Cobra Electronics (COBR) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 0-511

COBRA ELECTRONICS CORPORATION

(Exact name of Registrant as specified in its Charter)

DELAWARE	36-2479991
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
6500 WEST CORTLAND STREET CHICAGO, ILLINOIS	60707
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (773) 889-8870

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  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares of the Registrant’s Common Stock outstanding as of August 7, 2014 was 6,602,980

TABLE OF CONTENTS

		Page No.
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements		3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4	Controls and Procedures		26
PART II	OTHER INFORMATION
Item 1A	Risk Factors		27
Item 6	Exhibits		27
SIGNATURES			28

2

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Operations - Unaudited

(In Thousands, Except Per Share Amounts)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2014			2013			2014			2013
Net sales	$	28,739		$	25,630		$	50,120		$	47,207
Cost of sales		20,612			18,951			36,214			34,293
Gross profit		8,127			6,679			13,906			12,914
Selling, general and administrative expense		7,819			8,544			15,235			16,505
Earnings (loss) from operations		308			(1,865	)		(1,329	)		(3,591	)
Interest expense		(406	)		(150	)		(663	)		(310	)
Other income		195			86			401			439
Earnings (loss) before income taxes		97			(1,929	)		(1,591	)		(3,462	)
Tax provision (benefit)		10			14			(12	)		13
Net earnings (loss)	$	87		$	(1,943	)	$	(1,579	)	$	(3,475	)
Net earnings (loss) per common share:
Basic	$	0.01		$	(0.29	)	$	(0.24	)	$	(0.53	)
Diluted	$	0.01		$	(0.29	)	$	(0.24	)	$	(0.53	)
Weighted average shares outstanding:
Basic		6,603			6,611			6,603			6,611
Diluted		6,603			6,611			6,603			6,611

The accompanying notes are an integral part of these financial statements.

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Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) - Unaudited

(In Thousands)

	Three Months Ended					Six Months Ended
	June 30					June 30
	2014		2013			2014			2013
Net earnings (loss)	$	87	$	(1,943	)	$	(1,579	)	$	(3,475	)
Other comprehensive income (loss) net of tax:
Foreign currency translation		112		112			178			(558	)
Interest rate swap, no tax benefit		—		16			(106	)		33
Other comprehensive income (loss)		112		128			72			(525	)
Comprehensive income (loss)	$	199	$	(1,815	)	$	(1,507	)	$	(4,000	)

The accompanying notes are an integral part of these financial statements.

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Cobra Electronics Corporation and Subsidiaries

Consolidated Balance Sheets

(In Thousands)

	June 30,			December 31,
	2014			2013		��
	(Unaudited)
ASSETS
Current assets:
Cash	$	3,853		$	3,059
Receivables, net of allowance for doubtful accounts of $159 in 2014 and $126 in 2013		15,717			19,338
Inventories, primarily finished goods, net		35,715			35,810
Other current assets		3,722			3,686
Total current assets		59,007			61,893
Property, plant and equipment, at cost:
Buildings and improvements		7,027			7,010
Tooling and equipment		13,169			14,937
		20,196			21,947
Accumulated depreciation		(15,287	)		(16,724	)
Land		230			230
Property, plant and equipment, net		5,139			5,453
Other assets:
Cash surrender value of life insurance policies		8,050			7,586
Deferred income taxes, non-current		307			322
Intangible assets		7,266			7,372
Other assets		190			180
Total other assets		15,813			15,460
Total assets	$	79,959		$	82,806

The accompanying notes are an integral part of these financial statements.

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Cobra Electronics Corporation and Subsidiaries

Consolidated Balance Sheets (continued)

(In Thousands, Except Share Data)

	June 30,			December 31,
	2014			2013
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Revolving bank loan facility	$	18,674		$	20,673
Accounts payable		6,995			5,726
Accrued salaries and commissions		1,625			1,612
Accrued advertising and sales promotion costs		1,092			1,207
Accrued product warranty costs		853			1,113
Accrued income taxes		1			13
Deferred income taxes, current		182			174
Other accrued liabilities		2,904			3,102
Total current liabilities		32,326			33,620
Non-current liabilities:
Deferred compensation		7,946			7,910
Deferred income taxes		623			653
Other long-term liabilities		560			714
Total non-current liabilities		9,129			9,277
Total liabilities		41,455			42,897
Commitments and contingencies		—			—
Shareholders’ equity:
Preferred stock, $1 par value
Authorized: 1,000,000 shares
Issued: None		—			—
Common stock, $.33 1/3 par value
Authorized: 12,000,000 shares
Issued: 7,170,800 shares
Outstanding: 6,602,980 shares		2,390			2,390
Additional paid-in capital		21,634			21,532
Retained earnings		19,740			21,319
Accumulated other comprehensive loss		(1,423	)		(1,495	)
		42,341			43,746
Treasury stock, at cost (567,820 shares)		(3,837	)		(3,837	)
Total shareholders’ equity		38,504			39,909
Total liabilities and shareholders’ equity	$	79,959		$	82,806

The accompanying notes are an integral part of these financial statements.

6

Cobra Electronics Corporation and Subsidiaries

Consolidated Statements of Cash Flows - Unaudited

(In Thousands)

	Six Months Ended
	June 30
	2014			2013
Cash flows from operating activities:
Net loss	$	(1,579	)	$	(3,475	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		1,905			1,673
Deferred income taxes		(29	)		(31	)
Gain on cash surrender value (CSV) life insurance		(339	)		(564	)
Stock-based compensation		102			139
Changes in assets and liabilities:
Receivables		3,667			8,541
Inventories		179			3,040
Other assets		(457	)		(640	)
Accounts payable		1,254			(1,804	)
Other liabilities		(709	)		(1,078	)
Net cash provided by operating activities		3,994			5,801
Cash flows from investing activities:
Property, plant and equipment		(382	)		(776	)
Premiums on CSV		(125	)		(282	)
Intangible assets		(495	)		(563	)
Net cash used in investing activities		(1,002	)		(1,621	)
Cash flows from financing activities:
Bank borrowings		52,117			45,467
Bank repayments		(54,116	)		(49,536	)
Capital lease obligations		(29	)		(20	)
Net cash used in financing activities		(2,028	)		(4,089	)
Effect of exchange rate changes on cash and cash equivalents		(170	)		108
Net increase in cash		794			199
Cash at beginning of period		3,059			1,785
Cash at end of period	$	3,853		$	1,984
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	423		$	236
Income taxes	$	13		$	571

The accompanying notes are an integral part of these financial statements.

