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 March 31, 2006
Commission File Number 000-30138
ROCKFORD CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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ARIZONA
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86-0394353 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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600 South Rockford Drive
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85281 |
Tempe, Arizona
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(Zip Code) |
(Address of Principal Executive Offices) |
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(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, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2). (Check one)
Large accelerated filer o Accelerated filer o Non-accelerated filer 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 May 9, 2006, there were 9,385,970 shares of Common Stock, $.01 par value per share,
outstanding, which is the only class of common stock of the Company registered under Section 12(g)
of the Securities Act of 1933.
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, product development, business strategy, continued acceptance
and growth of our products, 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. Actual results may differ materially from those described in our forward-looking
statements. We disclaim any obligation or undertaking to update these 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 2005, filed with the SEC on March 31, 2006, 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 per share data)
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March 31, |
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December 31, |
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2006 |
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2005 |
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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 $2,202 and $2,307 at March 31, 2006
and December 31, 2005, respectively |
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24,496 |
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24,721 |
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Inventories |
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17,340 |
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18,618 |
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Income taxes receivable |
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372 |
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168 |
|
Prepaid expenses and other current assets |
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4,196 |
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3,901 |
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Current assets of discontinued operations |
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245 |
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289 |
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Total current assets |
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46,649 |
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47,697 |
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Property and equipment, net |
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2,977 |
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3,104 |
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Other assets |
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1,745 |
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1,497 |
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Total assets |
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$ |
51,371 |
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$ |
52,298 |
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Liabilities and shareholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
9,881 |
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$ |
10,182 |
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Accrued salaries and incentives |
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1,535 |
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1,317 |
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Accrued warranty |
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1,903 |
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1,982 |
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Other accrued expenses |
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5,265 |
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4,890 |
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Current portion of capital lease and other long-term liabilities |
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280 |
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Asset-based credit facility |
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6,047 |
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6,109 |
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Total current liabilities |
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24,911 |
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24,480 |
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Notes payable, less unaccreted discount of $291 and $313 at March 31, 2006 and
December 31, 2005, respectively |
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9,209 |
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9,187 |
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Long-term portion of capital lease and other long-term liabilities |
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594 |
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Total liabilities |
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34,714 |
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33,667 |
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Shareholders equity: |
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Common stock, $.01 par value Authorized shares 40,000
Issued shares 9,386 shares at March 31, 2006 and 9,384 at December 31, 2005 |
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94 |
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94 |
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Additional paid-in capital |
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37,620 |
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37,548 |
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Retained deficit |
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(21,461 |
) |
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(19,408 |
) |
Accumulated other comprehensive income |
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404 |
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397 |
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Total shareholders equity |
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16,657 |
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18,631 |
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Total liabilities and shareholders equity |
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$ |
51,371 |
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$ |
52,298 |
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Note: The consolidated balance sheet at December 31, 2005, 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 accompanying 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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March 31, |
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2006 |
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2005 |
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Net sales |
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$ |
29,928 |
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$ |
39,616 |
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Cost of goods sold |
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22,070 |
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28,293 |
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Gross profit |
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7,858 |
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11,323 |
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Operating expenses: |
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Sales and marketing |
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4,940 |
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5,828 |
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General and administrative |
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3,660 |
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4,413 |
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Research and development |
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1,001 |
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811 |
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Total operating expenses |
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9,601 |
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11,052 |
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Operating income (loss) |
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(1,743 |
) |
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271 |
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Interest and other expense, net |
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316 |
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746 |
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Loss from continuing operations before income taxes |
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(2,059 |
) |
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(475 |
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Income tax expense |
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16 |
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Loss from continuing operations |
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(2,059 |
) |
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(491 |
) |
Income (loss) from discontinued operations |
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6 |
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(117 |
) |
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Net loss |
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$ |
(2,053 |
) |
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$ |
(608 |
) |
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Net loss per common share: |
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Income (loss) from continuing operations |
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Basic |
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$ |
(0.22 |
) |
|
$ |
(0.05 |
) |
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Diluted |
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$ |
(0.22 |
) |
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$ |
(0.05 |
) |
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Income (loss) from discontinued operations |
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Basic |
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$ |
0.00 |
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$ |
(0.01 |
) |
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Diluted |
