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 March 31, 2003
Commission File Number 000-30138
ROCKFORD CORPORATION
(Exact Name of Registrant as Specified in its Charter)
ARIZONA 86-0394353
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 South Rockford Drive 85281
Tempe, Arizona (Zip Code)
(Address of Principal Executive Offices)
(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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practical date:
As of April 30, 2003, there were 8,987,160 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
PAGE
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Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 1
March 31, 2003 (Unaudited) and December 31, 2002
Condensed Consolidated Income Statements - 2
Three Months Ended March 31, 2003 and 2002 (Unaudited)
Condensed Consolidated Statements of Cash Flows - 3
Three Months Ended March 31, 2003 and 2002 (Unaudited)
Notes to Condensed Unaudited Consolidated Financial
Statements - March 31, 2003 4
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 16
Part II: Other Information
Item 1. Legal Proceedings 17
Item 3. Defaults upon Senior Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
-------- --------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash $ 327 $ 304
Accounts receivable, less allowances of $3,226 and $2,996 at
March 31, 2003 and December 31, 2002, respectively 38,751 32,890
Inventories, net 36,837 32,445
Deferred income taxes 5,161 5,160
Income taxes receivable 2,447 1,844
Prepaid expenses and other 5,147 4,395
-------- --------
Total current assets 88,670 77,038
Property and equipment, net 16,281 15,262
Deferred income taxes 292 292
Goodwill, net 7,027 6,890
Other assets 1,645 1,708
-------- --------
Total assets $113,915 $101,190
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,024 $ 10,753
Accrued salaries and incentives 1,956 1,978
Accrued warranty 4,856 4,595
Other accrued expenses 7,491 6,105
Current portion of notes payable, long-term debt and capital
lease obligations 1,248 1,253
-------- --------
Total current liabilities 27,575 24,684
Notes payable and long-term debt, less current portion 19,168 8,611
Capital lease obligations, less current portion 1,169 1,416
Minority Interest 764 933
Shareholders' equity:
Common stock, $.01 par value - Authorized shares - 40,000,000
Issued shares - 8,980,160 shares at March 31, 2003 and
8,747,197 at December 31, 2002 90 87
Additional paid-in capital 35,313 35,131
Retained earnings 28,252 29,198
Accumulated other comprehensive income 1,584 1,130
-------- --------
Total shareholders' equity 65,239 65,546
-------- --------
Total liabilities and shareholders' equity $113,915 $101,190
======== ========
Note: The consolidated balance sheet at December 31, 2002, 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.
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ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
Three months ended
March 31,
-----------------------
2003 2002
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales $ 39,624 $ 43,734
Cost of goods sold 26,785 27,212
-------- --------
Gross profit 12,839 16,522
Operating expenses:
Sales and marketing 7,397 7,244
General and administrative 5,419 4,651
Research and development 2,234 976
-------- --------
Total operating expenses 15,050 12,871
-------- --------
Operating (loss) income (2,211) 3,651
Interest and other (income) expense, net (48) 184
-------- --------
(Loss) income before income taxes (2,163) 3,467
Income tax (benefit) expense (1,047) 1,289
-------- --------
(Loss) income before minority interest (1,116) 2,178
Minority interest (170) --
-------- --------
Net (loss) income $ (946) $ 2,178
======== ========
Net (loss) income per common share:
Basic $ (0.11) $ 0.26
======== ========
Diluted $ (0.11) $ 0.24
======== ========
Weighted average shares:
Basic 8,881 8,275
======== ========
Diluted 8,881 9,216
======== ========
See notes to condensed consolidated financial statements.
