SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

Commission File Number 000-30138

ROCKFORD CORPORATION

(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 an accelerated filer (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 June 30, 2004, there were 9,025,563 shares of Common Stock, $.01 par value per share, outstanding. This is the only class of common stock of the Company registered under Section 12(g) of the Securities Act of 1933.

ROCKFORD CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

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.

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.

PART I. FINANCIAL INFORMATION

Item 1.       Financial Statements

ROCKFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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.

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ROCKFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

See notes to condensed consolidated financial statements.

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ROCKFORD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements.

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Rockford Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004

1.

Basis of Presentation

Unaudited Interim Financial Information

We have prepared our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States for 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, we have made all adjustments (consisting of normal recurring accruals) necessary for a fair presentation.

Operating results for the three-month and six-month periods ended June 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 June 30, 2003 interim financial statements and the December 31, 2003 consolidated balance sheet in order to conform to the June 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) income and (loss) earnings 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:

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For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the option’s vesting period.

2.

Inventories

Inventories consist of the following:

3.

Net (Loss) Income Per Share

The following table sets forth the computation of basic and diluted net (loss) income per share:

At June 30, 2004, options to purchase approximately 425,051 shares and warrants to purchase 649,810 shares of Rockford stock were excluded from the calculation of the diluted net loss per share because they were anti-dilutive. At June 30, 2003, options to purchase approximately 541,000 shares of Rockford stock were excluded from the calculation of the diluted net income per share because they were anti-dilutive.

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4.

Convertible Debt and Warrants

On June 11, 2004, Rockford completed the private placement of $12.5 million of Rockford’s 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 private placement closed, and Rockford issued the notes and warrants, as of June 11, 2004.

The noteholders may convert the notes into Rockford’s common stock at any time prior to the scheduled maturity date of June 10, 2009. The conversion price is $5.29 per share, which represents a 15% premium over the closing price of Rockford’s common stock on June 9, 2004. If fully converted, the Notes will convert into 2,362,949 shares of Rockford’s common stock. Rockford has the right to automatically convert the notes into common stock if the common stock trades above a specified target price for a specified period. Rockford may also force the exercise of the warrants under certain circumstances prior to their expiration date.

Rockford used the net proceeds from the sale to pay off its $4.0 million junior term loan with Hilco Capital LP (“Hilco”) and to pay down its revolving asset based credit facility with Congress Financial Corporation (Western), as agent (“Congress”). This resolves the previously reported default under the Hilco facility.

At the same time it completed the notes offering, Rockford received a waiver of its previously announced violation of covenants on the revolving credit facility with Congress. In addition, Rockford and Congress modified certain terms of the Congress facility. This amendment reduced the current availability of the line to $35.0 million until Congress is able to syndicate the balance of the facility and it added a rolling EBITDA covenant that is effective starting in August of 2004.

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 30, 2004.

Overview

Our second quarter results showed a significant improvement over the first quarter with income before taxes and minority interest improving by $5.3 million, resulting in a net loss of $3.1 million for the second quarter. Our gross margin increased by 7.1% from 20.2% to 27.3%. Our second quarter net loss included a charge of approximately $0.6 million related to the exit from the Hilco facility, described below. This expense contributed ($0.07) per share to our second quarter loss per share of ($0.27). Our loss was an improvement over the ($0.60) loss per share in the first quarter, but fell well short of the earnings per share of $0.21 achieved in the second quarter of 2003.

Our goal is to return to profitability and positive operating cash flow though increased sales and margins, reduced expenses and improved working capital management. We are beginning to see the results of our efforts, but recognize that we have significant challenges ahead of us.

Sales for the three months ended June 30, 2004 were $1.8 million less than sales for the three months ended June 30, 2003. Sales of our core Rockford Fosgate line in the second quarter of 2004 exceeded 2003 second quarter levels due to the strength of our relaunched product line. We believe sales would have been higher had we not continued to experience some of the product availability issues discussed in our first quarter 10-Q. Sales of our Lighting Audio brand for the second quarter of 2004 were well below second quarter 2003 levels, largely because 2003 included the load in sales of our 2 Fast 2 Furious promotional products. In order to preserve our domestic market presence and

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our relationships with our major customers, during the second quarter we diverted product into the US market that we would ordinarily allocate to overseas customers. This has reduced our international sales; however, we increased product shipments into these markets in June and expect to reduce our international backlog in the third quarter.

We began shipping our higher gross margin Power product line in the month of June, which contributed to an increase in our margin for June. April and May gross margins were approximately 25% versus a gross margin of 32% in June. In addition to the positive product mix change, our manufacturing variances improved significantly from approximately $3.4 million of unfavorable variances in the first quarter to $2.4 million of unfavorable variances in the second quarter. We expect variances will continue to improve now that we are producing all of our major relaunched product lines.

Our announced June 1 price increase had a minimal impact on our second quarter margins because we allowed dealers to order in May for scheduled delivery in June. Our margins in the second quarter were also negatively affected by the final significant sales of end of life products from our 2003 Rockford Fosgate product line.

Spending for sales and marketing, engineering and general and administrative functions for the six months ended June 30, 2004 versus 2003 remained flat as a result of our effort to contain operating costs. In May, we reduced headcount by 22 individuals, primarily in engineering and indirect marketing, in an effort to align the structure of these departments with our strategic goals and reduce operating costs. We recorded a reserve in May in the amount of $0.2 million to cover termination costs. We continue to review all our spending as part of our efforts to return to profitability.

We continued our efforts to improve liquidity in the second quarter with the placement of $12.5 million of convertible subordinated debt. This placement is intended to provide the bridge necessary until we return to generating positive operating cash flow. In addition, the new debt has a five year term and the interest rate is a low 4.5%.

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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:

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.

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Geographic Distribution of Sales

      Our sales by geographic region were as follows:

Six Months Ended June 30, 2004, Compared to Six Months Ended June 30, 2003

In the following discussion, certain increases or decreases may differ due to rounding.

Net Sales. Sales decreased by $1.4 million, or 1.5%, to $94.9 million for the six months ended June 30, 2004, from $96.3 million for the six months ended June 30, 2003. Major contributors to the decline include missed turns resulting from product delays and lower sales of Lightning Audio branded products. The Lightning Audio shortfall compared to the prior year was approximately $6.5 million, principally due to 2003 sales of 2 Fast 2 Furious products. An additional $0.8 million of sales decline is attributed to the same promotional products offered under the Rockford Fosgate brand name. Although sales in big-box retailers continue to show strength, declines in the domestic specialty dealer channel continue. U.S. sales in 2004 increased by 2.0% to $78.1 million compared to $77.6 million for the same period last year. International sales decreased by $2.9 million, or 15.5% to $15.8 million for the six months ended June 30, 2004, from $18.7 million for the six months ended June 30, 2003. The majority of the decrease is the result of the product delays mentioned previously, with the decrease impacting international sales because of our decision to allocate product to the US market in order to maintain US relationships.

Cost of Goods Sold<