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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2010**

 

**OR**

 

| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For the transition period from           to       **

 

**Commission File Number 0-511**

 

**COBRAELECTRONICS CORPORATION**

(Exact name of Registrant as specified in its Charter)

 

| **DELAWARE**                             | ** ** | **36-2479991**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **6500 WEST CORTLAND STREET**            | ** ** | ** **                           |
| **CHICAGO, ILLINOIS**               | ** ** | **60707**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

Registrant’s telephone number, including area code: **(773) 889-8870**

 

Indicateby check mark whether the Registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x  NO o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).  YES  o  NO  o

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “large accelerated filer”, “accelerated filer”, and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  YES o  NO x

 

Numberof shares of Common Stock of Registrant outstanding as of August 6, 2010:6,471,280

 

 

 

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**TABLE OF CONTENTS**

 
| ** **       | ** **                                                                                  | ** ** | **Page No.** |
|------------------|---------------------------------------------------------------------------------------------|------------|-------------------|
| **PART I**  | **FINANCIAL  INFORMATION**                                                                  |       |              |
|             |                                                                                        |       |              |
| Item 1           | Financial Statements                                                                        |       | 3                 |
| Item 2           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 17                |
| Item 3           | Qualitative  and Quantitative Disclosures About Market Risk                                 |       | 24                |
| Item 4           | Controls and  Procedures                                                                    |       | 24                |
|             |                                                                                        |       |              |
| **PART II** | **OTHER  INFORMATION**                                                                      |       |              |
|             |                                                                                        |       |              |
| Item 1A          | Risk Factors                                                                                |       | 25                |
| Item 6           | Exhibits                                                                                    |       | 25                |
|             |                                                                                        |       |              |
| **SIGNATURE**    |                                                                                        | 26         |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**CobraElectronics Corporation and Subsidiaries**

**ConsolidatedStatements of Operations - Unaudited**

**(InThousands, Except Per Share Amounts)**

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **June 30,**      | ** ** | **June  30,**   | ** ** |
| ** **                                                     | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                           |       |                   |       |                 |       |   |   |   |   |
| Net sales                                                      |       | $                      | 25,710     |                 | $          | 25,971 |   | $ | 46,793 |   | $ | 45,056 |   |
| Cost of sales                                                  |       | 18,848                 |       | 19,739               |       | 34,081 |   | 33,762 |   |
| Gross profit                                                   |       | 6,862                  |       | 6,232                |       | 12,712 |   | 11,294 |   |
| Selling, general and administrative expense                    |       | 6,562                  |       | 7,783                |       | 13,448 |   | 14,839 |   |
| Earnings (loss) from operations                                |       | 300                    |       | (1,551               | )          | (736 | ) | (3,545 | ) |
| Interest expense                                               |       | (251                   | )          | (190                 | )          | (514 | ) | (340 | ) |
| Other (expense) income                                         |       | (355                   | )          | 680                  |       | (380 | ) | 423 |   |
| Loss before income taxes                                       |       | (306                   | )          | (1,061               | )          | (1,630 | ) | (3,462 | ) |
| Tax provision                                                  |       | 10                     |       | 8,840                |       | 3 |   | 8,054 |   |
| Net loss                                                       |       | (316                   | )          | (9,901               | )          | (1,633 | ) | (11,516 | ) |
| Less: net earnings attributable to non-controlling  interest   |       | —                 |       | 1                    |       | — |   | 2 |   |
| Net loss attributable to Cobra                                 |       | $                      | (316       | )                    | $          | (9,902 | ) | $ | (1,633 | ) | $ | (11,518 | ) |
|                                                           |       |                   |       |                 |       |   |   |   |   |
| Net loss per common share attributable to Cobra  shareholders: |       |                   |       |                 |       |   |   |   |   |
| Basic                                                          |       | $                      | (0.05      | )                    | $          | (1.53 | ) | $ | (0.25 | ) | $ | (1.78 | ) |
| Diluted                                                        |       | $                      | (0.05      | )                    | $          | (1.53 | ) | $ | (0.25 | ) | $ | (1.78 | ) |
|                                                           |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares outstanding:                           |       |                   |       |                 |       |   |   |   |   |
| Basic                                                          |       | 6,471                  |       | 6,471                |       | 6,471 |   | 6,471 |   |
| Diluted                                                        |       | 6,471                  |       | 6,471                |       | 6,471 |   | 6,471 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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**CobraElectronics Corporation and Subsidiaries**

**ConsolidatedBalance Sheets - Unaudited**

**(InThousands)**

 

 
| ** **                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                           |       |              |       |                  |       |
| Current assets:                                                                      |       |              |       |                  |       |
| Cash                                                                                 |       | $                 | 1,519      |                  | $          | 1,405 |   |
| Receivables, net of allowance for doubtful accounts  of $95 in 2010 and $103 in 2009 |       | 14,548            |       | 22,095                |       |
| Inventories, primarily finished goods, net                                           |       | 27,553            |       | 26,198                |       |
| Other current assets                                                                 |       | 3,469             |       | 3,961                 |       |
| Total current assets                                                                 |       | 47,089            |       | 53,659                |       |
|                                                                                 |       |              |       |                  |       |
| Property, plant and equipment, at cost:                                              |       |              |       |                  |       |
| Buildings and improvements                                                           |       | 5,904             |       | 5,707                 |       |
| Tooling and equipment                                                                |       | 17,990            |       | 17,746                |       |
|                                                                                 |       |              |       |                  |       |
|                                                                                 |       | 23,894            |       | 23,453                |       |
|                                                                                 |       |              |       |                  |       |
| Accumulated depreciation                                                             |       | (19,169           | )          | (18,318               | )          |
| Land                                                                                 |       | 230               |       | 230                   |       |
| Property, plant and equipment, net                                                   |       | 4,955             |       | 5,365                 |       |
|                                                                                 |       |              |       |                  |       |
| Other assets:                                                                        |       |              |       |                  |       |
| Cash surrender value of life insurance policies                                      |       | 4,137             |       | 4,051                 |       |
| Deferred income taxes, non-current                                                   |       | 1,102             |       | 1,717                 |       |
| Intangible assets                                                                    |       | 9,728             |       | 10,769                |       |
| Other assets                                                                         |       | 201               |       | 142                   |       |
| Total other assets                                                                   |       | 15,168            |       | 16,679                |       |
|                                                                                 |       |              |       |                  |       |
| Total assets                                                                         |       | $                 | 67,212     |                  | $          | 75,703 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

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**Cobra Electronics Corporation and Subsidiaries**

**Consolidated Balance Sheets - Unaudited**

**(In Thousands, Except Share Data)**

 
| ** **                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                          |       |              |       |                  |       |
| Current  liabilities:                                                                                                  |       |              |       |                  |       |
| Current  maturities of long-term bank debt                                                                             |       | $                 | 11,838     |                  | $          | 16,549 |   |
| Accounts  payable                                                                                                      |       | 8,240             |       | 7,427                 |       |
| Accrued  salaries and commissions                                                                                      |       | 846               |       | 902                   |       |
| Accrued  advertising and sales promotion costs                                                                         |       | 850               |       | 1,392                 |       |
| Accrued  product warranty costs                                                                                        |       | 580               |       | 857                   |       |
| Accrued  income taxes                                                                                                  |       | 225               |       | 73                    |       |
| Deferred  income taxes, current                                                                                        |       | 1,109             |       | 1,728                 |       |
| Other  accrued liabilities                                                                                             |       | 2,495             |       | 2,524                 |       |
| Total  current liabilities                                                                                             |       | 26,183            |       | 31,452                |       |
|                                                                                                                   |       |              |       |                  |       |
| Non-current  liabilities:                                                                                              |       |              |       |                  |       |
| Long-term  bank debt, net of current maturities                                                                        |       | 440               |       | 1,320                 |       |
| Deferred  compensation                                                                                                 |       | 7,207             |       | 6,772                 |       |
| Deferred  income taxes                                                                                                 |       | 1,727             |       | 1,935                 |       |
| Other  long-term liabilities                                                                                           |       | 998               |       | 961                   |       |
| Total  non-current liabilities                                                                                         |       | 10,372            |       | 10,988                |       |
| Total  liabilities                                                                                                     |       | 36,555            |       | 42,440                |       |
|                                                                                                                   |       |              |       |                  |       |
| Commitments  and contingencies                                                                                         |       | —            |       | —                |       |
|                                                                                                                   |       |              |       |                  |       |
| Shareholders’  equity:                                                                                            |       |              |       |                  |       |
|                                                                                                                   |       |              |       |                  |       |
| Preferred  stock, $1 par value 1,000,000 shares authorized   None issued and outstanding                               |       | —            |       | —                |       |
|                                                                                                                   |       |              |       |                  |       |
| Common  stock, $.33 1/3 par value  12,000,000 share authorized   7,039,100 shares issued  6,471,280 shares outstanding |       | 2,345             |       | 2,345                 |       |
|                                                                                                                   |       |              |       |                  |       |
| Paid-in  capital                                                                                                       |       | 20,696            |       | 20,583                |       |
| Retained  earnings                                                                                                     |       | 14,400            |       | 16,033                |       |
| Accumulated  other comprehensive loss                                                                                  |       | (2,973            | )          | (1,889                | )          |
|                                                                                                                   |       | 34,468            |       | 37,072                |       |
| Treasury  stock, at cost (567,820 shares)                                                                              |       | (3,837            | )          | (3,837                | )          |
| Total  shareholders’ equity - Cobra                                                                               |       | 30,631            |       | 33,235                |       |
| Non-controlling  interest                                                                                              |       | 26                |       | 28                    |       |
| Total  equity                                                                                                          |       | 30,657            |       | 33,263                |       |
| Total  liabilities and shareholders’ equity                                                                       |       | $                 | 67,212     |                  | $          | 75,703 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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**Cobra Electronics Corporation and Subsidiaries**