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$ |
0.00 |
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$ |
(0.01 |
) |
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Net loss |
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Basic |
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$ |
(0.22 |
) |
|
$ |
(0.07 |
) |
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Diluted |
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$ |
(0.22 |
) |
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$ |
(0.07 |
) |
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Weighted average shares: |
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Basic |
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9,385 |
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9,233 |
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Diluted |
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9,385 |
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9,233 |
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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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Three months ended |
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March 31, |
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2006 |
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2005 |
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Cash flow from continuing operating activities: |
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Net loss from continuing operations |
|
$ |
(2,059 |
) |
|
$ |
(491 |
) |
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities: |
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Depreciation and amortization |
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712 |
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1,009 |
|
Gain on divestiture of business |
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(58 |
) |
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Loss on exit of European leases |
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|
700 |
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Gain on sale of property and equipment |
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(2 |
) |
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|
(15 |
) |
Share based compensation expense |
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68 |
|
|
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Provision for doubtful accounts |
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3 |
|
|
|
196 |
|
Provision for inventory |
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116 |
|
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|
187 |
|
Changes in operating assets and liabilities: |
|
|
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Accounts receivable |
|
|
(1,234 |
) |
|
|
(3,521 |
) |
Inventories |
|
|
295 |
|
|
|
4,850 |
|
Prepaid expenses and other |
|
|
65 |
|
|
|
(219 |
) |
Accounts payable |
|
|
269 |
|
|
|
(3,931 |
) |
Accrued salaries and incentives |
|
|
218 |
|
|
|
311 |
|
Accrued warranty |
|
|
(64 |
) |
|
|
(65 |
) |
Income taxes payable (receivable) |
|
|
(204 |
) |
|
|
21 |
|
Other accrued expenses |
|
|
526 |
|
|
|
(917 |
) |
|
|
|
|
|
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Net cash used in operating activities |
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(649 |
) |
|
|
(2,585 |
) |
Cash flow from investing activities: |
|
|
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|
|
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|
Purchases of property and equipment |
|
|
(151 |
) |
|
|
(143 |
) |
Proceeds from sale of property and equipment |
|
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2 |
|
|
|
93 |
|
Net proceeds from divestiture of businesses |
|
|
750 |
|
|
|
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|
(Increase) decrease in other assets |
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|
91 |
|
|
|
(106 |
) |
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Net cash provided by (used in) investing activities |
|
|
692 |
|
|
|
(156 |
) |
Cash flow from financing activities: |
|
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Net proceeds from (payments on) bank debt and short term notes |
|
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(46 |
) |
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2,756 |
|
Payments on capital lease obligations |
|
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(9 |
) |
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Proceeds from employee stock purchase plan |
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|
48 |
|
Proceeds from exercise of stock options |
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5 |
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Net cash (used in) provided by financing activities |
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|
(50 |
) |
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|
2,804 |
|
Effect of exchange rate changes on cash |
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7 |
|
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(63 |
) |
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|
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Net increase in cash flow from continuing operations |
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Net increase in cash flow from discontinued operations |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
|
$ |
|
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|
$ |
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|
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Cash flow from discontinued operations: |
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|
|
|
|
|
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|
Cash flow provided by operating activities |
|
|
17 |
|
|
|
51 |
|
Cash flow used in investing activities |
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(51 |
) |
Cash flow used in financing activities |
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(17 |
) |
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|
|
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|
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Net increase in cash flow from discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
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|
See notes to condensed consolidated financial statements.
6
Rockford Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2006
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, 2005, except for the adoption of
Statement of Financial Accounting Standards No. 123R, Share-Based Payments (SFAS 123R) see
Note 2. 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 necessary for a fair presentation.
Operating results for the three months ended March 31, 2006, are not necessarily indicative of
the results you may expect for the year ending December 31, 2006. Certain reclassifications have
been made to the March 31, 2005 interim financial statements in order to conform to the March 31,
2006 presentation.
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, 2005, filed with the Securities and
Exchange Commission (SEC) on March 31, 2006.
Comprehensive Loss
The components of comprehensive loss for the three months ended March 31, 2006 and 2005 are as
follows:
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Three months ended |
|
|
|
March 31, |
|
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|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Net loss |
|
$ |
(2,053 |
) |
|
$ |
(608 |
) |
Foreign currency translation adjustments |
|
|
7 |
|
|
|
(63 |
) |
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(2,046 |
) |
|
$ |
(671 |
) |
|
|
|
|
|
|
|
2. Share-based Compensation
At March 31, 2006 Rockford had four active share-based employee compensation plans. Stock
option awards granted from these plans are granted at the fair market value on the date of grant,
and vest over a period determined at the time the options are granted, ranging from zero to four
years, and have a maximum term of ten years. Certain options provide for accelerated vesting if
there is a change in control (as defined in the plans). When options under any of the plans are
exercised, new shares of Rockfords common stock are issued.
Prior to January 1, 2006 Rockford accounted for share-based employee compensation, including
stock options, using the method prescribed in Accounting Principles Board opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations (APB Opinion No. 25).
Under APB Opinion No. 25 stock options are granted at market price and no compensation cost is
recognized, and a disclosure is made regarding the pro forma effect on net earnings assuming
compensation cost had been recognized in accordance with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). In December 2004,
the FASB issued SFAS No. 123R, which requires companies to measure and recognize compensation
expense for all share-based payments at fair value. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using APB Opinion No 25, and generally requires
that such transactions be accounted for using prescribed fair-value based methods. SFAS No. 123R
permits public companies to adopt its requirements using one of two methods: (a) a modified
prospective method in which compensation costs are recognized beginning with the effective date
based on the requirements of SFAS No. 123R for all share-based payments granted or modified after
the effective date, and based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date
or (b) a modified retrospective method which includes the requirements of the modified
prospective method described above, but also
7
permits companies to restate based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures either for all periods presented or prior interim periods of the
year of adoption.
Effective January 1, 2006 Rockford adopted SFAS No 123R using the modified prospective method.
No share-based employee compensation cost has been reflected in net loss prior to the adoption of
SFAS No. 123R. Results for prior periods have not been restated.
The adoption of SFAS No. 123R increased loss before income tax expense and net loss for the
three months ended March 31, 2006 by approximately $68,000. Basic and diluted net loss per common
share for the three months ended March 31, 2006 would have been $0.21 and $0.21, respectively, if
Rockford had not adopted SFAS No. 123R, compared to reported basic and diluted net loss per common
share of $0.22 and $0.22 respectively. The total value of stock option awards is expensed ratably
over the service period of the employees receiving the awards. As of March 31, 2006, total
unrecognized compensation cost related to stock option awards was approximately $489,000 and the
related weighted-average period over which it is expected to be recognized is approximately 2.8
years.
Prior to the adoption of SFAS No. 123R, Rockford presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the condensed consolidated
statements of cash flows. SFAS No. 123R requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing cash flows. There were no excess tax benefits
for the three months ended March 31, 2006.
