments; dividends; redemptions and distributions; affiliate transactions; and other restrictions.

Contractual obligations and commitments

As of December 31, 2012, we had the following contractual obligations (in thousands):

 

          
Payments due by period    Total     Less than
1 year
     1-3 years      4-5 years      After
5 years
 

 

 

Current borrowings(1)

   $ 3,272 (2)    $ 3,272       $       $       $   

Long-term borrowings(1)

     73,674 (2)      3,375         12,735         12,015         45,549   

Operating lease obligations

     13,057        2,926         5,345         4,186         600   

Purchase obligations and other

     1,071        1,071                           
  

 

 

 

Total

   $ 91,074      $ 10,644       $ 18,080       $ 16,201       $ 46,149   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

 
(1)   Includes principal and interest.
(2)  

The current borrowings of $3.0 million and $56.3 million of the long-term borrowings in the above table were borrowed by us pursuant to our Existing Credit Facility. Concurrently with the closing of this offering we intend to use the net proceeds

 

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that we receive from this offering to repay our then outstanding indebtedness under our Existing Credit Facility. To the extent the net proceeds from this offering are insufficient to allow us to fully repay the indebtedness under our Existing Credit Facility, we intend to use borrowings under our New Credit Facility to pay any remaining balance outstanding under our Existing Credit Facility. We intend to terminate the Existing Credit Facility upon the consummation of this offering. See “—Liquidity and capital resources—Credit facility” above.

Seasonality

Our business is somewhat seasonal. In each of the last three fiscal years, our quarterly sales have been the lowest in the first quarter and the highest during our third quarter of the year. For example, our sales in our first and third quarters of 2012 represented 19% and 31% of our total sales for the year, respectively. We believe this seasonality is due to the delivery of new products containing our suspension products related to the new mountain bike season for each year. We also believe that the seasonal nature of our business may have been overshadowed over each of the past few years due to the rapid growth in sales we have experienced during the same periods.

Off-balance sheet arrangements

We have no material off-balance sheet arrangements.

Inflation

Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in the cost of raw materials could have an adverse impact on our business, financial condition and results of operations.

Critical accounting policies and estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, our allowance for doubtful accounts, inventory, goodwill and intangible assets, warranty, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see Note 1 of the accompanying notes to our consolidated financial statements.

We are an “emerging growth company” within the meaning of the rules under the Securities Act, and we will utilize certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. For example, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. In addition, Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption

 

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of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Revenue recognition

We recognize sales when persuasive evidence of an arrangement exists, title has transferred, the sales price is fixed or determinable, and collectability of the receivable is probable. Provisions for discounts, rebates, sales incentives, returns, and other adjustments are provided for in the period the related sales are recorded based on management’s assessment of historical trends and projection of future results. Sales are recorded net of sales tax.

Allowance for doubtful accounts

We record a provision for doubtful accounts deemed not collectable based on historical experience and a detailed assessment of the collectability of our accounts receivable. In estimating the allowance for doubtful accounts, we consider, among other factors, the aging of the accounts receivable, historical write-offs, and the credit-worthiness of each customer. If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations, we estimate if the recoverability of the amounts due could be reduced by a material amount.

Inventories

Inventories are stated at the lower of standard cost (which generally approximates actual costs on a first-in first-out basis) or market. Cost includes raw materials, direct labor and manufacturing overhead. Market value is based on current replacement cost for raw materials and on a net realizable value for finished goods. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence or impaired balances.

We regularly monitor inventory quantities on hand and on order and record write-downs for excess and obsolete inventories based on our estimate of the demand for our products, potential obsolescence of technology, product life cycles, and when pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price. These factors are affected by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on our gross margin. If inventory is written down, a new cost basis will be established that cannot be increased in future periods.

Goodwill, intangible assets and long-lived assets

Goodwill

Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. Annually, we either make a qualitative assessment prior to proceeding to step one of the annual goodwill impairment test or perform a two-step impairment test. If we make a qualitative assessment and it determines that the fair value of the reporting unit is less than its carrying amount, we would perform step one of the annual goodwill impairment test

 

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and, if necessary, proceed to step two. Otherwise, no further evaluation is necessary. For the two-step impairment test, in the first step, we compare the fair value of the reporting unit to its carrying value, including goodwill. We determine the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Impairments, if any, are charged directly to earnings. We have a single reporting unit for purposes of assessing goodwill impairment. We completed our most recent annual impairment test in the second quarter of 2013. No impairment charges have been incurred to date.

Indefinite-lived intangible assets

Trademarks are considered to be indefinite life intangibles, and are not amortized but are subject to testing for impairment annually.

Finite-lived intangible assets

We assess the impairment of identifiable finite-lived intangible assets whenever events or changes in circumstances indicate that an asset group’s carrying amount may not be recoverable. Recoverability of certain finite-lived intangible assets, particularly customer relationships and core technology, would be measured by a comparison of the carrying amount of the asset group to which the assets are assigned to the sum of the undiscounted estimated future cash flows the asset group is expected to generate. If the asset is considered to be impaired, the amount of such impairment would be measured by the difference between the carrying amount of the asset and its fair value. Recoverability and impairment of other finite-lived intangible assets, particularly developed technology and patents, would be measured by the comparison of the carrying amount of the asset to the sum of undiscounted estimated future product revenues offset by estimated future costs to dispose of the product to which the asset relates. No impairment charges have been incurred to date.

Warranty

Unless otherwise required by law, we generally provide limited warranties on our products for one to two years. We accrue estimated costs related to warranty activities as a component of cost of sales upon product shipment or when information becomes available indicating that an adjustment to the warranty reserves is appropriate. Management estimates are based upon historical and projected product failure rates and historical costs incurred in correcting product failures. The warranty reserve is assessed from time to time for adequacy and adjusted as necessary. Actual warranty expenses are charged against our estimated warranty liability when incurred. Factors that affect our liability include the number of units, historical and anticipated rates of warranty claims, and the cost per claim. An increase in warranty claims or the related costs associated with satisfying these warranty obligations could increase our cost of sales and negatively affect our operating results.

Income taxes

We record our income tax expenses or benefits in each federal, state and foreign jurisdiction in which we operate using an asset and liability approach. This process requires that we compute the

 

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current tax expense or benefit and deferred tax expense or benefit, which result from changes in temporary differences between the accounting and tax treatment of assets and liabilities, including items such as accruals and allowances, which are recorded in different periods for financial statement and income tax return purposes. The income tax effects of these differences we identify are classified as current or long-term deferred tax assets and liabilities in our consolidated balance sheets. Our judgments, assumptions, and estimates relative to the current provision for income taxes take into account enacted tax laws, our interpretation of enacted tax laws, and possible outcomes of current and future audits conducted by tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our consolidated balance sheets and consolidated statements of income. Interest and penalties associated with income taxes are recorded as income tax expense in our consolidated statements of income.

We account for uncertain tax positions on a two-step approach to recognize and measure those positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We adjust liabilities for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, expiration of a statute of limitations for assessment of income tax, the refinement of estimates, or the realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our consolidated statements of income in the period in which such determination is made.

We must also assess the likelihood that deferred tax assets will be realized from future taxable income and, based on this assessment establish a valuation allowance, if required. The determination of our valuation allowance involves assumptions, judgments, and estimates, including forecasted earnings, future taxable income, and the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. To the extent we establish a valuation allowance or change the valuation allowance in a period, we reflect the change with a corresponding increase or decrease of our income tax provision in our consolidated statements of income.

Stock-based compensation

Compensation expense related to stock-based compensation, including employee and non-employee director awards, is measured and recognized in the financial statements based on fair value. The fair value of the common stock underlying our stock options was determined by our board of directors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we use in the valuation model are based on future expectations regarding our business, combined with management judgment. Under the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the award.

 

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Determining the fair value of stock-based awards at the grant date represents our board of directors’ best estimates; however, the estimates involve inherent uncertainties and the application of judgment. We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

Fair value of our common stock

Because our stock is not publicly traded, we must estimate the fair value of our common stock, as discussed in “Common Stock Valuations” below.

Expected term

The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term was generally estimated using the simplified method allowed under SEC guidance. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. We intend to continue to utilize the simplified method for all “regular” awards until we have established a reasonable period of representative trading history as a public company, at which time we will determine the expected term based on the historical option exercise behavior of our option holders, expectations about future option exercise behavior and post-vesting cancellation.

Volatility

As we have been a private company and do not have a trading history for our common stock, we estimated the expected stock price volatility by taking the average historic price volatility for industry peers that we selected based on daily price observations over a period equivalent to the expected term of the stock option grants. We selected the peer group of companies from publicly traded companies in the same or similar lines of business to us, with consideration given to the fact that these companies had longer operating lives and were larger when compared to us, typically both in terms of revenue and net worth. We also selected companies with similar growth rates to us. We did not rely on implied volatilities of traded options in these industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case more suitable companies whose share prices are publicly available would be utilized in the calculation. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense determined at the date of grant.

Risk-free rate

The risk-free interest rate is based on the yields of zero coupon U.S. Treasury securities with maturities similar to the expected term of the options.

 

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Dividend yield

Although we paid a dividend as part of the recapitalization, we do not intend to pay cash dividends in the future, as such, expected dividends are zero.

The following table presents the assumptions used to estimate the fair value of options granted during the periods presented:

 

For the years ended December 31,    2010     2011     2012       

 

 

Expected term (years)

     6.5        6.5        5.5-6.5       

Volatility

     43     25     36%   

Risk-free interest rate

     0.42     3.31-3.41     0.60-1.40%   

Dividend yield

                   —       

 

 

In addition to assumptions used in the Black-Scholes option pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. To date, we have experienced and expect to continue to experience limited forfeitures for options granted. As a result, we have not historically applied a forfeiture rate.

Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation for future awards may differ materially compared with stock-based compensation associated with the awards granted previously.

Common stock valuations

We are required to estimate the fair value of the common stock underlying our stock-based compensation awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair values of the common stock underlying our stock-based compensation awards were determined by our board of directors, with input from management. Our board of directors has been and continues to be comprised of a majority of non-employee directors that we believe have the relevant experience and expertise to determine the fair value of our common stock on each respective grant date.

Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock.

In order to determine the fair value of our common stock underlying option grants issued prior to this initial public offering, we considered objective and subjective factors to determine the best estimate of the fair value. Given the absence of an active market for our common stock, our board of directors estimates the fair value of our common stock at the time of each grant of

 

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stock-based awards. The valuations performed by our majority stockholder are completed for the purpose of their financial reporting, are validated annually by an independent investment banking firm, and reviewed quarterly by our majority stockholder and updated as necessary.

