##### 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 March 31, 2007
 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 Executive Offices)
 (480) 967-3565
(Registrants Telephone Number, Including Area Code)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2). (Check one)
 Large accelerated filer o      Accelerated filer o Non-accelerated filer þ
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
 Indicate the number of shares of each of the issuers classes of common stock, as of the
latest practical date:
 As of May 3, 2007, there were 9,395,720 shares of Common Stock, $.01 par value per share,
outstanding, which is the only class of common stock of the Company registered under Section 12(g)
of the Securities Act of 1933.




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##### 



ROCKFORD CORPORATION AND SUBSIDIARIES
 TABLE OF CONTENTS
 Forward Looking StatementsPart I: Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets December 31, 2006 and March 31, 2007 (Unaudited)Condensed Consolidated Statements of Operations  Three Months Ended March 31, 2006 and 2007 (Unaudited)Condensed Consolidated Statements of Cash Flows  Three Months Ended March 31, 2006 and 2007 (Unaudited)Notes to Condensed Unaudited Consolidated Financial Statements  March 31, 2007Item 2. Managements Discussion and Analysis of Financial Condition and Results of Continuing OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPart II: Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 6. Exhibits and Reports on Form 8-KSignaturesCertificationsEx  31.1Ex  31.2Ex  32EX-31.1EX-31.2EX-32
  2




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Forward-Looking Statements
    3




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
  (In thousands except share data)
 December 31,
    
    
    March 31,2006
    
    
    2007(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    Accounts receivable, less allowances of $1,267 and $1,295 at December 31, 2006 and
March 31, 2007, respectively
    
    
    19,242
    
    
    
    24,942Inventories
    
    
    19,612
    
    
    
    18,636Prepaid expenses and other current assets
    
    
    1,998
    
    
    
    2,033Total current assets
    
    
    40,852
    
    
    
    45,611Property and equipment, net
    
    
    2,487
    
    
    
    2,373Other assets
    
    
    1,216
    
    
    
    1,059Total assets
    
    $
    44,555
    
    
    $
    49,043Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    7,094
    
    
    $
    11,482Accrued salaries and incentives
    
    
    1,485
    
    
    
    2,162Accrued warranty and returns
    
    
    2,199
    
    
    
    2,249Other accrued expenses
    
    
    2,193
    
    
    
    2,851Current portion of capital lease and other long-term liabilities
    
    
    1,002
    
    
    
    461Asset-based credit facility
    
    
    10,400
    
    
    
    10,166Total current liabilities
    
    
    24,373
    
    
    
    29,371Notes payable, less unaccreted discount of $222 and $199 at December 31, 2006 and
March 31, 2007, respectively
    
    
    9,278
    
    
    
    9,301Long-term portion of capital lease and other long-term liabilities
    
    
    659
    
    
    
    918Total liabilities
    
    
    34,310
    
    
    
    39,590Shareholders equity:Common stock, $.01 par value  Authorized shares  40,000,000 Issued shares
9,390,970 at December 31, 2006 and 9,395,720 shares at March 31, 2007
    
    
    94
    
    
    
    94Additional paid-in capital
    
    
    37,995
    
    
    
    38,069Retained deficit
    
    
    (28,255
    )
    
    
    (29,122
    )Accumulated other comprehensive income
    
    
    411
    
    
    
    412Total shareholders equity
    
    
    10,245
    
    
    
    9,453Total liabilities and shareholders equity
    
    $
    44,555
    
    
    $
    49,043
   4




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##### Table of Contents



(In thousands, except per share data)
 Three months endedMarch 31,2006
    
    
    2007Net sales
    
    $
    29,928
    
    
    $
    26,372Cost of goods sold
    
    
    22,070
    
    
    
    18,492Gross profit
    
    
    7,858
    
    
    
    7,880Operating expenses:Sales and marketing
    
    
    5,188
    
    
    
    3,464General and administrative
    
    
    3,601
    
    
    
    4,136Research and development
    
    
    753
    
    
    
    808Total operating expenses
    
    
    9,542
    
    
    