7

Cobra Electronics Corporation and Subsidiaries

Consolidated Statement of Shareholders’ Equity and Comprehensive Income (Loss) - Unaudited

(In Thousands)

								Accumulated
			Additional					Other
	Common		Paid-in		Retained			Comprehensive			Treasury
	Stock		Capital		Earnings			Income (Loss)			Stock			Total
Balance - December 31, 2013	$	2,390	$	21,532	$	21,319		$	(1,495	)	$	(3,837	)	$	39,909
Net loss		—		—		(1,579	)		—			—			(1,579	)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment		—		—		—			178			—			178
Interest rate swap, no tax benefit		—		—		—			(106	)		—			(106	)
Stock compensation expense		—		102		—			—			—			102
Balance - June 30, 2014	$	2,390	$	21,634	$	19,740		$	(1,423	)	$	(3,837	)	$	38,504

The accompanying notes are an integral part of these financial statements.

8

Cobra Electronics Corporation and Subsidiaries

Notes to Consolidated Financial Statements

For the Six Months Ended June 30, 2014 and 2013

(Unaudited)

The consolidated financial statements for the six months ended June 30, 2014 included herein have been prepared by Cobra Electronics Corporation (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The Consolidated Balance Sheet as of December 31, 2013 has been derived from the audited consolidated balance sheet as of that date. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim period a fair statement of such operations. Due to the seasonality of the Company’s business, the results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year.

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business — Cobra designs and markets consumer electronics products, which it sells primarily under the Cobra brand name principally in the United States, Canada and Europe. The Company, through its Performance Products Limited (“PPL”) subsidiary, sells products under the Snooper trade name, principally in the United Kingdom, as well as elsewhere in Europe. A majority of the Company’s products are purchased from overseas suppliers based in China, Hong Kong, Taiwan and South Korea. The consumer electronics market is characterized by rapidly changing technology and certain products may have limited life cycles. Management believes that it maintains strong relationships with its current suppliers and that, if necessary, other suppliers could be found. The extent to which a change in a supplier would have an adverse effect on the Company’s business depends on the timing of the change, the product or products that the supplier produces for the Company and the volume of that production. The Company also maintains insurance coverage that would, in certain limited circumstances, reimburse the Company for lost profits resulting from a supplier’s inability to fulfill its commitments to the Company.

Principles of Consolidation — The consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated entities are collectively referred to as the “Company”. All intercompany balances and transactions have been eliminated in consolidation.

Accounts Receivable — The majority of the Company’s accounts receivables are due from retailers and two-step distributors. Credit is extended based on an evaluation of a customer’s financial condition, including, at times, the availability of credit insurance, and, generally, collateral is not required. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for doubtful accounts.

The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, availability of credit insurance and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable against the allowance for doubtful accounts when they are judged to be uncollectible, and payments subsequently received on such receivables are credited to bad debt expense.

(2) NEW ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This new standard provides for a single comprehensive model and supersedes most current revenue recognition guidance, including industry specific guidance, and provides for enhanced disclosure requirements. The objective of the new guidance is to improve the consistency, comparability and usefulness to users of financial statements. ASU 2014-09 provides for two implementation methods (1) full retrospective application to each prior period or (2) modified retrospective application with the cumulative effect as of the date of adoption. The Company is in the process of evaluating the new pronouncement which is effective for annual reporting periods beginning after December 15, 2016 (the Company’s 2017 calendar year) and early application is not permitted.

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(3) SEGMENT INFORMATION

The Company operates in two business segments: (1) Cobra Consumer Electronics (“Cobra”) and (2) Performance Products Limited (“PPL”). The Cobra segment is comprised of Cobra Electronics Corporation, Cobra Hong Kong Limited (“CHK”) and Cobra Electronics Europe Limited (“CEEL”). Each segment has a separate sales department and maintains separate distribution channels which provide segment-exclusive product lines to its customers. There were no intersegment sales for the three and six months ended June 30, 2014. Intersegment sales of $37,000 and intersegment operating profits of $3,000 were excluded from the results for the PPL segment for the three and six months ended June 30, 2013. The financial information by business segment for the three months and six months ended June 30, 2014 and 2013 follows:

Three months — 2014 vs. 2013

	2014									2013
	COBRA			PPL			TOTAL			COBRA			PPL			TOTAL
	(in thousands)
Net sales	$	24,672		$	4,067		$	28,739		$	22,020		$	3,610		$	25,630
Cost of sales		17,948			2,664			20,612			16,536			2,415			18,951
Gross profit		6,724			1,403			8,127			5,484			1,195			6,679
Selling, general and administrative expense		6,501			1,318			7,819			7,316			1,228			8,544
Earnings (loss) from operations		223			85			308			(1,832	)		(33	)		(1,865	)
Interest expense		(406	)		—			(406	)		(150	)		—			(150	)
Other income (expense)		200			(5	)		195			105			(19	)		86
Earnings (loss) before income taxes		17			80			97			(1,877	)		(52	)		(1,929	)
Tax provision (benefit)		23			(13	)		10			29			(15	)		14
Net (loss) earnings	$	(6	)	$	93		$	87		$	(1,906	)	$	(37	)	$	(1,943	)

Six months — 2014 vs. 2013

	2014									2013
	COBRA			PPL			TOTAL			COBRA			PPL			TOTAL
	(in thousands)
Net sales	$	42,709		$	7,411		$	50,120		$	40,435		$	6,772		$	47,207
Cost of sales		31,301			4,913			36,214			29,898			4,395			34,293
Gross profit		11,408			2,498			13,906			10,537			2,377			12,914
Selling, general and administrative expense		12,585			2,650			15,235			14,077			2,428			16,505
Loss from operations		(1,177	)		(152	)		(1,329	)		(3,540	)		(51	)		(3,591	)
Interest expense		(663	)		—			(663	)		(310	)		—			(310	)
Other income (expense)		412			(11	)		401			558			(119	)		439
Loss before income taxes		(1,428	)		(163	)		(1,591	)		(3,292	)		(170	)		(3,462	)
Tax provision (benefit)		17			(29	)		(12	)		44			(31	)		13
Net loss	$	(1,445	)	$	(134	)	$	(1,579	)	$	(3,336	)	$	(139	)	$	(3,475	)

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(4) MULTIPLE ELEMENT ARRANGEMENTS

PPL bundles the sales of its navigation products with access to the AURA database and map updates. The deferred revenue was calculated using the relative selling price method based on Vendor Specific Objective Evidence (“VSOE”) and recognized over the applicable subscription period, generally two years. A summary of PPL’s deferred revenue at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014		December 31, 2013
	(in thousands)
Deferred revenue - PPL	$	1,188	$	1,110

In addition, the Company’s domestic business sells products bundled with access to the AURA database and mobile navigation products bundled with map updates. Revenues deferred from these arrangements were calculated using the relative fair market value method and recognized over the applicable subscription period, generally two years. A summary of deferred revenue for Cobra U.S. at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014		December 31, 2013
	(in thousands)
Deferred revenue - Cobra U.S.	$	207	$	297

(5) INCOME TAXES

Each quarter, the Company estimates the annual effective income tax rate (“ETR”) for the full year and applies that rate to the earnings (loss) before income taxes for tax jurisdictions not subject to a valuation allowance in determining its provision for income taxes for the interim periods. The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and the related valuation allowance requires management to make certain judgments and estimates. Changes in the estimated level of annual pre-tax earnings, tax laws and changes resulting from tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

The year-to-date ETR was less than the statutory U.S. federal income tax rate, mainly due to the taxing jurisdictions in which the Company and its foreign subsidiaries generate taxable income or loss and judgments as to the realizability of the Company’s deferred tax assets.