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ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31,
----------------------------
2003 2002
-------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net (loss) income $ (946) $ 2,178
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,183 1,165
Loss (gain) on sale of fixed assets 2 (11)
Provision for doubtful accounts 35 214
Provision for inventory allowances 248 396
Minority Interest (170) --
Changes in operating assets and liabilities:
Accounts receivable (6,003) (8,007)
Inventories (4,640) (1,340)
Prepaid expenses and other assets (859) 1,477
Accounts payable 1,258 896
Accrued salaries and incentives (22) 594
Accrued warranty 261 182
Income taxes receivable (603) (587)
Other accrued expenses 1,325 3,313
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (8,931) 470
INVESTING ACTIVITIES
Purchases of property and equipment (2,235) (1,463)
Proceeds from disposals of property and equipment -- 11
Acquisitions of business, net of cash acquired 317 66
Increase in other assets (73) (429)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,991) (1,815)
FINANCING ACTIVITIES
Net proceeds from notes payable, long-term debt 2 783
Proceeds from (payments on) notes payable and
long-term debt 10,557 (1,079)
Payments on capital lease obligations (253) (167)
Proceeds from the exercise of stock options and
warrants 185 438
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING 10,491 (25)
ACTIVITIES
Effect of exchange rate changes on cash 454 (51)
-------- --------
Net increase (decrease) in cash and cash
equivalents 23 (1,421)
Cash and cash equivalents at beginning of period 304 2,411
-------- --------
Cash and cash equivalents at end of period $ 327 $ 990
======== ========
See notes to condensed consolidated financial statements.
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Rockford Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
1. BASIS OF PRESENTATION
UNAUDITED INTERIM FINANCIAL INFORMATION
We have prepared our 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. 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, we have made all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation.
Operating results for the three month period ended March 31, 2003, are not
necessarily indicative of the results you may expect for the year ending
December 31, 2003.
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,
2002, filed with the Securities and Exchange Commission ("SEC") on March 7,
2003.
STOCK-BASED COMPENSATION
Rockford accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and has adopted the disclosure-only alternative
of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-based Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." Rockford grants stock options for a
fixed number of shares to employees with an exercise price equal to the fair
value of the shares at date of grant. Fair value of the underlying shares is
determined by the market price at the date of the grant. Stock option grants to
non-employees are charged to expense based upon the fair value of the options
granted.
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The following table represents the effect on net (loss) income and (loss)
earnings per share if Rockford had applied the fair value based method and
recognition provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
to stock-based employee compensation:
Three months ended
March 31,
--------------------
2003 2002
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net (loss) income as reported $ (946) $ 2,178
Proforma SFAS No. 123 expense (75) (82)
------- -------
Proforma net (loss) income $(1,021) $ 2,096
======= =======
Proforma (loss) income per common share
Basic $ (0.12) $ 0.25
======= =======
Diluted $ (0.12) $ 0.23
======= =======
For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the option's vesting period.
2. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2003 2002
-------- --------
(IN THOUSANDS)
Raw materials $ 10,221 $ 9,053
Work-in-progress 2,636 2,330
Finished goods 27,552 24,386
-------- --------
40,409 35,769
Less allowances (3,572) (3,324)
-------- --------
$ 36,837 $ 32,445
======== ========
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3. (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss)
income per share:
Three months ended
March 31,
--------------------
2003 2002
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Numerator:
Net (loss) income for basic and diluted net
(loss) income per share $ (946) $ 2,178
======== ========
Denominator:
Denominator for basic net (loss) income per
share, weighted average shares 8,881 8,275
Effect of dilutive securities:
Employee stock options -- 935
Warrants -- 6
-------- --------
Dilutive potential common shares -- 941
-------- --------
Denominator for diluted net (loss) income per
share, adjusted weighted average shares and
assumed conversions 8,881 9,216
======== ========
Basic net (loss) income per share $ (0.11) $ 0.26
======== ========
Diluted net (loss) income per share $ (0.11) $ 0.24
======== ========
At March 31, 2003, options to purchase 356,000 shares and warrants to purchase
4,000 shares of Rockford stock were excluded from the calculation of the diluted
net earnings per share because they were anti-dilutive.
4. RESTRUCTURING
During the three months ended March 31, 2003, Rockford restructured its
operations in Germany, Arizona and Michigan, which management expects will
result in improved efficiencies and customer service. The restructuring of MB
Quart's operations in Germany reduced the gross profit by approximately $425,000
primarily due to accrued and incurred severance costs related to reductions in
the direct labor workforce in Germany. The Arizona and Michigan restructuring
resulted in the reduction of less than 10% of salaried staff in these
operations. The related severance and benefit costs were approximately $423,000
and increased the selling, general and administrative expenses for the quarter
ended March 31, 2003.