The following stock options were granted between January 1, 2012 and March 31, 2013 to employees and members of our board of directors with the following fair value per share of our common stock for purposes of calculating stock-based compensation:

 

Option grant date   

Number of
shares
underlying
options

    

Exercise
price per
share

    

Common
stock fair
value per
share

 

 

  

 

 

    

 

 

    

 

 

 

February 10, 2012

     325,150         $7.34         $7.34   

February 27, 2012

     9,290         7.34         7.34   

June 15, 2012(1)

     1,536,658         5.16         5.16   

October 3, 2012

     325,150         6.20         6.20   

December 6, 2012

     23,225         6.20         6.20   

March 19, 2013

     9,290         7.59         7.59   

 

 

 

(1)   Includes options to purchase 1,246,392 shares issued in connection with our recapitalization in June 2012.

As of March 31, 2013, the aggregate intrinsic value of vested and unvested options was $5.3 million and $17.6 million, respectively, based on the estimated fair value for our common stock of $14.00 per share, which is the midpoint of the range of the initial public offering price listed on the cover page of this prospectus. As of December 31, 2012, we had $2.5 million of unrecognized stock-based compensation expense that is expected to be recognized over a weighted average period of three years with $1.6 million expected to be recognized in 2013. In future periods, we expect our stock-based compensation expense to increase in dollar amount as a result of our existing stock-based compensation to be recognized as these options vest and as we issue additional stock-based awards to attract and retain employees.

Recent accounting pronouncements

Fair value measurement

In May 2011, the Financial Accounting Standards Board, or FASB, issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” or ASU 2011-04. ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards, or IFRS. The amendments in ASU 2011-04 explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The adoption of ASU No. 2011-04 did not have an impact on our financial position or results of operations.

Comprehensive income: Presentation

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” or ASU 2011-05, to increase the prominence of items reported in other comprehensive income and to facilitate convergence of GAAP and IFRS. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires that all non-owner changes in stockholders’ equity be presented either in a

 

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single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. We adopted the provisions of ASU 2011-05 on January 1, 2012. The adoption of ASU 2011-05 did not have an impact on our financial position or results of operations.

Comprehensive income: Reclassifications

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” or ASU 2013-02, to supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05, which were deferred indefinitely under ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” or ASU 2011-12, issued in December 2011. The amendments in ASU 2013-02 would require an entity to provide additional information about reclassifications out of accumulated other comprehensive income by the respective line items of net income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of ASU 2013-02 will not have an impact on our financial position or results of operations.

Goodwill impairment testing

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” or ASU 2011-08, which simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We adopted the provisions of ASU 2011-08 on January 1, 2012. The adoption of ASU 2011-08 did not have an impact on our financial position or results of operations.

Release of cumulative translation adjustment

In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” or ASU 2013-05, which resolves diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The amendments in ASU 2013-05 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 will not have a material impact on our financial position or results of operations.

Quantitative and qualitative disclosures about market risk

Interest rate sensitivity

We are exposed to market risk in the normal course of our business operations due to our ongoing investing and financing activities. The risk of loss can be assessed from the perspective

 

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of adverse changes in fair values, cash flows and future earnings. We have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks and, at the completion of this offering, we will terminate our Existing Credit Facility and all outstanding borrowings thereunder will become amounts borrowed under the New Credit Facility. We generally do not hedge our interest rate exposure. We had $52.9 million of debt, bearing interest at a variable rate, outstanding under our credit facilities as of March 31, 2013. Based on the $52.9 million of variable interest rate indebtedness that was outstanding as of March 31, 2013, a hypothetical 100 basis point increase or decrease in the interest rate on our interest rate variable debt would have resulted in an approximately $0.5 million change to our interest expense for fiscal 2012. We intend to use the net proceeds we receive from this offering to pay a majority of the then outstanding indebtedness under our Existing Credit Facility which will reduce our outstanding indebtedness. After the closing of this offering we expect to borrow under our New Credit Facility in the future in order to finance our short term working capital and other needs. These borrowings will be subject to variable interest rates.

Exchange rate sensitivity

As of March 31, 2013, we were not exposed to significant foreign currency exchange rate risks that could have a material effect on our financial condition or results of operations. Foreign currency fluctuations could in the future have an adverse effect on our business and results of operations. We sell our products inside and outside of the United States in U.S. Dollars. As the

majority of our expenses are also in U.S. Dollars, we are somewhat insulated from currency

fluctuations. We do not currently hedge our foreign currency exposure.

Credit and other risks

We are exposed to credit risk associated with cash equivalents, investments, and trade

receivables. We do not believe that our cash equivalents or investments present significant credit

risks because the counterparties to the instruments consist of major financial institutions and we

manage the notional amount of contracts entered into with any one counterparty. Our cash and

cash equivalents as of March 31, 2013 consisted principally of FDIC insured certificates of deposit

and cash balances in non-interest bearing checking accounts. Substantially all trade receivable

balances of our businesses are unsecured. The concentration of credit risk with respect to trade

receivables is concentrated by the number of significant customers that we have in our customer

base and a prolonged economic downturn could increase our exposure to credit risk on our trade

receivables. We perform ongoing credit evaluations of our customers and maintain an allowance

for potential credit losses.

We do not currently hedge our exposure to increases in the prices for our primary raw materials.

 

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Business

Overview

Our company

We are a designer, manufacturer and marketer of high-performance suspension products used primarily on mountain bikes, side-by-side vehicles, or Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, or ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. We believe our products offer innovative design, performance, durability and reliability. Through our products we enhance ride dynamics, which we define as the interplay between the rider, the vehicle and the terrain, by improving performance and control. Our brand is associated with high-performance and technologically advanced products, by which we generally mean products that provide users with improved control and a smoother ride while riding over rough terrain in varied environments. We believe that the performance of our products has been demonstrated by, and our brand benefits from, the success of professional athletes who use our products in elite competitive events, such as the Union Cycliste Internationale Mountain Bike World Cup and the X Games. We believe the exposure our products receive when used by successful professional athletes positively influences the purchasing habits of enthusiasts and other consumers seeking high-performance products. We believe that our strategic focus on the performance and racing segments in our markets influences many aspiring and enthusiast consumers who we believe seek to emulate the performance of professional and other elite athletes. We believe our products are generally sold at premium prices, which to us means manufacturer suggested retail sale prices that are generally in the upper quartile of their respective product categories.

We design our products for, and market our products to, some of the world’s leading original equipment manufacturers, or OEMs, in our markets, and to consumers through the aftermarket channel. Many of our OEM customers, including Scott, Specialized and Trek in mountain bikes and BRP, Ford and Polaris in powered vehicles, are among the market leaders in their respective product categories, and help shape, as well as respond to, consumer trends in their respective categories. We believe that OEMs often prominently display and incorporate our products to improve the marketability and consumer demand for their high-performance models, which reinforces our brand image. In addition, consumers select our products in the aftermarket channel where we market through a global network of dealers and distributors.

We have experienced strong sales and profit growth over the past few years. Our sales increased from approximately $171.0 million in 2010 to $235.9 million in 2012. Over the same period, our net income increased from approximately $10.8 million to $14.2 million, and our Adjusted EBITDA increased from approximately $26.8 million to $36.0 million. See “Summary consolidated financial data—Non-GAAP financial measures” for the definition of Adjusted EBITDA and a reconciliation from net income to Adjusted EBITDA.

Our history

Robert C. Fox, Jr. began developing suspension products in 1974 when, having participated in motocross racing, he sought to create a racing suspension shock that performed better than existing coil spring shocks. Working in a friend’s garage, Mr. Fox created the “Fox AirShox.” The product was successful, and went into production in 1975. The next year, in 1976, Fox AirShox were used by the rider who won the AMA 500cc National Motocross Championship.

 

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Sales of Fox AirShox grew rapidly and, in 1978, our operating subsidiary, Fox Factory, Inc., was incorporated in California. From 1978 to 1983, FOX suspension users won numerous major races including 500cc Grand Prix races (motocross), Baja 1000 races (off-road), AMA SuperBike races (motorcycle road racing), and the Indianapolis 500 race (auto racing), generating greater market awareness of the FOX brand among enthusiasts.

As FOX grew, we applied many of the same core suspension technologies developed for motocross racing to other categories. For example, in 1987 we started selling high-performance suspension products for snowmobiles. By 1991, we began supplying the mountain bike industry with rear shocks and we entered the ATV and other off-road vehicle markets in the mid-1990s. Starting in 2001, we began offering front fork suspension products for mountain bikes.

Fox Factory Holding Corp., the registrant of this offering, is the holding company of Fox Factory, Inc. Fox Factory Holding Corp. was incorporated in Delaware on December 28, 2007 by Compass Group Diversified Holdings LLC, or our Sponsor. Our Sponsor purchased a controlling interest in us on January 4, 2008.

For clarification, we are not affiliated with Fox Head, Inc., an action sports apparel company.

Market opportunity

We participate in the large global markets for mountain bikes and powered vehicles used by recreational and professional users. Today, our products for powered vehicles are used primarily on Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles.

The markets in which we participate are diverse geographically and by product type. The following third party data sources provide unit volumes in selected geographies for the following markets in which we participate:

 

 

Suspended mountain bikes. Approximately 1,022,000 mountain bikes with front or full suspension systems were shipped from suppliers to U.S. bicycle shops and outdoor specialty retailers in 2012, according to the National Bicycle Dealer Association.

 

 

Side-by-Sides. Approximately 323,000 Side-by-Sides were sold in North America in 2012, according to Power Products Marketing.

 

 

ATVs. Approximately 278,000 ATVs in total were sold in the U.S. and Canada in 2012, according to the Motorcycle Industry Council, the Motorcycle and Moped Industry Council and Canadian Off-Highway Vehicle Distributors Council.

 

 

Snowmobiles. Approximately 145,000 snowmobiles were sold globally during the 2012-2013 snowmobile-selling season, according to the International Snowmobiling Manufacturers Association.

The following third party data sources provide unit volumes in selected geographies for portions of the motorcycle market, in which we currently participate to a lesser degree, but are in the process of expanding.

 

 

Off-highway motorcycles. Approximately 75,000 in total off-highway motorcycles were sold in the U.S. and Canada in 2012, according to the Motorcycle Industry Council, the Motorcycle and Moped Industry Council and Canadian Off-Highway Vehicle Distributors Council.

 

 

On-highway motorcycles. Approximately 318,000 on-highway motorcycles were sold in the U.S. in 2012, according to the Motorcycle Industry Council.

