S-1/A 1 ds1a.htm AMENDMENT NO. 2 TO FORM S-1 Amendment No. 2 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 21, 2011

Registration No. 333-174140

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Pre-effective

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SRAM International Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3751   80-0712932

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

1333 N. Kingsbury Street, 4th Floor

Chicago, Illinois 60642

(312) 664-8800

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

Stanley R. Day, Jr.

President and Chief Executive Officer

SRAM International Corporation

1333 N. Kingsbury Street, 4th Floor

Chicago, Illinois 60642

(312) 664-8800

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

 

 

Copies To:

 

Christopher D. Lueking

Mark D. Gerstein

Latham & Watkins LLP

233 South Wacker Drive, Suite 5800

Chicago, Illinois 60606

(312) 876-7700

 

Leland E. Hutchinson

Winston & Strawn LLP

35 West Wacker Drive

Chicago, Illinois 60601

(312) 558-5600

 

 

Approximate date of commencement of the 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 of 1933, 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, 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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

   Proposed Maximum Aggregate
Offering Price(1)(2)
   Amount of
Registration Fee(3)

Class A common stock, par value $0.01 per share

   $300,000,000    $34,830.00
 
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes additional shares that the underwriters have the option to purchase. See “Underwriting.”
(3) Previously paid.

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 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 preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated July 21, 2011.

             shares

LOGO

Class A common stock

This is an initial public offering of shares of Class A common stock of SRAM International Corporation.

We are offering              shares of our Class A common stock, and the selling stockholders identified in this prospectus are offering an additional              shares of our Class A common stock. We will not retain any of the net proceeds from the sale of the shares of Class A common stock by the selling stockholders. The estimated initial public offering price per share is expected to be between $             and $            .

We have applied to have our Class A common stock approved for quotation on the Nasdaq stock market under the symbol “SRAM.”

We will be a holding company, and our only business will be the operation and control of the business and affairs of SRAM, LLC and its subsidiaries.

Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to ten votes per share. Therefore, immediately following this offering, the holders of Class A common stock will hold     % of our total voting power, assuming no exercise of the underwriters’ option to purchase additional shares. Each share of Class B common stock is convertible at any time into one share of Class A common stock.

 

     Per Share   Total       
 

Initial public offering price

  $               $            

Underwriting discounts and commissions

  $               $            

Proceeds to SRAM International Corporation, before expenses

  $               $            

Proceeds to the selling stockholders, before expenses

  $               $            
 

The selling stockholders have granted the underwriters an option for a period of 30 days to purchase              additional shares of Class A common stock. We will not receive any proceeds from the sale of these shares by the selling stockholders.

Investing in our Class A common stock involves a high degree of risk. See “Risk factors” beginning on page 11.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

J.P. Morgan   BofA Merrill Lynch   Morgan Stanley
Baird     Lazard Capital Markets
Piper Jaffray     Stifel Nicolaus Weisel

                    , 2011


Table of Contents

LOGO


Table of Contents

Table of contents

 

     Page  

Prospectus summary

     1   

The offering

     7   

Summary consolidated and pro forma financial data

     9   

Risk factors

     11   

Special note regarding forward-looking statements

     26   

The refinancing and reorganization

     27   

Use of proceeds

     32   

Dividend policy

     33   

Capitalization

     34   

Dilution

     36   

Unaudited pro forma condensed consolidated financial data

     38   

Selected consolidated financial data

     47   

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

     49   

Business

     73   

Management

     89   

Executive compensation

     94   

Certain relationships and related person transactions

     106   

Principal and selling stockholders

     110   

Description of capital stock

     113   

Description of new credit facilities

     118   

Shares eligible for future sale

     121   

Material U.S. federal income tax consequences to non-U.S. holders of our Class A common stock

     123   

Underwriting

     127   

Legal matters

     135   

Experts

     136   

Where you can find more information

     137   

Index to the financial statements

     F-1   

You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission. Neither we nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. We are offering to sell, and seeking offers to buy, our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock.

Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States.

 

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our Class A common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk factors,” “Unaudited pro forma condensed consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations.” Unless the context requires otherwise, the words “SRAM International Corporation,” “SRAM,” “we,” “company,” “us” and “our” refer to SRAM International Corporation, a newly formed Delaware corporation, and its subsidiaries, including SRAM Holdings, LLC and SRAM, LLC.

Overview

We are a leading global designer, manufacturer and marketer of premium bicycle components. We believe consumers recognize our brands for innovative product design. Our portfolio of premium brands includes SRAM, RockShox, Zipp, Avid and Truvativ. Our products include drivetrain systems, suspension, brakes, internal gear hubs and wheelsets, all of which are essential components used on road bikes, mountain bikes and pavement bikes. Many of the world’s elite cyclists use our components, including the last two Tour de France winners, the 2010 Ironman World Championship winner and the winners of all six 2010 World Cup mountain bike races. We believe the success of elite cyclists using our products at the highest levels of competition creates aspirational demand for our components.

We are the second largest supplier of bicycle components in the world, measured in net sales for 2010, based on publicly-filed information for some of our competitors and management estimates. We focus primarily on the independent bicycle retailer market, which sells mid to high-end bikes, ranging in price from $300 to over $10,000 in the United States, Europe and other developed markets. We believe this is the highest margin segment of the bicycle component market. We believe the consumer in this market is generally the cycling enthusiast. We define the cycling enthusiast as a consumer who seeks higher performance premium branded bikes and components. Our products, which prominently display our brands, are used on all of the major premium brands produced by bicycle companies, including Trek, Specialized, Cannondale, Giant, Raleigh and Schwinn.

To reach the independent bicycle retailer market, we operate through two distribution channels: the OEM channel and the aftermarket channel. In the OEM channel, we market our products to bicycle companies as original equipment components for new bikes that they sell to consumers through independent bicycle retailers. In the aftermarket channel, we sell products through distributors to independent bicycle retailers and sell a limited number of premium aftermarket products directly to independent bicycle retailers in the United States, who in turn sell them to consumers for replacements, upgrades or custom bike builds. For each of the year ended December 31, 2010 and the three months ended March 31, 2011, we generated 67% of our net sales from the sale of components in the OEM channel and 33% of our net sales from the sale of components in the aftermarket channel. Due to our global production footprint, which consists of seven manufacturing facilities located in China, Germany, Portugal, Taiwan and the United States, 86.4% of our 2010 net sales were invoiced outside of the United States.

We believe our premium brands, technological innovation and product development have been key drivers of our strong financial performance. We grew our net sales from $283.8 million in 2006 to $524.2 million in 2010, representing a compound annual growth rate, or CAGR, of 16.6%. Our net sales for 2006, 2007, 2008, 2009 and 2010 were $283.8 million, $356.0 million, $478.4 million, $399.6 million and $524.2 million, respectively. Our net income (loss) for the same periods was $11.6 million, $18.0 million, ($48.6 million), $21.5 million and $50.0 million, respectively, representing a CAGR of 44.1%.

 

 

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Market overview and opportunity

Bicycle industry overview

The National Bicycle Dealers Association estimates annual worldwide bike production in 2010 was 130 million units, of which approximately 53 million were sold in developed markets, as reported in its U.S. Bicycle Market 2010 report. Developed markets include Australia, Europe, Japan, New Zealand and North America. There are two primary retail channels for the sale of bikes in developed markets: the independent bicycle retailer market (primarily independent bicycle retailers and to a lesser extent sporting good chains) and mass market retailers (e.g., Wal-Mart and Target). We estimate that in 2010 there were 18 million new bikes sold in the independent bicycle retailer market globally, representing $9.2 billion in retail sales, with an average retail price of approximately $500 per bike. Of these 18 million new bikes sold, we believe approximately 90% were sold in the United States, Europe and Japan.

Bicycle component market

We believe branded bicycle components are key to the performance of mid to high-end bikes and strongly influence the buying decisions of cycling enthusiasts. We estimate the size of the independent bicycle retailer market for bicycle components to be approximately $3.5 billion, as measured in component suppliers’ sales.

Outlook

We expect the bicycle component market to continue to grow due to a variety of factors that we believe will impact the cycling industry, including:

 

 

continuing growth in the number of cycling enthusiasts;

 

 

increasing average retail selling prices driven by better-performing product designs and technologies;

 

 

growing participation in road racing, mountain bike racing, organized weekend rides and charity cycling events, as well as cycling related sports, such as triathlons and cyclo-cross;

 

 

improving cycling infrastructure, such as cycling lanes in urban areas;

 

 

increasing consumer focus on healthier lifestyle trends;

 

 

growing focus on the environment; and

 

 

increasing adoption of mid to high-end bikes in emerging markets.

However, if the popularity of cycling or the number of cycling enthusiasts does not increase, or declines, the bicycle component market may not continue to grow and we may fail to achieve future growth. See “Risk factors—Risks related to our business—Our beliefs regarding the future growth of the bicycle component market are supported by qualitative data, limited services and may not be reliable, and a reduction or lack of continued growth in the popularity of cycling or the number of cycling enthusiasts could adversely affect our product sales and profits.” In addition, we may be unable to capitalize on these trends due to a number of factors, including our substantial leverage. See “Risk factors—Risks related to our business—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.”

 

 

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Our strengths

We believe our success is attributable to the following factors:

Premium brand portfolio.    We have five premium brands under the SRAM umbrella: SRAM (drivetrain systems), RockShox (suspension), Zipp (wheelsets), Avid (brakes) and Truvativ (cranks). Our brands are prominently displayed on all of our products and we believe are associated with innovation and performance by our customers, consumers and elite athletes.

Innovation and product development.    Our ability to develop innovative products has been a key driver of our success and growth as a company. We generated over 50% of our 2010 model year (July 1 through June 30) net sales from products that were less than three years old. We currently have more than 280 employees dedicated to product development, and we also have an intellectual property portfolio of over 550 patents. We currently have approximately 70 ongoing product development projects and to date have launched 49 new products for our 2011 model year.

Leader in independent bicycle retailer market.    We are the second largest supplier of bicycle components in the world, measured in 2010 net sales. We believe, based on publicly filed information for sales of our competitors and management estimates, that we have an estimated 15% share of the approximately $3.5 billion of annual net sales in the independent bicycle retailer market for bicycle components, as measured in component suppliers’ sales. We estimate that our primary competitor has approximately 47% of this market.

Differentiated business model.    Over the past 24 years, we have developed global design, production and distribution capabilities and established longstanding customer relationships that we believe are difficult to replicate. We are one of only two suppliers offering a full-line of mid to high-end components to bicycle companies for use on their bikes. We also offer leading customer service and warranty support to independent bicycle retailers.

Committed management team with deep-rooted corporate culture.    Our senior management team has an average tenure with SRAM of approximately 18 years and has transformed SRAM from a single product company in 1987 to a full-line bicycle component supplier with approximately 2,200 employees in nine countries around the world today.

Our strategy

Key elements of our growth strategy are:

Extend our technological and product leadership.    We intend to continue to develop and market products that incorporate innovative design, advanced features and improved performance that differentiate us in the bicycle component market. These efforts will include enhancing our existing products, introducing next generation technologies and developing new product offerings that leverage our existing product platforms in order to maintain our position as an industry leader.

Continue to increase our share of components on new bikes.    We believe we are favorably positioned to increase our share of components on new bikes by building on the strength of our brands, the diversity of our product portfolio and our innovation pipeline. We will focus on key decision-makers who influence component specifications for new bikes, including the bike brand product managers at bicycle companies, independent bicycle retailers, cycling industry media and competitive cyclists, including amateur racers and triathletes.

 

 

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Increase aftermarket penetration.    We intend to increase our sales of aftermarket components by strengthening our relationships with independent bicycle retailers and increasing brand awareness at the consumer level. We also intend to enhance our aftermarket product offerings by increasing differentiation of our aftermarket channel components from our OEM channel components and, where appropriate, expanding into product areas adjacent to our current product lines.

Grow the industry while strengthening our leadership profile.    We will continue to focus on a number of initiatives aimed at growing our industry and reinforcing our leadership position within it by continuing product innovation, strengthening our independent retailer network through training and marketing programs and promoting cycling advocacy.

History

SRAM International Corporation was incorporated on April 29, 2011 for the purpose of becoming the holding company of SRAM Holdings, LLC and SRAM, LLC immediately prior to the consummation of this offering. SRAM was originally founded in 1987 as SRAM Corporation, an Illinois corporation, to design, manufacture and market bicycle shifters. In 1995, after becoming a market leader in shifters, we began our transformation into a full-line, mid to high-end component supplier. We have grown through internal product development and a series of strategic acquisitions, including the acquisition of the bicycle division of Mannesman Sachs AG (1997), RockShox, Inc. (2002), the bicycle business of Avid, LLC (2004), Truvativ International Co., Ltd. (2004) and Compositech, Inc. (Zipp) (2007). One of our founders, Stanley R. Day, Jr., is our President, Chief Executive Officer and Chairman of the Board. On September 30, 2008, we completed a recapitalization in which Trilantic Capital Partners and certain affiliates and co-investors purchased a $234.8 million equity interest in SRAM. We refer to this investment and recapitalization as the 2008 recapitalization. See “Certain relationships and related person transactions—Trilantic 2008 investment and recapitalization” for information on the 2008 recapitalization.

The refinancing and reorganization

Refinancing

On June 7, 2011, we entered into new credit facilities consisting of a first-lien term and revolving facility and a second-lien term facility. The aggregate proceeds from the new credit facilities were $790.0 million. The proceeds from the new credit facilities were used to repay all outstanding amounts under our prior credit facilities, which as of June 7, 2011, were $194.8 million (including accrued interest), to directly or indirectly acquire all of the equity interests in SRAM Holdings, LLC held by Trilantic and its co-investors for $575.0 million and to pay fees and expenses related to the refinancing. In connection with these transactions, SRAM Holdings, LLC amended and restated its operating agreement to create a single class of common units and eliminate the corporate governance and liquidity rights of Trilantic and its co-investors. We refer to the entering into of our new credit facilities, the use of proceeds therefrom and the related amendment to the SRAM Holdings, LLC operating agreement as the refinancing. Following the refinancing, Trilantic and its co-investors have no remaining ownership of SRAM Holdings, LLC. See “The refinancing and reorganization” and “Description of new credit facilities” for additional information.

Reorganization

Immediately prior to the consummation of this offering, the existing equity holders of SRAM Holdings, LLC will enter into a reorganization pursuant to which SRAM International Corporation, will acquire 100% of the equity

 

 

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interests of SRAM Holdings, LLC, either directly or through its wholly-owned subsidiaries, and the equity holders of SRAM Holdings, LLC will exchange their direct or indirect equity interests in SRAM Holdings, LLC for shares of common stock of SRAM International Corporation. The existing equity holders include the Day family, SRAM management and current and former directors and employees. A portion of the shares of common stock issued to the existing equity holders will be sold in the secondary portion of this offering. SRAM Holdings, LLC will continue to hold 100% of the equity interests of our operating company, SRAM, LLC. Immediately prior to this offering, SRAM Holdings, LLC will make $             million of distributions to its existing equity holders with respect to the estimated federal and state income taxes on their allocable shares of SRAM Holdings, LLC’s estimated taxable income from January 1, 2011 through the closing date of this offering. We refer to the series of transactions described in this paragraph as the reorganization. See “The refinancing and reorganization” for additional information.

Corporate information

Our principal executive offices are located at 1333 North Kingsbury Street, 4th Floor, Chicago, Illinois 60642. Our telephone number is (312) 664-8800. Our website address is www.sram.com. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

SRAM®, RockShox®, Zipp®, Avid®, TRUVATIV®, Grip Shift®, DoubleTap®, ZeroLoss™ and other trademarks or service marks of SRAM appearing in this prospectus are the property of SRAM. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of the respective holders.

Risk factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk factors” immediately following this prospectus summary, that primarily represent challenges we face in connection with the successful implementation of our strategy and the growth of our business. We expect a number of factors may cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance. Such factors include our ability to introduce new products into the market, changes in the competitive landscape for bicycle components, unfavorable economic conditions, a weakening of our brand image, a disruption in the operations of our manufacturing facilities, loss of our senior management, changes in the popularity of cycling or the number of cycling enthusiasts and other risks described under “Risk factors.”

Industry and market data

Market data and industry statistics and forecasts used throughout this prospectus are based on independent industry publications, reports by market research firms and other published independent sources. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and data and independent sources. Although we believe these sources are credible, we have not independently verified the data or information obtained from external sources.

Presentation of financial information

SRAM International Corporation was incorporated in Delaware on April 29, 2011. The historical financial information presented in this prospectus is that of SRAM Holdings, LLC, which will become a subsidiary of SRAM International Corporation prior to the consummation of this offering, for the period from October 1, 2008

 

 

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through March 31, 2011 and SRAM Corporation, the predecessor to SRAM Holdings, LLC, for periods prior to October 1, 2008. For the purposes of the financial statements and information presented in this prospectus, we refer to SRAM Holdings, LLC and SRAM Corporation as our predecessor companies for these respective periods.

Terms used in this prospectus

As used in this prospectus, the term “Day family” means (1) the lineal descendants of the maternal grandfather of Stanley R. Day, Jr. and the current and surviving spouses of such descendants and (2) various trusts for the benefit of the individuals described in clause (1) and the trustees thereof.

As used in this prospectus, the term “Trilantic and its co-investors ” refers to Trilantic Capital Partners (f/k/a Lehman Brothers Merchant Banking) and certain of its affiliates (Trilantic) and GE Capital Equity Holdings Inc., Gleacher Mezzanine Fund II, L.P., GMF SRAM Holdings Corp., Southern Farm Bureau Life Insurance Company and JPM Mezzanine Capital, LLC (its co-investors), which prior to the refinancing collectively owned 100% of the Class A units of SRAM Holdings, LLC.

As used in this prospectus, the term “premium” when used in reference to our products or brands means bicycle components commanding higher prices than their “non-premium” counterparts and which are sold primarily through the independent bicycle retailer market (primarily independent bicycle retailers and to a lesser extent sporting good chains), as opposed to mass market retailers (e.g., Wal-Mart and Target).

References in this prospectus to our “stock” or our “common stock” mean shares of SRAM International Corporation’s Class A common stock, shares of SRAM International Corporation’s Class B common stock, or both, as the context requires.

 

 

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The offering

Common stock offered

 

Class A common stock being offered by SRAM International Corporation

             shares.

 

Class A common stock being offered by the selling stockholders

             shares (or              shares if the underwriters exercise in full their option to purchase additional shares).

 

Class A common stock to be outstanding after this offering

             shares (or              shares if the underwriters exercise in full their option to purchase additional shares).

 

Class B common stock to be outstanding after this offering

            shares (or              shares if the underwriters exercise in full their option to purchase additional shares).

 

Voting rights

Each share of our Class A common stock will entitle its holder to one vote per share on all matters to be voted on by stockholders generally. Each share of our Class B common stock will entitle its holder to ten votes per share on all matters to be voted on by stockholders generally. Immediately following this offering, the holders of Class A common Stock will hold     % of our total voting power.

 

Use of proceeds

We estimate that the net proceeds to us from the sale of shares of our Class A common stock by us in this offering will be approximately $             million after deducting assumed underwriting discounts and commissions payable by us, based on an offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus. We intend to use $             million of the proceeds to us to repay $             million of indebtedness under the new credit facilities and $             million of the proceeds to us to pay fees and expenses related to this offering.

 

  We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of proceeds.”

 

Risk factors

See “Risk factors” beginning on page 11 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.

 

Directed share program

The underwriters have reserved for sale, at the initial public offering price, up to              shares of our Class A common stock being offered for sale to certain of our customers, other business associates and employees and their family members. All shares purchased through the directed share program will be

 

 

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subject to a lock-up agreement. See “Underwriting.” 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.

 

Proposed Nasdaq symbol

“SRAM”

The number of shares of our common stock outstanding after this offering excludes:

 

 

an aggregate of              shares of Class A common stock reserved for issuance under the SRAM International Corporation 2011 Incentive Award Plan that we will adopt prior to the consummation of this offering.

Except as otherwise indicated, information in this prospectus reflects or assumes the following:

 

 

the reorganization has been consummated, including the filing of our amended and restated certificate of incorporation, which provides for, among other things, the authorization of              shares of Class A common stock and              shares of Class B common stock; and

 

 

no exercise of the underwriters’ option to purchase up to              additional shares of our Class A common stock.

 

 

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Summary consolidated and pro forma financial data

The following summary consolidated and pro forma financial data of our predecessor companies should be read together with “The refinancing and reorganization,” “Use of proceeds,” “Unaudited pro forma condensed consolidated financial data,” “Selected consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and the historical financial statements and related notes included elsewhere in this prospectus. The consolidated financial statements of our predecessor companies, SRAM Holdings, LLC and SRAM Corporation, will be our historical financial statements following this offering.

We derived the actual summary consolidated financial data as of March 31, 2011 and for the three months ended March 31, 2010 and 2011 from the unaudited consolidated financial statements of SRAM Holdings, LLC, included elsewhere in this prospectus. We derived the actual summary consolidated financial data as of December 31, 2010 and for each of the three years in the period ended December 31, 2010 from the audited consolidated financial statements of SRAM Holdings, LLC, included elsewhere in this prospectus. The interim unaudited consolidated financial data was prepared on a basis consistent with that used in preparing our annual audited consolidated financial statements and includes all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of the financial position and results of operations for the unaudited periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.