A summary of stock option activity within Rockfords share-based compensation plans and
changes for the three months ended March 31, 2006 is as follows:
|
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|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Balance at December 31, 2005 |
|
|
1,582,264 |
|
|
$ |
4.70 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
50,000 |
|
|
$ |
3.47 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,750 |
) |
|
$ |
2.69 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(2,950 |
) |
|
$ |
6.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
|
1,627,564 |
|
|
$ |
4.66 |
|
|
6.4 years |
|
$ |
882,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the three months ended March 31, 2006 was
$2,000. Options exercisable under Rockfords share-based compensation plans at March 31, 2006 were
1,213,501, with an average exercise price of $5.33, an average remaining contractual term of 5.6
years, and an aggregate intrinsic value of $408,000.
The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected stock price volatility |
|
|
.46 |
|
|
|
.46 |
|
Risk-free interest rate |
|
|
4.7 |
% |
|
|
3.4 |
% |
Expected life of options |
|
5 years |
|
5 years |
Using this model, the weighted average fair value of stock options granted during the three
months ended March 31, 2006 was $1.60 per share. There were no stock options granted during the
three months ended March 31, 2005.
8
The following table illustrates the effect on net loss and net loss per common share as if
Rockford had applied the fair value recognition provisions of SFAS No. 123 to all outstanding stock
option awards for periods presented prior to Rockfords adoption of SFAS No. 123R:
|
|
|
|
|
|
|
Three months |
|
|
|
ended |
|
|
|
March 31, |
|
|
|
2005 |
|
|
|
(In thousands, |
|
|
|
except per |
|
|
|
share data) |
|
Net loss as reported |
|
$ |
(608 |
) |
Proforma SFAS No. 123 expense |
|
|
(63 |
) |
|
|
|
|
Proforma net loss |
|
$ |
(671 |
) |
|
|
|
|
Proforma loss per common share: |
|
|
|
|
Basic |
|
$ |
(0.07 |
) |
|
|
|
|
Diluted |
|
$ |
(0.07 |
) |
|
|
|
|
For purposes of proforma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period.
3. Discontinued Operations
Rockford Home Group. In January 2005, Rockford engaged an investment banker to assess
strategic alternatives, including a potential sale, of its Rockford Home Group which was primarily
comprised of Rockfords NHT business. The Fosgate Audionics and Hafler businesses, along with NHT,
made up the Rockford Home Group.
On October 18, 2005, Rockford sold the assets and liabilities of NHT for a cash purchase price
of $2.4 million. At the closing, Rockford received approximately $2.2 million and the remaining
proceeds of approximately $0.2 million were placed into an escrow account that will be used to pay
claims, if any, of the Buyer relating to the representations made by Rockford in the Asset Purchase
Agreement. If there are no claims, the escrow amount will be released to Rockford in October 2006.
The amount held in escrow was recorded as a note receivable at March 31, 2006.
In connection with the sale of NHT, Rockford assigned a lease to office space, located in
Benicia, California, and used solely in NHTs operations, to the Buyer. As a condition of the
assignment of the lease, the landlord required Rockford to guarantee the rental payments through
October 2008, the lease termination date. As the buyer makes monthly lease payments, Rockfords
obligation is reduced by those amounts. As of March 31, 2006, the future rental commitment under
the original lease, and therefore the maximum potential exposure under the guarantee, was
approximately $0.4 million. Management believes the likelihood Rockford will have to perform under
the guarantee is remote. No liability relating to the guarantee has been recorded in Rockfords
financial statements as of March 31, 2006. As a result of the October 2005 sale, Rockford has
treated its Rockford Home Group operations as discontinued operations for all periods presented.
The following represents the results of operation for Rockfords Home Group for the three
months ended March 31, 2006 and 2005 and are reported on Rockfords statement of operations as
results from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
17 |
|
|
$ |
1,951 |
|
Cost of sales |
|
|
11 |
|
|
|
1,246 |
|
Operating expenses |
|
|
|
|
|
|
823 |
|
Interest and other (income) expense, net |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6 |
|
|
$ |
(117 |
) |
|
|
|
|
|
|
|
9
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
7,865 |
|
|
$ |
6,126 |
|
Work-in-progress |
|
|
1,381 |
|
|
|
1,494 |
|
Finished goods |
|
|
8,094 |
|
|
|
10,998 |
|
|
|
|
|
|
|
|
|
|
$ |
17,340 |
|
|
$ |
18,618 |
|
|
|
|
|
|
|
|
5. Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except per |
|
|
|
share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(2,059 |
) |
|
$ |
(491 |
) |
Income (loss) from discontinued operations |
|
|
6 |
|
|
|
(117 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,053 |
) |
|
$ |
(608 |
) |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic net loss per share |
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
9,385 |
|
|
|
9,233 |
|
Employee stock options |
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share |
|
|
9,385 |
|
|
|
9,233 |
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.22 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.22 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
Diluted |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.22 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.22 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
The effect of 200,620 and 468,871 employee stock options were not included in the diluted loss
per share calculation for the three month period ended March 31, 2006 and 2005, respectively, as
they were not dilutive. As of March 31, 2006 Rockford also has $9.5 million of 4.5% convertible
senior subordinated secured notes due 2009 and warrants to purchase 961,573 shares of common stock
at $3.73 per share. The noteholders may convert the notes into Rockford common stock at any time
before the scheduled maturity date of June, 2009 and Rockford has the
right automatically to convert
the notes before maturity under certain circumstances. The conversion price at March 31, 2006, was
$4.61 per share. If fully converted, the notes are scheduled to convert into 2,060,738 shares of
Rockfords common stock. The convertible senior subordinated secured notes and warrants were not
included in the diluted loss per share calculation for March 31, 2006 and 2005, as they were not
dilutive.
