##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 Commission File Number 000-30138 ROCKFORD CORPORATION (Exact Name of Registrant as Specified in its Charter)
 ARIZONA
    
    
    86-0394353(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)600 South Rockford Drive
    
    
    85281Tempe, Arizona
    
    (Zip Code)(Address of Principal ExecutiveOffices)
 (480) 967-3565
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or15(d)of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yesþ   No Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange
Act).    Yes    Noþ Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practical date: As of September 30, 2004, there were 9,025,563 shares of Common Stock,
$.01 par value per share, outstanding. This is the only class of stock of the
Company registered underSection 12(g)of the Securities Act of 1933.




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ROCKFORD CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PagePart I:
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets - September 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Income Statements - Three and Nine Months Ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements - September 30, 2004
    
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    19Part II:
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    20Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    20Signatures
    
    
    
    
    21Certifications
    
    
    
    
    22EX-31.1EX-31.2EX-32




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Forward-Looking Statements We make forward-looking statements in this report including, without
limitation, statements concerning the future of our industry, product
development, business strategy (including the possibility of future
acquisitions), continued acceptance and growth of our products, dependence on
significant customers and suppliers, and the adequacy of our available cash
resources. Our statements may contain projections of results of operations or
of financial condition. You may identify these statements by our use of
forward-looking terminology such as may, will, believe, expect,
anticipate, estimate, continue or other similar words. As a result of our poor financial performance, the lender on our principal
credit facility has restricted the availability on our credit line and we are
using substantially all of the availability. As a result, our ability to fund
all of our working capital requirements is under stress, we are seeking to
reduce our cash requirements, and we may be forced to seek additional
financing. We cannot be sure that financing will be available on acceptable
terms. If it is not, we cannot be certain that we will be able to carry out
our business in accordance with our business plans. In addition, although it appears that overall demand for aftermarket mobile
audio products is stabilizing, it is not clear whether our core consumers are
ready to increase their spending on mobile audio. Forward-looking statements are subject to many risks and uncertainties. We
caution you not to place undue reliance on our forward-looking statements,
which speak only as at the date on which they are made. Our actual results may
differ materially from those described in our forward-looking statements. We
disclaim any obligation or undertaking to update our forward-looking statements
to reflect changes in our expectations or changes in events, conditions, or
circumstances on which our expectations are based. When considering our forward-looking statements, you should keep in mind the
risk factors and other cautionary statements identified in this report, in our
Annual Report on Form 10-K for the year 2003, filed with the SEC on March 30,
2004, and in Exhibit 99.9 to our Annual Report, Risk Factors That May Affect
Rockfords Operating Results, Business Prospects and Stock Price. The risk
factors noted throughout this report and our Annual Report, particularly in the
discussion in Exhibit 99.9 to our Annual Report, and other risk factors that we
have not anticipated or discussed, could cause our actual results to differ
significantly from those anticipated in our forward-looking statements. 1




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS September 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note)(In thousands except share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    477Accounts
receivable, less allowances of $8,468 and $5,929 at
September 30, 2004 and December 31, 2003, respectively
    
    
    32,707
    
    
    
    31,090Inventories, net
    
    
    37,323
    
    
    
    33,287Deferred income taxes
    
    
    1,134
    
    
    
    5,524Income taxes receivable
    
    
    873
    
    
    
    3,064Prepaid expenses and other
    
    
    3,575
    
    
    
    3,711Net current
assets of discontinued operations
    
    
    
    
    
    
    3,667Total current assets
    
    
    75,612
    
    
    
    80,820Property and equipment, net
    
    
    10,916
    
    
    
    12,894Deferred income taxes
    
    
    
    
    
    
    Goodwill, net
    
    
    578
    
    
    
    5,557Other assets
    
    
    2,292
    
    
    
    1,509Net
long-term assets of discontinued operations
    
    
    
    
    
    
    5,592Total assets
    
    $
    89,398
    
    
    $
    106,372Liabilities and shareholders equityCurrent liabilities:Cash overdraft
    
    $
    634
    
    
    $
    Accounts payable
    
    
    21,445
    
    
    
    8,902Accrued salaries and incentives
    
    
    2,464
    
    
    
    1,959Accrued warranty
    
    
    2,900
    
    
    
    4,777Other accrued expenses
    
    
    4,906
    
    
    
    2,699Current portion of notes payable, long-term debt
    
    
    23,372
    
    
    
    24,345Total current liabilities
    
    
    55,721
    
    
    
    42,682Notes payable, less discount of $434
    
    
    12,066
    
    
    
    Total liabilities
    
    
    67,787
    
    
    
    42,682Minority interest
    
    
    146
    
    
    
    483Shareholders equity:Common
stock, $.01 par value  Authorized shares  40,000,000
Issued shares  9,025,563 shares at September 30, 2004, and
9,010,663 shares at December 31, 2003
    
    
    90
    
    
    
    90Additional paid-in capital
    
    
    36,753
    
    
    
    36,228Retained
earnings (deficit)
    
    
    (15,717
    )
    
    
    23,534Accumulated other comprehensive income
    
    
    339
    
    
    
    3,355Total shareholders equity
    
    $
    21,465
    
    
    
    63,207Total liabilities and shareholdersequity
    
    $
    89,398
    
    
    $
    106,372
 Note: The balance sheet at December 31, 2003, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. See notes to condensed
consolidated financial statements. 2




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ROCKFORD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share data)Revenues
    
    $
    41,130
    
    
    $
    38,561
    
    
    $
    133,150
    
    
    $
    130,256Cost of goods sold
    
    
    36,221
    
    
    
    27,466
    
    
    
    106,304
    
    
    
    86,638Gross profit
    
    
    4,909
    
    
    
    11,095
    
    
    
    26,846
    
    
    
    43,618Operating expenses:Sales and marketing
    
    
    7,853
    
    
    
    7,803
    
    
    
    24,116
    
    
    
    24,360General and administrative
    
    
    11,604
    
    
    
    4,185
    
    
    
    21,056
    
    
    
    13,910Research and development
    
    
    2,103
    
    
    
    1,770
    
    
    
    6,873
    
    
    
    5,593Total operating expenses
    
    
    21,560
    
    
    
    13,758
    
    
    
    52,045
    
    
    
    43,863Operating loss
    
    
    (16,651
    )
    
    
    (2,663
    )
    
    
    (25,199
    )
    
    
    (245
    )Interest and other expense (income), net
    
    
    1,580
    
    
    
    494
    
    
    
    3,274
    
    
    
    202Loss from
continuing operations before income tax
    
    
    (18,231
    )
    
    
    (3,157
    )
    
    
    (28,473
    )
    
    
    (447
    )Income tax (benefit) expense
    
    
    7,195
    
    
    
    (1,129
    )
    
    
    3,838
    
    
    
    (185
    )Loss from
continuing operations before minority interest
    
    
    (25,426
    )
    
    
    (2,028
    )
    
    
    (32,311
    )
    
    
    (262
    )Minority interest
    
    
    (88
    )
    
    
    (212
    )
    
    
    (344
    )
    
    
    (466
    )(Loss) Income from
continuing operations
    
    
    (25,338
    )
    
    
    (1,816
    )
    
    
    (31,967
    )
    
    
    204Discontinued operations (Note 4)Loss from
disposal of discontinued operations
    
    
    (5,676
    )
    
    
    
    
    
    
    (5,676
    )
    
    
    Loss from
discontinued operations, net of taxes
    
    
    (372
    )
    
    
    (917
    )
    
    
    (1,608
    )
    
    
    (2,050
    )Total loss
from discontinued operations
    
    
    (6,048
    )
    
    
    (917
    )
    
    
    (7,284
    )
    
    
    (2,050
    )Net loss
    
    $
    (31,386
    )
    
    $
    (2,733
    )
    
    $
    (39,251
    )
    
    $
    (1,846
    )Net (loss)
income per common share:(Loss)
Income from continuing operationsBasic
    
    $
    (2.81
    )
    
    $
    (0.21
    )
    
    $
    (3.54
    )
    
    $
    0.02Diluted
    
    $
    (2.81
    )
    
