10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 0-28822 ROCKSHOX, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0396555 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1610 Garden of the Gods Road, Colorado Springs, CO 80907 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (719) 278-7469 -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] As of November 9, 2001 there were 13,761,147 shares of the registrant's common stock outstanding. 1 INDEX Page ---- Part I: Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and March 31, 2001 . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three- and six- month periods ended September 30, 2001 and 2000 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2001 and 2000 (unaudited). . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 9 Part II: Other Information Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . 10 Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 10 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 11 2

The accompanying notes are an integral part of these condensed consolidated financial statements. 3

The accompanying notes are an integral part of these condensed consolidated financial statements. 4

The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Part I: Item 1. ROCKSHOX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of ROCKSHOX, INC. have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six-month period ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending March 31, 2002. The unaudited condensed consolidated interim financial statements contained herein should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended March 31, 2001 included in our Annual Report on Form 10-K. The balance sheet at March 31, 2001 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Unless the context indicates otherwise, when we refer to "we," "us," the "Company" or "RockShox" in this Quarterly Report on Form 10-Q, we are referring to ROCKSHOX, INC. MANAGEMENT'S PLANS The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred a net loss of approximately $6.1 million for the year ended March 31, 2001, and $4.5 million for the two quarters ended September 30, 2001. Continuation of the Company as a going concern is dependent upon its ability to generate sufficient cash flow to fund working capital and to ultimately sustain profitability. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The issue of the Company's ability to continue as a going concern was raised by our auditors in their audit report included in our Annual Report on Form 10-K. The Company is positioning itself to be able to generate sufficient cash flow to fund working capital by the end of fiscal year 2002 primarily through continuing cost reduction plans and borrowings under its secured credit agreement. Should the Company require additional funding, management believes it could obtain this funding from one or more of the following: a) additional asset based lending facility; b) subordinated debt facility; and/or c) sale of assets. Management believes these resources will be adequate to fund its operating and capital requirements through the end of fiscal 2002. There can be no assurance financing will be available in amounts or on terms acceptable to the Company, if at all. Should the Company be unsuccessful in its efforts to raise capital, management may be required to modify or curtail its plans. 2. INVENTORIES The components of inventory are as follows (in thousands): September 30, 2001 March 31, 2001 ------------------- --------------- Raw materials. . . . $ 8,591 $ 4,678 Finished goods . . . 2,665 1,132 ------------------- --------------- $ 11,256 $ 5,810 =================== =============== 6 3. LINE OF CREDIT On June 29, 2000, the Company entered into a credit agreement providing for borrowings up to $5.0 million, which bore interest at a base interest rate plus 1.375% annually (9.375% at March 31, 2001). Effective June 28, 2001, the Company entered into an amended, expanded credit facility in the amount of $10 million with their existing lender, Wells Fargo (the New Facility), under terms substantially similar to the previous facility. Any outstanding amounts bear interest at a base interest rate plus .725% annually (6.00% as of September 30, 2001). The New Facility terminates on December 10, 2003. Additionally, the Company has a $1.0 million letter of credit outstanding as collateral for the Colorado Springs facility lease. This letter of credit reduces the Company's borrowing availability by the full amount outstanding. Our New Facility set new financial covenants, and we are continuing to negotiate with Wells Fargo to lower certain financial covenants, subject to their approval. If the revised financial covenants are enacted, we expect to be in compliance with the new covenants throughout the current year. We are in the process of obtaining a waiver from Wells Fargo for being out of compliance on one of our existing debt covenants as of September 30, 2001. However, there is no assurance that our expected results will be achieved, or that a waiver will be obtained. 