**Consolidated Statement of Cash Flows - Unaudited**

**(In Thousands)**

 
| ** **                                                                      | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**     | ** ** |
| ** **                                                                      | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                          |       |                  |       |   |   |
| Net  loss attributable to Cobra                                                 |       | $                     | (1,633     | ) | $ | (11,518 | ) |
| Adjustments  to reconcile net loss to net cash flows from operating activities: |       |                  |       |   |   |
| Depreciation  and amortization                                                  |       | 1,907                 |       | 1,974 |   |
| Deferred  income taxes - valuation charge                                       |       | —                |       | 9,596 |   |
| Deferred  income taxes                                                          |       | (108                  | )          | (1,295 | ) |
| (Gain)  loss on cash surrender value (CSV) of life insurance                    |       | 179                   |       | (119 | ) |
| (Gain)  loss on sale of fixed assets                                            |       | (5                    | )          | 4 |   |
| Stock-based  compensation                                                       |       | 113                   |       | 116 |   |
| Non-controlling  interest                                                       |       | —                |       | 2 |   |
| Changes  in assets and liabilities:                                             |       |                  |       |   |   |
| Receivables                                                                     |       | 7,266                 |       | 2,090 |   |
| Inventories                                                                     |       | (2,106                | )          | (1,622 | ) |
| Other  assets                                                                   |       | (752                  | )          | (747 | ) |
| Income  tax refunds                                                             |       | 925                   |       | — |   |
| Accounts  payable                                                               |       | 1,045                 |       | 3,849 |   |
| Accrued  income taxes                                                           |       | 108                   |       | (180 | ) |
| Accrued  liabilities                                                            |       | (852                  | )          | (931 | ) |
| Deferred  compensation                                                          |       | 435                   |       | 182 |   |
| Deferred  income                                                                |       | 70                    |       | (17 | ) |
| Other  long-term liabilities                                                    |       | 7                     |       | (62 | ) |
| Net  cash provided by operating activities                                      |       | 6,599                 |       | 1,322 |   |
| Cash  flows from investing activities:                                          |       |                  |       |   |   |
| Property,  plant and equipment                                                  |       | (356                  | )          | (507 | ) |
| Premiums  on CSV life insurance                                                 |       | (266                  | )          | (274 | ) |
| Intangible  assets                                                              |       | (298                  | )          | (504 | ) |
| Net  cash used in investing activities                                          |       | (920                  | )          | (1,285 | ) |
| Cash  flows from financing activities:                                          |       |                  |       |   |   |
| Bank  (repayment) borrowings                                                    |       | (5,591                | )          | 493 |   |
| Net  cash used in financing activities                                          |       | (5,591                | )          | 493 |   |
| Effect  of exchange rate changes on cash and cash equivalents                   |       | 26                    |       | (615 | ) |
| Net  increase (decrease) in cash                                                |       | 114                   |       | (85 | ) |
| Cash  at beginning of period                                                    |       | 1,405                 |       | 1,985 |   |
| Cash  at end of period                                                          |       | $                     | 1,519      |   | $ | 1,900 |   |
|                                                                            |       |                  |       |   |   |
| Supplemental  disclosure of cash flow information:                              |       |                  |       |   |   |
| Cash  paid during the period for:                                               |       |                  |       |   |   |
| Interest                                                                        |       | $                     | 518        |   | $ | 342 |   |
| Income  taxes, net of refunds                                                   |       | $                     | (905       | ) | $ | 129 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**Cobra Electronics Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**For the three and six months ended June 30, 2010 and 2009**

**(Unaudited)**

 

The consolidated financialstatements included herein have been prepared by Cobra Electronics Corporation(the “Company”), without audit, pursuant to the rules and regulations ofthe Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted pursuant to such rules and regulations, although the Companybelieves that the disclosures contained herein are adequate to make theinformation presented not misleading. The Consolidated Balance Sheet as of December 31, 2009 has beenderived from the audited consolidated balance sheet as of that date.  These consolidated financial statementsshould be read in conjunction with the consolidated financial statements andthe notes thereto included in the Company’s latest Annual Report onForm 10-K for the year ended December 31, 2009.  In the opinion of management, the informationcontained herein reflects all adjustments necessary to make the results ofoperations for the interim period a fair statement of such operations. Due tothe seasonality of the Company’s business, the results of operations of anyinterim period are not necessarily indicative of the results that may beexpected for a fiscal year.

 

**(1)   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Business* — Cobra designs and marketsconsumer electronics products, which it sells primarily under the Cobra brandname principally in the United States, Canada and Europe. Performance ProductsLimited (“PPL”), a wholly-owned subsidiary of the Company, sells its productsunder the Snooper tradename, in the United Kingdom, as well as elsewhere inEurope. A majority of the Company’s products are purchased from overseassuppliers, primarily in China, Hong Kong and South Korea. The consumerelectronics market is characterized by rapidly changing technology and certainproducts may have limited life cycles. Management believes that it maintainsstrong relationships with its current suppliers and that, if necessary, othersuppliers could be found. The extent to which a change in a supplier would havean adverse effect on the Company’s business depends on the timing of thechange, the product or products that the supplier produces for the Company andthe volume of that production. The Company also maintains insurance coveragethat would, in certain limited circumstances, reimburse the Company for lostprofits resulting from a supplier’s inability to fulfill its commitments to theCompany.

 

*Principles of Consolidation* — The consolidatedfinancial statements include the accounts of the Company and its subsidiaries.The consolidated entities are collectively referred to as the “Company”.  All intercompany balances and transactionshave been eliminated in consolidation.

 

**(2)   SEGMENTINFORMATION**

 

TheCompany operates in two business segments (1) Cobra Consumer Electronics (“Cobra”)and (2) Performance Products Limited (“PPL”). The Cobra segment iscomprised of Cobra Electronics Corporation, Cobra Hong Kong Limited (“CHK”) andCobra Electronics Europe Limited (“CEEL”). The Company has separate salesdepartments and distribution channels for each segment, which provide segmentexclusive product lines to all customers for that segment. Currently, there areno intersegment sales.

 

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Thefinancial information by business segment for the three months and six monthsended June 30, 2010 and 2009 follows:

 

**Three months - 2010 vs. 2009**
| ** **                                                   | ** ** | **2010**            | ** ** | **2009** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                   | ** ** | **COBRA**           | ** ** | **PPL**  | ** ** | **TOTAL** | ** ** | **COBRA** | ** ** | **PPL** | ** ** | **TOTAL** | ** ** |
| ** **                                                   | ** ** | **(In Thousands)**  | ** ** |
| Net  sales                                                   |       | $                   | 22,212     |     | $          | 3,498 |   | $ | 25,710 |   | $ | 23,366 |   | $ | 2,605 |   | $ | 25,971 |   |
| Cost  of sales                                               |       | 16,313              |       | 2,535    |       | 18,848 |   | 18,059 |   | 1,680 |   | 19,739 |   |
| Gross  profit                                                |       | 5,899               |       | 963      |       | 6,862 |   | 5,307 |   | 925 |   | 6,232 |   |
| Selling,  general and administrative expense                 |       | 5,419               |       | 1,143    |       | 6,562 |   | 6,799 |   | 984 |   | 7,783 |   |
| Earnings  (loss) from operations                             |       | 480                 |       | (180     | )          | 300 |   | (1,492 | ) | (59 | ) | (1,551 | ) |
| Interest  expense                                            |       | (250                | )          | (1       | )          | (251 | ) | (190 | ) | — |   | (190 | ) |
| Other  (expense) income                                      |       | (276                | )          | (79      | )          | (355 | ) | 388 |   | 292 |   | 680 |   |
| (Loss)  earnings before income taxes                         |       | (46                 | )          | (260     | )          | (306 | ) | (1,294 | ) | 233 |   | (1,061 | ) |
| Tax  provision (benefit)                                     |       | 73                  |       | (63      | )          | 10 |   | 8,916 |   | (76 | ) | 8,840 |   |
| Net  (loss) earnings                                         |       | (119                | )          | (197     | )          | (316 | ) | (10,210 | ) | 309 |   | (9,901 | ) |
| Less:  net earnings attributable to non-controlling interest |       | —              |       | —   |       | — |   | — |   | 1 |   | 1 |   |
| Net  (loss) earnings attributable to Cobra                   |       | $                   | (119       | )        | $          | (197 | ) | $ | (316 | ) | $ | (10,210 | ) | $ | 308 |   | $ | (9,902 | ) |
| ** **                                                   |       |                |       |     |       |   |   |   |   |   |   |   |   |
| **Six  months - 2010 vs. 2009**                              |       |                |       |     |       |   |   |   |   |   |   |   |   |
| ** **                                                   | ** ** | **2010**            | ** ** | **2009** | ** ** |
| ** **                                                   | ** ** | **COBRA**           | ** ** | **PPL**  | ** ** | **TOTAL** | ** ** | **COBRA** | ** ** | **PPL** | ** ** | **TOTAL** | ** ** |
|                                                         |       | **(In  Thousands)** |       |
| Net  sales                                                   |       | $                   | 39,767     |     | $          | 7,026 |   | $ | 46,793 |   | $ | 40,614 |   | $ | 4,442 |   | $ | 45,056 |   |
| Cost  of sales                                               |       | 29,276              |       | 4,805    |       | 34,081 |   | 31,046 |   | 2,716 |   | 33,762 |   |
| Gross  profit                                                |       | 10,491              |       | 2,221    |       | 12,712 |   | 9,568 |   | 1,726 |   | 11,294 |   |
| Selling,  general and administrative expense                 |       | 11,220              |       | 2,228    |       | 13,448 |   | 12,876 |   | 1,963 |   | 14,839 |   |
| Loss  from operations                                        |       | (729                | )          | (7       | )          | (736 | ) | (3,308 | ) | (237 | ) | (3,545 | ) |
| Interest  expense                                            |       | (513                | )          | (1       | )          | (514 | ) | (340 | ) | — |   | (340 | ) |
| Other  (expense) income                                      |       | (243                | )          | (137     | )          | (380 | ) | 154 |   | 269 |   | 423 |   |
| (Loss)  earnings before income taxes                         |       | (1,485              | )          | (145     | )          | (1,630 | ) | (3,494 | ) | 32 |   | (3,462 | ) |
| Tax  provision (benefit)                                     |       | 108                 |       | (105     | )          | 3 |   | 8,203 |   | (149 | ) | 8,054 |   |
| Net  (loss) earnings                                         |       | (1,593              | )          | (40      | )          | (1,633 | ) | (11,697 | ) | 181 |   | (11,516 | ) |
| Less:  net earnings attributable to non-controlling interest |       | —              |       | —   |       | — |   | — |   | 2 |   | 2 |   |
| Net  (loss) earnings attributable to Cobra                   |       | $                   | (1,593     | )        | $          | (40 | ) | $ | (1,633 | ) | $ | (11,697 | ) | $ | 179 |   | $ | (11,518 | ) |