    $
    (0.21
    )
    
    $
    (3.54
    )
    
    $
    0.02Loss from discontinued operationsBasic
    
    $
    (0.67
    )
    
    $
    (0.10
    )
    
    $
    (0.81
    )
    
    $
    (0.23
    )Diluted
    
    $
    (0.67
    )
    
    $
    (0.10
    )
    
    $
    (0.81
    )
    
    $
    (0.23
    )Net loss per
common shareBasic
    
    $
    (3.48
    )
    
    $
    (0.31
    )
    
    $
    (4.35
    )
    
    $
    (0.21
    )Diluted
    
    $
    (3.48
    )
    
    $
    (0.31
    )
    
    $
    (4.35
    )
    
    $
    (0.21
    )Weighted
average shares:Basic
    
    
    9,026
    
    
    
    8,899
    
    
    
    9,022
    
    
    
    8,832Diluted
    
    
    9,026
    
    
    
    8,899
    
    
    
    9,022
    
    
    
    8,832
 See notes to condensed consolidated financial statements. 3




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ROCKFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30,2004
    
    2003(In thousands)Operating activitiesNet loss
    
    $
    (39,251
    )
    
    $
    (1,846
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    4,396
    
    
    
    3,810Loss on disposal of fixed assets
    
    
    1,404
    
    
    
    5Provision for doubtful accounts
    
    
    1,418
    
    
    
    608Impairment
of goodwill
    
    
    5,333
    
    
    
    Loss on
disposal of discontinued operation
    
    
    5,676
    
    
    
    Deferred income tax expense
    
    
    4,831
    
    
    
    Provision for inventory allowances
    
    
    5,497
    
    
    
    803Minority interest
    
    
    (337
    )
    
    
    (466
    )Changes in operating assets and liabilities:Bank overdraft
    
    
    272
    
    
    
    Accounts receivable
    
    
    (3,126
    )
    
    
    (8,181
    )Inventories
    
    
    (8,910
    )
    
    
    (8,836
    )Prepaid expenses and other assets
    
    
    (571
    )
    
    
    (242
    )Accounts payable
    
    
    13,211
    
    
    
    3,631Accrued salaries and incentives
    
    
    577
    
    
    
    (10
    )Accrued warranty
    
    
    (1,878
    )
    
    
    170Income tax receivable
    
    
    2,204
    
    
    
    996Other accrued expenses
    
    
    2,593
    
    
    
    318Net cash used in operating activities
    
    
    (6,661
    )
    
    
    (9,240
    )Investing activitiesPurchases of property and equipment
    
    
    (2,074
    )
    
    
    (4,151
    )Proceeds from disposal of property and equipment
    
    
    18
    
    
    
    21Acquisitions of business, net of cash acquired
    
    
    
    
    
    
    309Increase in other assets
    
    
    (24
    )
    
    
    (90
    )Net cash
used in continuing operations investing activities
    
    
    (2,080
    )
    
    
    (3,911
    )Change in
net assets of discontinued operations
    
    
    (1,973
    )
    
    
    (494
    )Net cash used in investing activities
    
    
    (4,053
    )
    
    
    (4,405
    )Financing activitiesNet payments on bank line of credit
    
    
    (1,528
    )
    
    
    Net proceeds from notes payable, long-term debt
    
    
    12,531
    
    
    
    13,567Payments on notes payable and long-term debt
    
    
    
    
    
    
    Payments on capital lease obligations
    
    
    (973
    )
    
    
    (743
    )Proceeds from the exercise of stock options and warrants
    
    
    64
    
    
    
    752Net cash provided by financing activities
    
    
    10,094
    
    
    
    13,576Effect of exchange rate changes on cash
    
    
    143
    
    
    
    1,369Net (decrease) increase in cash and cash equivalents
    
    
    (477
    )
    
    
    1,300Cash and cash equivalents at beginning of period
    
    
    477
    
    
    
    304Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    1,604
 See notes to condensed consolidated financial statements. 4




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Rockford Corporation and
Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2004 1. Basis of Presentation Unaudited Interim Financial Information We have prepared our unaudited condensed consolidated financial statements in
accordance with United States Generally Accepted Accounting Principles
applicable to interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of
management, we have made all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the
interim periods presented. Operating results for the three-month and nine-month periods ended September
30, 2004, are not necessarily indicative of the results you may expect for the
year ending December 31, 2004. We have made certain reclassifications to the
September 30, 2003 interim financial statements and the December 31, 2003
consolidated balance sheet in order to conform to the September 30, 2004
presentation. For further information, refer to the consolidated financial statements and
footnotes included as part of our Form 10-K for the year ended December 31,
2003, filed with the Securities and Exchange Commission (SEC) on March 30,
2004. Stock-based Compensation Rockford accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and has adopted the disclosure-only alternative
of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-based Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Rockford grants stock options for a
fixed number of shares to employees with an exercise price equal to the fair
value of the shares at date of grant. Fair value of the underlying shares is
determined by the market price at the date of the grant. Stock option grants to
non-employees are charged to expense based upon the fair value of the options
granted. The following table represents the effect on net loss and loss per share if
Rockford had applied the fair value based method and recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation,to Rockfords
stock-based employee compensation: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share data)Net loss as reported
    
    $
    (31,386
    )
    
    $
    (2,733
    )
    
    $
    (39,251
    )
    
    $
    (1,846
    )Proforma SFAS No. 123 expense
    
    
    (76
    )
    
    
    (108
    )
    
    
    (240
    )
    
    
    (295
    )Proforma net loss
    
    $
    (31,462
    )
    
    $
    (2,841
    )
    
    $
    (39,491
    )
    
    $
    (2,141
    )Proforma net loss per common share:Basic
    
    $
    (3.49
    )
    
    $
    (0.31
    )
    
    $
    (4.38
    )
    
    $
    (0.21
    )Diluted
    
    $
    (3.49
    )
    
    $
    (0.31
    )
    
    $
    (4.38
    )
    
    $
    (0.21
    )
 For purposes of proforma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting periods. 5




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2. Inventories Inventories consist of the following: September 30,
    
    December 31,2004
    
    2003(In thousands)Raw materials
    
    $
    14,188
    
    
    $
    7,719Work in progress
    
    
    2,108
    
    
    
    1,327Finished goods
    
    
    30,178
    
    
    
    28,18546,474
    
    
    
    37,231Less allowances
    
    
    (9,151
    )
    
    
    (3,944
    )$
    37,323
    
    
    $
    33,287
 3. Loss Per Share The following table sets forth the computation of basic and diluted net loss
per share: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share data)Numerator:Numerator for basic and diluted net loss per share
    
    $
    (31,386
    )
    
    $
    (2,733
    )
    
    $
    (39,251
    )
    
    $
    (1,846
    )Denominator:Denominator for basic net loss per share,
weighted average shares
    
    
    9,026
    
    
    
    8,899
    
    
    
    9,022
    
    
    
    8,832Effect of dilutive securities:Employee stock options
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Warrants
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Dilutive potential common shares
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Denominator for diluted net loss per share,
adjusted weighted average shares
    
    
    9,026
    
    
    
    8,899
    
    
    
    9,022
    
    
    
    8,832Basic net loss per share
    
    $
    (3.48
    )
    
    $
    (0.31
    )
    
    $
    (4.35
    )
    
    $
    (0.21
    )Diluted net loss per share
    
    $
    (3.48
    )
    
    $
    (0.31
    )
    
    $
    (4.35
    )
    