10
6. Notes Payable and Long-Term Debt
Rockford entered into a 3-year $35 million 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 on June 10, 2004, December 30, 2004, August 31, 2005 and March 21,
2006. This credit facility, as amended, has a 4-year term and is reduced to a $25 million
asset-based credit facility, which is collateralized by substantially all of Rockfords assets and
has a variable interest rate of LIBOR plus 300 basis points or Prime plus 100 basis points. The
balance on the facility and interest rate were $6.0 million and 8.25% per annum, respectively, at
March 31, 2006. At March 31, 2006, Rockford was in compliance with all applicable covenants.
The 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 $6.0 million
and $6.1 million outstanding balance as at March 31, 2006 and December 31, 2005 respectively, on
the Wachovia Capital credit facility as short term. The credit facility matures on March 29, 2008.
Rockford has outstanding $9.5 million of 4.5% convertible senior subordinated secured notes
due 2009 and warrants to purchase 961,573 shares of common stock at $3.73 per share. These items
are outstanding under agreements effective on June 10, 2004 and as amended on November 12, 2004.
The net proceeds of approximately $9.5 million face value are allocated between the warrants and
the notes based on their relative fair values. The value of the warrants was calculated using the
Black-Scholes pricing model. The discount on the notes is being accreted ratably, over the term of
the notes, to the $9.5 million amount due at maturity. Debt issuance costs were capitalized and are
being amortized over the life of the notes. The noteholders may convert the notes into Rockfords
common stock at any time before the scheduled maturity date of June 10, 2009. The conversion price
is $4.61 per share. If fully converted, the notes will convert into 2,060,738 shares of Rockfords
common stock. Rockford has the right automatically to convert the notes into common stock if the
common stock trades above a specified target price for a specified period. Rockford may also force
the exercise of the warrants under certain circumstances prior to their expiration date. The
noteholders also have a second priority lien on certain Rockford assets.
7. Disposal Of Assets
Q-Logic. Rockford sold the assets of its Q-Logic enclosures line of products on March 31,
2006 for $1.75 million. At closing on March 31, 2006, Rockford received $750,000 of cash and a
non-interest bearing note for $1.0 million payable in 30 equal monthly payments. The note was
discounted using Rockfords effective borrowing rate and recorded as a note receivable at March 31,
2006. Rockford adjusted the carrying value of its Q-Logic assets by recording an impairment charge
to cost of goods sold of approximately $0.8 million as of December 31, 2005. As a result of the
sale of the Q-Logic assets on March 31, 2006, Rockford recorded a gain of approximately $0.1
million to interest and other expense.
8. Restructuring
During the first quarter of 2006, Rockford restructured its European operations whereby
Rockford will sell its product through master distributors. Historically, in some European
countries Rockford distributed and sold products directly using its own warehouse and sales office.
Rockford recorded a liability for the future lease obligations of the vacated facilities by taking
a $0.7 million charge which increased cost of goods sold and general and administrative expense for
the three months ended March 31, 2006.
11
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 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 2005, filed with the SEC on March 31, 2006.
Overview
Rockford believes the strategic realignment announced in 2004, the investments made in new
products, distribution channels and technologies during 2004 and 2005, and improvements it is
implementing in its processes, have positioned Rockford for improved financial performance in 2006
and 2007. The strategic realignment has re-focused Rockford on its
core mobile audio business and
has resulted in the divestiture of its non-core businesses. Rockford
has also restructured its European operations, ending direct sales of
product to dealers and appointing new master distributors who will
undertake European sales. On March 31, 2006, Rockford sold the
assets and liabilities of its Q-Logic enclosure business. There were liabilities of approximately
$0.9 million at March 31, 2006 associated with
Rockfords strategic realignment. In Rockford's press release
relating to its first quarter 2006 results, Rockford anticipated that
the $0.7 million charge related to Rockford's vacated European
facilities would be included in interest and other expense. After
further review, Rockford determined it should reclassify this
expense, allocating $0.6 million to cost of goods sold and the
balance to general and administrative expense. This reclassification
did not change Rockford's net loss, but it reduced gross profit as a
percent of net sales by 1.9% and reduced operating income by $0.7
million compared to the amounts reported in the press release.
Rockfords results in the first three months of 2006 were lower compared to the first three
months of 2005. The 2006 period included charges related to the closures of Rockfords European
facilities and start-up costs incurred related to new product introductions for 2006, partially
offset by reduced expense levels resulting from the realignments undertaken during 2004 and 2005.
These items along with lower net sales contributed to an increase in net loss for the three months
ended March 31, from $(0.07) per share in 2005 to $(0.22) per share in 2006. Net sales for the
first three months of 2006 decreased compared to the first three months of 2005 by $9.7 million, or
24.5% primarily due to lower sales of Rockford Fosgate and Lightning Audio branded products,
including the elimination of sales associated with the discontinued source unit business, as well
as the elimination of sales of MB Quart and Omnifi branded products.
Rockford continues to expect a shift in its sales mix into different distribution channels. In
recent periods sales in the car audio aftermarket channels have been relatively flat or have had
declines in sales while the OEM channels have seen growth in sales. Rockford does not see a reason
to expect a change in these overall trends, although it is working to increase aftermarket sales.
Assuming a moderate decline in the overall car audio aftermarket, Rockford believes that it should
be able to stabilize or even increase its own aftermarket sales. The shift toward OEM sales has had
positive effects, including expansion of Rockfords product exposure beyond its traditional target
market and smoothing out of sales seasonality.
Adoption of SFAS No. 123R
As explained in Note 2 to the condensed consolidated financial statements included elsewhere
in this report, as of January 1, 2006, Rockford has adopted SFAS No. 123R using the modified
prospective method. During the three months ended March 31, 2006, Rockford recognized
approximately $68,000 of compensation expense related to the expensing of stock options in
accordance with SFAS No. 123R. This amount was allocated to cost of goods sold, sales and
marketing, general and administrative, and research and development expenses, in the accompanying
condensed consolidated statements of operations.