The Company reviews the need for a valuation allowance at each quarter-end. The U.S. operations were in a loss position for the six month period ended June 30, 2014. Based on this and other relevant information, the Company concluded it did not meet the more likely than not criteria to justify the reversal of the valuation allowance at June 30, 2014. The valuation allowance for the U.S. operations totaled $10.3 million at June 30, 2014 and December 31, 2013. The Company will continue to monitor the need for a valuation allowance throughout 2014, pursuant to the guidance of U.S. accounting principles. Should the Company demonstrate a favorable and sustainable trend for its historic and projected operating results in the U.S., a reduction in the valuation allowance and a corresponding income tax benefit may result.

(6) FINANCING ARRANGEMENTS

The Company is party to a Credit Agreement dated July 16, 2010 (as amended, the “Credit Agreement”) among the Company, BMO Harris Bank N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto from time to time (the “Lenders”). The Credit Agreement provides for a $35.0 million secured credit facility expiring on July 16, 2016.

The Credit Agreement was amended on March 6, 2014 to waive the non-compliance with the fixed charge coverage ratio for the fourth quarter of 2013, to replace the interest reserve with a $1.5 million availability block which applies to the borrowing base under the Credit Agreement and to add a 2 percent pricing fee on a portion of the amount of borrowings outstanding under the Credit Agreement. The Credit Agreement was further amended on April 2, 2014 to replace Fifth Third Bank with First Midwest Bank, as a lender. In the second quarter of 2014, $130,000 of the capitalized loan fees were written off and an additional $70,000 of the loan fees were capitalized and will be amortized over the remaining term. On May 14, 2014, the Lenders granted the Company a waiver with respect to the non-compliance with the minimum twelve-month trailing EBITDA As Defined covenant contained in the Credit Agreement of $1.5 million for the period ended March 31, 2014. The $105,000 waiver fee was expensed in the second quarter of 2014.

11

The Company did not meet the minimum twelve-month trailing EBITDA As Defined covenant of $4.3 million for the period ended June 30, 2014. On August 11, 2014, the Company and the Lenders entered into a waiver and amendment agreement pursuant to which the Lenders waived the non-compliance for the second quarter of 2014, increased the availability block to $2.0 million and changed the applicable covenant to a minimum fixed charge coverage ratio of 1.50 to 1.00 for the third quarter of 2014, the fourth quarter of 2014 and thereafter.

Borrowings under the Credit Agreement bear interest at either the base rate or the LIBOR lending rate (each as defined in the Credit Agreement), as applicable, plus the applicable margin set forth in the Credit Agreement. The Company will also pay certain fees and expenses, including (i) a commitment fee of 0.25 percent on the unused portion of the Lenders’ aggregate revolving commitment and (ii) a letter of credit fee equal to the product of the applicable margin set forth in the Credit Agreement times the face amount of the standby letters of credit and the commercial letters of credit outstanding at such time. The Credit Agreement contains customary covenants, including but not limited to financial covenants requiring the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) for the periods set forth in the Credit Agreement.

Certain other covenants under the Credit Agreement follow:

Annual capital expenditures limit (in thousands)	$	4,000
Annual dividend to shareholders limit (in thousands)	$	1,250

Pursuant to the terms of its Credit Agreement, the Company is required to make mandatory prepayments on the amounts outstanding thereunder in the event that the Company receives proceeds under certain circumstances or in connection with other specified events. Absent a waiver from lenders, a failure to comply with the covenants in the Credit Agreement could result in any outstanding indebtedness under the Credit Agreement becoming immediately due and payable and the inability to borrow additional funds under the Credit Agreement.

As a condition to the extension of the loan and the issuance of the letters of credit under the Credit Agreement, the Company has granted a security interest to the Administrative Agent, for the benefit of the Lenders, in substantially all the assets of the Company except (i) life insurance policies not collaterally assigned to the Lenders, (ii) any equipment subject to liens permitted under the Credit Agreement if such equipment is also subject to an agreement prohibiting the pledge of such equipment to the Lenders, (iii) deposit accounts used exclusively by the Company for payroll and employee retiree benefit purposes and (iv) the Company’s interest in the outstanding voting equity securities of any of its directly-owned foreign subsidiaries to the extent such interests exceed 65 percent of the outstanding voting equity securities of such foreign subsidiary.

The Company’s interest bearing debt outstanding under the revolving credit facility and credit availability under the revolving credit facility at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014		December 31, 2013
	(in thousands)
Interest bearing debt	$	18,674	$	20,673
Credit availability	$	5,441	$	8,369

The borrowing base formula to determine credit availability includes the following:

Percentage of eligible accounts receivable	85.0	%
The lesser of:
Percentage of lower of cost or market of eligible inventory	65.0	%
Percentage of appraised net orderly liquidation value of eligible inventory	85.0	%
Percentage of commercial letters of credit	65.0	%

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The borrowing base is also subject to certain limitations and reserves established at the Lender’s discretion. If necessary, the Credit Agreement permits an “overadvance” of up to $1 million for sixty consecutive days.

The weighted average interest rate for the three and six months ended June 30, 2014 and 2013 (which includes the amortization charges associated with the terminated interest rate swap, refer to Note 8, Derivatives for additional information) is summarized in the following table:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2014			2013			2014			2013
Weighted average interest rate		3.5	%		3.5	%		4.2	%		3.1	%

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash, accounts receivable, accounts payable, short-term debt and letters of credit. The carrying values of cash, accounts receivable and accounts payable approximated their fair value because of the short-term maturity of these instruments. The carrying amounts of the Company’s bank borrowings under its Credit Agreement approximated fair value because the interest rates are reset periodically to reflect current market rates. The letters of credit approximated fair value due to the short-term nature of the instruments. The fair value of letters of credit at June 30, 2014 and December 31, 2013 follows:

	June 30, 2014		December 31, 2013
	(in thousands)
Letters of credit at fair value	$	5,263	$	4,467

(8) DERIVATIVES

The Company transacts business globally with various manufacturing and distribution facilities. The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes. The Company regularly monitors foreign exchange exposures and ensures hedge contract amounts do not exceed the amounts of the underlying exposures.