    8,408Operating loss
    
    
    (1,684
    )
    
    
    (528
    )Interest and other expense, net
    
    
    375
    
    
    
    339Loss from continuing operations before income taxes
    
    
    (2,059
    )
    
    
    (867
    )Income tax expense
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (2,059
    )
    
    
    (867
    )Income from discontinued operations
    
    
    6
    
    
    
    Net loss
    
    $
    (2,053
    )
    
    $
    (867
    )Net loss per common share:Loss from continuing operationsBasic
    
    $
    (0.22
    )
    
    $
    (0.09
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.09
    )Income from discontinued operationsBasic
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    0.00
    
    
    $
    0.00Net lossBasic
    
    $
    (0.22
    )
    
    $
    (0.09
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.09
    )Weighted average shares:Basic
    
    
    9,385
    
    
    
    9,392Diluted
    
    
    9,385
    
    
    
    9,392
  5




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##### Table of Contents



(In thousands)
 Three months endedMarch 31,2006
    
    
    2007Cash flow from continuing operating activities:Net loss from continuing operations
    
    $
    (2,059
    )
    
    $
    (867
    )Adjustments to reconcile net loss from continuing operations to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    712
    
    
    
    415Gain on divestiture of business
    
    
    (58
    )
    
    
    Loss on exit of European leases
    
    
    700
    
    
    
    Gain on sale of property and equipment
    
    
    (2
    )
    
    
    (7
    )Share based compensation expense
    
    
    68
    
    
    
    63Provision for doubtful accounts
    
    
    3
    
    
    
    107Provision for inventory
    
    
    116
    
    
    
    446Special charge
    
    
    
    
    
    
    1,031Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,234
    )
    
    
    (5,807
    )Inventories
    
    
    295
    
    
    
    529Prepaid expenses and other
    
    
    (139
    )
    
    
    (27
    )Accounts payable
    
    
    269
    
    
    
    4,388Accrued salaries and incentives
    
    
    218
    
    
    
    99Accrued warranty and returns
    
    
    (64
    )
    
    
    50Other accrued expenses
    
    
    526
    
    
    
    658Net cash (used in) provided by operating activities
    
    
    (649
    )
    
    
    1,078Cash flow from investing activities:Purchases of property and equipment
    
    
    (151
    )
    
    
    (255
    )Proceeds from sale of property and equipment
    
    
    2
    
    
    
    50Net proceeds from divestiture of businesses
    
    
    750
    
    
    
    100Decrease in other assets
    
    
    91
    
    
    
    9Net cash provided by (used in) investing activities
    
    
    692
    
    
    
    (96
    )Cash flow from financing activities:Payments on bank debt
    
    
    (46
    )
    
    
    (234
    )Payments on capital lease obligations
    
    
    (9
    )
    
    
    (10
    )Payment on litigation settlement
    
    
    
    
    
    
    (750
    )Proceeds from exercise of stock options
    
    
    5
    
    
    
    11Net cash used in financing activities
    
    
    (50
    )
    
    
    (983
    )Effect of exchange rate changes on cash
    
    
    7
    
    
    
    1Net increase in cash flow from continuing operations
    
    
    
    
    
    
    Net increase in cash flow from discontinued operations
    
    
    
    
    
    
    Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    Cash flow from discontinued operations:Cash flow provided by operating activities
    
    
    17
    
    
    
    Cash flow used in investing activities
    
    
    
    
    
    
    Cash flow used in financing activities
    
    
    (17
    )
    
    
    Net increase in cash flow from discontinued operations
    
    $
    
    
    
    $
    
  6




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Rockford Corporation and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 March 31, 2007
 1. Basis of Presentation
 Unaudited Interim Financial Information
    Comprehensive Loss
  Three months endedMarch 31,2006
    
    
    2007(In thousands)Net loss
    
    $
    (2,053
    )
    
    $
    (867
    )Foreign currency translation adjustments
    
    
    7
    
    
    
    1Total comprehensive loss
    
    $
    (2,046
    )
    
