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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

Commission File Number 000-30138

ROCKFORD CORPORATION
(Exact Name of Registrant as Specified in its Charter)

ARIZONA (State or Other Jurisdiction of Incorporation or Organization)		86-0394353 (I.R.S. Employer Identification No.)
600 South Rockford Drive Tempe, Arizona (Address of Principal Executive Offices)		85281 (Zip Code)

(480) 967-3565
(Registrant’s 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     x          No

     Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practical date:

     As of June 30, 2001, there were 8,170,624 shares of Common Stock, $.01 par value per share, outstanding.

 

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
	CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
	CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	Notes to Condensed Consolidated Financial Statements (Unaudited)
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Item 2. Management’s Discussion and Analysis of Financial Condition and                      Results of Operations
Part II. Other Information
Item 1. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-10.39
EX-10.40

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ROCKFORD CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

					Page
Part I:			Financial Information
	Item 1.		Financial Statements (Unaudited)
			Condensed Consolidated Balance Sheets –			1
			June 30, 2001 and December 31, 2000
			Condensed Consolidated Income Statements –			2
			Three and Six Months Ended June 30, 2001 and 2000
			Condensed Consolidated Statements of Cash Flows –			3
			Six Months Ended June 30, 2001 and 2000
			Notes to Condensed Consolidated Financial Statements – June 30, 2001			4
	Item 2.		Management’s Discussion and Analysis of Financial			6
			Condition and Results of Operations
Part II:			Other Information
	Item 1.		Legal Proceedings			13
	Item 4.		Submission of Matters to a Vote of Security Holders			13
	Item 6.		Exhibits and Reports on Form 8-K			13
Signatures

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

				June 30,				December 31,
				2001				2000
				(Unaudited)				(Note)
				(In thousands)
Assets
Current assets:
		Cash		$	1,111			$	2,750
		Accounts receivable, less allowances of $2,385,000 and $1,427,000 at June 30, 2001 and December 31, 2000, respectively			34,898				28,488
		Inventories, net			25,119				20,406
		Deferred income taxes			3,596				3,596
		Prepaid expenses and other			3,129				2,091
Total current assets					67,853				57,331
Property and equipment, net					7,070				5,996
Deferred income taxes					605				605
Goodwill, net					2,191				2,275
Other assets					626				711
Total Assets				$	78,345			$	66,918
Liabilities and shareholders’ equity
Current liabilities:
		Accounts payable		$	11,701			$	7,118
		Accrued salaries and incentives			2,137				2,561
		Accrued warranty			4,662				4,621
		Income taxes payable			386				449
		Other accrued expenses			5,205				4,468
		Current portion of notes payable, long-term debt and capital lease obligations			1,167				935
Total current liabilities					25,258				20,152
Notes payable and long-term debt, less current portion					1,600				0
Capital lease obligations, less current portion					261				434
Shareholders’ equity:
		Common stock, $.01 par value – Authorized shares – 40,000,000
		Issued shares - 8,170,624 shares at June 30, 2001, and 7,997,529 shares at December 31, 2000			82				80
		Additional paid-in capital			30,060				29,504
		Retained earnings			21,271				16,695
	Accumulated other comprehensive income (loss)				(181	)			53
	Treasury stock – 832 shares				(6	)			0
Total shareholders’ equity					51,226				46,332
Total liabilities and shareholders’ equity				$	78,345			$	66,918

Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See notes to condensed consolidated financial statements.

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ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

			Three months ended								Six months ended
			June 30,								June 30,
			2001				2000				2001				2000
			(In thousands, except per share data)
Revenues			$	44,803			$	45,137			$	82,166			$	79,725
Cost of goods sold				29,306				27,561				53,389				48,674
Gross profit				15,497				17,576				28,777				31,051
Operating expenses:
	Sales and marketing			6,235				7,080				12,015				12,796
	General and administrative			4,326				4,121				7,700				7,586
	Research and development			691				646				1,461				1,357
Total operating expenses				11,252				11,847				21,176				21,739
Operating income				4,245				5,729				7,601				9,312
Interest and other expense, net				96				273				300				734
Income before income tax				4,149				5,456				7,301				8,578
Income tax expense				1,563				2,040				2,723				3,235
Net income			$	2,586			$	3,416			$	4,578			$	5,343
Net income per share:
	Basic		$	0.32			$	0.50			$	0.57			$	0.91
	Diluted		$	0.29			$	0.41			$	0.51			$	0.73
Weighted average shares:
	Basic			8,082				6,899				8,044				5,848
	Diluted			8,925				8,431				8,903				7,366

See notes to condensed consolidated financial statements.

