e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
Commission File Number 000-30138
ROCKFORD CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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ARIZONA
(State or Other Jurisdiction of
Incorporation or Organization)
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86-0394353
(I.R.S. Employer
Identification No.) |
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600 South Rockford Drive
Tempe, Arizona
(Address of Principal Executive Offices)
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85281
(Zip Code) |
(480) 967-3565
(Registrants Telephone Number, Including Area Code)
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 þ No o
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 o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares of each of the issuers classes of common stock, as of the
latest practical date:
As of August 6, 2009, there were 8,581,208 shares of Common Stock, $.01 par value per share,
outstanding.
ROCKFORD CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
2
Forward-Looking Statements
We make forward-looking statements in this report including, without limitation, statements
concerning the future of our industry, our business strategy, continued acceptance and growth of
our products, product development, our dependence on significant customers and suppliers, and the
adequacy of our available cash resources. Our statements may contain projections of results of
operations or of financial condition. These statements may be identified by the use of
forward-looking terminology such as may, will, believe, expect, anticipate, estimate,
continue or other similar words.
Forward-looking statements are subject to many risks and uncertainties. We caution you not to
place undue reliance on these forward-looking statements, which speak only as at the date on which
they are made. Our actual results may differ materially from those anticipated in our
forward-looking statements. We disclaim any obligation or undertaking to update our forward-looking
statements to reflect changes in our expectations or changes in events, conditions, or
circumstances on which our expectations are based.
When considering our forward-looking statements, you should keep in mind the risk factors and
other cautionary statements identified in this report, in our Annual Report on Form 10-K for the
year 2008, filed with the SEC on April 15, 2009, and in Item 1A to our Annual Report, Risk Factors
That May Affect Rockfords Operating Results, Business Prospects and Stock Price. The risk factors
noted throughout this report and our Annual Report, particularly in the discussion in Item 1A to
our Annual Report, and other risk factors that we have not anticipated or discussed, could cause
our actual results to differ significantly from those anticipated in our forward-looking
statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
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December 31, |
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June 30, |
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2008 |
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2009 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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|
Accounts receivable, less allowances of $1,441 and $841 at December 31, 2008 and
June 30, 2009, respectively |
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12,856 |
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15,697 |
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Inventories |
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13,043 |
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6,165 |
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Prepaid expenses and other current assets |
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|
551 |
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464 |
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|
|
|
|
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Total current assets |
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26,450 |
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|
22,326 |
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Property and equipment, net |
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1,743 |
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|
1,673 |
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Other assets |
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332 |
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271 |
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Total assets |
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$ |
28,525 |
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$ |
24,270 |
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Liabilities and shareholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
3,980 |
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$ |
6,245 |
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Accrued salaries and incentives |
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1,367 |
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|
793 |
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Accrued warranty and returns |
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|
700 |
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|
666 |
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Other accrued expenses |
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1,838 |
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2,232 |
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Current portion of capital lease and other long-term liabilities |
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161 |
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|
137 |
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Notes payable, less unaccreted discount of $20 at December 31, 2008 |
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4,980 |
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2,500 |
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Asset-based credit facility |
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7,547 |
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4,595 |
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Total current liabilities |
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20,573 |
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17,168 |
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Notes payable, less unaccreted discount of $10 at December 31, 2008 |
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2,593 |
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1,297 |
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Long-term portion of capital lease and other long-term liabilities |
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66 |
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106 |
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Total liabilities |
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23,232 |
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18,571 |
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Shareholders equity: |
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Common stock, $.01 par value Authorized shares 40,000,000 Issued shares
9,395,720 at December 31, 2008 and June 30, 2009 |
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94 |
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|
94 |
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Additional paid-in capital |
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38,554 |
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38,616 |
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Accumulated deficit |
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(32,044 |
) |
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(31,700 |
) |
Less: Treasury stock, at cost 814,512 shares at December 31, 2008 and June 30, 2009 |
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(1,311 |
) |
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(1,311 |
) |
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Total shareholders equity |
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5,293 |
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|
5,699 |
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Total liabilities and shareholders equity |
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$ |
28,525 |
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$ |
24,270 |
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|
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|
Note: The consolidated balance sheet at December 31, 2008, has been derived from the audited
consolidated financial statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete
financial statements.
See notes to condensed consolidated financial statements.
4
ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2008 |
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2009 |
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2008 |
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2009 |
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Net sales |
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$ |
21,786 |
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$ |
15,448 |
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$ |
40,230 |
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$ |
29,914 |
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Cost of goods sold |
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14,163 |
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10,530 |
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26,251 |
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20,572 |
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Gross profit |
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7,623 |
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4,918 |
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13,979 |
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9,342 |
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Operating expenses: |
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Sales and marketing |
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3,410 |
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2,073 |
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6,605 |
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4,330 |
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General and administrative |
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3,255 |
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1,989 |
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5,660 |
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4,012 |
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Research and development |
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716 |
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451 |
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1,356 |
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934 |
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Total operating expenses |
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7,381 |
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4,513 |
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13,621 |
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9,276 |
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Operating income |
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242 |
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|
405 |
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|
358 |
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|
66 |
|
Interest and other (income) expense, net |
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(597 |
) |
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78 |
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(390 |
) |
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(286 |
) |
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Income before income taxes |
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839 |
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|
327 |
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|
748 |
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|
352 |
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Income tax expense |
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8 |
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8 |
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Net income |
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$ |
839 |
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|
$ |
319 |
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|
$ |
748 |
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$ |
344 |
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Net income per common share: |
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Basic |
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$ |
0.10 |
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$ |
0.04 |
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$ |
0.08 |
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$ |
0.04 |
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Diluted |
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$ |
0.09 |
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$ |
0.04 |
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$ |
0.08 |
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$ |
0.04 |
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Weighted average shares: |
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Basic |
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8,744 |
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|
8,581 |
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|
8,813 |
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8,581 |
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Diluted |
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10,576 |
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|
8,581 |
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|
|
8,813 |
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|
8,581 |
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|
|
|
|
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|
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|
See notes to condensed consolidated financial statements.