The unaudited pro forma condensed consolidated statement of operations data for the year ended December 31, 2010 and for the three months ended March 31, 2011 presents our consolidated results of operations, and the unaudited pro forma condensed consolidated balance sheet data as of March 31, 2011 presents our consolidated financial position, after giving effect to the refinancing and reorganization described under “The refinancing and reorganization,” this offering and the use of the estimated net proceeds from this offering described under “Use of proceeds,” as if such transactions occurred on January 1, 2010 for the unaudited pro forma condensed consolidated statement of operations, and, as if such transactions occurred on March 31, 2011 for the unaudited pro forma condensed consolidated balance sheet.

 

     Predecessor(1)               Successor(1)  

(in thousands, except per share/unit
data)

  Actual              Pro forma as adjusted   
  Year ended December 31,     Three months
ended March 31,
             Year ended
December 31,
    Three months
ended March 31,
 
  2008     2009     2010     2010     2011            2010     2011  
   
 

Statement of operations data:

                   

Net sales

  $ 478,354      $ 399,581      $ 524,187      $ 122,037      $ 146,460            $                    $                 

Cost of sales

    310,725        239,448        312,954        72,145        86,267             
                     

Gross profit

    167,629        160,133        211,233        49,892        60,193             

Operating expenses

                   

General and administrative expense

    77,846        29,042        33,913        6,999        9,368             

Sales and marketing expense

    49,480        27,934        40,579        8,684        11,525             

Product development expense

    46,506        27,799        37,179        8,603        10,296             

Recapitalization costs(2)

    8,952                                         
                     
    182,784        84,775        111,671        24,286        31,189             
                     

Income (loss) from operations

    (15,155     75,358        99,562        25,606        29,004             

Other income (expense)

                   

Interest expense, net

    (21,703     (36,245     (32,634     (8,395     (3,716          

Foreign currency exchange gain (loss)

    4,072        (3,221     237        3,417        (3,058          
                     

Other expense, net

    (17,631     (39,466     (32,397     (4,978     (6,774          
                     

Income (loss) before income taxes

    (32,786     35,892        67,165        20,628        22,230             

Income tax expense

    15,838        14,373        17,193        4,348        4,457             
                     

Net income (loss)(3)

  $ (48,624   $ 21,519      $ 49,972      $ 16,280      $ 17,773            $                   $                
                     

 

 

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     Predecessor(1)             Successor(1)  

(in thousands, except per share/unit data)

  Actual            Pro forma as adjusted   
  Year ended
December 31,
  Three months
ended March 31,
           Year ended
December 31,
    Three months
ended March 31,
 
  2008   2009   2010   2010   2011          2010     2011  
   

Pro forma as adjusted weighted average common shares outstanding—basic and diluted

                   

Pro forma as adjusted earnings per common share—basic and diluted

                  $                   $                
   

 

      Predecessor(1)           Successor(1)  

As of March 31, 2011

(in thousands)

   Actual          

Pro forma

as adjusted

 
   
 

Balance sheet data:

         
 

Cash and cash equivalents

   $ 15,374           $                

Total assets

     240,809          

Loans and borrowings (including short-term borrowings)(4)

     198,753          

Total liabilities

     344,103          

Total members’ (deficit) equity

     (103,294       

Total stockholders’ (deficit) equity

              
   

 

(1)   Prior to this offering, the proceeds from the refinancing were used to directly or indirectly acquire all of the equity interests in SRAM Holdings, LLC held by Trilantic and its co-investors. As a result, SRAM-SP2, Inc. acquired control of SRAM Holdings, LLC and was required to apply acquisition accounting pursuant to ASC 805. Upon SRAM-SP2, Inc. obtaining control and a voting interest greater than 95%, SRAM Holdings, LLC was required to push down the new basis of SRAM-SP2, Inc. in accordance with Staff Accounting Bulletin Topic 5.J. Our historical financial statements for periods prior to the date of this transaction (our predecessor periods) were prepared on the historical cost basis of accounting, which existed prior to the acquisition. Our historical financial statements for periods subsequent to the date of this transaction (our successor periods) and our unaudited pro forma condensed consolidated financial statements will reflect the push down of the new basis of SRAM-SP2, Inc. upon acquisition with the recognition of assets and liabilities at their fair values pursuant to acquisition accounting. As a result, our results for the successor periods are not necessarily comparable to the predecessor periods.

 

(2)   Recapitalization costs relate to the 2008 recapitalization in which Trilantic and its co-investors purchased a $234.8 million equity interest in SRAM. See “Certain relationships and related person transactions–Trilantic 2008 investment and recapitalization” for a description of the 2008 recapitalization.

 

(3)   Net loss for 2008 includes expenses related to our 2008 recapitalization, including share-based compensation expense of $88.5 million in accordance with Accounting Standards Codification, or ASC, 718, Compensation—Stock Compensation. This expense was primarily due to the immediate vesting, exercise and repurchase of awards, triggered by the 2008 recapitalization, which was allocated across our cost of sales, general and administrative expense, sales and marketing expense and product development expense for the year. Net income for 2009 and 2010 includes share-based compensation expense of $3.7 million and $12.4 million, respectively, similarly allocated.

 

(4)   Loans and borrowings (including short-term borrowings) are defined as (i) the current portion of long-term debt plus (ii) long-term borrowings.

 

 

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Risk factors

An investment in our Class A common stock involves a high degree of risk. You should consider carefully the risks described below together with the financial and other information contained in this prospectus, before you decide to buy our Class A common stock. If any of the events contemplated by the following risks should occur, our business, financial condition and results of operations could be negatively affected. As a result, the market price of our Class A common stock could decline and you could lose all or part of your investment in our Class A common stock.

Risks related to our business

Successfully managing the frequent introduction of new products that satisfy changing consumer preferences is key to our success.

In order to meet the demands of the marketplace, we are focused on product innovation and continual product evolution. We introduce numerous new products each model year. For example, for our 2011 (to-date), 2010 and 2009 model years, we introduced 49, 30 and 25 new products, respectively. In addition, over 50% of our 2010 model year (July 1 through June 30) net sales were generated from products that were less than three years old. In order for us to continue to successfully introduce new products, we must properly anticipate the preferences of bicycle companies, independent bicycle retailers and consumers and invest in product development to design innovative products that meet those preferences. If we are unable to meet these demands, our products may not win specifications on new bike models or have success in the aftermarket, in which case our sales, margins and brand image could suffer. Furthermore, in order for new products to generate equivalent or greater revenues than their predecessors, they must either maintain the same or higher sales levels with the same or higher pricing, or exceed the performance of their predecessors in one or both of those areas. If our new products are unable to achieve sufficient pricing levels or we are unable to increase our sales volume to compensate, our profitability could decrease.

The bicycle component industry is highly competitive and we are subject to risks relating to competition that may adversely affect our performance.

The bicycle component industry is highly competitive. We compete with a number of other manufacturers that produce and sell bicycle components. We believe our products primarily compete on the basis of product design, innovation, customer service, manufacturing and distribution capabilities, product quality and price. Our continued success depends on our ability to continue to compete effectively against our numerous competitors, at least one of which has significantly greater financial, marketing and other resources than we have. 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 things. 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. For example, one of our competitors has developed and offers an electronic drivetrain system. An electronic drivetrain system is an electronic device that enables bike riders to shift with electronic switches instead of using conventional control levers. We currently do not offer an electronic drivetrain system to our customers. If the electronic drivetrain system gains industry acceptance among cycling enthusiasts, our business, financial condition or results of operations could be negatively affected.

In addition, we may encounter increased competition if our current competitors broaden their product offerings by beginning to produce additional types of components or through consolidation. Currently, we are one of only

 

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two suppliers offering bicycle companies a full-line of mid to high-end components used on their bikes, which we believe provides us an advantage with these customers. Our primary competitors generally compete with us in one or two of our product types. Our business, financial condition or results of operations may suffer if additional competitors are able to offer a full-line of components.

Unfavorable economic conditions could have a negative effect on our business, financial condition or results of operations.

Our business depends substantially on global economic and market conditions. For the year ended December 31, 2010, 67% of our net sales was generated from the OEM channel. A high percentage of these sales are recreational in nature and are discretionary purchases for consumers. Consumers are generally 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 of these factors exist, consumer discretionary spending could be reduced, which in turn could reduce our product sales and have a negative effect on our business, financial condition or results of operations.

In addition, 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 customers to obtain credit to finance purchases of our products or a desire of our customers to delay payment to us for the purchase of our products. Any of these effects could negatively affect our business, financial condition or results of operations.

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

We believe our bicycle components are selected by bike brand product managers at bicycle companies and by consumers in large part because of our brand reputation. Therefore, our success depends on our ability to maintain and build our brand image. We have focused on building our brands through strong relationships with the major bicycle companies and independent bicycle retailers and through marketing programs aimed at cycling enthusiasts in various media and other channels. For example, we currently sponsor over 15 professional teams and over 40 individuals in competitive cycling. In order to continue to enhance our brand image, we will need to continue to invest in sponsorships, marketing and public relations. In addition, maintaining and enhancing our brand image will depend largely on our ability to be a leader in the bicycle component industry and to continue to provide high quality products and services, which may require us to make substantial investments in areas such as product development and employee training.

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

 

 

internal product quality control issues with our components;

 

 

product quality issues on the bikes on which our components are installed;

 

 

product recalls;

 

 

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

 

 

negative publicity regarding our sponsored athletes.

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

 

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A significant disruption in the operations of our manufacturing facilities could have a negative effect on our business, financial condition or results of operations.

We have manufacturing facilities located in the United States, Europe and Asia. 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 slow down in production due to high employee turn-over 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. For example, the products manufactured at our Shen Kang, Taiwan facility accounted for 64% of our net sales in 2010. If there was a manufacturing disruption in our Shen Kang facility, we may 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.

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 President and Chief Executive Officer, Mr. Stanley R. Day, Jr. Our senior management team, which has an average tenure with us of approximately 18 years, is key to establishing our focus and executing our corporate strategies and has extensive experience in our industry and knowledge of our systems and processes.

All of our senior management are at-will employees. Given our senior management team’s extensive knowledge of the bicycle component industry and the limited number of direct competitors in the industry, we believe that it could be difficult to find replacements should any of our senior management team leave. Our inability to find suitable replacements for any of the members of our senior management team, even if the loss of service is covered in whole or in part by our key person insurance, could negatively affect our business, financial condition or results of operations.

If we cannot maintain our corporate culture, we could lose the innovation, teamwork and focus that we believe are important to our success.

We believe that an important component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork, cultivates creativity and innovation and promotes focus on execution. We have invested substantial time, energy and resources in building a highly collaborative team that works together effectively in an environment designed to promote openness, honesty, mutual respect and the pursuit of common goals. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate strategy.

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 net sales from $283.8 million in 2006 to $524.2 million in 2010, and we believe that we are well positioned to grow our business in the future. However, our future growth will depend upon various factors, including the strength of our brand image, our ability to continue to produce innovative bicycle components, consumer acceptance of our current and future bicycle components, competitive conditions in the marketplace and the continued growth of the bicycle industry as a whole. If we are unable to sustain our past growth or

 

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successfully implement our growth strategy, our business, financial condition or results of operations could be negatively affected.

We are and may become subject to intellectual property suits 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, we seek to avoid infringing the valid patents and other intellectual property rights of our competitors. However, from time to time, third parties have claimed, or may claim in the future, that our products infringe upon their proprietary rights. We will evaluate any such claim 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. We do not currently hold patent infringement insurance. Any claim, regardless of its merit, could be expensive and time consuming to defend. Moreover, if our products are found to infringe third-party intellectual property rights, we may be unable to obtain a license to use such technology, and we could incur substantial costs to redesign our products or to 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. We currently hold over 550 patents and have obtained an average of over 50 new patents per year since 2002. When appropriate, we assert our rights against those who infringe on our patents, trademarks and trade dress. However, these legal efforts may not be successful in reducing sales of bicycle components by those infringing. 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 the use of our proprietary rights by other parties in these countries. Furthermore, other bicycle component manufacturers may be able to successfully produce bicycle components which imitate our designs 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, even if we are ultimately successful in limiting the distribution of a product that infringes on us, which in turn may affect our business, financial condition or results of operations.

Our beliefs regarding the future growth of the bicycle component market are supported by qualitative data, limited sources and may not be reliable, and reduction or lack of continued growth in the popularity of cycling or the number of cycling enthusiasts could adversely affect our product sales and profits.

We generate all of our revenues from the sale of bicycle components. We attribute our historic growth in part to an increase in the number of cycling enthusiasts purchasing bikes with mid to high-end components. We expect the bicycle component market to continue to grow due to a variety of factors that impact the cycling industry, including continued growth in the number of cycling enthusiasts, increasing average retail selling prices driven by better-performing product designs and technologies, growing participation in cycling events and cycling related sports, improving cycling infrastructure, increasing consumer focus on healthier lifestyle trends, growing focus on the environment and increasing adoption of mid to high-end bicycles in emerging markets. Our beliefs regarding the outlook of the bicycle component market, however, are supported by qualitative data, limited sources and may not be reliable. If our beliefs regarding the growth of the cycling industry are incorrect and the popularity of cycling or the number of cycling enthusiasts 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.

 

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We are a supplier in the bicycle industry supply chain, and our business is dependent in part on the success of our bicycle company customers.

As a supplier in the bicycle industry supply chain, we are dependent in part on the success of the business of our customers, including, in the OEM channel, our bicycle company customers. Therefore, a decline in the business of our bicycle company customers could negatively impact our business. For example, if our bicycle company customers reduce bike production, orders from us could in turn be reduced, which could negatively affect our business, financial condition or results of operations. Similar declines in the businesses of our distributor and independent retailer customers in the aftermarket could similarly have a negative impact on our business, results of operations or financial condition.

We have significant international operations, and are therefore exposed to currency exchange rate fluctuations.

We maintain fifteen facilities located in the United States, Australia and seven other European and Asian countries and conduct business in U.S. dollars, Euros, Renminbi (RMB), Australian dollars and New Taiwan dollars. Manufacturing and conducting business in the currencies of foreign countries exposes us to fluctuations in foreign currency exchange rates relative to the U.S. dollar.

Foreign currency fluctuations can also affect the prices at which our products are sold in our international markets. Significant unanticipated changes in foreign currency exchange rates make it more difficult for us to manage pricing in our international markets. If we are unable to adjust our pricing in a timely manner to counteract the effects of foreign currency fluctuations, our pricing may not be competitive in the marketplace.

Our financial results are reported in U.S. dollars. As a result, transactions conducted in foreign currencies must be translated into U.S. dollars for reporting purposes based upon the applicable foreign currency exchange rates. Fluctuations in these foreign currency exchange rates can therefore significantly affect period-over-period comparisons.

Our international operations are exposed to risks associated with doing 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.

 

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

If we inaccurately forecast demand for our products, we may manufacture either insufficient or excess quantities, which, in either case, 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 component specifications on new bikes and on projections from the bicycle companies. In the aftermarket channel, our forecasts are based on discussions with our distributors. If actual demand for our products exceeds forecasted demand, we may not be able to produce sufficient quantities of new products in time to fulfill actual demand, which could limit our sales. 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, which could result in excess inventories. Either excess or insufficient production could have a negative effect on our business, financial condition or results of operations.

Our new credit facilities place operating restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.

Prior to this offering, we entered into our new credit facilities, consisting of a $605.0 million first-lien term and $50.0 million revolving credit facility, which was undrawn at the time of the refinancing, and a $185.0 million second-lien term credit facility. The new credit facilities contain covenants that place restrictions on us and our subsidiaries’ operating activities. These covenants, among other things, limit our ability and the ability of our subsidiaries to:

 

 

incur additional debt;

 

 

pay dividends, make distributions or repurchase stock;

 

 

transfer and sell assets, or issue equity interests of subsidiaries;

 

 

make certain investments;

 

 

prepay indebtedness;

 

 

create liens;

 

 

enter into transactions with affiliates;

 

 

change the nature of our business;

 

 

merge, consolidate or make acquisitions; and

 

 

make capital expenditures.

Our new revolving credit facility also requires us to maintain compliance with a consolidated leverage ratio while any borrowings or any letters of credit are outstanding under the facility. Our ability to comply with this financial covenant may be affected by events beyond our control. For additional information regarding our new credit facilities, see “Description of new credit facilities.”

If we are unable to comply with the covenants contained in our new credit facilities, it could constitute an event of default under our new credit facilities 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 and our subsidiaries’ assets.

 

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We have substantial leverage, and despite our substantial leverage, we and our subsidiaries may incur additional indebtedness.

As of March 31, 2011, as adjusted for the refinancing and the use of proceeds from this offering, our total indebtedness would have been approximately $         million. Our substantial level of indebtedness could have material negative consequences to us, including:

 

 

making it difficult to satisfy our obligations with respect to our indebtedness, which could ultimately cause our lenders to accelerate all amounts under our new credit facilities;

 

 

making it difficult to obtain financing in the future for working capital, capital expenditures, acquisitions or other purposes on commercially reasonable terms or at all;

 

 

increasing our vulnerability to general economic downturns and adverse industry conditions;

 

 

reducing our ability to further access the credit markets;

 

 

placing us at a competitive disadvantage compared to our competitors that have less indebtedness; and

 

 

limiting our flexibility in planning for, or reacting to, changes in our business and industry, including our ability to invest in product development.

As of March 31, 2011, as adjusted for the refinancing, our new revolving credit facility would have provided for additional borrowings of $50.0 million. In addition, although our new credit facilities contain restrictions on the incurrence of other additional indebtedness, such restrictions are subject to a number of qualifications and exceptions, and under certain circumstances indebtedness incurred in compliance with such restrictions could be substantial. To the extent new indebtedness is added to our current debt levels, the risks described in the paragraph above would increase.

An increase in interest rates would increase the interest costs on our new credit facilities and any additional variable rate indebtedness we may incur and could adversely impact our ability to refinance our indebtedness.

Borrowings under our new credit facilities are based on floating rates. An increase in interest rates would increase our debt service obligations and therefore reduce cash flow available for other corporate purposes. Further, rising interest rates could limit our ability to refinance our existing indebtedness when it matures and increase interest costs on any indebtedness that is refinanced. We may from time to time enter into agreements such as interest rate swaps or other interest rate hedging contracts. While these agreements may lessen the impact of rising interest rates, there can be no assurance that any hedging transactions will fully protect us from interest rate risk.

We are subject to certain safety and labor risks in our manufacturing facilities.

We employ approximately 2,200 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. Any accident could result in manufacturing delays, which could negatively affect our business, financial condition or results of operations. Also, the costs to defend any action or the potential liability resulting from any such accident or death, to the extent not covered by insurance, and any negative publicity associated therewith, could have a negative effect on our business, financial condition or results of operations. In addition, we have unionized workers in some of our European locations. Any strike, prolonged work stoppage or failure by us to reach a new agreement upon expiration of other union contracts could also have a negative effect on our business, financial condition or results of operations.

 

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We are and may in the future be subject to product liability claims, recalls or warranty claims, which could be expensive or damage our reputation and result in a diversion of management resources.

We are and in the future may be subject to product liability claims and other claims relating to bodily injury, property damage or other losses that result, or allegedly result, from the failure of our products to perform as expected. We may incur losses resulting from these claims or the defense of these claims. Currently we maintain product liability coverage, but there is a risk that any claims or liabilities will exceed our insurance coverage or otherwise be limited. We also cannot guarantee that we will be able to maintain product liability coverage in the future.

In the past, some of our products have been subject to recalls and in the future we may be required to or voluntarily participate in recalls involving our bicycle 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.

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 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.

Because we dual or multi source most materials and component parts required for our products, we do not believe we are dependent on any single supplier. If, however, our current suppliers, in particular the minority of those which are single-source suppliers, are unable to fulfill orders, or if we are required to transition to other suppliers, we could experience significant production delays or disruption to our business.

In addition, we purchase various raw materials and component parts in order to manufacture our products. The main commodity items purchased for production include steel, aluminum, carbon fiber and plastic. Historically, price fluctuations for these raw materials and component parts have not had a material impact on our business. In the future, however, if we experience material increases in the price of raw materials or component parts and are unable to pass on those increases to our customers, or there are shortages in the availability of such raw materials or component parts, it could negatively affect our business, financial condition or results of operations. In addition, some of our raw materials are sourced from Japan, including a significant portion of our carbon fiber. Although the recent earthquake and tsunami in Japan have not had a negative impact on our business or supply of raw materials, we continue to monitor this matter.

 

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Third party vendors manufacture and assemble approximately 15% our products, which may lead to delay in production or quality control issues.

Approximately 15% of our products are manufactured and assembled by seven different third party vendors located in Taiwan and China. The products manufactured by third parties are manufactured exclusively for us; however, we do not have any long term agreements with any of these vendors. We depend on these vendors to fill our orders on a timely basis and to manufacture our products at an acceptable cost. Should our current third party vendors become incapable of meeting our manufacturing requirements in a timely manner or cease doing business with us for any reason, we may not be able to obtain products at an acceptable cost, on a timely basis or in sufficient quantities. If we experience significant increased demand, or need to replace an existing vendor, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all.

In addition, because of our reduced oversight, there can be no assurance that our vendors will continue to manufacture and assemble products that are consistent with our standards and that comply with all applicable laws and regulations. We have occasionally received, and may in the future receive shipments of products that fail to conform to our quality control standards. While these manufacturers are separate businesses, negative publicity regarding the quality of any of our products manufactured by them could adversely affect our reputation, which could have a negative effect on our business, financial condition and results of operations.