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ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

					Six months ended
					June 30,
					2001				2000
					(In thousands)
Operating activities
Net income					$	4,578			$	5,343
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization				1,688				1,971
		Gain on sale of property and equipment				(4	)			(3	)
		Provision for doubtful accounts				465				246
		Provision for inventory				784				640
Changes in operating assets and liabilities:
	Accounts receivable					(6,875	)			(10,593	)
	Inventories					(5,497	)			(2,740	)
	Prepaid expenses and other assets					(1,038	)			(870	)
	Accounts payable					4,583				4,117
	Accrued salaries and incentives					(507	)			(1,828	)
	Accrued warranty					41				641
	Income taxes payable					20				276
	Other accrued expenses					738				2,679
			Net cash used in operating activities			(1,024	)			(121	)
Investing activities
Purchases of property and equipment						(2,764	)			(1,647	)
Proceeds from sale of property and equipment						4				3
Decrease (increase) in other assets						170				(378	)
			Net cash used in investing activities			(2,590	)			(2,022	)
Financing activities
Payments on bank line of credit						0				(15,812	)
Proceeds from (payments on) other long-term debt						2,068				(206	)
Payments on capital lease obligations						(409	)			(323	)
Proceeds from the exercise of stock options and warrants						437				128
Proceeds from sale of capital stock						121				24,530
Treasury shares purchased						(6	)			0
			Net cash provided by financing activities			2,211				8,317
Effect of exchange rate changes on cash						(236	)			(96	)
Net increase (decrease) in cash and cash equivalents						(1,639	)			6,078
Cash and cash equivalents at beginning of period						2,750				917
Cash and cash equivalents at end of period					$	1,111			$	6,995

See notes to condensed consolidated financial statements.

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Rockford Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2001

1. Basis of Presentation

We have prepared our unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, we have made all adjustments (consisting of normal recurring accruals) necessary for a fair presentation.

Operating results for the three-month and six-month periods ended June 30, 2001 are not necessarily indicative of the results you may expect for the year ending December 31, 2001.

For further information, refer to the consolidated financial statements and footnotes included as part of our Form 10-K for the year ended December 31, 2000 filed with the SEC on March 13, 2001.

2. Inventories

Inventories consist of the following:

		June 30,				December 31,
		2001				2000
		(In thousands)
Raw materials		$	7,489			$	7,330
Work-in-progress			1,186				863
Finished goods			18,379				13,659
			27,054				21,852
Less allowances			(1,935	)			(1,446	)
		$	25,119			$	20,406

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ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(continued)

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,
				2001				2000				2001				2000
				(in thousands, except per share data)
Numerator:
	Net income			$	2,586			$	3,416			$	4,578			$	5,343
	Effect of dilutive securities interest impact of convertible debentures				0				10				0				23
Numerator for diluted net income per share, income available to common shareholders after assumed Conversions				$	2,586			$	3,426			$	4,578			$	5,366
Denominator:
	Denominator for basic net income per share, weighted average shares				8,082				6,899				8,044				5,848
	Effect of dilutive securities:
		Employee stock options			837				1,212				853				1,143
		Warrants			6				8				6				19
		Convertible debentures			0				312				0				356
	Dilutive potential common shares				843				1,532				859				1,518
Denominator for diluted net income per share, adjusted weighted average shares and assumed conversions					8,925				8,431				8,903				7,366
Basic net income per share				$	0.32			$	0.50			$	0.57			$	0.91
Diluted net income per share				$	0.29			$	0.41			$	0.51			$	0.73

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read this discussion and analysis of financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related disclosures included elsewhere in this report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included as part of our Form 10-K for the year 2000, filed with the SEC on March 13, 2001.

Forward-Looking Statements

We make forward-looking statements in this report including, without limitation, statements concerning the future of our industry, product development, business strategy (including the possibility of future acquisitions), continued acceptance and growth of our products, dependence on significant customers and suppliers, and the adequacy of our available cash resources. You may identify these statements by our 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 our forward-looking statements, which speak only as at the date on which they are made. Our actual results will almost certainly differ materially from those described in our forward-looking statements. We disclaim any obligation or undertaking to update or revise our forward-looking statements to reflect changes in our expectations or changes in events, conditions, or circumstances on which our expectations are based.