    $
    (0.21
    )
 6




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At September 30, 2004, options to purchase approximately 425,051 shares and
warrants to purchase 649,810 shares
of Rockford common stock were excluded from the calculation of the diluted net
loss per share because they were anti-dilutive. At September 30, 2004, notes
convertible into 2,711,949 shares of common stock and warrants to purchase
1,246,573 shares of common stock resulting from our June 10, 2004 issuance of
4.5% Convertible Senior Secured Subordinated Notes due 2009 and warrants as
amended by the waiver effective on November 12, 2004, were excluded from the
calculation of the diluted net loss per share because they were anti-dilutive.
At September 30, 2003, options to purchase approximately 359,000 shares of
Rockford stock were excluded from the calculation of the diluted net income per
share because they were anti-dilutive. 4. MB Quart GmbH
Subsidiary Discontinued Operations Rockford placed its MB Quart GmbH subsidiary into receivership under German law
as at September 22, 2004, after Rockford determined that receivership was the
only alternative that would promptly relieve Rockford of further obligations to
invest working capital or incur losses arising from MB Quart GmbHs
manufacturing operation in Germany. By instituting the receivership, Rockford
relinquished any future benefit from the assets of this subsidiary. As a
result, Rockford has treated the MB Quart GmbH operations as
discontinued operations for all periods presented and recorded a loss on disposal of the discontinued
operations of $5.7 million during the period ended
September 30, 2004. The following represents the results of
operations for MB Quart GmbH for the periods presented and are
reported on Rockfords income statement as results from
discontinued operations: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In
thousands)Revenues
    
    $
    1,339
    
    
    $
    1,159
    
    
    $
    4,175
    
    
    $
    5,753Cost of sales
    
    
    806
    
    
    
    1,350
    
    
    
    2,528
    
    
    
    5,204Operating expenses
    
    
    898
    
    
    
    1,239
    
    
    
    3,258
    
    
    
    3,841Interest and other expense, net
    
    
    7
    
    
    
    50
    
    
    
    4
    
    
    
    10Income tax (benefit) expense
    
    
    
    
    
    
    (563
    )
    
    
    (7
    )
    
    
    (1,252
    )Net loss
    
    $
    (372
    )
    
    $
    (917
    )
    
    $
    (1,608
    )
    
    $
    (2,050
    ) Rockford continues to own and market the MB Quart brand in North America. 5. Waiver of Default on Credit Facilities At September 30, 2004, Rockford was in default on the senior credit facility with Congress Financial
Corporation (Western) both because of the MB Quart GmbH receivership and
because Rockford did not reach the required EBITDA targets established in the loan
agreement as of the end of September 2004. Congress granted a waiver on
November 12, 2004 that waives this default as of September 30, 2004. Rockford is working with Congress to amend the EBITDA
covenants to align them with its new forecasts for its restructured business. Placing MB Quart GmbH into receivership caused a default on the indenture under
which Rockford issued its 4.5% Convertible Senior Secured Subordinated Notes. The
holders of the convertible notes waived the default on November 12, 2004. In
connection with the waiver, the holders retroactively waived their right to be
paid default interest and the interest rate remains at 4.5% (versus the 9.5%
default interest rate). The noteholders waived the default in exchange for an
amendment to the facility that reduced the conversion price from $5.29 per
share to $4.61 per share. This will increase the number of shares of Common
Stock issuable, if all of the Notes are converted, from 2,362,949 shares to
2,711,497 shares. In addition, the original warrants issued were increased to
allow the purchase of 1,187,500 shares of common stock versus the 590,737
shares available under the original warrants (excluding the warrants to
purchase 59,073 shares issued to Piper Jaffray & Co., the placement agent for
the original transaction). The exercise price of the warrants, including the
Piper Jaffray warrants, was lowered from $5.75 to $3.73 per share. Finally,
the agreement was amended to delete the provisions that provided for the early
termination of the noteholders second priority lien on certain of Rockfords
assets if the average monthly EBITDA for any twelve consecutive months
commencing with the month ending June 30, 2004 is positive. 7




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6. Goodwill Impairment Rockford is required to do an impairment review on goodwill annually per SFAS
No. 142, Goodwill and Other Intangible Assets. This review is normally
performed at December 31st of each year; however, Rockford
determined that it needed to
accelerate this review due to its continued operating losses and the significant changes in its business as a
result of the strategic realignment announced on September 21, 2004. Goodwill
related to the acquisition of MB Quart GmbH was written off as part
of the MB Quart GmbH receivership, as discussed
in Note 4. Rockford tested goodwill for impairment using the two-step
process prescribed in SFAS No. 142. The first step is to screen for potential
impairment, while the second step measures the amount of the impairment, if
any. Based on the screening performed, Rockford determined
$5.0 million of goodwill was impaired and wrote it off during
the period ended September 30, 2004. Goodwill of $0.6 million related
to the SimpleDevices acquisition was not
written off because Rockford realized the value of this goodwill when it sold
its interest in SimpleDevices on October 1, 2004. 7. Deferred Taxes and Income Tax Benefit Rockford reviewed its recorded deferred tax assets under the guidelines of SFAS
No. 109, Accounting for Income Taxes. SFAS 109 requires a company to record a
valuation allowance against any portion of the deferred tax assets that may not
be utilized under the guidelines provided. Rockford determined that
an additional valuation allowance in the amount of $7.2 million
was required to be recorded during the quarter ended September 30,
2004, leaving a
remaining balance of $1.1 million in net deferred tax assets. This resulted in
a reversal of the year-to-date tax benefit in the amount of $3.4 million.
Rockford discontinued recording tax benefit in the second quarter of 2004. 8. Other Charges Rockford took several
additional non-cash charges during the quarter ended September 30,
2004. These charges
included additional inventory reserves for Omnifi and other products in the
amount of $5.3 million, additional warranty accrual of $0.9 million, the
write-off of obsolete internally developed software in the amount of $1.0
million and tooling in the amount of $0.3 million and additional bad debt reserves in the amount of $0.7 million. 9. Comprehensive Loss The components of comprehensive loss for the three and nine months ending
September 30, 2004 and 2003 are as follows: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share data)Net loss
    
    $
    (31,386
    )
    
    $
    (2,733
    )
    
    $
    (39,251
    )
    
    $
    (1,846
    )Foreign currency translation
    
    
    143
    
    
    
    402
    
    
    
    339
    
    
    
    1,372Comprehensive loss
    
    $
    (31,243
    )
    
    $
    (2,331
    )
    
    $
    (38,912
    )
    
    $
    (474
    )
 Accumulated comprehensive loss consists exclusively of foreign currency
translation adjustments. 8




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10. Subsequent Events Rockford sold its majority interest in SimpleDevices, Inc. to Universal
Electronics, Inc. as disclosed in its report on Form 8-K filed on October 4,
2004. Rockford received approximately $7.8 million at closing, including
approximately $6.4 million for its shares of SimpleDevices and
$1.4 million in
repayment of a loan to SimpleDevices. The proceeds, net of $0.2 million of
fees, were used to pay down the senior credit facility. In addition,
approximately $1.2 million of additional proceeds for the shares were placed
into an escrow account that will be used to pay claims, if any, of Universal relating to
the representations made in the Stock Purchase Agreement. If there are no
claims, one-third of the escrow amount will be released to Rockford in 6 months
and the rest will be released in 2 years. 9