12
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 |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
73.7 |
|
|
|
71.4 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
26.3 |
|
|
|
28.6 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
16.5 |
|
|
|
14.7 |
|
General and administrative |
|
|
12.2 |
|
|
|
11.1 |
|
Research and development |
|
|
3.4 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
32.1 |
|
|
|
27.9 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(5.8 |
) |
|
|
0.7 |
|
Interest and other expense, net |
|
|
1.1 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax |
|
|
(6.9 |
) |
|
|
(1.2 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(6.9 |
) |
|
|
(1.2 |
) |
Loss from discontinued operations |
|
|
0.0 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(6.9 |
)% |
|
|
(1.5 |
)% |
|
|
|
|
|
|
|
Cost of goods sold primarily consists of raw materials, direct labor and manufacturing costs
associated with production of products as well as warranty, warehousing and customer service
expenses.
Sales and marketing expenses primarily consist of salaries, sales commissions, outbound
freight, costs of advertising, trade shows and distributor and sales representative conferences.
General and administrative expenses primarily consist of salaries, facilities and other costs
of accounting, finance, management information systems, administrative and executive departments,
as well as legal, accounting and other professional fees and expenses associated with Rockfords
business.
Research and development expenses primarily consist of salaries associated with research and
development personnel and legal costs related to Rockfords intellectual property.
Geographic Distribution of Sales
Sales by geographic region were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Region: (1) |
|
|
|
|
|
|
|
|
United States |
|
$ |
25,663 |
|
|
$ |
33,036 |
|
Other Americas |
|
|
1,729 |
|
|
|
2,385 |
|
Europe |
|
|
1,521 |
|
|
|
2,797 |
|
Asia |
|
|
1,015 |
|
|
|
1,398 |
|
|
|
|
|
|
|
|
Total sales |
|
$ |
29,928 |
|
|
$ |
39,616 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Sales are attributed to geographic regions based on the location of customers. No
single foreign country accounted for greater than 10% of sales. |
13
In the following discussion, certain increases or decreases may differ due to rounding
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Net Sales. Net sales decreased by $9.7 million, or 24.5%, to $29.9 million for the three
months ended March 31, 2006, from $39.6 million for the three months ended March 31, 2005. The
decrease in sales was primarily attributable to lower sales of the Rockford Fosgate and Lightning
Audio branded product line, including the elimination of sales of Rockfords discontinued source
unit business, as well as the elimination of sales of MB Quart and Omnifi branded products. These
lower sales were partially offset by increases in OEM sales and by lower sales discounts.
U.S. sales decreased by $7.3 million, or 22.3%, to $25.7 million for the three months ended
March 31, 2006, from $33.0 million for the three months ended March 31, 2005. International sales
decreased by $2.3 million, or 35.2%, to $4.3 million for the three months ended March 31, 2006,
from $6.6 million for the three months ended March 31, 2005. The decrease in international sales
was primarily due to lower sales of the Rockford Fosgate and Lighting Audio product lines. The
transition to a new distribution method in Europe contributed to this decrease.
Gross Profit. Gross Profit decreased by $3.5 million, or 30.6%, to $7.9 million for the three
months ended March 31, 2006, from $11.3 million for the three months ended March 31, 2005. As a
percent of sales, gross profit decreased to 26.3% for the three months ended March 31, 2006, from
28.6% for the three months ended March 31, 2005. The gross profit decrease is primarily due to
lower net sales, higher manufacturing variances, including premium freight, related to 2006 new
product launches, and additional reserves for excess and obsolete inventory resulting from a
cancelled product introduction and a $0.6 million charge related to future obligations for Rockfords
vacated European warehouse facilities.
Sales and Marketing Expenses. Sales and marketing expenses decreased by $0.9 million, or
15.2%, to $4.9 million for the three months ended March 31, 2006 from $5.8 million for the three
months ended March 31, 2005. As a percent of sales, sales and marketing expenses increased to 16.5%
for the three months ended March 31, 2006 from 14.7% for the three months ended March 31, 2005. The
decrease in expenses was primarily due to lower sales commissions and reduced outbound freight
resulting from lower sales.
General and Administrative Expenses. General and administrative expenses decreased by $0.8
million or 17.1%, to $3.7 million for the three months ended March 31, 2006 from $4.4 million for
the three months ended March 31, 2005. As a percent of sales, general and administrative expenses
increased to 12.2% for the three months ended March 31, 2006 from 11.1% for the three months ended
March 31, 2005. The decrease in general and administrative expenses is primarily due to lower
personnel related expenses, facilities costs, bad debt expense and professional fees partially
offset by a charge related to the future obligations for Rockfords vacated European sales office.
Research and Development Expenses. Research and development expenses increased by $0.2
million, or 23.4% to $1.0 million for the three months ended March 31, 2006, from $0.8 million for
the three months ended March 31, 2005. As a percent of sales, these expenses increased to 3.4% for
the three months ended March 31, 2006, from 2.1% for the three months ended March 31, 2005. The
increase is primarily costs incurred related to 2006 new product introductions.
Operating Income (Loss). Operating income (loss) declined by $2.0 million, to a $1.7 million
operating loss for the three months ended March 31, 2006 from $0.3 million operating income for the
three months ended March 31, 2005. As a percent of sales, operating income (loss) declined to a
5.8% operating loss for the three months ended March 31, 2006, from a 0.7% operating income for the
three months ended March 31, 2005. This decline in operating income is primarily due to lower net
sales and gross profit and a $0.7 million charge related to future obligations for Rockfords vacated
European facilities.