Our forward-looking statements discuss future expectations. They may contain projections of results of operations or of financial condition or state other forward-looking information. 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 2000, filed with the SEC on March 13, 2001, and in Exhibit 99.1 to our Annual Report, “Risk Factors That May Affect Rockford’s Operating Results, Business Prospects and Stock Price.” The risk factors noted throughout this report and our Annual Report, particularly in the discussion in Exhibit 99.1 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.

Overview

History

Rockford is a designer, manufacturer and distributor of high performance car audio systems under the Rockford Fosgate and Lightning Audio brands for the worldwide car audio aftermarket. We also sell professional audio products under the Hafler brand. We began selling home theater products under the Fosgate Audionics brand in April 2001. Our corporate headquarters and electronics manufacturing facilities are located in Tempe, Arizona. We manufacture speakers at our facility in Grand Rapids, Michigan. We use warehouses strategically located in the U.S., Canada, Japan, Singapore and Germany that enhance our ability to serve our markets faster and, we believe, more cost effectively than many of our competitors.

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Business

We generated over 98% of our sales in the quarters ended June 30, 2001 and 2000 from our car audio products.

In the U.S., we sell our car audio products using commissioned independent sales representative firms who are supported by our employee regional managers. Internationally, we sell products in over 60 countries. In most countries outside the U.S., we have established relationships with independent distributors who purchase our products and resell them to retailers. As part of our efforts to convert selected foreign markets to a one-step distribution system, we sell through wholly owned subsidiaries using commissioned independent sales representatives in Germany (since 1999), Austria (beginning in early 2000) and Japan (starting in 2001). We sell through commissioned independent sales representatives in Canada (since 1999).

In March 1999, we began selling our car audio products to Best Buy. Best Buy accounted for 16.6% of our sales for the six months ended June 30, 2001 and 15.8% for the six months ended June 30, 2000. Our growth plan contemplates that Best Buy will continue to account for a significant portion of our sales for the foreseeable future.

In June 1999, we acquired Lightning Audio, a manufacturer and distributor of car audio accessories. In addition to continuing to market accessories under this brand, we acquired Lightning Audio with a view toward marketing a complementary line of car audio products under the Lightning Audio brand. In January 2000, at the Consumer Electronics Show, we introduced amplifiers and subwoofers under the new Lightning Audio brand, Strike. In January 2001, at the Consumer Electronics Show, we expanded the product offering under the Strike brand by introducing a new line of full-range speakers. Additionally, we introduced new lines of amplifiers and subwoofers under two new Lightning Audio brands, Bolt and Storm. The products under these three Lighting Audio brands are more moderately priced than our Rockford Fosgate products.

Results of Operations

The following table shows, for the periods indicated, selected consolidated statements of operations data expressed as a percentage of net sales:

			Three months ended								Six months ended
			June 30,								June 30,
			2001				2000				2001				2000
Net sales				100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold				65.4				61.1				65.0				61.1
Gross profit				34.6				38.9				35.0				38.9
Operating expenses:
	Sales and marketing			13.9				15.7				14.6				16.0
	General and administrative			9.7				9.1				9.3				9.5
	Research and development			1.5				1.4				1.8				1.7
Sales, general and administrative expenses				25.1				26.2				25.7				27.2
Operating income				9.5				12.7				9.3				11.7
Interest and other expense, net				0.2				0.6				0.4				0.9
Income before tax				9.3				12.1				8.9				10.8
Income tax expense				3.5				4.5				3.3				4.1
Net income				5.8	%			7.6	%			5.6	%			6.7	%

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Cost of goods sold primarily consists of raw materials, direct labor and manufacturing costs associated with production of our products as well as warranty, warehousing and customer service expenses.

Sales and marketing expenses primarily consist of salaries, sales commissions and costs of advertising, trade shows, distributor and sales representative conferences and freight.

General and administrative expenses primarily consist of salaries, facilities and other costs of our accounting, finance, management information systems, administrative and executive departments, as well as legal, accounting and other professional fees and expenses associated with our business.