 

Therehave been no differences in the basis of segmentation or the basis ofmeasurement.

 

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**(3) INCOME TAXES**

 

Deferredincome taxes are determined based on the estimated future tax effects ofdifferences between the financial statement and tax bases of assets andliabilities given the enacted tax laws for each applicable tax jurisdiction.The deferred income tax provisions and benefits are based on changes to theassets or liabilities from year to year. Valuation allowances related todeferred taxes are recorded based on the *morelikely than not* realization criteria. The Company reviews the needfor a valuation allowance on a quarterly basis for each of its taxjurisdictions. When evaluating the recoverability of future tax benefits, theCompany considers the historic operating results, projected operating resultsand available tax planning strategies, if any.

 

Dueto the operating results for the first half of 2009, the expected continuationof a global recession and the absence of tax planning strategies to generate asufficient level of taxable income, management concluded the full realizationof the deferred tax assets within a reasonable time horizon did not satisfy the*more likely than not* realizationcriteria. Accordingly, the Company established a $9.6 million deferred taxvaluation allowance for its U.S. operation in the second quarter of 2009. Thevaluation allowance is a non-cash charge that does not preclude the Companyfrom fully realizing the net deferred tax assets in the future. The deferredtax valuation allowance totaled $8.6 million at June 30, 2010 and $8.4million at December 31, 2009.

 

*The Worker, Homeownership, and Business Assistance Act of2009,* enacted November 6, 2009, allowed eligible businesses a one-timeelection to carry back net operating losses (“NOL”) from 2008 or 2009 (but notboth) for three, four or five years rather than the standard two years. Asresult of this one-time opportunity, the Company carried back $4.3 millionof 2009’s NOL to prior periods and generated a federal tax refund of $881,000.The available NOL carryforward for the 2008 tax year totals $1.1 million.

 

Theprovision for income taxes for the three and six months ended June 30,2010 and 2009 consists of:

 
| ** **                     | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                     | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                     | ** ** | **(In  Thousands)**     | ** ** | **(In  Thousands)**   | ** ** |
|                           |       |                    |       |                  |       |   |   |   |   |
| Current  provision (benefit):  |       |                    |       |                  |       |   |   |   |   |
| U.S.                           |       | $                       | 44         |                  | $          | (187 | ) | $ | 89 |   | $ | 40 |   |
| Foreign                        |       | 9                       |       | (315                  | )          | 126 |   | (287 | ) |
|                           |       | 53                      |       | (502                  | )          | 215 |   | (247 | ) |
|                           |       |                    |       |                  |       |   |   |   |   |
| Deferred  provision (benefit): |       |                    |       |                  |       |   |   |   |   |
| U.S.                           |       | —                  |       | 9,074                 |       | — |   | 8,134 |   |
| Foreign                        |       | (43                     | )          | 268                   |       | (212 | ) | 167 |   |
|                           |       | (43)                    |       | 9,342                 |       | (212 | ) | 8,301 |   |
| Total  provision               |       | $                       | 10         |                  | $          | 8,840 |   | $ | 3 |   | $ | 8,054 |   |

 

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**(4) FINANCING ARRANGEMENTS**

 

On July 16, 2010, theCompany entered into the Credit Agreement (the “Credit Agreement”) among theCompany, Harris N.A., as administrative agent (the “Administrative Agent”), andthe lenders party thereto from time to time (the “Lenders”). The CreditAgreement provided for a $25,000,000 revolving loan facility, which will matureon July 16, 2013. Borrowings under the Credit Agreement were used to repayamounts outstanding under the Company’s existing term loan and revolving creditfacility under the Loan and Security Agreement (as amended, the “TerminatedLoan Agreement”) dated as of February 15, 2008 among the Company, thelenders party thereto and The PrivateBank and Trust Company, as a lender andadministrative agent and for general corporate purposes.  Pursuant to theterms of the Credit Agreement, the Company is required to make mandatoryprepayments on the amounts outstanding thereunder in the event that the Companyreceives proceeds under certain circumstances or in connection with otherspecified events.  A copy of the CreditAgreement was filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-Kdated July 22, 2010.

 

Borrowings under the CreditAgreement will bear interest at either the base rate or the LIBOR lending rate(each as defined in the Credit Agreement), as applicable, plus the applicablemargin set forth in the Credit Agreement.  The Company will also paycertain fees and expenses, including a (i) commitment fee equal to 0.50percent per annum on the unused portion of the Lenders’ aggregate revolvingcommitment and (ii) a letter of credit fee equal to the product of theapplicable margin set forth in the Credit Agreement times the face amount ofthe standby letters of credit and the commercial letters of credit outstandingat such time.  The Credit Agreement contains customary covenants,including but not limited to financial covenants requiring the Company tomaintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of1.10 to 1.00 for the periods set forth in the Credit Agreement.

 

As a condition to theextension of the loans and the issuance of the letters of credit under theCredit Agreement, the Company has granted a security interest to the AdministrativeAgent, for the benefit of the Lenders, in substantially all the assets of theCompany except (i) life insurance policies not collaterally assigned tothe Lenders, (ii) any equipment subject to liens permitted under theCredit Agreement if such equipment is also subject to an agreement prohibitingthe pledge of such equipment to the Lenders, (iii) deposit accounts usedexclusively by the Company for payroll and employee retiree benefit purposesand (iv) the Company’s interest in the outstanding voting equitysecurities of any of its directly-owned foreign subsidiaries to the extent suchinterests exceed 65 percent of the outstanding voting equity securities of suchforeign subsidiary.

 

Due to the refinancing ofthe Company’s interest bearing debt on July 16, 2010, the second quarterresults for 2010 were not subject to any covenant tests.  Subsequent periods will be subject to a FixedCharge Coverage Ratio of at least 1.1 to 1.0.

 

AtJune 30, 2010, the Company had interest bearing debt outstanding of $12.3million, consisting of the $2.2 million term loan and $10.1 million borrowedunder the revolving credit facility. As of June 30, 2010, creditavailability was approximately $4.6 million under the revolving creditfacility, based on the borrowing base formula in effect at that time.  The weighted average interest rate for thethree months ending June 30, 2010 and 2009 was 6.75 percent and 3.8percent, respectively. On a year to date basis, the weighted average interestrate for the six months ending June 30, 2010 and 2009 was 6.8 percent and3.6 percent, respectively.

 

TheCredit Agreement replaced the Terminated Loan Agreement, which provided a$5.7 million term loan facility and a $40 million revolving creditfacility, both of which were to mature on October 19, 2011. The TerminatedLoan Agreement was amended on three separate occasions for covenant compliancewaivers. The latest amendment, which was effective March 9, 2010, reducedthe maximum borrowing amount to $23 million under the revolving credit facilityand eliminated the minimum cumulative EBITDA covenant.

 

In connection with the newCredit Agreement, the Company will write-off the deferred financing costsassociated with the Terminated Loan Agreement and recognize a non-cash pre-taxcharge of $349,000 in the third quarter of 2010.  Additionally, in connection with therefinancing, the Company terminated an interest rate swap agreement in exchangefor a $381,000 cash payment by the Company on July 16, 2010.  With the elimination of the interest rateswap, the fair value of debt is no longer affected by changes in the interestrate market.

 

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** **

**(5)   FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

TheCompany’s financial instruments include cash, cash surrender value (“CSV”) oflife insurance policies, accounts receivable, accounts payable, short-termdebt, long-term debt and letters of credit. The carrying values of cash,accounts receivable and accounts payable approximated their fair value becauseof the short-term maturity of these instruments. The carrying amounts of theCompany’s bank borrowings under its Terminated Loan Agreement approximated fairvalue because the interest rates are reset periodically to reflect currentmarket rates. The letters of credit approximated fair value due to theshort-term nature of the instrument. The contract value/fair value of theletters of credit was $3.3 million at June 30, 2010 and$2.7 million at December 31, 2009. The carrying value of the CSV forthe life insurance approximated fair value and was based on the market value ofthe underlying investments, which may increase or decrease due to fluctuationsin the overall financial markets.

