##### 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, 2006
 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 9, 2006, there were 9,385,970 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  March 31, 2006 (Unaudited) and December 31, 2005Condensed Consolidated Statements of Operations  Three Months Ended March 31, 2006 and 2005 (Unaudited)Condensed Consolidated Statements of Cash Flows  Three Months Ended March 31, 2006 and 2005 (Unaudited)Notes to Condensed Unaudited Consolidated Financial Statements  March 31, 2006Item 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. Rick FactorsItem 6. Exhibits and Reports on Form 8-KSignaturesCertificationsEX-10.71EX-10.72EX-10.73EX-31.1EX-31.2EX-32
  2




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Forward-Looking Statements
    3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
  (In thousands except per share data)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    Accounts receivable, less allowances of $2,202 and $2,307 at March 31, 2006
and December 31, 2005, respectively
    
    
    24,496
    
    
    
    24,721Inventories
    
    
    17,340
    
    
    
    18,618Income taxes receivable
    
    
    372
    
    
    
    168Prepaid expenses and other current assets
    
    
    4,196
    
    
    
    3,901Current assets of discontinued operations
    
    
    245
    
    
    
    289Total current assets
    
    
    46,649
    
    
    
    47,697Property and equipment, net
    
    
    2,977
    
    
    
    3,104Other assets
    
    
    1,745
    
    
    
    1,497Total assets
    
    $
    51,371
    
    
    $
    52,298Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    9,881
    
    
    $
    10,182Accrued salaries and incentives
    
    
    1,535
    
    
    
    1,317Accrued warranty
    
    
    1,903
    
    
    
    1,982Other accrued expenses
    
    
    5,265
    
    
    
    4,890Current portion of capital lease and other long-term liabilities
    
    
    280
    
    
    
    Asset-based credit facility
    
    
    6,047
    
    
    
    6,109Total current liabilities
    
    
    24,911
    
    
    
    24,480Notes payable, less unaccreted discount of $291 and $313 at March 31, 2006 and
December 31, 2005, respectively
    
    
    9,209
    
    
    
    9,187Long-term portion of capital lease and other long-term liabilities
    
    
    594
    
    
    
    Total liabilities
    
    
    34,714
    
    
    
    33,667Shareholders equity:Common stock, $.01 par value  Authorized shares  40,000
Issued shares  9,386 shares at March 31, 2006 and 9,384 at December 31, 2005
    
    
    94
    
    
    
    94Additional paid-in capital
    
    
    37,620
    
    
    
    37,548Retained deficit
    
    
    (21,461
    )
    
    
    (19,408
    )Accumulated other comprehensive income
    
    
    404
    
    
    
    397Total shareholders equity
    
    
    16,657
    
    
    
    18,631Total liabilities and shareholders equity
    
    $
    51,371
    
    
    $
    52,298
   4




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##### Table of Contents



(In thousands, except per share data)
 Three months endedMarch 31,2006
    
    
    2005Net sales
    
    $
    29,928
    
    
    $
    39,616Cost of goods sold
    
    
    22,070
    
    
    
    28,293Gross profit
    
    
    7,858
    
    
    
    11,323Operating expenses:Sales and marketing
    
    
    4,940
    
    
    
    5,828General and administrative
    
    
    3,660
    
    
    
    4,413Research and development
    
    
    1,001
    
    
    
    811Total operating expenses
    
    
    9,601
    
    
    
    11,052Operating income (loss)
    
    
    (1,743
    )
    
    
    271Interest and other expense, net
    
    
    316
    
    
    
    746Loss from continuing operations before income taxes
    
    
    (2,059
    )
    
    
    (475
    )Income tax expense
    
    
    
    
    
    
    16Loss from continuing operations
    
    
    (2,059
    )
    
    
    (491
    )Income (loss) from discontinued operations
    
    
    6
    
    
    
    (117
    )Net loss
    
    $
    (2,053
    )
    
    $
    (608
    )Net loss per common share:Income (loss) from continuing operationsBasic
    
    $
    (0.22
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.05
    )Income (loss) from discontinued operationsBasic
    