Research and development expenses primarily consist of salaries associated with our research and development personnel.

Geographic Distribution of Sales

Our sales by geographic region were as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2001				2000				2001				2000
		(In thousands)								(In thousands)
REGION:
United States		$	36,733			$	37,210			$	68,168			$	66,773
Other Americas			3,304				3,112				5,190				4,661
Europe			2,627				2,111				4,517				3,771
Asia			2,139				2,704				4,291				4,520
Total sales (1)		$	44,803			$	45,137			$	82,166			$	79,725

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(1)

Sales are attributed to geographic regions based on the location of customers. No single foreign country accounted for greater than 10% of our sales.

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

In the following discussion, certain increases or decreases may differ due to rounding.

Net Sales. Sales increased by $2.5 million, or 3.1%, to $82.2 million for the six months ended June 30, 2001 from $79.7 million for the six months ended June 30, 2000. Excluding currency effects, sales increased 3.9% for the six months ended June 30, 2001. The increase in sales primarily was attributable to growth in Lightning Audio sales due to the launch of a new line of full-range speakers and the introduction of new brand line amplifiers and subwoofers. The increase in Lightning Audio sales of 54.0% was partially offset by a 3.2% decrease in Rockford Fosgate sales year over year. In addition, Best Buy accounted for $13.6 million, or 16.6% of our sales, for the six months ended June 30, 2001 compared to $12.6 million, or 15.8% of our sales, for the six months ended June 30, 2000.

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U.S. sales increased by $1.4 million, or 2.1%, to $68.2 million for the six months ended June 30, 2001 from $66.8 million for the six months ended June 30, 2000. International sales increased by $1.1 million, or 8.5%, to $14.0 million for the six months ended June 30, 2001 from $12.9 million for the six months ended June 30, 2000.

Cost of Goods Sold. Cost of goods sold increased by $4.7 million, or 9.6%, to $53.4 million for the six months ended June 30, 2001 from $48.7 million for the six months ended June 30, 2000. Substantially all of the increase was due to increased sales of lower margined product. As a percent of sales, cost of goods sold increased to 65.0% for the six months ended June 30, 2001 from 61.1% for the six months ended June 30, 2000. The primary reasons for the increase as a percent of sales included a mix shift toward lower margined products, a more aggressive stance on pricing and promotional programs to increase market share and end-of-life discounts on source units.

Sales and Marketing Expenses. Sales and marketing expenses decreased by $0.8 million, or 6.7%, to $12.0 million for the six months ended June 30, 2001 from $12.8 million for the six months ended June 30, 2000. As a percent of sales, sales and marketing expenses decreased to 14.6% for the six months ended June 30, 2001 from 16.0% for the six months ended June 30, 2000. The decrease as a percent of sales primarily was because of lower commissions and because some expenses in this category are fixed and do not fluctuate with sales.

General and Administrative Expenses. General and administrative expenses increased slightly by $0.1 million, or 1.3%, to $7.7 million for the six months ended June 30, 2001 from $7.6 million for the six months ended June 30, 2000. As a percent of sales, general and administrative expenses decreased to 9.3% for the six months ended June 30, 2001 from 9.5% for the six months ended June 30, 2000. The decrease as a percent of sales primarily was because some expenses in this category are fixed and do not fluctuate with sales.

Research and Development Expenses. Research and development expenses increased by $0.1 million, or 7.1%, to $1.5 million for the six months ended June 30, 2001 from $1.4 million for the six months ended June 30, 2000. As a percent of sales, these expenses increased to 1.8% for the six months ended June 20, 2001 from 1.7% for the six months ended June 30, 2000.

Operating Income. Operating income decreased by $1.7 million, or 18.3%, to $7.6 million for the six months ended June 30, 2001 from $9.3 million for the six months ended June 30, 2000. As a percent of sales, operating income decreased to 9.3% for the six months ended June 30, 2001 from 11.7% for the six months ended June 30, 2000. This decrease primarily was attributable to mix shift toward lower margined products, a more aggressive stance on pricing and promotional programs to increase market share and end-of-life discounts on source units.

Interest and Other Expense, Net. Interest and other expense, net, primarily consists of interest expense and currency gains and losses. Interest and other expense, net, decreased by $0.4 million, or 59.1%, to $0.3 million for the six months ended June 30, 2001 from $0.7 million for the six months ended June 30, 2000. The decrease in interest expense was primarily due to the repayment of our line of credit with proceeds from our initial public offering on April 20, 2000, which was partially offset by losses resulting from foreign currency exchange rate changes on certain international sales.