In addition, Rockford discontinued its Japanese subsidiary's operations and
began selling products to an independent distributor in Japan to enhance
profitability. The write down of assets and additional closure costs associated
with the shutdown of the Japanese distribution facility resulted in
approximately $1,100,000 of expenses. These expenses were partially offset by
reduced tax liability of $900,000 related to a deduction for the write off of
its investment in the stock of the Japanese subsidiary and the write off of bad
debt related to the Japanese subsidiary. The deduction partially offsets the
expense resulting in a net loss of approximately $200,000 relating to the
Japanese subsidiary during the first quarter of 2003.
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5. DEFAULTS UPON SENIOR SECURITIES
Because of restructuring expenses and excess capital investment relating to
SimpleDevices, Rockford was out of compliance at March 31, 2003, with one of the
financial covenants in its bank line of credit, relating to the minimum required
consolidated fixed charge coverage ratio. The actual ratio was 1.4 and the
required ratio was 2.0. The banks have agreed to waive this non-compliance for
March 31, 2003, and have agreed to modify the financial covenants in the loan
agreement so that, based on the expectations for revenues and expenses in the
remainder of 2003, management anticipates Rockford will be in compliance with
the bank covenants during the remainder of 2003 and thereafter. In connection
with these modifications, management has agreed to report to the banks monthly
about compliance with the covenants (previously reported quarterly), have added
an additional covenant requiring that the Consolidated EBITDA achieve specified
levels, and have agreed to increases in the interest rate on the loans so that
the swing line of credit will have a blended variable interest rate per annum of
Prime plus 100 basis points (increasing from 75 basis points) and the revolving
line of credit will have a blended variable interest rate of LIBOR plus 300
basis points (increasing from 225 basis points).
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 2002, filed with the
SEC on March 7, 2003.
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. Our statements may
contain projections of results of operations or of financial condition. 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 may differ
materially from those described in our forward-looking statements. We disclaim
any obligation or undertaking to update our forward-looking statements to
reflect changes in our expectations or changes in events, conditions, or
circumstances on which our expectations are based.
When considering our forward-looking statements, you should keep in mind the
risk factors and other cautionary statements identified in this report, in our
Annual Report on Form 10-K for the year 2002, filed with the SEC on March 7,
2003, and in Exhibit 99.9 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 99.9 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.
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OVERVIEW
Rockford designs, manufacturers and distributes high-performance audio systems
for the mobile, professional and home theater audio markets. Our mobile audio
products are sold primarily in the worldwide mobile audio aftermarket to
consumers who want to improve the audio systems in their cars, trucks, boats and
airplanes. We market our mobile audio products under the Rockford Fosgate,
Lightning Audio, Q-Logic and MB Quart brand names, selling products that include
digital and analog amplifiers, speakers, source units, CD changers and
accessories. Based on dollar sales in 2002 of all our brands, we rank first in
U.S. market share for mobile audio amplifiers and second for mobile audio
speakers. We sell home theater products under the MB Quart, Fosgate Audionics
and NHT brands. We also sell professional audio products under the MB Quart,
NHT, and Hafler brands. Additionally we have invested in SimpleDevices Inc.,
which licenses its standards-based SimpleWare and SimpleMedia Services software
to consumer electronics, PC, automotive and network equipment OEMs. We sell
licensed SimpleDevices products for home and mobile applications under the
Omnifi brand.
We manufacture amplifiers, signal processors and various accessories at our
facilities in Tempe, Arizona, and mid-range speakers, woofers and subwoofers at
our facility in Grand Rapids, Michigan. We manufacture Q-Logic enclosure and
kick panel products at our facilities in Stillwater, Oklahoma. We manufacture
most of our MB Quart products, and have begun to manufacture some Rockford
Fosgate speakers, at our facility in Obrigheim, Germany.
We generated over 95% of our sales in the quarter ended March 31, 2003, and over
97% of our sales in the quarter ended March 31, 2002, from our mobile audio
products.
In the U.S., we sell our mobile audio products using commissioned independent
sales representative firms who are supported by our employee regional managers.
Internationally, we sell products in 61 countries. In Germany we sell through
wholly owned subsidiaries using commissioned independent sales representatives.
In Canada, Austria, Switzerland and Italy we sell through commissioned
independent sales representatives. In other countries, we sell our products to
independent distributors who resell them to retailers. During the first quarter
of 2003, we had substantially closed our Japanese subsidiary and started selling
our products to an independent distributor who sells them to Japanese retailers.