    $
    0.00
    
    
    $
    (0.01
    )Diluted
    
    $
    0.00
    
    
    $
    (0.01
    )Net lossBasic
    
    $
    (0.22
    )
    
    $
    (0.07
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.07
    )Weighted average shares:Basic
    
    
    9,385
    
    
    
    9,233Diluted
    
    
    9,385
    
    
    
    9,233
  5




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##### Table of Contents



(In thousands)
 Three months endedMarch 31,2006
    
    
    2005Cash flow from continuing operating activities:Net loss from continuing operations
    
    $
    (2,059
    )
    
    $
    (491
    )Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:Depreciation and amortization
    
    
    712
    
    
    
    1,009Gain on divestiture of business
    
    
    (58
    )
    
    
    Loss on exit of European leases
    
    
    700
    
    
    
    Gain on sale of property and equipment
    
    
    (2
    )
    
    
    (15
    )Share based compensation expense
    
    
    68
    
    
    
    Provision for doubtful accounts
    
    
    3
    
    
    
    196Provision for inventory
    
    
    116
    
    
    
    187Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,234
    )
    
    
    (3,521
    )Inventories
    
    
    295
    
    
    
    4,850Prepaid expenses and other
    
    
    65
    
    
    
    (219
    )Accounts payable
    
    
    269
    
    
    
    (3,931
    )Accrued salaries and incentives
    
    
    218
    
    
    
    311Accrued warranty
    
    
    (64
    )
    
    
    (65
    )Income taxes payable (receivable)
    
    
    (204
    )
    
    
    21Other accrued expenses
    
    
    526
    
    
    
    (917
    )Net cash used in operating activities
    
    
    (649
    )
    
    
    (2,585
    )Cash flow from investing activities:Purchases of property and equipment
    
    
    (151
    )
    
    
    (143
    )Proceeds from sale of property and equipment
    
    
    2
    
    
    
    93Net proceeds from divestiture of businesses
    
    
    750
    
    
    
    (Increase) decrease in other assets
    
    
    91
    
    
    
    (106
    )Net cash provided by (used in) investing activities
    
    
    692
    
    
    
    (156
    )Cash flow from financing activities:Net proceeds from (payments on) bank debt and short term notes
    
    
    (46
    )
    
    
    2,756Payments on capital lease obligations
    
    
    (9
    )
    
    
    Proceeds from employee stock purchase plan
    
    
    
    
    
    
    48Proceeds from exercise of stock options
    
    
    5
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (50
    )
    
    
    2,804Effect of exchange rate changes on cash
    
    
    7
    
    
    
    (63
    )Net 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
    
    
    
    51Cash flow used in investing activities
    
    
    
    
    
    
    (51
    )Cash flow used in financing activities
    
    
    (17
    )
    
    
    Net increase in cash flow from discontinued operations
    
    $
    
    
    
    $
    
  6




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##### Table of Contents



1. Basis of Presentation
 Unaudited Interim Financial Information
    Comprehensive Loss
  Three months endedMarch 31,2006
    
    
    2005(In thousands)Net loss
    
    $
    (2,053
    )
    
    $
    (608
    )Foreign currency translation adjustments
    
    
    7
    
    
    
    (63
    )Total comprehensive loss
    
    $
    (2,046
    )
    
    $
    (671
    )
 2. Share-based Compensation
   7




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WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueBalance at December 31, 2005
    
    
    1,582,264
    
    
    $
    4.70Granted
    
    
    50,000
    
    
    $
    3.47Exercised
    
    
    (1,750
    )
    
    $
    2.69Terminated/expired
    
    
    (2,950
    )
    
    $
    6.38Balance at March 31, 2006
    
    
    1,627,564
    
    
    $
    4.66
    
    
    6.4 years
    
    $
    882,000
   Three months endedMarch 31,2006
    
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    .46
    
    
    
    .46Risk-free interest rate
    
    
    4.7
    %
    
    
    3.4
    %Expected life of options
    
    5 years
    
    5 years
  8




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##### Table of Contents



Three monthsendedMarch 31,2005(In thousands,except pershare data)Net loss as reported
    