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 42.5%, to $0.3 million for the three months ended March 31, 2006 from $0.7 million for
the three months ended March 31, 2005. The decrease is primarily attributable to lower interest
expense in 2006 due to lower levels of borrowings and the $0.1 million gain from the divestiture of
the Q-Logic enclosure business.
Income Tax Expense. Income tax expense from continuing operations decreased by $16,000 to a
zero expense for the three months ended March 31, 2006 from a $16,000 expense for the three months
ended March 31, 2005. The effective income tax rates were 0.0% for the three months ended March 31,
2006, and 3.4% for the three months ended March 31, 2005. Rockford is not recording any tax benefit
on losses in the first quarter of 2006 for financial reporting purposes.
14
Liquidity and Capital Resources
Rockford has financed its business primarily using existing capital, cash flows from
operations, if any, proceeds from its private placement of convertible notes, and bank borrowings.
Rockfords cash flow used in operations was $0.6 million for the three months ended March 31, 2006
compared to $2.6 million of cash flow used in operations for the three months ended March 31, 2005.
Reductions in inventory and increases in other accrued expenses were the primary source of cash for
Rockford during the first three months of 2006. Increases in accounts receivable was the primary
use of cash during the first three months of 2006.
Rockford entered into a 3-year $35 million 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 on June 10, 2004, December 30, 2004, August 31, 2005 and March 21,
2006. This credit facility, as amended, has a 4-year term and is reduced to a $25 million
asset-based credit facility, which is collateralized by substantially all of Rockfords assets and
has a variable interest rate of LIBOR plus 300 basis points or Prime plus 100 basis points. The
balance on the facility and interest rate were $6.0 million and 8.25% per annum, respectively, at
March 31, 2006. At March 31, 2006, Rockford was in compliance with all applicable covenants.
Rockford has outstanding $9.5 million of 4.5% convertible senior subordinated secured notes
due 2009 and warrants to purchase 961,573 shares of common stock at $3.73 per share. These items
are outstanding under agreements effective on June 10, 2004 and as amended on November 12, 2004.
The net proceeds of approximately $9.5 million are allocated between the warrants and the notes
based on their relative fair values. The value of the warrants was calculated using the
Black-Scholes pricing model. The discount on the notes is being accreted ratably, over the term of
the notes, to the $9.5 million amount due at maturity. Debt issuance costs were capitalized and are
being amortized over the life of the notes. The noteholders may convert the notes into Rockfords
common stock at any time before the scheduled maturity date of June 10, 2009. The conversion price
is $4.61 per share. If fully converted, the notes will convert into 2,060,738 shares of Rockfords
common stock. Rockford has the right automatically to convert the notes into common stock if the
common stock trades above a specified target price for a specified period. Rockford may also force
the exercise of the warrants under certain circumstances prior to their expiration date. The
noteholders also have a second priority lien on certain Rockford assets.
Rockford anticipates, based on its cash flow forecast, that cash flow from operations at the
expected level of operations for 2006 and 2007 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 anticipates that its operations will
improve compared to its operations during 2005, so that its cash requirements in 2006 and 2007 will
be less than its cash requirements in 2004 and 2005. Rockford did not budget for proceeds from
non-core asset sales resulting from its strategic realignment, so that such proceeds have
supplemented Rockfords cash resources. The sale of the Q-Logic enclosure business completes the
anticipated sale of non-core assets and Rockford does not expect additional sales to supplement its
cash resources.
If Rockfords operations fail to improve, or if Rockford is otherwise unable to satisfy its
liquidity needs as anticipated, it could be forced to seek one or more financing alternatives.
These alternatives could include reducing or delaying capital expenditures, borrowing additional
funds, restructuring indebtedness, selling additional assets, reducing expenditures for new product
development, and cutting other costs. Some of these alternatives might not prove to be available on
acceptable terms; others may substantially interfere with Rockfords business and prospects.
Rockford cannot give assurance that satisfactory actions 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.
Rockford had working capital of $21.7 million at March 31, 2006, compared to $23.2 million at
December 31, 2005. The significant components of working capital at March 31, 2006 include:
|
|
|
Rockford had no cash and cash equivalents at March 31, 2006 and December 31, 2005. 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. |
|
|
|
|
Rockfords net accounts receivable were $24.5 million at March 31, 2006 compared to $24.7
million at December 31, 2005. The decrease in accounts receivable balances is primarily due
to the reduction of trade receivables related to the divestiture of Rockfords Q-Logic
enclosure business. |
15
|
|
|
Rockfords inventory position decreased from $18.6 million at the end of 2005 to $17.3
million at March 31, 2006. This inventory decrease was primarily due to improved inventory
turns, and the reduction of inventory related to the divestiture of the Q-Logic enclosure
business. |
|
|
|
|
Accounts payable decreased $0.3 million, from $10.2 million at December 31, 2005 to $9.9
million at March 31, 2006. This decrease was primarily due to lower inventory purchases. |
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 $6.0 million
and $6.1 million outstanding balance as at March 31, 2006 and December 31, 2005, respectively, on
the Wachovia Capital credit facility as short term. The credit facility matures on March 29, 2008.
Investing activities generated cash of $0.7 million for the three months ended March 31, 2006
versus a use of $0.2 million cash for the three months ended March 31, 2005. The source of cash
from investing activities in the first three months of 2006 was primarily due to proceeds from the
sale of Rockfords Q-Logic enclosure business. Capital expenditures, the primary use of cash from
investing activities, were $0.2 million for the three months ended March 31, 2006 versus $0.1
million for the three months ended March 31, 2005. Rockford continues to work to improve management
of its capital spending and has imposed increased payback requirements for approval of capital
spending. Rockfords capital spending is primarily in tooling for specific product lines, general
machinery and equipment to support manufacturing and computer hardware and software to support
operations. Rockford does not anticipate significant changes in its future capital spending
requirements, other than reductions resulting from its divestiture of non-core businesses and
elimination of the capital spending required for those businesses.