Changes in equipment standards promulgated by major cycling associations could negatively affect us.

We believe that we have products that conform to all equipment standards promulgated by major cycling associations, such as the Union Cycliste Internationale or the USA Triathlon. However, our future products may not satisfy these standards, or existing standards may be altered in ways that adversely affect the sales of our current or future products. If a change in rule were adopted and we did not have, or were unable to manufacture, a conforming product, we may be unable to sponsor athletes in various competitions, and our business, financial condition or results of operations could be negatively affected.

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. 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 unknown matters could give rise to currently unanticipated investigation, assessment or expenditures. Furthermore, through acquisitions over the years, we have acquired a number of facilities, and we could incur material costs and liabilities relating to activities that predate our ownership. Compliance with more stringent laws or regulations

 

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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.

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.

Since 1995, we have achieved growth due in part to our ability to successfully acquire and integrate complementary businesses. Our acquisitions include the bicycle division of Mannesman Sachs AG (1997), RockShox, Inc. (2002), the bicycle business of Avid, LLC (2004), Truvativ International Co., Ltd. (2004) and Compositech, Inc. (Zipp) (2007). Acquisitions may continue to play a role in our future growth. Any future acquisitions that we might make, however, are subject to various risks and uncertainties and could have a negative impact on our 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) and the inability to achieve anticipated cost savings or operating synergies, or the risk we may not be able to effectively manage our operations at an increased scale of operations resulting from such acquisitions.

In addition, we may not be able to identify or consummate any future acquisitions on favorable terms, or at all. We may have limited opportunities to acquire businesses that we believe will enhance our product lines or our business.

Changes in our effective tax rate and our provision for income taxes could negatively affect our business, financial condition or results of operations.

Due to the global nature of our operations, we are subject to federal and state income taxes in the United States and various foreign jurisdictions. Our effective tax rate and our provision for income taxes is affected by changes in the mix of earnings and losses in jurisdictions with differing statutory tax rates, certain non-tax deductible expenses, including those arising from the requirement to expense stock options, changes in the valuation of our deferred tax assets and liabilities, and changes in accounting principles. Our tax liabilities are also impacted by the amounts we record in intercompany transactions for services, licenses, funding, and other items, which may be challenged by the tax authorities in the jurisdictions in which we operate. In addition, changes to tax laws in the jurisdictions in which we operate, such as an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense.

Currently, our foreign subsidiaries are treated as disregarded or transparent entities for U.S. federal income tax purposes, with the result that income generated by our foreign subsidiaries is subject to U.S. federal income tax on a current basis to the members of SRAM Holdings, LLC, in addition to the taxes imposed by the foreign jurisdictions in which the income is earned. Distributions of earnings and other payments to us from our foreign subsidiaries also may be subject to foreign withholding taxes. Prior to and in connection with the reorganization and this offering, we plan to implement a foreign holding company structure intended to facilitate global cash management strategies and minimize international operational and tax risks and which generally will allow us to defer U.S. income taxation of the income of our foreign subsidiaries until the earnings are repatriated to the United States by cash distributions or, in certain circumstances, deemed distributions under the U.S. tax law. In general, a U.S. taxpayer may claim a foreign tax credit against its U.S. federal income tax liability for foreign income and withholding taxes paid on its foreign-source income. However, the amount of foreign tax credit that we may claim against our U.S. federal income tax liability is subject to many limitations that may significantly restrict our ability to claim a credit for all of the foreign taxes we pay, and we may incur incremental tax costs as a result of these limitations.

 

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Risks related to our corporate structure

Control by our principal stockholders could adversely affect our other stockholders.

When this offering is completed, the Day family will beneficially own approximately     % of the voting power of our common stock (or     % of the voting power if the underwriters exercise in full their option to purchase additional shares), which will be voted in accordance with the Day family voting trust agreement. As a result, the Day family will be able to exert a significant degree of influence or actual control over our management and affairs and over matters requiring stockholder approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets and other significant business or corporate transactions. This concentrated control will limit the ability of other stockholders to influence corporate matters and, as a result, we may take actions that our other stockholders do not view as beneficial. For example, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of SRAM, which in turn could cause the market price of our Class A common stock to decline or prevent our stockholders from realizing a premium over the market price for their Class A common stock. In addition, under the “controlled company” exemption to the independence requirements of the Nasdaq, we will be exempt from the rules of the Nasdaq that require that our board of directors be comprised of a majority of independent directors, that our compensation committee be comprised solely of independent directors and that our nominating and governance committee be comprised solely of independent directors.

We are a holding company with no operations of our own, and we will depend on distributions from SRAM Holdings, LLC and its subsidiaries to meet our ongoing obligations and, if applicable, to pay cash dividends on our common stock.

We are a holding company with no operations of our own and we have no independent ability to generate revenue. Consequently, our ability to obtain operating funds depends upon distributions from SRAM Holdings, LLC and its subsidiaries. The distribution of cash and other transfers of funds by SRAM Holdings, LLC and its subsidiaries to us will be subject to restrictions. For example, our new credit facilities limit our ability to distribute cash based upon certain covenants. We will be unable to pay dividends to our stockholders or pay other expenses outside the ordinary course of business if SRAM Holdings, LLC is unable to distribute cash to us.

Following the reorganization, we will hold directly or indirectly, 100% of the equity interests of SRAM Holdings, LLC. Because SRAM Holdings, LLC is treated as a partnership for U.S. federal and state income tax purposes, we and our subsidiaries, as members of SRAM Holdings, LLC, will incur U.S. federal and state income taxes on our proportionate shares of any net taxable income of SRAM Holdings, LLC. To the extent we and our subsidiaries need funds to pay such taxes or for any other purpose, and SRAM Holdings, LLC is unable to provide such funds because of limitations in its new credit facilities or other restrictions, such inability to pay could have a negative effect on our business, financial condition and results of operations.

A significant portion of our business is conducted through foreign subsidiaries and our failure to generate sufficient cash flow from these subsidiaries, or otherwise repatriate or receive cash from these subsidiaries, could result in our inability to repay our indebtedness and other liabilities.

For the year ended December 31, 2010, 86.4% of our net sales were generated outside of the United States. Our ability to meet our debt service and other obligations with cash from foreign subsidiaries will depend upon the results of operations of these subsidiaries and may be subject to legal, contractual or other restrictions and other business considerations. In addition, dividend, interest, royalty and other payments to us from our foreign subsidiaries may be subject to foreign withholding taxes, which could reduce the amount of funds we receive from our foreign subsidiaries. Distributions of earnings and other payments received from our foreign subsidiaries may

 

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also be subject to fluctuations in currency exchange rates and legal and other restrictions on repatriation, which could further reduce the amount of funds we receive from our foreign subsidiaries. Therefore, to the extent that we must use cash generated in foreign jurisdictions to make principal or interest payments on our indebtedness or other obligations, there may be a cost associated with repatriating cash to the United States.

Our anti-takeover provisions may delay or prevent a change of control, which could negatively affect our stock price.

Upon the consummation of this offering, our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make it difficult to remove our board of directors and management and may discourage or delay “change of control” transactions, which could negatively affect the price of our stock. These provisions include, among others:

 

 

holders of our Class A common stock vote together with holders of our Class B common stock on all matters, unless otherwise required by law, including the election of directors, and our amended and restated certificate of incorporation prohibits cumulative voting in the election of directors;

 

 

immediately following this offering, our board of directors will consist of a single class, with each director serving a one-year term. However, if all shares of our Class B common are converted into Class A common stock or otherwise cease to be outstanding, our board of directors will be divided into three classes, with each class serving for a staggered three-year term;

 

 

vacancies on our board of directors, and any newly created director positions created by the expansion of the board of directors, may be filled only by a majority of remaining directors then in office;

 

 

immediately following this offering, our stockholders may act by written consent. However, if all shares of our Class B common stock are converted into Class A common stock or otherwise cease to be outstanding, actions to be taken by our stockholders will only be permitted to be effected at an annual or special meeting of our stockholders and not by written consent;

 

 

special meetings of our stockholders may be called by our chairman, president, chief executive officer or a majority of our board of directors. In addition, immediately following this offering, our secretary must also call a special meeting of stockholders upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at that meeting. However, if all shares of our Class B common are converted into Class A common stock or otherwise cease to be outstanding, our stockholders will not be permitted to call special meetings of our stockholders;

 

 

our amended and restated bylaws establish an advance notice procedure for stockholders to submit proposed nominations of persons for election to our board of directors and other proposals for business to be brought before an annual or special meeting of our stockholders; and

 

 

our board of directors may issue up to              shares of preferred stock, with designations, rights and preferences as may be determined from time to time by our board of directors.

Risks related to this offering

The requirements of being a public company may strain our resources and affect our ability to attract and retain qualified board members.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented by the Securities and Exchange Commission (SEC) and the Nasdaq. The expenses incurred by public companies

 

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generally for reporting and corporate governance purposes have been increasing and are difficult to predict. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation. In addition, our senior management has no prior experience managing a publicly traded company or complying with the increasingly complex laws pertaining to public companies described above. These obligations will require substantial attention from our senior management and partially divert their attention away from the day-to-day management of our business, which could negatively impact our business, financial condition or results of operations.

If we fail to maintain adequate internal control over financial reporting in accordance with Section 404 of Sarbanes-Oxley or if we do not remedy our material weaknesses or significant deficiencies in our internal controls it could result in inaccurate financial reporting and have a negative impact on the price of our Class A common stock or our business.

As a public company, we will be required to comply with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of Sarbanes-Oxley regarding internal control over financial reporting. Prior to becoming a public company, we are not required to be compliant with the requirements of Section 404. The process of becoming compliant with Section 404 may divert internal resources and will take a significant amount of time and effort to complete. We may experience higher than anticipated operating expenses, as well as increased independent auditor fees during the implementation of these changes and thereafter. We are required to be compliant under Section 404 with our second Annual Report on Form 10-K after the completion of this offering and at that time our management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. We will also be required to deliver an attestation report of our auditors on our management’s assessment of our internal controls. Completing documentation of our internal control system and financial processes, remediation of control deficiencies, and management testing of internal controls will require substantial effort by us.

In preparation for this offering and for future compliance with Section 404 of Sarbanes-Oxley, we and our independent auditors identified material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented, or detected and corrected on a timely basis. The material weaknesses were attributed to us not maintaining sufficient: external reporting, technical accounting and tax functions; financial reporting and closing processes with respect to complex transactions; and written policies and procedures, in each case to meet our needs as a public company. Specifically, we do not currently maintain a sufficient complement of personnel with an appropriate level of accounting and financial reporting knowledge, experience and training in the application of U.S. generally accepted accounting principles as will be required of us as a public company. We have begun implementing measures and plan to take additional steps to remediate the underlying causes of our material weaknesses. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We are enhancing the technical capability of our staff by adding resources and personnel to the accounting and finance team. Until such time as we are able to retain permanent personnel, we are engaging outside consultants to assist us.

 

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If the steps we intend to take do not remediate these material weaknesses in a timely manner, we will not be able to conclude that we have and maintain effective internal control over financial reporting. In addition, we may identify additional material weaknesses or significant deficiencies in the future. In either case, our independent registered accounting firm may not be able to issue an unqualified report on the effectiveness of our internal control over financial reporting. As a result, our ability to report our financial results on a timely and accurate basis may be adversely affected, we may be subject to sanctions or investigation by regulatory authorities and investors may lose confidence in our financial information, which in turn could adversely affect the market price of our Class A common stock.

The market price of our common stock may be volatile, which could cause the value of an investment in our stock to decline.

The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

 

 

announcements concerning our competitors or the bicycle industry;

 

 

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

 

industry-specific economic conditions;

 

 

changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ or our own performance expectations;

 

 

risks relating to our business and industry, including those described above; and

 

 

general market, political and economic conditions.

As a result of these and other factors, investors in our Class A common stock may not be able to resell their shares at or above the initial offering price or may not be able to resell them at all.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our Class A common stock. Furthermore, price volatility may be greater if the public float and trading volume of our Class A common stock is low.

In addition, in the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources, and have a negative effect on our business, financial condition or results of operations.

No public market for our Class A common stock currently exists and an active trading market may not develop or be sustained following this offering.

Before this offering, there has been no public market for our Class A common stock. An active, liquid trading market for our Class A common stock may not develop or be sustained following this offering. We have applied to have our Class A common stock approved for quotation on the Nasdaq, but we cannot assure you that our application will be approved. In addition, we cannot assure you as to the liquidity of any such market that may develop or the price that our stockholders may obtain for their shares of our Class A common stock.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

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The assumed initial public offering price of our Class A common stock is substantially higher than the pro forma net tangible book value per share of our Class A common stock outstanding prior to this offering. Therefore, if you purchase our Class A common stock in this offering, you will incur immediate substantial dilution in pro forma net tangible book value per share from the price you paid. For a further description of the dilution that you will experience immediately after this offering, please see “Dilution.”

The value of our Class A common stock may be adversely affected by additional issuances of common stock by us or sales by our principal stockholders.

Any future issuances or sales of Class A common stock by us will be dilutive to our existing common stockholders. Upon consummation of this offering, we will have             shares of Class A common stock outstanding and              shares of Class B common stock outstanding, assuming no exercise of the underwriters’ option to purchase additional shares. All              of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act. Subject to certain exceptions, the holders of approximately     % of the              shares of our common stock have signed lock-up agreements with the underwriters of this offering, under which they have agreed not to sell, transfer or dispose of, directly or indirectly, any shares of our Class A common stock or any securities convertible into or exercisable or exchangeable for Class A common stock without the prior written consent of the underwriters for a period of 180 days, subject to a possible extension under certain circumstances, after the date of this prospectus. See “Underwriting.” After this offering, the holders of approximately              shares of our Class B common stock will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to a registration rights agreement. See “Certain relationships and related person transactions—2011 refinancing and reorganization—Registration rights.” Sales of substantial amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of securities exercisable or convertible into our common stock, could adversely affect the prevailing price of our Class A common stock.

We do not intend to pay cash dividends for the foreseeable future.

SRAM International Corporation was formed on April 29, 2011 and has never declared or paid cash dividends on its common stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, restrictions contained in current or future financing instruments, including our new credit facilities, and such other factors as our board of directors deems relevant.

Even if we decide in the future to pay any dividends, we are a holding company with no independent operations of our own. As a result, we depend on SRAM Holdings, LLC and its subsidiaries for cash to pay our obligations and make dividend payments. Deterioration in the financial conditions, earnings or cash flow of SRAM Holdings, LLC and its subsidiaries for any reason could limit or impair their ability to pay cash distributions or other distributions to us and thereby limit or impair our ability to pay dividends to our stockholders.

 

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Special note regarding forward-looking statements

This prospectus includes forward-looking statements. The words “believe,” “may,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our company, our business and our management, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

 

our ability to introduce new products into the market;

 

 

changes in the competitive landscape for bicycle components;

 

 

unfavorable economic conditions;

 

 

a weakening of our brand image;

 

 

a disruption in the operations of our manufacturing facilities;

 

 

loss of our senior management;

 

 

changes in the popularity of cycling or the number of cycling enthusiasts; and

 

 

other risks included under “Risk factors” and risks described in “Management’s discussion and analysis of financial condition and results of operations” in this prospectus.

In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

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The refinancing and reorganization

Current organizational and ownership structure

Since the completion of the 2008 recapitalization in which Trilantic and its co-investors acquired a $234.8 million equity interest in SRAM, our business has been conducted through SRAM, LLC, a wholly-owned subsidiary of SRAM Holdings, LLC. For a description of the 2008 transaction, see “Certain relationships and related person transactions—Trilantic 2008 investment and recapitalization.”

Immediately prior to the completion of the refinancing described below, the ownership of SRAM Holdings, LLC was as follows:

 

 

Trilantic and its co-investors owned 3,640,000 Class A units (100% of the Class A units). As Class A unit holders, Trilantic and its co-investors were entitled to a Class A priority interest in the amount of their initial $234.8 million investment plus a 10% annual preferred return, compounded quarterly. On June 7, 2011, the Class A priority interest consisted of the $234.8 million initial investment plus $71.4 million of accrued preferred return. The Class A unit holders were also entitled to participate in distributions after the repayment of their priority interest, which we refer to as the common participation right.

 

 

The Day family, SRAM management and current and former directors and employees indirectly owned 5,460,000 Class B units (100% of the Class B units) through two holding corporations: SRAM-SP2, Inc. and SRAM International Holdings, Inc. Class B unit holders were entitled to participate in distributions after the repayment of the Class A priority interest.

 

 

SRAM management and current and former directors and employees owned 538,237 incentive units. Incentive unit holders were entitled to participate in distributions after the repayment of the Class A priority interest subject to the distribution thresholds established at the time the incentive units were granted. Distributions payable with respect to unvested incentive units are retained by SRAM until the units vest. The board of SRAM Holdings, LLC will approve the immediate vesting of these units in connection with this offering.

Refinancing

On June 7, 2011, SRAM, LLC entered into new credit facilities consisting of a first-lien term and revolving facility and a second-lien term facility. The aggregate proceeds from the new credit facilities were $790.0 million. The proceeds from the new credit facilities were used to (i) repay the entire outstanding amount under our prior credit facilities, which as of June 7, 2011, was $194.8 million (including accrued interest), (ii) acquire all of the 3,640,000 Class A units of SRAM Holdings, LLC held by Trilantic and its co-investors for $575.0 million and (iii) pay all fees and expenses related to the refinancing. The $575.0 million received by Trilantic and its co-investors was in full payment for all of their interests in SRAM Holdings, LLC and consisted of $268.8 million in respect of the common participation right and $306.2 million in respect of the priority interests of the 3,640,000 Class A units held by Trilantic and its co-investors. In connection with these transactions, SRAM Holdings, LLC amended and restated its operating agreement to combine the Class A units and the Class B units into a single class of common units and eliminate the corporate governance and liquidity rights of Trilantic and its co-investors. We refer to the entering into of our new credit facilities, the use of proceeds therefrom and the related amendment to the SRAM Holdings LLC operating agreement as the refinancing. Following the refinancing, Trilantic and its co-investors have no remaining ownership of SRAM Holdings, LLC. For additional information regarding our new credit facilities, see “Description of new credit facilities.”

 

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The following diagram depicts our organizational structure and economic ownership (which may differ from voting interests) upon consummation of the refinancing and prior to the completion of the reorganization and this offering:

LOGO

 

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Reorganization

On April 29, 2011, SRAM International Corporation, a Delaware corporation, was formed to be the issuer for this offering. Immediately prior to the consummation of this offering, the existing equity holders of SRAM Holdings, LLC will enter into a reorganization pursuant to which SRAM International Corporation will acquire 100% of the equity interests of SRAM Holdings, LLC, either directly or through its wholly-owned subsidiaries, and the equity holders of SRAM Holdings, LLC will exchange their direct or indirect equity interests in SRAM Holdings, LLC for shares of common stock of SRAM International Corporation.

The following steps will be taken to effect the reorganization:

 

 

SRAM International Corporation will file an amended and restated certificate of incorporation which will authorize two classes of common stock, Class A common stock and Class B common stock, each having the terms described in “Description of capital stock.”

 

 

SRAM Holdings, LLC will make a $             million distribution to its existing equity holders to cover the estimated federal and state income taxes payable with respect to their allocable shares of the estimated taxable income of SRAM Holdings, LLC from January 1, 2011 through the closing date of this offering.

 

 

SRAM International Corporation will indirectly acquire 5,391,839 common units of SRAM Holdings, LLC held by the Day family, SRAM management and current and former directors and employees through SRAM-SP2, Inc. and its subsidiaries. The Day family will receive              shares of Class B common stock of SRAM International Corporation in exchange for their shares of stock of SRAM-SP2, Inc. Of these shares,              shares will be converted to Class A common stock and will be sold in this offering. The SRAM management and current and former directors and employees will receive              shares of Class A common stock of SRAM International Corporation in exchange for their shares of stock of SRAM-SP2, Inc. Of these shares,              shares will be sold in this offering.

 

 

SRAM International Corporation will indirectly acquire the remaining 68,161 common units of SRAM Holdings, LLC held by foreign employees of SRAM through SRAM International Holdings, Inc. The stockholders of SRAM International Holdings, Inc. will receive              shares of Class A common stock of SRAM International Corporation in exchange for their shares of stock of SRAM International Holdings, Inc. Of these shares,              shares will be sold in this offering.

 

 

All unvested incentive units will immediately vest, and SRAM management and current and former directors and employees holding incentive units of SRAM Holdings, LLC will exchange their incentive units for              shares of Class A common stock of SRAM International Corporation. Of these shares,              shares will be sold in this offering.

We refer to the series of transactions listed above as the reorganization. In addition, prior to and in connection with the reorganization and this offering, we plan to implement a foreign holding company structure for our foreign subsidiaries intended to facilitate global cash management strategies and minimize international operational and tax risks.

 

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New organizational and capital structure

The following diagram depicts our organizational structure and economic ownership (which may differ from voting interests) immediately after the completion of the reorganization and this offering:

LOGO

 

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Immediately after the consummation of this offering, the ownership of SRAM International Corporation will be as follows:

 

 

The Day family will collectively own              shares of our Class B common stock, representing 100% of our Class B common stock and     % of the total voting power of SRAM International Corporation (or     % of the total voting power if the underwriters exercise in full their option to purchase additional shares).