 

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We focus on the premium priced products within each of these categories, which we consider to be the high-end segment because of their higher retail sale prices, where we believe consumers have a preference for well-designed, performance-oriented equipment. We believe that suspension systems are critical to the performance of the mountain bikes and powered vehicles in the product categories in which we focus and that technical features, component performance, product design, durability, reliability and brand recognition strongly influence the purchasing decisions of consumers. Over the past decade, there have been significant technological advances in materials and features that have increased product functionality and performance, allowing high-end suspension products to be adapted for use in additional end-markets and mountain bike and powered vehicle categories.

We believe the high-end segments in which we participate are well positioned for growth due to several factors, including:

 

 

increasing average retail sales prices, which we believe are driven by differentiated and feature-rich products with advanced technologies;

 

 

continuing product cycle innovation, which we have observed often motivates consumers to upgrade and purchase new products for enhanced performance;

 

 

branded auto OEMs introducing on-road vehicles with off-road capabilities, such as the Ford F-150 SVT Raptor; and

 

 

increased sales opportunities for high-end mountain bikes and powered vehicles in international markets.

As vehicles in our end-markets evolve and grow more capable, suspension products and components have become, and we believe will continue to become, increasingly more important for improved performance and control. Additionally, we believe there are opportunities to continue to leverage our technical know-how in suspension products to provide solutions beyond our current end-markets.

Our competitive strengths

Broad offering of high-performance products across multiple consumer markets

Our suspension products enhance ride dynamics across multiple consumer markets. Through the use of adjustable suspension, position sensitive damping, multiple air spring technologies, lightweight and rigid materials, and other technologies and methods, our products improve the performance and control of the vehicles used by our consumers. We believe our reputation for high-performance products is reinforced by the successful finishes in world class competitive events by athletes incorporating our products in their vehicles, including the following examples in 2012:

 

 

three out of four Union Cycliste Internationale World Cup Mountain Bike Series titles;

 

 

World Off Road Championship Series Side x Side Production 1000 Class Championship;

 

 

American Motorcyclist Association, or AMA, Pro ATV Championship and first place finishes in 10 out of 10 races;

 

 

International Series of Champions National Pro Open Championship for snowmobiles and first place finishes in 16 out of 16 races; and

 

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two out of two overall Pro 2 Championships and first place finishes in 21 out of 29 Pro 2 races in the TORC and LOORRS off-road short course racing series.

Premium brand with strong consumer loyalty

We believe that we have developed a reputation for high-performance products and that we have established a premium brand, as our high-performance suspension products are generally sold at premium prices. Our logo is prominently displayed on our products used on mountain bikes and powered vehicles sold by our OEM customers, which helps further reinforce our brand image. We believe that our brand has achieved strong loyalty from our consumers. To support our brand, we introduce new products that we believe feature innovative technologies designed to improve vehicle performance and enhance our brand loyalty with consumers. For instance, according to a 2012 independent survey conducted by Bike Germany Magazine, a leading European mountain bike magazine, FOX was voted as the best brand for suspension forks and 81.7% of FOX consumers surveyed stated that they would buy a FOX suspension fork again, and in a 2011 Audience Survey by Vital MTB, a popular mountain bike website: (i) of the 44.5% of survey respondents that stated they would buy a mountain bike suspension fork within 12 months, 41.0% of these respondents, the highest percentage of all brands included, stated that they would buy a FOX suspension fork; and (ii) of the 22.4% of survey respondents that stated they would buy a rear mountain bike shock within 12 months, 42.2% of these respondents, again the highest percentage of all brands included, stated that they would buy a FOX rear shock.

Track record of innovation and new product introductions

Innovation, including new product development, is a key component of our growth strategy. Due to our experience in suspension engineering and design in multiple markets and with a variety of vehicles, we are able to bring unique ride dynamics solutions to our customers, often developed for use in one market and ultimately deployed across multiple markets. For example, our success in the high-end ATV category led to the widespread adoption of our suspension technology in the Side-by-Side market, which became our second largest product category by sales in 2012. Our innovative product development and speed to market are supported by:

 

 

our racing culture, including on-site technical race support of professional athletes, which provides us with unique real-time insights as to the evolving ride dynamic needs of those participating in world-class events;

 

 

ongoing research and development through a team of more than 20 full-time engineers and numerous other technicians and employees who spend at least part of their time testing and using our products and helping develop engineering-based solutions to enhance our product offerings;

 

 

feedback from professional athletes, race teams, enthusiasts and other consumers who use our products;

 

 

strategic and collaborative relationships with OEM customers, which furthers our ability to extend technologies and applications across end-markets; and

 

 

our integrated manufacturing facilities and performance testing center, which allow us to quickly move from concept to product.

 

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During 2012, we launched more than 20 new products and generated more than 70% of our sales from products introduced by us during the last three years, such as the:

 

 

Podium RC3, which provides external adjustment that allows the shock to easily be tuned for different rider skill, terrain, and racing type without having to be disassembled;

 

 

Float X Evol, which allows the rider to tune the spring characteristics of the shock via an air pump without having to remove the shock;

 

 

ECS Shock, which has an external cooling system that significantly lowers shock temperatures, allowing powered vehicles to operate at higher speeds for extended periods without sacrificing driver control, particularly in extreme environments; and

 

 

Float iCD, which provides riders the ability to adjust modes for different skills, terrains and activity levels on mountain bikes, resulting in increased utilization of the modes and an overall more efficient ride dynamics experience.

Strategic brand for OEMs, dealers and distributors

Through our strategic relationships, we are often sought out by our OEM customers and work closely with them to develop and design new products and product enhancements. We believe our collaborative approach and product development processes strengthen our relationships with our OEM customers. We believe consumers value our branded suspension products when selecting high-performance mountain bikes and powered vehicles, and as a result, OEMs purchase and incorporate our products in their mountain bikes and powered vehicles in order to increase the sales of their premium priced products. In addition, we believe the inclusion of our products on high-end mountain bikes and powered vehicles reinforces our premium brand image which helps to drive our sales in the aftermarket channel where dealers and distributors sell our products to consumers.

Experienced management team

We have an experienced senior management team led by Larry L. Enterline, our Chief Executive Officer. Collectively, our eight member senior management team has an average tenure at FOX of approximately eight years per person. In addition, many members of our management team and many of our employees are avid users of our products, which further extends their knowledge of, and expertise in, our products and end-markets. We are able to attract and retain highly trained and specialized employees who enhance our company culture and serve as strong brand advocates.

Our strategy

Our goal is to expand our leadership position as a designer, manufacturer and marketer of high-performance products designed to enhance ride dynamics. We intend to focus on the following key strategies in pursuit of this goal:

Continue to develop new and innovative products in current end-markets

We intend to continue to develop and introduce new and innovative products in our current end-markets to improve ride dynamics for our consumers. For example, our patented position-sensitive damping systems provide terrain optimized ride characteristics across many of our product lines. We believe that high-performance and control are important to a large portion of our consumer base,

 

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and that our frequent introduction of products with innovative and improved technologies increases both OEM and aftermarket demand as consumers seek out products for their vehicles that can deliver these characteristics. We also believe evolving market trends, such as changing mountain bike wheel sizes and increasing adoption rates of Side-by-Side vehicles, should increase demand for vehicles in our end-markets, which, in turn, should increase demand for our suspension products.

Leverage technology and brand to expand into new categories and end-markets

We believe that we have a reputation as a leader in ride dynamics, and that our reputation combined with our ability to improve the performance of vehicles by incorporating high-performance suspension products, results in us often being approached by OEM product development teams, athletes and others looking to improve the performance of their vehicles, including in end-markets in which we have not previously offered productsWe believe that our ride dynamics technologies have applications in end-markets in which we do not currently participate in a meaningful way, and we intend to selectively develop products for and forge relationships with customers in additional markets. These markets may include military, recreational vehicles (RVs), on-road motorcycles, commercial trucks and “performance street” cars. We also intend to evaluate selective potential acquisition opportunities for high-performance products and technologies that we believe will help us extend our ride dynamics platform.

Increase our aftermarket penetration

We currently have a broad aftermarket distribution network of more than 2,300 retail dealers and distributors worldwide. We intend to further penetrate the aftermarket channel by selectively adding dealers and distributors in certain geographic markets, increasing our internal sales force and strategically expanding aftermarket-specific products and services to existing vehicle platforms.

Accelerate international growth

While a significant percentage of our current sales are to OEMs and dealers and distributors located outside the United States, we believe international expansion represents a significant opportunity for us and we intend to selectively increase infrastructure investments and focus on identified geographic regions. We believe that rising consumer discretionary income in a number of developing markets and increasing consumer preferences for premium, high-performance mountain bikes and powered vehicles, should contribute to increasing demand for our products. In addition, we believe increasing international viewership of racing and extreme sports and other outdoor events, such as the X Games, is contributing to growing international participation in activities where our products are used. We intend to leverage our brand recognition to capitalize on these trends by increasing our sales to both OEMs and dealers and distributors globally, particularly in markets where we perceive significant opportunities. Our areas of greatest interest include Asia-Pacific (including China, South Korea and Australia) and South America (particularly Brazil, Argentina and Chile).

Improve operating and supply chain efficiencies

We intend to improve operating margins in the medium term by enhancing our design and production processes to increase efficiencies, reducing new product time to market and lowering production costs. Specifically, we have begun the process of moving a majority of the manufacturing of our mountain bike products to Taiwan and intend to complete this process in

 

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2015. We believe this transition to Taiwan, once completed, will shorten production lead times to our mountain bike OEM customers, improve supply chain efficiencies and reduce manufacturing costs.

Our products

We design and manufacture high-performance suspension products that dissipate the energy and force generated by mountain bikes and powered vehicles while they are in motion. A suspension product allows wheels or skis (in the case of snowmobiles) to move up and down to absorb bumps and shocks while maintaining contact with the ground for better control. Our products use adjustable suspension, position sensitive damping, multiple air spring technologies, low weight and structural rigidity, all of which improve user control for greater performance.

We use high-grade materials in our products and have developed a number of sophisticated assembly machines to maintain quality across all product lines. Our suspension products are assembled according to precise specifications throughout the assembly process to create consistently high-performance levels and customer satisfaction.

Mountain bikes

In our mountain bike product category, we offer upper mid-end and high-end front fork and rear suspension products designed for cross-country, trail, all-mountain, free-ride and downhill riding. We also offer a ride-height adjustable seat post product, our D.O.S.S. remote adjustable seat post, which we introduced in 2012 to allow a rider to adjust his or her seat position for uphill, rolling trail or downhill riding without having to stop the mountain bike to adjust the seat. Our mountain bike products are sold in three series: (i) our Evolution series, designed for demanding, yet value-minded, enthusiasts; (ii) our Performance series, designed for experienced enthusiasts and expert riders; and (iii) our Factory series, which is designed for maximum performance at a professional level.