The Company maintained an interest rate swap, which was terminated on July 16, 2010, to fix the interest rate for the term of the revolving credit facility and term loan under its previous Credit Agreement, thereby protecting the Company from future interest rate increases. The interest rate swap represented a cash flow hedge and was recorded at fair value and classified as a non-current liability.

Changes in the recorded fair value of the interest rate swap were recorded to Accumulated Other Comprehensive Income (Loss). The termination cost of the interest rate swap was amortized into interest expense through March 31, 2014. The interest amortization for the Company’s terminated interest rate swap reclassified from Accumulated Other Comprehensive Income (Loss) into Interest Expense during the three and six months ended June 30, 2014 and 2013 follows:

	Three Months Ended				Six Months Ended
	June 30				June 30
Income Statement Location	2014		2013		2014		2013
	(in thousands)				(in thousands)
Interest expense		—	$	16	$	10	$	33

With the conclusion of interest rate swap amortization, the residual effect of interest rate swap amounts previously charged to Accumulated Other Comprehensive Income (Loss) were reclassified to other income in the first quarter of 2014.

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(9) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock resulted in the issuance of common stock. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings (loss) per share. The earnings or loss per share for the three and six months ended June 30, 2014 and 2013 follows:

	Three Months Ended					Six Months Ended
	June 30					June 30
	2014		2013			2014			2013
	(in thousands, except per share data)					(in thousands, except per share data)
Net earnings (loss)	$	87	$	(1,943	)	$	(1,579	)	$	(3,475	)
Weighted-average shares outstanding
Basic		6,603		6,611			6,603			6,611
Diluted		6,603		6,611			6,603			6,611
Basic earnings (loss) per share	$	0.01	$	(0.29	)	$	(0.24	)	$	(0.53	)
Diluted earnings (loss) per share	$	0.01	$	(0.29	)	$	(0.24	)	$	(0.53	)

The diluted earnings per share calculations include the incremental shares of common stock issuable upon the exercise of stock options that have a market price in excess of the exercise price. When the exercise price of an option exceeds its market price, the incremental shares are excluded from the diluted earnings per share calculation. A summary of the options outstanding, the options includable and excludable from the diluted earnings per share calculations and the incremental shares included in the diluted earnings per share calculation for the three and six months ended June 30, 2014 and 2013 follows:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2014		2013		2014		2013
	(in thousands)				(in thousands)
Options included in diluted earnings (loss) per share calculation		—		—		—		—
Options excluded from diluted earnings (loss) per share calculation		325		352		325		352
Total options		325		352		325		352
	Three Months Ended				Six Months Ended
	June 30				June 30
	2014		2013		2014		2013
	(in thousands)				(in thousands)
Incremental shares included in the diluted earnings (loss) per share		—		—		—		—

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(10) COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as the change in equity of a business enterprise from transactions and other events from non-owner sources. Comprehensive income (loss) includes net earnings (loss) and other non-owner changes in equity that bypass the statement of operations and are reported in a separate component of equity. For the three and six months ended June 30, 2014 and 2013, Accumulated Other Comprehensive Income (Loss) included the foreign currency translation adjustment and a terminated interest rate swap.

A summary of the change in the Accumulated Other Comprehensive Income (Loss) from December 31, 2013 to June 30, 2014 follows:

	Interest Rate Swap			Foreign Currency Translation			Total
	(in thousands)
Balance, December 31, 2013	$	106		$	(1,601	)	$	(1,495	)
Other comprehensive income (loss) before reclassifications		—			178			178
Amounts reclassified from accumulated other comprehensive income (loss)		(106	)		—			(106	)
Balance, June 30, 2014	$	—		$	(1,423	)	$	(1,423	)

A summary of the amounts reclassified out of Accumulated Other Comprehensive Income (Loss) for the six months ended June 30, 2014 follows:

Accumulated Other Comprehensive Income (Loss) Components	2014
	(in thousands)
Interest rate swap - amortization	$	10
Reclassification of the residual effect of the interest rate swap		(116	)
Total	$	(106	)

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(11) OTHER CURRENT ASSETS

The components of other current assets at June 30, 2014 and December 31, 2013 follow:

	June 30,		December 31,
	2014		2013
	(in thousands)
Prepayments	$	2,420	$	2,518
Vendor and miscellaneous receivables		1,302		1,168
	$	3,722	$	3,686

(12) INTANGIBLE ASSETS

The components of intangible assets at June 30, 2014 and December 31, 2013 follow:

	June 30,			December 31,
	2014			2013
	(in thousands)
Internal use software	$	3,227		$	3,109
Less accumulated amortization		(2,818	)		(2,701	)
		409			408
ERP internal software system		4,408			4,397
Less accumulated amortization		(4,279	)		(4,242	)
		129			155
Trademarks, trade names and patents		7,573			7,253
Less accumulated amortization		(2,606	)		(2,424	)
		4,967			4,829
Product software, net of impairment		1,665			1,494
Less accumulated amortization, net of impairment		(1,127	)		(956	)
		538			538
Customer relationships		5,313			5,144
Less accumulated amortization		(4,090	)		(3,702	)
		1,223			1,442
Total	$	7,266		$	7,372

Product software assets and accumulated amortization shown in the preceding table are shown net of the respective impairment charges. There were no product software impairment charges for the three and six months ended June 30, 2014 and 2013. The anticipated amortization expense of intangible assets over the next five years ending December 31 follows:

Year	Cost
	(in thousands)
2015	$	1,000
2016		800
2017		400
2018		400
2019		400
	$	3,000

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(13) COMMITMENTS AND CONTINGENCIES

The Company is subject to various unresolved legal actions which arise in the normal course of its business. None of these matters are expected to have a material adverse effect on the Company’s financial position or results of operations. However, the ultimate resolution of these matters cannot be determined at this time.

The Company’s outstanding inventory purchase orders with suppliers at June 30, 2014 and December 31, 2013 were as follows:

	June 30,		December 31,
	2014		2013
	(in thousands)
Open purchase orders	$	18,864	$	14,266

(14) PRODUCT WARRANTY COSTS AND INVENTORY VALUATION RESERVES

The Company warrants to the consumer who purchases its products that it will repair or replace, without charge, defective products within one year of purchase. The Company also has a return policy for its customers that allow them to return, to the Company, products returned to them by their customers for full or partial credit based on when the Company’s customer last purchased these products. Accordingly, the Company maintains a warranty reserve and a liquidation reserve.