5
ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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Six months ended |
|
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June 30, |
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2008 |
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2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
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Net income |
|
$ |
748 |
|
|
$ |
344 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
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|
Depreciation and amortization |
|
|
806 |
|
|
|
423 |
|
Net gain on buy back of notes and warrants |
|
|
(812 |
) |
|
|
(497 |
) |
Gain on sale of property and equipment |
|
|
(29 |
) |
|
|
(89 |
) |
Share based compensation expense |
|
|
95 |
|
|
|
61 |
|
Provision for doubtful accounts |
|
|
336 |
|
|
|
99 |
|
Provision for inventories |
|
|
213 |
|
|
|
61 |
|
Impairment of other assets |
|
|
188 |
|
|
|
33 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5,026 |
) |
|
|
(2,940 |
) |
Inventories |
|
|
3,524 |
|
|
|
6,818 |
|
Prepaid expenses and other |
|
|
270 |
|
|
|
53 |
|
Accounts payable |
|
|
2,088 |
|
|
|
2,265 |
|
Accrued salaries and incentives |
|
|
142 |
|
|
|
(578 |
) |
Accrued warranty and returns |
|
|
(379 |
) |
|
|
(35 |
) |
Other accrued expenses |
|
|
133 |
|
|
|
397 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,297 |
|
|
|
6,415 |
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(574 |
) |
|
|
(271 |
) |
Proceeds from sale of property and equipment |
|
|
34 |
|
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|
89 |
|
Net proceeds from divestiture of businesses |
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|
100 |
|
|
|
|
|
Decrease in other assets |
|
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45 |
|
|
|
3 |
|
|
|
|
|
|
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|
Net cash used in investing activities |
|
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(395 |
) |
|
|
(179 |
) |
Cash flow from financing activities: |
|
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|
|
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|
Proceeds from bank debt |
|
|
34,700 |
|
|
|
24,821 |
|
Payments on bank debt |
|
|
(34,730 |
) |
|
|
(27,773 |
) |
Payments on capital lease obligations |
|
|
(23 |
) |
|
|
(26 |
) |
Payments on notes payable and other debt |
|
|
(1,253 |
) |
|
|
(3,258 |
) |
Payment on other, debt |
|
|
(184 |
) |
|
|
|
|
Purchase of treasury stock |
|
|
(412 |
) |
|
|
|
|
|
|
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Net cash used in financing activities |
|
|
(1,902 |
) |
|
|
(6,236 |
) |
|
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Net increase in cash flow |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
Rockford Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2009
1. Basis of Presentation
Unaudited Interim Financial Information
Rockford Corporation and subsidiaries (Rockford) has prepared these unaudited condensed
consolidated financial statements in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X consistent in all material respects with those applied in Rockfords
Annual Report on Form 10-K for the year ended December 31, 2008. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. In the opinion of management, Rockford has made
all adjustments (all of which were normal and recurring) necessary for a fair presentation.
In connection with preparation of the condensed consolidated financial statements and in
accordance with the recently issued Statement of Financial Accounting Standards No, 165 Subsequent
Events (SFAS 165), Rockford evaluated subsequent events after the balance sheet date of June 30,
2009 through August 6, 2009, the date the condensed consolidated financial statements were issued.
Operating results for the three and six months ended June 30, 2009, are not necessarily
indicative of the results you may expect for the year ending December 31, 2009, or for any other
period.
For further information, refer to the consolidated financial statements and footnotes included
as part of Rockfords Form 10-K for the year ended December 31, 2008, filed with the Securities and
Exchange Commission (SEC) on April 15, 2009. Managements plans with respect to the Companys
continued viability as described in the Basis of Presentation section of the financial statements
in the Form 10-K remain unchanged at June 30, 2009.
Accounting Policy
Product Warranty Cost and Service Returns
Rockfords return policy is to replace, repair or issue credit for product under warranty.
Returns received during the current period are expensed as received and a reserve is maintained for
future returns from current shipments. Management calculates the reserve using historical return
rates by brand. These rates are reviewed and adjusted periodically as actual results become
available.
A reconciliation of the warranty and returns reserve activity is as follows for the three and
six months ended June 30, 2008 and 2009.
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Three Months Ended |
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Six Months Ended |
|
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|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Balance at the beginning of period |
|
$ |
1,224 |
|
|
$ |
642 |
|
|
$ |
1,267 |
|
|
$ |
700 |
|
Provision for warranties and returns |
|
|
1,285 |
|
|
|
798 |
|
|
|
2,402 |
|
|
|
1,358 |
|
Net settlements made during the period |
|
|
(1,621 |
) |
|
|
(774 |
) |
|
|
(2,781 |
) |
|
|
(1,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
888 |
|
|
$ |
666 |
|
|
$ |
888 |
|
|
$ |
666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
2. Inventories
Inventories consist of the following:
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|
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|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
501 |
|
|
$ |
323 |
|
Work-in-progress |
|
|
49 |
|
|
|
66 |
|
Finished goods |
|
|
12,493 |
|
|
|
5,776 |
|
|
|
|
|
|
|
|
|
|
$ |
13,043 |
|
|
$ |
6,165 |
|
|
|
|
|
|
|
|
3. Earnings Per Share
The following table sets forth the computation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
(In thousands, except per share |
|
|
(In thousands, except per share |
|
|
|
data) |
|
|
data) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
839 |
|
|
$ |
319 |
|
|
$ |
748 |
|
|
$ |
344 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income impact of assumed conversion of convertible debt |
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income available to shareholders |
|
$ |
1,002 |
|
|
$ |
319 |
|
|
$ |
748 |
|
|
$ |
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share |
|
|
8,744 |
|
|
|
8,581 |
|
|
|
8,813 |
|
|
|
8,581 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from assumed conversion of convertible debt |
|
|
1,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
1,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share |
|
|
10,576 |
|
|
|
8,581 |
|
|
|
8,813 |
|
|
|
8,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.10 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no stock options which would have increased net shares outstanding using the
treasury stock method in the diluted income per share calculation for the three and six months
ended June 30, 2008 and 2009, respectively, because the exercise price of the stock options
exceeded the average market price of the stock.
Until June 10, 2009, Rockford also had outstanding $5.0 million of 4.5% convertible senior
subordinated secured notes due 2009 and warrants to purchase 534,073 shares of common stock at
$3.73 per share. The noteholders had the right to convert the notes into Rockfords common stock at
any time before the original maturity date of June 10, 2009. The conversion price was $4.61 per
share. The convertible senior subordinated secured notes and warrants were not included in the
diluted income per share calculation for the three and six month periods ended June 30, 2009, as
they were not dilutive and as the conversion rights had been terminated as of the end of the
period, and for the six month period ended June 30, 2008, as they were not dilutive.