Powered vehicles

In our powered vehicle product category, we offer high-end suspension products for Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. Products for these vehicles are designed for trail riding, racing and performance. Our products have also been used on limited quantities of off-road military vehicles and other small-scale select military applications. Our products in the powered vehicle category range from two inch aluminum bolt-on shocks to our patented position sensitive internal bypass shocks.

 

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The following chart highlights select products from our two product categories:

LOGO

Product development

We are committed to the development and introduction of technologically advanced products that feature innovative designs and high-quality materials. We strive to maintain our product leadership through the introduction of new and innovative products and enhancements and refinements to our existing products. In 2012, we launched more than 20 new products, including our Float iCD fork and rear shock, 34 Factory FIT CTD fork, Dual Speed Compression module and our Bottom Out Cup position-sensitive damping module.

Research and development is at the core of our product innovation and market leadership strategy. We have a team of more than 20 full-time engineers focused on product development. We also employ numerous other technicians and employees who spend at least part of their time testing and using our products and helping develop engineering-based solutions to enhance our product offerings. In addition, a large number of our other employees, many of whom use our products in their recreational activities, contribute to our research and development and product innovation initiative. Their involvement in the development of new products ranges from participating in initial brainstorming sessions to ride testing products in development. Product development also includes collaborating with OEM customers across end-markets, field testing by professional athletes and sponsored race teams and working with enthusiasts and other users of our products. This feedback helps us to develop innovative products which meet our demanding standards as well as the evolving needs of professional and recreational end users and to quickly commercialize these products.

Our research and development activities are supported by state-of-the-art engineering software design tools, integrated manufacturing facilities and a performance testing center equipped to enhance product safety, durability and high-performance. Our testing center collects data and

 

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tests products prior to and after commercial introduction. Suspension products undergo a variety of rigorous performance and accelerated life tests before they are introduced into the market. The research and development portion of our total engineering costs totaled approximately $7.3 million, $9.8 million and $9.7 million in 2010, 2011 and 2012, respectively.

Intellectual property

Intellectual property is an important aspect of our business. We rely upon 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.

Our in-house intellectual property department and in-house counsel diligently protect our new technologies with patents and trademarks and defend against patent infringement allegations. As of March 31, 2013, we owned 37 patents on proprietary technologies related to vehicle suspension and other products and had approximately 82 patent pending applications on file in the U.S. and European Patent Offices. Our principal intellectual property also includes our trademarks. We have more than 50 pending or registered trademarks in the U.S. and a number of international jurisdictions, including the marks FOX®, FOX RACING SHOX® and REDEFINE YOUR LIMITS®. Although our intellectual property is important to our business operations and in the aggregate constitutes a valuable asset, we do not believe that any single patent, trademark or trade secret is critical to the success of our business as a whole. We cannot be certain that our patent applications will be issued or that any issued patents will provide us with any competitive advantages or will not be challenged by third parties.

In addition to the foregoing protections, we generally control access to and use of our proprietary and other confidential information through the use of internal and external controls, including contractual protections with employees, OEMs, distributors and others. Despite these protections, we may be unable to prevent third parties from using our intellectual property without our authorization, breaching any nondisclosure agreements with us, or independently developing products that are similar to ours, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States.

Customers

Our OEM customers include market leaders in their respective categories, and help define, as well as respond to, consumer trends in their respective industries. These OEM customers include our products on a number of their high-performance models. We believe OEMs will often use our products to improve the marketability and demand of their own products, which, in turn, strengthens our brand image. In addition, consumers select our high-performance products in the aftermarket channel, where we market through a global network of dealers and distributors. We currently sell to more than 150 OEMs and distribute our products to more than 2,300 retail dealers and distributors worldwide. In 2012, 81% of our sales resulted from sales to OEM customers and 19% resulted from sales to dealers and distributors for resale in the aftermarket channel.

Sales attributable to our 10 largest OEM customers, which can vary from year-to-year, collectively accounted for approximately 54%, 53% and 56% of our sales in 2010, 2011 and 2012, respectively.

Although we refer to the branded mountain bike OEMs that use our products throughout this document as “our customers,” “our OEM customers” or “our mountain bike OEM customers,”

 

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branded mountain bike OEMs often use contract manufacturers to manufacture and assemble their bikes. As a result, even though we typically negotiate price and volume requirements directly with our mountain bike OEM customers, it is the contract manufacturer that usually places the purchase order with us and is responsible for paying us (rather than the branded mountain bike OEMs). Giant is an OEM and a contract manufacturer used by certain of our mountain bike OEM customers. Sales to Giant accounted for approximately 16%, 12% and 13% of our sales in 2010, 2011 and 2012, respectively. In the event Giant were to experience manufacturing or other problems, or were to fail to pay us, it could have a material adverse impact on our business and our results of operations.

Our domestic sales totaled $53.5 million, $65.8 million and $84.3 million, or 31%, 33% and 36% of our total sales in 2010, 2011 and 2012, respectively. Our international sales totaled $117.4 million, $132.0 million and $151.6 million or 69%, 67% and 64% of our total sales in 2010, 2011 and 2012, respectively. Sales attributable to countries outside the United States are based on shipment location. Our international sales, however, do not necessarily reflect the location of the end users of our products, as many of our products are incorporated into mountain bikes that are assembled at international locations and then shipped back to the United States. We estimate, based on our internal projections, that approximately one-third of the end users of our products are located outside the United States.

Mountain bikes

We sell our mountain bike suspension products to more than 150 domestic and international bike OEMs, including Scott, Specialized and Trek. We have long-standing relationships with many of the top mountain bike OEMs. After incorporating our products on their mountain bikes, OEMs typically sell their mountain bikes to independent dealers, which then sell directly to consumers.

In the aftermarket, we typically sell to dealers in the U.S. and through distributors internationally. Our dealers sell directly to aftermarket consumers. Our overseas distributors sell to independent dealers, which then sell directly to consumers.

Powered vehicles

We sell our suspension products for the powered vehicles industry to OEMs, including BRP, Ford and Polaris. We are also currently developing relationships with new OEMs, as the powered vehicles market continues to grow. After incorporating our products on their powered vehicles, OEMs typically sell their powered vehicles to independent dealers, which then sell directly to consumers.

In the aftermarket, we typically sell through dealers and distributors, both in the U.S. and internationally. Our dealers sell directly to aftermarket consumers. When we sell to our distributors, they sell to independent dealers, which then sell directly to consumers.

Our product offerings currently target high-performance suspension products for Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. Our products have also been used on limited quantities of off-road military vehicles and other small-scale select military applications.

Sales and marketing

As of March 31, 2013, we employed 36 specialized and dedicated sales professionals. Each sales person is fully committed to servicing either OEM or aftermarket customers within our product

 

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categories, which ensures that our customers are in contact with capable and knowledgeable sales persons to address their specific needs. We strongly believe that providing a high level of service to our end customers is essential to maintaining our reputational excellence in the marketplace. Our sales personnel receive training on the latest FOX products and technologies and attend trade shows to increase their market knowledge.

Our marketing strategy focuses on strengthening and promoting the FOX brand in the marketplace. We strategically focus our marketing efforts on enthusiasts seeking high-end suspension systems through promotions at destination riding locations and individual and team sponsorships. We believe that the performance of our products has been demonstrated by, and our brand benefits from, the success of professional athletes who use our products in elite competitive events, such as the Union Cycliste Internationale Mountain Bike World Cup and the X Games, which we believe positively influences the purchasing habits of enthusiasts and other consumers seeking high-performance products. We believe that our strategic focus on the performance and racing segments in our markets influences many aspiring and enthusiast consumers and enables our products to be sold at premium price points. For example, we sponsor a number of professional athletes and professional race teams. In order to continue to enhance our brand image, we will need to maintain our position in the suspension products industry and to continue to provide high quality products and services. Additionally, we have been able to develop long-term strategic relationships with leading OEMs. Our reputation for high-performance suspension products plays a critical role in our aftermarket sales to consumers.

In addition to our website and traditional marketing channels, such as print advertising and tradeshows, we maintain an active social media platform, including a Facebook page, YouTube channel, Vimeo page and Twitter feed to increase brand awareness, foster loyalty and build a community of users. As strategies and marketing plans are developed for our products, our internal marketing and communications group works to ensure brand cohesion and consistency.

Suppliers

The primary raw materials used in the production of our products are aluminum, magnesium and steel. We generally use multiple suppliers for our raw materials and believe that our raw materials are in adequate supply and available from many suppliers at competitive prices. Prices for our raw materials fluctuate from time to time, but historically, price fluctuations have not had a material impact on our business.

We work closely with our supply base, and depend upon certain suppliers to provide raw inputs, such as forgings, castings and molded polymers that have been optimized for weight, structural integrity, wear and cost. In certain circumstances, we depend upon a limited number of suppliers for such raw inputs. We typically have no firm contractual sourcing agreements with our suppliers other than purchase orders.

Miyaki is the exclusive producer of the Kashima coating for our suspension component tubes. As part of our agreement with Miyaki, which we entered into in 2009, or the Kashima Agreement, we have been granted the exclusive right to use the trademark “KASHIMACOAT” on products comprising the aluminum finished parts for suspension components (e.g., tubes) and on related sales and marketing material worldwide, subject to a minimum model year order and certain other exclusions. The Kashima Agreement does not contain minimum purchase obligations, except to the extent that Miyaki reasonably commits to purchase, or purchases, materials or tubes based on a run rate forecast in anticipation of a purchase order that we ultimately do not

 

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submit and such materials or tubes cannot be otherwise be used by Miyaki. The Kashima Agreement has an initial term of five (5) years and automatically renews for successive one year periods unless and until one party gives the other notice of non-renewal prior to the then applicable expiration date.

Employees

As of March 31, 2013, we had approximately 545 full-time employees in the United States, Europe and Taiwan. We also use part-time employees at our manufacturing facilities to help us meet seasonal demands. None of our employees are subject to collective bargaining agreements. We have never experienced a material work stoppage or disruption to our business relating to employee matters. We believe that our relationship with our employees is good.

Facilities

The following sets forth our principal facilities as of March 31, 2013. All of our principal facilities are leased.

 

Location    Principal uses    Approximate
sq. footage
 

 

 

Scotts Valley, California

   Corporate headquarters, sales, research and development      51,236   

Scotts Valley, California

   Manufacturing      42,813   

Watsonville, California

   Manufacturing and service      86,000   

Watsonville, California

  

Distribution and warehousing

     12,947   

El Cajon, California

   Manufacturing, sales, service and research and development      30,152   

Taichung, Taiwan

   Manufacturing and sales      28,000   

 

 

Manufacturing and backlog

We manufacture and complete final assembly on our products. By controlling the manufacturing process of our products, we are able to maintain our strict quality standards, customize our machines and processes for the specific requirements of our products, and quickly respond to feedback we receive on our products in development and otherwise. Furthermore, manufacturing our own products enables us to adjust our labor and production inputs to meet seasonal demands and the customized requirements of some of our customers.