 

 

SRAM management and current and former directors and employees will own              shares of our Class A common stock, representing     % of our Class A common stock and approximately     % of the total voting power of SRAM International Corporation (or     % of the total voting power if the underwriters exercise in full their option to purchase additional shares).

 

 

The investors in this offering will collectively own              shares of our Class A common stock, representing     % of our Class A common stock and     % of the total voting power of SRAM International Corporation (or     % of the total voting power if the underwriters exercise in full their option to purchase additional shares).

In addition,              shares of Class A common stock will be issuable under the SRAM International Corporation 2011 Incentive Award Plan that we will adopt prior to the consummation of this offering.

Holding company structure

Upon completion of this offering, SRAM International Corporation will be a holding company that, directly, and indirectly through its subsidiaries SRAM-SP2, Inc., SRAM-SP3, LLC and SRAM-SP4, LLC, controls SRAM Holdings, LLC, which in turn will control our operating company, SRAM, LLC. We will have no business operations or material assets other than our direct and indirect ownership of 100% of the outstanding equity interests in of SRAM Holdings, LLC and SRAM, LLC and its subsidiaries and we will control all of the business and affairs of SRAM Holdings, LLC and SRAM, LLC and its subsidiaries. We will consolidate the financial results of SRAM Holdings, LLC and SRAM, LLC and its subsidiaries into our consolidated financial statements. Our only source of cash flow from operations will be distributions from SRAM Holdings, LLC pursuant to its amended and restated operating agreement. See ‘‘Risk factors—Risks related to our corporate structure—We are a holding company with no operations of our own, and we will depend on the distributions from SRAM Holdings, LLC and its subsidiaries to meet our ongoing obligations and, if applicable, to pay cash dividends on our common stock.”

 

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Use of proceeds

We estimate that the net proceeds to us from the sale of our Class A common stock in this offering will be approximately $             million, based on an offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting assumed underwriting discounts and commissions payable by us. We intend to use $             million of the proceeds to us to repay $             million of indebtedness under our new credit facilities and $             million of the proceeds to us to pay fees and expenses related to this offering.

We expect the repayments under our new credit facilities to include $         million under our first-lien term facility, which bears interest at          and matures on June 7, 2018, and $         million under our second-lien term facility, which bears interest at          and matures on December 7, 2018. The proceeds of the new credit facilities were used to repay all outstanding amounts under our prior credit facilities, which as of June 7, 2011, 2011 were $194.8 million (including accrued interest), and to directly or indirectly acquire all of the equity interests in SRAM Holdings, LLC held by Trilantic and its co-investors. See “The refinancing and reorganization” and “Description of new credit facilities” for additional information.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, respectively, the net proceeds to us from this offering by approximately $             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 assumed underwriting discounts and commissions.

We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders.

 

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Dividend policy

We have never declared or paid cash dividends on our common stock. We do not anticipate declaring or paying any cash dividends on our common stock. We are a holding company and have no material assets other than our direct and indirect ownership of SRAM Holdings, LLC and SRAM, LLC and its subsidiaries following the reorganization. We depend on SRAM Holdings, LLC and its subsidiaries for cash to pay our obligations and make dividend payments. Our ability to pay dividends in the future is dependent upon our receipt of cash from SRAM Holdings, LLC and its subsidiaries.

In addition, we will need to comply with the restrictions contained in our financing instruments, including our new credit facilities in order to pay cash dividends. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

Immediately prior to the consummation of this offering, SRAM Holdings, LLC will make a $         million distribution to its pre-offering equity holders to cover the estimated federal and state income taxes payable with respect to their allocable shares of the estimated taxable income of SRAM Holdings, LLC from January 1, 2011 through the closing date of this offering.

 

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Capitalization

The following table sets forth our cash and capitalization as of March 31, 2011:

 

 

on an actual basis;

 

 

on a pro forma basis to give effect to the refinancing and reorganization, including (i) the incurrence of $         million of indebtedness under our new credit facilities and the application of the proceeds thereof, (ii) the application of purchase accounting, the allocation of estimated values of assets and liabilities, and the recognition of a related gain as a result of the reorganization, (iii) the vesting of all outstanding incentive units and the granting of new stock options, (iv) the conversion of 5,460,000 common units and 538,237 incentive units into              shares of Class A and              shares of Class B common stock of SRAM International Corporation and (v) the distribution of approximately $             to the pre-offering equity holders of SRAM Holdings, LLC to cover the estimated federal and state income taxes payable with respect to their allocable shares of the estimated taxable income of SRAM Holdings LLC from January 1, 2011 through the closing date of this offering; and

 

 

on a pro forma as adjusted basis, to also give effect to the issuance of             shares of Class A common stock in this offering (assuming an estimated public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus) and the use of proceeds from this offering.

 

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You should read this capitalization table together with our historical financial statements and the related notes appearing at the end of this prospectus, “The refinancing and reorganization,” “Use of proceeds,” “Unaudited pro forma condensed consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations,” “Description of new credit facilities” and the other financial information included in this prospectus.

 

      Predecessor(1)           Successor(1)  

As of March 31, 2011

(in thousands, except share/unit amounts)

   Actual           Pro forma      Pro forma as
adjusted
 
   

Cash and cash equivalents:

   $ 15,374           $                    $                
   

Debt, current and long-term(2):

   $ 198,753           $         $     
                     
 

Members’ / stockholders’ equity

            

Member units—Class A, 3,640,000 units authorized, issued and outstanding, actual; no units issued and outstanding, pro forma or pro forma as adjusted

     60,262             

Member units—Class B, 5,460,000 units authorized, issued and outstanding, actual; no units issued and outstanding, pro forma or pro forma as adjusted

                 

Member units—Common Units, no units authorized, issued and outstanding; 5,460,000 units authorized, issued and outstanding, pro forma;              units authorized, issued and outstanding, pro forma as adjusted

  

 

  

         

Member units—incentive units, 337,500 units authorized, 276,697 units issued, and 269,118 units outstanding, actual; no units issued and outstanding, pro forma or pro forma as adjusted

     3,130             

Accumulated deficit

     (177,581          

Accumulated other comprehensive income

     10,895             

Class A common stock; $0.01 par value; no shares authorized, issued and outstanding, actual;              shares authorized and              shares issued and outstanding, pro forma;              shares authorized and              shares issued and outstanding, pro forma as adjusted

                 

Class B common stock; $0.01 par value; no shares authorized, issued and outstanding, actual;              shares authorized and              shares issued and outstanding, pro forma;              shares authorized and              shares issued and outstanding, pro forma as adjusted

                 

Additional paid-in capital

                 
                     

Total members’ / stockholders’ equity (deficit)

     (103,294          
                     

Total capitalization

   $ 95,459           $         $     
   

 

(1)   Prior to this offering, the proceeds from the refinancing were used to directly or indirectly acquire all of the equity interests in SRAM Holdings, LLC held by Trilantic and its co-investors. As a result, SRAM-SP2, Inc. acquired control of SRAM Holdings, LLC and was required to apply acquisition accounting pursuant to ASC 805. Upon SRAM-SP2, Inc. obtaining control and a voting interest greater than 95%, SRAM Holdings, LLC was required to push down the new basis of SRAM-SP2, Inc. in accordance with Staff Accounting Bulletin Topic 5.J. Our historical financial statements for periods prior to the date of this transaction (our predecessor periods) were prepared on the historical cost basis of accounting, which existed prior to the acquisition. Our historical financial statements for periods subsequent to the date of this transaction (our successor periods) and our unaudited pro forma condensed consolidated financial statements will reflect the push down of the new basis of SRAM-SP2, Inc. upon acquisition with the recognition of assets and liabilities at their fair values pursuant to acquisition accounting. As a result, our results for the successor periods are not necessarily comparable to the predecessor periods.

 

(2)   Debt, current and long-term is defined as current portion of long-term debt and long-term borrowings.

 

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Dilution

If you invest in our Class A common stock, you will experience dilution to the extent of the difference between the public offering price per share you pay in this offering and the pro forma net tangible book value (deficit) per share of our common stock immediately after this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the book value per share attributable to the existing equity holders.

After giving effect to the refinancing and reorganization, our pro forma net tangible book value as of March 31, 2011 was $             million, or $             per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2011, prior to the sale of             shares of Class A common stock in this offering, but assuming the completion of the refinancing and reorganization. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the net tangible book value per share of our common stock outstanding immediately after this offering.

After giving effect to the completion of the refinancing, reorganization and the sale of             shares of Class A common stock in this offering, based upon an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering, our pro forma as adjusted net tangible book value as of March 31, 2011 would have been $             million, or $             per share of common stock. This represents an immediate increase in pro forma net tangible book value of $             per share to existing stockholders and immediate dilution of $             per share to new investors purchasing shares of common stock in this offering at the initial public offering price.

The following table illustrates this per share dilution:

 

     

Assumed initial public offering price per share

      $                

Pro forma net tangible book value (deficit) per share as of March 31, 2011 (which gives effect to the refinancing and reorganization)

   $                   

Increase in net tangible book value per share attributable to new investors

     
           

Pro forma as adjusted net tangible book value (deficit) per share as of March 31, 2011 (which gives effect to the refinancing, reorganization and this offering)

     
           

Dilution per share to new investors

      $     
   

 

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Table of Contents

The following table summarizes, as of March 31, 2011, on a pro forma as adjusted basis giving effect to the reorganization, the refinancing and the sale of              shares of Class A common stock in this offering, the number of shares of our common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid to us by existing stockholders and paid by new investors purchasing shares of our common stock from us in this offering. The table assumes an initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering.

 

       
     Shares purchased      Total consideration      Average price
per share
 
     Number    Percentage      Amount      Percentage     
   

Existing stockholders

        %       $                      %       $                

New investors

              
      

Total

        100%       $           100%      
   

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by investors participating in this offering by $             million, or increase (decrease) the percent of total consideration paid by investors participating in this offering by     %, 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 the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The tables and calculations above are based on shares of common stock outstanding as of March 31, 2011 (after giving effect to the refinancing and reorganization) and exclude an aggregate of shares of Class A common stock reserved for issuance under the SRAM International Corporation 2011 Incentive Award Plan.

 

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Table of Contents

Unaudited pro forma condensed consolidated financial data

The following unaudited pro forma condensed consolidated financial data sets forth our unaudited pro forma and historical condensed consolidated statements of operations for the year ended December 31, 2010 and for the three months ended March 31, 2011 and our unaudited pro forma and historical condensed consolidated balance sheet at March 31, 2011. Historical information is based on the audited and unaudited consolidated financial statements of SRAM Holdings, LLC appearing elsewhere in this prospectus. Prior to the date of the reorganization, SRAM Holdings, LLC and its subsidiaries is considered to be our predecessor company.

The unaudited pro forma condensed consolidated balance sheet at March 31, 2011, and the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2010 and for the three months ended March 31, 2011, is presented on:

 

 

on an actual basis;

 

 

on a pro forma basis to give effect to the refinancing and reorganization, including (i) the incurrence of $790.0 million of indebtedness under our new credit facilities and the application of the proceeds thereof, (ii) the application of purchase accounting, and the recognition of a related gain as a result of the reorganization, (iii) the vesting of all outstanding incentive units and the granting of new stock options, (iv) the conversion of 5,460,000 common units and 538,237 incentive units into              shares of Class A and              shares of Class B common stock of SRAM International Corporation, (v) the distribution of approximately $             to the pre-offering equityholders of SRAM Holdings, LLC to cover the estimated federal and state income taxes payable with respect to their allocable shares of the estimated taxable income of SRAM Holdings, LLC from January 1, 2011 through the closing date of this offering, and (vi) a provision for corporate income taxes on the income attributable to SRAM International Corporation and its subsidiaries at an effective rate of             %; and

 

 

on a pro forma as adjusted basis, to also give effect to the issuance of             shares of Class A common stock in this offering (assuming an estimated public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus) and the use of proceeds from this offering, as if such transactions occurred on March 31, 2011, for the unaudited pro forma condensed consolidated balance sheet, and as if such transactions occurred on January 1, 2010, for the unaudited pro forma condensed consolidated statements of operations.

Our unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. Presentation of our unaudited pro forma condensed consolidated financial data is prepared in conformity with Article 11 of Regulation S-X.

The unaudited pro forma condensed consolidated financial data should be read in conjunction with “The refinancing and reorganization,” “Use of proceeds,” “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. The unaudited pro forma condensed consolidated financial data is included for informational purposes only and does not purport to reflect our results of operations or financial position that would have occurred had we operated as a public company during the periods presented, and it therefore should not be relied upon as being indicative of our results of operations or financial position had the refinancing, the reorganization and this offering occurred on the dates assumed. The unaudited condensed consolidated pro forma financial data is also not a projection of our results of operations, or financial position for any future period or date. The estimates and assumptions used in preparation of the unaudited pro forma condensed consolidated financial data may be materially different from our actual experience in connection with any specific sale by the selling stockholders.

 

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Table of Contents
Unaudited pro forma condensed consolidated balance sheet  
    Predecessor(1)          Successor(1)  
As of March 31, 2011
(in thousands, except share/unit
amounts)
  Actual         

Adjustments

for the

refinancing(2)

   

Adjustments

for the

reorganization(3)

    Pro
forma
   

Adjustments

for this

offering(4)

    Pro
forma
as
adjusted
 
   
 

Assets

               

Cash and cash equivalents

  $ 15,374          $ (5,857 )(a)    $        $        $        $     

Accounts receivable, net

    88,843                      

Inventories

    29,425            3,446 (c)         

Other current assets

    8,379                      
               
                   

Total current assets

    142,021            (2,411        

Property and equipment, net

    34,268            13,131 (c)         

Intangible assets, net

    43,463            1,432,637 (c)         

Goodwill

    15,606            359,642 (c)         

Deferred financing charges and other assets

    5,451            7,649 (c)         
          (9,816 )(c)         
                   

Total assets

  $ 240,809          $ 1,800,832      $        $        $        $     
                   
 

Liabilities and members’ / stockholders’ (deficit) equity

               

Current portion of long-term debt

  $          $      $                   $                   $                   $                

Accounts payable

    67,105                      

Accrued personnel costs

    19,361                      

Accrued expenses and other current liabilities

    14,511                      

Accrued member units—incentive units

    16,536            675 (c)         

Income taxes payable

    12,784                      
                   

Total current liabilities

    130,297            675           

Long-term borrowings

    198,753            577,219 (a)         

Other noncurrent liabilities

    15,053                      
                   

Total liabilities

    344,103            577,894           
                   

 

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Table of Contents
    Predecessor(1)          Successor(1)  
As of March 31, 2011
(in thousands, except share/unit
amounts)
  Actual         

Adjustments

for the

refinancing(2)

   

Adjustments

for the

reorganization(3)

    Pro
forma
 

Adjustments

for this

offering(4)

    Pro
forma
as
adjusted
 
   
 

Members’ / stockholders’ equity

               

Member units—Class A, 3,640,000 units authorized, issued and outstanding, actual; no units issued and outstanding, pro forma or pro forma as adjusted

    60,262            (60,262 )(e)         

Member units—Class B, 5,460,000 units authorized, issued and outstanding actual; no units issued and outstanding, pro forma or pro forma as adjusted

                         

Member units—Common Units, no units authorized, issued and outstanding; 5,460,000 units authorized, issued and outstanding, pro forma;              units authorized, issued and outstanding, pro forma as adjusted

               1,102,433 (e)         

Member units—incentive units 337,500 units authorized, 276,697 units issued, and 269,118 units outstanding, actual; no units issued and outstanding, pro forma or pro forma as adjusted

    3,130            14,081 (e)         

Accumulated deficit

    (177,581         177,581 (e)         

Accumulated other comprehensive income

    10,895            (10,895 )(e)         

Class A common stock; $0.01 par value; no shares authorized, issued and outstanding, actual;              shares authorized and              shares issued and outstanding, pro forma;              shares authorized and              shares issued and outstanding, pro forma as adjusted

                         

Class B common stock; $0.01 par value; no shares authorized, issued and outstanding, actual;              shares authorized and              shares issued and outstanding, pro forma;              shares authorized and              shares issued and outstanding, pro forma as adjusted

                         

Additional paid-in capital

                         
                   

Total members’ / stockholders’ (deficit) equity

    (103,294         1,222,938           
                   

Total liabilities and members’ / stockholders’ (deficit) equity

  $ 240,809          $ 1,800,832      $                     $                   $                
   

 

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Table of Contents
Unaudited pro forma condensed consolidated statement of operations  
    Predecessor(1)          Successor(1)  
Year ended December 31, 2010
(in thousands, except share/
unit amounts)
  Actual         

Adjustments

for the

refinancing(2)

   

Adjustments

for the

reorganization(3)

    Pro
forma
   

Adjustments

for the

offering(4)

    Pro forma
as
adjusted
 
   

Net sales

  $ 524,187          $      $                   $                   $                   $                

Cost of sales

    312,954            4,779 (d)         
                   

Gross profit

    211,233            (4,779        
 

Operating expenses

               

General and administrative expense

    29,922            869 (d)         

Amortization expense

    3,991            78,169 (d)         

Sales and marketing expense

    40,579            124 (d)         

Product development expense

    37,179            434 (d)         
                   
    111,671            79,596           
                   

Income from operations

    99,562            (84,375        
 

Other income (expense)

               

Interest expense, net

    (32,634         (13,205 )(b)         

Foreign currency exchange gain

    237                      
                   

Other expense, net

    (32,397         (13,205        

Income (loss) before income taxes

    67,165            (97,580        

Income tax expense

    17,193                      
                   

Net income

  $ 49,972          $ (97,580   $          $        $     
                   

Pro forma as adjusted weighted average common shares outstanding—basic and diluted

               

Pro forma as adjusted earnings per common share—basic and diluted

                $     
   

 

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Table of Contents
Unaudited pro forma condensed consolidated statement of operations  
    Predecessor(1)          Successor(1)  

Three months ended
March 31, 2011

(in thousands, except share/
unit amounts)

  Actual         

Adjustments

for the

refinancing(2)

   

Adjustments

for the

reorganization(3)

    Pro
forma
   

Adjustments

for the

offering(4)

    Pro forma
as
adjusted
 
   

Net sales

  $ 146,460          $      $                   $                   $                   $                

Cost of sales

    86,267            1,104 (d)         
                   

Gross profit

    60,193            (1,104        
 

Operating expenses

               

General and administrative expense

    8,371            201 (d)         

Amortization expense

    997            19,542 (d)         

Sales and marketing expense

    11,525            29 (d)         

Product development expense

    10,296            100 (d)         
                   
    31,189            19,872           
                   

Income from operations

    29,004            (20,976        
 

Other income (expense)

               

Interest expense, net

    (3,716         (7,497 )(b)         

Foreign currency exchange gain

    (3,058         —             
                   

Other expense, net

    (6,774         (7,497        

Income (loss) before income taxes

    22,230            (28,473        

Income tax expense

    4,457            —             
                   

Net income

  $ 17,773          $ (28,473   $          $        $     
                   

Pro forma as adjusted weighted average common shares outstanding—basic and diluted

               

Pro forma as adjusted earnings per common share—basic and diluted

                $     
   

 

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Table of Contents

Notes to unaudited pro forma condensed consolidated financial data

(in thousands, except share/unit amounts)

Basis of presentation

 

1.   As further described in “The refinancing and reorganization,” prior to this offering, the proceeds from the refinancing were used to directly and indirectly acquire all of the equity interests in SRAM Holdings, LLC held by Trilantic and its co-investors. As a result, SRAM-SP2, Inc. acquired control of SRAM Holdings, LLC and was required to apply acquisition accounting pursuant to ASC 805. Upon SRAM-SP2, Inc. obtaining control and a voting interest greater than 95%, SRAM Holdings, LLC was required to push down the new basis of SRAM-SP2, Inc. in accordance with Staff Accounting Bulletin Topic 5.J. Our historical financial statements for the periods prior to the date of this transaction (our predecessor periods) were prepared on the historical cost basis of accounting, which existed prior to the acquisition. Our historical financial statements for periods subsequent to the date of this transaction (our successor periods) and our unaudited pro forma condensed consolidated financial statements will reflect the push down of the new basis of SRAM-SP2, Inc. upon acquisition with the recognition of assets and liabilities at their fair values pursuant to acquisition accounting. As a result, our results for the successor periods are not necessarily comparable to the predecessor periods.

Pro forma adjustments

 

2.   The amounts in this column represent the pro forma adjustments to reflect the refinancing transactions described within “The refinancing and reorganization.”

 

  a)   On June 7, 2011, SRAM Holdings, LLC entered into new credit facilities consisting of a first-lien term facility, a second-lien term facility, and a revolving facility, the proceeds of which were used to acquire approximately 80% of the Class A member units, approximately 10.5% of the Class B member units, and to refinance existing borrowings. The following table reflects the sources and uses of cash attributable to the refinancing and reorganization on a pro forma basis:

 

      (in thousands)  
          

Sources:

  

First-lien term facility

   $   605,000   

Second-lien term facility

     185,000   

Revolving credit facility

       
        

Total sources

     790,000   

Uses:

  

Distribution to certain of Trilantic and its co-investors in redemption of their portion of the Class A interest in SRAM Holdings, LLC

     459,850   

Distribution to SRAM-SP2, Inc. in redemption of 575,820 Class B units in SRAM Holdings, LLC

     115,150   

Payoff of existing debt*

     206,000   

Transaction fees and expenses

     14,857   
        

Net cash and cash equivalents

   $ (5,857
        

 

         * The March 31, 2011 balance sheet reflects $198,753 in Long-term borrowings, which reflects gross borrowings of $206,000 net of unamortized original issue discount of $7,247.