Outstanding stock options with exercise prices (plus unearned compensation for unvested
awards) greater than the average market price of Rockfords common stock during the period are
excluded from the computation of diluted net income per share of common stock. A summary of the
excluded amounts follows (in thousands, except exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30, |
|
Six Months ended June 30, |
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
Outstanding options |
|
|
1,654 |
|
|
|
1,495 |
|
|
|
1,654 |
|
|
|
1,495 |
|
Average exercise price |
|
$ |
4.18 |
|
|
$ |
2.98 |
|
|
$ |
4.18 |
|
|
$ |
2.98 |
|
8
Rockford Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
4. Notes Payable and Long-Term Debt
Rockford entered into an asset-based credit facility with Wachovia Capital Financial
Corporation (Western) as Agent and Wachovia Bank, National Association as Arranger on March 29,
2004 and as amended most recently on August 3, 2009. This credit facility, as amended, is a $20
million asset-based credit facility, has a term expiring on March 24, 2011, and is collateralized
by substantially all of Rockfords assets. Under the agreement, pricing options based on LIBOR and
prime rates are available to Rockford. The LIBOR and prime interest rate options were approximately
2.9% and 3.75% at June 30, 2009, respectively. As of June 30, 2009, Rockford was in compliance with
all applicable covenants. The availability under the credit facility at June 30, 2009 was
approximately $7.5 million in excess of the outstanding balance of $4.6 million.
The Wachovia credit facility requires that Rockford maintain blocked lock box accounts,
whereby Wachovia takes possession of all cash receipts on a daily basis and these amounts are
applied to reduce Rockfords outstanding debt. In accordance with EITF 95-22: Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement, Rockford has recorded the $7.5 million
and $4.6 million outstanding balances as of December 31, 2008 and June 30, 2009, respectively, on
the Wachovia credit facility as short-term. Rockford expects to maintain the facility for its
entire term.
At April 1, 2009, Rockford had $5 million of convertible notes outstanding which were to
become due on June 10, 2009. In April of 2009, Rockford agreed with the sole holder of the
convertible notes to amend their terms, increasing the interest rate from 4.5% to 10% as of June
10, 2009, and requiring four equal payments of $1.25 million on June 10, 2009, December 10, 2009,
June 10, 2010, and December 10, 2010. Until June 10, 2009, the notes were convertible into
Rockford common stock and had associated warrants to purchase additional shares of Rockford common
stock. All conversion rights and warrants were terminated as at June 10, 2009. Rockford made the
required $1.25 million payment on June 10, 2009. As a result of the amendment and payment, at June
30, 2009, Rockford had outstanding $3.75 million of its senior subordinated secured notes and such
notes were not convertible into Rockford equity. Rockford may repay early any or all of the
outstanding principal without penalty. The notes are secured by a second priority lien on certain
Rockford assets.
In January 2009 Rockford had repurchased $2.5 million of convertible notes for approximately
$2.0 million. In connection with this repurchase, Rockford recorded a gain to interest and other
expense (income), net of approximately $0.5 million, net of fees and related unamortized debt
issuance costs. The repurchase reduced the principal amount outstanding on the notes from $7.5
million to $5.0 million.
5. Income Taxes
Rockford adopted the provisions of FASB Interpretation No. 48 Accounting for Uncertainty in
Income Taxes (FIN 48) an interpretation of FASB Statement No. 109 (SFAS 109) on January 1,
2007. Adoption had no net impact because the approximately $1.1 million adjustment reduced both
Rockfords deferred tax assets and the related valuation allowance. The future recognition of the
$1.1 million would not impact the effective income tax rate as long as Rockford maintains its full
valuation allowance against its deferred tax assets. If Rockford decides that it must recognize
such assets, and release the related valuation allowance, the application of SFAS 109 could
favorably affect Rockfords effective income tax rate. In 2008, Rockfords unrealized tax benefits
decreased by $505,000 due to completion of an IRS review of Rockfords 2006 federal income tax
return.
Rockford recognizes interest and penalties related to uncertain tax positions in income tax
expense. As of June 30, 2009, Rockford had not recorded any related expense in its statement of
operations. Rockfords 2005-2008 years remain subject to examination for federal income tax
purposes and its 2004-2008 years remain subject to examination for certain state taxing
jurisdictions where Rockford operates. The statute of limitations for certain years may be extended
if Rockford were to use certain of its carryover attributes from years outside of this range.
Rockford does not expect the amount of unrecognized tax benefits to increase or decrease
significantly over the next twelve months.
9
Rockford Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
6. Special Charges
During 2008 Rockford recorded special charges of approximately $1.1 million of which $0.5
million related to the second quarter of 2008. The second quarter of 2008 charges are costs
associated with the elimination of two executive officer positions. The remaining costs were for
personnel discharges associated with the closing of Rockfords Tempe manufacturing facilities in
2008 and the closing of Rockfords Michigan distribution facility in the second quarter of 2009.
Each of the special charges increased general and administrative expenses. Rockford expects to
complete all payments arising from these special charges by January 31, 2010. The following table
summarizes the outstanding liabilities arising from these special charges at December 31, 2008, the
changes in the six month period ending June 30, 2009, and the outstanding liabilities at June 30,
2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
Liability at |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at |
|
|
December 31, |
|
Reserve |
|
|
|
|
|
Adjustments |
|
June 30, |
|
|
2008 |
|
Recorded |
|
Payments |
|
To Reserve |
|
2009 |
Post employment costs: |
|
$ |
740 |
|
|
$ |
|
|
|
$ |
527 |
|
|
$ |
|
|
|
$ |
213 |
|
7. Stock Purchase Program
In September 2007 and February 2008, Rockfords Board of Directors adopted two common share
repurchase programs that authorized Rockford to purchase, in the open market or through negotiated
transactions, up to approximately 920,000 of its outstanding common shares. Rockford had
repurchased, before January 1, 2009, 814,512 shares for an aggregate purchase price of
approximately $1.3 million. Rockford did not repurchase any shares during the six month period
ended June 30, 2009, and has remaining authority to purchase up to 105,488 shares under the
programs.
8. Subsequent Events
Rockfords board of directors approved the delisting of Rockfords common stock from the
NASDAQ Stock Market and the deregistering of its common stock with the SEC. Rockford anticipates
that its delisting filing of Form 25 and its deregistration filing of Form 15 will be made with the
SEC during August 2009. Rockford expects the deregistration with the SEC to become effective 90
days from the date of the filing of the Form 15. After its shares have been delisted from NASDAQ,
Rockford anticipates that its shares will be quoted on the Pink OTC Markets Inc. quotation service.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Continuing
Operations
This discussion and analysis of financial condition and results of continuing operations
should be read keeping in mind the risk factors noted in the Forward Looking Statements section of
this report and in conjunction with Rockfords unaudited condensed consolidated financial
statements and the related disclosures included elsewhere in this report, and Managements
Discussion and Analysis of Financial Condition and Results of Continuing Operations included as
part of Rockfords Form 10-K for the year 2008, filed with the SEC on April 15, 2009.
