Table ofContents

 

 

 

**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 September 30, 2009**

 

**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 periodthat the Registrant was required to file such reports), and (2) has beensubject to such 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 to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch 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 smallerreporting  company) |   |                        |

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2ofthe Exchange Act).  YES  o  NO x

 

Number of shares of Common Stock of Registrant outstanding as of November 9,2009: 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 | 22                |
| Item 3           | Qualitative  and Quantitative Disclosures About Market Risk                                 | 35                |
| Item 4           | Controls and  Procedures                                                                    | 35                |
|             |                                                                                        |              |
| **PART II** | **OTHER INFORMATION**                                                                       |              |
|             |                                                                                        |              |
| Item 1A          | Risk Factors                                                                                | 36                |
| Item 3           | Defaults  Upon Senior Securities                                                            | 36                |
| Item 6           | Exhibits                                                                                    | 36                |
|             |                                                                                        |
| **SIGNATURE**    | 37                                                                                          |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

** **

**Cobra Electronics Corporation and Subsidiaries**

**Consolidated Statements of Operations - Unaudited**

**(In Thousands, Except Per Share Amounts)**

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                                | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  sales                                                                |       | $                      | 27,405     |                  | $          | 33,242 |   | $ | 72,461 |   | $ | 96,418 |   |
| Cost  of sales                                                            |       | 20,777                 |       | 23,538                |       | 54,539 |   | 66,358 |   |
| Gross  profit                                                             |       | 6,628                  |       | 9,704                 |       | 17,922 |   | 30,060 |   |
| Selling,  general and administrative expense                              |       | 7,393                  |       | 8,911                 |       | 22,232 |   | 26,002 |   |
| (Loss)  earnings from operations                                          |       | (765                   | )          | 793                   |       | (4,310 | ) | 4,058 |   |
| Interest  expense                                                         |       | (275                   | )          | (231                  | )          | (615 | ) | (775 | ) |
| Other  income (expense)                                                   |       | 422                    |       | (135                  | )          | 845 |   | (441 | ) |
| (Loss)  earnings before income taxes                                      |       | (618                   | )          | 427                   |       | (4,080 | ) | 2,842 |   |
| Tax  (benefit) provision                                                  |       | (109                   | )          | 285                   |       | 7,945 |   | 895 |   |
| Net  (loss) earnings                                                      |       | (509                   | )          | 142                   |       | (12,025 | ) | 1,947 |   |
| Less:  net earnings attributable to non-controlling interest              |       | —                 |       | —                |       | 2 |   | 14 |   |
| Net  (loss) earnings attributable to Cobra                                |       | $                      | (509       | )                     | $          | 142 |   | $ | (12,027 | ) | $ | 1,933 |   |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Net  (loss) earnings per common share attributable to Cobra shareholders: |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                     |       | $                      | (0.08      | )                     | $          | 0.02 |   | $ | (1.86 | ) | $ | 0.30 |   |
| Diluted                                                                   |       | $                      | (0.08      | )                     | $          | 0.02 |   | $ | (1.86 | ) | $ | 0.30 |   |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Weighted  average shares outstanding:                                     |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                     |       | 6,471                  |       | 6,471                 |       | 6,471 |   | 6,471 |   |
| Diluted                                                                   |       | 6,471                  |       | 6,471                 |       | 6,471 |   | 6,471 |   |
|                                                                      |       |                   |       |                  |       |   |   |   |   |
| Dividends  declared per common share                                      |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | 0.16 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Cobra Electronics Corporation and Subsidiaries**

**Consolidated Balance Sheets - Unaudited**

**(In Thousands)**

 
| ** **                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                        |       |                   |       |                  |       |
| Current  assets:                                                                                  |       |                   |       |                  |       |
| Cash                                                                                              |       | $                      | 1,230      |                  | $          | 1,985 |   |
| Receivables,  net of allowance for claims and doubtful accounts of $120 in 2009 and $107 in  2008 |       | 19,973                 |       | 18,017                |       |
| Inventories,  primarily finished goods, net                                                       |       | 30,281                 |       | 27,464                |       |
| Deferred  income taxes, current                                                                   |       | —                 |       | 6,130                 |       |
| Prepaid  assets                                                                                   |       | 1,716                  |       | 1,979                 |       |
| Other  current assets                                                                             |       | 1,310                  |       | 1,223                 |       |
| Total  current assets                                                                             |       | 54,510                 |       | 56,798                |       |
| Property,  plant and equipment, at cost:                                                          |       |                   |       |                  |       |
| Buildings  and improvements                                                                       |       | 5,961                  |       | 5,996                 |       |
| Tooling  and equipment                                                                            |       | 17,428                 |       | 21,512                |       |
|                                                                                              |       | 23,389                 |       | 27,508                |       |
| Accumulated  depreciation                                                                         |       | (18,186                | )          | (21,962               | )          |
| Land                                                                                              |       | 230                    |       | 230                   |       |
| Property,  plant and equipment, net                                                               |       | 5,433                  |       | 5,776                 |       |
| Other  assets:                                                                                    |       |                   |       |                  |       |
| Cash  surrender value of officers’ life insurance policies                                   |       | 3,903                  |       | 3,034                 |       |
| Deferred  income taxes, non-current                                                               |       | —                 |       | 2,004                 |       |
| Intangible  assets, net                                                                           |       | 11,138                 |       | 11,218                |       |
| Other  assets                                                                                     |       | 111                    |       | 168                   |       |
| Total  other assets                                                                               |       | 15,152                 |       | 16,424                |       |
| Total  assets                                                                                     |       | $                      | 75,095     |                  | $          | 78,998 |   |

 

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)**

 
| ** **                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **LIABILITIES AND EQUITY**                                                        |       |                   |       |                  |       |
| Current  liabilities:                                                             |       |                   |       |                  |       |
| Short-term  bank debt                                                             |       | $                      | 20,105     |                  | $          | 1,370 |   |
| Accounts  payable                                                                 |       | 6,129                  |       | 2,923                 |       |
| Accrued  salaries and commissions                                                 |       | 1,122                  |       | 1,124                 |       |
| Accrued  advertising and sales promotion costs                                    |       | 926                    |       | 1,174                 |       |
| Accrued  product warranty costs                                                   |       | 844                    |       | 897                   |       |
| Accrued  income taxes                                                             |       | 83                     |       | 495                   |       |
| Other  accrued liabilities                                                        |       | 2,613                  |       | 2,584                 |       |
| Total  current liabilities                                                        |       | 31,822                 |       | 10,567                |       |
| Non-current  liabilities:                                                         |       |                   |       |                  |       |
| Long-term  bank debt                                                              |       | 1,760                  |       | 16,301                |       |
| Deferred  compensation                                                            |       | 6,878                  |       | 6,516                 |       |
| Deferred  income taxes                                                            |       | 2,002                  |       | 1,983                 |       |
| Other  long-term liabilities                                                      |       | 1,133                  |       | 1,077                 |       |
| Total  non-current liabilities                                                    |       | 11,773                 |       | 25,877                |       |
| Total  liabilities                                                                |       | 43,595                 |       | 36,444                |       |
| Commitments  and contingencies                                                    |       | —                 |       | —                |       |
| Shareholders’  equity:                                                       |       |                   |       |                  |       |
| Preferred  stock, $1 par value, 1,000,000 shares authorized, none issued          |       | —                 |       | —                |       |
| Common  stock, $.33 1/3 par value, 12,000,000 shares authorized, 7,039,100 issued |       | 2,345                  |       | 2,345                 |       |
| Paid-in  capital                                                                  |       | 20,527                 |       | 20,354                |       |
| Retained  earnings                                                                |       | 14,278                 |       | 26,305                |       |
| Accumulated  other comprehensive loss                                             |       | (1,841                 | )          | (2,637                | )          |
|                                                                              |       | 35,309                 |       | 46,367                |       |
| Treasury  stock, at cost (567,820 shares)                                         |       | (3,837                 | )          | (3,837                | )          |
| Total  shareholders’ equity - Cobra                                          |       | 31,472                 |       | 42,530                |       |
| Non-controlling  interest                                                         |       | 28                     |       | 24                    |       |
| Total  equity                                                                     |       | 31,500                 |       | 42,554                |       |
| Total  liabilities and equity                                                     |       | $                      | 75,095     |                  | $          | 78,998 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Cobra Electronics Corporation and Subsidiaries**

**Consolidated Statement of Cash Flows - Unaudited**

**(In Thousands)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,** | ** ** |
| ** **                                                                                 | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Cash  flows from operating activities:                                                     |       |                   |       |   |   |
| Net  (loss) earnings attributable to Cobra                                                 |       | $                      | (12,027    | ) | $ | 1,933 |   |
| Adjustments  to reconcile net (loss) earnings to net cash flows from operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                             |       | 2,947                  |       | 4,269 |   |
| Product  software impairment                                                               |       | —                 |       | 266 |   |
| Deferred  income taxes - valuation charge                                                  |       | 10,543                 |       | — |   |
| Deferred  income taxes                                                                     |       | (2,390                 | )          | (1,120 | ) |
| Loss  (gain) on cash surrender value (CSV) life insurance                                  |       | (594                   | )          | 780 |   |
| Loss  on sale of fixed assets                                                              |       | 1                      |       | — |   |
| Stock-based  compensation                                                                  |       | 173                    |       | 194 |   |
| Non-controlling  interest                                                                  |       | 2                      |       | 14 |   |
| Changes  in assets and liabilities:                                                        |       |                   |       |   |   |
| Receivables                                                                                |       | (1,851                 | )          | 4,029 |   |
| Inventories                                                                                |       | (2,547                 | )          | 3,486 |   |
| Other  assets                                                                              |       | (164                   | )          | 1,541 |   |
| Accounts  payable                                                                          |       | 3,146                  |       | (2,534 | ) |
| Accrued  income taxes                                                                      |       | (412                   | )          | 716 |   |
| Accrued  liabilities                                                                       |       | (556                   | )          | (3,992 | ) |
| Deferred  compensation                                                                     |       | 362                    |       | 489 |   |
| Deferred  income                                                                           |       | (17                    | )          | (275 | ) |
| Other  long-term liabilities                                                               |       | 56                     |       | 360 |   |
| Net  cash (used in) provided by operating activities                                       |       | (3,328                 | )          | 10,156 |   |
| Cash  flows from investing activities:                                                     |       |                   |       |   |   |
| Capital  expenditures                                                                      |       | (739                   | )          | (642 | ) |
| Premiums  on CSV life insurance                                                            |       | (274                   | )          | (295 | ) |
| Intangible  assets                                                                         |       | (607                   | )          | 154 |   |
| Net  cash used in investing activities                                                     |       | (1,620                 | )          | (783 | ) |
| Cash  flows from financing activities:                                                     |       |                   |       |   |   |
| Bank  borrowings                                                                           |       | 4,194                  |       | (5,745 | ) |
| Dividends  paid                                                                            |       | —                 |       | (1,035 | ) |
| Other                                                                                      |       | —                 |       | (1 | ) |
| Net  cash provided by (used in) financing activities                                       |       | 4,194                  |       | (6,781 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                              |       | (1                     | )          | (900 | ) |
| Net  (decrease) increase in cash                                                           |       | (755                   | )          | 1,692 |   |
| Cash  at beginning of period                                                               |       | 1,985                  |       | 1,860 |   |
| Cash  at end of period                                                                     |       | $                      | 1,230      |   | $ | 3,552 |   |
| Supplemental  disclosure of cash flow information:                                         |       |                   |       |   |   |
| Cash  paid during the period for:                                                          |       |                   |       |   |   |
| Interest                                                                                   |       | $                      | 602        |   | $ | 791 |   |
| Income  taxes, net of refunds                                                              |       | $                      | (483       | ) | $ | (780 | ) |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**Cobra Electronics Corporation and Subsidiaries**