    $
    (608
    )Proforma SFAS No. 123 expense
    
    
    (63
    )Proforma net loss
    
    $
    (671
    )Proforma loss per common share:Basic
    
    $
    (0.07
    )Diluted
    
    $
    (0.07
    )
  3. Discontinued Operations
 Rockford Home Group.
    Three months endedMarch 31,2006
    
    
    2005(In thousands)Revenues
    
    $
    17
    
    
    $
    1,951Cost of sales
    
    
    11
    
    
    
    1,246Operating expenses
    
    
    
    
    
    
    823Interest and other (income) expense, net
    
    
    
    
    
    
    (1
    )Net income (loss)
    
    $
    6
    
    
    $
    (117
    )
 9




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##### Table of Contents



4. Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Raw materials
    
    $
    7,865
    
    
    $
    6,126Work-in-progress
    
    
    1,381
    
    
    
    1,494Finished goods
    
    
    8,094
    
    
    
    10,998$
    17,340
    
    
    $
    18,618
 5. Income (Loss) Per Share
  Three months endedMarch 31,2006
    
    
    2005(In thousands, except pershare data)Numerator:Loss from continuing operations
    
    $
    (2,059
    )
    
    $
    (491
    )Income (loss) from discontinued operations
    
    
    6
    
    
    
    (117
    )Net loss
    
    $
    (2,053
    )
    
    $
    (608
    )Denominator:Denominator for basic net loss per shareEffect of dilutive securities:
    
    
    9,385
    
    
    
    9,233Employee stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Dilutive potential common shares
    
    
    
    
    
    
    Denominator for diluted net income (loss) per share
    
    
    9,385
    
    
    
    9,233Loss per common share:Loss from continuing operationsBasic
    
    $
    (0.22
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.05
    )Income (loss) from discontinued operationsBasic
    
    $
    0.00
    
    
    $
    (0.01
    )Diluted
    
    $
    0.00
    
    
    $
    (0.01
    )Net lossBasic
    
    $
    (0.22
    )
    
    $
    (0.07
    )Diluted
    
    $
    (0.22
    )
    
    $
    (0.07
    )
  10




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6. Notes Payable and Long-Term Debt
  Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement
  7. Disposal Of Assets
 Q-Logic.
 8. Restructuring
  11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Continuing
Operations
  Overview
    Adoption of SFAS No. 123R
  12




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Results of Operations
  Three months endedMarch 31,2006
    
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    73.7
    
    
    
    71.4Gross profit
    
    
    26.3
    
    
    
    28.6Operating expenses:Sales and marketing
    
    
    16.5
    
    
    
    14.7General and administrative
    
    
    12.2
    
    
    
    11.1Research and development
    
    
    3.4
    
    
    
    2.1Total operating expenses
    
    
    32.1
    
    
    
    27.9Operating income (loss)
    
    
    (5.8
    )
    
    
    0.7Interest and other expense, net
    
    
    1.1
    
    
    
    1.9Loss from continuing operations before income tax
    
    
    (6.9
    )
    
    
    (1.2
    )Income tax expense
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (6.9
    )
    
    
    (1.2
    )Loss from discontinued operations
    
    
    0.0
    
    
    
    (0.3
    )Net loss
    
    
    (6.9
    )%
    
    
    (1.5
    )%
     Geographic Distribution of Sales
  Three months endedMarch 31,2006
    
    
    2005(In thousands)Region:(1)United States
    
    $
    25,663
    
    
    $
    33,036Other Americas
    
    
    1,729
    
    
    
    2,385Europe
    
    
    1,521
    
    
    
    2,797Asia
    
    
    1,015
    
    
    
    1,398Total sales
    
    $
    29,928
    
    
    $
    39,616
 
 (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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##### Table of Contents



In the following discussion, certain increases or decreases may differ due to rounding
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
 Net Sales
  Gross Profit
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Research and Development Expenses
 Operating Income (Loss)
 Interest and Other Expense, Net
 Income Tax Expense.
 14