    $
    (866
    )
 2. Share-based Compensation
   7




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Rockford Corporation and Subsidiaries
 Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2006
    
    
    1,885,351
    
    
    $
    4.14Granted
    
    
    
    
    
    
    Exercised
    
    
    (5,000
    )
    
    
    2.15Terminated/expired
    
    
    (74,287
    )
    
    
    3.10Outstanding at March 31, 2007
    
    
    1,806,064
    
    
    
    4.18
    
    
    6.7 years
    
    $
    74,000Exercisable at March 31, 2007
    
    
    1,322,589
    
    
    $
    4.75
    
    
    5.8 years
    
    $
    50,000
  3. Discontinued Operations
 Rockford Home Group.
    Three months endedMarch 31,2006(In thousands)Revenues
    
    $
    17Cost of sales
    
    
    11Net income
    
    $
    6
 8




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Rockford Corporation and Subsidiaries
 Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
 4. Inventories
  December 31,
    
    
    March 31,2006
    
    
    2007(In thousands)Raw materials
    
    $
    4,801
    
    
    $
    4,558Work-in-progress
    
    
    563
    
    
    
    544Finished goods
    
    
    14,248
    
    
    
    13,534$
    19,612
    
    
    $
    18,636
 5. Income (Loss) Per Share
  Three months endedMarch 31,2006
    
    
    2007(In thousands, except pershare data)Numerator:Loss from continuing operations
    
    $
    (2,059
    )
    
    $
    (867
    )Income from discontinued operations
    
    
    6
    
    
    
    Net loss
    
    $
    (2,053
    )
    
    $
    (867
    )Denominator:Denominator for basic net loss per share
    
    
    9,385
    
    
    
    9,392Effect of dilutive securities:Employee stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Dilutive potential common shares
    
    
    
    
    
    
    Denominator for diluted net income (loss) per share
    
    
    9,385
    
    
    
    9,392Loss per common share:Loss from continuing operationsBasic
    
    $
    (0.22
    )
    
    $
    (0.09
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.09
    )Income from discontinued operationsBasic
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    0.00
    
    
    $
    0.00Net lossBasic
    
    $
    (0.22
    )
    
    $
    (0.09
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.09
    )
  9




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Rockford Corporation and Subsidiaries
 Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
 6. Notes Payable and Long-Term Debt
    7. Disposal Of Assets
 Q-Logic.
 10




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Rockford Corporation and Subsidiaries
 Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
 8. Special Charges
    Three months endedMarch 31, 2007Liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    LiabilityDecember 31,
    
    Reserve
    
    
    
    
    
    Adjustments
    
    March 31,2006
    
    Recorded
    
    Payments
    
    To Reserve
    
    2007Post Employment Costs:
    
    $
    615
    
    
    $
    1,077
    
    
    $
    229
    
    
    $
    
    
    
    $
    1,463
 9. Income Taxes
    11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Continuing
Operations
  Overview
     
    
    overall softness in the aftermarket channel;
    
    aggressive pricing and promotional activity by competitors in the aftermarket channel; and
    
    continuing distribution channel shifts.
  12




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Results of Operations
  Three months endedMarch 31,2006
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    73.7
    
    
    
    70.1Gross profit
    
    
    26.3
    
    
    
    29.9Operating expenses:Sales and marketing
    
    
    17.4
    
    
    
    13.1General and administrative
    
    
    12.0
    
    
    
    15.7Research and development
    
    
    2.5
    
    
    
    3.1Total operating expenses
    
    
    31.9
    
    
    
    31.9Operating loss
    
    
    (5.6
    )
    
    
    (2.0
    )Interest and other expense, net
    
    
    1.3
    
    
    
    1.3Loss from continuing operations before income tax
    
    
    (6.9
    )
    
    
    (3.3
    )Income tax expense
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (6.9
    )
    
    
    (3.3
    )Income discontinued operations
    
    
    0.0
    
    
    
    Net loss
    
    
    (6.9
    )%
    
    
    (3.3
    )%
     Geographic Distribution of Sales
  Three months endedMarch 31,2006
    