Sales of our mobile audio products to Best Buy accounted for 21.6% of our sales
for the three months ended March 31, 2003, and 15.8% of our sales for the three
months ended March 31, 2002. Our business plans contemplate that Best Buy will
continue to account for a significant portion of our sales for the foreseeable
future. No other single customer accounts for more than 10% of our sales. During
the three months ended March 31, 2003 we began distribution of selected Lighting
Audio products in Wal-Mart stores in the United States; however, sales to
Wal-Mart stores began late in the quarter and were not a significant percentage
of our sales during the quarter.
Best Buy generally helps us to smooth out our normal sales seasonality. For our
specialty and audio-video dealers, our peak-selling season is in the spring and
summer and our slowest season is typically in the fourth quarter. We believe
that we experience this seasonality because our core 16-35 year old consumers
tend to buy mobile audio products during the spring and summer when they are on
semester breaks and when generally more favorable weather facilitates
installation of our products. Best Buy sales, while strong in May and June, are
not as concentrated among our core consumers and are also strong in the fourth
quarter.
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Best Buy is not obligated to any long-term purchases of our products and has
considerable discretion to reduce, change or terminate its purchases of our
products. The loss of Best Buy as a customer or significant reductions in its
purchases of our products would materially reduce our sales.
We believe our acquisition of NHT will also moderate the seasonality of our
sales in future years, since its sales tend to be more concentrated in the third
and fourth quarters of the year, which is a typical seasonality for the home
audio business.
During the three months ended March 31, 2003, we restructured our operations in
Germany, Arizona and Michigan, which is expected to result in improved
efficiencies and customer service. The restructuring of MB Quart's operations in
Germany reduced our gross profit by approximately $425,000 primarily due to
accrued and incurred severance costs related to reductions in our direct labor
workforce in Germany. The Arizona and Michigan restructuring resulted in the
reduction of less than 10% of salaried staff in these operations. The related
severance and benefit costs were approximately $423,000 and increased our
selling, general and administrative expenses for the quarter ended March 31,
2003.
In addition, we discontinued our Japanese subsidiary's operations and began
selling our products to an independent distributor in Japan to enhance our
profitability. The write down of assets and additional closure costs associated
with the shutdown of our Japanese distribution facility resulted in
approximately $1,100,000 of expenses. These expenses were partially offset by
reduced tax liability of $900,000 related to a deduction for the write off of
our investment in the stock of our Japanese subsidiary and the write off of bad
debt related to our Japanese subsidiary. The deduction partially offsets the
expense resulting in a net loss of approximately $200,000 relating to our
Japanese subsidiary during the first quarter of 2003.
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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,
-------------------
2003 2002
------ ------
Net sales 100.0% 100.0%
Cost of goods sold 67.6 62.2
------ ------
Gross profit 32.4 37.8
Operating expenses:
Sales and marketing 18.7 16.6
General and administrative 13.7 10.7
Research and development 5.6 2.2
------ ------
Total operating expenses 38.0 29.5
------ ------
Operating (loss) income (5.6) 8.3
Interest and other (income) expense, net (0.1) 0.4
------ ------
(Loss) income before tax (5.5) 7.9
Income tax (benefit) expense (2.7) 2.9
Minority Interest (0.4) --
------ ------
Net (loss) income (2.4)% 5.0%
====== ======
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 and legal costs related to our
intellectual property.
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GEOGRAPHIC DISTRIBUTION OF SALES
Our sales by geographic region were as follows:
Three months ended
March 31,
--------------------------
2003 2002
------- -------
(IN THOUSANDS)
REGION: (1)
United States $33,929 $36,237
Other Americas 1,368 2,995
Europe 3,531 3,349
Asia 796 1,153
------- -------
Total sales $39,624 $43,734
======= =======
- ----------
(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.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
IN THE FOLLOWING DISCUSSION, CERTAIN INCREASES OR DECREASES MAY DIFFER DUE
TO ROUNDING.
NET SALES. Sales decreased by $4.1 million, or 9.4%, to $39.6 million for the
three months ended March 31, 2003, from $43.7 million for the three months ended
March 31, 2002. The decrease in sales was primarily attributable to continued
difficulties in sales to the specialty dealer channel and in sales to Canada,
Asia and Latin America. Slowness in the specialty dealer channel was offset by
better results from big-box retailers.