**Notes to Consolidated Financial Statements**

**For the three and nine months ended September 30, 2009 and 2008**

**(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 andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to such rules and regulations,although the Company believes that the disclosures contained herein areadequate to make the information presented not misleading. The ConsolidatedBalance Sheet as of December 31, 2008 has been derived from the auditedconsolidated balance sheet as of that date. These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and the notes thereto included in the Company’s latest Annual Reporton Form 10-K for the year ended December 31, 2008. In the opinion ofmanagement, the information contained herein reflects all adjustments necessaryto make the results of operations for the interim period a fair statement ofsuch operations. Due to the seasonality of the Company’s business, the resultsof operations of any interim period are not necessarily indicative of theresults that may be expected for a fiscal year.

 

**(1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Business* — Cobra Consumer Electronics (“Cobra”)designs and markets consumer electronics products, which it sells primarilyunder the Cobra brand nameprincipally in the United States, Canada and Europe.Performance Products Limited (“PPL”), a subsidiary of the Company, sells itsproducts under the Snoopertradename, principally in the United Kingdom, as wellas elsewhere in Europe.  A majority ofthe Company’s products are purchased from overseas suppliers, primarily inChina, Hong Kong and South Korea. The consumer electronics market ischaracterized by rapidly changing technology and certain products may have limitedlife cycles. Management believes that it maintains strong relationships withits current suppliers and that, if necessary, other suppliers could be found.  The extent to which a change in a supplierwould have an adverse effect on the Company’s business depends on the timing ofthe change, the product or products that the supplier produces for the Companyand the volume of that production.  TheCompany also maintains insurance coverage that would, in certain limitedcircumstances, reimburse the Company for lost profits resulting from a supplier’sinability to fulfill its commitments to the Company.

 

*Principlesof Consolidation*— The consolidated financial statements include the accounts of the Company andits subsidiaries. The consolidated entities are collectively referred to as the“Company”. All significant intercompany balances and transactions have been eliminatedin consolidation.

 

*Reclassifications***—-**Prepaid packaging and outside designcosts were reclassified from *other current assets*to *prepaid assets*for the periods presentedin the consolidated financial statements included in this Form 10Q. The non-controllinginterest reported in the Consolidated Balance Sheet as of December 31,2008 is presented in accordance with Accounting Standards Codification (“ASC”) 810,*Non-Controlling Interests.*

 

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**(2)   NEW ACCOUNTING PRONOUNCEMENTS**

 

The Financial Accounting Standards Board (“FASB”) issuedASC 810, *Non-Controlling Interests* in December 2007.ASC 810 changed the accounting for, and the financial statement presentationof, non-controlling equity interests in a consolidated subsidiary. ASC 810replaced the existing minority-interest provisions by defining a new term *non-controlling interests* to replace what were previouslycalled *minority interests*. The new standardestablishes *non-controlling interests* as a componentof the equity of a consolidated entity. The underlying principle of the newstandard is that both the controlling interest and the non-controlling interestsare part of the equity of a single economic entity: the consolidated reportingentity. Classifying non-controlling interests as a component of consolidatedequity is a change from the current practice of treating minority interests asa mezzanine item between liabilities and equity or as a liability. The changeaffects both the accounting and financial reporting for non-controllinginterests in a consolidated subsidiary. ASC 810 includes reporting requirementsintended to clearly identify and differentiate the interests of the parent andthe interests of the non-controlling owners. The Company adopted ASC 810 on January 1,2009 and the reporting and disclosure requirements of this standard wereapplied retrospectively to the prior periods. Adoption of ASC 810 did not havea material effect on the financial statements.

 

ASC 815, *Disclosures about Derivative Instruments and Hedging Activities*was issued in March 2008. ASC 815, required enhanced disclosures about anentity’s derivative and hedging activities, including (i) how and why anentity uses derivative instruments, (ii) how derivative instruments andrelated hedged items are accounted for, and (iii) how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. The Company adopted ASC 815 on January 1,2009. Since ASC 815 only required enhanced disclosures, this standard did notaffect the Company’s financial position or results of operations.

 

ASC 825, *Disclosures About Fair Value of Financial Instruments*, wasupdated in April 2009, amending existing fair value disclosurerequirements and requiring fair value disclosures for interim periods. This ASCwas effective for interim periods ending after June 15, 2009. However, theCompany early adopted ASC 825 on January 1, 2009. Since this ASC onlyrequires enhanced disclosures, this standard did not affect the Company’sfinancial position or results of operations.

 

ASC 855, *Subsequent Events,*was issued in May 2009. ASC 855which was effective for annual and interim periods ending after June 15,2009, established the accounting and disclosure standards for events that occurafter the balance sheet date but prior to the issuance of financial statements(“subsequent events”). The Company adopted ASC 855 and will evaluate subsequentevents through the filing date of its quarterly and annual SEC filings.Adoption of this standard did not affect the Company’s financial position orresults of operations.

 

ASC 105, *The FASB Accounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles*, was issued in June 2009*.*ASC 105 replacedthe existing*Hierarchy of Generally Accepted AccountingPrinciples*and allowed the *FASB**Accounting Standards Codification*to become the sole sourceof non-governmental Generally Accepted Accounting Principles (“GAAP”), exceptfor the rules and interpretations of the SEC. ASC 105 became effective forannual and interim periods ending after September 15, 2009. The adoptionof ASC 105 did not have a material affect on its financial statements.

 

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Accounting StandardsUpdate (“ASU”) 2009-05, *Measuring Liabilities atFair Value*, was issued by the FASB in August 2009. ASU 2009-05amends ASC 820, *Fair Value Measurements and Disclosures*to clarify how entities should estimate the fair value of liabilities. ASC 820,as amended, includes clarifying guidance for circumstances in which a quotedprice in an active market is not available, the effect of the existence of aliability transfer restrictions, and the effect of quoted prices for theidentical liability, including when the identical liability is traded as anasset. The amended guidance in ASC 820 on measuring liabilities at fair valueis effective for the first interim or annual period beginning after August 28,2009, with an earlier application permitted. The Company does not believe thatthe adoption of the amended guidance in ASC 820 will have a material effect onits financial statements.

 

ASU 2009-13, *Multiple-Deliverable Revenue Arrangements — a consensus of the FASBEmerging Issues Task Force*, was issued by the FASB in October 2009.ASU 2009-13 amends certain guidance in ASC 605, *RevenueRecognition*. The amended guidance in ASC 605-25 (1) modifiesthe separation criteria by eliminating the criterion that requires objectiveand reliable evidence of fair value for the undelivered item(s), and (2) eliminatesthe use of the residual method of allocation and instead requires thatarrangement consideration be allocated, at the inception of the arrangement, toall deliverables, based on their relative selling price. The amended guidancein ASC 605-25 is effective prospectively for revenue arrangements entered intoor materially modified in fiscal years beginning on or after June 15,2010, with early application and retrospective application permitted. Theamended guidance in ASC 605-25 was applied retrospectively and did not have amaterial effect on the financial statements.

 

**(3)   ****FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES**

 

The Company’sfinancial instruments include cash, cash surrender value (“CSV”)of officers’ life insurance policies,accounts receivable, accounts payable, short-term debt, long-term debt andletters of credit. The carrying values of cash, accounts receivable andaccounts payable approximate their fair value because of the short-termmaturity of these instruments. The carrying amountsof the Company’s bank borrowings under its creditfacility approximate fair value because the interest rates are resetperiodically to reflect current market rates. The letters of credit approximatefair value due to the short-term nature of the instrument. The contractvalue/fair value of the letters of credit was $3.3 million at September 30,2009 and $2.0 million at December 31, 2008. The carrying value of the CSVfor the officers’ life insurance approximates fair value and is based on themarket value of the underlying investments, which may increase or decrease dueto fluctuations in the overall financial markets.

 

On January 1, 2008,the Company adopted ASC 820, *Fair Value Measurements*as it relates to financial assets and liabilities. On January 1, 2009, theCompany adopted ASC 820 as it relates to non-financial assets and liabilitiesthat are not recognized or disclosed at fair value in the financial statementsat least annually. The adoption of ASC 820, as it relates to non-financialassets and liabilities, had no impact on the financial statements.

 

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ASC 820 defines fairvalue as the price that would be received to sell an asset or pay to transfer aliability in an orderly transaction between market participants at themeasurement date. This standard is now the single source in GAAP for thedefinition of fair value, except for the fair value of leased property as definedin ASC 840. ASC 820 establishes a fair value hierarchy that distinguishesbetween (1) market participant assumptions developed based on market dataobtained from independent sources (observable inputs) and (2) an entity’sown assumptions about market participant assumptions developed based on thebest information available in the circumstances (unobservable inputs). The fairvalue hierarchy consists of three broad levels, which gives the highestpriority to unadjusted quoted prices in active markets for identical assets andliabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).The three levels of the fair value hierarchy under ASC 820 are described below:

 

·                  Level 1 — Unadjusted quoted prices in active marketsthat are accessible at the measurement date for identical, unrestrictedassets or liabilities.