Although we currently manufacture most of our suspension products at our California facilities, we are in the process of transitioning the majority of our mountain bike products manufacturing operations to our new facility in Taichung, Taiwan over the next three years, with the final completion of the transition scheduled for 2015. In connection with our transition, we expect to utilize suppliers who are located closer to our facility in Taichung, Taiwan for a number of materials and components. We currently have limited manufacturing operations at our Taiwan facility, where we presently manufacture our adjustable seat post and other select mountain bike products. During the transition period, we intend to manufacture mountain bike suspension products at both our facility in Watsonville, California and in Taichung, Taiwan, thereby providing us with dual manufacturing facilities and reducing the risk of interruptions. In

 

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addition, during the transition period, we intend to train certain of our Taichung employees at our Watsonville facility as a way to help us maintain our quality controls. We believe that the orderly transition of the majority of our mountain bike manufacturing operations from California to our new facility in Taiwan should enable us to maintain our strict quality control standards, meet product demand requirements and relocate the majority of the manufacturing of our products for mountain bikes to a location that is geographically close to a number of our mountain bike OEMs, many of which are located in Taiwan. We estimate that our sales to mountain bike OEMs located in Taiwan represented approximately 47% of our total sales to mountain bike OEMs in the year ended December 31, 2012.

Once the transition of the majority of our mountain bike product manufacturing operations is complete, we anticipate converting the Watsonville facility primarily to the manufacturing of powered vehicle suspension products. We believe that this conversion process will help us to increase our manufacturing capacity for our powered vehicle products, which should help us to reduce our lead time to our powered vehicle OEMs.

Competition

The markets for suspension products are highly competitive. We compete with other companies that produce suspension products for sale to OEMs, dealers and distributors, as well as with OEMs that produce their own line of suspension products for their own use. Some of our competitors may have greater financial, research and development or marketing resources than we do. Competition in the high-end segment of the suspension products market revolves around technical features, performance, product design, innovation, reliability and durability, brand, time to market, customer service and reliable order execution, and we compete on such basis. While the pricing of competing products is always a factor, we believe the high-performance of our products helps justify our premium pricing. We compete with several large suspension providers and numerous small manufacturers that provide branded and unbranded products across all of our product lines. These competitors can be divided into the following categories:

Mountain bikes

Within the market for mountain bike suspension products, we compete with several companies that manufacture front and rear suspension products, including RockShox (a subsidiary of SRAM Corporation), X-Fusion Shox (a wholly-owned subsidiary of A-Pro), Manitou (a subsidiary of HB Performance Systems), SR Suntour, DT Swiss (a subsidiary of Vereinigte Drahtwerke AG) and Marzocchi (Tenneco).

Powered vehicles

Within the market for powered vehicle suspension products, we compete with several companies in different submarkets. We believe a significant competitor for suspension products in the snowmobile market is KYB (Kayaba Industry Co., Ltd.). Other suppliers of suspension products for snowmobiles include Öhlins Racing AB, Walker Evans Racing, Works Performance Products, Inc. and Penske Racing Shocks / Custom Axis, Inc. In the ATV and Side-by-Side markets, outside of captive OEM suppliers, we compete with ZF Sachs (ZF Friedrichshafen AG) and Walker Evans Racing for OEM business and Elka Suspension Inc., Öhlins Racing AB, Works Performance Products and Penske Racing Shocks / Custom Axis, Inc. for aftermarket business. In the market for off-road and specialty vehicle suspension products, we believe our two biggest competitors are ThyssenKrupp Bilstein Suspension GmbH (commonly known as Bilstein) and King Shock

 

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Technology, Inc. (commonly known as King Shock). Other competitors include Icon Vehicle Dynamics, Sway-A-Way, Pro Comp USA Suspension and Rancho (Tenneco).

Government regulation

Environmental

Our manufacturing operations, facilities and properties in the United States and Taiwan are subject to evolving foreign, international, federal, state and local environmental and occupational health and safety laws and regulations, including those governing air emissions, wastewater discharge and the storage and handling of chemicals and hazardous substances. If we fail to comply with such laws and regulations, we could be subject to significant fines, penalties, costs, liabilities or restrictions on operations, which could negatively affect our financial condition.

We believe that our operations are in compliance, in all material respects, with applicable environmental and occupational health and safety laws and regulations, and our compliance with such laws and regulations has not had, nor is it expected to have, a material impact on our earnings or competitive position. However, new requirements, more stringent application of existing requirements or the discovery of previously unknown environmental conditions could result in material environmental related expenditures in the future.

Employment

We are also subject to numerous foreign, federal, state and local government laws and regulations governing our relationships with our employees, including those relating to minimum wage, overtime, working conditions, hiring and firing, non-discrimination, work permits and employee benefits. We believe that our operations are conducted in compliance, in all material respects, with such laws and regulations.

Consumer safety

We are subject to the jurisdiction of the United States Consumer Product Safety Commission, or the 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. We have never had any of our products recalled and are not aware of any current defects in our products that would require a recall.

Legal proceedings

From time to time we are involved in legal proceedings incidental to our business, in particular intellectual property related disputes, product liability claims, as well as other litigation of a non-material nature in the ordinary course of business. In connection with ASC 450, Contingencies, we have not accrued for material loss contingencies relating to any legal proceedings because we believe that, although unfavorable outcomes in proceedings may be possible, they are not considered by our management to be probable and reasonably estimable. We believe that the outcome of any such pending matters, either individually or in the aggregate, will not have a material impact on our business or financial condition.

 

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Management

Executive officers and directors

The following table provides the names, ages and positions of our executive officers and directors as of July 15, 2013:

 

Name    Age    Position

 

Executive Officers:

     

Larry L. Enterline

   60    Chief Executive Officer and Director

Zvi Glasman

   49    Chief Financial Officer, Secretary and Treasurer

John Boulton

   51    Senior Vice President, Global Operations

Mario Galasso

   47    Senior Vice President, Business Divisions

Non-Employee Directors:

     

Elias Sabo

   42    Director and Chairman of the Board of Directors

Robert C. Fox, Jr.

   74    Director

Joseph Hagin

   57    Director

Dudley Mendenhall

   58    Lead Independent Director

Carl Nichols

   58    Director

Ted Waitman

   63    Director

 

Executive officers

Larry L. Enterline has served as Chief Executive Officer and director of our wholly-owned operating subsidiary, Fox Factory, Inc., or our Subsidiary, since March 2011. In anticipation of this offering, we engaged Mr. Enterline to serve directly as our Chief Executive Officer, in addition to his positions with our Subsidiary, in May 2013, and we appointed him directly to our board of directors in June 2013. Since April 2010, he has served as the Chief Executive Officer of Vulcan Holdings, Inc., his private investment holding and consulting services company. From January 2006 to April 2010, Mr. Enterline was Chief Executive Officer of COMSYS IT Partners, Inc., an IT staffing and solutions company. Since October 2005, Mr. Enterline has served on the board of directors of Concurrent Computer Corporation (NASDAQ: CCUR), a provider of software, hardware and professional services for the video market and the high-performance, real-time market. From April 2005 to September 2011, Mr. Enterline served on the board of directors of Raptor Networks Technology, Inc., now known as Mabwe Minerals Inc. (PINK: MBWE), which, at the time of Mr. Enterline’s membership on the board, was engaged in the data network switching industry. From 1989 to 2000, Mr. Enterline served in various management roles, including Senior Vice President of Worldwide Sales and Service Organization, at Scientific-Atlanta, Inc., a Georgia-based manufacturer of cable television, telecommunications and broadband equipment. Mr. Enterline earned a BSEE in Engineering from Case Western Reserve University in 1974, and an MBA from Cleveland State University in 1988. We believe that Mr. Enterline’s current position as our Chief

 

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Executive Officer and as Chief Executive Officer of our Subsidiary, service on other public company boards and leadership experience give him the qualifications and skills to serve as our director.

Zvi Glasman first joined us in January 2008 as Chief Financial Officer of our Subsidiary, initially as a consultant until his employment under the same title in September 2008. In anticipation of this offering, we engaged Mr. Glasman to serve directly as our Chief Financial Officer, in addition to his position with our Subsidiary, in May 2013. Prior to joining our Subsidiary, Mr. Glasman served as Chief Financial Officer of Motive Eyewear, Inc., an eyewear supplier, from 2005 until 2008. From 2003 to 2005, he was Chief Financial Officer at Marshall & Swift, a software company focused on providing valuation solutions to the insurance and real estate industries, and from 2001 to 2003, he served as Chief Financial Officer of RealTimeImage Inc. (RTI), an internet infrastructure company providing imaging products and services for the graphic arts and medical communities. Mr. Glasman is an inactive certified public accountant. He earned a BS in Finance from Pennsylvania State University in 1985.

John Boulton has served as Senior Vice President, Global Operations of our Subsidiary since February 2012. In anticipation of this offering, we engaged Mr. Boulton to serve directly as our Senior Vice President, Global Operations, in addition to his position with our Subsidiary, in June 2013 from January 2011 to February 2012, he served in a similar capacity with our Subsidiary. Prior to joining our Subsidiary, Mr. Boulton served as Vice President, Operations, of Utilimaster Corporation, a producer of walk-in vans and delivery trucks, from 2007 until 2010. From September 1985 to June 2004 he worked for General Electric Company in various management positions, most recently under the title Vice President of Operations for Fleet Services, GE Capital. Mr. Boulton earned a BSEE in Electrical Engineering from Reading College of Technology in 1983.

Mario Galasso has served as Senior Vice President, Business Divisions of our Subsidiary since January 2013. In anticipation of this offering, we engaged Mr. Galasso to serve directly as our Senior Vice President, Business Divisions, in addition to his position with our Subsidiary, in June 2013. From February 2003 to January 2013, Mr. Galasso held a number of positions with our Subsidiary including Vice President, Bicycle & Corporate Engineering and Corporate Senior Vice President from February 2012 to February 2013. Mr. Galasso earned a BSME in Engineering from Worcester Polytechnic Institute in 1988.