U.S. sales decreased by $2.3 million, or 6.4%, to $33.9 million for the three
months ended March 31, 2003, from $36.2 million for the three months ended March
31, 2002. International sales decreased by $1.8 million, or 24.0%, to $5.7
million for the three months ended March 31, 2003, from $7.5 million for the
three months ended March 31, 2002. Sales growth in Europe was offset by lower
sales in Asia, the delayed reset by a major Canadian retailer, and a changeover
of distribution partners in Latin America.
COST OF GOODS SOLD. Cost of goods sold decreased by $0.4 million, or 1.6%, to
$26.8 million for the three months ended March 31, 2003, from $27.2 million for
the three months ended March 31, 2002. As a percent of sales, cost of goods sold
increased to 67.6% for the three months ended March 31, 2003, from 62.2% for the
three months ended March 31, 2002. This increase was primarily due to higher
levels of markdown required to clear end-of-life inventory into a difficult
market as well as $0.4 million in restructuring costs in Germany.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by $0.2
million, or 2.1%, to $7.4 million for the three months ended March 31, 2003,
from $7.2 million for the three months ended March 31, 2002. As a percent of
sales, sales and marketing expenses increased to 18.7% for the three months
ended March 31, 2003, from 16.6% for the three months ended March 31, 2002. This
increase as a percent of sales was primarily due to additional cost related to
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the acquisitions of NHT and SimpleDevices. Restructuring costs, increased
freight costs, and Canadian duty also contributed to this increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $0.8 million, or 16.6%, to $5.4 million for the three months ended
March 31, 2003, from $4.6 million for the three months ended March 31, 2002. As
a percent of sales, general and administrative expenses increased to 13.7% for
the three months ended March 31, 2003, from 10.7% for the three months ended
March 31, 2002. This increase includes nearly $0.8 million of costs incurred to
close Rockford's Japanese subsidiary. The remaining increase is due primarily to
the acquisitions of NHT and SimpleDevices.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
by $1.3 million, or 128.9% to $2.2 million for the three months ended March 31,
2003, from $1.0 million for the three months ended March 31, 2002. As a percent
of sales, these expenses increased to 5.6 % for the three months ended March 31,
2003, from 2.2% for the three months ended March 31, 2002. The increase is
primarily due to increased personnel and product development costs relating to
SimpleDevices and NHT. Also, there was an increase in legal costs associated
with the defense of the Fiori patent matter discussed in our prior SEC filings.
OPERATING (LOSS) INCOME. Operating (loss) income decreased by $5.9 million, or
160.6%, to a $(2.2) million loss for the three months ended March 31, 2003 from
$3.7 million income for the three months ended March 31, 2002. As a percent of
sales, operating (loss) income decreased to a (5.6)% loss for the three months
ended March 31, 2003, from a 8.3% income for the three months ended March 31,
2002. This decrease is the result of costs related to restructuring in
Rockford's U.S., German and Japanese operations, higher cost structures related
to NHT and SimpleDevices businesses acquired during the last quarter of 2002,
and the overall decline in mobile audio sales during the quarter.
INTEREST AND OTHER (INCOME) EXPENSE, NET. Interest and other (income) expense,
net, primarily consists of interest expense and currency gains and losses.
Interest and other (income) expense, net, decreased by $0.3 million, or 126.1%,
to less than $(0.1) million income for the three months ended March 31, 2003
from $0.2 million expense for the three months ended March 31, 2002. An increase
in interest expense, primarily due to the increased balance of our line of
credit resulting from decreased operating income, was offset by gains resulting
from the effect of foreign currency exchange rate changes on our international
sales.
INCOME TAX (BENEFIT) EXPENSE. Income tax (benefit) expense decreased by $2.3
million, or 181.2%, to a $(1.0) million benefit for the three months ended March
31, 2003, from a $1.3 million expense for the three months ended March 31, 2002.
The effective income tax rates were 48.4% for the three months ended March 31,
2003, and 37.2% for the three months ended March 31, 2002. The tax benefit
recorded during the three months ended March 31, 2003 was primarily due to a
$0.9 million tax benefit related to the substantial closure of our Japanese
subsidiary, partially offset by a net loss from SimpleDevices for which no tax
benefit was recorded.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our business primarily using existing working capital, cash
flows from operations, the proceeds from our initial public offering, and bank
borrowings. On June 28, 2001, we entered into a $30.0 million revolving credit
facility with Bank of America, N.A. and Bank One, Arizona, N.A. We had working
capital of $61.1 million at March 31, 2003, compared to $52.4 million at
December 31, 2002. At March 31, 2003, we maintained $ 0.3 million of cash and
cash equivalent balances.