 

·                  Level 2 — Inputs other than quoted prices includedwithin Level 1 that are observable for the asset or liability, either directlyor indirectly, including quoted prices for similar assets or liabilities inactive markets; quoted prices for identical or similar assets or liabilities inmarkets that are not active; inputs other than quoted prices that areobservable for the asset or liability (e.g., interest rates); and inputs thatare derived principally from or corroborated by observable market data bycorrelation or other means.

 

·                  Level 3 — Inputs that are both significant to the fairvalue measurement and unobservable.

 

The Company has aderivative contract for an interest rate swap that is valued on a recurringbasis using quoted market prices. This financial instrument is exchange-tradedand is classified within Level 2 of the fair value hierarchy because theexchange is not deemed to be an active market. The derivative was classified asa long-term liability on the balance sheet. Refer to Note 4 *Derivatives,*for additional information.

 

The following tableprovides the fair value information as of September 30, 2009 and December 31,2008.

 
| ** **          | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **          | ** ** | ** **                  | ** ** | **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 |       | $                           | 508        |                       | $          | 508 |   | $ | 508 |   | $ | 291 |   | $ | 291 |   | $ | 291 |   |
|                     |            |                             |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(4)****   ****DERIVATIVES**

 

The Companytransacts business globally with various manufacturing and distributionfacilities. The Company may reduce its exposure to fluctuations in foreignexchange rates by creating offsetting positions through derivative financialinstruments. The Company currently does not use derivative financialinstruments for trading or speculative purposes. The Company regularly monitorsforeign exchange exposures and ensures hedge contract amounts do not exceed theamounts of the underlying exposures.

 

The Company’scurrent hedging activity is limited to foreign currency purchases and aninterest rate swap. The purpose of the foreign currency hedging activities isto protect the Company from the risk that eventual settlement of foreigncurrency transactions will be adversely affected by changes in exchange rates.The purpose of the interest rate swap is to fix the interest rate for the termof the revolving and term loans, thereby protecting the Company from futureinterest rate increases. The interest rate swap represents a cash flow hedgeand is recorded at fair value and classified as a non-current liability.Changes in the recorded fair value of the interest rate swap are recorded toother 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.

 

The Company hedgesforeign exchange exposures by entering into various short-term foreign exchangeforward contracts. The instruments are carried at fair value in theConsolidated Balance Sheets as a component of current liabilities. Changes inthe fair value of foreign exchange forward contracts that meet the applicablehedging criteria are recorded as a component of other comprehensive income andreclassified into earnings in the same period during which the hedgedtransaction affects earnings. Changes in the fair value of foreign exchangeforward contracts that do not meet the applicable hedging criteria are recordedcurrently in income as cost of sales. Hedging activities did not have amaterial impact on results of operations or financial condition during thethree and nine month periods ending September 30, 2009 and 2008.

 

At September 30,2009, the Company did not have any open foreign exchange contracts. Thecarrying value of the interest rate swap, net of tax, totaled $305,000 at September 30,2009 and $175,000 at December 31, 2008. The tax effect of the interestrate swap was included in the valuation allowance reserve.

 

The fair value ofoutstanding derivative contracts designated as hedging instruments recorded asliabilities in the accompanying balance sheet were as follows:

 
| ** **               | ** ** | ** **                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|----------------------------|------------|------------------------|------------|-----------------------|------------|
| **Liability Derivative** | ** ** | **Balance Sheet Location** | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **               | ** ** | ** **                 | ** ** | **(In thousands)**     | ** ** |
| Interest  rate swap      |       | Non-current liability      |       | $                      | 508        |                  | $          | 291 |   |
| Total                    |       |                       |       | $                      | 508        |                  | $          | 291 |   |

 

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Theeffective portion of the loss on outstanding derivatives recognized in OtherComprehensive Income (“OCI”) for the three and nine month periods ending September 30,2009 and 2008 follows:

 
| ** **         | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------|------------|-------------------------|------------|------------------------|------------|
| ** **         | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **         | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **         | ** ** | **(In  Thousands)**     | ** ** |
| Interest rate swap |       | $                       | (26        | )                      | $          | (301 | ) | $ | (140 | ) | $ | (250 | ) |
| Total              |       | $                       | (26        | )                      | $          | (301 | ) | $ | (140 | ) | $ | (250 | ) |

 

Theeffective portion of the gain reclassified from Accumulated Comprehensive OtherIncome into Income during the three and nine month periods ending September 30,2009 follows**:**

 
| ** **                    | ** ** | **Three  Months**       | ** ** | **Nine  Months**        | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **Ended**               | ** ** | **Ended**               | ** ** |
| **Income Statement Location** | ** ** | **September  30, 2009** | ** ** | **September  30, 2009** | ** ** |
| ** **                    | ** ** | **(In  Thousands)**     | ** ** |
| Interest expense              |       | $                       | 42         |                    | $          | 85 |   |
| Total                         |       | $                       | 42         |                    | $          | 85 |   |

 

**(5)   SEGMENTINFORMATION**

 

The Companyoperates 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 allsegment exclusive product lines to all customers for that segment. Currently,there are no intersegment sales. The financial information by business segmentfor the three and nine months ended September 30, 2009 and 2008 follows:

 

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**Segment Information - Three months ended September 30, 2009 vs.2008**

 
| ** **                                                   | ** ** | **2009**            | ** ** | **2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                   | ** ** | **COBRA**           | ** ** | **PPL**  | ** ** | **TOTAL** | ** ** | **COBRA** | ** ** | **PPL** | ** ** | **TOTAL** | ** ** |
| ** **                                                   | ** ** | **(In  Thousands)** | ** ** |
| Net  sales                                                   |       | $                   | 24,556     |     | $          | 2,849 |   | $ | 27,405 |   | $ | 30,778 |   | $ | 2,464 |   | $ | 33,242 |   |
| Cost  of sales                                               |       | 18,682              |       | 2,095    |       | 20,777 |   | 22,375 |   | 1,163 |   | 23,538 |   |
| Gross  profit                                                |       | 5,874               |       | 754      |       | 6,628 |   | 8,403 |   | 1,301 |   | 9,704 |   |
| Selling,  general and administrative expense                 |       | 6,323               |       | 1,070    |       | 7,393 |   | 7,586 |   | 1,325 |   | 8,911 |   |
| (Loss)  earnings from operations                             |       | (449                | )          | (316     | )          | (765 | ) | 817 |   | (24 | ) | 793 |   |
| Interest  expense                                            |       | (275                | )          | —   |       | (275 | ) | (231 | ) | — |   | (231 | ) |
| Other  income (expense)                                      |       | 357                 |       | 65       |       | 422 |   | (328 | ) | 193 |   | (135 | ) |
| (Loss)  earnings before income taxes                         |       | (367                | )          | (251     | )          | (618 | ) | 258 |   | 169 |   | 427 |   |
| Tax  provision (benefit)                                     |       | (51                 | )          | (58      | )          | (109 | ) | 268 |   | 17 |   | 285 |   |
| Net  (loss) earnings                                         |       | (316                | )          | (193     | )          | (509 | ) | (10 | ) | 152 |   | 142 |   |
| Less:  net earnings attributable to non-controlling interest |       | —              |       | —   |       | — |   | — |   | — |   | — |   |
| Net  (loss) earnings attributable to Cobra                   |       | $                   | (316       | )        | $          | (193 | ) | $ | (509 | ) | $ | (10 | ) | $ | 152 |   | $ | 142 |   |

 

**Segment Information - Nine months ended September 30,2009 vs.****2008**

 
| ** **                                                   | ** ** | **2009**            | ** ** | **2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                   | ** ** | **COBRA**           | ** ** | **PPL**  | ** ** | **TOTAL** | ** ** | **COBRA** | ** ** | **PPL** | ** ** | **TOTAL** | ** ** |
| ** **                                                   | ** ** | **(In  Thousands)** | ** ** |
| Net  sales                                                   |       | $                   | 65,170     |     | $          | 7,291 |   | $ | 72,461 |   | $ | 84,286 |   | $ | 12,132 |   | $ | 96,418 |   |
| Cost  of sales                                               |       | 49,728              |       | 4,811    |       | 54,539 |   | 60,693 |   | 5,665 |   | 66,358 |   |
| Gross  profit                                                |       | 15,442              |       | 2,480    |       | 17,922 |   | 23,593 |   | 6,467 |   | 30,060 |   |
| Selling,  general and administrative expense                 |       | 19,199              |       | 3,033    |       | 22,232 |   | 21,981 |   | 4,021 |   | 26,002 |   |
| (Loss)  earnings from operations                             |       | (3,757              | )          | (553     | )          | (4,310 | ) | 1,612 |   | 2,446 |   | 4,058 |   |
| Interest  expense                                            |       | (615                | )          | —   |       | (615 | ) | (775 | ) | — |   | (775 | ) |
| Other  income (expense)                                      |       | 511                 |       | 334      |       | 845 |   | (774 | ) | 333 |   | (441 | ) |
| (Loss)  earnings before income taxes                         |       | (3,861              | )          | (219     | )          | (4,080 | ) | 63 |   | 2,779 |   | 2,842 |   |
| Tax  provision (benefit)                                     |       | 8,152               |       | (207     | )          | 7,945 |   | 326 |   | 569 |   | 895 |   |
| Net  (loss) earnings                                         |       | (12,013             | )          | (12      | )          | (12,025 | ) | (263 | ) | 2,210 |   | 1,947 |   |
| Less:  net earnings attributable to non-controlling interest |       | —              |       | 2        |       | 2 |   | — |   | 14 |   | 14 |   |
| Net  (loss) earnings attributable to Cobra                   |       | $                   | (12,013    | )        | $          | (14 | ) | $ | (12,027 | ) | $ | (263 | ) | $ | 2,196 |   | $ | 1,933 |   |

 

There have been no differences in the basis of segmentation or thebasis of measurement.

 

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**(6)   MOBILE NAVIGATION STRATEGY CHANGE**

 

The Company’s decision tochange its North American mobile navigation strategy resulted in a $7.7 millioncharge in the fourth quarter of 2007. This strategy change limits the futuredevelopment of mass market mobile navigation products in North America tounique mobile navigation products sold into niche markets with specialized andfocused distribution and employs lower cost sourcing arrangements utilizing theplatform of Performance Products Limited or that of other qualified vendors.The mobile navigation strategy change reserve totaled $92,000 at September 30,2009 and $250,000 at December 31, 2008. The Company does not expect futurecosts to exceed the current reserve balance by any material amount.