 

Untilit was terminated on July 16, 2010, the Company had a derivative contractfor an interest rate swap that was valued on a recurring basis using quotedmarket prices. This financial instrument is exchange-traded and was classifiedwithin Level 2 of the fair value hierarchy because the exchange is notdeemed to be an active market. The derivative was classified as a long-termliability on the balance sheet. Refer to Note 6, *Derivatives*, for additional information.

 

Inconnection with the refinancing of bank debt, the Company paid $381,000 on July 16,2010 to terminate the related interest rate swap agreement. The terminationcost of the interest rate swap will be amortized into interest expense through March 31,2014.  The following table provides thefair value information for the Company’s interest rate swap as of June 30,2010 and December 31, 2009:

 
| ** **          | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **          | ** ** | ** **              | ** ** | **Fair  Value**             | ** ** | ** ** | ** ** | **Fair  Value** | ** ** |
| ** **          | ** ** | ** **              | ** ** | ** **                  | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Significant** | ** ** |
| ** **          | ** ** | ** **              | ** ** | ** **                  | ** ** | **Other  Observable** | ** ** | ** ** | ** ** | ** ** | ** ** | **Other  Observable** | ** ** |
| ** **          | ** ** | **Carrying**            | ** ** | **Total**                   | ** ** | **Inputs** | ** ** | **Carrying** | ** ** | **Total** | ** ** | **Inputs** | ** ** |
| **Liabilities**     | ** ** | **Amount**              | ** ** | **Fair  Value**             | ** ** | **(Level  2)** | ** ** | **Amount** | ** ** | **Fair  Value** | ** ** | **(Level  2)** | ** ** |
| ** **          | ** ** | **(In  Thousands)**     | ** ** |
|                |       |                    |       |                        |       |   |   |   |   |   |   |   |   |
| Interest  rate swap |       | $                       | 447        |                        | $          | 447 |   | $ | 447 |   | $ | 420 |   | $ | 420 |   | $ | 420 |   |
|                     |            |                         |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**(6)   DERIVATIVES**

 

TheCompany transacts business globally with various manufacturing and distributionfacilities.  The Company may reduce itsexposure to fluctuations in foreign exchange rates by creating offsettingpositions through derivative financial instruments. The Company currently doesnot use derivative financial instruments for trading or speculativepurposes.  The Company regularly monitorsforeign exchange exposures and ensures hedge contract amounts do not exceed theamounts of the underlying exposures.

 

Asof June 30, 2010 the Company’s hedging activity was limited to foreigncurrency purchases and an interest rate swap. The purpose of the foreigncurrency hedging activities was to protect the Company from the risk thateventual settlement of foreign currency transactions would be adverselyaffected by changes in exchange rates. The purpose of the interest rate swapwas to fix the interest rate for the term of the revolving credit facility andterm loan under the Terminated Loan Agreement, thereby protecting the Companyfrom future interest rate increases.  Theinterest rate swap represented a cash flow hedge and was recorded at fair valueand classified as a non-current liability. Changes in the recorded fair valueof the interest rate swap were recorded to other comprehensive income.  At March 31, 2009, the existing contractapplicable to the term loan with a value of $250,000 was terminated andreplaced with a contract applicable to the term loan and a portion of therevolving loan valued at $377,000. The $250,000 value of the terminatedliability will be amortized through September 30, 2011.  In connection with the refinancing of bankdebt the Company paid $381,000 on July 16, 2010 to terminate the relatedinterest rate swap agreement. The termination cost of the interest rate swapwill be amortized into interest expense through March 31, 2014.

 

TheCompany hedges foreign exchange exposures by entering into various short-termforward foreign exchange contracts. The instruments were carried at fair valuein its Consolidated Balance Sheets as a component of current liabilities.Changes in the fair value of foreign exchange forward contracts that meet theapplicable hedging criteria were recorded as a component of other comprehensiveincome and reclassified into earnings in the same period during which thehedged transaction affects earnings. Changes in the fair value of foreign exchange forward contracts that donot meet the applicable hedging criteria were recorded currently in income ascost of sales. Hedging activities did not have a material impact on results ofoperations or financial condition during the three and six month periods endingJune 30, 2010 and 2009.

 

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AtJune 30, 2010, the Company did not have any open foreign exchangecontracts. The carrying value of the interest rate swap totaled $447,000 atJune 30, 2010 and $420,000 at December 31, 2009.

 

Thefair value of outstanding derivative contracts designated as hedginginstruments recorded as liabilities in the accompanying balance sheet were asfollows:

 
| ** **               | ** ** | ** **                  | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------------|------------|---------------------|------------|-----------------------|------------|
| **Liability Derivative** | ** ** | **Balance  Sheet Location** | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **               | ** ** | ** **                  | ** ** | **(In  thousands)** | ** ** |
|                     |       |                        |       |                |       |                  |       |
| Interest  rate swap      |       | Non-current liability       |       | $                   | 447        |                  | $          | 420 |   |
|                          |            |                             |            |                     |            |                       |            |  |  |

 

Theeffective portion of the gain (loss) on outstanding derivatives recognized inOther Comprehensive Income (“OCI”) for the three and six months ending June 30,2010 and 2009 follows:

 
| ** **          | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|---------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **          | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **          | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **          | ** ** | **(In  Thousands)**     | ** ** | **(In  Thousands)**   | ** ** |
|                |       |                    |       |                  |       |   |   |   |   |
| Interest  rate swap |       | $                       | (38        | )                     | $          | 87 |   | $ | (26 | ) | $ | (114 | ) |
|                     |            |                         |            |                       |            |  |  |  |  |  |  |  |  |

 

Theeffective portion of the gain reclassified from Accumulated Comprehensive OtherIncome into income during the three and six months ending June 30, 2010and 2009 follows**:**

 
| ** **                    | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------|------------|
| **Income Statement Location** | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                    | ** ** | **(In  Thousands)**     | ** ** | **(In  Thousands)**   | ** ** |
|                          |       |                    |       |                  |       |   |   |   |   |
| Interest  expense             |       | $                       | 28         |                  | $          | 43 |   | $ | 61 |   | $ | 43 |   |
|                               |            |                         |            |                       |            |  |  |  |  |  |  |  |  |

 

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**(7)   (LOSS)EARNINGS PER SHARE**

 

Basicearnings (loss) per share excludes any dilution and is computed by dividing netearnings (loss) available to common shareholders by the weighted-average numberof common shares outstanding for the period. Diluted earnings (loss) per sharereflect the potential dilution that could occur if securities or othercontracts to issue common stock resulted in the issuance of common stock.  If the common stock equivalents have ananti-dilutive effect, they are excluded from the computation of dilutedearnings (loss) per share.  The loss pershare for the three and six months ending June 30, 2010 and 2009 follows:

 
| ** **                                                          | ** ** | **Three  Months Ended**                | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **June 30,**                      | ** ** | **June 30,**     | ** ** |
| ** **                                                          | ** ** | **2010**                               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                          | ** ** | **(In  Thousands, Except Share Data)** | ** ** |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Basic  loss per share:                                              |       |                                   |       |                  |       |   |   |   |   |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Net  loss available to Cobra shareholders                           |       | $                                      | (316       | )                     | $          | (9,902 | ) | $ | (1,633 | ) | $ | (11,518 | ) |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Weighted-average  shares outstanding                                |       | 6,471,280                              |       | 6,471,280             |       | 6,471,280 |   | 6,471,280 |   |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Basic  loss per share                                               |       | $                                      | (0.05      | )                     | $          | (1.53 | ) | $ | (0.25 | ) | $ | (1.78 | ) |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Weighted-average  shares outstanding                                |       | 6,471,280                              |       | 6,471,280             |       | 6,471,280 |   | 6,471,280 |   |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Dilutive  shares issuable in connection with stock option plans (a) |       | —                                 |       | —                |       | — |   | — |   |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Less:  shares purchasable with option proceeds                      |       | —                                 |       | —                |       | — |   | — |   |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Total                                                               |       | 6,471,280                              |       | 6,471,280             |       | 6,471,280 |   | 6,471,280 |   |
|                                                                |       |                                   |       |                  |       |   |   |   |   |
| Diluted  loss per share                                             |       | $                                      | (0.05      | )                     | $          | (1.53 | ) | $ | (0.25 | ) | $ | (1.78 | ) |

 

----

(a) Stock options to purchase 442,780 shares for the three and sixmonths ending June 30, 2010 and 504,296 shares for the three and sixmonths ending June 30, 2009 were not included in the calculation for thedilutive loss per share since the exercise price was above market price.