Overview
Rockford is now focused almost entirely on its core mobile audio business. During 2009,
Rockford expects to work on improving penetration of the mobile audio markets and continuously
improving its core operations.
Production of all of Rockfords products is now outsourced. Rockford completed the
outsourcing of amplifier assembly during the fourth quarter of 2008, allowing the removal of
another layer of overhead in its operations in 2009. With the completion of its outsourcing
projects, and assuming only favorable or moderately adverse changes in exchange rates and
international trading conditions, Rockford anticipates that its 2009 results will reflect further
reductions in its cost structure.
All of Rockfords sales are now focused on the mass retail, independent specialist,
international distribution and OEM channels. In the first half of 2009 aftermarket sales were
down in the international and independent specialist channels for the Rockford Fosgate branded
product line and in the mass retail and international distribution channels for Rockfords
Lightning Audio branded product line. The mobile audio aftermarket in the U.S. continues to be
under pressure, creating an environment in which competitors in the aftermarket channels continued
aggressive pricing and promotional activity.
Rockford is working to increase aftermarket sales and believes its current products perform
better than the products Rockford had previously offered. Their improved performance contributes
positively to Rockfords sales efforts as dealers have found their installation to be easier and
their operation to be more powerful and more reliable. Assuming a moderate decline in the overall
mobile audio aftermarket, Rockford believes that it should be able to stabilize or even increase
its aftermarket sales. If consumer spending as a whole decreases more significantly, Rockford
expects the mobile audio aftermarket would also decline significantly and Rockford would likely
suffer a decrease in its aftermarket sales. Rockford believes its sales in the aftermarket channel
for the first half of 2009 were consistent with these expectations.
In 2008 and early 2009 OEM sales were impacted by a significant reduction in consumer spending
for automobiles, with a particularly dramatic impact on Rockfords revenues in these periods as its
OEM partners reduced production to bring their inventories in line with sales. Since Rockfords
sales and royalty revenues are recognized on automobile production rather than its OEM partners
final sales, their inventory reduction efforts had a disproportionate impact on Rockfords
revenues. Rockford anticipates some revival in OEM sales as its OEM partners return to production
consistent with their final sales results. Nevertheless, if decreases in consumer spending
continue, and sales of Nissan and Mitsubishi vehicles continue to decline, or if other changes in
demand reduce sales of the particular vehicles in which Rockfords systems are offered, OEM sales
may decline further.
Because financial events in late 2008 and early 2009, increased consumer fears, and reduced or
eliminated available financing, particularly lease financing, the outlook for vehicle sales and
leasing remains uncertain and the trend appears to be away from vehicle leasing. Leasing has been
an impediment to aftermarket audio sales because consumers are less willing to modify leased
vehicles. In the longer term, if the shift away from vehicle leasing continues, the shift may
contribute to a revival in aftermarket audio sales because (1) consumers will own and be more
willing to modify their vehicles and (2) consumers who are unable to replace their existing
vehicles may choose to spend on improvements.
11
Results of Operations
The following table shows selected consolidated statements of operations data expressed as a
percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
65.0 |
|
|
|
68.2 |
|
|
|
65.2 |
|
|
|
68.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35.0 |
|
|
|
31.8 |
|
|
|
34.8 |
|
|
|
31.2 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
15.7 |
|
|
|
13.4 |
|
|
|
16.4 |
|
|
|
14.5 |
|
General and administrative |
|
|
14.9 |
|
|
|
12.9 |
|
|
|
14.1 |
|
|
|
13.4 |
|
Research and development |
|
|
3.3 |
|
|
|
2.9 |
|
|
|
3.4 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
33.9 |
|
|
|
29.2 |
|
|
|
33.9 |
|
|
|
31.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1.1 |
|
|
|
2.6 |
|
|
|
0.9 |
|
|
|
0.2 |
|
Interest and other expense (income), net |
|
|
(2.7 |
) |
|
|
0.5 |
|
|
|
(1.0 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax |
|
|
3.8 |
|
|
|
2.1 |
|
|
|
1.9 |
|
|
|
1.2 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3.8 |
% |
|
|
2.1 |
% |
|
|
1.9 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold primarily consists of product costs, direct labor and manufacturing costs
associated with production of Rockfords products as well as warehousing, freight-in and customer
service expenses.
Sales and marketing expenses primarily consist of salaries, sales commissions, costs of
advertising, trade show costs and freight-out expenses.
General and administrative expenses primarily consist of salaries, facilities and other costs
of Rockfords accounting, finance, management information systems, administrative and executive
departments, as well as legal, accounting and other professional fees.
Research and development expenses primarily consist of salaries associated with research and
development personnel as well as prototyping and other costs related to new product development.
Geographic Distribution of Sales
Sales by geographic region were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Region: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
17,642 |
|
|
$ |
13,093 |
|
|
$ |
32,796 |
|
|
$ |
25,661 |
|
Other Americas |
|
|
2,044 |
|
|
|
837 |
|
|
|
3,480 |
|
|
|
1,804 |
|
Europe |
|
|
1,472 |
|
|
|
647 |
|
|
|
2,521 |
|
|
|
1,077 |
|
Asia |
|
|
628 |
|
|
|
871 |
|
|
|
1,433 |
|
|
|
1,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
21,786 |
|
|
$ |
15,448 |
|
|
$ |
40,230 |
|
|
$ |
29,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Sales are attributed to geographic regions based on the location of customers. No single
foreign country accounted for greater than 10% of sales. |
12
In the following discussion, certain increases or decreases may differ due to rounding.
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Net Sales. Net sales decreased by $6.3 million, or 29.1%, to $15.4 million for the three
months ended June 30, 2009, from $21.8 million for the three months ended June 30, 2008. The
decrease in sales was primarily attributable to substantial reductions in royalty revenue, lower
sales of Rockfords Lightning Audio branded products, lower sales to international customers, and
higher discounts due to end-of-life sales. These reductions were partially offset by lower
returns. Net sales for the three months ended June 30, 2009 also included sales of end-of-life
product and initial pipeline shipments of Rockfords 2009 new product line. OEM royalty revenue for
the three months ended June 30, 2009 and 2008 were $0.2 million and $1.6 million, respectively.