 

  b)   The first-lien term facility has a principal amount of $605,000, has a term of 7 years, and bears interest at a variable rate, as further described in “Description of new credit facilities.” Of the $605,000 borrowed on this term facility, $595,000 is comprised of Adjusted Base Rate (ABR) loans, for which the interest rate used in calculating interest expense on a pro forma basis is 4.75%, and $10,000 is comprised of a Eurodollar loan, for which the interest rate used in calculating interest expense on a pro forma basis was 5.75%.

 

         The second-lien term facility has a principal amount of $185,000, has a term of 7.5 years, and bears interest at a variable rate, as further described in “Description of new credit facilities.” Borrowings under this term facility are Eurodollar loans, for which the interest rate used in calculating interest expense on a pro forma basis is 8.5%.

 

         Our revolving credit facility provides for $50,000 in maximum borrowings, has a term of 5 years, bears interest based on the same terms as the first-lien term facility and has an annual commitment fee of 0.5% per year on the unused portion of our revolving credit facility.

 

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Table of Contents
         As a result of the refinancing, the unaudited pro forma condensed consolidated statements of operations reflect incremental interest expense on a pro forma basis for the year ended December 31, 2010 and for the three months ended March 31, 2011. The following summarizes this incremental interest expense for both periods:

 

(in thousands)

   Year
ended
December
31, 2010
    Three
months
ended
March
31,
2011
 
                  
Pro forma interest expense     

Predecessor interest expense

    

Contractual interest expense

   $ 25,913      $ 3,372   

Amortization of discount & deferred financing costs

     7,821        866   

Fair value adjustments on interest rate swaps

     (1,005     (514

Interest income

     (95     (8
                

Total predecessor interest expense

     32,634        3,716   

Successor interest expense

    

Contractual interest expense

     44,973        11,244   

Amortization of discount

     1,966        491   

Fair value adjustments on interest rate swaps

     (1,005     (514

Interest income

     (95     (8
                

Total successor interest expense

     45,839        11,213   
                

Pro forma incremental interest expense

   $ 13,205      $ 7,497   
                  
         A 1/8th% variance in the interest rates that apply to our borrowings would result in a change in pro forma interest expense of $988 and $247 for the year ended December 31, 2010, and the three months ended March 31, 2011, respectively.

 

  c)   Using proceeds received from the refinancing, SRAM-SP2, Inc. indirectly acquired the remaining Class A member units and obtained control of SRAM Holdings, LLC resulting in acquisition accounting pursuant to ASC 805. As SRAM-SP2, Inc. acquired greater than 95% of the member voting interest in SRAM Holdings, LLC. SRAM-SP2, Inc.’s basis was pushed down to SRAM Holdings, LLC’s financial statements in accordance with Staff Accounting Bulletin Topic 5.J. As of the date of this amended registration statement, the valuation of the net assets has not been completed.

 

         The following table summarizes the provisional allocation of fair value to the assets and liabilities, as of March 31, 2011.

 

(in thousands)    Historical     After
giving
effect to
the
refinancing
    Fair value     Adjustment  
                                  

Cash

   $ 15,374      $ 9,517      $ 9,517      $   

Inventory

     29,425        29,425        32,871        3,446   

Other current assets

     97,222        97,222        97,222          

Property, plant, and equipment, net

     34,268        34,268        47,399        13,131   

Intangible assets, net

     43,463        43,463        1,476,100        1,432,637   

Goodwill

     15,606        15,606        375,248        359,642   

Deferred finance charges and other assets

     5,451        13,100        3,284        (9,816

Total current liabilities

     (130,297     (130,297     (130,972     (675

Long-term borrowings

     (198,753     (779,311     (775,972     3,339   

Other non-current liabilities

     (15,053     (15,053     (15,053       
                                

Net assets

   $ (103,294   $ (682,060   $ 1,119,644      $ 1,801,704   
                                  

 

  d)   The unaudited pro forma condensed consolidated statement of operations includes adjustments to reflect incremental depreciation and amortization expense resulting from the application of acquisition accounting, using a weighted average useful life of tangible assets and definite-lived intangible assets of 2.7 and 18.0 years, respectively. Incremental depreciation and amortization expense for the year ended December 31, 2010 and for the three months ended March 31, 2011 was $84,375 and $20,976, respectively.
         Depreciation has been appropriately allocated amongst Cost of sales, General and administrative expense, Sales and marketing expense, and Product development expense. Amortization expense consists of amortization related to our tradenames, trademarks, patents, and customer relationships.

 

  e)   Following the purchase of Trilantic and its co-investors’ interest, SRAM Holdings, LLC amended and restated its operating agreement to combine the Class A units and Class B units into a single class of common units and eliminated the corporate governance and liquidity rights of Trilantic and its co-investors. Trilantic and its co-investors have no remaining ownership interest in SRAM Holdings, LLC following the refinancing.

 

        

The unaudited pro forma condensed consolidated balance sheet has been adjusted to eliminate SRAM Holdings, LLC’s historical equity pursuant to the push down of SRAM-SP2, Inc.’s new basis. Common units and incentive units have been adjusted to reflect their relative shares of SRAM-SP2 Inc.’s interest that has been pushed down to SRAM Holdings, LLC, resulting in total members’ capital of $1,119,644,

 

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allocated amongst the Common units and incentive units in accordance with the operating agreement. For the purposes of the allocation of members’ capital, the Company considered that 50% of incentive units are liability classified and accordingly excluded these units from the allocation.

 

3.   The amounts in this column represent the pro forma adjustments to reflect the reorganization described within “The refinancing and reorganization.”

 

  a)   Pursuant to the reorganization, SRAM International Corporation will acquire control of SRAM Holdings, LLC through SRAM-SP2, Inc. SRAM International Corporation will indirectly acquire 5,460,000 Common units of SRAM Holdings, LLC held by the Day family, SRAM management and current and former directors and employees through SRAM-SP2, Inc. The Day family will receive              shares of Class B common stock of SRAM International Corporation in exchange for their shares of stock of SRAM-SP2, Inc. Of these shares,              shares will be converted into Class A common stock and will be sold in this offering. SRAM management and current and former directors and employees will receive              shares of Class A common stock of SRAM International Corporation in exchange for their shares of stock of SRAM-SP2, Inc. Of these shares,              will be sold in this offering. The reorganization will be accounted for as a common control transaction. Our basis of presentation upon the execution of reorganization reflects that of SRAM International Corporation.

 

  b)   SRAM-SP2, Inc. will remove its previously recorded equity method investment in SRAM Holdings, LLC which had a carrying value of $0 as of March 31, 2011. SRAM-SP2, Inc. will record a gain for the difference between the carrying value and fair value of this equity method investment. The fair value of SRAM-SP2, Inc’s previously held equity method investment in SRAM Holdings, LLC was $            , resulting in a gain of $        .

 

  c)   Concurrent with the reorganization, SRAM Holdings, LLC will make a $         tax distribution to its existing equity holders to cover the estimated federal and state income taxes payable with respect to their allocable shares of the estimated taxable income of SRAM Holdings, LLC from January 1, 2011 through the closing date of this offering, of which $             relates to Common Unit holders and of which $             relates to Incentive Unit holders.

 

  d)   The change in control described in (2)(b) above did not result in a change in the terms of the incentive units. The following events will take place with respect to the incentive units:

 

   

Vesting of incentive units: The Board of Directors will elect to vest all outstanding incentive units on a date prior to the reorganization. The vesting of incentive units will result in $             additional compensation expense, of which $             will relate to equity classified awards and $                 will relate to liability classified awards.

 

   

Exchange of incentive units for Class A common stock in SRAM International Corporation: Concurrent with the reorganization, outstanding incentive units will be exchanged for Class A common stock in SRAM International Corporation. The exchange will result in the remeasurement of our equity classified awards to reflect the fair value of the Class A common shares for which they will be exchanged, resulting in $             additional compensation expense. The accrued liability for our liability classified awards of $             will be closed to additional paid in capital, resulting in a total adjustment to additional paid in capital of $            .

 

  e)   Upon completion of this offering, we will establish a stock compensation plan, 2011 Incentive Award Plan, through which we will grant approximately              stock options on SRAM International Corporation Class A common stock to our directors and employees. Options granted under the plan will have an exercise price of $         , a term of         years, and will cliff vest over          years. The assumed grant-date fair value of these awards, determined in accordance with ASC 718, Stock Compensation, is $             per share. The unaudited pro forma condensed consolidated statement of operations reflects additional share based compensation of $             and $             for the year ended December 31, 2010 and the three months ended March 31, 2011, respectively.

 

  f)   Prior to this offering, our predecessor company, SRAM Holdings, LLC was a limited liability company, with income and losses flowing directly to the members. Following the reorganization, our successor company, SRAM International Corporation, will incur taxes on its income and losses and will record deferred tax assets and liabilities.

 

         The unaudited pro forma condensed consolidated statements of operations reflect an increase (decrease) in the tax provision for income taxes on a pro forma basis of $             and $             for the year ended December 31, 2010 and for the three months ended March 31, 2011 at an assumed pro forma tax rate of     %, representing a combined federal, foreign and state statutory tax rate.

 

         Our deferred tax balances will change as a result of the change in the book value of our assets and liabilities. After giving effect to the aforementioned book purchase accounting adjustments and other book-tax differences, our deferred tax balances will be as follows:

 

(in thousands)    March 31, 2011  
          

Current deferred tax assets/(liabilities)

   $                

Non-current deferred tax assets/(liabilities)

  
        

Net deferred tax assets/(liabilities)

   $                
        

 

(4)  

 

  a)   Reflects the issuance of              shares of Class A common stock in this offering, assuming an estimated public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting underwriting discounts, commissions, and other offering costs of $             resulting in net proceeds of $            .

 

  b)  

Reflects the use of our equity proceeds of $             to pay down our outstanding borrowings. Our borrowings under our first-lien term facility and our-second lien term facility will decrease by $             and $            , respectively, resulting in a decrease in pro forma interest expense of $             and $             for the year ended December 31, 2010 and the three months ended March 31, 2011, respectively. After giving effect to the offering and the use of proceeds to pay down borrowings, a 1/8th% variance in the interest rates that apply to our

 

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borrowings would result in a change in pro forma interest expense of $             and $            for the year ended December 31, 2010, and the three months ended March 31, 2011, respectively.

 

         We will not retain any of the net proceeds of the shares sold in this offering.

 

  c)   Reflects the write-off of deferred financing costs and unamortized original issue discount related to the repayment of a portion of our first-lien term facility and all of our second-lien term facility using the offering proceeds.

 

  d)   Reflects the tax impact of the adjustments related to the offering at an assumed pro forma tax rate of     %, representing a combined federal, foreign and state statutory tax rate.

 

  e)   The following table illustrates the calculation of pro forma as adjusted net income per share for the year ended December 31, 2010 and the three months ended March 31, 2011:

 

      Year ended
December 31,2010
     Three
months ended
March 31, 2011
 
                   

Pro forma as adjusted net income

   $                    $                
                   

 

         Calculation of weighted average numbers of shares outstanding:

 

     Year ended
December 31,2010
   Three
months ended
March 31, 2011
     Basic    Diluted    Basic    Diluted
                     

Class A common stock

           

Class B common stock

           
                     

 

     

Year ended

December
31, 2010

    

Three

months ended
March 31, 2011

 
                   

Pro forma as adjusted earnings per share, basic and diluted

   $                    $                
                   

 

         The participation and liquidation rights of both the Class A and Class B common stock are the same.

 

         Stock options represent the only class of potentially dilutive financial instruments that will be outstanding after the refinancing.

 

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Selected consolidated financial data

The following selected consolidated financial data of our predecessor companies should be read together with “The refinancing and reorganization,” “Management’s discussion and analysis of financial condition and results of operations” and the historical financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section is not intended to replace our historical financial statements and is qualified in its entirety by the historical financial statements and related notes included in this prospectus. Our predecessor companies will be SRAM Holdings, LLC and SRAM Corporation and their consolidated financial statements will be our historical financial statements following this offering.

The statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the balance sheet data as of December 31, 2009 and 2010 are derived from the audited consolidated financial statements of our predecessor companies included in this prospectus. The statement of operations data for the years ended December 31, 2006 and 2007 and the balance sheet data as of December 31, 2006, 2007 and 2008 are derived from the audited consolidated financial statements of our predecessor companies not included in this prospectus. For comparison purposes, certain balances with respect to the financial data for the years ended December 31, 2006 and 2007 have been reclassified in order to conform with the presentation for the years ended December 31, 2008, 2009 and 2010.

The statement of operations data for each of the three months ended March 31, 2010 and 2011 and the balance sheet data as of March 31, 2011 are derived from the unaudited consolidated financial statements of SRAM Holdings, LLC, which are included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future.

 

(in thousands, except per unit data)

  Year ended December 31,     Three months ended
March 31,
 
  2006     2007     2008     2009     2010     2010     2011  
                   

Statement of operations data:

             

Net sales

  $ 283,806      $ 356,025      $ 478,354      $ 399,581      $ 524,187      $ 122,037      $ 146,460   

Cost of sales

    206,235        247,013        310,725        239,448        312,954        72,145        86,267   
       

Gross profit

    77,571        109,012        167,629        160,133        211,233        49,892        60,193   

Operating expenses

             

General and administrative expense

    12,444        23,215        77,846        29,042        33,913        6,999        9,368   

Sales and marketing expense

    19,729        22,621        49,480        27,934        40,579        8,684        11,525   

Product development expense

    21,702        27,568        46,506        27,799        37,179        8,603        10,296   

Recapitalization costs(1)

                  8,952                               
       
    53,875        73,404        182,784        84,775        111,671        24,286        31,189   
       

Income (loss) from operations

    23,696        35,608        (15,155     75,358        99,562        25,606        29,004   

Other income (expense)

             

Interest expense, net

    (3,205     (2,736     (21,703     (36,245     (32,634     (8,395     (3,716

Foreign currency exchange gain (loss)

    (3,734     (3,993     4,072        (3,221     237        3,417        (3,058
       

Total other expense, net

    (6,939     (6,729     (17,631     (39,466     (32,397     (4,978     (6,774
       

Income (loss) before income taxes

    16,757        28,879        (32,786     35,892        67,165        20,628        22,230   

Income tax expense

    5,169        10,866        15,838        14,373        17,193        4,348        4,457   
       

Net income (loss)(2)

  $ 11,588      $ 18,013      $ (48,624   $ 21,519      $ 49,972      $ 16,280      $ 17,773   
       

 

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(in thousands, except per unit data)

   As of December 31,     As of March 31,  
   2006     2007      2008     2009     2010     2011  
           

Balance sheet data:

             

Cash and cash equivalents

   $ 13,557      $ 10,309       $ 27,100      $ 33,689      $ 19,409      $ 15,374   

Total assets

     151,315        236,703         251,632        238,334        249,275        240,809   

Loans and borrowings (including short-term borrowings)(3)

     40,000        109,332         339,356        301,428        227,103        198,753   

Stockholders’ loans

     (156                                    

Total liabilities

     121,679        216,477         441,193        404,655        373,185        344,103   

Total Members’ equity (deficit)

     29,636        20,225         (189,561     (166,321     (123,910     (103,294
           

 

(1)   The recapitalization costs relate to the 2008 recapitalization in which Trilantic and its co-investors purchased a $234.8 million equity interest in SRAM. See “Certain relationships and related person transactions–Trilantic 2008 investment and recapitalization” for a description of the 2008 recapitalization.

 

(2)   Net loss for 2008 includes expenses related to our 2008 recapitalization, including share-based compensation expense of $88.5 million in accordance with ASC 718, Compensation—Stock Compensation, which was allocated across our cost of sales, general and administrative expense, sales, and marketing expense and product development expense for the year. This expense was primarily due to the immediate vesting, exercise and repurchase of awards, triggered by the 2008 recapitalization. Net income for the years ended December 31, 2009 and 2010, and for the three months ended March 31, 2011 includes share-based compensation expense of $3.7 million, $12.4 million, and $3.6 million, respectively, similarly allocated.

 

(3)   Loans and borrowings (including short-term borrowings) are defined as (i) the current portion of long-term debt plus (ii) long-term borrowings.

 

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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 “Prospectus summary—Summary consolidated financial data,” “Selected consolidated financial data” and our historical financial statements included elsewhere in this prospectus. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in the sections entitled “Risk factors” and “Special note regarding forward-looking statements” included elsewhere in this prospectus.

Overview

We are a leading global designer, manufacturer and marketer of premium bicycle components. We believe consumers recognize our brands for innovative design. Our products include drivetrain systems, suspension, brakes, internal gear hubs and wheelsets, all of which are essential components used on road bikes, mountain bikes or pavement bikes.

We operate in two distribution channels, the OEM and aftermarket channels, which correspond to our two reportable segments, OEM and aftermarket. In the OEM channel, we market our products to bicycle companies as original equipment components for new bikes that they sell to consumers through independent bicycle retailers. Although our products are specified for use by bicycle companies for their new bike models, we sell our products directly to the bicycle factories that manufacture bike frames and assemble bikes on behalf of bicycle companies in accordance with their specifications. Generally, during the second quarter we receive clarification of these specifications for our coming model year (July 1 through June 30). We then refine our internal forecast for annual production based on this information and historical production levels. However, production does not occur until receipt of customer orders. Given this process, we do not carry significant inventory and we have the flexibility to respond to subsequent changes in demand by adjusting production throughout the year.

We sell aftermarket products through distributors to independent bicycle retailers, who in turn sell them to consumers for replacements, upgrades or custom bike builds. Additionally, we sell a limited number of our premium aftermarket products directly to independent bicycle retailers in the United States. We base our production of aftermarket components on our frequent interaction with the distributors and dealers who sell our aftermarket products. Because we are able to achieve higher prices for our aftermarket components, our aftermarket components have higher margins than their OEM counterparts.

For the three months ended March 31, 2011, OEM and aftermarket sales represented 67% and 33%, respectively, of our total sales, as compared to 67% and 33% of our sales for the year ended December 31, 2010, 67% and 33% of our sales for the year ended December 31, 2009, and 74% and 26% of our sales for the year ended December 31, 2008. We attribute the growth of our aftermarket segment since 2008 to an increased internal focus and external marketing efforts, as well as general economic conditions, as discussed below. We expect the percentage of sales of our two segments in the foreseeable future to remain similar to 2010 and the three months ended March 31, 2011.

We focus on a variety of key indicators to monitor our financial performance, including net sales and operating income. For the three months ended March 31, 2011, our net sales increased from $122.0 million to $146.5 million and our operating income increased from $25.6 million to $29.0 million, as compared to the three months ended March 31, 2010. For the year ended December 31, 2010, our net sales increased from $399.6

 

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million to $524.2 million and our operating income increased from $75.4 million to $99.6 million, as compared to 2009. We attribute these increases to increased market penetration due to new product introductions, increased cycling participation leading to growth in our industry and continued specification gains at our OEM customers.

Other significant activities during the year ended December 31, 2010 and the three months ended March 31, 2011 included:

 

 

The refinancing of our credit facilities in April 2010, which resulted in a significant decrease in the average interest rate on our indebtedness and lower interest expense.

 

 

The implementation of the first phase of a three-phase restructuring plan for our German operations, which reduces our German workforce as we shift manufacturing from Germany to our Taiwan plant. We implemented this restructuring plan in order to take advantage of lower manufacturing costs in Taiwan and to reduce excess capacity at our German facility resulting from a shift of bike production by bicycle companies from Europe to Asia. In the first phase of the plan, 74 employees were released as of December 31, 2010 through a combination of early retirement, voluntary resignations or the acceptance of a severance package that included severance pay, retraining and job search assistance. In the second phase of the plan, we expect to release up to 27 employees as of July 31, 2011 and provide them with a severance package that will include severance pay, retraining and job search assistance. In the third phase of the plan, we expect to release up to 29 employees as of July 31, 2012 and provide them with a severance package that will include severance pay, retraining and job search assistance. The restructuring plan was paid for by our contributions with additional benefits provided by the German government. The training and release of employees in phases two and three will depend upon the successful transfer of production to our Taiwan facility. The German facility will remain a product development center and customer training and service center. In connection with this restructuring plan, we expect to incur total severance expenses of $10.9 million, of which $8.0 million was incurred in 2010. We incurred an additional $0.8 million of expenses in the three months ended March 31, 2011.

 

 

Investments in property and equipment of $17.9 million, including the construction of our new Indianapolis manufacturing and product development facility, which provides us with additional production capacity in the U.S. and office space for our expanding product development and sales and marketing functions and replaces our old facility.