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations You should read this discussion and analysis of financial condition and results
of operations in conjunction with our unaudited condensed consolidated
financial statements and the related disclosures included elsewhere in this
report, and Managements Discussion and Analysis of Financial Condition and
Results of Operations included as part of our Form 10-K for the year 2003,
filed with the SEC on March 7, 2004. Overview We announced plans for the strategic realignment of our business on September
21, 2004. These plans will re-focus our business on our core mobile audio
business and involve the divestiture of non-core businesses. We have already
completed the first phase of the realignment by putting our MB Quart GmbH
German manufacturing operations into receivership on September 22, 2004 and
completing the sale of our SimpleDevices Wi-Fi business just after the end of
the third quarter, on October 1, 2004. In order to facilitate our strategic
realignment, we took non-cash reserves and write-offs totaling $26.5 million
during the third quarter, including $5.7 million for the loss on the disposal
of our MB Quart GmbH subsidiary and $0.4 million in loss from
the discontinued operations of that entity, $7.2 million to establish a valuation
allowance against our US deferred tax assets, $5.3 million for additional
reserves on our Omnifi and other inventory, $5.0 million for the write-off
of goodwill and other miscellaneous adjustments totaling
$2.0 million. Our net loss for the third quarter was $31.4 million compared to
a net loss of $2.7 million for the third quarter of 2003. Our net loss
excluding the non-cash reserves and write-offs was $4.9 million. We placed MB Quart GmbH into receivership under German law after we determined
that receivership was the only alternative that would promptly relieve us of
any further obligations to invest working capital or incur losses arising from
MB Quart GmbHs manufacturing operation in Germany. By instituting the
receivership we relinquished any future benefit from the assets of this
subsidiary. As a result, we recorded a loss on disposal of this
discontinued operation of $5.7 million during the period ended
September 30, 2004. We believe this action will eliminate
over $2 million in annual operating loss. We remain a creditor of MB Quart GmbH; however, there is only a remote
chance that we will recover any significant portion of our loan
balance and we have fully reserved against this asset. We
continue to own the MB Quart brand in North America and plan to pursue a
relaunch of this brand. Continuation of the brand will require a redesign and
resourcing of certain speaker products in the MB Quart product line. In addition,
the German receiver has indicated that MB Quart GmbH may not be able to supply
us with product, which may result in product supply delays. We believe the MB
Quart brand is a strategic fit given our focus on our core mobile audio
business and we plan to relaunch of this brand in the North American
market, which accounts for approximately two-thirds of the world market for MB
Quart. Although relinquishing the German operation was a positive step to resolving
our cashflow and profitability issues, it caused a default on both our Congress
credit facility and our convertible notes. The holders of our convertible notes
waived the default on November 12, 2004. In connection with the waiver, the
holders retroactively waived their right to be paid default interest and our
interest rate remains at 4.5% (versus the 9.5% default interest rate). The
noteholders waived the default in exchange for an amendment to the notes that
reduced the conversion price from $5.29 per share to $4.61 per share. This
will increase the number of shares of Common Stock issuable, if all of the
Notes are converted, from 2,362,949 shares to 2,711,497 shares. In addition,
the original warrants issued were increased to allow the purchase of 1,187,500
shares of common stock versus the 590,737 shares available under the original
warrants (excluding the 59,073 warrants issued to Piper Jaffray, the placement
agent in the original transaction). The exercise price of the warrants,
including the Piper Jaffray warrants, was also lowered from $5.75 to $3.73 per
share. Finally, the agreement was amended to delete the provisions that
provided for the early 10




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##### Table of Contents



termination of the noteholders second priority lien on certain of our assets
if our average monthly EBITDA for any twelve consecutive months commencing with
the month ending June 30, 2004 is positive. We were also in default on the Congress facility both because of the MB Quart
GmbH receivership and because we did not reach the required EBITDA targets
established in the Congress loan agreement as of the end of September, 2004.
Congress granted a waiver on November 12, 2004 that waives this default as of
September 30, 2004. We are working with Congress to amend the
EBITDA covenants to align them with our new forecast for our
restructured business. Based on our cashflow forecast, we anticipate that without significant changes
in our business we will be in an overadvance position on the Congress facility
at the end of December 2004 and during the first quarter of
2005. The projected shortfall results
from a combination of our expected continued losses during the 4th quarter, which is
typically our lowest quarter for sales because of the seasonality of mobile
audio sales, and our normal seasonal inventory build in anticipation of
increased sales in the first and second quarters. We are pursuing initiatives
that will prevent this situation and expect that we will be able to
decrease capital requirements, sell non-core assets, and raise vendor financing to accomplish this objective. We continue to
believe that our relationship with Congress remains strong. The balance on our
Congress facility was $22.8 million as of September 30, 2004, down from our
balance of $25.4 million at June 30, 2004. We used the proceeds from the sale
of SimpleDevices on October 1, 2004 to pay down the Congress facility and the
balance at October 31, 2004 was $17.9 million. In furtherance of our strategic realignment, we sold our majority interest in
SimpleDevices, Inc. to Universal Electronics, Inc. as disclosed in our report
on Form 8-K filed on October 4, 2004. We received approximately $7.8 million
at closing, including approximately $6.4 million for our shares of
SimpleDevices and $1.4 million in repayment of a loan to SimpleDevices. The
proceeds, net of $0.2 million of fees, were used to pay down the senior credit
facility. In addition, approximately $1.2 million of additional proceeds for
our shares were placed into an escrow account that will be used to pay claims
of Universal, if any, relating to the representations made in the Stock
Purchase Agreement. If there are no claims, one-third of the escrow amount will
be released to us in 6 months and the rest will be released in 2 years. This
divestiture is expected to eliminate approximately $300,000 per month of operating losses. Sales for the three months
ended September 30, 2004 were $2.6 million higher
than sales for the three months ended September 30, 2003. Sales of our core
Rockford Fosgate line in the third quarter of 2004 exceeded 2003 third quarter
levels due to the strength of our relaunched product line. We also filled most
of the backlog in our international markets and had 15% growth in
international sales over the same period in 2003. Although our OEM business is
still a small portion of our sales, the growth in this area is significant,
with a growth in sales of over 300% for the third quarter 2004 compared to the
third quarter 2003. We are aggressively pursuing opportunities in the OEM
market as we believe the strength of our brands will allow us to expand in this
channel. Gross margin for the three
months ended September 30, 2004 was $4.9 million, or
12% of sales versus 29% of sales for the three months ended September 30,
2003. Cost of goods sold for the third quarter included approximately $5.3
million of additional inventory reserves for obsolescence and our strategic realignment decisions.
Gross margin was 25% if this inventory reserve adjustment is excluded. 11




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We are required to do an impairment review on goodwill annually. We normally
do this review at December 31st of each year; however, we determined that we
needed to accelerate this review due to our continued operating
losses and the significant changes in our business
as a result of our strategic realignment. As noted above, goodwill related to
the acquisition of MB Quart GmbH was written off in connection with the MB Quart GmbH receivership. We have tested
goodwill for impairment using the two-step process prescribed in SFAS No. 142.
The first step is to screen for potential impairment, while the second step
measures the amount of the impairment, if any. Based on the screening
performed, we determined that $5.0 million of goodwill was
impaired and wrote if off during the quarter ended
September 30, 2004. We did not write off $0.6 million of
goodwill related to the SimpleDevices acquisition because we realized the
value of this goodwill when we sold our majority interest in Simple Devices on
October 1, 2004. We also reviewed our deferred tax assets under the guidelines of SFAS No. 109,
Accounting for Income Taxes. SFAS 109 requires that we record a valuation
allowance against any portion of the deferred tax assets that may not be
utilized under the guidelines provided. We determined that a
valuation allowance in the amount of $7.2 million was required
to be recorded during the quarter ended September 30, 2004, leaving a
remaining balance of $1.1 million in net deferred tax assets. We have made some tough decisions and realize that we have a challenge ahead of
us. We are reviewing our results by brand and channel to make sure that we are
providing value and are realizing an adequate return on sales to each
customer. We anticipate that our consolidated sales for 2005 will
be lower than 2004 due to the divestiture of non-core businesses and the
elimination or repositioning of certain products. We
anticipate these steps will have a positive impact on operating income. As we disclosed previously, the manufacturing cost of our relaunched Rockford
Fosgate mobile audio products are higher than we anticipated and do not
currently provide adequate gross margin to cover our operating costs. We are
undertaking significant value engineering projects to reduce the cost of these
products. We anticipate these projects will help us improve gross margins
beginning in 2005 and continuing into 2006. In addition, we have a number
of initiatives underway to reduce our operating costs. We are encouraged by the strong reception our core mobile audio products
continue to receive in the marketplace and are looking forward to growth across
all of our significant mobile audio distribution channels. We are focused on
resolving our short-term liquidity shortfall to allow us time to focus on
improvements in our core business that will return us to profitability 12




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Results of Operations The following table shows, for the periods indicated, selected
consolidated statements of operations data expressed as a percentage of net
sales: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    88.1
    
    
    
    71.2
    
    
    
    79.8
    
    
    
    66.5Gross profit
    
    
    11.9
    
    
    
    28.8
    
    
    
    20.2
    
    
    
    33.5Operating expenses:Sales and marketing
    
    
    19.1
    
    
    
    20.2
    
    
    
    18.1
    
    
    
