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Rockford Restructures, Cutting MB Quart Germany

10/11/2004 02:00:00 AM Eastern

Rockford Corporation announced plans to restructure its operations and place MB Quart in Germany in receivership due to losses of $750,000 per quarter.

Rockford also sold its majority interest in SimpleDevices, a Wi-Fi software business in which it is a majority owner. Simple Devices software is at the core of Rockford's Omnifi Wi-Fi products, but Rockford said this will not affect its ability to continue to offer OmniFi products. Stated Gary Suttle, Rockford's president and CEO: “We had an option to sell it at a very attractive price. We figured we didn't have to own Simple Technologies to get access to the technology.”

Rockford said MB Quart products will continue to be sold in the North America, although it remains to be seen if Rockford will retain the rights to sell the brand overseas. Most of the production of MB Quart products had already been moved from Germany, said Suttle. “Subwoofers are made in Michigan, amplifiers in our Arizona amplifier plant and in Korea. Some products of MB Quart has been outsourced to China for some time, like coaxials and entry-level product, and the remainder is made in the plant in Germany.”

Rockford's overall plan is to return to its core car audio business and divest itself of non-core related businesses, claimed the company. The company plans a “re-evaluation of our home audio businesses,” said Suttle. Among Rockford's current home and professional audio brands are Hafler, Fosgate Audionics and NHT. Car audio brands include Rockford Fosgate, MB Quart, Q-Logic and Lightning Audio.

Suttle noted, “Our core mobile audio business remains strong. We are number one in amplifiers and number two in speakers. And we continue to capture market share.” The company said it will reduce inventory, cut costs and find ways to engineer more value into products. The company also plans to grow its car audio OEM business.

Continued losses at Rockford's MB Quart GmbH subsidiary in Germany led the company to announce it will discontinue the German operations of its subsidiary MB Quart GmbH. “After considering several options, Rockford has decided to place MB Quart GmbH into receivership under German law. This action will eliminate approximately $750 thousand in operating loss per quarter and is expected to have a minimal cash impact,” said Suttle.

Rockford also failed to meet the requirements of the EBITDA (earnings before interest, taxes, depreciation and amortization) covenant of its asset based credit facility with Congress Financial as of the end of August. This constitutes a default under the current terms of the agreement, as does placing MB Quart into receivership, said Rockford.

The company expects it will be able to restructure its credit with Congress. “We have very good, strong relations with Congress. They are quite supportive, and we have every confidence we will restructure the credit going forward,” said Suttle.

In terms of growing its core business, Rockford noted that it recently increased distribution by adding Pep Boys, and it will begin shipping its Lightning Audio and Q-Logic brands to the chain in October, followed by OmniFi in November.

Rockford said its OEM business increased 340 percent this year and continues to grow. The OEM market itself is growing at an annual rate of 10 percent, said Suttle. The company is currently working with Nissan and has contracts with Mitsubishi. It is also in negotiations with other car makers, Rockford said.

A spokesman added, “This summer saw solid demand for mobile audio products, and we worked out much of the backlog in the U.S. We expect sales for the remainder of the year will be slightly higher than last year despite lower overall market sales in the U.S. The company has worked through many of the production issues experienced during the first half of the year. We believe the shortcomings in our product development process that we experienced in the first half have been addressed sufficiently to prevent this from occurring next year.”

To facilitate its strategic realignment, Rockford plans to take additional non-cash reserves or write-offs during the third quarter. These are expected to total an estimated $25 million, detailed as follows:

  • Approximately $11 million in reserves against Rockford's investment in and inter-company loan to MB Quart GmbH

  • Approximately $7 million to establish a valuation allowance against Rockford's U.S. deferred tax assets

  • Approximately $3 million for Omnifi and other inventory

  • Approximately $4 million for goodwill associated with Rockford's acquisition of the Q-Logic brand and business

Rockford noted that its shareholder's equity remains substantially positive after these adjustments.