Income Tax Expense. Income tax expense decreased by $0.5 million, or 15.6%, to $2.7 million for the six months

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ended June 30, 2001 from $3.2 million for the six months ended June 30, 2000. The effective income tax rates were 37.3% for the six months ended June 30, 2001 and 37.7% for the six months ended June 30, 2000.

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

In the following discussion, certain increases or decreases may differ due to rounding.

Net Sales. Sales decreased by $0.3 million, or 0.7%, to $44.8 million for the three months ended June 30, 2001 from $45.1 million for the three months ended June 30, 2000. Excluding currency effects, sales decreased by 0.2% for the three months ended June 30, 2001. The decrease in sales primarily was attributable to an overall softness in the car audio market. In addition, Best Buy accounted for $7.0 million, or 15.6% of our sales, for the three months ended June 30, 2001 compared to $6.3 million, or 13.9% of our sales, for the three months ended June 30, 2000.

U.S. sales decreased by $0.5 million, or 1.3%, to $36.7 million for the three months ended June 30, 2001 from $37.2 million for the three months ended June 30, 2000. International sales increased by $0.2 million, or 2.5%, to $8.1 million for the three months ended June 30, 2001 from $7.9 million for the three months ended June 30, 2000.

Cost of Goods Sold. Cost of goods sold increased by $1.7 million, or 6.2%, to $29.3 million for the three months ended June 30, 2001 from $27.6 million for the three months ended June 30, 2000. Substantially all of the increase was due to increased sales of lower margined product. As a percent of sales, cost of goods sold increased to 65.4% for the three months ended June 30, 2001 from 61.1% for the three months ended June 30, 2000. The primary reasons for the increase as a percent of sales included a mix shift toward lower margined products, a more aggressive stance on pricing and promotional programs to increase market share and end-of-life discounts on source units.

Sales and Marketing Expenses. Sales and marketing expenses decreased by $0.9 million, or 12.7%, to $6.2 million for the three months ended June 30, 2001 from $7.1 million for the three months ended June 30, 2000. As a percent of sales, sales and marketing expenses decreased to 13.9% for the three months ended June 30, 2001 from 15.7% for the three months ended June 30, 2000. The decrease as a percent of sales primarily was because of lower commissions and because some expenses in this category are fixed and do not fluctuate with sales.

General and Administrative Expenses. General and administrative expenses increased slightly by $0.2 million, or 4.9%, to $4.3 million for the three months ended June 30, 2001 from $4.1 million for the three months ended June 30, 2000. Although our focus is on controlling operational spending, some expenses that are fixed over the short run cannot be quickly reduced. As a percent of sales, general and administrative expenses increased to 9.7% for the three months ended June 30, 2001 from 9.1% for the three months ended June 30, 2000. The increase as a percent of sales primarily was because some expenses in this category could not be decreased in the short run while our sales decreased slightly during this period.

Research and Development Expenses. Research and development expenses increased by $0.1 million, or 7.0%, to $0.7 million for the three months ended June 30, 2001 from $0.6 million for the three months ended June 30, 2000. As a percent of sales, these expenses increased to 1.5% for the three months ended June 20, 2001 from 1.4% for the three months ended June 30, 2000.

Operating Income. Operating income decreased by $1.5 million, or 26.3%, to $4.2 million for the three months

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ended June 30, 2001 from $5.7 million for the three months ended June 30, 2000. As a percent of sales, operating income decreased to 9.5% for the three months ended June 30, 2001 from 12.7% for the three months ended June 30, 2000. This decrease primarily was attributable to a mix shift toward lower margined products, a more aggressive stance on pricing and promotional programs to increase market share and end-of-life discounts on source units.

Interest and Other Expense, Net. Interest and other expense, net, primarily consists of interest expense and currency gains and losses. Interest and other expense, net, decreased by $0.2 million, or 66.7%, to $0.1 million for the three months ended June 30, 2001 from $0.3 million for the three months ended June 30, 2000. The decrease in interest expense was primarily due to the repayment of our line of credit with proceeds from our initial public offering on April 20, 2000, which was partially offset by losses resulting from foreign currency exchange rate changes on certain international sales.