7 Part I: Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: Net sales. Net sales for the quarter ended September 30, 2001 was $17.6 million, a decrease of 24.8% from $23.4 million for the corresponding period of the prior year. For the six months ended September 30, 2001, net sales decreased by 30.5% to $24.8 million, from $35.6 million for the corresponding period of the prior year. For the quarter ended September 30, 2001, OEM sales decreased by 34.7% to $12.4 million compared to $19.0 million in the corresponding period of the prior year, and decreased by 35.5% to $18.0 million from $27.9 million for the related six months of operations. Sales to the retail accessory market in the quarter ended September 30, 2001 were $5.2 million compared to $4.4 million in the corresponding period of the prior year, an increase of 18.2%. For the six months ended September 30, 2001, sales to the retail accessory market decreased by $905,000, or 11.8%, to $6.8 million compared to $7.7 million in the corresponding period of the prior year. The OEM sales decrease resulted from a soft demand worldwide for mountain bike components, caused primarily by continued poor weather conditions throughout Europe and financial challenges faced by certain US customers. Sales for the retail accessory market are down for the six months ended September 30, 2001 because in the first quarter we relocated the manufacturing portion of our operations to Colorado Springs, and made the decision to discontinue 2001 model year production in conjunction with our move. As a result, we had less 2001 inventory to pass on to the aftermarket channel than is typical of our first fiscal quarter. Gross margin. Gross margin (gross profit as a percentage of net sales) for the quarter ended September 30, 2001 increased to 23.0% compared to 22.0% for the corresponding period of the prior year. For the first six months of this year, gross margin decreased to 14.7% of sales compared to 18.2% for the corresponding period of the prior year. Included within the gross margin for the periods ended September 30, 2000 was a $2 million warranty charge associated with the recent product recall of certain model 2001 forks primarily produced in Taiwan (see Part II, Item 5 following). Partially offsetting this charge during that period was the reversal of certain warranty reserves related to products whose warranty period had lapsed, totaling $500,000. Overall, the gross margin for 2002 is lower due to fixed overhead costs being spread over fewer units produced. Furthermore, operating inefficiencies were experienced during the first quarter of fiscal 2002, as we relocated our assembly facility. Selling, general and administrative expense. Selling, general and administrative ("SG&A") expense for the quarter ended September 30, 2001 was $3.4 million, or approximately 19.6% of net sales, compared to $3.2 million, or approximately 13.7% of net sales, in the corresponding period of the prior year. For the six-month period ended September 30, 2001, SG&A expenses were $5.9 million, down 4.8%, versus $6.2 million in the prior year. Reductions in compensation, travel, advertising and promotional expenses for the current quarter were offset by $821,000 in expenses related to certain patent disputes. Research, development and engineering expense. Research, development and engineering ("R&D") expense for the quarter ended September 30, 2001 was $453,000 or approximately 2.6% of net sales, compared to $438,000, or approximately 1.9% of net sales in the corresponding quarter of the prior year. For the six months ended September 30, 2001, R&D expenses were reduced by 25% to $878,000, or 3.5% of net sales, versus $1.2 million, or 3.3% of net sales for the same period in the prior year. These cost reductions were largely the result of reduced headcount and prototype expenditure achieved through the consolidation of the Research and Development and Engineering departments in Colorado. Relocation expenses. One-time relocation expenses incurred for moving the Company's operations to Colorado Springs, Colorado were $175,000 in the September 30, 2001 quarter, for a total of $1.0 million for the fiscal year to date. This compares to $764,000 in corporate relocation expenses for the quarter ended September 30, 2000, and $1.7 million for the year-to-date at that time. These annual figures incorporate all known costs to date of Phases I (non-manufacturing) and II (manufacturing) of our relocation. The company 8 continues to move forward with the third and final phase of the relocation, which is to outsource the machine shop operations. The timetable and related cost estimates connected with this final phase have not yet been finalized. Interest expense. For the quarter ended September 30, 2001 we recognized interest expense of $93,000 compared to $51,000 in the corresponding period of the prior year. For the six months ended September 30, 2001, we recognized interest expense of $126,000 compared to $32,000 in the corresponding period of the prior year. Increased line of credit balances in 2001, primarily due to funding costs for the recall and the relocation, account for this differential. Income tax expense. The income tax expense recorded for the current period relates to our estimated taxes payable for the domestic Taiwan operations, the effective rate being 25%. For the quarter ended September 30, 2001, we did not recognize any additional tax benefit