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As at March 31, 2003, we had a balance of $19.0 million on our $30.0 million
bank credit facility, which is collateralized by substantially all of our assets
and consists of a swing line-of-credit and a revolving line of credit. The swing
line of credit has a blended variable interest rate per annum of Prime plus 75
basis points. The revolving line of credit has a blended variable interest rate
of LIBOR plus 225 basis points. As of March 31, 2003, the bank credit facility
had a weighted average interest rate of 2.91% per annum. The bank credit
facility is scheduled to mature on June 28, 2004. The bank credit facility
contains provisions that, among other things, require that we maintain certain
minimum levels of EBITDA and debt service coverage and also limit the amount of
total debt incurred and annual capital expenditures. Because of the
restructuring expenses referred to above and excess capital investment relating
to SimpleDevices, we were out of compliance at March 31, 2003, with one of the
financial covenants in our bank line of credit, relating to the minimum required
consolidated fixed charge coverage ratio. The actual ratio was 1.4 and the
required ratio was 2.0. Our banks have agreed to waive this non-compliance for
March 31, 2003, and have agreed to modify the financial covenants in our loan
agreement so that, based on our expectations for revenues and expenses in the
remainder of 2003, we anticipate we will be in compliance with our bank
covenants during the remainder of 2003 and thereafter. In connection with these
modifications, we have agreed to report to the banks monthly about our
compliance with the covenants (previously we reported quarterly), have added an
additional covenant requiring that our Consolidated EBITDA achieve specified
levels, and have agreed to increases in the interest rate on our loans so that
the swing line of credit will have a blended variable interest rate per annum of
Prime plus 100 basis points (increasing from 75 basis points) and the revolving
line of credit will have a blended variable interest rate of LIBOR plus 300
basis points (increasing from 225 basis points). We do not believe that these
terms will materially change Rockford's results of operations.
We also have a $5.0 million capital lease credit facility under which we can
fund leases until June 28, 2003, 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 at March 31, 2003, the capital lease credit facility had
an outstanding balance of $2.1 million with a weighted-average interest rate of
5.70% per annum.
Net cash (used in) provided by operating activities was $(8.9) million for the
three months ended March 31, 2003, and $0.5 million for the three months ended
March 31, 2002. Cash (used in) provided by operating activities is less than net
(loss) income due to the effect of increasing accounts receivables, inventories
and prepaid expenses, which was only partially offset by an increase in accounts
payable and other accrued expenses.
Net cash used in investing activities was $(2.0) million for the three months
ended March 31, 2003, and $(1.8) million for the three months ended March 31,
2002. Net cash used in investing activities was primarily related to purchases
of property and equipment.
Net cash provided by (used in) financing activities was $10.5 million for the
three months ended March 31, 2003, and less than $(0.1) million for the three
months ended March 31, 2002. Net cash provided by financing activities during
the three months ended March 31, 2003, was primarily a result of increased
borrowings on our bank credit facility, which was partially offset by payments
on capital leases.
We believe our existing resources and anticipated cash flows from operations,
coupled with availability on our credit facility, will be sufficient to meet our
cash needs for the next twelve months. However, should we pursue an acquisition
larger than our existing resources can support, we may need to seek additional
debt or equity resources. Based on the modifications to our credit facility
agreed with our banks and described above, we do not expect the changes to our
credit facilities to have a material effect on our ability to meet our cash
needs.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The methods, estimates and judgments we use in applying our accounting policies
have a significant impact on the results we report in our consolidated condensed
financial statements. We evaluate our estimates and judgments on an on-going
basis. We base our estimates on historical experience and assumptions that we
believe to be reasonable under the circumstances. Our experience and assumptions
form the basis for our judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
vary from what we anticipate and different assumptions or estimates about the
future could change our reported results. We believe the following accounting
policies are the most critical to us, in that they are important to the
portrayal of our financial statements and they require our most difficult,
subjective or complex judgments in the preparation of our consolidated financial
statements:
REVENUE RECOGNITION. We recognize revenue pursuant to Staff Accounting Bulletin
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. Accordingly, we recognize
revenue and record sales, net of related discounts, when all of the following
criteria are met:
o Persuasive evidence of an arrangement exists;
o Ownership has transferred to the customer;
o The price to the customer is fixed or determinable; and
o Collectibility is reasonably assured.