U.S. sales decreased by $4.5 million, or 25.8%, to $13.1 million for the three months ended
June 30, 2009, from $17.6 million for the three months ended June 30, 2008. International sales
decreased by $1.8 million, or 43.1%, to $2.4 million for the three months ended June 30, 2009, from
$4.1 million for the three months ended June 30, 2008. The decrease in international sales was
primarily due to across the board reductions in sales, which were significantly aggravated by a
receivership for one of Rockfords larger European distributors. Rockford replaced the European
distributor at the end of the second quarter 2009
Gross Profit. Gross profit decreased by $2.7 million, or 35.5%, to $4.9 million for the three
months ended June 30, 2009 from $7.6 million for the three months ended June 30, 2008. As a percent
of sales, gross profit decreased to 31.8% for the three months ended June 30, 2009, from 35.0% for
the three months ended June 30, 2008. The decrease in gross profit as a percent of net sales is
primarily due to lower royalty revenue as a percent of net sales and higher discounts on
end-of-life products. This decline was partially offset by lower product costs.
Sales and Marketing Expenses. Sales and marketing expenses decreased by $1.3 million, or
39.2%, to $2.1 million for the three months ended June 30, 2009 from $3.4 million for the three
months ended June 30, 2008. As a percent of sales, sales and marketing expenses decreased to 13.4%
for the three months ended June 30, 2009 from 15.7% for the three months ended June 30, 2008. The
decrease in sales and marketing expenses was primarily due to lower sales commissions and reduced
outbound freight expenses resulting from lower sales.
General and Administrative Expenses. General and administrative expenses decreased by $1.3
million or 38.9%, to $2.0 million for the three months ended June 30, 2009 from $3.3 million for
the three months ended June 30, 2008. As a percent of sales, general and administrative expenses
decreased to 12.9% for the three months ended June 30, 2009 from 14.9% for the three months ended
June 30, 2008. The decrease in general and administrative expenses is due in large part to lower
personnel related expenses and professional fees, and $0.5 million of severance expense for the
three months ended June 30, 2008 that was not repeated during the same period in 2009.
Research and Development Expenses. Research and development expenses decreased by $0.3
million, or 37.0%, to $0.5 million for the three months ended June 30, 2009 from $0.7 million for
the three months ended June 30, 2008. As a percent of sales, these expenses decreased to 2.9% for
the three months ended June 30, 2009, from 3.3% for the three months ended June 30, 2008. The
decrease in research and development expenses is primarily related to the costs incurred in 2008
associated with the launch of Rockfords 2008 new products. Although Rockford also introduced a
significant number of new products in 2009, the outsourced model allowed Rockford to reduce
research and development expenses relating to the 2009 new products.
Operating Income. Operating income increased by $0.2 million to $0.4 million for the three
months ended June 30, 2009 from $0.2 million for the three months ended June 30, 2008. As a percent
of sales, operating income increased to 2.6% for the three months ended June 30, 2009, from 1.1%
for the three months ended June 30, 2008. This increase in operating income is primarily due to
lower operating expenses partially offset by reduced sales.
Interest and Other Expense (Income), Net. Interest and other expense (income), net, primarily
consists of interest expense and other gains and losses. Interest and other expense (income), net,
increased by $0.7 million or 113.1%, to an expense of $0.1 million for the three months ended June
30, 2009 from income of $0.6 million for the three months ended June 30, 2008. The decline is
primarily attributable to the gain of approximately $0.8 million arising from the repurchase of
$2.0 million face value of convertible notes in 2008 partially offset by lower interest expense in
2009 due to lower effective borrowing rates and reduced loan balances.
Income Tax Expense. Income tax expense was $8,000 expense for the three months ended June 30,
2009 and zero expense for the three months ended June 30, 2008. The effective income tax rates were
0.0% for the three months ended June 30, 2009 and 2008.
13
Rockford did not record any federal tax expense on income in the second quarters of 2008 or
2009 for financial reporting purposes. Income tax expense for the second quarter 2009 related to
state income tax in jurisdictions where loss carryforwards are not available. Rockford continues to
maintain a valuation allowance reserve against all of its net deferred tax assets which include net
operating loss carryforwards. The available loss carryforwards are likely to offset virtually all
current period income tax expense until such time, if ever, that management concludes that some
portion of the reserved deferred tax asset becomes more likely than not recoverable.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Net Sales. Net sales decreased by $10.3 million, or 25.6%, to $29.9 million for the six months
ended June 30, 2009, from $40.2 million for the six months ended June 30, 2008. The decrease in
sales was primarily attributable to substantially lower royalty revenue, lower sales of Rockfords
Lightning Audio branded products, lower sales to international customers, and higher discounts due
to end-of-life sales. These reductions were partially offset by lower returns. Net sales for the
six months ended June 30, 2009 also included sales of end-of-life product and initial pipeline
shipments of Rockfords 2009 new product line. OEM royalty revenue for the six months ended June
30, 2009 and 2008 were $0.5 million and $3.4 million, respectively.
U.S. sales decreased by $7.1 million, or 21.8%, to $25.7 million for the six months ended June
30, 2009, from $32.8 million for the six months ended June 30, 2008. International sales decreased
by $3.2 million, or 42.8%, to $4.3 million for the six months ended June 30, 2009, from $7.4
million for the six months ended June 30, 2008. The decrease in international sales was primarily
due to across the board reductions in sales, which were significantly aggravated by a receivership
for one of Rockfords larger European distributors. Rockford replaced the European distributor at
the end of the second quarter 2009.
Gross Profit. Gross profit decreased by $4.6 million, or 33.2%, to $9.3 million for the six
months ended June 30, 2009 from $14.0 million for the six months ended June 30, 2008. As a percent
of sales, gross profit decreased to 31.2% for the six months ended June 30, 2009, from 34.8% for
the six months ended June 30, 2008. The decrease in gross profit as a percent of net sales is
primarily due to lower royalty revenue as a percent of net sales and higher discounts on
end-of-life products. This decline was partially offset by lower product costs.
Sales and Marketing Expenses. Sales and marketing expenses decreased by $2.3 million, or
34.4%, to $4.3 million for the six months ended June 30, 2009 from $6.6 million for the six months
ended June 30, 2008. As a percent of sales, sales and marketing expenses decreased to 14.5% for the
six months ended June 30, 2009 from 16.4% for the six months ended June 30, 2008. The decrease in
sales and marketing expenses was primarily due to lower sales commissions and reduced outbound
freight expenses resulting from lower sales.
General and Administrative Expenses. General and administrative expenses decreased by $1.6
million or 29.1%, to $4.0 million for the six months ended June 30, 2009 from $5.7 million for the
six months ended June 30, 2008. As a percent of sales, general and administrative expenses
decreased to 13.4% for the six months ended June 30, 2009 from 14.1% for the six months ended June
30, 2008. The decrease in general and administrative expenses is due in large part to lower
personnel related expenses and professional fees.