 

**(7)   FINANCING ARRANGEMENTS**

 

On February 15,2008, the Company entered into a Loan and Security Agreement (the “LoanAgreement”) with The PrivateBank and Trust Company, as lender and agent, andRBS Citizens, N.A., as lender, for a $5.7 million term loan facility and a $40million revolving credit facility, both of which mature on October 19,2011. Borrowings under the term loan were used to pay off the balance and closethe term loan from the Company’s previous credit agreement. Borrowings underthe new revolving credit facility were used to pay off and close the previousrevolving credit facility and for general corporate purposes. The LoanAgreement replaced the Company’s previous credit agreement.

 

On August 13, 2009,the Company entered into an amendment to the Loan Agreement (the “LoanAgreement Amendment”). Pursuant to the Loan Agreement Amendment, the lenderswaived the failure of the Company to comply as of June 30, 2009 with thefinancial covenants set forth in the Loan Agreement relating to Total Debt toEBITDA Ratio (as defined in the Loan Agreement) and Fixed Charge Coverage Ratio(as defined in the Loan Agreement). In addition, the Loan Agreement Amendmentdecreased the maximum principal amount available to be borrowed by the Companypursuant to the revolving credit facility under the Loan Agreement from $40million to $28 million. The Company paid an amendment fee of $159,150, as wellas certain fees and expenses, in connection with the execution of the LoanAgreement Amendment.

 

The Loan AgreementAmendment also amended the covenants set forth in the Loan Agreement to providefor the following financial covenants:

 

·                  minimum fixed charge coverage at revised levels fromthose contained in the Loan Agreement

·                  minimum cumulative EBITDA

·                  minimum tangible net worth

 

Due to the continuedimpact of the global economic downturn and the preference of retail anddistribution customers to defer third quarter purchases to the fourth quarter,the Company did not satisfy the financial covenants under the Loan Agreementfor the third quarter of 2009. On November 2, 2009, the Company and thelenders under the Loan Agreement entered into an amendment to the LoanAgreement. Pursuant to the amendment, which was effective as of October 24,2009, the lenders waived the covenant violations. The Company paid an amendmentfee of $50,000, as well as certain fees and expenses of the lenders, inconnection with execution of the amendment. The Company believes that it has asufficient credit line to operate its business.

 

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As amended, the LoanAgreement requires lockbox agreements, which provide for all Company receiptsto be swept daily to reduce borrowings outstanding under the revolving creditfacility. These agreements, combined with the existence of a material adverse change(“MAC”) clause in the Loan Agreement, result in the Revolving Credit Facilitybeing classified as a current liability, per guidance in the ASC 470, *Balance Sheet Classification of Borrowings Outstanding under RevolvingCredit Agreements that Include Both a Subjective Acceleration Clause and aLock-Box Arrangement*. The Company does not expect to repay, or berequired to repay, within one year, the balance of its revolving creditfacility, which has a final expiration date of October 19, 2011. The MACclause, which is a common requirement in commercial credit agreements, allowsthe lender to require the loan to become due if there has been a materialadverse change in the Company’s financial condition, operations or otherstatus.

 

Interest on amountsborrowed under the Loan Agreement is based on the prime rate plus an applicablemargin, or LIBOR plus an applicable margin, with the applicable margin beingdetermined based on the Total Debt to EBITDA Ratio for the prior four quarters,with the further requirement that qualifying for a reduction from the currentlystipulated applicable margin requires that the Company achieve the designatedTotal Debt to EBITDA ratio for two consecutive quarters. The applicable marginbased on the Total Debt to EBITDA Ratio of the Company as of September 30,2009 was 2.0% for prime rate loans and 4.5% for LIBOR loans. Availability underthe revolving credit facility is calculated based on a borrowing base formulathat includes 75% of eligible accounts receivable, the lesser of 60% of lowerof cost or market value of eligible inventory or 85% of the appraised orderlyliquidation value of eligible inventory, and 60% of commercial letters ofcredit issued for the purchase of inventory, subject to certain limitations andto reserves established at the lenders’ discretionincluding but not limited to an availability reserveof $2.5 million through September 30, 2009 and $3.0 million thereafter.The Loan Agreement requires an inventory appraisal, when deemed necessary bythe lender, the results of which could lead to a reduction in the availabilitybased on inventory. The inventory appraisal conducted as of June 30, 2009did not affect credit availability. The revolving credit facility continues tobe subject to an unused line fee of 0.5% and the term loan under the LoanAgreement is subject to quarterly principal payments by the Company of $310,000for the quarter ending September 30, 2009 and $440,000 for each quarterthereafter through September 30, 2011. The term of the Loan Agreementcontinues to extend until October 19, 2011. Borrowings under the LoanAgreement are secured by substantially all of the assets of the Company exceptfor equity interests in the non-U.S. subsidiaries.

 

At September 30,2009, the Company had interest bearing debt outstanding of $21.9 million,consisting of the $3.5 million term loan and $18.4 million borrowed under therevolving credit facility. As of September 30, 2009, availability wasapproximately $3.9 million under the revolving credit facility, based on theborrowing base formula in effect at that time. The weighted average interestrate for the three and nine months ending September 30, 2009 was 5.4% and4.2%, respectively. The weighted average interest rate for the three and ninemonths ending September 30, 2008 was 6.5% and 5.98%, respectively. TheCompany entered into an interest rate swap on March 31, 2009 which fixedthe interest rate on the term loan and a portion of the revolving loan at3.47%.

 

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**(8)   (LOSS) EARNINGS PER SHARE**

 
| ** **                                                          | ** ** | **Three Months Ended**                 | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **September 30,**                 | ** ** | **September 30,** | ** ** |
| ** **                                                          | ** ** | **2009**                               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                          | ** ** | **(In Thousands, Except Share  Data)** | ** ** |
| Basic  (loss) earnings per share:                                   |       |                                   |       |                   |       |   |   |   |   |
| Net  (loss) earnings available to Cobra shareholders                |       | $                                      | (509       | )                      | $          | 142 |   | $ | (12,027 | ) | $ | 1,933 |   |
| Weighted-average  shares outstanding                                |       | 6,471,280                              |       | 6,471,280              |       | 6,471,280 |   | 6,471,280 |   |
|                                                                |       |                                   |       |                   |       |   |   |   |   |
| Basic  (loss) earnings per share                                    |       | $                                      | (0.08      | )                      | $          | 0.02 |   | $ | (1.86 | ) | $ | 0.30 |   |
|                                                                |       |                                   |       |                   |       |   |   |   |   |
| Diluted  (loss) earnings per share:                                 |       |                                   |       |                   |       |   |   |   |   |
| 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) earnings per share                                  |       | $                                      | (0.08      | )                      | $          | 0.02 |   | $ | (1.86 | ) | $ | 0.30 |   |

 

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(a) Stock options to purchase 447,780 shares were not included inthe calculation for dilutive loss per share for the three months and ninemonths ended September 30, 2009 since the exercise price was above the marketprice. Stock options to purchase 516,296 shares were not included in thecalculation for the dilutive earnings per share for the three and nine monthsended September 30, 2008 since the exercise price was above market price.

 

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**(9)   COMPREHENSIVE (LOSS) EARNINGS**

 

The Company reports comprehensive income (loss) in accordance with ASC220. Comprehensive Income or Loss is defined as the change in equity fromtransactions and events from non-owner sources and includes net earnings or netloss as well as non-owner changes that bypass the statement of operations. TheCompany’s Other Comprehensive Income or Loss includes foreign currencytranslation adjustments and the net of tax impact of an interest rate swap andis reported****as a separate component ofequity. A summary of the Other Comprehensive Income (Loss) for the three andnine month periods ending September 30, 2009 and 2008 follows**:**

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | **(In Thousands)**     | ** ** |
| Foreign  currency translation adjustment          |       | $                      | (95        | )                      | $          | (1,145 | ) | $ | 937 |   | $ | (841 | ) |
| Interest  rate swap - gross                       |       | (43                    | )          | (502                   | )          | (233 | ) | (417 | ) |
| Total  excluding tax effect of interest rate swap |       | (138                   | )          | (1,647                 | )          | 704 |   | (1,258 | ) |
| Tax  effect of interest rate swap                 |       | 17                     |       | 201                    |       | 93 |   | 167 |   |
| Total  net of tax                                 |       | $                      | (121       | )                      | $          | (1,446 | ) | $ | 797 |   | $ | (1,091 | ) |

 

A summary of the Comprehensive Income (Loss) for the three and ninemonth periods ending September 30, 2009 and 2008 follows:

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                               | ** ** | **(In Thousands)**     | ** ** |
| Net  (loss) earnings attributable to Cobra               |       | $                      | (509       | )                      | $          | 142 |   | $ | (12,027 | ) | $ | 1,933 |   |
| Foreign  currency translation adjustment (no tax effect) |       | (95                    | )          | (1,145                 | )          | 937 |   | (841 | ) |
| Interest  rate swap and foreign exchange (net of tax)    |       | (26                    | )          | (301                   | )          | (140 | ) | (250 | ) |
| Total  comprehensive (loss) earnings                     |       | $                      | (630       | )                      | $          | (1,304 | ) | $ | (11,230 | ) | $ | 842 |   |

 

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**(10)   COMMITMENTS AND CONTINGENCIES**

 

The Company is subjectto various unresolved legal actions, which arise in the normal course of itsbusiness. None of these matters are expected to have a material adverse effecton the Company’s financial position or results of operations. However, theultimate resolution of these matters could result in a change in the Company’sestimate of its liability for these matters. 

 

The Company warrants tothe consumer 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 for its customers that allows customers toreturn to the Company products returned to them by their customers for full orpartial credit based on when the Company’s customer last purchased theseproducts. Consequently, it maintains a warranty reserve, which reflectshistorical warranty return rates by product category multiplied by the mostrecent six months of unit sales of that model and the unit standard cost of themodel. A roll-forward of the warranty reserve follows:

 
| ** **                                           | ** ** | **Nine Months**        | ** ** | **Year**              | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **Ended**              | ** ** | **Ended**             | ** ** |
| ** **                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                           | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                           | ** ** | **(In Thousands)**     | ** ** |
| Accrued  product warranty costs, beginning of period |       | $                      | 897        |                  | $          | 3,440 |   |
| Warranty  provision                                  |       | 1,683                  |       | 2,908                 |       |
| Warranty  expenditures                               |       | (1,736                 | )          | (5,451                | )          |
| Accrued  product warranty costs, end of period       |       | $                      | 844        |                  | $          | 897 |   |

 

AtSeptember 30, 2009 and December 31, 2008, the Company had outstandinginventory purchase orders with suppliers totaling approximately $17.8 millionand $16.6 million, respectively.