    18.7General and administrative
    
    
    28.2
    
    
    
    10.9
    
    
    
    15.8
    
    
    
    10.7Research and development
    
    
    5.1
    
    
    
    4.6
    
    
    
    5.2
    
    
    
    4.3Sales, general and administrative expenses
    
    
    52.4
    
    
    
    35.7
    
    
    
    39.1
    
    
    
    33.7Operating
loss
    
    
    (40.5
    )
    
    
    (6.9
    )
    
    
    (18.9
    )
    
    
    (0.2
    )Interest and other expense, net
    
    
    3.8
    
    
    
    1.3
    
    
    
    2.5
    
    
    
    0.2Loss from
continuing operations income before tax
    
    
    (44.3
    )
    
    
    (8.2
    )
    
    
    (21.4
    )
    
    
    (0.3
    )Income tax (benefit) expense
    
    
    17.5
    
    
    
    (2.9
    )
    
    
    (2.9
    )
    
    
    (0.1
    )Minority interest
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    (0.3
    )
    
    
    (0.4
    )(Loss)
income from
continuing operations
    
    
    (61.6
    )
    
    
    (4.7
    )
    
    
    (24.0
    )
    
    
    0.2Discontinued
operationsLoss from
disposal of discontinued operations
    
    
    (13.8
    )
    
    
    
    
    
    
    (4.3
    )
    
    
    Loss from
discontinued operations, net of taxes
    
    
    (0.9
    )
    
    
    (2.4
    )
    
    
    (1.2
    )
    
    
    (1.6
    )Net Loss
    
    
    (76.3
    %)
    
    
    (7.1
    %)
    
    
    (29.5
    %)
    
    
    (1.4
    %)
 Cost of goods sold primarily consists of raw materials, direct labor and
manufacturing costs associated with production of our products as well as
warranty, in-bound freight, warehousing and customer service expenses. Sales and marketing expenses primarily consist of salaries, sales commissions
and costs of advertising, trade shows, distributor and sales representative
conferences and freight. General and administrative expenses primarily consist of salaries, facilities
and other costs of our accounting, finance, management information systems,
administrative and executive departments, as well as legal, accounting and
other professional fees and expenses associated with our business. Research and development expenses primarily consist of salaries associated with
our research and development personnel and legal costs related to our
intellectual property. 13




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##### Table of Contents



Geographic Distribution of Sales Our sales by geographic region were as follows: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(In thousands)
    
    (In thousands)REGION:United States
    
    $
    32,174
    
    
    $
    30,764
    
    
    $
    111,261
    
    
    $
    109,600Other Americas
    
    
    3,678
    
    
    
    2,729
    
    
    
    8,209
    
    
    
    7,718Europe
    
    
    3,095
    
    
    
    3,122
    
    
    
    7,787
    
    
    
    8,630Asia
    
    
    2,183
    
    
    
    1,946
    
    
    
    5,893
    
    
    
    4,308Total sales (1)
    
    $
    41,130
    
    
    $
    38,561
    
    
    $
    133,150
    
    
    $
    130,256
   (1)
    
    Sales are attributed to geographic regions based on the location of
customers. No single foreign country accounted for greater than 10% of
our sales. In the following discussion, certain increases or decreases may differ due to rounding. Three Months Ended September 30, 2004, Compared to Three Months Ended September 30, 2003 Net Sales. Sales
increased by $2.6 million, or 6.5%, to $41.1 million for the
three months ended September 30, 2004, from $38.6 million for the three months
ended September 30, 2003. The increase in sales was primarily the result of the
demand for our new Rockford Fosgate product lines and growth in our OEM
business. U.S. sales increased by $1.4 million, or 4.6%, to $32.2 million for the three
months ended September 30, 2004, from $30.8 million for the three months ended
September 30, 2003. The $1.4 million increase in U.S. sales was the result of
the strong demand for our new Rockford Fosgate product line and growth in our
OEM business. International sales increased by $1.2 million, or 14.9%, to
$9.0 million for the three months ended September 30, 2004, from $7.8 million
for the three months ended September 30, 2003, also attributable to strong
demand for our new Rockford Fosgate product line. The gain was larger than
expected because during the 3rd quarter we were able to fill almost all of the
second quarter backlog that had been caused by product delays. Although we
have finally returned to more normal backlog levels, we believe our product
delays cost us a substantial amount of sales. Cost of Goods Sold. Cost of goods sold increased by $8.8 million, or 31.9%, to
$36.2 million for the three months ended September 30, 2004, from $27.5 million
for the three months ended September 30, 2003. As a percent of sales, cost of
goods sold increased to 88.1% for the three months ended September 30, 2004,
from 71.2% for the three months ended September 30, 2003. Cost of goods sold
for the third quarter included approximately $5.3 million of additional
inventory reserves for obsolescence and our strategic
realignment decisions. General and Administrative Expenses. General and administrative expenses
increased by $7.4 million, or 177%, to $11.6 million for the three months
ended September 30, 2004, from $4.2 million for the three months ended 14




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##### Table of Contents



September 30, 2003. As a percent of sales, general and administrative expenses
increased to 28.2% for the three months ended September 30,
2004, from 10.9%
for the three months ended September 30, 2003. Included in the increase over
the prior year were charges taken for goodwill impairment and reserves for
severance of $5.0 million and $0.2 million, respectively. Operating Loss.
Operating loss increased by $14.0 million to a
$16.7 million operating loss for the three months ended September 30, 2004,
from a $2.7 million operating loss for the three months ended September 30,
2003. As a percent of sales, operating loss increased to a 40.5% loss for the
three months ended September 30, 2004, from a 6.9% loss for the three months
ended September 30, 2003. Excluding the $19.0 million non-cash
charges we would have had operating income for the third quarter of
$2.3 million. Interest and Other Expense, Net. Interest and other expense, net, primarily
consists of interest expense and currency gains and losses. Interest and other
expense, net, increased by $1.1 million to result in expense of $1.6 million
for the three months ended September 30, 2004, compared to expense of $0.5
million for the three months ended September 30, 2003. The other expense for
the three months ended September 30, 2004 includes $1.0 million of write-offs
of internally developed software we determined was obsolete. In addition, we
incurred increased interest expense due to the increased balance of our line of
credit and our recently issued convertible notes. Income Tax (Benefit)
Expense. Income tax (benefit) expense decreased by $8.3
million to a $7.2 million expense for the three months ended
September 30, 2004, from a $1.1 million benefit for the three months ended
September 30, 2003. The $7.2 million expense was the charge taken to establish
a valuation allowance against a majority of our deferred tax assets. Nine Months Ended September 30, 2004, Compared to Nine Months Ended September 30, 2003 Net Sales. Sales
increased by $2.9 million, or 2.2%, to $133.2 million for the
nine months ended September 30, 2004, from $130.2 million for the nine months
ended September 30, 2003. This was due to growth in our OEM
sales that were offset by lost turns early in the year resulting from product delays in our Rockford Fosgate
product line and lower sales of our Lighting Audio branded products. Although we have finally returned to more normal backlog levels, we
believe our product delays cost us a substantial amount of sales. U.S. sales increased by $1.6 million, or 1.5%, to $111.3 million for the nine
months ended September 30, 2004, from $109.6 million for the nine months ended
September 30, 2003. This was due to growth in our OEM sales
that were offset by lost turns early in the year resulting from product delays in our Rockford Fosgate
product line and lower sales of our Lighting Audio branded products.
International sales increased by $1.2 million, or 6.0%, to $21.9
million for the nine months ended September 30, 2004, from $20.7 million for
the nine months ended September 30, 2003. The majority of this
increase is the
result of increased sales in Asia and Latin America and despite the
product delays mentioned previously. Cost of Goods Sold.
Cost of goods sold increased by $19.7 million, or 22.6%,
to $106.3 million for the nine months 15