 

 

**(8)   COMPREHENSIVE(LOSS) INCOME**

 

Comprehensiveincome (loss) is defined as the change in equity of a business enterprise fromtransactions and other events from non-owner sources. Comprehensive income(loss) includes net earnings (loss) and other non-owner changes in equity thatbypass the statement of operations and are reported in a separate component ofequity.  For the three and six monthsending June 30, 2010   and 2009,other comprehensive income (loss) included the foreign currency translationadjustment and an interest rate swap. The cumulative balance of the comprehensive loss at June 30, 2010and December 31, 2009 follows:

 
| ** **                               | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                               | ** ** | **(In  Thousands)** | ** ** |
|                                     |       |                |       |                  |       |
| Foreign  currency translation adjustment |       | $                   | (2,643     | )                     | $          | (1,585 | ) |
|                                     |       |                |       |                  |       |
| Interest  rate swap - gross              |       | (330                | )          | (304                  | )          |
|                                     |       |                |       |                  |       |
| Total                                    |       | $                   | (2,973     | )                     | $          | (1,889 | ) |

 

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Asummary of the Comprehensive Loss for the three and six month periods endingJune 30, 2010 and 2009 follows:

 
| ** **                                                       | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                                       | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                       | ** ** | **(In  Thousands)**     | ** ** |
|                                                             |       |                    |       |                  |       |   |   |   |   |
| Net loss attributable to  Cobra                                  |       | $                       | (316       | )                     | $          | (9,902 | ) | $ | (1,633 | ) | $ | (11,518 | ) |
|                                                             |       |                    |       |                  |       |   |   |   |   |
| Foreign currency  translation adjustment (no tax effect)         |       | (359                    | )          | 1,415                 |       | (1,058 | ) | 1,032 |   |
|                                                             |       |                    |       |                  |       |   |   |   |   |
| Interest rate swap and  foreign exchange (net of applicable tax) |       | (38                     | )          | 87                    |       | (26 | ) | (114 | ) |
|                                                             |       |                    |       |                  |       |   |   |   |   |
| Total comprehensive loss                                         |       | $                       | (713       | )                     | $          | (8,400 | ) | $ | (2,717 | ) | $ | (10,600 | ) |

 

 

**(9)   COMMITMENTSAND CONTINGENCIES**

 

TheCompany is subject to various unresolved legal actions which arise in thenormal course of its business.  None ofthese matters are expected to have a material adverse effect on the Company’sfinancial position or results of operations. However, the ultimate resolution of these matters cannot be determinedat this time.

 

AtJune 30, 2010 and December 31, 2009, the Company had outstandinginventory purchase orders with suppliers totaling approximately $22.8 millionand $17.7 million, respectively.

 

 

**(10)   OTHERCURRENT ASSETS**

 

Thefollowing table summarizes the components of other current assets atJune 30, 2010 and December 31, 2009:

 
| ** **                            | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                            | ** ** | **(In  Thousands)** | ** ** |
|                                  |       |                |       |                  |       |
| Prepaid  assets                       |       | $                   | 1,592      |                  | $          | 1,523 |   |
|                                  |       |                |       |                  |       |
| Tax  refunds and receivables          |       | 193                 |       | 1,060                 |       |
|                                  |       |                |       |                  |       |
| Vendor  and miscellaneous receivables |       | 1,684               |       | 1,378                 |       |
|                                  |       |                |       |                  |       |
|                                  |       | $                   | 3,469      |                  | $          | 3,961 |   |

 

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**(11)**  **PRODUCT WARRANTY COSTS ANDINVENTORY VALUATION RESERVES**

 

The Company warrants to theconsumer who purchases its products that it will repair or replace, withoutcharge, defective products within a specified time period, generally one year.The Company also has a return policy that allows its customers to return to theCompany products returned to them by their customers for full or partial creditbased on when the Company’s customer last purchased these products.  Consequently, it maintains a warrantyreserve, which reflects historical warranty return rates by product categorymultiplied by the most recent six months of unit sales of that model and theunit standard cost of the model.  Aroll-forward of the warranty reserve follows:

 
| ** **                                           | ** ** | **Six Months**      | ** ** | **Year**              | ** ** |
|------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                                           | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
| ** **                                           | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                                           | ** ** | **(In  Thousands)** | ** ** |
|                                                 |       |                |       |                  |       |
| Accrued  product warranty costs, beginning of period |       | $                   | 857        |                  | $          | 897 |   |
|                                                 |       |                |       |                  |       |
| Warranty  provision                                  |       | 990                 |       | 2,459                 |       |
|                                                 |       |                |       |                  |       |
| Warranty  expenditures                               |       | (1,267              | )          | (2,499                | )          |
|                                                 |       |                |       |                  |       |
| Accrued  product warranty costs, end of period       |       | $                   | 580        |                  | $          | 857 |   |

 

TheCompany maintains a liquidation reserve representing the write-down of returnedproduct from its customers to its net realizable value.  Returned inventory is either sold to various liquidatorsor returned to vendors for partial credit against similar, new models. Thedecision to sell or return products to vendors depends upon the estimatedfuture demand for the models.  Judgmentsare made as to whether various models are to be liquidated or returned to thevendor, taking into consideration the liquidation prices expected to bereceived and the amount of the vendor credit. The amount of the reserve is determined by comparing the cost of eachunit returned to the estimated amount to be realized upon each unit’sdisposition, either from returning the unit to the vendor for partial credittowards the cost of new, similar product or liquidating the unit.  This reserve can fluctuate significantly fromquarter to quarter depending upon quantities of returned inventory on-hand andthe estimated liquidation price or vendor credit per unit.  A roll-forward of the liquidation reservefollows:

 
| ** **                                | ** ** | **Six  Months**     | ** ** | **Year**              | ** ** |
|-------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                                | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
| ** **                                | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                                | ** ** | **(In  Thousands)** | ** ** |
|                                      |       |                |       |                  |       |
| Liquidation  reserve, beginning of period |       | $                   | 648        |                  | $          | 623 |   |
|                                      |       |                |       |                  |       |
| Liquidation  provision                    |       | 906                 |       | 2,650                 |       |
|                                      |       |                |       |                  |       |
| Liquidation  of models                    |       | (999                | )          | (2,625                | )          |
|                                      |       |                |       |                  |       |
| Liquidation  reserve, end of period       |       | $                   | 555        |                  | $          | 648 |   |

 

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TheCompany maintains a net realizable value (“NRV”) reserve to write-down, asnecessary, certain finished goods, except for those goods covered by thepreviously discussed liquidation reserve, below cost.  The reserve includes models where it isdetermined that the estimated realizable value is less than cost. Thus,judgments must be made about which slow-moving, excess or non-current modelswere to be included in the reserve and the NRV of such models.  The estimated NRV of each model is the perunit price that is estimated to be received if the model were sold in themarketplace. This reserve will vary depending upon the specific modelsselected; the estimated NRV for each model and quantities of each model thatare determined will be sold below cost from quarter to quarter.  A roll-forward of the NRV reserve follows:

 
| ** **                                   | ** ** | **Six  Months**     | ** ** | **Year**              | ** ** |
|----------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                                   | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
| ** **                                   | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                                   | ** ** | **(In  Thousands)** | ** ** |
|                                         |       |                |       |                  |       |
| Net  realizable reserve, beginning of period |       | $                   | 238        |                  | $          | 109 |   |
|                                         |       |                |       |                  |       |
| NRV  provision                               |       | 196                 |       | 427                   |       |
|                                         |       |                |       |                  |       |
| NRV  write-offs                              |       | (187                | )          | (298                  | )          |
|                                         |       |                |       |                  |       |
| Net  realizable reserve, end of period       |       | $                   | 247        |                  | $          | 238 |   |

 

 

**(12)  OTHER INCOME (EXPENSE)**

 

Thefollowing table shows the components of other income (expense) for the threeand six month periods ending June 30, 2010 and 2009:

 
| ** **              | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **              | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **              | ** ** | **(In  Thousands)**     | ** ** | **(In  Thousands)**   | ** ** |
|                    |       |                    |       |                  |       |   |   |   |   |
| Interest  income        |       | $                       | —     |                  | $          | — |   | $ | — |   | $ | 4 |   |
|                    |       |                    |       |                  |       |   |   |   |   |
| CSV  (loss) income      |       | (248                    | )          | 398                   |       | (179 | ) | 119 |   |
|                    |       |                    |       |                  |       |   |   |   |   |
| Exchange  (loss) income |       | (90                     | )          | 277                   |       | (139 | ) | 251 |   |
|                    |       |                    |       |                  |       |   |   |   |   |
| Other  (loss) income    |       | (17                     | )          | 5                     |       | (62 | ) | 49 |   |
|                    |       |                    |       |                  |       |   |   |   |   |
|                    |       | $                       | (355       | )                     | $          | 680 |   | $ | (380 | ) | $ | 423 |   |

 

 

**(13)  SUBSEQUENT EVENTS**

 

On July 16, 2010, theCompany entered into the Credit Agreement (the “Credit Agreement”) among theCompany, Harris N.A., as administrative agent and the lenders party theretofrom time to time. The Credit Agreement provided for a $25,000,000 revolvingloan facility, which will mature on July 16, 2013. Borrowings under theCredit Agreement were used to repay amounts outstanding under the Company’sexisting term loan and revolving credit facility under the Loan and SecurityAgreement dated as of February 15, 2008 among the Company, the lendersparty thereto and The PrivateBank and Trust Company, as a lender andadministrative agent, as amended, and for general corporate purposes. Pursuant to the terms of the Credit Agreement, the Company is required to makemandatory prepayments on the amounts outstanding thereunder in the event thatthe Company receives proceeds under certain circumstances or in connection withother specified events.  Refer to Note 4,*Financing Arrangements*, for additional information.

 

In connection with the newCredit Agreement, the Company will write-off the deferred financing costsassociated with the prior credit facility and recognize a non-cash pre-taxcharge of $349,000 in the third quarter of 2010.  Additionally, in connection with therefinancing, the Company terminated a related interest rate swap agreement inexchange for a cash payment by the Company of $381,000 on July 16, 2010.