As of March 31, 2006, Rockford was not involved in any unconsolidated Variable Interest Entity
(VIE) transactions.
Contractual Obligations as of March 31, 2006
Rockford had certain contractual obligations at March 31, 2006 due as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
Less than |
|
More than |
Contractual Obligations |
|
Total |
|
1 year |
|
1-3 years |
|
3-5 years |
|
5 years |
Asset-based credit facility |
|
$ |
7,117 |
|
|
$ |
504 |
|
|
$ |
6,613 |
|
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
10,889 |
|
|
$ |
427 |
|
|
$ |
855 |
|
|
$ |
9,607 |
|
|
|
|
|
Capital leases and other long-term liabilities |
|
$ |
874 |
|
|
$ |
280 |
|
|
$ |
321 |
|
|
$ |
204 |
|
|
$ |
69 |
|
Operating Leases |
|
$ |
5,457 |
|
|
$ |
2,150 |
|
|
$ |
2,928 |
|
|
$ |
379 |
|
|
|
|
|
There have not been material changes in Rockfords Operating Leases since December 31, 2005.
Rockford did not have any material outstanding noncancelable purchase obligations at March 31,
2006. 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
The methods, estimates and judgments Rockford uses in applying its accounting policies have a
significant impact on the results reported in its consolidated financial statements. Rockford
evaluates its estimates and judgments on an on-going basis. Rockford bases its estimates on
historical experience and assumptions that Rockford believes to be reasonable under the
circumstances. Rockfords experience and assumptions form the basis for its judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results may vary from what Rockford anticipates and different assumptions or estimates about the
future could change its reported results. Rockford believes the following accounting policies are
the most critical to Rockford, in that they are important to the portrayal of Rockfords financial
statements and they require Rockfords most difficult, subjective or complex judgments in the
preparation of its consolidated financial statements:
16
Revenue Recognition. Rockford recognizes revenue pursuant to Staff Accounting Bulletin Nos.
101 and 104, Revenue Recognition in Financial Statements. Accordingly, Rockford recognizes revenue
and records sales, net of related discounts, when all of the following criteria are met:
|
|
|
Persuasive evidence of an arrangement exists; |
|
|
|
|
The price to the customer is fixed or determinable; and |
|
|
|
|
Collectibility is reasonably assured. |
Rockford sells almost all of its products F.O.B. place of shipment, so that upon shipment of
products, the above criteria are met and revenue is recognized.
Rockford also records reductions to revenue for estimated customer returns and additional
sales incentive offerings, such as growth and volume incentive rebates and prompt pay discounts,
based on historical rates. Should a greater proportion of customers return product or redeem
incentives than estimated, Rockford may need to make additional reductions to revenue.
Share-Based Compensation. As part of Rockfords adoption of SFAS No. 123R as of January 1,
2006, Rockford was required to recognize the fair value of share-based compensation awards as an
expense. Rockford applied the Black-Scholes option-pricing model in order to determine the fair
value of stock options on the date of grant, and Rockford applied judgment in estimating key
assumptions that are important elements in the model such as the expected stock-price volatility,
expected stock option life and expected forfeiture rates. Rockfords estimates of these important
assumptions are based on historical data and judgment regarding market trends and factors. If
actual results are not consistent with Rockfords assumptions and judgments used in estimating
these factors, Rockford may be required to record additional stock-based compensation expense.
Intangible Assets. Rockford accounts for acquired businesses under SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. When Rockford accounts for
acquired businesses as purchases, it allocates purchase prices to the assets, definite-lived
intangible assets, and liabilities acquired based on the estimated fair values on the respective
acquisition dates. Based on these values, Rockford allocates any excess purchase price over the
fair value of the net assets acquired to goodwill. Prior to December 31, 2005, Rockford had written
off all remaining goodwill because of its impairment as outlined in the notes to Rockfords
financial statements for the year ended December 31, 2005.
Allowance for Doubtful Accounts. Rockford maintains an allowance for doubtful accounts, based
on historical rates, for estimated losses resulting from the inability of its customers to make
required payments. The assessment of customers ability to pay generally includes direct contact
with the customer, investigation into customers financial status, as well as consideration of
customers payment history. If the financial condition of Rockfords customers were to deteriorate,
resulting in an impairment of their ability to make payments, Rockford might need to make
additional allowances.
Inventory. Rockford carries inventory at the lower of cost or market, computed using the
weighted average method. For purposes of the lower of cost or market calculations, Rockford writes
down obsolete or unmarketable inventory in amounts equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and market
conditions. Rockford reviews information such as quantity on hand versus forecasted use and
inventory aging listings to assist in this assessment. If actual future demand or market conditions
are less favorable than projected, Rockford may need to take additional inventory write-downs. Any
write-downs are reflected in cost of sales in the period incurred.
Warranty. Rockford maintains a warranty reserve, based on historical rates, for costs
associated with the repair or replacement of product that fails to meet its standard warranty
against defects in material and workmanship. Should actual product failure rates differ from its
estimates, Rockford would need to make revisions to its estimated accruals.
17
Income Taxes. Rockford must make certain estimates and judgments in determining income tax
expense for financial statement purposes. These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which arise from differences in the timing of recognition of
revenue and expense for tax and financial statement purposes. Rockford must assess the likelihood
that it will be able to recover Rockfords deferred tax assets. If recovery is not likely, Rockford
must increase its provision, or decrease its benefit, by recording a valuation allowance against
the deferred tax assets that Rockford estimates will not ultimately be recoverable. Based on
Rockfords review of its deferred tax assets at March 31, 2006, it determined that a valuation
allowance in the amount of $17.5 million was required and has reserved against all of its deferred
tax assets.