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##### Table of Contents



ended September 30,
2004, from $86.6 million for the nine months ended
September 30, 2003. As a percent of sales, cost of goods sold increased to
79.8% for the nine months ended September 30, 2004, from 66.5% for the nine
months ended September 30, 2003. The largest contributing factors were
manufacturing variances and premium freight resulting from our first quarter
product development delays discussed in our prior filings and the additional
inventory reserves taken in the third quarter. General and Administrative Expenses. General and administrative expenses
increased by $7.1 million, or 51.4%, to $21.1 million for the nine months ended
September 30, 2004, from $13.9 million for the nine months ended September 30,
2003. As a percent of sales, general and administrative expenses increased to
15.8% for the nine months ended September 30, 2004, from 10.7% for the nine
months ended September 30, 2003. General and administrative expenses for the
nine months ended September 30, 2004 included the write-off of goodwill in the
amount of $5.0 million. Research and Development Expenses. Research and development expenses increased
by $1.3 million, or 22.9%, to $6.9 million for the nine months ended September
30, 2004, from $5.6 million for the nine months ended September 30, 2003. As a
percent of sales, these expenses increased to 5.2% for the nine months ended
September 30, 2004, from 4.3% for the nine months ended September 30, 2003.
The rise continues to relate primarily to increased personnel and product
development costs associated with the product delays in our core Rockford
Fosgate product line. Development costs related to Simple Devices and Omnifi
brands also contributed to the increase. Operating (Loss)
Income. Operating loss increased by $25.0 million
to a $25.2 million loss for the nine months ended September 30, 2004, compared
to $0.2 million loss for the nine months ended September 30, 2003. Operating
loss was 18.9% as a percentage of sales for the nine months ended
September 30, 2004, compared to loss of 0.2% for the nine months ended
September 30, 2003. The operating loss for the nine months ended September 30,
2004, net of the $19.0 million non-cash charges, would have been
$6.2 million. As mentioned previously, the primary reasons for the increase in
operating loss, aside from the additional non-cash charges,
are unfavorable manufacturing variances, premium freight costs, inefficiencies
and development costs associated with the delayed launch of our core Rockford
Fosgate products, as well as additional selling and administrative expenses
related to acquisitions. Interest and Other Expense, Net. Interest and other expense, net, primarily
consists of interest expense and currency gains and losses. Interest and other
expense, net, increased by $3.0 million to result in expense of $3.3 million
for the nine months ended September 30, 2004, compared to expense of $0.2
million for the nine months ended September 30, 2003. The other expense for
the nine months ended September 30, 2004 includes $1.0 million of write-offs of
internally developed software we determined was obsolete. In addition,
interest expense is greater than the prior year due to the increased balance on
our credit facilities and our recently issued convertible notes. Income Tax (Benefit)
Expense. Income tax (benefit) expense increased by $4.0
million to $3.8 million of expense for the nine months ended
September 30, 2004, from $0.2 million of benefit for the nine months ended
September 30, 2003. The expense in 2004 includes a
$7.2 million non-cash charge taken
in the third quarter to establish a valuation allowance against a majority of
our deferred tax assets. For the nine months, it is offset by $3.4 million of
tax benefit recorded during the first quarter of 2004. We had ceased taking any
tax benefit during the second quarter of 2004. 16




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##### Table of Contents



Liquidity and Capital Resources We have financed our business primarily using existing capital, cash flows from
operations, the proceeds from our initial public offering, the proceeds from
our private placement of convertible notes, and bank borrowings. Our cash flow
used in operations was $6.7 million for the nine months ended September 30,
2004 compared to $9.2 million used in operations for the nine months ended
September 30, 2003. The net loss accounts for our primary use of cash. We entered into a 3-year asset based credit facility with Congress Financial
Corporation (Western) as Agent and Wachovia Bank, National Association as
Arranger on March 29, 2004. This credit facility replaced the $30 million
revolving credit facility we previously maintained with Bank of America, N.A.
and Bank One, Arizona, N.A. This credit facility is collateralized by
substantially all of our assets and has a variable interest rate of LIBOR plus
300 basis points or Prime plus 100 basis points. As of September 30, 2004, we were in default of the Congress facility both
because we did not reach the required EBITDA target established in the loan
agreement as of September 30, 2004 and because we placed our German subsidiary,
MB Quart GmbH, into receivership. Congress granted a waiver on November 12,
2004 that waives these defaults as of September 30, 2004. We are
working with Congress to amend the EBITDA covenants to align them
with our new forecasts for our restructured business. As of June 10, 2004 we entered into, and closed, agreements for the private
placement of $12.5 million of our 4.5% convertible senior subordinated secured
notes due 2009 and warrants to purchase 649, 810 shares of common stock at
$5.75 per share. The note holders may convert the notes into our common stock
at any time before the scheduled maturity date of June 10, 2009. The
conversion price was $5.29 per share, which represents a 15% premium over the
closing price of our common stock on June 9, 2004. If fully converted, the
notes were scheduled to convert into 2,362,949 shares of our common stock. We
have the right to automatically convert the notes into common stock if the
common stock trades above a specified target price for a specified period. We
may also force the exercise of the warrants under certain circumstances prior
to their expiration date. As of September 30, 2004 we were in default on the indenture under which we
issued our convertible notes. The default was caused by the voluntary
receivership of our German subsidiary, MB Quart GmbH. The holders of our
convertible notes waived the default on November 12, 2004. In connection with
the waiver, the holders retroactively waived their right to be paid default
interest and our interest rate remains at 4.5% (versus the 9.5% default
interest rate). The noteholders waived the default in exchange for an
amendment to the notes that reduced the conversion price from $5.29 per share
to $4.61 per share. This will increase the number of shares of Common Stock
issuable, if all of the Notes are converted, from 2,362,949 shares to 2,711,497
shares. In addition, the original warrants issued were increased to allow the
purchase of 1,187,500 shares of common stock versus the 590,737 shares
available under the original agreement (excluding the 59,073 warrants issued to
Piper Jaffray, the placement agent in the original transaction). The exercise
price of the warrants, including the Piper Jaffray warrants, was also lowered
from $5.75 to $3.73 per share. Finally, the agreement was amended to delete
the provisions that provided for the early termination of the noteholders
second priority lien on certain of our assets if our average monthly EBITDA for
any twelve consecutive months commencing with the month ending June 30, 2004 is
positive. Based on our cashflow forecast, we anticipate that without significant changes
in our business we would be in an overadvance position on the Congress facility
at the end of December 2004 and during the first quarter of 2005. 17




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The projected shortfall
results from a combination of our expected continued losses during the 4th quarter,
which is typically our lowest quarter for sales because of the seasonality of
mobile audio sales, and our normal seasonal inventory build in anticipation of
increased sales in the first and second quarters. We are pursuing initiatives
that will prevent this situation and expect that we will be able to decrease capital requirements, sell non-core assets, and raise vendor financing to accomplish this objective. We continue to
believe that our relationship with Congress remains strong. Our balance on our
Congress facility was $22.8 million as of September 30, 2004, down from our
balance of $25.4 million at June 30, 2004. We used the proceeds from the sale
of our interest in SimpleDevices on October 1, 2004 to pay down the Congress
facility and the balance at October 31, 2004 was $17.9 million. Our inventory position
decreased from $46.2 million at the end of the second
quarter (taking into account the removal of MB Quart GmbH
inventory as a discontinued operation) to $37.3 million at the end of third quarter of 2004. This inventory
decrease was due to the establishment of additional reserves pertaining to
Omnifi and excess and obsolete inventory and our continued focus on reducing
overall inventory levels. Although an improvement from the second quarter, our
inventory levels are still high and we continue to pursue inventory management
initiatives to further reduce inventory levels. We have confidence that we are
taking the correct steps to improve our inventory position and expect our
inventory levels to decrease further in the fourth quarter of 2004. We had working capital of $19.9 million at September 30, 2004, compared to
$38.1 million at December 31, 2003. The significant components of working
capital for the quarter ended September 30, 2004 include:  
    
    There were no cash and cash equivalents at September 30, 2004
versus $0.4 million as at December 31, 2003. Due to the daily sweep
of cash by Congress, we do not carry any cash balances. The bank
overdraft presented as a current liability represents outstanding
checks, which we expect to pay when presented using advances from
the Congress facility.
    