The warranty reserve reflects historical return rates by product category multiplied by the most recent six months of unit sales and the unit standard cost of each model. The Company uses the most recent six months of unit sales in its estimate, as historical experience indicates that most returns will occur within six months of the Company’s original sale date. Therefore, judgments must be made based on historical return rates and how the returned product will be disposed of either by liquidation or return to vendors for credit on new purchases. The amount of the reserve reflects the estimated quantity of future returns and the expected return costs. The expected return cost is based on the difference between the purchase cost and the return credit from the vendor or the difference between the purchase cost and the liquidation sale. This reserve may vary based upon the level of sales and changes in historical return rates from quarter to quarter as well as estimated costs of disposal, either liquidation prices or the credit given by vendors. A roll-forward of the warranty reserve follows:

	Six Months			Year
	Ended			Ended
	June 30,			December 31,
	2014			2013
	(in thousands)
Accrued product warranty costs, beginning of period	$	1,113		$	1,040
Warranty provision		1,085			2,100
Warranty expenditures		(1,345	)		(2,027	)
Accrued product warranty costs, end of period	$	853		$	1,113

The liquidation reserve represents the write-down of returned product from our customers to its net realizable value. Returned inventory is either sold to various liquidators or returned to vendors for partial credit against similar, new models; this decision depends upon the estimated future demand for the models. Judgments are made as to whether various models are to be liquidated or returned to the vendor, taking into consideration the liquidation prices expected to be received and the amount of vendor credit. The amount of the reserve reflects the quantity of returned products on-hand and the expected return costs. The expected return cost is the difference between the purchase cost and the return credit from the vendor or the difference between the purchase cost and the

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liquidation sale. This reserve can fluctuate significantly from quarter to quarter depending upon quantities of returned inventory on hand and the estimated liquidation price or vendor credit per unit. A roll-forward of the liquidation reserve, which is classified as a contra inventory item on the balance sheet, follows:

	Six Months			Year
	Ended			Ended
	June 30,			December 31,
	2014			2013
	(in thousands)
Liquidation reserve, beginning of period	$	1,004		$	1,134
Liquidation provision		1,192			2,379
Liquidation of models		(1,047	)		(2,509	)
Liquidation reserve, end of period	$	1,149		$	1,004

The Company maintains a net realizable value (“NRV”) reserve to write-down, as necessary, certain inventory not previously sold to customers, except for that covered by the liquidation reserve discussed above, below cost. The reserve includes models where it is determined that the NRV is less than cost. Thus, judgments must be made about which slow-moving, excess or non-current models are to be included in the reserve and the estimated net realizable value of such models. The estimated realizable value of each model is the per unit price that it is estimated to be received if the model was sold in the marketplace. This reserve will vary depending upon the specific models selected, the estimated NRV for each model and quantities of each model that are determined will be sold below cost from quarter to quarter. A roll-forward of the NRV reserve, which is classified as a contra inventory item on the balance sheet, follows:

	Six Months			Year
	Ended			Ended
	June 30,			December 31,
	2014			2013
	(in thousands)
Net realizable reserve, beginning of period	$	383		$	263
NRV provision		311			599
NRV write-offs		(310	)		(479	)
Net realizable reserve, end of period	$	384		$	383

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(15) INTEREST EXPENSE AND OTHER INCOME (EXPENSE)

The components of Interest Expense for the three and six months ended June 30, 2014 and 2013 follow:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2014		2013		2014		2013
	(in thousands)				(in thousands)
Interest on debt	$	138	$	110	$	347	$	229
Waiver and amortization of loan fees		268		24		306		48
Interest rate swap amortization		—		16		10		33
	$	406	$	150	$	663	$	310

The components of Other Income (Expense) for the three and six months ended June 30, 2014 and 2013 follow:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2014			2013			2014			2013
	(in thousands)						(in thousands)
CSV income	$	235		$	106		$	339		$	564
Foreign exchange expense		(17	)		(9	)		(33	)		(106	)
Other - net		(23	)		(11	)		95			(19	)
	$	195		$	86		$	401		$	439

(16) SUBSEQUENT EVENTS

The Company did not meet the minimum twelve-month trailing EBITDA As Defined covenant of $4.3 million for the period ended June 30, 2014. On August 11, 2014, the Company and the Lenders entered into a waiver and agreement pursuant to which the Lenders waived the non-compliance for the second quarter of 2014, increased the availability block to $2.0 million and changed the applicable covenant to a minimum fixed charge coverage ratio of 1.50 to 1.00 for the third quarter of 2014, the fourth quarter of 2014 and thereafter.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

ANALYSIS OF RESULTS OF OPERATIONS

Executive Summary - Second Quarter

Operating earnings for the second quarter of 2014 totaled $308,000 compared to an operating loss of $1.9 million for the same quarter last year. Key factors contributing to the $2.2 million improvement in operating results for 2014’s second quarter when compared to 2013’s second quarter were as follows:

• Net sales increased $3.1 million, or 12.1 percent, attributable to sales increases in both segments

• Gross profit increased $1.4 million and gross margin improved over 2 points to 28.3 percent

• Selling, general and administrative expenses decreased $725,000, or 8.5 percent, mainly due to lower legal and professional fees

Interest expense increased $256,000 mainly due to the 2014 write-off of financing fees for bank amendments and waivers. Other income increased $109,000 primarily due to higher CSV income for the current year quarter compared to the prior year’s quarter.

The combined impact of the favorable change in operating results, the higher interest expense and the increase in other income generated a $2.0 million increase in pre-tax earnings for the second quarter of 2014 compared to the second quarter of 2013.

The Company’s consolidated tax provision for the second quarter of 2014 totaled $10,000 compared to a $14,000 tax provision in the same quarter last year.

For the second quarter of 2014, the Company reported a net income of $87,000, or $0.01 per share, compared to a net loss of $1.9 million, or $0.29 per share, for the second quarter of 2013.

Executive Summary - Six Months

Operating loss for the first six months of 2014 totaled $1.3 million compared to an operating loss of $3.6 million for the same period last year. Key factors contributing to the $2.3 million improvement in operating results for the first half of 2014 as compared to 2013 were as follows:

• Net sales increased $2.9 million, or 6.2 percent, attributable to sales increases in both segments

• Gross profit increased $992,000 and gross margin improved by nearly half a point to 27.8 percent

• Selling, general and administrative expenses decreased $1.3 million, or 7.7 percent, mainly due to lower legal and professional fees

Interest expense increased $353,000 mainly due to the 2014 write-off of the financing fees for bank amendments and waivers. Other income decreased mainly due to lower CSV income and a smaller foreign exchange loss when compared to the prior year.