Research and Development Expenses. Research and development expenses decreased by $0.4
million, or 31.1%, to $0.9 million for the six months ended June 30, 2009 from $1.4 million for the
six months ended June 30, 2008. As a percent of sales, these expenses decreased to 3.1% for the six
months ended June 30, 2009, from 3.4% for the six months ended June 30, 2008. The decrease in
research and development expenses is primarily related to the costs incurred in 2008 associated
with the launch of Rockfords 2008 new products. Although Rockford also introduced a significant
number of new products in 2009, the outsourced model allowed Rockford to reduce research and
development expenses relating to the 2009 new products.
Operating Income. Operating income declined by $0.3 million, to $0.1 million for the six
months ended June 30, 2009 from $0.4 million for the six months ended June 30, 2008. As a percent
of sales, operating income declined to 0.2% for the six months ended June 30, 2009, from 0.9% for
the six months ended June 30, 2008. This decline in operating income is primarily due to reduced
sales partially offset by lower operating expenses.
Interest and Other Expense (Income), Net. Interest and other expense (income), net, primarily
consists of interest expense and other gains and losses. Interest and other expense (income), net,
declined by $0.1 million or 26.7%, to income of $0.3 million for the six months ended June 30, 2009
from income of $0.4 million for the six months ended June 30, 2008. The decline is primarily
attributable to the gain of approximately $0.8 million arising from the repurchase of $2.0 million
face value of convertible notes in 2008 compared to the gain of approximately of $0.5 million
arising from the repurchase of $2.5 million face value of convertible notes
14
in 2009. The decline was also partially offset by lower interest expense in 2009 due to lower
effective borrowing rates and reduced loan balances.
Income Tax Expense. Income tax expense was $8,000 for the six months ended June 30, 2009 and
zero expense for the six months ended June 30, 2008. The effective income tax rates were 0.0% for
the six months ended June 30, 2009 and 2008. Rockford did not record any federal tax expense on
income in the first half of 2009 and 2008 for financial reporting purposes. Income tax expense for
the first half of 2009 related to state income tax in jurisdictions where loss carryforwards are
not available. Rockford continues to maintain a valuation allowance reserve against all of its net
deferred tax assets which include net operating loss carryforwards. The available loss
carryforwards are likely to offset virtually all current period income tax expense until such time,
if ever, that management concludes that some portion of the reserved deferred tax asset becomes
more likely than not recoverable.
Liquidity and Capital Resources
Rockford has financed its business primarily using existing capital, cash flows from
operations and bank borrowings. Rockfords cash flow provided by operations was $6.4 million for
the six months ended June 30, 2009 compared to $2.3 million of cash provided by operations for the
six months ended June 30, 2008. A reduction in inventory and an increase in accounts payable were
the primary sources of cash for Rockford during the first six months of 2009. An increase in
accounts receivable was the primary use of cash during the first six months of 2009.
Rockford entered into an asset-based credit facility with Wachovia Capital Financial
Corporation (Western) as Agent and Wachovia Bank, National Association as Arranger on March 29,
2004 and as amended most recently on August 3, 2009. This credit facility, as amended, is a $20
million asset-based credit facility, has a term expiring on March 24, 2011, and is collateralized
by substantially all of Rockfords assets. Under the agreement, pricing options based on LIBOR and
prime rates are available to Rockford. The LIBOR and prime interest rate options were approximately
2.9% and 3.75% at June 30, 2009, respectively. As of June 30, 2009, Rockford was in compliance
with all applicable covenants. The availability under the credit facility at June 30, 2009 was
approximately $7.5 million in excess of the outstanding balance of $4.6 million.
At April 1, 2009, Rockford had $5 million of convertible notes outstanding which were to
become due on June 10, 2009. In April of 2009, Rockford agreed with the sole holder of the
convertible notes to amend their terms, increasing the interest rate from 4.5% to 10% as of June
10, 2009, and requiring four equal payments of $1.25 million on June 10, 2009, December 10, 2009,
June 10, 2010, and December 10, 2010. Until June 10, 2009, the notes were convertible into Rockford
common stock and had associated warrants to purchase additional shares of Rockford common stock.
All conversion rights and warrants were terminated as at June 10, 2009. Rockford made the
required $1.25 million payment on June 10, 2009. As a result of the amendment and payment, at June
30, 2009, Rockford had outstanding $3.75 million of its senior subordinated secured notes and such
notes were not convertible into Rockford equity. Rockford may repay early any or all of the
outstanding principal without penalty. The notes are secured by a second priority lien on certain
Rockford assets.
As amended, Rockford will be required to pay $2.5 million of the remaining outstanding notes
during the next twelve months. Based on current cash-flow forecasts, Rockford anticipates that it
will have available borrowings under its credit facility to complete this repayment. This
availability could be reduced by adverse economic events such as the credit crisis suffered at the
end of 2008 and early 2009 or by a deterioration in Rockfords operations or financial performance.
In January 2009 Rockford had repurchased $2.5 million of convertible notes for approximately
$2.0 million. In connection with this repurchase, Rockford recorded a gain to interest and other
expense (income), net of approximately $0.5 million, net of fees and related unamortized debt
issuance costs. This repurchase reduced the principal amount outstanding on the notes from $7.5
million to $5.0 million.
Rockford anticipates, based on its cash flow forecast, that cash flow from operations at the
expected level of operations for 2009 and available borrowings under its credit facility will be
adequate to meet Rockfords requirements for current capital expenditures, working capital and
interest payments for the next twelve months. Rockford does not expect asset sales will be a
significant source of cash in 2009 or 2010.
If Rockford is unable to meet its liquidity needs, it could be forced to seek one or more
financing alternatives and to consider changes in its operations. Financing alternatives could
include reducing or delaying capital expenditures, borrowing additional funds, selling equity
securities, restructuring indebtedness, selling additional assets, reducing expenditures for new
product development, and cutting other costs. Operational changes could include reductions in
employee compensation and benefits, reductions in working capital needs, changes in distribution
strategies and potential exit strategies. Some of these alternatives and changes might not prove to
15
be available on acceptable terms; others may substantially interfere with Rockfords business
and prospects and with the market for and liquidity of Rockfords common shares. Rockford cannot
give assurance that satisfactory alternatives or changes could be put into effect on reasonable
terms. If it needs to take some or all of these actions, but is not able to do so, Rockford may not
be able to satisfy its liquidity needs. Under such circumstances, Rockford might not be able to
continue its business as currently anticipated.