 

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**(11)   INVENTORY VALUATION RESERVES**

 

TheCompany maintains a liquidation reserve representing the write-down of returnedproduct from its customers to its net realizable value. Returned inventory iseither sold to various liquidators or returned to vendors for partial creditagainst similar, new models. The decision to sell or return products to vendorsdepends upon the estimated future demand for the models. Judgments are made asto whether various models are to be liquidated or returned to the vendor,taking into consideration the liquidation prices expected to be received andthe amount of the vendor credit. The amount of the reserve is determined bycomparing the cost of each unit returned to the estimated amount to be realizedupon each unit’s disposition, either from returning the unit to the vendor forpartial credit towards the cost of new, similar product or liquidating theunit. This reserve can fluctuate significantly from quarter to quarterdepending upon quantities of returned inventory on-hand and the estimatedliquidation price or vendor credit per unit. A roll-forward of the liquidationreserve follows:

 
| ** **                               | ** ** | **Nine  Months**       | ** ** | **Year**              | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Ended**              | ** ** | **Ended**             | ** ** |
| ** **                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                               | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                               | ** ** | **(In  Thousands)**    | ** ** |
| Liquidation reserve, beginning of period |       | $                      | 623        |                  | $          | 2,695 |   |
| Liquidation provision                    |       | 2,142                  |       | 4,490                 |       |
| Liquidation of models                    |       | (1,923                 | )          | (6,562                | )          |
| Liquidation reserve, end of period       |       | $                      | 842        |                  | $          | 623 |   |

 

The Company maintains a net realizable value(“NRV”) reserve to write-down, as necessary, certain finished goods, except forthose goods covered by the previously discussed liquidation reserve, belowcost. The reserve includes models where it is determined that the estimatedrealizable value is less than cost. Thus, judgments must be made about whichslow-moving, excess or non-current models are to be included in the reserve andthe NRV of such models. The estimated NRV of each model is the per unit pricethat is estimated to be received if the model were sold in the marketplace.

 

This reserve will varydepending upon the specific models selected, the estimated NRV for each modeland quantities of each model that are determined will be sold below cost fromquarter to quarter. A roll-forward of the NRV reserve follows:

 
| ** **                                  | ** ** | **Nine  Months**       | ** ** | **Year**              | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **Ended**              | ** ** | **Ended**             | ** ** |
| ** **                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                  | ** ** | **(In  Thousands)**    | ** ** |
| Net realizable reserve, beginning of period |       | $                      | 109        |                  | $          | 1,614 |   |
| NRV provision                               |       | 289                    |       | 870                   |       |
| NRV write-offs                              |       | (260                   | )          | (2,375                | )          |
| Net realizable reserve, end of period       |       | $                      | 138        |                  | $          | 109 |   |

 

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**(12)   INCOME TAXES**

 

The Company accounts for income taxes in accordance with ASC 740.Deferred income taxes are determined based on the estimated future tax effectsof differences between the financial statement and tax bases of assets andliabilities given the enacted tax laws for each applicable tax jurisdiction.Valuation allowances are recorded related to deferred assets based on the “morelikely than**not” criteria of ASC 740. The Companyreviews the need for a valuation allowance on a quarterly basis for each of itstax jurisdictions. When evaluating the recoverability of future tax benefits,the Company considers the historic operating results, projected operatingresults and available tax planning strategies, if any.

 

Due to the actual and projected operating results for 2009, theexpected continuation of the global recession and the absence of a tax planningstrategy to generate a sufficient level of taxable income, management concludedthe full realization of the deferred tax assets within a reasonable timehorizon does not satisfy the “more likely than not*”*criteria of ASC 740.  Accordingly, theCompany recorded a charge of $9.6 million for a valuation allowance in thesecond quarter of 2009 to fully offset the net deferred tax asset for its U.S.operation at June 30, 2009. The valuation allowance was increased to $10.5million at September 30, 2009. The valuation allowance is a non-cashcharge that does not preclude the Company from fully realizing these netdeferred tax assets in the future.

 

A recap of the income tax provision (benefit) for the three and ninemonths ended September 30, 2009 and 2008 follows:

 
| ** **      | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------|------------|-------------------------|------------|------------------------|------------|
| ** **      | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **      | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **      | ** ** | **(In  Thousands)**     | ** ** | **(In  Thousands)**    | ** ** |
| Current         |       |                    |       |                   |       |   |   |   |   |
| U.S.            |       | $                       | (38        | )                      | $          | (125 | ) | $ | 2 |   | $ | 77 |   |
| Foreign         |       | 77                      |       | 374                    |       | (210 | ) | 1,955 |   |
|            |       | 39                      |       | 249                    |       | (208 | ) | 2,032 |   |
| Deferred        |       |                    |       |                   |       |   |   |   |   |
| U.S.            |       | —                  |       | 287                    |       | 8,134 |   | 5 |   |
| Foreign         |       | (148                    | )          | (251                   | )          | 19 |   | (1,142 | ) |
|            |       | (148                    | )          | 36                     |       | 8,153 |   | (1,137 | ) |
| Total provision |       | $                       | (109       | )                      | $          | 285 |   | $ | 7,945 |   | $ | 895 |   |

 

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A reconciliation of the deferred tax amounts to the ConsolidatedBalance Sheet follows:

 
| ** **                           | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**                | ** ** | **2008**              | ** ** |
| ** **                           | ** ** | **(In Thousands)** | ** ** |
| Future  tax benefit - U.S.           |       | $                       | 6,452      |                  | $          | 6,130 |   |
| Valuation  allowance - U.S.          |       | (6,452                  | )          | —                |       |
| Deferred  tax asset, current         |       | —                  |       | 6,130                 |       |
| Future  tax benefit - U.S.           |       | 4,091                   |       | 2,004                 |       |
| Valuation  allowance - U.S.          |       | (4,091                  | )          | —                |       |
| Deferred  tax asset, non-current     |       | —                  |       | 2,004                 |       |
| Future  tax liability - Foreign      |       | (2,002                  | )          | (1,983                | )          |
| Deferred  tax liability, non-current |       | (2,002                  | )          | (1,983                | )          |
| Net  deferred tax (liability) asset  |       | $                       | (2,002     | )                     | $          | 6,151 |   |

 

**(13) OTHER INCOME (EXPENSE)**

 

The following table shows the components of other income (expense):

 
| ** **        | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended**  | ** ** |
|-------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **        | ** ** | **September 30,**  | ** ** | **September 30,**  | ** ** |
| ** **        | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **        | ** ** | **(In Thousands)** | ** ** | **(In Thousands)** | ** ** |
| Interest  income  |       | $                       | 1          |                    | $          | 11 |   | $ | 5 |   | $ | 56 |   |
| CSV income (loss) |       | 475                     |       | (319                    | )          | 594 |   | (780 | ) |
| Exchange gain     |       | 26                      |       | 20                      |       | 277 |   | 134 |   |
| Other - net       |       | (80                     | )          | 153                     |       | (31 | ) | 149 |   |
|              |       | $                       | 422        |                    | $          | (135 | ) | $ | 845 |   | $ | (441 | ) |

 

**(14) SUBSEQUENT EVENTS**

 

The Company evaluated its September 30, 2009 financial statementsfor subsequent events through November 12, 2009, the date the financialstatements were issued. Other than the amendment to the Loan Agreementreferenced in the following paragraph, the Company is not aware of anysubsequent events which would require recognition or disclosure in thefinancial statements.

 

As of September 30, 2009 the Company failed to be in compliancewith certain covenants set forth in the Loan Agreement. On November 2,2009, the Company andthe lenders under the Loan Agreement entered into an amendment to the LoanAgreement. Pursuant to the amendment, which was effective as of October 24,2009, the lenders waived the covenant violations. Details on the LoanAgreement are discussed in Note 7, *Financing Arrangements.*

 

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

 

**ANALYSISOF RESULTS OF OPERATIONS**

 

***ExecutiveSummary – Third Quarter***

 

Pre-tax loss for thethird quarter of 2009 totaled $618,000 compared to the pre-tax income of$427,000 for year ago period. Key factors contributing to the pre-tax losswere:

 

·                  Net sales declined $5.8 million, or17.6%, principally due to the adverse economic climate in the United States andEurope. Current sales trends indicate customers are deferring purchases untilthe fourth quarter and that consumers are shifting purchasing dollars to lowerprice-point products. Furthermore, the weakness of the pound sterling and euroin relation to the U.S. dollar reduced international sales revenue.

 

·                  Gross profit decreased by $3.1 million.Gross margin decreased by 5 points to 24.2% due to lower volume, unfavorablesales/margin mix, unfavorable exchange rate movements for the Company’sEuropean businesses and the impact of fixed overhead charges against a lowersales base.

 

·                  Selling, general and administrativeexpenses decreased $1.5 million, or 17%, due to management’s effort to reducespending, lower variable selling costs and the weakness of the pound sterlingand euro in relation to the U.S. dollar.

 

·                  Other income increased by $513,000 mainlydue to CSV income.

 

The combined impact ofthe foregoing factors was a $1.0 million decrease in income before taxes.

 

During thesecond quarter of 2009, management concluded that a deferred tax valuationallowance was required for its U.S. operation. This conclusion was based on the fact that theU.S. operation has sustained cumulative losses over the past three years, isforecasted to have a loss in 2009 because of the recession and has no taxplanning strategies available that if implemented would generate taxable incomesufficient for the U.S. operation to realize in full its net deferred taxassets within a reasonable time horizon absent a turnaround in the business. The deferredtax valuation allowance was increased by $900,000 in the third quarter to fullyoffset the net deferred tax asset for its U.S. operation at September 30,2009. The Company reported a tax benefit of $109,000, primarily attributable tothe PPL segment, for the 2009’s third quarter compared to a $285,000 taxexpense in the year ago quarter.  The net loss for the three-month periodending September 30, 2009 totaled $509,000, or $0.08 per share, comparedto the net income of $142,000, or $0.02 per share, reported for the prior year.

 

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***ExecutiveSummary – Nine Months***

 

Pre-tax loss for thefirst nine months of 2009 totaled $4.1 million compared to the pre-tax incomeof $2.8 million in the year ago period. Key factors contributing to the pre-taxloss were:

 

·                  Net sales declined $24 million, or 24.8%,principally because of the adverse economic climate in the United States andEurope. Current sales trends indicate customers are deferring purchases untilthe fourth quarter and that customers are shifting purchasing dollars to lowerprice-point products. The weakness of the pound sterling and euro in relationto the U.S. dollar reduced international sales revenue.