 

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** **

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

 

**ANALYSIS OF RESULTS OF OPERATIONS**

 

***Executive Summary- Second Quarter***

 

Pre-taxloss for the second quarter of 2010 totaled $306,000 compared to a pre-tax lossof $1.1 million for the year ago period. Key factors contributing to thesignificant improvement were:

 

·                  Net sales decreased $261,000, or 1.0 percent.Higher satellite navigation sales for the PPL segment were more than offset bylower Cobra-segment domestic and CobraElectronics Europe Limited (“CEEL”) sales.

·                  Gross margin increased 2.7 percentage points to26.7 percent as a result of lower costs and an improved product mix in theCobra segment.

·                  Selling, general and administrative expensesdecreased $1.2 million or 15.7 percent, driven by lower Cobra segment expensesdue primarily to management’s effort to reduce fixed costs.

 

Asa result of the above, earnings from operations were $300,000 in the secondquarter of 2010 as compared to a loss from operations of $1.6 million in thesecond quarter of 2009.  However, otherexpenses increased by $1.0 million, mainly due to the change in cash surrendervalue of life insurance the Company carries to fund certain deferredcompensation programs and foreign exchange losses, and interest expenseincreased by $61,000 due to higher prevailing interest rates.

 

Thecombined impact of the foregoing factors with the improvement in operatingincome was a $755,000 decrease in the pre-tax loss in the second quarter of2010 from the second quarter of 2009.

 

Thetax provision for the second quarter of 2010 was $10,000 compared to an $8.8million provision for the second quarter of 2009, which included a charge for afull valuation allowance on the deferred tax assets of the Company’s U.S.operations.

 

Thenet loss for the three month period ending June 30, 2010 was $316,000, ora $0.05 loss per share, versus the $9.9 million loss, or $1.53 loss per share,for three month period ending June 30, 2009.

 

 

***Executive Summary- Six Months***

 

Pre-taxloss for the first half of 2010 totaled $1.6 million compared to a pre-tax lossof $3.5 million for the comparable prior year period. Key factors contributingto the significant improvement were:

 

·                  Net sales increased $1.7 million, or 3.9percent. Higher sales for the PPL segment more than offset the sales declinefor the Cobra segment, mainly lower domestic detection and CEEL sales.

·                  Gross margin increased 2.1 percentage pointsto 27.2 percent as a result of a higher Cobra segment gross margin.

·                  Selling, general and administrative expensesdecreased $1.4 million, or 9.4 percent, driven by lower Cobra segment expensesdue primarily to management’s effort to reduce fixed costs.

·                  Interest expense increased $174,000 due tohigher rates.

·                  Other expenses increased by $803,000 mainlydue to cash surrender value (CSV) of life insurance income and foreign exchangelosses.

 

Thecombined impact of the foregoing factors was a $1.8 million decrease in the pre-taxloss in the first half of 2010 from the same period in 2009.

 

Thetax provision for first half of 2010 amounted to $3,000 compared to an $8.1million provision for the prior year period. The $8.1 million provisionincluded a charge for a full valuation allowance on the deferred tax assets ofthe Company’s U.S. operations.

 

Thenet loss for the six month period ending June 30, 2010 was $1.6 million,or $.25 loss per share, compared to the $11.5 million loss, or $1.78 loss pershare, for the year ago period.

 

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***Outlook***

 

The Company anticipates returning to profitability in 2010, as itdrives the business forward with new products and new distribution andmarketing channels.  The improvement inthe Company’s results for the first half of 2010 was built on this strategicthrust. The Company will maintain its focus on containing expenses and managingworking capital in the second half of 2010.

 

***EBITDA***

 

Thefollowing table shows the reconciliation of net loss to *EBITDA*and *EBITDA As Defined* for the three and sixmonths ending June 30, 2010 and 2009:

 
| ** **                | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                | ** ** | **(In  Thousands)**                   | ** ** | **(In  Thousands)**                 | ** ** |
|                      |       |                                  |       |                                |       |   |   |   |   |
| **Net loss**              | ** ** | **$**                                 | **(316**   | **)**                               | **$**      | **(9,902** | **)** | **$** | **(1,633** | **)** | **$** | **(11,518** | **)** |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Depreciation/amortization |       | 957                                   |       | 996                                 |       | 1,907 |   | 1,974 |   |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Interest  expense         |       | 251                                   |       | 190                                 |       | 514 |   | 340 |   |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Income  tax provision     |       | 10                                    |       | 8,840                               |       | 3 |   | 8,054 |   |
|                      |       |                                  |       |                                |       |   |   |   |   |
| **EBITDA**                | ** ** | **902**                               | ** ** | **124**                             | ** ** | **791** | ** ** | **(1,150** | **)** |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Stock  option expense     |       | 57                                    |       | 58                                  |       | 113 |   | 117 |   |
|                      |       |                                  |       |                                |       |   |   |   |   |
| CSV  (income) loss        |       | 248                                   |       | (398                                | )          | 179 |   | (119 | ) |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Non-controlling  interest |       | —                                |       | 1                                   |       | — |   | 2 |   |
|                      |       |                                  |       |                                |       |   |   |   |   |
| Other  non-cash items     |       | 390                                   |       | (165                                | )          | 1,077 |   | (112 | ) |
|                      |       |                                  |       |                                |       |   |   |   |   |
| **EBITDA As Defined**     | ** ** | **$**                                 | **1,597**  | ** **                          | **$**      | **(380** | **)** | **$** | **2,160** | ** ** | **$** | **(1,262** | **)** |

 

*EBITDA* represents earnings before interest, taxes,depreciation and amortization. *EBITDA As Defined*represents*EBITDA* plus the applicable adjustmentsrequired to agree with the *EBITDA*measurement for compliance with the financial covenants of the Company’slenders.  The Company believes *EBITDA* is a useful performance indicator and is frequentlyused by management, securities analysts and investors to judge operatingperformance between time periods and among other companies.  The Company uses *EBITDA AsDefined* to assess operating performance and ensure compliance withfinancial covenants.

 

*EBITDA*and *EBITDA As Defined*are non-GAAP performance indicators that should be used in conjunction withGenerally Accepted Accounting Principles (“GAAP”) performance measurements suchas net sales, operating profit and net income to evaluate the Company’soperating performance.  *EBITDA* and *EBITDA As Defined*are not alternatives to net income or cash flow from operations determined inaccordance with GAAP.  Furthermore*, EBITDA*and *EBITDA As Defined*may not be comparable to the calculation of similarly titled measures reportedby other companies.

 

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***Second Quarter — 2010 vs. 2009***

 

Thefollowing table contains sales and pre-tax profit or loss by business segmentfor the three month period ending June 30, 2010 and 2009:

 
| ** **           | ** ** | ** **          | ** ** | ** **         | ** ** | ** **   | ** ** | ** **         | ** ** | **2010  vs. 2009** | ** ** |
|----------------------|------------|---------------------|------------|--------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|
| ** **           | ** ** | **2010**            | ** ** | **2009**           | ** ** | **Increase** | ** ** |
| ** **           | ** ** | **(In  Thousands)** | ** ** |
| ** **           | ** ** | **Net**             | ** ** | **Pre-tax**        | ** ** | **Net**      | ** ** | **Pre-tax**        | ** ** | **Net**            | ** ** | **Pre-tax** | ** ** |
| **Business Segment** | ** ** | **Sales**           | ** ** | **Profit  (Loss)** | ** ** | **Sales**    | ** ** | **Profit  (Loss)** | ** ** | **Sales**          | ** ** | **Profit** | ** ** |
|                 |       |                |       |               |       |         |       |               |       |               |       |   |   |
| Cobra                |       | $                   | 22,212     |               | $          | (46          | )          | $                  | 23,366     |               | $          | (1,294 | ) | $ | (1,154 | ) | $ | 1,248 |   |
| PPL                  |       | 3,498               |       | (260               | )          | 2,605        |       | 233                |       | 893                |       | (493 | ) |
|                 |       |                |       |               |       |         |       |               |       |               |       |   |   |
| Total  Company       |       | $                   | 25,710     |               | $          | (306         | )          | $                  | 25,971     |               | $          | (1,061 | ) | $ | (261 | ) | $ | 755 |   |

 

**Cobra Business Segment**

 

Cobra net sales decreased $1.2 million, or 4.9percent, in the second quarter of 2010 to $22.2 million compared to $23.4million in the second quarter of 2009. The main contributors to the decreasewere lower net sales domestically and at CEEL partially offset by higher salesinto Canada.  The decrease in domesticnet sales was due mainly to declines for (1) two-way radios, primarilybecause of load-in sales when Cobra became a major retailer’s exclusive two-wayradio supplier a year ago, and (2) detectors,because of weak store traffic at a major retailer. Additionally, domestic saleswere adversely affected by the transition of a key retail account from beingserved by a distributor to direct service by Cobra.  While this transition will provideopportunities to improve sales and earnings through the balance of this yearand beyond, the short-term impact was to reduce sales as the affecteddistributor balanced its inventory to anticipated sales levels. These domesticdeclines were partly offset by sales of the mobile navigation productfor the professional driver (the 7700 PRO), introduced in the second half of2009, and higher marine radios salesbecause of strong sales of two new floating handheld marine radios (one withBluetooth® technology), introduced in late 2009.  CEEL net sales declined in partbecause of the slowness of the economic recovery in Europe, which has laggedthe U.S. economic recovery, as well as the timing of radar detector sales to anew European distributor, which shifted to the second half of 2010.  Increased Canadian sales, mainly in two-way radios, reflected an improvedCanadian economy and a shift in sales from the first quarter of 2010.