Immediately before the filing of this Form 10-Q, Rockford announced in a press release and in
a separate Form 8-K filing that its board of directors approved the delisting of Rockfords common
stock from the NASDAQ Stock Market and the deregistering of its common stock with the SEC. The
primary reasons for this decision, which are discussed in more detail in the Form 8-K filing and
press release, are:
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The nature and limited extent of the trading in Rockfords common stock as well as the
market value that the public markets are currently applying to Rockford; |
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|
The costs, both direct and indirect, associated with the preparation and filing of
Rockfords periodic reports with the SECRockford estimates it will save approximately $0.5
million on an annualized basis by delisting and deregistering; |
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The costs associated with complying with the Sarbanes-Oxley Act of 2002; |
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The fact that Rockfords stock price has reached very low levels and that delisting
proceedings involving additional expense and distraction are almost certain; |
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|
The expiration of Rockfords contractual obligation to maintain its NASDAQ listing. This
obligation to the holders of its convertible notes expired on June 10, 2009; |
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|
The fact that many other typical advantages of being a public company are not currently
available to Rockford, including enhanced access to capital and the ability to use equity
securities to acquire other businesses; and |
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|
The current level of analyst coverage and minimal liquidity for Rockfords common stock
under current and reasonably foreseeable market conditions. |
Rockford anticipates that its delisting filing of Form 25 will be made with the SEC on
approximately August 17, 2009, and that its deregistration filing of Form 15 will be made with the
SEC on approximately August 27, 2009. Rockford expects the deregistration with the SEC to become
effective 90 days from the date of the filing of the Form 15. After its shares have been delisted
from NASDAQ, Rockford anticipates that its shares will be quoted on the Pink OTC Markets Inc.
quotation service. For more information about this service, please see www.pinksheets.com. Once on
the pink sheets, Rockford intends to continue to make available periodic financial information.
Rockford had working capital of $5.2 million at June 30, 2009, compared to $5.9 million at
December 31, 2008. The significant components of working capital at June 30, 2009 include:
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Rockford had no cash and cash equivalents at June 30, 2009 and December 31, 2008. Due to
the daily sweep of cash by Wachovia Capital, described below, Rockford has reclassified cash
and cash equivalents to net against its current debt balance. |
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|
Rockfords net accounts receivable were $15.7 million at June 30, 2009 compared to $12.9
million at December 31, 2008. The increase in accounts receivable balances is primarily due
to increased sales late in the second quarter of 2009. |
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|
Rockfords inventory position decreased from $13.0 million at the end of 2008 to $6.2
million at June 30, 2009. This inventory decrease was primarily due to outsourcing, reduced
inventory purchases, the reduction of end of life inventory, and improved inventory
management resulting in increased inventory turns. |
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|
Accounts payable increased $2.2 million, from $4.0 million at December 31, 2008 to $6.2
million at June 30, 2009. This increase was primarily due to higher inventory purchases late
in the second quarter of 2009. |
Notes payable decreased $3.8 million, from $7.6 million at December 31, 2008 to $3.8 million
at June 30, 2009. The decrease is the result of the payments on the convertible notes completed
during the first half of 2009.
16
The Wachovia Capital credit facility requires that Rockford maintain blocked lock box
accounts, whereby Wachovia Capital takes possession of all cash receipts on a daily basis and these
amounts are applied to reduce Rockfords outstanding debt. In accordance with EITF 95-22: Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both
a Subjective Acceleration Clause and a Lock-Box Arrangement, Rockford has recorded the $4.6 million
and $7.5 million outstanding balance as at June 30, 2009 and December 31, 2008, respectively, on
the Wachovia Capital credit facility as short term. The credit facility matures on March 24, 2011,
and Rockford currently expects to maintain the facility until it matures.
Investing activities used $0.2 million of cash for the six months ended June 30, 2009 and used
$0.4 million of cash for the six months ended June 30, 2008. Capital expenditures, the primary use
of cash from investing activities, were $0.3 million for the six months ended June 30, 2009 versus
$0.6 million for the six months ended June 30, 2008. Rockfords capital spending is primarily in
tooling for specific product lines, and computer hardware and software to support operations.
Rockford does not anticipate significant changes in its future capital spending requirements, other
than additional expenditures that may arise from future product development opportunities.
As of June 30, 2009, Rockford was not involved in any unconsolidated Variable Interest Entity
(VIE) transactions.
Inflation. Inflation has not had a significant impact on Rockfords operations since it
operates in a market that requires continuing price decreases and Rockford has historically been
able to insist on continuing price decreases from its suppliers. Rising metal prices and increasing
transportation costs had an impact on Rockfords operations during much of 2008, but these impacts
have moderated late in 2008 and during 2009. Depending upon future cost trends, increases in
commodity and transportation costs may have an unfavorable impact on Rockfords operations in 2009.
Rockford sources a significant and increasing portion of its products and parts from China.
Although most of its purchases from China are priced in dollars, the suppliers ability to maintain
or reduce current prices may be affected by changes in Chinas exchange rate policy and related
exchange rate.
Contractual Obligations
Rockford did not have any material outstanding noncancelable purchase obligations at June 30,
2009. Several of Rockfords sourcing agreements require Rockford to place monthly purchase orders,
but do not require a minimum purchase quantity or dollar amount. Rockford does not anticipate
significant liability in connection with these contractual requirements.
Critical Accounting Policies and Estimates
There were no material changes to Rockfords critical accounting policies and estimates during
the three months ended June 30, 2009. For further information on Rockfords critical accounting
policies and estimates, refer to the annual report on Form 10-K for the year ended December 31,
2008 which was filed with the SEC on April 15, 2009.
New Accounting Standards
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent
Events (SFAS 165). SFAS 165 is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date, that is, whether that
date represents the date the financial statements were issued or were available to be issued. SFAS
165 is effective for interim or annual financial periods ending after June 15, 2009. Rockford
adopted SFAS 165 during the second quarter of 2009, and its adoption did not have a material impact
on our results of operations and financial position.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Rockfords primary market risk exposures are in the areas of interest rate risk and foreign
currency exchange rate risk. Its holdings of cash equivalents are subject to interest rate
fluctuations, but Rockford believes this risk is immaterial due to the short-term nature of these
investments and the essentially zero cash balances it carries. The outstanding balances on its
credit facilities are also subject to interest rate fluctuations.
The value of the U.S. dollar affects Rockfords financial results. Changes in exchange rates
may positively or negatively affect revenues, gross margins and operating expenses as expressed in
U.S. dollars. Historically, Rockfords exposure to currency exchange rate fluctuations have been
modest because it purchased finished goods and sold its products primarily in U.S. dollars and held
only a small percentage of its assets outside the U.S. However, Rockford conducts a portion of its
business in Canadian currency.