 

·                  Gross profit decreased by $12.1 million.Gross margin decreased by 6.5 points to 24.7% due to lower volume, unfavorablesales/margin mix unfavorable exchange rate movements for the Company’s Europeanbusinesses and the impact of fixed overhead charges against a lower sales base.

 

·                  Selling, general and administrativeexpenses decreased $3.8 million, or 14.5%, due to management’s effort to reducespending, lower variable selling costs and the weakness of the pound sterlingand euro in relation to the U.S. dollar.

 

·                  Other income increased by $1.4 millionmainly due to CSV income.

 

The combined impact ofthe foregoing factors was a $6.9 million decrease in income before taxes.

 

During thesecond quarter of 2009, management concluded a deferred tax valuation allowancewas required for its U.S. operation. This conclusion was based on the fact that theU.S. operation has sustained cumulative losses over the past three years, isforecasted to have a loss in 2009 because of the recession and has no taxplanning strategies available that if implemented would generate taxable incomesufficient for the U.S. operation to realize in full its net deferred taxassets within a reasonable time horizon absent a turnaround in the business.Accordingly, the Company recorded a charge of $9.6 million for avaluation allowance in the second quarter of 2009 and an additional valuationallowance of $900,000 was recorded in the third quarter to fully offset the netdeferred tax asset for its U.S. operation at September 30, 2009. With the$10.5 million valuation allowance, the Company reported a tax provision of $7.9million for the first nine months of 2009 compared to the $895,000 provision with effective rate of31.5% for the year ago period.  Until the “morelikely than not*”* criteria of ASC 740 can be met,the Company will notreport a U.S. tax benefit for any future pre-tax losses or a U.S. tax provisionfor any future pre-tax income. This does not affect tax reporting for CEEL andPPL as each of these is in a separate, non-U.S. tax jurisdiction. Managementcurrently believes that net deferred tax asset will be realized in the futurewhen the Company’s operations return to profitability. The net loss for the nine-month periodending September 30, 2009 totaled $12 million or $1.86 per share, comparedto the net income of $1.9 million or $.30 per share, reported for the prioryear’s period.

 

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***Outlook***

 

Due to the globaleconomic downturn and the preference of retail and distribution customers todefer third quarter purchases to the fourth quarter, the Company did notsatisfy the financial covenants for the third quarter of 2009. On November 2,2009, the Company and the lenders under the Loan Agreement entered into anamendment to the Loan Agreement. Pursuant to the amendment, which was effectiveas of October 24, 2009, the lenders waived the covenant violations. TheCompany believes that it has a sufficient credit line to operate its business.  The Company anticipates improved performancein the fourth quarter for both its Cobra and PPL segments. The Company willcontinue to address opportunities to contain expenses in light of reducedconsumer spending.

 

A failure to comply,absent a waiver from lenders, with the covenants contained in the LoanAgreement in future periods could result in any outstanding indebtedness underthe Loan Agreement becoming immediately due and payable and in the inability toborrow additional funds under the Loan Agreement. Based on the Company’s outlookfor the fourth quarter, management believes the Company will be able tomaintain compliance with the covenants contained in the Loan Agreement for thefourth quarter.

 

The Company announced inlate October 2009 that it executed an agreement with a major manufacturerof mobile phones and mobile navigation products to include the Company’sproprietary AURATM database in its North American and Europeannavigation products, which will be released early next year.  The Company considers this as a significantstep in its plan to make the AURA database the preeminent provider ofphoto-enforcement alerts globally and expects the agreement to contribute torevenues and earnings in the second half of 2010.

 

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***EBITDA***

 

The following table showsthe reconciliation of net earnings (loss) to Adjusted EBITDA:

 
| ** **                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **(In Thousands)**                         | ** ** |
| ** **                | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Net (loss) earnings**   | ** ** | **$**                                      | **(509**   | **)**                                     | **$**      | **142** | ** ** | **$** | **(12,027** | **)** | **$** | **1,933** | ** ** |
| Depreciation/amortization |       | 973                                        |       | 1,130                                     |       | 2,947 |   | 4,535 |   |
| Interest  expense         |       | 275                                        |       | 231                                       |       | 615 |   | 775 |   |
| Income  tax provision     |       | (109                                       | )          | 285                                       |       | 7,945 |   | 895 |   |
| **EBITDA**                | ** ** | **630**                                    | ** ** | **1,788**                                 | ** ** | **(520** | **)** | **8,138** | ** ** |
| Stock  option expense     |       | 56                                         |       | 65                                        |       | 173 |   | 194 |   |
| CSV  (income) loss        |       | (475                                       | )          | 319                                       |       | (594 | ) | 780 |   |
| Non-controlling  interest |       | —                                     |       | —                                    |       | 2 |   | 14 |   |
| Other  non-cash items     |       | 233                                        |       | (217                                      | )          | 121 |   | (273 | ) |
| **Adjusted EBITDA**       | ** ** | **$**                                      | **444**    | ** **                                | **$**      | **1,955** | ** ** | **$** | **(818** | **)** | **$** | **8,853** | ** ** |

 

EBITDA representsearnings before interest, taxes, depreciation and amortization. Adjusted EBITDArepresents EBITDA plus the applicable adjustments required to agree with theEBITDA measurement for compliance with the financial covenants of the Company’slenders. The EBITDA adjustments typically include stock option compensation,CSV income/loss, non-controlling interest, deferred revenue and foreignexchange gain/loss. The Company believes EBITDA is a useful performanceindicator and is frequently used by management, securities analysts andinvestors to judge operating performance between time periods and among othercompanies. The Company uses Adjusted EBITDA to assess operating performance andmeasure compliance with financial covenants. EBITDA and Adjusted EBITDA arenon-GAAP performance indicators that should be used in conjunction with GAAPperformance measurements such as net sales, operating profit and net income toevaluate the Company’s operating performance. EBITDA and Adjusted EBITDA arenot alternatives to net income or cash flow from operations determined inaccordance with GAAP. Furthermore, EBITDA and Adjusted EBITDA may not becomparable to the calculation of similar titled measures reported by othercompanies.

 

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***Third Quarter2009 Compared to Third Quarter******2008***

 

The following tablecontains sales and pre-tax (loss) profit after eliminating intercompany accountsby business segment for the quarter ending September 30, 2009 and 2008:

 
| ** **                | ** ** | **2009**           | ** ** | **2008**    | ** ** | **2009 vs. 2008  Increase (Decrease)** | ** ** |
|---------------------------|------------|--------------------|------------|-------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **(In Thousands)** | ** ** |
| ** **                | ** ** | **Net**            | ** ** | **Pre-tax** | ** ** | **Net**                                | ** ** | **Pre-tax** | ** ** | **Net** | ** ** | **Pre-tax** | ** ** |
| **Business Segment** | ** ** | **Sales**          | ** ** | **(Loss)**  | ** ** | **Sales**                              | ** ** | **Profit** | ** ** | **Sales** | ** ** | **Profit (Loss)** | ** ** |
| Cobra                     |       | $                  | 24,556     |        | $          | (367                                   | )          | $ | 30,778 |   | $ | 258 |   | $ | (6,222 | ) | $ | (625 | ) |
| PPL                       |       | 2,849              |       | (251        | )          | 2,464                                  |       | 169 |   | 385 |   | (420 | ) |
| Total  Company            |       | $                  | 27,405     |        | $          | (618                                   | )          | $ | 33,242 |   | $ | 427 |   | $ | (5,837 | ) | $ | (1,045 | ) |

 

**CobraBusiness Segment**

 

Cobranet sales decreased $6.2 million, or 20.2%, in the third quarter of 2009 to$24.6 million compared to $30.8 million in the third quarter of 2008 as aresult of declines in both domestic and international sales, which declined12.5% and 50.9%, respectively. Domestically, sales were adversely affected bythe economic conditions that resulted in reduced store traffic, reducedconsumer spending for discretionary items and the consumer preference for lowerprice-point items. Furthermore, key retail and distribution customers deferredthird quarter purchases to the fourth quarter. Much of the decline in domesticsales was due to lower sales of detection and Citizens Band radios, whichdeclined 28.6%, and 31.0%, respectively. The decline in detection sales was duein part to a store-count reduction by a major retailer and the bankruptcy andliquidation in 2008 of Circuit City, which accounted for more than 3.0% of radar detectionsales in the third quarter of last year.The decline in Citizens Band radios reflected the recession’s negativeimpact on freight traffic, which fell markedly resulting in a reduction in thedisposable income of professional drivers and directly impacting sales ofCitizens Band radios, especially those at higher price points. Partiallyoffsetting these declines were strong salesof the new mobile navigation product for the professional driver and a 20.6%increase in two-way radio sales because of an exclusive supply agreement with amajor retailer. International sales, mainly two-way radio and detection salesto Canada and Europe, were down due to depressed local economic conditions inthese markets. The decrease in European sales was offset in part by sales to anew distributor in Russia as the Company continued to expand its distributionnetwork throughout Europe.

 

Grossprofit decreased $2.5 million to $5.9 million for the third quarter of 2009.Gross margin for the third quarter decreased to 23.9% compared to the 27.3%reported for the year ago quarter. The lower gross profit and margin resultedfrom lower sales volume and product mix, including the recession-inducedconsumer preference for purchases of lower price-point items, which negativelyaffected the margin on Citizens Band radios as average selling prices droppedalmost 5% for models sold primarily to the professional driver compared to theprior year’s quarter. Gross margin was also negatively impacted by a weakereuro compared to the year ago period.

 

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Selling,general and administrative expenses declined $1.3 million, or 16.6%, to $6.3million in the third quarter of 2009 from $7.6 million in the third quarter of2008. Variable selling costs decreased $876,000 primarily due to lower sales.Lower fixed selling and administrative expenses made up the remainder of thedecline in part due to cost savings measures implemented by management,including headcount reductions and lower professional fees, which werepartially offset by $89,000 of severance expense.

 

Interestexpense increased by $44,000 to $275,000 in the third quarter of 2009 due tothe higher level of debt outstanding for the three-month period. Other incomewas $357,000 for the third quarter of 2009 compared to other expense $328,000in the prior year’s quarter. This favorable swing was due primarily to $475,000of CSV income for 2009 compared to $319,000 of CSV expense for 2008. The CSV oflife insurance policies is affected by the market value of the underlyinginvestments and adverse market conditions may result in a non-cash expense.