Non-employee directors

Elias Sabo has served as a director of our company since December 2007. Mr. Sabo served as our President from January 2008 until June 2013. Since 1998, Mr. Sabo has served as a founding partner at Compass Group Management LLC, the manager of Compass Diversified Holdings (NYSE: CODI), our Sponsor’s parent, and other alternative asset vehicles. Prior to joining Compass Group, Mr. Sabo worked in the acquisition department of Colony Capital, LLC, a Los Angeles-based real estate private equity firm, from 1992 to 1996, and as a healthcare investment banker for CIBC World Markets (formerly Oppenheimer & Co.) from 1996 to 1998. Mr. Sabo also serves on the boards of directors of several private companies. Mr. Sabo earned a BS in Business from Rensselaer Polytechnic Institute in 1992. Mr. Sabo brings to our board of directors business leadership experience, an extensive understanding of investment activities, and public company experience with respect to governance and risk management. His in-depth investment experience

with our Sponsor enables him to advise our board of directors on various strategic and business matters.

 

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Robert C. Fox, Jr. is the founder of our Subsidiary and has served as a director of our company since January 2008. He served as Chief Executive Officer of our Subsidiary from its inception in February 1978 until January 2008. From January 2008 to June 2009, he served as Chief Engineering Officer of our Subsidiary. Mr. Fox earned a BS in Physics from Santa Clara University in 1961, and an MBA from Santa Clara University in 1968. As the founder of our Subsidiary, Mr. Fox brings a deep understanding of our history, culture and technology to our board of directors, which enables him to advise our board of directors on all aspects of our business, while bringing historic knowledge and continuity to our board of directors.

Joseph Hagin joined us as a director of our Subsidiary in January 2009. In anticipation of this offering, he was appointed to serve directly as a member of our board of directors in June 2013. Mr. Hagin has served as senior partner at Command Consulting Group, an international security and intelligence consulting firm since January 2009. From September 2008 to August 2010, he was the Chairman of S Mobile Corporation, a technology company. Mr. Hagin served as White House Deputy Chief of Staff for President George W. Bush from January 2001 until August 2008. Mr. Hagin earned a BA in English from Kenyon College in 1979. Mr. Hagin’s executive management experience and expertise brings a unique perspective to our board of directors and enables him to provide insight with respect to the management of our company.

Dudley Mendenhall joined us as a director of our Subsidiary in February 2012. In anticipation of this offering, he was appointed to serve directly as a member of our board of directors in June 2013. Mr. Mendenhall also serves as the Lead Independent Director on our board of directors. Since July 2012, Mr. Mendenhall has been an independent consultant providing financial advisory services. From January 2011 to July 2012, he was Vice President, Strategy, Planning and Operations in the office of Strategy and Technology at Hewlett-Packard Company. From March 2009 to August 2010, Mr. Mendenhall served as Chief Financial Officer of Solera Holdings, Inc., a provider of software and services to the automobile insurance claims processing industry. From September 2007 to March 2009, Mr. Mendenhall was Chief Financial Officer of Websense, Inc., a company providing integrated web, data and email security solutions. From April 2003 to September 2007, Mr. Mendenhall was Senior Vice President and Chief Financial Officer of K2, Inc., an international sporting equipment manufacturer. Mr. Mendenhall holds a BA in economics from Colorado College. Mr. Mendenhall’s experience as a chief financial officer at public companies, and background in finance and accounting, assists our board of directors with financial review and risk management obligations.

Carl Nichols joined us as a director of our Subsidiary in May 2008. In anticipation of this offering, he was appointed to serve directly as a member of our board of directors in June 2013. Since 2003, Mr. Nichols has served as Chief Executive Officer of david ID, LLC, a strategic brand consulting company. He also serves on the boards of directors of several private companies. Mr. Nichols has also served as a business council member of Solera Capital, LLC, an investment firm, since 2007. Mr. Nichols earned a BA in Economics from the University of California, Santa Cruz in 1978. Mr. Nichols’ experience with strategic consulting, serving on the boards of companies and advising the portfolio companies of Solera Capital, LLC give him the qualifications and skills to serve as our director.

Ted Waitman has served as a director of our company since June 2013. Since 1978, Mr. Waitman has held various leadership positions, including serving as President and Chief Executive Officer since 1996 and as a director since 2003, at CPM Holdings, Inc., a designer and manufacturer of process equipment for the animal feed and oilseed processing industries. From 2006 to 2008, he served as an independent director of Compass Diversified Holdings, our Sponsor’s parent.

 

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Mr. Waitman was also previously a director of the American Feed Industry Association and president of the Process Equipment Manufacturers’ Association. Mr. Waitman earned a BS in Industrial Engineering from the University of Evansville. Mr. Waitman’s various leadership positions and extensive management and operating experience qualifies him to serve on our board of directors.

Involvement in certain legal proceedings

Except as stated below, during the past 10 years, none of our current directors, nominees for directors or current executive officers has been involved in any legal proceeding identified in Item 401(f) of Regulation S-K, including, without limitation any: (i) involvement in bankruptcy or insolvency proceedings, (ii) conviction or is a named subject of a criminal proceeding (excluding traffic violations or other minor offenses), (iii) involvement in any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement or were subsequently reversed, suspended or vacated) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities, commodities or business laws, or a finding of any violation of federal or state securities or commodities laws, laws respecting financial institutions or insurance companies or laws respecting mail or wire fraud or fraud in connection with any business entity, (iv) involvement in any disciplinary sanction or order imposed by a stock, commodities or derivatives exchange or other self-regulatory organization, or (v) involvement in any proceeding adverse to our company. In February 2012, Mr. Boulton, our Senior Vice President, Global Operations, was charged with a misdemeanor offense related to driving under the influence and pled no contest. We believe that this matter does not adversely affect Mr. Boulton’s integrity or his fitness or ability to serve as an executive officer.

Code of business conduct and ethics

Prior to the completion of this offering, our board of directors will adopt a code of business conduct and ethics that will apply to all of our employees, officers and directors involved in the oversight of our day-to-day operations, including our Chief Executive Officer, Chief Financial Officer and other executive and senior officers. Upon completion of this offering, the code of business conduct and ethics will be posted on our website. The code of business conduct and ethics can only be amended by the approval of a majority of our board of directors, including a majority of our independent directors. Any waiver to the code of business conduct and ethics for an executive officer or director may only be granted by our board of directors and must be timely disclosed as required by applicable law. We expect that any amendments to the code of business conduct and ethics, or any waivers of its requirements, will be disclosed on our website.

Board of directors

Our business and affairs are managed under the direction of our board of directors, which currently consists of seven members. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management.

In accordance with our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws, immediately after the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the

 

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remainder of their respective three-year terms. Our directors will be divided among the three classes as follows:

 

 

our class I directors will be Mr. Mendenhall and Mr. Hagin and their term will expire at the annual meeting of stockholders to be held in 2014;

 

 

our class II directors will be Mr. Nichols and Mr. Waitman and their term will expire at the annual meeting of stockholders to be held in 2015; and

 

 

our class III directors will be Messrs. Sabo, Enterline and Fox and their term will expire at the annual meeting of stockholders to be held in 2016.

At each annual meeting of stockholders after the initial classification, the successors to the directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. In addition, the authorized number of directors may be changed only by resolution of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing a change of our management or a change in control.

Director independence

Under the rules and listing standards of The Nasdaq Stock Market LLC, or the Nasdaq Listing Rules, a majority of the members of our board of directors must satisfy the Nasdaq Listing Rules criteria for “independence.” No director qualifies as independent under the Nasdaq Listing Rules unless our board of directors affirmatively determines that the director does not have a relationship with us that would impair independence (directly or as a partner, stockholder or officer of an organization that has a relationship with us). Our board of directors has determined that Messrs. Hagin, Mendenhall, Nichols and Waitman are independent directors as defined under the Nasdaq Listing Rules. Mr. Enterline is not independent under the Nasdaq Listing Rules as a result of his position as our Chief Executive Officer, Mr. Sabo is not independent under the Nasdaq Listing Rules as a result of his relationship with our Sponsor and Mr. Fox is not independent under the Nasdaq Listing Rules as a result of the fact that we rent our Watsonville, California manufacturing and office facilities from Mr. Fox. See “Certain relationships and related party transactions—Our Sponsor” and “Certain relationships and related party transactions—Real property leases” below for additional information.

Governance guidelines

Our board of directors has adopted a set of governance guidelines, the Governance Guidelines, to assist our board of directors and its committees in performing their duties and serving the best interests of our company and our stockholders. The Governance Guidelines cover topics including, but not limited to, director selection and qualification, director responsibilities and operation of our board of directors, director access to management and independent advisors, director compensation, director orientation and continuing education, succession planning, recoupment of performance-based compensation and the annual evaluations of our board of directors.

 

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Committees of the board of directors

Our board of directors will, effective immediately prior to the completion of this offering, establish an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors are described below. Members will serve on these committees until their resignation or until otherwise determined by our board of directors.

Audit committee

Our audit committee is comprised of Messrs. Hagin, Mendenhall and Nichols, with Mr. Mendenhall serving as Chairman of the committee. Each member of the audit committee must be independent as defined under the applicable Nasdaq and SEC rules and financially literate under the Nasdaq Listing Rules. Our board of directors has determined that each member of the audit committee is “independent” and “financially literate” under the Nasdaq Listing Rules and the SEC and that Mr. Mendenhall is an “audit committee financial expert” under the rules of the SEC. The responsibilities of the audit committee are included in its written charter. The functions of this committee include, among others:

 

 

appointing, retaining, terminating, determining compensation for, and overseeing the independent registered public accounting firm;

 

 

reviewing the scope of the audit by the independent registered public accounting firm;

 

 

inquiring into the effectiveness of our accounting and internal control functions;

 

 

assisting our board of directors in fulfilling its oversight responsibilities relating to the integrity of our financial statements, our compliance with legal and regulatory requirements, our adherence to policies regarding ethics and business practices and our enterprise risk-management practices;

 

 

approving, or pre-approving, all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm; and

 

 

obtaining and reviewing a report by the independent registered public accounting firm, at least annually, that describes our internal control procedures, any material issues with such procedures, and any steps taken to deal with such issues.

Compensation committee

Our compensation committee is comprised of Messrs. Mendenhall, Nichols and Waitman, with Mr. Waitman serving as Chairman of the committee. Our board of directors has determined that each member of the committee is “independent” under the Nasdaq Listing Rules and all applicable laws. Each of the members of this committee is also a “nonemployee director” as that term is defined under Rule 16b-3 of the Exchange Act and an “outside director” as that term is defined in Treasury Regulations Section 1.162-27(3). The responsibilities of the compensation committee are included in its written charter. The functions of this committee include, among others:

 

 

determining, or recommending to our board of directors for determination, the compensation of our Chief Executive Officer and our other executive officers and reviewing and approving or

 

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recommending to our board of directors for approval performance goals relevant to such compensation;

 

 

evaluating and recommending the type and amount of compensation to be paid or awarded to the members of our board of directors;

 

 

approving, periodically evaluating and proposing amendments to long-term incentive plans;

 

 

evaluating and recommending to our board of directors new equity incentive plans, compensation plans and similar programs advisable for us, as well as recommending to our board of directors the modification or termination existing plans and programs; and

 

 

establishing or recommending policies with respect to compensation arrangements, including recoupment policies.