Key trends affecting our business

In the OEM channel, our business is impacted by global economic conditions. For example, in 2009, in response to the global recession, bicycle companies decreased production of new bikes, which in turn led to a decrease of our component sales in the OEM channel. According to the National Bicycle Dealers Association, the number of bikes sold in the United States decreased to 14.9 million in 2009 from 18.5 million in 2008, as reported in its U.S. Bicycle Market 2009 and 2008 reports. We believe this volume decrease is indicative of the volume change that occurred in the independent bicycle retailer market during this period. In response to these economic conditions, we took a number of steps in 2009 to reduce our expenses in order to mitigate the effect of the recession on our results of operations. The actions we took included a reduction in labor costs in our manufacturing facilities, reductions in bonuses and pay increases, a hiring freeze, reduced travel and outside consulting expenses, a decrease in marketing expenses and a reduction in capital expenditures. We were also able to partially offset our reduced net sales in the OEM channel in 2009 by increased sales of our higher-margin aftermarket products. In 2010, our expenses and capital expenditures increased from the reduced 2009 levels as economic conditions improved and our spending levels increased in response to increasing bike production volumes and to support further growth. According to the National Bicycle Dealers Association, the number of bikes sold in the United States increased to 19.8 million in 2010 from 14.9 million in 2009, as

 

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reported in its U.S. Bicycle Market 2010 and 2009 reports. We believe this volume increase is indicative of the volume change that occurred in the independent bicycle center market during this period.

We believe a key driver of our net sales and margins in both the OEM and aftermarket channels has been our ability to continually develop innovative new products, which enables us to increase specifications of our components on new bike models as well as increase aftermarket sales. Our product development lifecycle enables us to maintain a constant innovation pipeline, allowing us to continually capture specifications on new bike models. We expect our ability to continue to develop innovative new products will be key to our future growth. In addition, in recent years we have generally been able to achieve price increases of 2% to 3% on existing products across our product base.

We believe our business in both the OEM and aftermarket channels has also been impacted by other trends affecting the cycling industry generally, such as growth in the number of cycling enthusiasts, growing participation in cycling events and cycling related sports, improving cycling infrastructure, increasing consumer focus on healthier lifestyle trends, growing focus on the environment and increasing purchases of mid to high-end bikes in emerging markets. We expect these positive growth trends to continue in 2011. For additional information on factors that we believe may impact the cycling industry, see “Business—Market overview and opportunity—Outlook.”

Financial information and the refinancing and reorganization

The financial results presented in this section are those of our predecessors, SRAM Holdings, LLC and SRAM Corporation. See “Prospectus summary—Presentation of financial information.” Upon consummation of this offering, SRAM International Corporation will acquire 100% of the equity interests of SRAM Holdings, LLC. SRAM International Corporation will be a holding company that directly, and indirectly through its subsidiaries controls SRAM Holdings, LLC, which in turn will control our operating company, SRAM, LLC. We will have no business operations or material assets other than our ownership of 100% of the outstanding equity interests of SRAM Holdings, LLC and its subsidiaries, including SRAM, LLC, and we will control the business and affairs of SRAM Holdings, LLC and SRAM, LLC and its subsidiaries.

On June 7, 2011, SRAM, LLC entered into new credit facilities consisting of a first-lien term and revolving facility and a second-lien term facility. As a result of the refinancing, our results of operations and liquidity will be impacted by: a $2.8 million expense associated with the write-off of unamortized deferred financing costs with respect to our prior credit facilities, the incurrence of $790.0 million in additional debt under our new credit facilities and the payment of $575.0 million to Trilantic and its co-investors to acquire their equity interests in SRAM Holdings, LLC. In addition, as a result of the refinancing, SRAM-SP2, Inc. will recognize a gain of $             million by obtaining control of SRAM Holdings, LLC.

Our results of operations and liquidity will also be affected as a result of the reorganization and this offering in a number of significant ways. In the quarter in which the reorganization is consummated, our historical financial statements will reflect the gain recognized by SRAM-SP2, Inc. resulting from its obtaining control over SRAM Holdings, LLC during the refinancing. Also in this quarter, we expect to incur an expense of approximately $             million related to the immediate accelerated vesting of incentive compensation units of SRAM Holdings, LLC, to incur expenses and fees of approximately $             million related to the reorganization and this offering, and to make a distribution of approximately $             million to SRAM Holdings, LLC’s pre-offering equity holders to cover the estimated federal and state income taxes payable with respect to their allocable shares of the estimated taxable income of SRAM Holdings, LLC from January 1, 2011 through the closing date of this offering. In addition, prior to and in connection with the reorganization, we intend to liquidate SRAM Cycling Fund, LLC and donate its assets of $             million to a newly-formed non-profit entity, the purpose of which will be to make grants exclusively to charitable organizations that promote safe cycling and the public

 

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health and environmental benefits of cycling as a form of recreation or transportation. This donation represents the remaining undistributed amount from our initial $10.0 million capitalization of SRAM Cycling Advocacy Fund, LLC in 2008. As a result of this donation, we no longer expect to incur significant ongoing monthly or annual expenses for cycling advocacy efforts through SRAM Cycling Advocacy Fund, LLC. For additional information regarding the refinancing and reorganization, see “The refinancing and reorganization.”

In addition, we expect the following changes will have an ongoing impact on our results of operations and liquidity after the consummation of the refinancing, the reorganization and this offering: we will incur an annual expense in connection with the granting of awards under the new SRAM International Corporation 2011 Incentive Award Plan, depreciation and amortization expense will increase as a result of purchase accounting in connection with the refinancing, income tax expense will increase as a result of our reorganization as a C-corporation and interest expense will increase as a result of increased amounts outstanding under our new credit facilities.

2008 recapitalization

On September 30, 2008, we completed the 2008 recapitalization, pursuant to which Trilantic and its co-investors purchased a $234.8 million equity interest in SRAM. In connection with the 2008 recapitalization, we recorded $88.5 million of compensation expense due to the vesting of outstanding stock options and buyout of certain options, which was allocated across our cost of sales, general and administrative expense, sales and marketing expense and product development expense for the year. In addition, we incurred transaction expenses of $9.0 million, consisting of legal, accounting and investment banking fees in connection with the 2008 recapitalization.

Note about segments    We have two reportable segments, OEM and aftermarket. In addition, we report certain “corporate” costs, consisting of general and administrative costs not allocated to the OEM or aftermarket segments, separately in our segmented results of operations below. Unallocated general and administrative costs include the following: payroll and related benefits, stock option and incentive unit compensation, finance and IT costs, transaction costs, litigation costs and other corporate operating costs.

 

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Results of operations

The statement of operations data for the years ended December 31, 2008, 2009, 2010, and for the three months ended March 31, 2010 and 2011 are derived from the consolidated financial statements of our predecessor companies, which, in the opinion of management, include all adjustments necessary for a fair presentation of our financial position and operating results for such periods and as of such dates. See note 13 of our annual financial statements and note 10 of our interim financial statements included elsewhere in this prospectus for additional information regarding our segment reporting.

Three months ended March 31, 2010 compared with three months ended March 31, 2011

 

      2010      2011          
Three months ended March 31,
(in thousands, except percentages)
   Amount     As a % of
net sales
     Amount     As a % of
net sales
     Period-to-period
change
 
   

Net sales

   $ 122,037        100.0%       $ 146,460        100.0%       $ 24,423        20.0%   

Cost of sales

     72,145        59.1%         86,267        58.9%         14,122        19.6%   
        

Gross profit

     49,892        40.9%         60,193        41.1%         10,301        20.6%   

Operating expenses

              

General and administrative expense

     6,999        5.7%         9,368        6.4%         2,369        33.8%   

Sales and marketing expense

     8,684        7.1%         11,525        7.9%         2,841        32.7%   

Product development expense

     8,603        7.0%         10,296        7.0%         1,693        19.7%   
        
     24,286        19.9%         31,189        21.3%         6,903        28.4%   
        

Income (loss) from operations

     25,606        21.0%         29,004        19.8%         3,398        13.3%   

Other income (expense)

              

Interest expense, net

     (8,395     (6.9)%         (3,716     (2.5)%         4,679        (55.7)%   

Foreign currency exchange gain (loss)

     3,417        2.8%         (3,058     (2.1)%         (6,475     (189.5)%   
        

Total other expense, net

     (4,978     (4.1)%         (6,774     (4.6)%         (1,796     36.1%   
        

Income before income taxes

     20,628        16.9%         22,230        15.2%         1,602        7.8%   

Income tax expense

     4,348        3.6%         4,457        3.0%         109        2.5%   
        

Net income

   $ 16,280        13.3%       $ 17,773        12.1%         1,493        9.2%   
        

Segment data

              

Net sales

              

OEM segment

   $ 80,951        66.3%       $ 97,670        66.7%         16,719        20.7%   

Aftermarket segment

     41,086        33.7%         48,790        33.3%         7,704        18.8%   
        

Total net sales

   $ 122,037        100.0%       $ 146,460        100%         24,423        20.0%   
                                                  

Income (loss) from operations

              

OEM segment

   $ 20,569        16.9%       $ 24,253        16.6%         3,684        17.9%   

Aftermarket segment

     13,224        10.8%         15,201        10.4%         1,977        15.0%   

Corporate

     (8,187     (6.7)%         (10,450     (7.1)%         (2,263     27.6%   
                                                  

Total income (loss) from operations

   $ 25,606        21.0%         29,004        19.8%         3,398        13.3%   
   

Net sales increased $24.4 million, or 20.0%, to $146.5 million for the three months ended March 31, 2011 from $122.0 million in the prior year period. Net sales in the OEM and aftermarket segments as a percentage of total net sales remained steady at 67% and 33%, respectively, in the three months ended March 31, 2011, as compared to 66% and 34%, respectively, in the prior year period. We increased prices on our existing products

 

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by 2% to 3% on average, as compared to the prior year period. In the OEM segment, net sales increased $16.7 million, or 20.7%, to $97.7 million for the three months ended March 31, 2011 from $81.0 million in the prior year period. We attribute this increase primarily to specification gains across our bicycle company customers, particularly on mountain and road bikes, which led to volume increases. In the aftermarket segment, net sales increased $7.7 million, or 18.8%, to $48.8 million for the three months ended March 31, 2011 from $41.1 million in the prior year period. This increase was a result of increased volumes, which we attribute to increased consumer preference for custom bike builds and component upgrades to existing bikes, continued momentum of our brands and an increase in cycling participation.

Cost of sales increased $14.1 million, or 19.6%, to $86.3 million for the three months ended March 31, 2011 from $72.1 million in the prior year period. The increase was primarily attributable to higher net sales and volume of products produced during the period, as described above. Cost of sales as a percentage of net sales remained mostly flat, dropping slightly to 58.9% for the three months ended March 31, 2011 from 59.1% in the prior year period. The three components of cost of sales are material costs, labor costs and overhead costs. For the three months ended March 31, 2011, material costs increased as a percentage of net sales to 46.7% from 46.1% in the prior year period, driven by the transfer of certain products produced in our German facility to an outside vendor. Labor costs as a percentage of net sales decreased to 4.0% for the three months ended March 31, 2011 from 4.4% in the prior year period, which was attributable to improved labor efficiency and automation in our production facilities and the reduction in labor costs in our German facility from the restructuring program. Overhead costs as a percentage of net sales decreased to 8.3% for the three months ended March 31, 2011 from 8.6% in the prior year period, primarily as a result of continued factory efficiencies and higher sales volumes covering our fixed cost base. Overhead costs for the three months ended March 31, 2011 included $0.8 million of restructuring costs for our German facility.

Gross profit increased $10.3 million, or 20.6%, to $60.2 million for the three months ended March 31, 2011 from $49.9 million in the prior year period. This increase in gross profit was primarily attributable to the higher volumes and pricing that led to our increase in net sales, as described above. Gross margin increased slightly to 41.1% for the three months ended March 31, 2011 from 40.9% in the prior year period, which reflects cost of sales remaining proportional to our net sales growth and continued growth in our aftermarket sales.

General and administrative expense includes payroll and related benefits, and other general and administrative expense for our corporate, finance and information technology functions. General and administrative expense increased $2.4 million, or 33.8%, to $9.4 million for the three months ended March 31, 2011 from $7.0 million in the prior year period. This increase was attributable to an increase in employee-related expenses of $0.7 million resulting from increased headcount and travel costs, $1.4 million of transaction expenses incurred in connection with this offering and $0.2 million of information technology and insurance costs. As a result of the higher costs, general and administrative expense as a percentage of net sales increased to 6.4% for the three months ended March 31, 2011 from 5.7% in the prior year period.

Sales and marketing expense consists primarily of wages, salaries and other employee costs, as well as advertising, trade show and sponsorship costs. Sales and marketing expense increased $2.8 million, or 32.7%, to $11.5 million for the three months ended March 31, 2011 from $8.7 million in the prior year period. This increase was primarily a result of increased spending of $1.7 million for marketing activities, including advertising costs and team and event sponsorship. Additionally we incurred higher compensation expense of $0.6 million resulting from additional headcount and $0.3 million in increased travel costs. Sales and marketing expense as a percentage of net sales increased to 7.9% for the three months ended March 31, 2011 from 7.1% in the prior year period as a result of our allocation of additional resources to marketing activities aimed at continuing to increase our visibility in the market and supporting top line sales growth.

 

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Product development expense consists primarily of wages, salaries and other employee costs, as well as product testing and prototype costs. Product development expense increased $1.7 million, or 19.7%, to $10.3 million for the three months ended March 31, 2011 from $8.6 million in the prior year period. The increase was primarily a result of higher compensation expense of $1.3 million from increased headcount from hiring of engineers and increased prototype and consulting costs of $0.3 million. Product development expense as a percentage of net sales was 7.0% for the three months ended March 31, 2011 and 2010.

Income (loss) from operations increased $3.4 million, or 13.3%, to $29.0 million for the three months ended March 31, 2011 from $25.6 million in the prior year period. The increase was a result of increased sales, which was partially offset by the increases in cost of goods sold and operating expenses, as described above. Operating margins dropped slightly to 19.8% for the three months ended March 31, 2011 from 21.0% in the prior year period. In the OEM segment, income from operations increased $3.7 million, or 17.9%, to $24.3 million for the three months ended March 31, 2011 from $20.6 million in the prior year period, while operating margins decreased slightly to 24.8% from 25.4%. The decrease in operating margin is primarily attributable to increased product development costs from additional hires and increased marketing costs. In the aftermarket segment, income from operations increased $2.0 million, or 15.0%, to $15.2 million for the three months ended March 31, 2011 from $13.2 million in the prior year period, while operating margins decreased slightly to 31.2% from 32.2%. The decline in operating margin was the result of our increased sales and marketing costs for the aftermarket segment as we continued to increase our focus on growth in this segment.

Interest expense, net decreased $4.7 million, or 55.7%, to $3.7 million for the three months ended March 31, 2011 from $8.4 million in the prior year period. The decrease was a result of lower interest rates on our prior credit facilities as a result of the refinancing of our credit facilities in April 2010, as well as a $29.0 million reduction of the amounts outstanding under our prior credit facilities throughout the three months ended March 31, 2011.

Foreign currency exchange gain (loss) changed by $6.5 million to a loss of $3.1 million for the three months ended March 31, 2011 from a gain of $3.4 million during the prior year period, primarily due to non-cash currency movement on intercompany balances between various subsidiaries, with $2.6 million of Euro-denominated balances being the largest driver of the loss.

Income tax expense increased $0.1 million, or 2.5%, to $4.5 million for the three months ended March 31, 2011 from $4.3 million in the prior year period. The increase was driven by higher foreign pretax income and corresponding tax expense. Our foreign pretax income as a percentage of total pretax income increased to 58.4% for the three months ended March 31, 2011 from 49.9% in the prior year period, and our effective foreign tax rate increased to 18.9% from 17.2% due to decreased income levels in foreign jurisdictions with lower tax rates.

 

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Year ended December 31, 2009 compared with year ended December 31, 2010

 

      2009      2010          
Year ended December 31,
(in thousands, except percentages)
   Amount     As a % of
net sales
     Amount     As a % of
net sales
     Period-to-period
change
 
   

Net sales

   $ 399,581        100.0%       $ 524,187        100.0%       $ 124,606        31.2%   

Cost of sales

     239,448        59.9%         312,954        59.7%         73,506        30.7%   
        

Gross profit

     160,133        40.1%         211,233        40.3%         51,100        31.9%   

Operating expenses

              

General and administrative expense

     29,042        7.3%         33,913        6.5%         4,871        16.8%   

Sales and marketing expense

     27,934        7.0%         40,579        7.7%         12,645        45.3%   

Product development expense

     27,799        7.0%         37,179        7.1%         9,380        33.7%   
        
     84,775        21.2%         111,671        21.3%         26,896        31.7%   
        

Income (loss) from operations

     75,358        18.9%         99,562        19.0%         24,204        32.1%   

Other income (expense)

              

Interest expense, net

     (36,245     (9.1)%         (32,634     (6.2)%         3,611        (10.0)%   

Foreign currency exchange gain (loss)

     (3,221     (0.8)%         237        0.0%         3,458        107.4%   
        

Total other expense, net

     (39,466     (9.9)%         (32,397     (6.2)%         7,069        (17.9)%   
        

Income before income taxes

     35,892        9.0%         67,165        12.8%         31,273        87.1%   

Income tax expense

     14,373        3.6%         17,193        3.3%         2,820        19.6%   
        

Net income

   $ 21,519        5.4%       $ 49,972        9.5%       $ 28,453        132.2%   
        

Segment data

              

Net sales

              

OEM segment

   $ 265,629        66.5%       $ 348,879        66.6%       $ 83,250        31.3%   

Aftermarket segment

     133,952        33.5%         175,308        33.4%         41,356        30.9%   
        

Total net sales

   $ 399,581        100.0%       $ 524,187        100.0%       $ 124,606        31.2%   
                                                  

Income (loss) from operations

              

OEM segment

   $ 61,430        15.4%       $ 83,321        15.9%       $ 21,891        35.6%   

Aftermarket segment

     41,286        10.3%         53,440        10.2%         12,154        29.4%   

Corporate

     (27,358     (6.8)%         (37,199     (7.1)%         (9,841     36.0%   
                                                  

Total income (loss) from operations

   $ 75,358        18.9%       $ 99,562        19.0%       $ 24,204        32.1%   
   

Net sales increased $124.6 million, or 31.2%, to $524.2 million in 2010 from $399.6 million in 2009. Net sales in the OEM and aftermarket segments as a percentage of total net sales remained steady at 67% and 33%, respectively, in 2010, as compared to 67% and 33%, respectively, in 2009. During 2010, we increased prices of our existing products by 2% to 3% on average. In the OEM segment, net sales increased $83.3 million, or 31.3%, to $348.9 million in 2010 from $265.6 million in 2009. We attribute this increase primarily to specification gains across our bicycle company customers, particularly on mountain and road bikes, as well as volume increases driven by a return to historical bike production levels in the OEM segment after the global recession in 2009 and increased cycling participation. In the aftermarket segment, net sales increased $41.4 million, or 30.9%, to $175.3 million in 2010 from $134.0 million in 2009. This increase was a result of increased volumes, which we attribute to increased consumer preference for custom bike builds and component upgrades to existing bikes, robust retail sales driven by economic recovery and an increase in cycling participation.

Cost of sales increased $73.5 million, or 30.7%, to $313.0 million in 2010 from $239.4 million in 2009. The increase was primarily attributable to higher net sales and volume of products produced during the year, as

 

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described above. Cost of sales as a percentage of net sales remained mostly flat, decreasing to 59.7% in 2010 from 59.9% in 2009. During 2010, material costs remained flat as a percentage of net sales at 45.9% as compared to 2009. Labor costs as a percentage of net sales decreased to 4.2% in 2010 from 4.9% in 2009, which was attributable to improved labor efficiency and automation in our production facilities. This decrease was offset by an increase in overhead costs. Overhead costs as a percentage of net sales increased in 2010 to 9.5% from 9.1% in 2009, primarily as a result of an $8.0 million expense related to the restructuring of our German operations.

Gross profit increased $51.1 million, or 31.9%, to $211.2 million in 2010 from $160.1 million in 2009. This increase in gross profit is attributable to the higher volumes and pricing that led to our increased net sales, as described above. Gross margin stayed relatively flat, increasing slightly to 40.3% in 2010 from 40.1% in 2009, which reflects cost of sales remaining proportional to our net sales growth.

General and administrative expense increased $4.9 million, or 16.8%, to $33.9 million in 2010 from $29.0 million in 2009. This increase was attributable to an increase in payroll-related expenses of $2.7 million resulting primarily from increased bonuses, an increase in incentive unit compensation expense of $3.4 million and a writedown of $1.3 million with respect to our old Indianapolis facility, which was partially offset by reduced litigation costs of $3.0 million. General and administrative expense as a percentage of net sales decreased to 6.5% in 2010 from 7.3% in 2009 as a result of our increase in net sales in 2010 coupled with the largely fixed nature of these costs.

Sales and marketing expense increased $12.6 million, or 45.3%, to $40.6 million in 2010 from $27.9 million in 2009. This increase was primarily a result of increased spending of $5.7 million for marketing activities, including advertising costs and team and event sponsorship. Additionally, we incurred an increased commission expense of $1.3 million from expansion of our independent representative program and a higher compensation expense of $2.1 million resulting from additional headcount and increased bonus expense due to our return to our regular bonus plan in 2010 following a reduction in bonuses in 2009 and a $2.1 million increase in incentive unit compensation expense. Sales and marketing expense as a percentage of net sales increased to 7.7% in 2010 from 7.0% in 2009, as a result of our allocation of additional resources to marketing activities aimed at increasing our visibility in the market and supporting top line sales growth after emerging from the recession in 2009.

Product development expense increased $9.4 million, or 33.7%, to $37.2 million in 2010 from $27.8 million in 2009. The increase was primarily a result of higher compensation expense of $4.4 million resulting from additional compensation expense due to higher headcount and bonus, increased incentive unit compensation expense of $2.7 million and increased prototype costs of $1.1 million. Product development expense as a percentage of net sales remained relatively flat from 2009 to 2010.