 

Asa result of the above, the Cobra segment had a pre-tax loss of $367,000 in thethird quarter of 2009 compared to pre-tax income of $258,000 in the thirdquarter of 2008.

 

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***PerformanceProducts Limited (“PPL”) Business Segment***

 

PPL’s net sales increased$385,000, or 15.6%, to $2.8 million in the third quarter of 2009 compared to$2.5 million reported for the year ago quarter. The sales increase was achieved despite a weaker pound sterling thatdecreased revenue by 16%. On a local currency basis, PPL’s sales for the thirdquarter of 2009 increased 33.6% from the same period in 2008. Most of therevenue increase from 2008 was due to the demand for PPL’s truck and RVnavigation products. Sales of these truck and RV navigation products werelimited by the availability of inventory as backordered sales of the truck andRV navigation products at September 30, 2009 totaled $656,000. Managementexpects that the inventory shortfall for the truck and RV navigation productswill be resolved in the fourth quarter of 2009.

 

Gross profit was $754,000in the third quarter of 2009compared to $1.3 million in the prior year’s quarter, while gross margindecreased to 26.5% in 2009 from 52.8% in 2008. The gross margin decrease wasdue to product and geographic mix (with more sales with lower margins outsidethe U.K.), a 4 point margin decrease because of revenue deferred for productsthat included free AURA*TM* database subscriptions, a 3 point margindecrease due to an inventory write down in 2009, and the favorable impact on2008’s cost of sales due to the weaker pound sterling as inventory purchasesare based in U.S. dollars.

 

Selling, general andadministrative expenses were $255,000, or 19.2%, lower than the third quarter of 2008 and duemainly to the effect of the weaker pound sterling and a 7% spending reduction.As a percentage of net sales, selling, general and administrative expensesdecreased to 37.6% in 2009 from 53.8% in 2008 due to the combined effect ofhigher sales and lower spending in 2009 as compared to 2008.

 

PPL had other income of$65,000 in the third quarter of 2009 compared to other income of $193,000 inthe prior year’s quarter. The decrease was mainly due to non-recurringmiscellaneous income recorded in 2008.  

 

As a result of the above,the PPL segment had pre-tax loss of $251,000 for the third quarter of 2009 compared to $169,000 of pre-tax incomefor the third quarter of 2008.

 

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***Nine Months 2009Compared to Nine Months 2008***

 

The following tablecontains sales and pre-tax (loss) profit after eliminating intercompanyaccounts by business segment for the nine months ending September 30, 2009and 2008:

 
| ** **                | ** ** | ** **         | ** ** | ** **  | ** ** | **2009 vs. 2008**       | ** ** |
|---------------------------|------------|--------------------|------------|-------------|------------|-------------------------|------------|
| ** **                | ** ** | **2009**           | ** ** | **2008**    | ** ** | **Increase (Decrease)** | ** ** |
| ** **                | ** ** | **(In Thousands)** | ** ** |
| ** **                | ** ** | **Net**            | ** ** | **Pre-tax** | ** ** | **Net**                 | ** ** | **Pre-tax** | ** ** | **Net** | ** ** | **Pre-tax** | ** ** |
| **Business Segment** | ** ** | **Sales**          | ** ** | **(Loss)**  | ** ** | **Sales**               | ** ** | **Profit** | ** ** | **Sales** | ** ** | **Profit (Loss)** | ** ** |
| Cobra                     |       | $                  | 65,170     |        | $          | (3,861                  | )          | $ | 84,286 |   | $ | 63 |   | $ | (19,116 | ) | $ | (3,924 | ) |
| PPL                       |       | 7,291              |       | (219        | )          | 12,132                  |       | 2,779 |   | (4,841 | ) | (2,998 | ) |
| Total Company             |       | $                  | 72,461     |        | $          | (4,080                  | )          | $ | 96,418 |   | $ | 2,842 |   | $ | (23,957 | ) | $ | (6,922 | ) |

 

***Cobra Business Segment***

 

Cobranet sales decreased $19.1 million, or 22.7%, in the first nine months of 2009to $65.2 million compared to $84.3 million in the comparable period of 2008.Sales were adversely affected by the economic conditions that resulted inreduced store traffic, reduced consumer spending for discretionary items andthe consumer preference for lower price-point items. Furthermore, the Company’sretail and distribution customers deferred third quarter purchases to thefourth quarter. Much of the decline was due to lower domestic sales, with salesof Citizens Band radios and detection declining 32.9% and 26.2%, respectively.The decline in Citizens Band radios reflected the recession’s negative impact on freighttraffic, which fell markedly resulting in a reduction in the disposable incomeof professional drivers and directly impacting sales of Citizens Band radios,especially those at higher price points. Thedecline in detection sales was due in part to a store-count reduction by amajor retailer and the bankruptcy and liquidation of Circuit City in 2008.Partially offsetting these declines were strong sales of the new mobilenavigation product for the professional driver. International sales, mainlytwo-way radios and detection products to Canada and Europe, were down 39% dueto the adverse economic conditions in these markets as well as 10.2% weakeningof the euro in the first nine months of 2009 compared to the prior year’speriod.

 

Grossprofit decreased $8.2 million for the first nine months of 2009 from the yearago period to $15.4 million while gross margin for 2009 decreased to 23.7% fromthe 28.0% for 2008. The decline in gross margin was mainly due to sales mix asconsumers focused their discretionary spending on purchases of lower pricepoint, lower margin products, which particularly affected Citizens Band radioand detection gross margins as average selling prices in these categoriesdropped 7.1% and 6.1%, respectively. Also, negatively impacting gross marginwas the effects of fixed overhead expenses on the reduced sales base and theweaker euro.

 

Selling,general and administrative expenses declined $2.8 million, or 12.7%, to $19.2million in the first nine months of 2009 from $22.0 million for the prior yearperiod. $1.8 million of the decline was due to decreased variable selling costsprimarily because of the sales decrease. The remainder of the decline was dueto lower fixed selling, general and administrative expenses as a result oflower professional fees and cost savings measures implemented by management,including headcount reductions. Severance expense of $238,000 in part offsetthese declines.

 

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Interestexpense decreased $160,000 in the first nine months of 2009 compared to theprior year due to a lower average interest rate in 2009 compared to 2008. Otherexpense decreased $1.3 million due to $594,000 of CSV income in the currentperiod compared to CSV expense of $780,000 in the prior year period. The CSV oflife insurance policies is affected by the market value of the underlyinginvestments and adverse market conditions may result in a non-cash expense.

 

Asa result of the above, the Cobra segment reported a pre-tax loss of $3.9million for the nine-month period ending September 30, 2009 compared to a pre-taxprofit of $63,000 reported for the year ago period.

 

***PerformanceProducts Limited (“PPL”) Business Segment***

 

PPL’s net sales decreasedby $4.8 million, or 39.9%, to $7.3 million in the first nine months of 2009from $12.1 million for the year agoperiod. This decrease was due to the severe recession, particularly inthe United Kingdom as well as elsewhere in Europe. Also, the weaker poundsterling, which fell 20.8% versus the U.S. dollar compared to the prior year’speriod, reduced the current year’s net sales when compared to 2008 by 15%. Thedecreased sales volume from 2008 was mainly due to mass consumer navigationproducts, download fees and the absence of the database sales for smartphoneuse in 2009. Third quarter sales of the truck and RV navigation products offsetsome of the decline from the prior year although, as noted above, these saleswere limited by the availability of inventory, as demand exceeded supply.Backordered sales of the truck and RV navigation products at September 30,2009 approximated $656,000 with the inventory shortfall for these productsexpected to be resolved in the fourth quarter.

 

Gross profit decreased$4.0 million to $2.5 million in thefirst nine months of 2009 from the $6.5 million for the same period in2008 and gross margin decreased to 34.0% from 53.3%. Reduced sales volume, anunfavorable sales mix and the impact of the weaker pound sterling were the maincontributors to the lower gross margin. The unfavorable sales mix reflected theabsence of similar high-margin database sales for smartphone use made in 2008,sales in 2009 of older, low margin GPS models and more sales of productsoutside the U.K., which have lower gross margins because the products includesubscription free access to the AURA database. Gross margin was also reducedbecause of fixed transaction-based amortization of intangible assets over lowersales volume and the favorable impact on 2008’s cost of sales due to the weakerpound sterling as inventory purchases are based in U.S. dollars.

 

Selling, general andadministrative expenses for the nine months ending September 30, 2009 were$988,000, or 24.6% lower than the prioryear and mainly reflected the impact of a weaker pound sterling. On a localcurrency basis, spending in 2009 was down 5% from 2008. As a percentage of netsales, selling, general and administrative expenses increased to 41.6% in 2009from 33.1% in 2008 due to the lower level of sales in 2009 as compared to 2008.

 

As a result of the above,the PPL segment had a loss before income taxes of $219,000 for the first nine months of 2009compared to $2.8 million pre-tax income forthe year ago period.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

On August 13, 2009,the Company entered into an amendment to the Loan Agreement (the “LoanAgreement Amendment”). Pursuant to the Loan Agreement Amendment, the lenderswaived the failure of the Company to comply as of June 30, 2009 with thefinancial covenants set forth in the Loan Agreement relating to Total Debt toEBITDA Ratio (as defined in the Loan Agreement) and Fixed Charge Coverage Ratio(as defined in the Loan Agreement). In addition, the Loan Agreement Amendmentdecreased the maximum principal amount available to be borrowed by the Companypursuant to the revolving credit facility under the Loan Agreement from $40million to $28 million. The Company paid an amendment fee of $159,150, as wellas certain fees and expenses, in connection with the execution of the LoanAgreement Amendment.

 

The Loan AgreementAmendment also amended the covenants set forth in the Loan Agreement to providefor the following financial covenants:

 

·                  minimum fixed charge coverage at revised levels fromthose contained in the Loan Agreement

·                  minimum cumulative EBITDA

·                  minimum tangible net worth

 

Due to the continuedimpact of the global economic downturn and the preference of retail anddistribution customers to defer third quarter purchases to the fourth quarter,the Company did not satisfy the financial covenants under the Loan Agreementfor the third quarter of 2009. On November 2, 2009, the Company and thelenders under the Loan Agreement entered into an amendment to the LoanAgreement. Pursuant to the amendment, which was effective as of October 24,2009, the lenders waived the covenant violations. The Company paid an amendmentfee of $50,000, as well as certain fees and expenses of the lenders, inconnection with execution of the amendment. The Company believes that it has asufficient credit line to operate its business.