 

Gross profit increased $592,000, or 11.2 percent,to $5.9 million for the second quarter of 2010, while gross margin increased3.9 percentage points to 26.6 percent from 22.7 percent in the prior year’squarter.  The increase in gross marginresulted from higher gross margins for domestic sales and at CEEL.  The increase in the domestic gross margin wasdue to improved margins for several categories, especially two-way radiosbecause of cost reductions and lower net realizable value expense, as well as amore favorable product mix because of a greater proportion of higher-marginCitizens Band and marine radios and the added sales of the 7700 PRO.  The gross margin improvement for CEEL was duein part to sales of new, high-margin radar detector and marine radio models andthe fact that there were excess inventory sales of two-way radios at reducedprices in 2009, which were not repeated in the current quarter, as well as afavorable inventory adjustment due to the weakening of the euro in the currentquarter.

 

Selling, general and administrative expensesdeclined $1.4 million, or 20.3 percent, to $5.4 million for the current quarterfrom $6.8 million in the prior year’s quarter and, as a percentage of netsales, were 24.4 percent and 29.1 percent, respectively.  Both lower variable selling expenses,primarily because of lower domestic sales and the favorable impact of customermix, and lower fixed expenses, primarily public relations, media and trade showattendance expenses and professional fees, contributed to the decline.

 

Interest expense increased $60,000 in the secondquarter of 2010 from the prior year period due to higher interest rates.  Other expense increased $664,000 from the yearago period mainly due to a CSV loss of $248,000 for the current quartercompared to income of $398,000 in the year ago quarter.

 

As a result of the above, the Cobra segment had apre-tax loss of $46,000 in the second quarter of 2010 compared to a pre-taxloss of $1.3 million in the second quarter of 2009.

 

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***Performance Products Limited (“PPL”) Business Segment***

 

PPL’snet sales increased $893,000 or 34.3 percent, to $3.5 million in the secondquarter of 2010 compared to the year ago quarter. The increase was due tohigher satellite navigation sales, especially those with routing designed specifically for trucks and motorhomes, and outdoor leisure products, which were not sold in the second quarterof 2009, offset in part by lower download fee revenue in the current quarter ascompared to the same period in 2009 due to the growth in product sales outsideof the U.K., where download fees are not charged due to the competitiveenvironment.

 

Gross profit increased $38,000, or 4.1 percent, to$963,000 for the second quarter of 2010, while gross margin decreased 8percentage points to 27.5 percent from 35.5 percent in the prior year’squarter.  The decrease in gross marginwas due primarily to $95,000 of exchange rate losses thatflowed through the cost of sales in 2010 and a 25 percent decrease in downloadfees, which have a 100 percent gross margin, to 12 percent of net salescompared to 22 percent of net sales for the prior year quarter.

 

Selling, general and administrative expensesincreased $159,000, or 16.2 percent, to $1.1 million for the current quarterfrom $984,000 in the prior year’s quarter but, as a percentage of net sales,were 32.7 percent and 37.8 percent, respectively. The increase in selling, generaland administrative expenses was due mainly to higher advertising andprofessional fees, partially offset by the favorable impact of a 3.8 percentweakening of the British pound sterling relative to the U.S. dollar for thecurrent quarter versus the prior year’s quarter.

 

Otherexpense for the second quarter of 2010 increased $371,000 compared to the prioryear period. This unfavorable change was principally due to the strengtheningof the U.S. dollar versus the British pound sterling, which resulted in aforeign exchange loss of $81,000 in the current quarter versus a $295,000foreign exchange gain for the second quarter of 2009.

 

Asa result of the above, the PPL segment had a pre-tax loss of $260,000 for the second quarter of 2010 comparedto pre-tax income of $233,000 for thesecond quarter of 2009.

 

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***Six Months - 2010 vs. 2009***

 

Thefollowing table contains sales and pre-tax profit or loss by business segmentfor the six month period ending June 30, 2010 and 2009:

 
| ** **           | ** ** | ** **          | ** ** | ** **        | ** ** | ** **   | ** ** | ** **        | ** ** | **2010  vs. 2009** | ** ** |
|----------------------|------------|---------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------------|------------|
| ** **           | ** ** | **2010**            | ** ** | **2009**          | ** ** | **Increase** | ** ** |
| ** **           | ** ** | **(In  Thousands)** | ** ** |
| ** **           | ** ** | **Net**             | ** ** | **Pre-tax**       | ** ** | **Net**      | ** ** | **Pre-tax**       | ** ** | **Net**            | ** ** | **Pre-tax** | ** ** |
| **Business Segment** | ** ** | **Sales**           | ** ** | **Profit (Loss)** | ** ** | **Sales**    | ** ** | **Profit (Loss)** | ** ** | **Sales**          | ** ** | **Profit** | ** ** |
|                 |       |                |       |              |       |         |       |              |       |               |       |   |   |
| Cobra                |       | $                   | 39,767     |              | $          | (1,485       | )          | $                 | 40,614     |               | $          | (3,494 | ) | $ | (847 | ) | $ | 2,009 |   |
| PPL                  |       | 7,026               |       | (145              | )          | 4,442        |       | 32                |       | 2,584              |       | (177 | ) |
|                 |       |                |       |              |       |         |       |              |       |               |       |   |   |
| Total  Company       |       | $                   | 46,793     |              | $          | (1,630       | )          | $                 | 45,056     |               | $          | (3,462 | ) | $ | 1,737 |   | $ | 1,832 |   |

 

**Cobra Business Segment**

 

Cobra net sales decreased $847,000, or 2.1 percent,in the first half of 2010 to $39.8 million compared to $40.6 million for theyear ago period. The main contributors to this decrease were lower domesticdetection and CEEL sales offset in part by higher sales of Citizens Band radiosas professional drivers benefit from solid first-half growth in truck tonnageand sales of the 7700 PRO mobile navigation product, introducedin the second half of 2009. Lowerdetection sales were due primarily to the fact that in the prior year’s periodthere were load-in shipments for two major retailers, one of which was a newdetection customer at the beginning of 2009 while the other switched over tonew models in the first quarter of 2009. CEEL net sales declined inpart because of the slowness of the economic recovery in Europe, which haslagged the U.S. economic recovery, as well as the timing of radar detectorsales to a new European distributor, which shifted to the second half of 2010.

 

Gross profit for the first half of 2010 increased$923,000 to $10.5 million, while gross margin increased 2.8 percentage pointsto 26.4 percent from 23.6 percent for the first half of 2009.  The improvement in gross margin was due tohigher domestic gross margin, particularly for two-way radios, which was drivenby cost reductions and lower net realizable value expense, as well as a morefavorable product mix resulting from increased sales of higher-margin Citizens Band radios and theadded sales from the 7700 PRO.   Alsocontributing to the increase was a higher gross margin at CEEL, which was duein part to sales of new, high-margin radar detector and marine radio models anda favorable inventory adjustment due to the weakening of the euro in thecurrent quarter.

 

Selling, general and administrative expenses forthe first six months of 2010 declined $1.7 million, or 12.9 percent, to $11.2million from $12.9 million for the first half of 2009 and, as a percentage ofnet sales were 28.2 percent and 31.7 percent, respectively.  Most of the $1.7 million decrease was infixed expenses, which fell $1.3 million, or 12.6 percent, primarily because oflower severance costs (related to headcount reductions in the first quarter of2009), public relations and trade show attendance expenses and professionalfees.

 

Interest expense for the first half of 2010increased $173,000 compared to the prior year period due to higher interestrates.  Other expense increased $397,000mainly due to a CSV loss of $179,000 for the first half of 2010 compared to CSVincome of $119,000 for the prior year period.

 

As a result of the above, the Cobra segment had apre-tax loss of $1.5 million for the first six months of 2010 compared to apre-tax loss of $3.5 million for the prior year period.

 

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***Performance Products Limited (“PPL”) Business Segment***

 

PPL’snet sales increased $2.6 million or 58.2 percent, to $7.0 million for the firstsix months of 2010 compared to $4.4 million reported for the year ago period.Much of the increase was due to higher satellite navigation sales, whichincreased 51.8 percent because of strong sales of units with routing, designed specifically for trucks and motorhomes, and to strong sales of outdoor leisure products, one of PPL’snewer categories.  Partially offsettingthe increases in satellite navigation and outdoor leisure sales were a decline in download fees in thecurrent period versus last year due to the growth in product sales outside ofthe U.K., where download fees are not charged due to the competitiveenvironment.

 

Gross profit increased $495,000, or 28.7 percent,to $2.2 million for the first half of 2010, while gross margin decreased 7.3percentage points to 31.6 percent from 38.9 percent in the prior year’squarter.  The decrease in gross marginwas due primarily to $89,000 of exchange rate losses thatflowed through the cost of sales in 2010 and a 27 percent decrease in downloadfees, which have a 100 percent gross margin, to 12 percent of net salescompared to 26 percent of net sales for the prior year period.

 

Selling, general and administrative expensesincreased $265,000, or 13.5 percent, to $2.2 million in the current period from$2.0 million in the prior year’s period but, as a percentage of net sales, were31.7 percent and 44.2 percent, respectively. The increase was due primarily to higher advertising andprofessional fees.

 

Otherexpense for the first half of 2010 increased $406,000 compared to the prioryear period due to a $142,000 foreign exchange loss for the first half of 2010compared to a $268,000 foreign exchange gain for the first half of 2009.