Income Tax Expense. Income tax expense decreased by $0.4 million, or 20.0%, to $1.6 million for the three months ended June 30, 2001 from $2.0 million for the three months ended June 30, 2000. The effective income tax rates were 37.7% for the three months ended June 30, 2001 and 37.4% for the three months ended June 30, 2000.

Liquidity and Capital Resources

Since 1995, we have financed our business primarily using cash flows from operations, bank borrowings and borrowings from shareholders. In the second quarter of 2000 we added the proceeds of our initial public offering to this financing. We had working capital of $42.6 million at June 30, 2001, compared to $37.2 million at December 31, 2000. At June 30, 2001, we maintained $1.1 million of cash balances.

On June 28, 2001, we entered into a $30 million revolving credit facility with Bank of America, N.A. and Bank One, Arizona, N.A. This new credit facility replaced a $20 million line previously held with another financial institution.

As of June 30, 2001 we had a balance of $1.6 million on this bank credit facility, which is collateralized by substantially all of our assets. The line-of-credit has a blended variable interest rate per annum of LIBOR plus 150 basis points or prime plus no basis points. As of June 30, 2001, the revolving line-of-credit had an interest rate of 5.37% per annum. The bank credit facility is scheduled to mature on June 27, 2003. The credit facility contains provisions that, among other things, require Rockford to maintain certain minimum levels of EBITDA and debt service coverage and also limit the amount of debt incurred and capital expenditures annually.

We also have a $5.0 million capital lease credit facility under which we can fund leases until July 1, 2002, at which time the availability to enter into additional leases expires. We use the capital lease credit facility for the purchase of capital equipment under agreements structured as three-year capital lease obligations. As of June 30, 2001, the capital lease credit facility had an outstanding balance of $0.7 million with a weighted-average interest rate of 8.16% per annum.

Net cash used in operating activities was $1.0 million for the six months ended June 30, 2001, and $0.1 million for the six months ended June 30, 2000. Cash used in operating activities was primarily related to the effect of increasing accounts receivables and inventories, which was partially offset by the increase in accounts payable.

Net cash used in investing activities was $2.6 million for the six months ended June 30, 2001, and $2.0 million for the six months ended June 30, 2000. Net cash used in investing activities was primarily related to purchases of property and equipment and an increase in other assets.

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Net cash provided by financing activities was $2.2 million for the six months ended June 30, 2001, and $8.3 million for the six months ended June 30, 2000. Net cash provided by financial activities was primarily a result of borrowing from our new credit facility established on June 28, 2001. It also includes proceeds from the exercise of stock options, which was partially offset by payments on capital lease obligations. Net cash provided by financing activities for 2000 was primarily a result of the net proceeds received from our initial public offering on April 20, 2000 of $24.5 million partially offset by the repayment of our credit facility.

We may pursue acquisitions of businesses, products or technologies that could complement or expand our business and product offerings. Any material acquisition could result in an increase in working capital requirements depending on the amount, timing and nature of the consideration we agree to pay. On July 16, 2001, we entered into an agreement to purchase Audio Innovations, Inc., located in Stillwater, Oklahoma. Audio Innovations manufactures, markets and distributes branded, aftermarket car audio enclosures under the names of Q-Logic, Q-Forms and Q-Customs. Audio Innovations has a broad range of distribution including over 1,000 specialty dealer locations and major retailers such as Best Buy, Circuit City and Crutchfield. We completed this acquisition on July 31, 2001. We financed the purchase price of approximately $4 million, as well as debt repayments of approximately $2 million, from our line of credit. We also anticipate making earn-out payments to the sellers of $500,000 over the next three years.

We believe our existing resources and anticipated cash flows from operations will be sufficient to meet our cash needs for the next twelve months. This is the case even taking into account our Audio Innovations acquisition. However, should we pursue an acquisition larger than our existing resources can support, we may need to pursue additional debt or equity resources.

Subsequent Events

As noted above, we announced our agreement to acquire Audio Innovations on July 16, 2001, and completed the acquisition on July 31, 2001.

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Part II. Other Information

Item 1. Legal Proceedings.