The compensation committee may delegate authority to the Chief Executive Officer to grant rights in, or options to purchase, shares of our common stock to eligible employees who are not executive officers, subject to certain limitations.

Nominating and corporate governance committee

Our nominating and corporate governance committee is comprised of Messrs. Hagin, Mendenhall and Waitman, with Mr. Hagin serving as Chairman of the committee. Our board of directors has determined that each member of the committee is “independent” under the Nasdaq Listing Rules and all applicable laws. The responsibilities of the nominating and corporate governance committee are included in its written charter. The functions of this committee include, among others:

 

 

interviewing, evaluating and recommending to our board of directors candidates for election as our directors, including nominations by stockholders;

 

 

responsibility for matters relating to nomination of directors;

 

 

maintaining formal criteria for selecting director nominees who will best serve the interests of our company and our stockholders;

 

 

considering and assessing the independence of members of our board of directors;

 

 

evaluating director performance on our board of directors and applicable committees of our board of directors and determining whether continued service on our board of directors is appropriate;

 

 

evaluating the adequacy of our corporate governance practices and policies;

 

 

reviewing and approving all related party transactions;

 

 

developing and periodically reviewing and recommending to our board of directors appropriate revisions to our corporate governance framework, including our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Governance Guidelines;

 

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monitoring compliance with our Governance Guidelines;

 

 

reviewing the composition of each committee annually and presenting recommendations for committee membership for our board of directors to consider; and

 

 

reviewing and discussing with the CEO and reporting to our board of directors plans for executive officer development and corporate succession plans for the CEO and other executive officers.

Executive officers

Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no familial relationships between our directors and executive officers.

Compensation committee interlocks and insider participation

Prior to establishing our compensation committee, the compensation committee of Fox Factory, Inc., our wholly-owned subsidiary, made decisions relating to the compensation of our executive officers since all of our executive officers (or, in the case of Mr. Enterline, his wholly-owned consulting services corporation) had a consulting agreement, employment agreement or offer letter directly with Fox Factory, Inc. None of our executive officers currently serves, or in the past year has served, as a member of a board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Non-employee director compensation

The following table presents the total compensation for each person who served as a non-employee member of our board of directors during 2012. Other than as set forth in the table and described more fully below, in 2012 we did not pay any compensation to, reimburse any expense of, or grant any equity awards or non-equity awards to any of the non-employee members of our board of directors.

In 2012, the standard fee arrangements for our non-employee directors (other than those serving on our board of directors on behalf of our Sponsor) included an annual cash retainer of $20,000, payable quarterly, for service as a director of Fox Factory, Inc. In addition, each non-employee director generally received options to purchase shares of our common stock upon his or her election or appointment to the board of directors of Fox Factory, Inc. Historically, the number of shares of our common stock subject to the options has varied from year to year and the options have generally vested in a single installment on the one-year anniversary of the grant date.

In connection with this offering, we intend to approve and implement a compensation program for our non-employee directors that consists of annual retainer fees and long-term equity awards.

The following table sets forth information for the year ended December 31, 2012 regarding the compensation awarded to, earned by or paid to persons who served as our directors during 2012 who are not named executive officers. Each of Messrs. Sabo, Maciariello, Bottiglieri and Massoud served on our board of directors on behalf of our Sponsor and received no compensation for his services as a director in 2012. We pay CGM management fees pursuant to the Management Services Agreement, as described below under “Certain relationships and related party

 

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transactions—Management Services Agreement.” Mr. Fox, the founder of Fox Factory, Inc., also received no compensation for his services as a director in 2012.

 

Name   

Fees earned

or paid in

cash ($)

   

Option

awards(1)

    

All other

compensation

    Total  

 

 

Elias Sabo

            —                      

Robert C. Fox, Jr.

            —                      

Patrick A. Maciariello(2)

            —                      

James J. Bottiglieri(3)

            —                      

I. Joseph Massoud(4)

            —                      

Dudley Mendenhall

   $ 20,000 (5)(6)    $ 19,031(7)              $ 39,031   

Carl Nichols

     20,000 (6)      —           $ 13,020 (8)      33,020   

Joseph Hagin

     20,000 (6)      19,031(7)                39,031   

 

 
(1)   Options exercisable for the following number of shares of our common stock were outstanding as of December 31, 2012: Mr. Mendenhall—4,645 shares; Mr. Nichols—6,503 shares and Mr. Hagin—4,645 shares.

 

(2)   Mr. Maciariello resigned from our board of directors on April 11, 2013.

 

(3)   Mr. Bottiglieri resigned from our board of directors on February 27, 2012.

 

(4)   Mr. Massoud resigned from our board of directors on November 30, 2012.

 

(5)   Mr. Mendenhall’s service as a director of Fox Factory, Inc. commenced on February 27, 2012. His compensation was not pro-rated even though he did not serve on the board of directors of Fox Factory, Inc. during all of 2012.

 

(6)   The director joined our board of directors on June 13, 2013. During 2012, the director served on the board of directors of Fox Factory, Inc. and received $20,000 as an annual retainer for such service.

 

(7)   The director was granted an option to purchase 4,645 shares of our common stock on February 27, 2012 with an exercise price of $7.34 per share as consideration for service as a director of Fox Factory, Inc. In June 2012, in connection with our recapitalization, this option was subsequently cancelled and the director was granted a new option to purchase 4,645 shares of our common stock with an exercise price of $5.16 per share. See “Certain relationships and related party transactions—Recapitalization—Cancellation and issuance of director options” below. The amounts in this column represent the aggregate grant date fair value of both the cancelled and new option awards computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 10 to our financial statements and related notes included elsewhere in this prospectus. These amounts do not reflect the actual economic value that will be realized by the director upon the vesting of the stock options, the exercise of the stock options or the sale of the common stock underlying such stock options.

 

(8)   Represents amounts paid to Mr. Nichols in June 2012 in connection with the recapitalization transaction to compensate him for the loss in value of his outstanding stock options. See “Certain relationships and related party transactions—Recapitalization—Cancellation and issuance of director options” below.

 

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Executive compensation

Summary compensation table for 2012

The following table sets forth certain information with respect to the compensation paid to our named executive officers for the fiscal year ended December 31, 2012:

 

Name and principal position    Salary      Non-equity
incentive plan
compensation(2)
    

Option

awards(3)

    All other
compensation
    Total  

 

 

Larry L. Enterline(1)

   $ 700,000       $ 750,000       $ 1,316,193 (4)    $ 30,000 (5)    $ 2,796,193   

Chief Executive Officer

            

John Boulton

   $ 246,539       $ 140,000       $ 275,072 (6)           $ 661,611   

Senior Vice President,
Global Operations

            

Zvi Glasman

   $ 253,923       $ 150,000       $ 189,499 (7)           $ 593,422   

Chief Financial Officer

            

 

 

 

(1)   In 2012, Mr. Enterline served as Chief Executive Officer of Fox Factory, Inc. pursuant to the terms of a Services and Secondment Agreement, as amended, or the Enterline Services Agreement, by and among us, Fox Factory, Inc. and Vulcan Holdings, Inc., Mr. Enterline’s wholly-owned consulting services corporation, or Vulcan. All amounts listed in the Summary Compensation Table for Mr. Enterline were paid to Vulcan as provided in the Enterline Services Agreement. See “Narrative disclosure to summary compensation table—2012 employment agreements and arrangements” below for additional information on the terms of this arrangement.

 

(2)   Amounts in this column represent cash performance bonuses earned for fiscal 2012 by the respective named executive officer pursuant to, in the case of Mr. Enterline, the Enterline Services Agreement and, in the case of Messrs. Boulton and Glasman, our offer letter or employment agreement, respectively, with the named executive officer. Cash performance bonuses were awarded to our named executive officers based on the achievement of specified company performance metrics and the achievement of individual performance goals. In addition, in June 2013 we paid to Mr. Enterline pursuant to the Enterline Services Agreement a bonus of $500,000 based on his superior performance and the overall strong performance of our company over the two-year period ended March 31, 2013. See “Narrative disclosure to summary compensation table—2012 employment agreements and arrangements” below for additional information.

 

(3)   The amounts in this column represent the aggregate grant date fair value of the option awards computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 10 of the accompanying notes to our consolidated financial statements. These amounts do not reflect the actual economic value that will be realized by the named executive officer upon the vesting of the stock options, the exercise of the stock options or the sale of the common stock underlying such stock options.

 

(4)   Consists of: (i) the aggregate grant date fair value of the new options to purchase 592,191 shares of our common stock with an exercise price of $5.16 per share granted to Vulcan; and (ii) the additional compensation expense, computed in accordance with FASB ASC Topic 718, incurred by us with respect to options to purchase an aggregate of 414,891 shares of our common stock that were subject to accelerated vesting, in each case, in connection with our recapitalization effected on June 15, 2012. See “Certain relationships and related party transactions—Recapitalization—Exercise of options and new option grants” below for additional information.

 

(5)   Consists of $30,000 for miscellaneous general and administrative costs paid to Vulcan. See “Narrative disclosure to summary compensation table—2012 employment agreements and arrangements” below for additional information on the terms of this arrangement.

 

(6)   Consists of: (i) the aggregate grant date fair value of an option to purchase 69,675 shares of our common stock with an exercise price of $6.20 per share granted to Mr. Boulton on October 3, 2012; (ii) the aggregate grant date fair value of a new option to purchase 65,726 shares of our common stock with an exercise price of $5.16 per share granted to Mr. Boulton in connection with our recapitalization effected on June 15, 2012; and (iii) the additional compensation expense, computed in accordance with FASB ASC Topic 718, incurred by us with respect to options to purchase an aggregate of 41,805 shares of our common stock that were subject to accelerated vesting in connection with our recapitalization effected on June 15, 2012. See “Certain relationships and related party transactions—Recapitalization—Exercise of options and new option grants” below for additional information.

 

(7)   Consists of: (i) the aggregate grant date fair value of the new option to purchase 106,231 shares of our common stock with an exercise price of $5.16 per share granted to Mr. Glasman; and (ii) the additional compensation expense, computed in accordance with FASB ASC Topic 718, incurred by us with respect to options to purchase an aggregate of 99,728 shares of our common stock that were subject to accelerated vesting, in each case in connection with our recapitalization effected on June 15, 2012. See “Certain relationships and related party transactions—Recapitalization—Exercise of options and new option grants” below for additional information.