Income (loss) from operations increased $24.2 million, or 32.1%, to $99.6 million in 2010 from $75.4 million in 2009. The increase was a result of increased sales, which was partially offset by the increases in cost of sales and operating expenses, as described above. Operating margins remained relatively flat, increasing to 19.0% in 2010 from 18.9% in 2009. In the OEM segment, income from operations increased $21.9 million, or 35.6%, to $83.3 million in 2010 from $61.4 million in 2009, while operating margins increased slightly to 23.9% in 2010 from 23.1% in 2009. The increase in operating margin is primarily attributable to our ability to spread our cost basis over higher sales levels. In the aftermarket segment, income from operations increased $12.2 million, or 29.4%, to $53.4 million in 2010 from $41.3 million in 2009, while operating margins decreased slightly to 30.5% in 2010 from 30.8% in 2009. The decline in operating margin was the result of our increased sales and marketing costs for the aftermarket segment as we continued to increase our focus on growth in this segment.

 

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Interest expense, net decreased $3.6 million, or 10.0%, to $32.6 million in 2010 from $36.2 million in 2009. The decrease was a result of lower interest rates on our existing credit facilities as a result of the refinancing of our credit facilities in April 2010, as well as a $75.4 million reduction of the debt outstanding under our prior credit facilities throughout the year.

Foreign currency exchange gain (loss) changed by $3.5 million to a gain of $0.2 million in 2010 from a loss of $3.2 million in 2009, primarily due to non-cash currency movement on intercompany balances between various subsidiaries, with Euro-denominated balances being the largest driver of the gain at $5.0 million.

Income tax expense increased $2.8 million, or 19.6%, to $17.2 million in 2010 from $14.4 million in 2009. The increase was a result of higher foreign tax expense as a result of higher net income in 2010. Our foreign pretax income as a percentage of total pretax income increased slightly to 82.8% in 2010 from 78.9% in 2009. The pretax income increase was partially offset by a decrease in the Taiwanese income tax rate, reducing our foreign effective tax rate from 19.0% in 2009 to 15.7% in 2010.

Year ended December 31, 2008 compared with year ended December 31, 2009

 

      2008      2009          
Year ended December 31,
(in thousands, except percentages)
   Amount     As a % of
net sales
     Amount     As a % of
net sales
     Period-to-period
change
 
   

Net sales

   $ 478,354        100.0%       $ 399,581        100.0%       $ (78,773     (16.5)%   

Cost of sales

     310,725        65.0%         239,448        59.9%         (71,277     (22.9)%   
        

Gross profit

     167,629        35.0%         160,133        40.1%         (7,496     (4.5)%   

Operating expenses

              

General and administrative expense

     77,846        16.3%         29,042        7.3%         (48,804     (62.7)%   

Sales and marketing expense

     49,480        10.3%         27,934        7.0%         (21,546     (43.5)%   

Product development expense

     46,506        9.7%         27,799        7.0%         (18,707     (40.2)%   

Recapitalization costs

     8,952        1.9%                        (8,952     (100)%   
        
     182,784        38.2%         84,775        21.2%         (98,009     (53.6)%   
        

Income (loss) from operations

     (15,155     (3.2)%         75,358        18.9%         90,513        597.2%   

Other income (expense)

              

Interest expense, net

     (21,703     (4.5)%         (36,245     (9.1)%         (14,542     67.0%   

Foreign currency exchange gain (loss)

     4,072        0.9%         (3,221     (0.8)%         (7,293     (179.1)%   
        

Other expense, net

     (17,631     (3.7)%         (39,466     (9.9)%         (21,835     123.8%   
        

Income (loss) before income taxes

     (32,786     (6.9)%         35,892        9.0%         68,678        209.5%   

Income tax expense

     15,838        3.3%         14,373        3.6%         (1,465     (9.2)%   
        

Net income (loss)

   $ (48,624     (10.2)%       $ 21,519        5.4%       $ 70,143        144.3%   
        

Segment data

              
   

Net sales:

              

OEM segment

   $ 353,584        73.9%       $ 265,629        66.5%       $ (87,955     (24.9)%   

Aftermarket segment

     124,770        26.1%         133,952        33.5%         9,182        7.4%   
        

Total net sales

   $ 478,354        100.0%       $ 399,581        100.0%       $ (78,773     (16.5)%   
                                                  

Income (loss) from operations

              

OEM segment

   $ 68,487        14.3%       $ 61,430        15.4%       $ (7,057     (10.3)%   

Aftermarket segment

     34,062        7.1%         41,286        10.3%         7,224        21.2%   

Corporate

     (117,704     (24.6)%         (27,358     (6.8)%         90,346        76.8%   
        

Total income (loss) from operations

   $ (15,155     (3.2)%       $ 75,358        18.9%       $ 90,513        597.2%   
   

 

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Net sales decreased $78.8 million, or 16.5%, to $399.6 million in 2009 from $478.4 million in 2008. This decrease was primarily the result of a decline in overall bike production due to the global recession, offset in part by increased sales of our aftermarket products, which have slightly higher prices than our OEM products. Net sales in the OEM segment decreased to 67% of total net sales in 2009 compared to 74% in 2008 while net sales in the aftermarket segment increased to 33% of total net sales in 2009 compared to 26% in 2008. Our net sales in 2009 benefitted from increased sales of components for road bikes, for which prices and margins are typically higher, and the introduction of a number of high-end mountain bike components. Additionally we increased prices on average of 2 to 3% during the year. In the OEM segment, net sales decreased $88.0 million, or 24.9%, to $265.6 million in 2009 from $353.6 million in 2008. During 2009, bicycle companies reduced bike production globally in anticipation of slower consumer demand for fully assembled bikes as a result of the recession, which in turn decreased demand for our components and resulted in this decline in net sales. Despite this overall decline in bicycle production, we increased specifications on new bike models, positioning us to take advantage of rebounding volumes after the recession. In the aftermarket segment, net sales increased $9.2 million, or 7.4%, to $134.0 million in 2009 from $124.8 million in 2008. This increase was a result of a shift in retail demand during the recession from new bike purchases to component replacements and upgrades purchased in the aftermarket.

Cost of sales decreased $71.3 million, or 22.9%, to $239.4 million in 2009 from $310.7 million in 2008. This decrease was primarily attributable to lower net sales and volume during the year, as described above. As production volume decreased during the year, we were able to reduce our labor and other manufacturing-related costs by reducing the size of our manufacturing labor force, bringing certain manufacturing processes in-house and ongoing efficiency gains. These efforts reduced our effective cost of sales per unit significantly, resulting in a decrease in cost of sales as a percentage of net sales to 59.9% in 2009 from 65.0% in 2008. Material costs as a percentage of net sales decreased to 45.9% in 2009 from 49.6% in 2008, largely as a result of our ability to bring more manufacturing processes in-house and our continued aftermarket growth. Labor costs as a percentage of net sales decreased to 4.9% in 2009 from 5.3% in 2008, which was a result of ongoing efficiency gains in our factories. Overhead costs as a percentage of net sales decreased to 9.1% in 2009 from 10.1% in 2008 as a result of the consolidation of our two facilities in China, which provided $3.0 million of savings, cost reduction efforts at our factories in response to lower sales volumes and $2.1 million of savings from reduced option compensation expense.

Gross profit decreased $7.5 million, or 4.5%, to $160.1 million in 2009 from $167.6 million in 2008. This decrease in gross profit was attributable to the lower volumes that led to the decrease in our net sales, as described above. Gross margin increased to 40.1% in 2009 from 35.0% in 2008. The increase in gross margin reflected increased net sales of our higher-margin aftermarket products, as well as the labor and other manufacturing-related cost reductions taken in response to decreased demand in our OEM segment resulting from the global recession.

General and administrative expense decreased $48.8 million, or 62.7%, to $29.0 million in 2009 from $77.8 million in 2008. This decrease was primarily a result of a reduction in share-based compensation expense of $50.1 million due to the expense recognized in 2008 of $51.3 million in connection with the 2008 recapitalization, partially offset by a litigation accrual of $3.0 million in 2009 related to a European patent case. In addition, as part of our cost-reduction efforts in 2009, we eliminated bonuses for certain senior employees and we reduced the bonus payout for all other employees, resulting in an expense reduction of $2.8 million. General and administrative expense as a percentage of net sales decreased to 7.3% in 2009 from 16.3% in 2008, which reflects the cost reductions discussed above.

Sales and marketing expense decreased $21.5 million, or 43.5%, to $27.9 million in 2009 from $49.5 million in 2008. This decrease was primarily a result of a reduction in share-based compensation expense of $16.8 million due to the expense of $17.8 million recognized in 2008 in connection with the 2008 recapitalization, a reduction

 

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in marketing and advertising spending of $2.2 million, employee-related cost reduction efforts of $0.9 million (which includes the elimination of bonuses for certain senior employees and reduced bonuses for all other employees) and a reduction in travel costs of $0.8 million. Sales and marketing expense as a percentage of net sales decreased to 7.0% in 2009 from 10.3% in 2008, which reflects the cost reductions discussed above.

Product development expense decreased $18.7 million, or 40.2%, to $27.8 million in 2009 from $46.5 million in 2008. The decrease was a result of a reduction in share-based compensation expense of $15.8 million due to the expense of $17.2 million recognized in 2008 in connection with the 2008 recapitalization, cost reduction efforts aimed at streamlining the product development process, including reductions in product development employee costs from decreased bonus payments and reduced hiring in this area of $1.9 million, reductions in product development-related spending on travel of $0.5 million and reductions in outside consulting and prototype costs of $0.4 million. Product development expense as a percentage of net sales decreased to 7.0% in 2009 from 9.7% in 2008, which reflects the cost reductions discussed above.

Income (loss) from operations changed by $90.5 million to $75.4 million in 2009 from a loss of $15.2 million in 2008. The change was primarily a result of the cost reduction measures taken in 2009 in response to the global recession, combined with the fact that our 2008 loss from operations included optionholder compensation expense of $88.5 million and transaction costs of $9.0 million related to the 2008 recapitalization. Operating margin changed to 18.9% in 2009 from (3.2)% in 2008. This change was a result of the expense reductions discussed above, increased sales of higher-margin products in the aftermarket and increased sales of components for road bikes, for which prices and margins are typically higher than mountain or pavement bikes, and the successful introduction of a number of high-end higher-margin mountain bike components. Income from operations in the OEM segment decreased $7.1 million, or 10.3%, to $61.4 million in 2009 from $68.5 million in 2008. The decrease was primarily a result of a decrease in net sales. Despite the decline in OEM sales, operating margin in the OEM segment increased to 23.1% in 2009 from 19.4% in 2008. This increase resulted from increased sales of components for road bikes and the introduction of a number of high-end higher-margin mountain bike components, as discussed above. In addition, operating margins improved as a result of the cost reductions we made in response to the global recession, as discussed above. Income from operations in the aftermarket segment increased $7.2 million, or 21.2%, to $41.3 million in 2009 from $34.1 million in 2008. This increase was the result of increased sales of our aftermarket products resulting from the shift in retail demand during the recession from new bike purchases to component replacements discussed above. Operating margin in the aftermarket increased to 30.8% in 2009 from 27.3% in 2008, primarily as a result of our 2009 cost reduction efforts.

Interest expense, net increased $14.5 million, or 67%, to $36.2 million in 2009 from $21.7 million in 2008. The increase was a result of increased indebtedness and higher average interest rates on the credit facilities entered into in connection with the 2008 recapitalization, which were outstanding for only the last quarter of 2008 and consisted of a $240.0 million term loan accruing interest at a floating rate of approximately 8.0% and a $110.0 million subordinated note accruing interest at 13.0%. Prior to the 2008 recapitalization, we had a $40.0 million term facility accruing interest at 6.6% and a revolving facility with an average outstanding balance of $59.0 million accruing interest at a 5.0% average interest rate.

Foreign currency exchange gain (loss) changed by $7.3 million from a gain of $4.1 million in 2008 to a loss of $3.2 million in 2009, primarily due to non-cash currency movement on intercompany balances between various subsidiaries, with Euro-denominated balances of $5.9 million being the largest driver of the gain.

Income tax expense decreased $1.5 million, or 9.2%, to $14.4 million in 2009 from $15.8 million in 2008. The decrease was a result of lower foreign taxes paid due to lower taxable income for the year. Foreign pretax income decreased to $28.3 million in 2009 from $64.4 million in 2008. During this same period, our effective foreign tax rate decreased to 19.0% from 21.4% as income and activity shifted to lower tax jurisdictions in Asia.

 

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Liquidity and capital resources

Our primary uses of cash are to fund working capital, operating expenses, debt service and capital expenditures. Historically, our primary sources of liquidity have been cash flows from operations and the use of our credit facilities. We believe that the cash generated by operations and cash and cash equivalents, together with the borrowing availability under our new credit facilities, will be sufficient to meet our working capital needs for the foreseeable future, including investments made and expenses incurred in connection with our growth strategy.

Upon completion of this offering, we will have $             million outstanding under our new credit facilities, which will accrue interest at variable rates. Therefore, a substantial portion of our cash flows will be used to meet our interest obligations and will not be available for other purposes. Our ability to meet our debt service obligations under our new credit facilities and to reduce our total debt will depend on our future operating performance and on economic, financial, competitive and other factors, as well as future interest rates.

On or about the date of the closing of this offering, SRAM Holdings, LLC will make a $             million distribution to its pre-offering equity holders to cover the estimated federal and state income taxes payable with respect to their allocable shares of the estimated taxable income of SRAM Holdings, LLC from January 1, 2011 through the closing date of this offering. In addition, we expect to incur severance expenses in 2011 and 2012 related to the 2010 restructuring of our German operations. In the first quarter of 2011, we incurred $0.8 million of restructuring expenses, and we expect to incur $0.8 million in the second quarter of 2011 and $0.3 million in each of the third and fourth quarters of 2011 and the first and second quarters of 2012. For additional information regarding the impact of the refinancing and the reorganization on our financial condition, see “—Financial information and the refinancing and reorganization.”

Sources and uses of cash

The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods indicated. As of March 31, 2011, we had cash and cash equivalents of $15.4 million, compared to $19.4 million as of December 31, 2010, and $33.7 million as of December 31, 2009.

 

      Year ended December 31,     Three months
ended  March 31,
 
(in thousands)    2008     2009     2010     2010     2011  
   

Cash provided by (used in)

          

Operating activities

   $ 19,136      $ 58,548      $ 88,691      $ 27,554      $ 28,423   

Investing activities

     (10,328     (6,095     (17,378     (2,544     (3,637

Financing activities

     6,871        (44,979     (88,353     (25,527     (29,000

Effect on exchange rates on cash

     1,112        (885     2,760        (76     179   
        

Net change in cash and cash equivalents

   $ 16,791      $ 6,589      $ (14,280   $ (593   $ (4,035

Cash flows from operating activities

For the three months ended March 31, 2011, cash flows provided by operating activities totaled $28.4 million and consisted of $17.8 million of net income, non-cash items of $9.7 million plus $0.9 million for working capital activities, including sources of cash of $1.3 million from accounts receivable and $5.1 million from inventory, and a use of cash of $7.1 million from accounts payable, driven by increased net sales as compared to the same period in the prior year. Non-cash items for the three months ended included $4.0 million of depreciation and amortization, $3.6 million of incentive unit stock compensation expense resulting from an increase in SRAM’s valuation and $0.9 million in amortization of deferred financing fees related to our prior credit facility.

 

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For the three months ended March 31, 2010, cash flows provided by operating activities totaled $27.6 million and consisted of $16.3 million of net income, non-cash items of $7.8 million plus $3.5 million for working capital activities, including sources of cash of $4.7 million from inventory and uses of cash of $1.0 million from accounts receivable and $4.8 million from accounts payable, driven by increased net sales as compared to the same period in the prior year. Non-cash items for the three months ended included $3.8 million of depreciation and amortization, $3.7 million of incentive unit stock compensation expense resulting from an increase in SRAM’s valuation and $0.7 million in amortization of deferred financing fees related to our prior credit facilities.

In 2010, cash flows provided by operating activities totaled $88.7 million and consisted of $50.0 million of net income, non cash items of $35.5 million plus $3.2 million for working capital activities, including uses of cash of $17.4 million from accounts receivables and $5.2 million from inventory, and a source of cash of $15.0 million from accounts payable, driven by increased net sales as compared to the prior year. Non-cash items for 2010 included $15.5 million of depreciation and amortization, $12.4 million of incentive unit stock compensation expense resulting from an increase in SRAM’s valuation and $7.8 million in amortization and write off of deferred financing fees related to our prior credit facilities, which we entered into in April 2010.

In 2009, cash flows provided by operating activities totaled $58.5 million and consisted of $21.5 million of net income, $23.2 million of non cash items plus $13.9 million of working capital activities, including sources of cash of $6.5 million from accounts receivable and $8.6 million from inventory, and a use of cash of $1.8 million from accounts payable, driven by decreased sales as compared to the prior year. Non-cash items included $15.2 million of depreciation and amortization, $3.7 million of incentive unit compensation expense, $2.9 million of amortization of deferred financing fees related to the 2008 recapitalization and $2.2 million of paid-in-kind interest on the mezzanine loan we entered into in connection with the 2008 recapitalization.

In 2008, cash flows provided by operating activities totaled $19.1 million and consisted of $(48.6) million of net loss, non cash items of $81.0 million less $13.2 million for working capital activities, including uses of cash of $1.7 million from accounts receivable and $4.6 million from inventory and a use of cash of $9.2 million from accounts payable, driven by increased net sales as compared to the prior year. Non-cash items included $15.8 million of depreciation and amortization, $61.6 million of stock option compensation expense related to accelerated vesting of stock options in connection with the 2008 recapitalization, $1.5 million in amortization and write off of deferred financing fees related to the 2008 recapitalization and $0.6 million of paid-in-kind interest related to the mezzanine loan.

Cash flows from investing activities

Net cash used in investing activities relates almost entirely to capital expenditures. The majority of our capital expenditures are used for machinery, equipment and tooling purchases for our production facilities in order to support our continued growth. For the three months ended March 31, 2011 and 2010, cash flows used in investing activities totaled $3.6 million and $2.5 million, respectively. In 2010, cash flows used in investing activities totaled $17.4 million, which included $6.1 million related to the construction of our new facility in Indianapolis. In 2009, net cash used in investing activities totaled $6.1 million. Our investment expenditures were lower in 2009 than either 2008 or 2010 as we curtailed capital expenditures in response to the global recession. The focus of capital spending in 2009 was on maintaining our existing machinery, equipment and tooling for new product introductions, as opposed to purchases of new equipment. In 2008, cash flows used in investing activities totaled $10.3 million. We expect our total capital expenditures for 2011 to be consistent with 2010, with a focus on machinery, equipment and tooling purchases to support the growth of our business.

Cash flows from financing activities

For the three months ended March 31, 2011 and 2010 cash flows used in financing activities totaled $29.0 million and $25.5 million, respectively, which was attributable to payments on our prior credit facilities.

 

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In 2010, cash flows used in financing activities totaled $88.4 million. During the year, we reduced the outstanding amounts under our term facilities and prior mezzanine loans by $75.4 million. We also incurred debt issuance costs of $6.0 million related to the refinancing of our credit facilities in 2010. Additionally, we made a distribution of $7.0 million to SRAM Holdings, LLC unitholders for the income tax liability attributable to their earnings. In 2009, cash flows used in financing activities totaled $45.0 million. During 2009, we reduced the debt outstanding under our credit facilities by $42.4 million. Additionally, we made a distribution of $2.6 million to SRAM Holdings, LLC unitholders for the income tax liability attributable to their earnings. In 2008, cash flows provided by financing activities totaled $6.9 million, which was primarily attributable to the 2008 recapitalization and included borrowings under a new credit facility of $338.3 million, borrowings and repayment of debt under prior credit facilities of $86.9 million and $196.2 million, respectively, the payment of a distribution of $240.9 million to SRAM-SP2, Inc. proceeds of $12.2 million in connection with exercised options and a capital contribution for SRAM Cycling Advocacy Fund, LLC of $10.0 million.

Our borrowings

New credit facilities

Prior to this offering, SRAM, LLC entered into new credit facilities consisting of a first-lien term and revolving credit facility and a second-lien term facility. The proceeds from the new credit facilities were used to repay amounts outstanding under our prior credit facilities. For additional information regarding our new credit facilities, see “Description of new credit facilities.”

Prior credit facilities

Our prior credit facilities consisted of a $25.0 million revolving credit facility and a $290.0 million term loan facility, which would have matured on April 30, 2015. We refer to those credit facilities collectively as our prior credit facilities. The borrower under our prior credit facilities was SRAM, LLC. We entered into our prior credit facilities on April 30, 2010 to refinance the $172.1 outstanding under our then-existing credit facilities and the $113.3 million outstanding under a mezzanine credit facility, each of which we had entered into in connection with Trilantic and its co-investors’ 2008 equity investment in SRAM.

Revolving credit facility. In April 2010, SRAM, LLC entered into the revolving credit facility. The revolving credit facility included a $10.0 million letter of credit sub-facility and a swingline sub-facility of up to $10.0 million. Outstanding letters of credit were subject to a letter of credit fee equal to the Eurodollar margin on the revolver. The revolving credit facility was subject to an unused line fee of 0.50%. As of December 31, 2010 and March 31, 2011, we had no amounts drawn under the revolving credit facility and no outstanding letters of credit which would reduce the remaining undrawn portion of the revolving credit facility that is available for future borrowing.