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 may have an impact on Rockfords operations in 2006 and 2007, if Rockford is not able to
secure concessions from its suppliers. Rockford sources a significant 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 the recent change in Chinas
exchange rate policy and by changes in the exchange rate.
New Accounting Standards
In 2006 the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets, which
amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. This Statement permits an entity to choose either of the
amortization or fair value measurement methods for each class of separately recognized servicing
assets and servicing liabilities. The Statement is effective as of the beginning of an entitys
first fiscal year that begins after September 15, 2006. However, earlier adoption of the Statement
is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued
financial statements for any interim period of that fiscal year. Rockford does not expect the
adoption of this standard to have a material effect on its financial position, results of
operations or cash flow.
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 foreign 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, operating expenses and shareholders
equity as expressed in U.S. dollars. Historically, Rockfords exposure to currency exchange rate
fluctuations were modest because it 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 foreign currencies including currencies in Canada and Europe.
In recent years, Rockford has sourced an increasing percentage of its products, or of raw
materials and parts for its products, from outside the United States. Most of these 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. The recent change in the Chinese governments exchange rate policies may
have increased the risk of adverse changes in the dollar/renminbi exchange rate.
At March 31, 2006, Rockford did not have any outstanding forward contracts or other financial
hedges against exchange rate risk.
18
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Rockfords principal executive officer (CEO) and principal financial officer (CFO) are
responsible for establishing and maintaining adequate internal control over its financial
reporting. They have reviewed Rockfords disclosure controls and procedures during the last 30 days
in order to comply with the SECs requirements for certification of this Form 10-Q. Rockford is a
non-accelerated filer and, accordingly, it is required to comply with the SECs enhanced
requirements for certification and attestation of internal control over financial reporting for its
Form 10-K for its fiscal year ending December 31, 2007.
Rockford is currently evaluating what changes will be needed to meet the enhanced reporting
relating to internal controls required by the Sarbanes Oxley Act and subsequent SEC regulations.
There was no change in internal control over financial reporting that occurred in the first quarter
of 2006, and through the date of filing, that has materially affected, or is reasonably likely to
materially affect, Rockfords internal controls over financial reporting.
Based on their review of Rockfords disclosure controls and policies, Rockfords CEO and CFO
concluded that its disclosure controls and procedures were effective to ensure that information
required to be disclosed by Rockford in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC, and included controls and procedures designed
to ensure that information required to be disclosed by Rockford in such reports is accumulated and
communicated to management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosures.
Material Weaknesses of Disclosure Controls and Procedures
None
Part II. Other Information
Item 1. Legal Proceedings
Since the date of Rockfords Annual Report for the year 2005, filed with the SEC on March 31,
2006, there have been no additional material developments in connection with the patent claim
described in the Legal Proceedings section of the Annual Report.
Rockford is, and may continue to be, a party to various lawsuits and arbitrations from time to
time. As at March 31, 2006, Rockford was not a party to any legal proceedings that it believes are
material, other than the effect of the expenses associated with the lawsuits described in the
Annual Report.
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 March 31, 2006.
19
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+ |
|
|
|
3.7
|
|
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 and 3.7 for a
description of the rights of the holders of Common Stock.
|
|
|
|
10.71
|
|
Asset Purchase Agreement between
Rockford Corporation, Audio Innovations, Inc., and Advanced Integration, LLC, dated as of March 31, 2006
|
|
|
|
10.72
|
|
Loan and Security Agreement is
between Advanced Integration, LLC as borrower and Rockford Corporation as lender, dated March 31, 2006
|
|
|
|
10.73
|
|
Subordination and Intecreditor
Agreement among Rockford Corporation, Advanced Integration, LLC, and Stillwater National Bank And Trust Company, dated as of March 31, 2006
|
|
|
|
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 W. Gary Suttle.
|
|
|
|
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. |
(b) During the period from January 1, 2006, through March 31, 2006, Rockford filed the following
reports on Form 8-K.
|
|
|
March 23, 2006 Report disclosing on Item 9 that Rockford had issued a news release
regarding Rockfords results of operations for the year, ended December 31, 2005. This
report furnished a copy of the press release under Item 9 of Form 8-K. |
|
|
|
|
March 31, 2006 report disclosing on Item 9 that Rockford had issued a news release
regarding the timely filing of its Annual Report on Form 10-K. 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, thereunto duly authorized.
|
|
|
|
|
|
ROCKFORD CORPORATION
|
|
Date: May 9, 2006 |
By: |
/s/ Richard G. Vasek
|
|
|
|
Richard G. Vasek |
|
|
|
Vice President of Finance,
Chief Financial Officer and Secretary
(Principal Financial Officer and Duly Authorized Officer) |
|
|
21
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+ |
|
|
|
3.7
|
|
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 and 3.7 for a description of the
rights of the holders of Common Stock. |
|
|
|
10.71
|
|
Asset Purchase Agreement between Rockford Corporation, Audio Innovations, Inc., and
Advanced Integration, LLC, dated as of March 31, 2006 |
|
|
|
10.72
|
|
Loan and Security Agreement is between Advanced Integration, LLC as borrower and Rockford
Corporation as lender, dated March 31, 2006 |
|
|
|
10.73
|
|
Subordination and Intecreditor Agreement among Rockford Corporation, Advanced
Integration, LLC, and Stillwater National Bank And Trust Company, dated as of March 31,
2006 |
|
|
|
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 W. Gary Suttle. |
|
|
|
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