The combined impact of the favorable change in operating results, the higher interest expense and the decrease in other income generated a $1.9 million reduction in the pre-tax loss for the first six months of 2014 compared to the comparable prior year period.

The Company’s consolidated tax benefit for the first half of 2014 totaled $12,000 compared to a $13,000 tax provision for the year ago period.

For the six months ended June 30, 2014, the Company reported a net loss of $1.6 million, or $0.24 per share, compared to a net loss of $3.5 million or $0.53 per share, for the same period in 2013.

Valuation Allowance

The U.S. operations were in a loss position for the six month period ended June 30, 2014. Based on this and other relevant information, the Company concluded it did not meet the more likely than not criteria to justify the reversal of the valuation allowance at June 30, 2014. The valuation allowance for the U.S. operations totaled $10.3 million at June 30, 2014 and December 31, 2013. The Company will continue to monitor the need for a valuation allowance throughout 2014, pursuant to the guidance of U.S. accounting principles. Should the Company demonstrate a favorable and sustainable trend for its historic and projected operating results in the U.S., a reduction in the valuation allowance and a corresponding income tax benefit may result.

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EBITDA

The following table shows the reconciliation of net earnings (loss) to EBITDA and EBITDA As Defined for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended June 30						Six Months Ended June 30
	2014			2013			2014			2013
	(in thousands)						(in thousands)
Net earnings (loss)	$	87		$	(1,943	)	$	(1,579	)	$	(3,475	)
Depreciation/amortization		1,087			833			1,905			1,673
Interest expense, excluding waiver and loan fee amortization		138			126			357			262
Income tax provision (benefit)		10			14			(12	)		13
EBITDA		1,322			(970	)		671			(1,527	)
Stock option expense		41			65			102			139
CSV gain		(235	)		(106	)		(339	)		(564	)
Other non-cash items		(212	)		(43	)		(422	)		(287	)
EBITDA As Defined	$	916		$	(1,054	)	$	12		$	(2,239	)

Other non-cash items shown in the preceding EBITDA reconciliation include exchange gains and losses and deferred revenue.

EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA As Defined represents EBITDA adjusted to conform with the EBITDA measurement used to measure compliance with the financial covenants under the Company’s Credit Agreement. The Company believes EBITDA is a useful performance indicator and is frequently used by management, securities analysts and investors to judge operating performance between time periods and among other companies. The Company uses EBITDA As Defined to assess operating performance and ensure compliance with financial covenants.

EBITDA and EBITDA As Defined are non-GAAP performance indicators that should be used in conjunction with GAAP performance measurements such as net sales, operating profit and net income to evaluate the Company’s operating performance. EBITDA and EBITDA As Defined are not alternatives to net income or cash flow from operations determined in accordance with GAAP. Furthermore, EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.

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Second Quarter — 2014 vs. 2013

The following table summarizes net sales and pre-tax earnings by business segment for the three months ended June 30, 2014 and 2013:

										2014 vs. 2013
	2014				2013					Increase (Decrease)
	(In Thousands)
	Net		Pre-tax		Net		Pre-tax			Net		Pre-tax
Business Segment	Sales		Earnings		Sales		Loss			Sales		Earnings
Cobra	$	24,672	$	17	$	22,020	$	(1,877	)	$	2,652	$	1,894
PPL		4,067		80		3,610		(52	)		457		132
Total Company	$	28,739	$	97	$	25,630	$	(1,929	)	$	3,109	$	2,026

Cobra Business Segment

Net sales increased $2.7 million, or 12.0 percent, in the second quarter of 2014 to $24.7 million compared to $22.0 million in the second quarter of 2013. Domestic sales were up $5.1 million and international sales were down $2.4 million. The increase in domestic sales was attributed to higher sales of Two-Way radio, Citizens Band radio, Portable Power Pack, Truck Navigation and Dash Cam products. Sales of the recently introduced Truck Navigation products (6500 PRO HD and 8500 PRO HD), the new Two-Way radio products (CXT 1095 FLT and 1035 FLT), the four new Portable Power Pack models and the three new Dash Cam models contributed to the domestic sales increase for the second quarter of 2014 compared to the prior year. The international sales decline from 2013, mainly in the Two-Way radio, Citizens Band radio and Detection products, was attributable to the economic conditions in certain of the Company’s export markets and the political turmoil in parts of Eastern Europe.

Gross profit increased $1.2 million, or 22.6 percent, to $6.7 million for the second quarter of 2014, and gross margin increased to 27.3 percent from 24.9 percent in the prior year’s quarter. The improved gross margin for the domestic business was due to the higher margin on Two-Way radios and favorable sales mix, which included more sales of the higher margin products such as Citizens Band radios, Truck Navigation, and Portable Power Packs. International gross margins improved due to sales mix, lower product costs and a foreign exchange gain.

Selling, general and administrative expense decreased $815,000, or 11.1 percent, to $6.5 million for the second quarter of 2014 compared to $7.3 million in the prior year’s quarter and, as a percentage of net sales, were 26.4 percent and 33.2 percent, respectively. The $326,000 increase in variable selling expenses reflected higher merchandising program costs and sales commissions due to higher sales volume. Fixed selling and general administrative expenses decreased $1.1 million or 18.1 percent, mainly due to lower legal and professional fees, which included settlement expenses for the Fleming patent litigation in the second quarter of 2013.

Interest expense for the second quarter of 2014 increased $256,000 to $406,000 from the year ago period mainly because of the 2014 write-off of the financing fees for the bank amendment that was required due to a change in the participant bank from Fifth Third Bank to First Midwest Bank and the waiver required for the non-compliance with the twelve-month trailing EBITDA As Defined covenant for the first quarter of 2014. Other income for the second quarter of 2014 increased to $200,000 from $105,000 in the second quarter of 2013 mainly due to higher CSV income in 2014 when compared to 2013.

As a result of the above, the Cobra segment had pre-tax earnings of $17,000 for the current year’s quarter compared to the $1.9 million pre-tax loss reported for 2013’s second quarter.

Performance Products Limited (“PPL”) Business Segment

Net sales for the second quarter of 2014 increased $457,000, or 12.7 percent, to $4.1 million from $3.6 million for the second quarter of 2013. The increase in net sales was mainly due to Satellite Navigation products. Foreign currency translation due to the strength of the British pound versus the U.S. dollar significantly affected the sales revenue. On a local currency basis, net sales for 2014 increased 2.9 percent from the prior year.