    Our net accounts receivable were $32.7 million, or 63.1 days
sales outstanding (DSO) at September 30, 2004 compared to
$31.1
million or 77.6 DSO at December 31, 2003. The slight increase in
accounts receivable balances is due to seasonally higher sales. The
DSO improvement is due to strengthening of our collection efforts.
    
    Net inventory increased
$4.0 million, from $33.3 million at December 31, 2003 to $37.3
million at September 30, 2004.
    
    Accounts payable increased $12.6 million, from $8.9 million
at December 31, 2003 to $21.5 million at September 30, 2004. This
increase was primarily due to increased inventory purchases and
extending of vendor payment terms. We have obtained extended terms
from most of our vendors to compensate for the longer payment terms
expected of us by our big box and mass merchandising customers. The Congress facility requires that we maintain blocked lock box accounts,
whereby Congress takes possession of all cash receipts on a daily basis and
these amounts are applied to reduce our outstanding debt. In accordance with
EITF 95-22: Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective Acceleration Clause
and a Lock-Box Arrangement, we have recorded the $22.8 million outstanding
balance as at September 30, 2004 on the Congress Facility as short-term. We
expect to maintain the facility for the entire three-year term. Investing activities used
cash in continuing operations of $2.1 million in the nine months ended
September 30, 2004 versus $3.9 million for the nine months ended September 30,
2003. Capital expenditures, the primary use of cash from investing activities,
were $2.1 million for the first nine months of 2004 versus $4.2 million for the
first nine months of 2003. We continue working to improve management of our
capital spending and have imposed increased payback requirements for
approval of capital spending. Our capital spending is primarily in tooling for
specific production 18




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lines, general machinery and equipment to support manufacturing and computer
hardware and software to support our operations. We do not anticipate
significant changes in our future capital spending requirements, other than
reductions resulting from our divestiture of non-core businesses and
elimination of the capital spending required for those businesses. Off Balance Sheet Arrangements We do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities referred to
as structured finance or variable interest entities (VIEs), which would have
been established for the purpose of facilitating off-balance sheet
arrangements. As of September 30, 2004, we are not involved in any
unconsolidated VIE transactions. Contractual Obligations as of September 30, 2004 We had certain contractual obligations at September 30, 2004 due as follows: Payments due by period(in thousands)Less than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsCurrent portion of
long-term debt
    
    $
    23,372
    
    
    $
    555
    
    
    $
    22,817Long-term notes payable
    
    $
    12,500
    
    
    
    
    
    
    
    
    
    
    $
    12,500Operating leases
    
    $
    9,187
    
    
    $
    2,947
    
    
    $
    4,766
    
    
    $
    1,474
 There have not been material changes in our operating leases since December 31,
2003. We did not have any material outstanding noncancelable purchase obligations at
September 30, 2004. One of our vendor sourcing agreements includes contractual
terms that would require us to pay for excess raw materials in the event the
program is terminated and to honor submitted purchase orders if we attempt to
cancel after a stated production lead time. Under this agreement, we have
requirements to purchase $0.7 million of additional raw materials for our
Omnifi products during 2004. We have accrued for this obligation. We
are in the process of terminating another vendor and have purchase
commitments of $0.5 million to that vendor. Several of
our other sourcing agreements require us to place monthly purchase orders, but
do not require a minimum purchase quantity or dollar amount. We do not
anticipate significant liability in connection with these contractual
requirements. Critical Accounting Policies and Estimates The methods, estimates and judgments we use in applying our accounting policies
have a significant impact on the results we report in our consolidated
condensed financial statements. We evaluate our estimates and judgments on an
on-going basis. We base our estimates on historical experience and assumptions
that we believe to be reasonable under the circumstances. Our experience and
assumptions form the basis for our judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual
results may vary from what we anticipate and different assumptions or estimates
about the future could change our reported results. We believe the following
accounting policies are the most critical to us, in that they are important to
the portrayal of our financial statements and they require our most difficult,
subjective or complex judgments in the preparation of our consolidated
financial statements: 19




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Revenue Recognition.We recognize revenue pursuant to Staff Accounting Bulletin
No. 104, Revenue Recognition in Financial Statements. Accordingly, we recognize
revenue and record sales, net of related discounts, when all of the following
criteria are met:  
    
    Persuasive evidence of an arrangement exists;
    
    Ownership has transferred to the customer;
    
    The price to the customer is fixed or determinable; and
    
    Collectibility is reasonably assured. We sell almost all of our products F.O.B. our facility, so that upon shipment
of products, the above criteria are met and revenue is recognized.
Additionally, we recognize revenue from the sale of software in accordance with
SOP 97-2, Software Revenue Recognition.Revenue is recorded from packaged
software and license fees when persuasive evidence of an arrangement exists,
the software product has been shipped, the fees are fixed and determinable,
collectibility is reasonably assured and vendor-specific objective evidence of
fair value exists for any undeliverable products or services (elements) of
the arrangement. We also record reductions to revenue for estimated customer returns and
additional sales incentive offerings such as growth and volume incentive
rebates and prompt pay discounts based on historical rates. Should a greater
proportion of customers return product or redeem incentives than we estimate,
we may need to make additional reductions to revenue. Intangible Assets.On January 1, 2002, we adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. When we
account for acquired businesses as purchases, we allocate purchase prices to
the assets, definite-lived intangible assets, and liabilities acquired based on
the estimated fair values on the respective acquisition dates. Based on these
values, we allocate any excess purchase price over the fair value of the net
assets acquired to goodwill. Prior to January 1, 2002, we amortized goodwill over the useful life of the
underlying asset, not to exceed 15 years. On January 1, 2002, we began
accounting for goodwill under the provisions of SFAS Nos. 141 and 142. As at
September 30, 2004, we had gross goodwill of $0.6 million pertaining to our
investment in SimpleDevices, which was sold in October 2004. All remaining
goodwill has been written off because of its impairment as outlined in the
notes to our financial statements. In assessing the recoverability of our goodwill and other intangibles, we must
make assumptions about estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for these assets not previously recorded. Some factors we
consider important which could trigger an impairment review include the
following:  
    
    Significant underperformance relative to expected historical or projected future operating results;
    
    Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
    
    Our market capitalization relative to net book value; and
    
    Significant negative industry or economic trends. We have tested goodwill for impairment using the two-step process prescribed in
SFAS No. 142. The first step is to screen for potential impairment, while the
second step measures the amount of the impairment, if any. We performed 20




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the first of the required impairment tests for goodwill as at December 31,
2002, and a second at December 31, 2003. In each case we determined that our
goodwill was not impaired and it was not necessary to undertake the second step
in the two-step process. During the nine months ended September 30, 2004, as a
result of our continued operating losses and our realignment decisions announced on September 21, 2004, we
concluded that it was necessary to perform an early impairment test. Based on
the screening performed, we determined that $5.0 million of
goodwill was impaired and wrote it off during the period ended
September 30, 2004. We did not write off $0.6 million of goodwill related to the
SimpleDevices acquisition because we realized the value of this goodwill when we
sold our interest in SimpleDevices on October 1, 2004. For the nine months
ended September 30, 2003, we did not record any impairment losses related to
goodwill and other intangible assets. Allowance for Doubtful Accounts.We maintain an allowance for doubtful
accounts, based on historical rates, for estimated losses resulting from the
inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, we might need to make additional allowances. Excess and Obsolete Inventory.We maintain a reserve for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. We review information such as quantity on hand versus
forecasted use and inventory aging listings to assist in this assessment. If
actual future demand or market conditions are less favorable than those we
project, we may need to take additional inventory write-downs. Any change to
the reserve arising from forecast revisions is reflected in cost of sales in
the period the revision is made. As a result of the realignment we announced
on September 21, 2004, we took inventory write downs of $5.3 million for the
quarter ending September 30, 2004. Warranty.We maintain a warranty reserve, based on historical rates, for costs
associated with the repair or replacement of product that fails to meet our
standard warranty against defects in material and workmanship. Should actual
product failure rates differ from our estimates, we would need to make
revisions to our estimated accruals. Income taxes. We must make certain estimates and judgments in determining
income tax expense for financial statement purposes. These estimates and
judgments occur in the calculation of certain tax assets and liabilities, which
arise from differences in the timing of recognition of revenue and expense for
tax and financial statement purposes. We must assess the likelihood that we
will be able to recover our deferred tax assets. If recovery is not likely, we
must increase our provision, or decrease our benefit, by recording a valuation
allowance against the deferred tax assets that we estimate will not ultimately
be recoverable. Based on our review of our deferred tax assets at September
30, 2004, we determined that a valuation allowance in the amount of $7.1
million was required during the third quarter of 2004, leaving a remaining
balance of $1.1 million in net deferred tax assets. Inflation.Inflation has not had a significant impact on our operations since
we operate in a market that requires continuing price decreases and we have
historically been able to insist on continuing price decreases from our
suppliers. Rising metal prices and increasing transportation costs may have an
impact on our operations in the remainder of 2004 and in 2005, if we are not
able to secure concessions from our suppliers. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Our primary market risk exposures are in the areas of interest rate risk and
foreign currency exchange rate risk. Our holdings of cash equivalents are
subject to interest rate fluctuations, but we believe this risk is immaterial
due to the 21