 

As amended, the LoanAgreement requires lockbox agreements, which provide for all Company receiptsto be swept daily to reduce borrowings outstanding under the revolving creditfacility. These agreements, combined with the existence of a material adverse change(“MAC”) clause in the Loan Agreement, result in the Revolving Credit Facilitybeing classified as a current liability, per guidance ASC 470, *Balance Sheet Classification of Borrowings Outstanding under RevolvingCredit Agreements that Include Both a Subjective Acceleration Clause and aLock-Box Arrangement*. The Company does not expect to repay, or berequired to repay, within one year, the balance of its revolving creditfacility, which has a final expiration date of October 19, 2011. The MACclause, which is a common requirement in commercial credit agreements, allowsthe lender to require the loan to become due if there has been a materialadverse change in the Company’s financial condition, operations or otherstatus. The classification of the revolving credit facility as a currentliability results only because of the combination of the lockbox agreements andthe MAC clause.

 

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Interest on amountsborrowed under the Loan Agreement is based on the prime rate plus an applicablemargin or LIBOR plus an applicable margin, with the applicable margin beingdetermined based on the Total Debt to EBITDA Ratio for the prior four quarters,with the further requirement that qualifying for a reduction from the currentlystipulated applicable margin requires that the Company achieve the designatedTotal Debt to EBITDA ratio for two consecutive quarters. The applicable marginbased on the Total Debt to EBITDA Ratio of the Company as of September 30,2009 was 2.0% for prime rate loans and 4.5% for LIBOR loans. Availability underthe revolving credit facility is calculated based on a borrowing base formulathat includes 75% of eligible accounts receivable, the lesser of 60% of lowerof cost or market value of eligible inventory or 85% of the appraised orderlyliquidation value of eligible inventory, and 60% of commercial letters ofcredit issued for the purchase of inventory, subject to certain limitations andto reserves established at the lenders’ discretion including but not limited toan availability reserve of $2.5 million through September 30, 2009 and$3.0 million thereafter. The Loan Agreement requires an inventory appraisal,when deemed necessary by the lender, the results of which could lead to areduction in the availability based on inventory. The inventory appraisalconducted as of June 30, 2009 did not affect credit availability. Therevolving credit facility continues to be subject to an unused line fee of 0.5%and the term loan under the Loan Agreement is subject to quarterly principalpayments by the Company of $310,000 for the quarter ending September 30,2009 and $440,000 for each quarter thereafter through September 30, 2011.The term of the Loan Agreement continues to extend until October 19, 2011.Borrowings under the Loan Agreement are secured by substantially all of theassets of the Company except for equity interests in the non-U.S. subsidiaries.

 

At September 30,2009, the Company had interest bearing debt outstanding of $21.9 million,consisting of the $3.5 million term loan and $18.4 million in the revolver. Asof September 30, 2009, availability was approximately $3.9 million underthe revolving credit line, based on the borrowing base formula in effect atthat time.

 

For the nine months endedSeptember 30, 2009, net cash flows used by operating activities were $3.3million. Significant net cash inflows from operations and non-cash add-backsincluded the non-cash depreciation and amortization of $2.9 million, thenon-cash valuation allowance of $10.5 million, an increase in accounts payableof $3.1 million. The increase in accounts payable was mainly due to higherinventory levels and additions to prepaid and other current assets. More thanoffsetting these inflows was the net loss of $12.0 million, an increase ininventory of $2.5 million, an increase in accounts receivable of $1.9 million,a decrease in accrued liabilities of $556,000, and an increase in the netdeferred income tax asset of $2.4 million. The increase in inventory was due tolower sales of higher price-point products, particularly in the Citizens Bandradio and detection lines, because of the recession-induced shift of consumerpreference to lower price-point items.  Theincrease in accounts receivable resulted from higher sales in the current monthcompared to December 2008 sales. The deferred tax asset increase was dueto the current year tax benefit while the decrease in accrued liabilities wasbecause of lower accruals for variable program selling expenses (reflectingboth lower nine-month sales for 2009 compared to the prior year’s period andthe timing of payments) and payment of year-end payroll bonuses. Workingcapital requirements are seasonal, with demand for working capital being higherlater in the year as customers begin purchasing for the holiday selling season.The Company believes that cash generated from operations and from borrowingsunder its credit agreement will be sufficient in 2009 to fund its workingcapital needs.

 

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Net cash used ininvesting activities amounted to $1.6 million in the first nine months of 2009.$607,000 was due to an increase in intangible assets and $739,000 was used forcapital expenditures, primarily tooling, building improvements and officeequipment.

 

Net cash provided byfinancing activities in the first nine months of 2009 totaled $4.2 million dueto increased debt. The Company decided not to pay a dividend in 2009. The cashused in 2009 for financing activities will most likely be limited to debtreduction.

 

A failure to comply,absent a waiver from lenders, with the covenants contained in the LoanAgreement in future periods could result in any outstanding indebtedness underthe Loan Agreement becoming immediately due and payable and in the inability toborrow additional funds under the Loan Agreement. 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 Loan Agreement or similar future credit agreement.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Critical accountingpolicies and estimates generally consist of those that reflect significantjudgments and uncertainties and could potentially result in materiallydifferent results under different assumptions. For a description of the Company’scritical accounting polices and estimates refer to the Company’s Annual Reporton Form 10-K for the year ended December 31, 2008.  The application of certain of these policiesrequires significant judgments or a historical based estimation process thatcan affect the results of operations and financial position of the Company aswell as the related footnote disclosures. The Company bases its estimates onhistorical experience and other assumptions that it believes are reasonable. Ifactual amounts ultimately differ from previous estimates, the revisions areincluded in the Company’s results of operations for the period in which theactual amounts become known.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This report containsforward-looking statements within the meaning of that term in the PrivateSecurities Litigation Reform Act of 1995 found at Section 27A of theSecurities 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, but are not limited to, projections ofrevenue, income or loss and capital expenditures, statements regarding futureoperations, anticipated financing needs, compliance with financial covenants inloan agreements, liquidity, plans for acquisitions or sales of assets orbusinesses, plans relating to products or services, assessments of materiality,expansion into international markets, growth trends in the consumer electronicsbusiness, technological and market developments in the consumer electronicsbusiness, the availability of new consumer electronics products and

 

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predictions of futureevents, as well as assumptions relating to these statements. In addition, whenused in this report, the words “anticipates,” “believes,” “should,” “estimates,”“expects,” “intends,” “plans” and variations thereof and similar expressionsare intended to identify forward-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 toor cause such differences include, but are not limited to, unanticipated developmentsin any one or more of the following 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 pricesfor older products as newer technologies are introduced;

·                  significant competition in the consumerelectronics business, 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 in exchangerates);

·                  ability of the Company to maintainadequate financing, to bear the interest cost of such financing and to remainin compliance with financing covenants;

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

·                  changes in law;

·                  ability to successfully integrateacquisitions;

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

 

Readers are cautioned notto place undue reliance on any forward-looking statements contained in thisreport, which speak only as of the date set forth on the signature page hereto.The Company undertakes no obligation to publicly release the result of anyrevisions to these forward-looking statements that may be made to reflectevents or circumstances after such date or to reflect the occurrence ofanticipated or unanticipated events.

 

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**Item 3.Qualitative and Quantitative Disclosures About Market Risk**

 

Market risks related tochanges in foreign currency exchange risks and interest rates are inherent tothe Company’s operations. Changes to these factors could cause fluctuations inthe Company’s net earnings, cash flows and the fair values of financialinstruments subject to market risks. The Company identifies these risks andmitigates the financial impact with hedging and interest rate swaps.

 

Other than executing aninterest rate swap agreement to cover the term loan and $4.0 million of therevolving loan, there have been no material changes in the Company’s marketrisk since December 31, 2008.

 

**Item 4.Controls and Procedures**

 

The Company hasestablished disclosure controls and procedures to ensure that informationrequired to be disclosed in the reports that the Company files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in SEC rules and forms. The Company’s disclosurecontrols and procedures have also been designed to ensure that informationrequired to be disclosed in the reports that the Company files or submits underthe Exchange Act is accumulated and communicated to the Company’s management,including the principal executive officer and principal financial officer, toallow timely decisions regarding required disclosure.

 

As of September 30,2009, the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s principalexecutive officer and principal financial officer, of the effectiveness of theCompany’s disclosure controls and procedures. Based on this evaluation, theprincipal executive officer and principal financial officer of the Company haveconcluded that the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) are effective as of September 30,2009.

 

There has been nochange in the Company’s internal control over financial reporting that occurredduring the first nine months of 2009 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1A.Risk Factors**

 

There have been nomaterial changes to the risk factors as previously disclosed under Item 1Ain our Annual Report on Form 10-K for the year ended December 31,2008.

 

**Item 3.Defaults Upon Senior Securities**

 

As of September 30,2009, the Company failed to comply with certain financial covenants set forthin the Loan Agreement. On November 2, 2009, the Company and the lendersunder the Loan Agreement entered into an amendment to the Loan Agreement.Pursuant to the amendment, which was effective as of October 24, 2009, thelenders waived the covenant violations.

 

**Item 6. Exhibits**

 

a)** **Exhibit 10.1Third Amendment to Loan and Security Agreement and Waiver, effective as of October 24,2009 among Cobra Electronics Corporation, The PrivateBank and Trust Company aslender and administrative agent for itself and other lenders and RBS Citizens, N.A.,as lender - filed as Exhibit 10.1 to the Current Report on Form 8-Kof Cobra Electronics Corporation filed on November 6, 2009 and****incorporated herein by reference.

 

b)  Exhibit 31.1Rule 13a-14(a)/15d-14(a) Certification of the Chief ExecutiveOfficer.

 

c)  Exhibit 31.2Rule 13a-14(a)/15d-14(a) Certification of the Chief FinancialOfficer.

 

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

 

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

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

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

 

 

Dated: November 12,2009

 

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## **INDEX TO EXHIBITS**

##  

| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description  of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1        |       | Exhibit 10.1  Third Amendment to Loan and Security Agreement and Waiver, effective as of  October 24, 2009 among Cobra Electronics Corporation, The PrivateBank  and Trust Company as lender and administrative agent for itself and other  lenders and RBS Citizens, N.A., as lender - filed as Exhibit 10.1 to the  Current Report on Form 8-K of Cobra Electronics Corporation filed on  November 6, 2009 and incorporated herein by reference. |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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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