We sell almost all of our products F.O.B. our facility, so that upon shipment of
products, the above criteria are met and revenue is recognized. Additionally, we
recognize revenue from the sale of software in accordance with SOP 97-2,
SOFTWARE REVENUE RECOGNITION. Revenue is recorded from packaged software and
license fees when persuasive evidence of an arrangement exists, the software
product has been shipped, the fees are fixed and determinable, collectibility is
reasonably assured and vendor-specific objective evidence of fair value exists
for any undeliverable products or services ("elements") of the arrangement.
We also record 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 we estimate, we may need
to make additional reductions to revenue.
INTANGIBLE ASSETS. On January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. When we account for acquired businesses as
purchases, we allocate 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, any excess purchase price
over the fair value of the net assets acquired is allocated to goodwill
Prior to January 1, 2002, we amortized goodwill over the useful life of the
underlying asset, not to exceed 15 years. On January 1, 2002, we began
accounting for goodwill under the provisions of SFAS Nos. 141 and 142. As at
March 31, 2003, we had gross goodwill of $7,401,000 and accumulated amortization
of $374,000. For the three months ended March 31, 2003 and 2002, we did not
recognize amortization expense related to goodwill. We completed two
acquisitions in the third quarter of 2001 and two acquisitions in the fourth
quarter of 2002 and have not recorded any amortization for these acquisitions on
amounts allocated to goodwill in accordance with SFAS No. 141.
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In assessing the recoverability of our goodwill and other intangibles, we must
make assumptions about estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for these assets not previously recorded. Some factors we
consider important which could trigger an impairment review include the
following:
o Significant underperformance relative to expected historical or
projected future operating results;
o Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o Our market capitalization relative to net book value; and
o Significant negative industry or economic trends.
We have tested goodwill for impairment using the two-step process prescribed in
SFAS No. 142. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. We performed the
first of the required impairment tests for goodwill as at December 31, 2002, and
determined that our goodwill is not impaired and it is not necessary to
undertake the second step in the two-step process. During the three months ended
March 31, 2003 and 2002, we did not record any impairment losses related to
goodwill and other intangible assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts,
based on historical rates, for estimated losses resulting from the inability of
our customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances might be required.
EXCESS AND OBSOLETE INVENTORY. We maintain a reserve for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual future demand or market conditions are less
favorable than those we project, additional inventory write-downs might be
required. Any change to the reserve arising from forecast revisions is reflected
in cost of sales in the period the revision is made.
WARRANTY. We maintain a warranty reserve, based on historical rates, for costs
associated with the repair or replacement of product that fails to meet our
standard warranty against defects in material and workmanship. Should actual
product failure rates differ from our estimates, revisions to our estimated
accruals would be required.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are in the areas of interest rate risk and
foreign currency exchange rate risk. We do not use derivative financial
instruments. Our holdings of cash equivalents are subject to interest rate
fluctuations, but we believe this risk is immaterial due to the short-term
nature of these investments and the relatively small cash balances we carry.
The value of the U.S. dollar affects our financial results. Changes in exchange
rates may positively or negatively affect our revenues, gross margins, operating
expenses and shareholders' equity as expressed in U.S. dollars. Historically,
our exposure to currency exchange rate fluctuations was modest due to the fact
that we sold our products primarily in U.S. dollars and held only a small
15
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percentage of our assets outside the U.S. However, we conduct a growing portion
of our business in foreign currency and are increasing our billings in local
currencies in Canada and Europe.
At March 31, 2003, we had not engaged in any foreign currency hedging
activities, but instead have attempted to minimize currency exposure risk
through "natural hedges," which balance foreign denominated assets with foreign
denominated liabilities. There can be no assurance that such an approach will be
successful, especially if a significant and sudden decline occurs in the value
of local currencies. During the first quarter of 2003 our Board of Directors
approved and we began to implement a new foreign currency hedging policy,
although no hedging activity occurred in the first quarter of 2003. The goal of
the program is to provide stability to the U.S. dollar values of non-function
currency cash flows. Although it is impossible to eliminate all currency risk,
implementation of this program should mitigate the risk of significant changes
in our earnings due to short-term foreign exchange fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive officer and principal accounting officer reviewed our
disclosure controls and procedures during the last 90 days in order to comply
with the SEC's requirements for certification of this Form 10-Q.