Term loan. In April 2010, SRAM, LLC also entered into a $290.0 million term loan facility. The term loan facility was drawn in its entirety at the closing of the facility. As of March 31, 2011, we had $198.8 million outstanding under the term loan facility. Initially, the term loan amortized in quarterly installments of $0.7 million, which commenced on June 30, 2010, with a bullet payment due on the fifth anniversary of the closing date. As of March 31, 2011, no additional quarterly installments were required prior to maturity. In addition to the regularly scheduled amortization payments, an excess cash flow recapture equal to 50% is applied to the term loan for each year, with a step down to 0% based on leverage.

Collateral for prior credit facilities.    Collateral for the prior credit facilities included equity interests in our domestic subsidiaries and first priority security interests in substantially all of the existing and after-acquired real and personal property of SRAM Holdings, LLC and each guarantor (including guarantors that are foreign subsidiaries). Collateral also included 100% of the equity interests in the foreign subsidiaries of SRAM Holdings, LLC.

 

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Financial covenants.     The financial covenants in our prior credit facilities include minimum fixed charge coverage and maximum total leverage ratios.

Contractual obligations and commitments

As of December 31, 2010, our commitments and contractual obligations are as follows:

 

As of December 31,

(in thousands)

   2011      2012      2013      2014      2015      After 2015      Total  
   

Long term debt(1)

                    

GE Capital Corporation senior note

   $ 75,000       $ 80,000       $ 80,000       $       $       $       $ 235,000   

Interest on long term debt

     12,263         6,107         2,075                                 20,445   

Operating leases(2)

     4,195         3,641         3,378         2,703         2,381         3,071         19,369   

Postretirement obligations

     602         634         695         762         1,017         3,679         7,389   

Germany restructuring(3)

     3,077         1,296         296                                 4,669   

Litigation(4)

     308                                                 308   

Other long term obligations(5)

     384         125         125         125         42                 801   
        

Total contractual obligations

   $ 95,829       $ 91,803       $ 86,569       $ 3,590       $ 3,440       $ 6,750       $ 287,981   
   

 

(1)   Amounts represent expected principal and interest payments consistent with historical principal payments on our prior credit facilities. The total principal amount of $235.0 million was contractually due in full in 2015. 2011 also includes $0.8 million of accrued interest payable at December 31, 2010 due in January 2011. On June 7, 2011, we entered into our new credit facilities and repaid all outstanding amounts due under our prior credit facilities. See “The refinancing and reorganization.”

 

(2)   After 2015 amount represents certain operating lease obligations for our France, Germany, Ireland and Taiwan locations, converted at Euro rate of 0.7704 and New Taiwan Dollar rate of 30.479.

 

(3)   Germany restructuring amounts represent payments associated with the transfer of manufacturing to Asia.

 

(4)   Litigation amounts represent royalty payments and legal fees related to various legal proceedings. The royalty payments are the result of two settlement agreements entered into in connection with two patent infringement cases.

 

(5)   2011 other long term obligations represent a commitment fee of 0.50% on the unused portion of our prior revolving credit facility and commissions payable in January 2011. Other long term obligations from 2012 and onward represent only the unused fee owed on our prior revolving credit facility.

As of December 31, 2010, as adjusted for the refinancing, our commitments and contractual obligations are as folows:

 

(in thousands)    2011     2012     2013     2014     2015     After
2015
    Total  
                                                          

Long term debt(1)

              

1st lien term facility

   $ 3,025      $ 6,050      $ 6,050      $ 6,050      $ 6,050      $ 577,775      $ 605,000   

2nd lien term facility

                                        185,000        185,000   

Interest on long term debt

     27,137        44,947        44,256        44,198        44,070        84,997        289,605   

Operating leases(2)

     4,195        3,641        3,378        2,703        2,381        3,165        19,463   

Postretirement obligations

     602        634        695        762        1,017        3,679        7,389   

Germany restructuring(3)

     3,077        1,296        296                             4,669   

Litigation(4)

     308                                           308   

Other long term obligations(5)

     403        254        254        254        254        624        2,043   
        

Total contractual obligations

   $ 38,747      $ 56,822      $ 54,929      $ 53,967      $ 53,772      $ 855,240      $ 1,113,477   
                                                          

 

(1)   On June 7, 2011, we entered into our new credit facility and repaid all outstanding amounts due under our prior credit facilities. See “The refinancing and reorganization”. Amounts represent expected principal and interest payments based on new credit facilities. 2011 also includes $0.8M of accrued interest payable at December 31, 2010 due in January 2011.

 

(2)   After 2015 amount represents certain operating lease obligations for our France, Germany, Ireland and Taiwan locations, converted at Euro rate of 0.7704 and New Taiwan Dollar rate of 30.479.

 

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(3)   Germany restructuring amounts represent payments associated with the transfer of manufacturing to Asia.

 

(4)   Litigation amounts represent royalty payments and legal fees related to various legal proceedings. The royalty payments are the result of two settlement agreements entered into in connection with two patent litigation infrigements cases.

 

(5)   2011 other long term obligations represent a commitment fee of 0.50% on the unsued portion of our new revolving credit facility, commissions payable in January 2011 and capital lease payments on a fixed asset. Other long term obligations from 2012 and onward represent only the unused fee owed on new revolving credit facility and capital lease payments.

Off-balance sheet arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, sales, expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical accounting policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Critical accounting policies are those that are the most important portrayal of our financial condition and results of operations, and require our most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. In applying such policies, we must use some amounts that are based upon our informed judgments and best estimates. Estimates, by their nature, are based on judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis.

Goodwill

We review goodwill for impairment at the end of each year, and on an interim basis whenever events or changes in circumstances indicate that the carrying value of our reporting units may not be recoverable. A reporting unit is an operating segment or one level below an operating segment for which discrete financial information is prepared and is regularly reviewed by management. We define our reporting units as OEM and aftermarket, which are equivalent to our operating and reportable segments. The trends that we specifically monitor for each of our reporting units are as follows:

 

 

Significant variances in financial performance (e.g. revenues, earnings and cash flows) in relation to expectations and historical performance;

 

 

Significant changes in end markets or other economic factors; and

 

 

Significant changes in customer relationships and competitive conditions.

The impairment test for goodwill is a two-step process. The first step is to compare the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, the second step is performed to measure the amount of the impairment loss, if any. In this second step, if the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.

 

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We determine the fair value of our reporting units by combining two valuation methods. A discounted future cash flow analysis (DCF) is used to determine our consolidated enterprise value and market multiples of comparable publicly-traded companies are used to substantiate the fair value of our reporting units. For the DCF method, we prepare annual projections of future cash flows over a period of six years (the “discrete projection period”), and apply a terminal value assumption to the final year within the discrete projection period to estimate the total value of the cash flows beyond the final year. Projections of future cash flows are based on the estimated net debt-free cash flows. These cash flows are then discounted to their present value as of the valuation date at an estimated cost of capital. The estimated cost of capital is derived by a weighted average cost of capital (WACC) using the capital asset pricing model (CAPM), based in part on guideline publicly-traded companies. The terminal value is estimated using the Gordon Growth model, which is based on the expected cash flows of the last year in the discrete projection period, the expected long-term growth rate, and the WACC.

In the market multiples method, fair value is determined by applying a multiple to EBITDA (earnings before interest, taxes, depreciation and amortization). The EBITDA multiple reflects the risk of cash flows generated by an entity. We use peer groups with similar risk profiles as well as the implied multiple from our DCF analysis to determine the appropriate multiple for our reporting units.

The determination of the reporting unit fair value includes numerous uncertainties, and a material change in assumptions utilized or in the conditions and circumstances influencing fair values could have a significant effect on our goodwill impairment assessment.

No impairment charges to goodwill were recorded during 2008, 2009, 2010 or the three months ended March 31, 2011, and the fair value of our reporting units was substantially in excess of the respective carrying values. While the WACC is only one of several important estimates used in the analysis, we determined that an increase of one percentage point in the WACC used for each respective reporting unit would not have resulted in an impairment indicator for our reporting units at the time of this analysis.

Product warranty costs

Reserves are recorded on the balance sheet to reflect our contractual liabilities relating to warranty commitments to customers. After the original purchase date, two years of warranty coverage is provided to customers for defects in materials and workmanship. An estimate for warranty expense is recorded at the time of sale within cost of sales based on historical warranty return rates and all repair costs to satisfy claims, including labor and materials. Product warranty liabilities are included within accrued expenses and other current liabilities on the consolidated balance sheets. A 10% change in historical warranty rates used to estimate the liability would have affected net income by $0.3 million, $0.3 million and $0.4 million, for the years ended December 31, 2008, 2009 and 2010, respectively.

Stock based compensation

In accordance with the accounting standards for share based payments, all share based payments, including grants of equity-classified incentive units and stock options, are required to be recognized in the consolidated statement of operations as an operating expense, based on their grant date fair values, over the requisite service period.

The liability-classified incentive awards are re-measured at fair value at each reporting date until settlement and the changes in fair value are also recorded in the consolidated statement of operations as an operating expense.

 

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Incentive units

As of each grant date and period end, we performed valuations consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation” (AICPA Practice Aid) to calculate the fair value of our incentive units.

Valuations as of December 31, 2008 and December 31, 2009

We used a Black-Scholes option pricing model to estimate the grant date fair value. Inputs include the fair value of the underlying assets distributable to award holders (based on our enterprise value and the terms of the awards), estimated price volatility, dividend yield and the risk-free interest rate. In determining our enterprise value, we used the DCF method. The expected volatility is based on the historical volatility of publicly-traded companies that are similar in size, industry, growth stage, or business model. The expected dividend yield represents the expected annual dividends to be paid to award holders over the term of the incentive units, and the risk-free interest rate is based on United States Treasury rates with remaining terms similar to the expected term of the incentive units. The 2008 and 2009 valuations utilized the following assumptions:

 

      December 31, 2008      December 31, 2009*  
   

Expected volatility

     39.6%         47.2%   

Expected dividend yield

     0%         0%   

Expected term (in years)

     6         5   

Risk free interest rate

     2.1%         2.0%   
   

 

*   There was no material difference between the valuation performed on December 1, 2009 and December 31, 2009

Valuations as of July 23, 2010, December 31, 2010 and March 31, 2011

As we assessed the prospects of an initial public offering, starting in mid-2010 we began using multiple valuation techniques. We established our enterprise value through an equal weighting between (a) the income approach in the form of the DCF method and (b) the market approach in the form of the guideline public company method. For the guideline public company method, we selected a group of publicly-traded companies that are similar in size, industry, growth stage, or business model. The valuation multiples considered for providing indicated values were the ratio of enterprise value to the last twelve months and estimated future EBITDA and the ratio of the market value of equity (MVE) to the last twelve months and estimated future net income. Both enterprise value and MVE of each guideline public company were calculated based on closing stock prices as of the respective valuation dates.

After establishing our enterprise value, we added back cash and cash equivalents and deducted outstanding debt to determine our total equity value. We then allocated the total equity value among the securities that comprise our capital structure using an average of the Black-Scholes method and the probability-weighted expected return method (PWERM), as described in the AICPA Practice Aid.

The Black-Scholes method utilized the following assumptions:

 

      July 23, 2010      December 31, 2010      March 31, 2011  
   

Expected volatility

     35.0%         35.0%         35.0%   

Expected dividend yield

     0%         0%         0%   

Expected term (in years)

     1.0         0.5         0.25   

Risk free interest rate

     0.3%         0.2%         0.1%   
   

 

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We used the PWERM due to:

 

 

our improved financial results as demonstrated by strong sales growth and improving profitability;

 

 

our favorable growth prospects and expectations for continued improvement in profitability; and

 

 

the increasing prospects on an initial public offering or sale/merger.

The PWERM estimates value based upon an analysis of future values of the enterprise assuming various outcomes such as an IPO, merger or sale, dissolution or continued operation as a viable enterprise. Unit value is based upon the probability-weighted present value of expected future investment returns, considering each of the possible future outcomes available to the enterprise, as well as the rights of each unit class.

The PWERM utilized the following assumptions:

 

      July 23, 2010      December 31, 2010      March 31, 2011  
   

IPO scenario

     75.0%         75.0%         75.0%   

M&A scenario

     20.0%         20.0%         20.0%   

No value scenario

     5.0%         5.0%         5.0%   
   

Incentive unit fair value under the IPO scenario reflects the equity value by the estimated IPO price, allocated according to (a) the projected Class A liquidation preference at the assumed IPO date, (b) the distribution thresholds associated with the incentive units and (c) the participating distribution ratios of each class of equity. Incentive unit fair value under the M&A scenario reflects the equity value by the estimated sales price allocated in the same manner as the IPO scenario. Under the no value scenario, upon a liquidity event, our distributions would not exceed the specified distribution thresholds, therefore resulting in a $0 value for the incentive units.

The suggested values from the Black-Scholes method and PWERM reflect a fully marketable security that is not burdened by limited marketability; however, our incentive units represent economic interests in a privately held company without a ready market for its units. Therefore, we considered it necessary to incorporate a discount for lack of marketability to reflect the most likely time horizons until an incentive unitholder can achieve liquidity.

The fair value per unit for each of our grants is summarized in the following table:

 

Grant date    Valuation date  
     12/31/2008      12/1/2009      12/31/2009      7/23/2010      12/31/2010      3/31/2011  
   

12/31/2008

   $ 21.03         N/A       $ 29.04         N/A       $ 104.73       $ 118.01   

12/1/2009

     N/A       $ 29.04         29.04         N/A         104.73         118.01   

7/23/2010

     N/A         N/A         N/A       $ 81.01         98.16         111.14   
   

Comparison from December 31, 2008 to December 31, 2009

The primary factors that supported these estimates, and which contributed to an increase in the estimated value of the incentive units were:

 

 

higher than expected operating results primarily driven by stronger than anticipated profitability;

 

 

strong demand for our products in the aftermarket channel;

 

 

increased retention of cash; and

 

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improved forecast profitability.

Comparison from December 31, 2009 to July 23, 2010

The primary factors that supported these estimates, and which contributed to an increase in the estimated value of the incentive units were:

 

 

continued strong demand for our products in the aftermarket channel and a return to pre-recession demand in the OEM channel;

 

 

improved financial results as demonstrated by strong sales growth and profitability;

 

 

decreased market risk and uncertainty associated with continuing improvement of economic trends; and

 

 

improvement in the capital markets which generally increased business valuations.

Comparison from July 23, 2010 to December 31, 2010

The primary factors that supported these estimates, and which contributed to an increase in the estimated value of the incentive units were:

 

 

continued improvement in our financial results;

 

 

our favorable growth prospects and expectations for continued improvement in profitability;

 

 

improved guideline public company valuations;

 

 

continued improvement in the capital markets which generally increased business valuations; and

 

 

efforts undertaken to prepare for and expectations of an initial public offering.

Comparison from December 31, 2010 to March 31, 2011

The primary factors that supported these estimates, and which contributed to an increase in the estimated value of the incentive units were:

 

 

strong financial results for the first quarter 2011;

 

 

improved leverage levels from debt pay down;

 

 

macroeconomic trends favorable for continued growth;

 

 

continued efforts in the initial public offering process.

Stock options.    We used a Black-Scholes option pricing model to estimate the grant date fair value of our stock options. The inputs we use in estimating the fair value include expected stock price volatility over the term of the awards, dividend yield and the risk-free interest rate. The expected term of stock options granted represents the period of time that stock options granted are expected to be outstanding. The expected volatility is based on the historical volatility of publicly-traded companies that are similar in size, industry, growth stage, or business model. The expected dividend yield represents the expected annual dividends to be paid to stockholders over the term of the stock options, and the risk-free interest rate is based on United States Treasury rates with remaining terms similar to the expected term of the stock options. There were no options granted in 2008, 2009, 2010 or the three months ended March 31, 2011.

 

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Income taxes

For federal income taxation purposes, SRAM Holdings, LLC is taxed as a partnership. Consequently, income and losses flow directly through to the members of SRAM Holdings, LLC. Accordingly, no provision for U.S. federal income taxes has been reflected in the consolidated financial statements of SRAM Holdings, LLC.

Income taxes in foreign jurisdictions and certain U.S. state taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, we consider projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies and the overall deferred tax position. As of December 31, 2010 and March 31, 2011, we believe that it is more likely than not that we will have future taxable income to utilize our deferred tax assets. Therefore, we have not provided a valuation allowance against any of our deferred tax assets.

The amount of income tax that we pay annually is dependent on various factors, including the timing of certain deductions and ongoing audits by foreign and state tax authorities, which may result in proposed adjustments. We perform reviews of our income tax positions on a quarterly basis and accrue for potential uncertain tax positions. Accruals for these uncertain tax positions are recorded based on an expectation as to the timing of when the matter will be resolved. As events change or resolution occurs, these accruals are adjusted, such as in the case of audit settlements with taxing authorities. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, statute expirations, new regulatory or judicial pronouncements, changes in tax laws, changes in projected levels of taxable income, future tax planning strategies or other relevant events.

Fair value of financial instruments

The fair value guidance establishes a three-level valuation hierarchy for financial instruments. These valuation techniques are based upon the transparency of inputs (observable and unobservable) to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1—Valuation is based on quoted prices for identical assets or liabilities in active markets;

Level 2—Valuation is based on quoted prices for similar assets or liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for the full term of the financial instrument; and

Level 3—Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

Our financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, and long-term debt. Management considers the carrying values of cash and cash equivalents, trade receivables and trade payables to be representative of their respective fair values because of their short-term maturities or expected settlement dates. We measure the fair value of our long-term borrowings using a DCF technique that

 

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incorporates a market interest yield curve with adjustments for our projected payment schedule, duration, optionality and risk profile. In determining the market interest yield curve, the Company considered its corporate ratings from Moody’s and S&P, as well as other companies with similarly rated debt securities.

Effects of inflation

We do not believe that our sales or operating results have been materially impacted by inflation during the periods presented in our financial statements. There can be no assurance, however, that our sales or operating results will not be impacted by inflation in the future.

Quantitative and qualitative disclosures about market risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates and commodity prices. Changes in these factors could cause fluctuations in the results of our operations and cash flows. In the ordinary course of business, we are primarily exposed to interest rate risks and changes in foreign currency exchange rates.

Interest rate risk

Our new credit facilities bear, and our prior credit facilities bore, interest at a variable rate tied to LIBOR or prime rate, at our option, and, therefore, our results of operations and our cash flows will be exposed to changes in interest rates. A one percentage point change in the interest rates applicable to our credit facilities during the year ended December 31, 2010 (for the respective periods for which they were effective) would have caused an increase to interest expense of approximately $2.6 million. As of December 31, 2010, we had one interest rate swap agreement for $75.0 million, effectively converting that portion of debt from variable rate to fixed rate. The swap agreement expires in October 2011. In the future, in an effort to mitigate losses associated with these risks, we may at times enter into additional derivative financial instruments.

Foreign currency risk

For the year ended December 31, 2010, we generated approximately 59% of our net sales in U.S. Dollars, 32% of our net sales in New Taiwan Dollars, 8% of our net sales in Euros and 1% of our net sales in RMB. The reporting currency for our consolidated financial statements is U.S. Dollars. Our results of operations could be adversely impacted by changes in exchange rates. For example, if we recognize international sales in local foreign currencies, as the U.S. Dollar strengthens it would have a negative impact on our international results upon translation of those results into U.S. Dollars upon consolidation. To an extent, there is a natural hedge against foreign currency changes due to the fact that, while certain receipts for international sales may be denominated in a foreign currency, certain production and distribution expenses are also denominated in foreign currencies, mitigating fluctuations to some extent depending on their relative magnitude. As a result, fluctuations of 10% in foreign currency rates would not have a material impact on our results of operations. We historically have not engaged in foreign currency hedging activities and do not intend to do so in the foreseeable future. However, in the future, in an effort to mitigate losses associated with these risks, we may at times enter into derivative financial instruments.

Internal controls over financial reporting

As a public company, we will be required to comply with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of Sarbanes-Oxley regarding internal control over financial reporting. Prior to becoming a public company, we are not required to be compliant with the requirements of Section 404.

 

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In preparation for this offering and for future compliance with Section 404, we and our independent auditors identified material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented, or detected and corrected on a timely basis. The material weaknesses were attributed to us not maintaining sufficient: external reporting, technical accounting and tax functions; financial reporting and closing processes with respect to complex transactions; and written policies and procedures, in each case to meet our needs as a public company. We have begun implementing measures and plan to take additional steps to remediate the underlying causes of our material weakness.

We are currently implementing a remediation plan to improve the effectiveness of our internal controls over financial reporting. The plan includes:

Financial Reporting Function

 

 

Implementing our recruiting plan to attract additional accounting and finance personnel.

 

 

Engaging outside consultants to assist our accounting and finance team until such time as we are able to retain permanent personnel.

 

 

Evaluating of skill sets and experience levels of existing financial reporting staff relative to those needed as a public company.

Controls Documentation/Testing Process

 

 

Reviewing and evaluating current documentation of internal controls.

 

 

Evaluating and documenting overall entity control environment.

 

 

Developing documentation standards/methodology.

 

 

Determining and documenting key controls in each functional area of our operations.

 

 

Developing and implementing a testing plan.