In recent years, Rockford has sourced an increasing percentage of its products, and of raw
materials and parts for its products, from outside the United States. Substantially all of
Rockfords finished goods, raw materials and parts are sourced in Asia, principally in China.
Although most of these purchases are denominated in dollars, an extended decline in the value of
the dollar may affect the terms and prices on which Rockford is able to purchase from its foreign
suppliers and may, therefore, increase Rockfords costs. Changes in the Chinese governments
exchange rate policies may have increased the risk of adverse changes in the U.S./China exchange
rate.
At June 30, 2009, Rockford did not have any outstanding forward contracts or other financial
hedges against exchange rate risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Rockfords principal executive officer (PEO) and principal financial officer (PFO), after
evaluating the effectiveness of Rockfords disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the
period covered by this quarterly report, have concluded that Rockfords disclosure controls and
procedures are effective based on their evaluation of these controls and procedures required by
paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting
There were no changes in Rockfords internal control over financial reporting that occurred
during Rockfords last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, Rockfords internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Rockfords management, including Rockfords PEO and PFO, believes that Rockfords disclosure
controls and procedures and internal control over financial reporting are effective at the
reasonable assurance level. However, Rockfords management does not expect that its disclosure
controls and procedures or its internal control over financial reporting will prevent all errors
and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision making can be faulty and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented by individual
acts, by collusion of two or more people or by management override of the controls. The design of
any system of controls also is based in part upon certain assumptions about the likelihood of
future events. There can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions and the degree of compliance with policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.
18
Part II. Other Information
Item 1. Legal Proceedings
Rockford is, and may continue to be, a party to various lawsuits and arbitrations from time to
time. As at June 30, 2009, Rockford was not a party to any legal proceedings that it believes are
material.
Item 1A. Risk Factors
Rockford is not aware of any material changes in the Risk Factors described in Item 1A to
Rockfords Annual Report filed with the SEC on April 15, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 4. Submission of Matters to a Vote of Security Holders
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(a) |
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Rockfords annual meeting of shareholders was held on May 28, 2009. |
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(b) |
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At the meeting, Rockfords shareholders elected six Directors for one-year terms which
expire at the annual shareholders meeting in 2010. The following tabulation represents
voting for the Directors |
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Name |
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Votes For |
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Withheld Authority |
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Nicholas G. Bartol |
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7,702,979 |
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101,205 |
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Timothy C. Bartol |
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6,923,012 |
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881,172 |
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Ralph B. Godfrey |
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6,827,185 |
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976,999 |
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Jerry E. Goldress |
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7,445,055 |
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359,129 |
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William R. Jackson |
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7,701,751 |
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102,433 |
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John P. Lloyd |
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7,611,383 |
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192,801 |
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(c) |
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At the annual meeting, Rockfords shareholders ratified the appointment of Ernst & Young
L.L.P. as Rockfords auditors for 2009. The holders of 7,783,116 common shares voted to
ratify the appointment, the holders of 20,568 common shares voted against the ratification,
and 500 common shares abstained. |
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(d) |
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At the meeting, Rockfords shareholders also approved the proposal to amend Rockfords
1997, 2002, 2005, and 2008 stock option plans, authorize an option exchange program for
options granted under the plans, and reapprove the plans as amended. The holders of
4,478,517 common shares voted in favor of the proposal, the holders of 2,602,718 common
shares voted against the Plan, the holders of 480 common shares abstained and the holders of
722,469 common shares did not vote. |
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(e) |
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Not applicable. |
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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Exhibit |
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Number |
|
Description of Document |
3.1
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Articles of Incorporation+ |
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3.2
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Restated Bylaws as amended through July 27, 2000++ |
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3.3
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Amendment to Articles of Incorporation filed on January 12, 1988+ |
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3.4
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Amendment to Articles of Incorporation filed on May 12, 1999+ |
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3.5
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Amendment to Articles of Incorporation filed on May 17, 1999+ |
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3.7
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Amendment to Articles of Incorporation filed on July 1, 1999+ |
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4.1
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Specimen Common Stock Certificate+ |
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4.2
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|
Reference is made to the Articles of Incorporation, as amended, and the Restated Bylaws,
as amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.7 for a description of the
rights of the holders of Common Stock. |
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10.84
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Ninth Amendment to Loan and Security Agreement, dated August 3, 2009, among Rockford and Wachovia Capital
Finance Corporation (Western) |
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31.1
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|
Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 for William R. Jackson. |
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31.2
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Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard G. Vasek. |
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32
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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+ |
|
Previously filed with our registration statement on Form S-1, which the SEC declared effective on April 19, 2000 and/or
amendments |
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++ |
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Previously filed on August 11, 2000 with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. |
(b) During the period from April 1, 2009, through June 30, 2009, Rockford filed the following
reports on Form 8-K.
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May 1, 2009 report disclosing on Item 9 that Rockford had issued a news release regarding
Rockfords results of Operations for the Quarter ended March 31, 2009. This report furnished
a copy of the press release under Item 9 of Form 8-K. |
20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned duly authorized officer.
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ROCKFORD CORPORATION
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Date: August 6, 2009 |
By: |
/s/ Richard G. Vasek
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Richard G. Vasek |
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Vice President of Finance,
Chief Financial Officer and Secretary
(Principal Financial Officer and Duly Authorized Officer) |
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21
EXHIBIT INDEX
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Exhibit |
|
|
Number |
|
Description of Document |
3.1
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Articles of Incorporation+ |
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3.2
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Restated Bylaws as amended through July 27, 2000++ |
|
|
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3.3
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Amendment to Articles of Incorporation filed on January 12, 1988+ |
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3.4
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Amendment to Articles of Incorporation filed on May 12, 1999+ |
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3.5
|
|
Amendment to Articles of Incorporation filed on May 17, 1999+ |
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|
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3.7
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|
Amendment to Articles of Incorporation filed on July 1, 1999+ |
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|
4.1
|
|
Specimen Common Stock Certificate+ |
|
|
|
4.2
|
|
Reference is made to the Articles of Incorporation, as amended, and the Restated Bylaws, as
amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.7 for a description of the rights
of the holders of Common Stock. |
|
|
|
10.84
|
|
Ninth Amendment to Loan and Security Agreement, dated August 3, 2009, among Rockford and
Wachovia Capital Finance Corporation (Western) |
|
|
|
31.1
|
|
Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for William R. Jackson. |
|
|
|
31.2
|
|
Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for Richard G. Vasek. |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
+ |
|
Previously filed with our registration statement on Form S-1, which the SEC declared effective on April 19, 2000 and/or
amendments |
|
++ |
|
Previously filed on August 11, 2000 with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. |
22