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short-term nature of these investments and the essentially zero cash balances
we carry. The outstanding balances on our credit facilities are also subject to
interest rate fluctuations. The value of the U.S. dollar affects our financial results. Changes in exchange
rates may positively or negatively affect our revenues, gross margins,
operating expenses and shareholders equity as expressed in U.S. dollars.
Historically, our exposure to currency exchange rate fluctuations was modest
due to the fact that we sold our products primarily in U.S. dollars and held
only a small percentage of our assets outside the U.S. However, we conduct a
growing portion of our business in foreign currency and we are increasing our
billings in local currencies in Canada and Europe. In recent years we have sourced an increasing percentage of our products, or of
raw materials and parts for our products, from outside the United States. Most
of these raw materials and parts are sources in the far east, principally in
China. Although most of these purchases are denominated in dollars, an
extended decline in the value of the dollar may affect the terms and prices on
which we are able to purchase from our foreign suppliers and may, therefore,
increase our costs. During the first quarter of 2003, our Board of Directors approved and we began
to implement a new foreign currency hedging policy. The goal of the program
was to provide stability to the U.S. Dollar values of non-function currency
cash flows. Although it is impossible to eliminate all currency risk,
implementation of this program should mitigate the risk of significant changes
in our earnings due to short-term foreign exchange fluctuations. During the
year ended December 31, 2003, we entered into several Canadian dollar forward
contracts to hedge foreign denominated assets with foreign denominated
liabilities in order to mitigate the risk of significant changes in earnings
due to short-term foreign exchange fluctuations. Changes in the fair value of
derivatives were recognized through net loss. We did not engage in any hedging
activity during the first nine months of 2004 because we determined that we had
uses that are more important for our available cash. At September 30, 2004, we
did not have any outstanding forward contracts. 
 Item 4. Controls and Procedures Our principal executive officer and principal accounting officer reviewed our
disclosure controls and procedures during the last 90 days in order to comply
with the SECs requirements for certification of this Form 10-Q. Our Chief
Financial Officer resigned effective July 13, 2004 and we have appointed an
interim Chief Financial Officer who is performing the duties of principal
accounting officer and has participated in the review of our disclosure
controls and procedures in connection with the preparation of this Form 10-Q. Since we became a public company, we have maintained a disclosure policy
committee, which currently includes our Chief Executive Officer, Interim Chief
Financial Officer, Chief Accounting Officer, Treasurer, Director of Investor
Relations, and General Counsel. Our officers, directors, and employees are
responsible to inform the committee about material developments in our business
so that the committee can decide when we need to make new filings with the SEC
or make disclosures to the public markets about developments in our business. The disclosure policy committee, other senior managers, and our finance staff
are responsible for preparation of our periodic reports. Our finance staff and
senior managers:  
    
    monitor our operations and financial performance on a regular basis,
    
    evaluate how our performance may affect our reports to the SEC, and
    
    schedule preparation of our periodic reports. 22




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We use our Oracle information system to develop the financial information used
in our reports beginning shortly after the end of each reporting period.
Members of our finance staff and our senior managers compile this information,
as well as reports about our business from our officers, directors, and
employees, and use the compiled information to prepare our reports to the SEC.
Our procedures have allowed us to file our reports within the time frames that
the SECs rules require. Based on their review of our disclosure controls and policies, our principal
executive officer and principal accounting officer concluded that our
disclosure controls and procedures are effective and that they allow us to
comply with our periodic reporting obligations. We believe the reports we have
filed are in compliance with the SECs requirements. We have not made significant changes to our internal controls, and we are not
aware of changes in other factors that could significantly affect these
controls, since our principal executive officer and principal accounting
officer reviewed our disclosure controls and procedures. 
 Part II. Other Information 
 Item 1. Legal Proceedings. Since we filed our Form 10-Q for the second quarter with the SEC on August 11,
2004, there have been no additional material developments in connection with
the patent claim or litigation with a former distributor as described in the
Legal Proceedings section of our Annual Report. We are and may continue to be a party to various lawsuits and arbitrations from
time to time. As at September 30, 2004, we were not a party to any legal
proceedings that we believe are material, other than the effect of the expenses
associated with the lawsuits described in our Annual Report. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation+3.2
    
    Restated Bylaws as amended through July 27, 2000++3.3
    
    Amendment to Articles of Incorporation filed on January 12,
1988+3.4
    
    Amendment to Articles of Incorporation filed on May 12,
1999+3.5
    
    Amendment to Articles of Incorporation filed on May 17,
1999+3.7
    
    Amendment to Articles of Incorporation filed on July 1,
 23




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ExhibitNumber
    
    Description of Document1999+4.1
    
    Specimen Common Stock Certificate+4.2
    
    Reference is made to the Articles of Incorporation, as
amended, and the Restated Bylaws, as amended, filed as
Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.7 for a description
of the rights of the holders of Common Stock.31.1
    
    Certification Required by Section 302 of the Sarbanes-Oxley Act31.2
    
    Certification Required by Section 302 of the Sarbanes Oxley Act32
    
    Certification Required by Section 906 of the Sarbanes Oxley Act99.1
    
    Risk Factors That May Affect Rockfords Operating Results,
Business Prospects and Stock Price+++
   +
    
    Previously filed with our registration statement on Form S-1, which the
SEC declared effective on April 19, 2000 and/or amendments++
    
    Previously filed on August 11, 2000 with our Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.+++
    
    Previously filed on March 30, 2004, with our Annual Report on Form
10-K for the year ended December 31, 2003.  (b)
    
    During the period from July 1, 2004, through September 30, 2004, Rockford
filed the following reports on Form 8-K: July 21,
2004    Report disclosing on Item 7 that Rockford had issued a
news release announcing the resignation of James
Thomson, Rockford Chief Financial Officer. This report
furnished a copy of the press release as Exhibit 99.1
to the Form 8-K. August 3, 2004    Report disclosing on Item 7 that Rockford had issued a
news release regarding Rockfords results of operations
for the 2nd Quarter of 2004 and for the first half of
2004. This report furnished a copy of the press
release as Exhibit 99.1 to the Form 8-K. September 21, 2004    Report disclosing on Item 2.04 that Rockford had
defaulted on its senior credit facility with Congress
and on its convertible notes, on Item 2.05 that
Rockford had placed its MB Quart GmbH subsidiary into
receivership and estimating charges relating to this
action of approximately $11 million, on Item 2.06 that
the realignment of Rockfords business and refocus on
its core mobile audio business would lead to material
charges in an estimated amount of approximately $25
million, and on Item 7.01 that Rockford had issued a
news release regarding the strategic realignment of its
businesses, anticipated impairment charges, and
defaults under its financing facilities. This report
furnished a copy of the press release as Exhibit 99.1
to the Form 8-K. 
 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. ROCKFORD CORPORATIONDate: November 15, 2004
    By:
    /s/ Murray CohenMurray CohenVice President of Finance and Interim Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer) 24