    
    2007(In thousands)Region:(1)United States
    
    $
    25,663
    
    
    $
    22,033Other Americas
    
    
    1,729
    
    
    
    1,820Europe
    
    
    1,521
    
    
    
    1,599Asia
    
    
    1,015
    
    
    
    920Total sales
    
    $
    29,928
    
    
    $
    26,372
 
 (1)
    
    Sales are attributed to geographic regions based on the location of customers. No single
foreign country accounted for greater than 10% of sales. 13




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In the following discussion, certain increases or decreases may differ due to rounding
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Net Sales
  Gross Profit
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Research and Development Expenses
 Operating Loss
 Interest and Other Expense, Net
 Income Tax Expense.
 14




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Liquidity and Capital Resources
        
    
    Rockford had no cash and cash equivalents at March 31, 2007 and December 31, 2006. Due to
the daily sweep of cash by Wachovia Capital, described below, Rockford has reclassified cash
and cash equivalents to net against its current debt balance.
    
    Rockfords net accounts receivable were $24.9 million at March 31, 2007 compared to $19.2
million at December 31, 2006. The increase in accounts receivable balances is primarily due
to sales of Rockfords new 2007 products that were introduced late in the first quarter of
2007.
    
    Rockfords inventory position decreased from $19.6 million at the end of 2006 to $18.6
million at March 31, 2007. This inventory decrease was primarily due to improved inventory
turns, and the reduction of end of life inventory during the first quarter of 2007.
 15




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
    
    Accounts payable increased $4.4 million, from $7.1 million at December 31, 2006 to $11.5
million at March 31, 2007. This increase was primarily due to higher inventory purchases
related to Rockfords 2007 new products.
 Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both
a Subjective Acceleration Clause and a Lock-Box Arrangement
   Contractual Obligations
  Critical Accounting Policies and Estimates
 Income Taxes.
  Inflation
  16




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    Material Weaknesses of Disclosure Controls and Procedures
  17




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Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  18




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Item 6. Exhibits and Reports on Form 8-K
  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, 1999+4.1
    
    Specimen Common Stock Certificate+4.2
    
    Reference is made to the Articles of Incorporation, as amended, and the Restated Bylaws,
as amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.7 for a description of the
rights of the holders of Common Stock.31.1
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 for William R. Jackson.31.2
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard G. Vasek.32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 +
    
    Previously filed with our registration statement on Form S-1, which the SEC declared effective on April 19, 2000 and/or
amendments++
    
    Previously filed on August 11, 2000 with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.  
    
    March 22, 2007 Report disclosing on Item 9 that Rockford had issued a news release
regarding Rockfords results of operations for the year ended December 31, 2006. This report
furnished a copy of the press release under Item 9 of Form 8-K.
    
    February 15, 2007 report disclosing on Item 5 that Rockfords Chief Executive Officer,
Gary Suttle, had announced his retirement as CEO. This report furnished a copy of the press
release under Item 9 of Form 8-K.
    
    January 24, 2007 report disclosing on Item 1 that Rockford entered into a binding
agreement settling an outstanding patent infringement lawsuit.
 19




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SIGNATURES
  ROCKFORD CORPORATIONDate: May 3, 2007
    By:
    /s/ Richard G. VasekRichard G. VasekVice President of Finance,
Chief Financial Officer and Secretary
(Principal Financial Officer and Duly Authorized Officer) 20




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EXHIBIT INDEX
 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, 1999+4.1
    
    Specimen Common Stock Certificate+4.2
    
    Reference is made to the Articles of Incorporation, as amended, and the Restated Bylaws, as
amended, filed as Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.7 for a description of the rights
of the holders of Common Stock.31.1
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for William R. Jackson.31.2
    
    Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 for Richard G. Vasek.32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 +
    
    Previously filed with our registration statement on Form S-1, which the SEC declared effective on April 19, 2000 and/or
amendments++
    
    Previously filed on August 11, 2000 with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 21