 

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Narrative disclosure to summary compensation table for 2012

2012 employment agreements and arrangements

During 2012, Mr. Enterline served as the Chief Executive Officer of Fox Factory, Inc. pursuant to a Services and Secondment Agreement, as amended, or the Enterline Services Agreement, by and among us, Fox Factory, Inc. and Vulcan Holdings, Inc., Mr. Enterline’s wholly-owned consulting services company, or Vulcan. Under the Enterline Services Agreement, we agreed to pay Vulcan an annual fee of $700,000, an annual incentive fee equal to the sum of (1) an escalating percentage of up to 100% of $500,000 and (2) an escalating percentage of up to 100% of $250,000, with each escalating percentage based on our company-wide EBITDA as compared to a target EBITDA for the year as provided for in the agreement. The amount listed under the column “Non-equity incentive plan compensation” in the Summary compensation table above represents the cash bonus amount that Vulcan received in 2012 based on the achievement of such targets. In addition, the agreement provided that we will pay a fee of up to $1.0 million if, our board of directors determines, in its reasonable discretion, that certain performance measures have been achieved. In June 2013, we paid to Mr. Enterline a $500,000 bonus in satisfaction of this obligation in light of his performance and the overall strong performance of the company. We also agreed to pay Vulcan $2,500 per month for general and administrative costs, as well as to reimburse Vulcan for reasonable, ordinary and necessary business expenses incurred by Mr. Enterline in connection with providing services to us under the Enterline Services Agreement.

During 2012, Mr. Boulton served as the Senior Vice President, Global Operations, of Fox Factory, Inc. pursuant to an offer letter with Fox Factory, Inc. Mr. Boulton’s annual base salary in 2012 was initially $240,000, which was increased to $250,000 in May 2012. In 2012, Mr. Boulton was eligible to receive an annual cash bonus equal to 20% to 60% of his annual base salary based on our achievement of certain EBITDA targets on a company-wide basis as provided for in the agreement and Mr. Boulton’s achievement of individual performance measures. The amount listed under the column “Non-equity incentive plan compensation” in the Summary compensation table for 2012 represents the cash bonus amount that Mr. Boulton received in 2012 based on the achievement of such targets and performance measures.

During 2012, Mr. Glasman served as the Chief Financial Officer of Fox Factory, Inc. pursuant to an employment agreement with Fox Factory, Inc. Mr. Glasman’s annual base salary in 2012 was initially $250,000, which was increased to $256,000 in May 2012. In 2012, Mr. Glasman was eligible to receive an annual cash bonus based on our achievement of certain EBITDA targets as provided for in the agreement on a company-wide basis and Mr. Glasman’s achievement of individual performance measures. The amount listed under the column “Non-equity incentive plan compensation” in the Summary compensation table for 2012 represents the cash bonus amount that Mr. Glasman received in 2012 based on the achievement of such targets and performance measures.

New Employment Agreements

In July 2013, Fox Factory Holding Corp. entered into new employment agreements with each of our named executive officers. These new employment agreements will become effective upon the closing of our public offering, at which time the Enterline Services Agreement, under which Mr. Enterline currently provides CEO services to us will terminate, and the employment agreement or offer letter, as applicable, between Fox Factory, Inc. and Messrs. Boulton and

 

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Glasman will terminate (other than the right to receive a pro-rated incentive fee or bonus, as applicable, for 2013). The new employment agreements provide for base salaries, incentive compensation benefits, and, in certain circumstances, severance benefits.

The new employment agreements with each of Messrs. Enterline, Boulton, and Glasman provide for an initial base salary of $750,000, $250,000, and $295,000, respectively. Mr. Enterline is eligible to receive a lump sum cash performance bonus of $250,000 to $750,000 based on our achievement of certain EBITDA targets as provided for in his new employment agreement. Mr. Boulton and Mr. Glasman are each eligible to receive bonuses ranging from 14% to 42% and 25% to 75%, respectively, of their annual base salaries based on our achievement of certain EBITDA targets as provided for in their new employment agreements. Mr. Boulton is also eligible to receive a bonus ranging from 6% to 18% of his annual base salary based on his achievement of individual performance measures. In addition to base salary and performance bonuses, the new employment agreements provide for paid time off and the ability to participate in our employee benefit plans on the same terms as other similarly situated executive officers.

As described below, the new employment agreements also provide the named executive officers with certain payments and benefits upon certain terminations of employment. Under the new employment agreements, in order to receive certain severance benefits, each named executive officer is required to execute a general release in favor of our company. Furthermore, the new employment agreements prohibit the named executive officers from soliciting our employees for two years following their cessation of employment.

Under the terms of the new employment agreements, in the event that a named executive officer resigns without “Good Reason” (as defined below), or his employment terminates due to mutual agreement, death, disability (as defined in the new employment agreements), or for “Cause” (as defined below), such executive is entitled to receive the following payments and compensation: (i) accrued and unpaid annual base salary for services rendered prior to the date of termination or resignation and (ii) reimbursement of any un-reimbursed business expenses as of the date of termination or resignation. In addition, in the event of an executive’s cessation of employment due to his death or disability, such executive is also entitled to receive a pro rata lump sum cash payment of the executive’s performance bonus (which the executive would have earned under his new employment agreement if employed for the entire fiscal year in which such termination occurs, and payable during the year the applicable audited financial statements become available).

In the event a named executive officer’s employment is terminated for any reason other than death, disability, or for “Cause,” or if a named executive officer resigns for “Good Reason,” such executive officer is entitled, provided he executes a release in our favor, to receive the following payments and compensation: (i) accrued and unpaid annual base salary for services rendered prior to the date of termination or resignation; (ii) reimbursement of any un-reimbursed business expenses as of the date of termination or resignation; (iii) (a) severance in an amount equal to the named executive’s annual base salary as of the date of termination, unless the executive’s base salary was reduced in such a way as to trigger a “Good Reason” resignation, in which case the severance amount will be equal to the executive’s annual base salary prior to such reduction, provided that such severance amount is greater than the executive’s base salary at termination, payable in 12 substantially equal payments following execution of a release, or (b) if we terminate Mr. Enterline or Mr. Glasman without Cause within 24 months after a change of control, or Mr. Enterline or Mr. Glasman resign for Good Reason within 24 months after a change

 

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of control, severance in an amount equal to two times (in the case of Mr. Enterline) or 1.5 times (in the case of Mr. Glasman) such executive’s annual base salary, payable in 24 (in the case of Mr. Enterline) or 18 (in the case of Mr. Glasman) equal monthly payments following execution of a release; (iv) a pro rata payment of the executive’s performance bonus (which the executive would have earned under his new employment agreement if employed for the entire fiscal year in which termination occurs, payable during the year the applicable audited financial statements become available); and (v) continued company sharing in the cost of health care insurance during the period executive receives severance.

For purposes of the new employment agreements, termination for “Cause” means with respect to a named executive, one or more of the following: (i) willful or grossly negligent violation of any law which causes material injury to the business of our company (or any subsidiary) or entry of a plea of nolo contendere (or similar plea) to a charge of such an offense; (ii) conduct causing us or any of our subsidiaries significant public disgrace or disrepute; (iii) any act or omission aiding or abetting a competitor, supplier, or customer of ours or any of our subsidiaries to the material disadvantage or detriment of us and our subsidiaries; (iv) the executive’s willful violation of fiduciary duties to our company or any subsidiary, including the duty of loyalty and the corporate opportunity doctrine; (v) commission of, or the act of fraud, dishonesty, misappropriation or embezzlement, or the executive’s commission of any felony offense; (vi) material breach of the executive’s representations, warranties, or covenants under his new employment agreement or any other agreement between the parties hereto that, if curable and unrelated to a breach of his confidentiality obligations, remains uncured for 15 days following written notice thereof from us to executive; and (vii) refusal to comply with our reasonable orders or directives (including refusal to perform, other than as a result of death or disability, material assigned duties or responsibilities that are consistent with normal business practices and his new employment agreement) or our (or our subsidiaries’) material and reasonable rules, regulations, policies, procedures or practices that are not inconsistent with the terms of his new employment agreement or applicable law, which continues uncured for 15 days following written notice thereof from us to the executive.

A resignation by a named executive officer will be deemed a resignation for “Good Reason” if the executive provides written notice to the company of the specific circumstances alleged to constitute Good Reason within 90 days after any one or more of the following events: (i) a reduction in executive’s base salary below the amount as of the date of his new employment agreement (other than a substantially similar reduction applicable to all executives); (ii) for Mr. Boulton only, our requiring, without the executive’s consent, that the executive relocate the executive’s principal place of business outside a 30-mile radius from the location where the executive is employed as of the effective date of his new employment agreement or such other location as consented to by the executive; (iii) material breach by us of his new employment agreement; or (iv) without the executive’s consent, a material reduction in the executive’s duties or responsibilities. Where curable, we will have 30 days to cure such circumstances upon the receipt of notice from the executive.

 

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Perquisites, health, welfare and retirement plans and benefits

Health and welfare benefits

Our named executive officers are eligible to participate in all of our employee benefit plans, including our medical, dental, vision, group life and disability insurance plans, in each case on the same basis as other employees.

401(k) plan

We maintain a tax-qualified retirement plan, our 401(k) plan, which provides all regular employees with an opportunity to save for retirement on a tax-advantaged basis. Under our 401(k) plan, participants may elect to defer a portion of their compensation on a pre-tax basis and have it contributed to the plan subject to applicable annual limits set forth in the Internal Revenue Code of 1986, as amended, or the Code. Pre-tax contributions are allocated to each participant’s individual account and are then invested in select investment alternatives according to the participants’ directions. Our 401(k) plan allows for matching contributions to be made by us. As a tax-qualified retirement plan, contributions to our 401(k) plan and earnings on those contributions are not taxable to the employees until distributed and all contributions are deductible by us when made.

Perquisites and personal benefits

We do not provide perquisites or personal benefits to our named executive officers. We do, however, pay certain premiums for term life insurance and accidental death and dismemberment for all of our employees, including all of our named executive officers, other than Mr. Enterline prior to completion of this offering since, prior to such time, he was a consultant and not an employee.

Pension benefits and non-qualified deferred compensation

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.

Outstanding equity-based awards at fiscal year-end 2012

The following table presents certain information concerning outstanding equity awards held by each of our named executive officers as of December 31, 2012:

 

Name    Option awards  
  

Number of securities
underlying
unexercised options

(#) exercisable

   

Number of securities
underlying
unexercised options

(#) unexercisable

    

Option exercise

price per share

    

Option

expiration

date

 

 

 

Larry L. Enterline(1)

     —  (2)      592,191       $ 5.16         6/15/2022   

John Boulton

     —