Gross profit increased $208,000, or 17.4 percent, to $1.4 million for the second quarter of 2014, while gross margin improved 1.4 points to 34.5 percent from 33.1 percent in the prior year’s quarter. The improved gross margin was mainly due to sales mix, including new products with higher margins and lower sales of the low margin Trackers.

Selling, general and administrative expenses for the second quarter of 2014 totaled $1.3 million compared to $1.2 million for the second quarter of 2013 and as a percentage of net sales were 32.4 percent and 34.0 percent, respectively. Excluding the translation effect of the stronger British pound, selling, general and administrative expenses were down 1.8 percent due to lower advertising and promotion costs.

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Other expense for the second quarter of 2014 was $5,000 compared to $19,000 for the second quarter of 2013, principally due to a lower foreign exchange loss in 2014 as compared to 2013.

As a result of the above, the PPL segment had pre-tax earnings of $80,000 for the second quarter of 2014 compared to a pre-tax loss of $52,000 for the second quarter of 2013.

Six Months — 2014 vs. 2013

The following table summarizes net sales and pre-tax earnings by business segment for the six months ended June 30, 2014 and 2013:

											2014 vs. 2013
	2014					2013					Increase (Decrease)
	(In Thousands)
	Net		Pre-tax			Net		Pre-tax			Net		Pre-tax
Business Segment	Sales		Loss			Sales		Loss			Sales		Loss
Cobra	$	42,709	$	(1,428	)	$	40,435	$	(3,292	)	$	2,274	$	1,864
PPL		7,411		(163	)		6,772		(170	)		639		7
Total Company	$	50,120	$	(1,591	)	$	47,207	$	(3,462	)	$	2,913	$	1,871

Cobra Business Segment

Net sales increased $2.3 million, or 5.6 percent, for the six months ended June 30, 2014 to $42.7 million compared to $40.4 million in the year ago period. Domestic sales were up $4.9 million and international sales were down $2.6 million. The increase in domestic sales was attributed to higher sales of Two-Way radio, Citizens Band radio, Portable Power Pack, Truck Navigation and Dash Cam products. Sales of the new Two-Way radio products (1035 FLT and 1095 FLT), the four new Portable Power Pack models, the recently introduced Truck Navigation products (6500 PRO HD and 8500 PRO HD) and the three new Dash Cam models contributed to the domestic sales increase for the first six months of 2014 compared to 2013. The international sales decline, mainly in the Two-Way radio, Citizens Band radio and Detection products, was attributable to the weather and economic conditions in certain of the Company’s export markets and the political turmoil in parts of Eastern Europe.

Gross profit increased $871,000, or 8.3 percent, to $11.4 million for the first half of 2014, and gross margin increased to 26.7 percent from 26.1 percent in the prior year period. The improved gross margin for the domestic market was partially offset by lower margin for the international market. The improved gross margin for the domestic business was due to the higher margin on Two-Way radios and favorable sales mix, which included more sales of the higher margin products such as Citizens Band radios, Truck Navigation, and Portable Power Packs. The decline in the international gross margin was mainly due to pricing concessions to move older products and lower sales volume on the higher margin detection products in Eastern Europe.

Selling, general and administrative expense decreased $1.5 million, or 10.6 percent, to $12.6 million for the first half of 2014 compared to $14.1 million for the year ago period and, as a percentage of net sales, were 29.5 percent and 34.8 percent, respectively. The increase in variable selling expenses of $487,000 reflected higher merchandising program costs and sales commissions due to higher sales volume. Fixed selling and general administrative expenses decreased $2.0 million, or 16.0 percent, mainly due to lower legal and professional fees, which included the litigation expenses incurred in the first six months of 2013 for the Fleming patent lawsuit.

Interest expense for the first half of 2014 increased $353,000 to $663,000 from the year ago period mainly because of the 2014 write-off of the financing fees for the bank amendment that was required due to a change in the participant bank from Fifth Third Bank to First Midwest Bank and the waiver required for the non-compliance with the twelve-month trailing EBITDA As Defined covenant for the first quarter of 2014. Other income for the first six months of 2014 decreased to $412,000 from $558,000 for 2013 mainly due to lower CSV income in 2014 when compared to 2013.

As a result of the above, the Cobra segment had a pre-tax loss of $1.4 million for the current year’s first half compared to the $3.3 million pre-tax loss reported for the first six months of 2013.

Performance Products Limited (“PPL”) Business Segment

Net sales for the first six months of 2014 increased $639,000, or 9.4 percent, to $7.4 million from $6.8 million for the same period of 2013. The increase in net sales was mainly due to Satellite Navigation and GPS products. Foreign currency translation due to the strength of the British pound versus the U.S. dollar significantly affected the sales revenue. On a local currency basis, net sales for 2014 increased 1.2 percent from the prior year.

Gross profit increased $121,000, or 5.1 percent, to $2.5 million for the first half of 2014, while gross margin decreased 1.4 points to 33.7 percent from 35.1 percent in the prior year. The decreased gross margin was mainly due to lower average selling prices for the older Satellite Navigation, AVN and golf products.

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Selling, general and administrative expenses for the first half of 2014 totaled $2.7 million compared to $2.4 million for the first six months of 2013 and as a percentage of net sales were 35.8 percent and 35.9 percent, respectively. Excluding the translation effect of the stronger British pound, selling, general and administrative expenses were up 1.3 percent mainly due to the costs related to the new General Manager in the Cobra Europe group.

Other expense for the first six months of 2014 was $11,000 compared to a $119,000 expense for the same period of 2013, principally due to a lower foreign exchange loss in 2014 as compared to 2013.

As a result of the above, the PPL segment had a pre-tax loss of $163,000 for six months ended June 30, 2014 compared to a pre-tax loss of $170,000 for the same period of 2013.

LIQUIDITY AND CAPITAL RESOURCES

The Company is party to a Credit Agreement dated July 16, 2010 (as amended, the “Credit Agreement”) among the Company, BMO Harris Bank N.A., as administrative agent (the “Administrative Agent”), and the lenders party thereto from time to time (the “Lenders”). The Credit Agreement provides for a $35.0 million secured credit facility expiring on July 16, 2016. At June 30, 2014, the Company had interest bearing debt outstanding of $18.7 million and credit availability of approximately $5.4 million under the Credit Agreement.

The Credit Agreement was amended on March 6, 2014 to waive the non-compliance with the fixed charge coverage ratio for the fourth quarter of 2013, to replace the interest reserve with a $1.5 million availability block which applies to the borrowing base under the Credit Agreement and to add a 2 percent pricing fee on a portion of the amount of borrowings outstanding under the Credit Agreement. On May 14, 2014, the Lenders granted the Company a waiver with respect to non-compliance with the minimum twelve-month trailing EBITDA As Defined covenant contained in the Credit Agreement of $1.5 million for the period ended March 31, 2014.