of our consolidated operating losses because realization is not assured as required by SFAS No. 109. Liquidity and Capital Resources: For the six months ended September 30, 2001, net cash used in operating activities was $6.0 million which consisted of a net loss of $4.5 million, offset by non-cash charges for depreciation and amortization of $2.0 million, and a net decrease of $3.5 million related to the change in operating assets and liabilities. Net cash used in investing activities was $1.6 million for the six months ended September 30, 2001, which consisted of acquisitions of property and equipment. Short-term borrowings provided $6.3 million in cash flow for the year to date ended September 30, 2001, and financing of a long-term liability provided another $325,000. At September 30, 2001, we had cash and cash equivalents of $157,000 and working capital of $4.1 million. We believe that our current working capital and available financing sources will be sufficient to provide operating liquidity for at least the next twelve months. Forward-Looking Statements Certain statements made in this document constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other facts that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors are discussed in detail in our Annual Report on Form 10-K. Given these uncertainties, prospective and current investors are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained in the Annual Report, Form 10-K or this document. Item 3. Quantitative and Qualitative Disclosures About Market Risks We considered the provision of Financial Reporting Release No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments". We had no holdings of derivative financial or commodity instruments at September 30, 2001. We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. An increase in interest rates would not significantly affect our net loss. The majority of our revenue and capital spending is transacted in U.S. dollars, with the exception of the sale of domestic Taiwan product, which is transacted in New Taiwan Dollars. 9 Part II: Other Information Item 1. Legal Proceedings We are involved in certain legal matters in the ordinary course of business. Accordingly, in the second quarter of fiscal 2002, we accrued an amount associated with the settlement of the Halson Designs, Inc. patent lawsuit. We have not accrued any potential liability associated with our pending lawsuit with Answer Products, Inc., as described in our most recent 10-K filing. No other provision for any liability that may result upon the resolution of other legal matters has been made in the accompanying financial statements nor is the amount or range of possible loss, if any, reasonably estimable. Item 2. Changes in Securities and Use of Proceeds Under our revised credit agreement, we will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Item 3. Defaults Upon Senior Securities We are currently in default under our net worth covenant of our line of credit facility as of September 30, 2001. Discussions are ongoing with Wells Fargo to receive a waiver for this default, however there is no assurane that a waiver will be obtained. Item 4. Submission of Matters to a Vote of Security Holders On August 21, 2001, the Company held its annual meeting of the stockholders (the "Annual Meeting"). At the Annual Meeting, the Company's stockholders elected the Company's Board of Directors as proposed and there was no solicitation in opposition of any of the existing Board members. With respect to the election of directors, the following directors received the following number of votes and were therefore elected to the Board of Directors. No broker non-votes were received on this proposal. For Against ---------- ------- Stephen W. Simons 10,665,423 12,950 Bryan L. Kelln 10,665,423 12,950 John W. Jordan II 10,665,423 12,950 Adam E. Max 10,665,423 12,950 Michael R. Gaulke 10,665,423 12,950 Edward T. Post 10,665,423 12,950 Also at the Annual Meeting, the Company's stockholders ratified the selection of Ernst & Young (the "Ratification of Accountants") as the Company's independent accountants for the fiscal year ending March 31, 2002. With respect to the Ratification of Accountants, a total of 10,673,958 votes were cast in favor, 2,315 were cast against, and 2,100 votes abstained. No broker non-votes were received. Item 5. Other Information On October 5, 2000, we issued a stop sell notice for 2001 Judy TT, Judy TT Special, Jett and Metro front suspension forks. Working with the Consumer Product Safety Commission, we subsequently implemented a recall for these forks. We quickly remedied the situation and resumed production with newly designed components. The cost of this recall was estimated to total $2.0 million and had been included in the results of operations for the second quarter of fiscal 10 2001. The actual cost to date of this recall has been $1.9 million. New testing procedures have already been implemented in our internal processes. Item 6. Exhibits on and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K: None. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROCKSHOX, INC. Dated: November 13, 2001 /s/ Chris Birkett ------------------- Chris Birkett Chief Financial Officer and Duly Authorized Officer 12

ROCKSHOX INC 10-Q