Since we became public we have maintained a disclosure policy committee, which
currently includes our CEO, CFO, Director of Finance, Treasurer, Director of
Investor Relations, and General Counsel. Our officers, directors, and employees
are responsible to inform the committee about material developments in our
business so that the committee can decide when we need to make new filings with
the SEC or make disclosures to the public markets about developments in our
business.
The disclosure policy committee, other senior managers, and our finance staff
are responsible for preparation of our periodic reports. Our finance staff and
senior managers:
o monitor our operations and financial performance on a regular basis,
o evaluate how our performance may affect our reports to the SEC, and
o schedule preparation of our periodic reports.
We use our Oracle information system to develop the financial information used
in our reports beginning shortly after the end of each reporting period. Members
of our finance staff and our senior managers compile this information, as well
as reports about our business from our officers, directors, and employees, and
use the compiled information to prepare our reports to the SEC. Our procedures
have allowed us to file our reports within the times that the SEC's rules
require.
We are currently evaluating what changes will be needed to meet the accelerated
time frames the SEC recently adopted. We do not anticipate material changes
other than slightly accelerated internal deadlines for compilation of
information and preparation of initial drafts. We are also currently in the
process of establishing an enhanced internal control process, including an
additional internal auditor, to further enhance our internal controls.
Based on their review of our disclosure controls and policies, our principal
executive officer and principal accounting officer concluded that our disclosure
controls and procedures are effective and that they allow us to comply with our
periodic reporting obligations. We believe the reports we have filed are in
compliance with the SEC's requirements.
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We have not made significant changes to our internal controls, and are not aware
of changes in other factors that could significantly affect these controls,
since our principal executive officer and principal accounting officer reviewed
our disclosure controls and procedures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since the date of our Annual Report for the year 2002, filed with the SEC on
March 7, 2003, there have been no additional material developments in connection
with the patent claim described in the Legal Proceedings section of our Annual
Report.
We are and may continue to be a party to various lawsuits and arbitrations from
time to time. As at March 31, 2003, we were not a party to any legal proceedings
that we believe are material, other than the effect of the expenses associated
with the Fiori patent matter described in our Annual Report for the year 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Because of the restructuring expenses and excess capital investment relating to
SimpleDevices, we were out of compliance at March 31, 2003, with one of the
financial covenants in our bank line of credit, relating to the minimum required
consolidated fixed charge coverage ratio. The actual ratio was 1.4 and the
required ratio was 2.0. We have discussed this non-compliance with our banks and
our banks have waived this non-compliance on terms described above. For a
description of the terms for the waiver, please see Part I, Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources. We are in compliance with all payment
obligations under our bank line of credit and other credit facilities.
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+
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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.
99.9 Risk Factors That May Affect Rockford's Operating Results,
Business Prospects and Stock Price+++
+ 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.
+++ Previously filed on March 7, 2003, with our Annual Report on Form 10-K for
the year ended December 31, 2002.
(b) During the period from January 1, 2003, through March 31, 2003, Rockford
filed the following reports on Form 8-K:
February 20, 2003
Report disclosing on Item 9 that Rockford had issued a news release
regarding Rockford's results of operations for the 4th Quarter of 2003 and
for the year 2003. This report furnished a copy of the press release under
Item 9 of Form 8-K.
March 7, 2003
Report disclosing on Item 9 that our CEO and CFO had certified Rockford's
annual report as required by Section 906 of the Sarbanes-Oxley Act of 2002.
This report furnished a copy of the certification under Item 9 of Form 8-K.
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 14, 2003 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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CERTIFICATIONS
I, W. Gary Suttle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rockford Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ W. Gary Suttle
----------------------------------------
W. Gary Suttle
President and CEO
Principal Executive Officer
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I, James M. Thomson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rockford Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ James M. Thomson
----------------------------------------
James M. Thomson
Chief Financial Officer
Principal Financial Officer
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