The Company did not meet the minimum twelve-month trailing EBITDA As Defined covenant of $4.3 million for the period ended June 30, 2014. On August 11, 2014, the Company and the Lenders entered into a waiver and amendment agreement pursuant to which the Lenders waived the non-compliance for the second quarter of 2014, increased the availability block to $2.0 million and changed the applicable covenant to a minimum fixed charge coverage ratio of 1.50 to 1.00 for the third quarter of 2014, the fourth quarter of 2014 and thereafter.

As amended, the Credit Agreement provides a minimum covenant based on a fixed charge coverage ratio of 1.50 to 1.00 for the third and fourth quarter of 2014 and thereafter. A failure to comply, absent a waiver from Lenders, with the covenants contained in the Credit Agreement could result in any outstanding indebtedness under the Credit Agreement becoming immediately due and payable and in the inability to borrow additional funds under the Credit Agreement. The Company believes that, for the foreseeable future, it will be able to continue to fund its operations and seasonal working capital requirements with cash generated from operations and borrowings under the Credit Agreement.

For the six months ended June 30, 2014, net cash flows provided by operating activities totaled $4.0 million. Net cash inflows from operations and non-cash add-backs included a net loss of $1.6 million, non-cash depreciation and amortization of $1.9 million, a decrease in accounts receivable of $3.7 million, an increase in accounts payable of $1.3 million and a decrease in inventories of $179,000. Offsetting these inflows were decreases in other liabilities of $709,000 and increases in other assets of $457,000. The decrease in accounts receivable was due to normal cash collections and lower sales for the second quarter of 2014 as compared to the fourth quarter of 2013. Accounts payables increased due to the payment timing for receipts of the new product rollouts. The inventory decrease reflected the net effect of sales volume for the first half of 2014 and inventory purchases for new product rollouts for the second and third quarters of 2014. The decrease in other liabilities was attributable to a lower payroll accrual for the second quarter due to the timing of the pay cycles compared to year end and lower promotional and warranty accruals due to the lower sales volume for the second quarter of 2014 compared to the prior year’s fourth quarter. The increase in other assets resulted from higher vendor receivables and additions to prepaid assets.

Working capital requirements are seasonal, with demand for working capital being higher later in the year as customers begin purchasing for the holiday selling season. The Company believes that cash generated from operations and from borrowings under its Credit Agreement will be sufficient in 2014 to fund its working capital needs.

Net cash used in investing activities for the first six months of 2014 totaled $1.0 million. Property, plant and equipment additions, which totaled $382,000, were primarily for tooling. Intangible asset additions, which totaled $495,000, included in-house development of software for new products, patents and trademarks. Premiums for life insurance totaled $125,000.

Net cash used in financing activities for the six months ended June 30, 2014 totaled $2.0 million and mainly resulted from repayments of bank borrowings.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies and estimates consist of those that reflect significant judgments and uncertainties and could potentially result in materially different results under different assumptions. For a description of the Company’s critical accounting policies and estimates, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the Company as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts ultimately differ from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 found at Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the SEC, press releases or otherwise. Statements contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss and capital expenditures, statements regarding future operations, anticipated financing needs, compliance with financial covenants in loan agreements, liquidity, plans for acquisitions or sales of assets or businesses, plans relating to products or services, assessments of materiality, expansion into international markets, growth trends in the consumer electronics industry, technological and market developments in the consumer electronics industry, the availability of new consumer electronics products and predictions of future events, as well as assumptions relating to these statements. In addition, when used in this report, the words “anticipates,” “believes,” “should,” “estimates,” “expects,” “intends,” “plans” and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements contained in this report or in other Company filings, press releases, or otherwise. Factors that could contribute to or cause such differences include, but are not limited to, unanticipated developments in any one or more of the following areas:

• global economic and market conditions, including continuation of or changes in the current economic environment;

• ability of the Company to introduce new products to meet consumer needs, including timely introductions as new consumer technologies are introduced, and customer and consumer acceptance of these new product introductions;

• pressure for the Company to reduce prices for older products as newer technologies are introduced;

• significant competition in the consumer electronics business, including introduction of new products and changes in pricing;

• factors related to foreign manufacturing, sourcing and sales (including foreign government regulation, trade and importation, and health and safety concerns, and effects of fluctuation in exchange rates);

• ability of the Company to maintain adequate financing, to bear the interest cost of such financing and to remain in compliance with financing covenants;

• impairment of intangible assets due to market conditions and/or the Company’s operating results;

• ability of the Company to defend its intellectual property rights and the costs associated with such defense;

• changes in law; and

• other risk factors, which may be detailed from time to time in the Company’s SEC filings.

Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date set forth on the signature page hereto. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks related to changes in foreign currency exchange and interest rates are inherent to the Company’s operations. Changes to these factors could cause fluctuations in the Company’s net earnings, cash flows and the fair values of financial instruments subject to market risks. Future changes in the applicable interest rate will affect the interest expense incurred by the Company on its outstanding indebtedness.

There have been no material changes in the Company’s market risk since December 31, 2013.

Item 4. Controls and Procedures

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures have also been designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As of June 30, 2014, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of June 30, 2014.

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item  1A.Risk Factors

There have been no material changes to the risk factors as previously disclosed under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 6. Exhibits

a) Exhibit 10.1 Waiver and Eighth Amendment to Credit Agreement dated August 11, 2014 among Cobra Electronic Corporation, BMO Harris Bank N.A., as administrative agent, and the lenders party thereto.

b) Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

c) Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

d) Exhibit 32.1 Section 1350 Certification of the Chief Executive Officer.

e) Exhibit 32.2 Section 1350 Certification of the Chief Financial Officer.

f) Exhibit 101 Financial statements and footnotes formatted in XBRL (eXtensible Business Reporting Language).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COBRA ELECTRONICS CORPORATION
By	/s/ Robert J. Ben
	Robert J. Ben
	Senior Vice President, Chief Financial Officer and Secretary
	(Principal Accounting and Financial Officer and duly authorized signatory)

Dated: August 13, 2014

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INDEX TO EXHIBITS

Exhibit Number	Description of Document
10.1	Waiver and Eighth Amendment to Credit Agreement dated August 11, 2014 among Cobra Electronic Corporation, BMO Harris Bank N.A., as administrative agent, and the lenders party thereto.
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.
101	Financial statements and footnotes formatted in XBRL (eXtensible Business Reporting Language).

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