     In our Annual Report on Form 10-K for the year 2000, filed with the SEC on March 13, 2001, we described a patent claim made against us by Integrated Electronic Technologies ("IET") and its principal, David Fiori. The claim, which IET and Fiori have pursued intermittently since 1998, alleges that our patented TOPAZ circuit design infringes IET and Fiori patents. The TOPAZ circuit is used in our higher-priced “Punch” line of car audio amplifiers and in our Hafler professional amplifiers. Since March 13, 2001, we have engaged in additional discussions with Fiori and his counsel relating to the complaint filed early this year. Based on our belief that our products do not infringe the patents, and other available defenses, we have refused to make a material payment to settle the claim. Fiori served the complaint on us on June 26, 2001, and we filed an answer on July 16, 2001. Our answer denied all liability, asserted various defenses, and requested a finding that our products do not infringe on any of the patents in question. We continue to believe that these claims are without merit and intend to defend this matter vigorously.

     In addition to the above, we are and may continue to be a party to various lawsuits and arbitrations from time to time. As of June 30, 2001, we were not a party to any legal proceedings that we believe are material.

Item 4. Submission of Matters to a Vote of Security Holders.

     We held our annual meeting of shareholders on Wednesday, April 25, 2001. The election of all our directors was the only matter submitted to our shareholders. The shareholders re-elected all six of our directors at the meeting.

     The names of the directors elected, and the number of votes each received, is as follows:

Name		Votes For				Votes Against				Abstentions				Broker Non-Votes
W. Gary Suttle			7,431,867				0				2,951				0
Nicholas G. Bartol			7,431,867				0				2,951				0
Ralph B. Godfrey			7,431,867				0				2,951				0
Jerry E. Goldress			7,431,867				0				2,951				0
Timothy C. Bartol			7,431,867				0				2,951				0
John P. Lloyd			7,431,867				0				2,951				0

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

Exhibit
Number		Description of Document
3.1		Articles of Incorporation+
3.2		Restated Bylaws as amended through July 27, 2000++
3.3		Amendment to Articles of Incorporation filed on January 12, 1988+
3.4		Amendment to Articles of Incorporation filed on May 12, 1999+
3.5		Amendment to Articles of Incorporation filed on May 17, 1999+
3.6		Amendments to Bylaws adopted by the board of directors on

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Exhibit
Number		Description of Document
3.6		May 14, 1999+
3.7		Amendment to Articles of Incorporation filed on July 1, 1999+
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, 3.6, and 3.7 for a description of the rights of the holders of Common Stock.
10.39		Credit Agreement among Rockford Corporation, the Subsidiaries of Rockford Corporation, Bank One, Arizona, N.A., and Bank of America, N.A.
10.40		Stock Purchase Agreement among Rockford Corporation, Audio Innovations, Inc., and the shareholders of Audio Innovations, Inc.*

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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
++		Previously filed on August 11, 2000 with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
*		Portions of the document have been omitted and filed separately with the Commission under a request for confidential treatment.

(b)

Rockford did not file any reports on Form 8-K during the quarter for which this report is filed.

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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, thereunto duly authorized.

ROCKFORD CORPORATION

Date: August  14, 2001

By:

/s/ James M. Thomson                                           James M. Thomson Vice President of Finance, Chief Financial Officer and Secretary (Principal Financial Officer and Duly Authorized Officer)

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Exhibit Index

Exhibit
Number		Description of Document
3.1		Articles of Incorporation+
3.2		Restated Bylaws as amended through July 27, 2000++
3.3		Amendment to Articles of Incorporation filed on January 12, 1988+
3.4		Amendment to Articles of Incorporation filed on May 12, 1999+
3.5		Amendment to Articles of Incorporation filed on May 17, 1999+
3.6		Amendments to Bylaws adopted by the board of directors on May 14, 1999+
3.7		Amendment to Articles of Incorporation filed on July 1, 1999+
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, 3.6, and 3.7 for a description of the rights of the holders of Common Stock.
10.39		Credit Agreement among Rockford Corporation, the Subsidiaries of Rockford Corporation, Bank One, Arizona, N.A., and Bank of America, N.A.
10.40		Stock Purchase Agreement among Rockford Corporation, Audio Innovations, Inc., and the shareholders of Audio Innovations, Inc.*

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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
++		Previously filed on August 11, 2000 with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

*

Portions of the document have been omitted and filed separately with the Commission under a request for confidential treatment.