 

Asa result of the above, the PPL segment had a pre-tax loss of $145,000 for the first six months of 2010 comparedto pre-tax income of $32,000 for theprior year period.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

TheCompany recently refinanced its bank debt and replaced a $23 million revolvingasset-based facility and a $2.2 million term loan with a $25 million revolvingasset-based facility.  This new CreditAgreement provided a lower cost credit facility and greater liquidity. Refer toNote 4, *Financing Arrangements*, for additionalinformation.

 

AtJune 30, 2010, the Company had interest bearing debt outstanding of $12.3million, consisting of the $2.2 million term loan and $10.1 million borrowedunder the revolving credit facility. As of June 30, 2010, creditavailability was approximately $4.6 million under the revolving creditfacility, based on the borrowing base formula in effect at that time.  Due to the refinancing of the Company’s bankdebt, there were no debt covenants applicable to second quarter results.

 

Forthe six months ended June 30, 2010, net cash flows provided by operatingactivities totaled $6.6 million. Significant net cash inflows from operationsand non-cash add-backs included a decrease in accounts receivable of $7.3million, non-cash depreciation and amortization of $1.9 million, receipt of$925,000 in income tax refunds, and increases in accounts payable and deferredcompensation of $1.0 million and $435,000, respectively. The decrease inaccounts receivable was primarily due to normal collections of year-end andquarter-end receivables and lower sales in the first half of 2010 compared tosales in the second half of 2009. The increase in accounts payable was mainlydue to higher inventories. Partially offsetting these inflows was a net loss of$1.6 million; an increase in inventories of $2.1 million, primarily due to aseasonal build-up for the second half of 2010; and a decrease in accruedliabilities of $852,000, mainly because of lower promotional and warranty costsdue to the sales decline from year end and an increase in other assets of$752,000.

 

Workingcapital requirements are seasonal, with demand for working capital being higherlater in the year as customers begin purchasing for the holiday sellingseason.  The Company believes that cashgenerated from operations and from borrowings under its Credit Agreement will besufficient in 2010 to fund its working capital needs.

 

Netcash used in investing activities for the first six months of 2010 totaled$920,000.  Additions to intangible assetstotaled $298,000,  PP&E expenditurestotaled $356,000, and premium payments for life insurance totaled $266,000.

 

Netcash used by financing activities in the first six months of 2010 totaled $5.6million and was used to reduce bank debt. The Company is not expected to pay adividend in 2010.  The cash used in 2010for financing activities will most likely be limited to debt reduction.

 

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Afailure to comply, absent a waiver from lenders, with the covenants containedin the Credit Agreement in future periods could result in any outstandingindebtedness under the Credit Agreement becoming immediately due and payableand in the inability to borrow additional funds under the CreditAgreement.  The Company believes that forthe foreseeable future, it will be able to continue to fund its operations andseasonal working capital requirements with cash generated from operations andborrowings under the Credit Agreement or similar future credit agreement.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Criticalaccounting policies and estimates generally consist of those that reflectsignificant judgments and uncertainties and could potentially result inmaterially different results under different assumptions.  For a description of the Company’s criticalaccounting policies and estimates refer to the Company’s Annual Report onForm 10-K for the year ended December 31, 2009. The application   of certain of these policies requiressignificant judgments or a historical based estimation process that can affectthe results of operations and financial position of the Company as well as therelated footnote disclosures.  TheCompany bases its estimates on historical experience and other assumptions thatit believes are reasonable.  If actual amountsultimately differ from previous estimates, the revisions are included in theCompany’s results of operations for the period in which the actual amountsbecome known.

 

**FORWARD-LOOKING STATEMENTS**

 

Thisreport contains forward-looking statements within the meaning of that term inthe Private Securities Litigation Reform Act of 1995 found at Section 27Aof the Securities Act of 1933 and Section 21E of the Exchange Act.  Additional written or oral forward-lookingstatements may be made by the Company from time to time in filings with theSEC, press releases, or otherwise. Statements contained in this report that arenot historical facts are forward-looking statements made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act.  Forward-looking statements may include, butare not limited to, projections of revenue, income or loss and capitalexpenditures, statements regarding future operations, anticipated financingneeds, compliance with financial covenants in loan agreements, liquidity, plansfor acquisitions or sales of assets or businesses, plans relating to productsor services, assessments of materiality, expansion into international markets,growth trends in the consumer electronics industry, technological and marketdevelopments in the consumer electronics industry, the availability of newconsumer electronics products and predictions of future events, as well asassumptions relating to these statements. In addition, when used in thisreport, the words “anticipates,” “believes,” “should,” “estimates,” “expects,” “intends,”“plans” and variations thereof and similar expressions are intended to identifyforward-looking statements.

 

Forward-lookingstatements are inherently subject to risks and uncertainties, some of whichcannot be predicted or quantified based on current expectations.  Consequently, future events and actualresults could differ materially from those set forth in, contemplated by orunderlying the forward-looking statements contained in this report or in otherCompany filings, press releases, or otherwise. Factors that could contribute to or cause such differences include, butare not limited to, unanticipated developments in any one or more of thefollowing areas:

 

·                  global economic and market conditions,including continuation of or changes in the current economic environment;

·                  ability of the Company to introduce newproducts to meet consumer needs, including timely introductions as new consumertechnologies are introduced, and customer and consumer acceptance of these newproduct introductions;

·                  pressure for the Company to reduce prices forolder products as newer technologies are introduced;

·                  significant competition in the consumerelectronics industry, including introduction of new products and changes inpricing;

·                  factors related to foreign manufacturing,sourcing and sales (including foreign government regulation, trade andimportation, and health and safety concerns, and effects of fluctuation inexchange rates);

·                  ability of the Company to maintain adequatefinancing, to bear the interest cost of such financing and to remain incompliance with financing covenants;

·                  impairment of intangible assets due to marketconditions and/or the Company’s operating results;

·                  changes in law;

·                  ability to successfully integrateacquisitions;

·                  and other risk factors, which may be detailedfrom time to time in the Company’s SEC filings.

 

Readersare cautioned not to place undue reliance on any forward-looking statementscontained in this report, which speak only as of the date set forth on thesignature page hereto.  The Companyundertakes no obligation to publicly release the result of any revisions tothese forward-looking statements that may be made to reflect events orcircumstances after such date or to reflect the occurrence of anticipated orunanticipated events.

 

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**Item 3.  Qualitative andQuantitative Disclosures About Market Risk**

 

Marketrisks related to changes in foreign currency exchange risks and interest ratesare inherent to the Company’s operations. Changes to these factors could causefluctuations in the Company’s net earnings, cash flows and the fair values offinancial instruments subject to market risks. The Company identifies theserisks and mitigates the financial impact with hedging and interest rate swapsas of June 30, 2010.  However, withthe elimination of the interest rate swap in July 2010, the Company is nowsubject to interest rate risk on the portion of the debt that was subject tothis hedge previously. Consequently, future changes in the applicable interestrate will affect the interest expense incurred by the Company’s on itsoutstanding indebtedness.

 

Otherthan the elimination of the interest rate swap in July 2010, there havebeen no material changes in the Company’s market risk since December 31,2009.

 

**Item 4.  Controls and Procedures**

 

TheCompany has established disclosure controls and procedures to ensure thatinformation required to be disclosed in the reports that the Company files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in SEC rules and forms.  The Company’s disclosure controls andprocedures have also been designed to ensure that information required to bedisclosed in the reports that the Company files or submits under the ExchangeAct is accumulated and communicated to the Company’s management, including theprincipal executive officer and principal financial officer, to allow timelydecisions regarding required disclosure.

 

Asof June 30, 2010, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s principal executive officer and principal financial officer, ofthe effectiveness of the Company’s disclosure controls and procedures.  Based on this evaluation, the principalexecutive officer and principal financial officer of the Company have concludedthat the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) were effectiveas of June 30, 2010.

 

There has been no change in the Company’s internal control overfinancial reporting that occurred during the first six months of 2010 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1A. Risk Factors**

 

Therehave been no material changes to the risk factors as previously disclosed underItem 1A in our Annual Report on Form 10-K for the year endedDecember 31, 2009.

** **

**Item** **6**  **Exhibits**

 

a)      Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certificationof the Chief Executive Officer.

 

b)     Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certificationof the Chief Financial Officer.

 

c)      Exhibit 32.1 Section 1350Certification of the Chief Executive Officer.

 

d)     Exhibit 32.2 Section 1350Certification of the Chief Financial Officer.

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |   | COBRA  ELECTRONICS CORPORATION |
|--------|--------|--------------------------------|
|   |   |                           |   |
|   |   | By                             | **/s/ Michael Smith** |
|   |   |                           |   |
|   |   |                           | **Michael Smith** |
|   |   |                           | **Senior Vice President and  Chief Financial Officer** |
|   |   |                           | **(Duly Authorized Officer and Principal Financial  Officer)** |

 

Dated:August 12, 2010

 

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**INDEX TOEXHIBITS**

 
| **Exhibit** | ** ** | ** **                                                                        |
|-------------|------------|-----------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Document**                                                       |
| ** **  | ** ** | ** **                                                                        |
| 31.1        |       | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Executive Officer. |
|        |       |                                                                              |
| 31.2        |       | Rule 13a-14(a)/15d-14(a) Certification  of the Chief Financial Officer. |
|        |       |                                                                              |
| 32.1        |       | Section 1350  Certification of the Chief Executive Officer.                  |
|        |       |                                                                              |
| 32.2        |       | Section 1350  Certification of the Chief Financial Officer.                  |

 

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