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##### Table of Contents



Liquidity and Capital Resources
       
    
    Rockford had no cash and cash equivalents at March 31, 2006 and December 31, 2005. 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 $24.5 million at March 31, 2006 compared to $24.7
million at December 31, 2005. The decrease in accounts receivable balances is primarily due
to the reduction of trade receivables related to the divestiture of Rockfords Q-Logic
enclosure business.
 15




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##### Table of Contents




    
    Rockfords inventory position decreased from $18.6 million at the end of 2005 to $17.3
million at March 31, 2006. This inventory decrease was primarily due to improved inventory
turns, and the reduction of inventory related to the divestiture of the Q-Logic enclosure
business.
    
    Accounts payable decreased $0.3 million, from $10.2 million at December 31, 2005 to $9.9
million at March 31, 2006. This decrease was primarily due to lower inventory purchases.
 Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both
a Subjective Acceleration Clause and a Lock-Box Arrangement
   Contractual Obligations as of March 31, 2006
  Payments due by periodLess than
    
    More thanContractual Obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsAsset-based credit facility
    
    $
    7,117
    
    
    $
    504
    
    
    $
    6,613
    
    
    
    
    
    
    
    Notes payable
    
    $
    10,889
    
    
    $
    427
    
    
    $
    855
    
    
    $
    9,607
    
    
    
    Capital leases and other long-term liabilities
    
    $
    874
    
    
    $
    280
    
    
    $
    321
    
    
    $
    204
    
    
    $
    69Operating Leases
    
    $
    5,457
    
    
    $
    2,150
    
    
    $
    2,928
    
    
    $
    379
    
    
    
    
   Critical Accounting Policies and Estimates
  16




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##### Table of Contents



Revenue Recognition. Revenue Recognition in Financial Statements.
 
    
    Persuasive evidence of an arrangement exists;
    
    The price to the customer is fixed or determinable; and
    
    Collectibility is reasonably assured.
   Share-Based Compensation.
 Intangible Assets. Business
Combinations Goodwill and Other Intangible Assets.
 Allowance for Doubtful Accounts.
 Inventory.
 Warranty.
 17




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Income Taxes.
 Inflation
  New Accounting Standards
 Accounting for Servicing of Financial Assets Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
     18




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    Material Weaknesses of Disclosure Controls and Procedures
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  19




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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.10.71
    
    Asset Purchase Agreement between
Rockford Corporation, Audio Innovations, Inc., and Advanced Integration, LLC, dated as of March 31, 200610.72
    
    Loan and Security Agreement is
between Advanced Integration, LLC as borrower and Rockford Corporation as lender, dated March 31, 200610.73
    
    Subordination and Intecreditor
Agreement among Rockford Corporation, Advanced Integration, LLC, and Stillwater National Bank And Trust Company, dated as of March 31, 200631.1
    
    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 W. Gary Suttle.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 23, 2006 Report disclosing on Item 9 that Rockford had issued a news release
regarding Rockfords results of operations for the year, ended December 31, 2005. This
report furnished a copy of the press release under Item 9 of Form 8-K.
    
    March 31, 2006 report disclosing on Item 9 that Rockford had issued a news release
regarding the timely filing of its Annual Report on Form 10-K. This report furnished a
copy of the press release under Item 9 of Form 8-K.
 20




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##### Table of Contents



SIGNATURES
  ROCKFORD CORPORATIONDate: May 9, 2006
    By:
    /s/ Richard G. VasekRichard G. VasekVice President of Finance,

Chief Financial Officer and Secretary

(Principal Financial Officer and Duly Authorized Officer) 21




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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.10.71
    
    Asset Purchase Agreement between Rockford Corporation, Audio Innovations, Inc., and
Advanced Integration, LLC, dated as of March 31, 200610.72
    
    Loan and Security Agreement is between Advanced Integration, LLC as borrower and Rockford
Corporation as lender, dated March 31, 200610.73
    
    Subordination and Intecreditor Agreement among Rockford Corporation, Advanced
Integration, LLC, and Stillwater National Bank And Trust Company, dated as of March 31,
200631.1
    
    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 W. Gary Suttle.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. 22