<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1999
REGISTRATION NO.333-79285
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
ROCKFORD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
ARIZONA 3651 86-0394353
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
546 SOUTH ROCKFORD DRIVE
TEMPE, ARIZONA 85281
(480) 967-3565 (800) 366-2349
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
W. GARY SUTTLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROCKFORD CORPORATION
546 SOUTH ROCKFORD DRIVE
TEMPE, ARIZONA 85281
(480) 967-3565 (800) 366-2349
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
KEVIN L. OLSON RONALD G. SKLOSS
STEPTOE & JOHNSON LLP BROBECK, PHLEGER & HARRISON LLP
40 N. CENTRAL AVENUE, SUITE 2400 301 CONGRESS AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004 AUSTIN, TEXAS 78701
(602) 257-5275 (512) 477-5495
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for this same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for this same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share....... 3,387,824 $13 $50,647,969 $14,080.00
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Of which $12,788.00 was previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 12, 1999
PROSPECTUS
3,387,824 SHARES
[ROCKFORD CORPORATION LOGO]
COMMON STOCK
Of the 3,387,824 shares of common stock offered, we are offering 2,500,000
shares and the selling shareholders, none of whom are involved in our day-to-day
operations, are offering 887,824 shares. We will not receive any of the proceeds
from the shares sold by the selling shareholders. This is our initial public
offering and no public market currently exists for our shares. We have applied
to have our common stock approved for quotation on The Nasdaq National Market
under the symbol "ROFO." We anticipate that the initial public offering price
will be between $11 and $13 per share.
<TABLE>
<CAPTION>
PER
SHARE TOTAL
--------- -------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Rockford...................... $ $
Proceeds, before expenses, to selling shareholders.......... $ $
</TABLE>
The underwriters have a 30-day option to purchase up to 508,174 additional
shares of common stock from us to cover over-allotments, if any.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY PERSON TO TELL
YOU OTHERWISE.
<TABLE>
<S> <C>
DAIN RAUSCHER WESSELS NEEDHAM & COMPANY, INC.
a division of Dain
Rauscher Incorporated
</TABLE>
, 1999
<PAGE> 3
Inside front cover
Entire page: [Close up picture of Rockford wolf]
Upper left: [Diamond R and Rockford Fosgate Logo]
Down right margin: Pictures of Rockford Fosgate products:
2 channel/multi-channel amplifiers
Subwoofers
Source Units
Trunk Mount/In Dash Signal Processors
Coax/Full Range Speakers
Bottom left: [Vicious car audio trademark]
Inside gatefold of page 2:
Left margin: [Diamond R, Rockford Fosgate, and car audio for fanatics Logo]
Upper left: Independent Specialty Retailers, 5000 stores worldwide
[Photo of specialty retailer storefront and Rockford product display]
Middle left: Independent National Chains, 300+ Stores in the USA
[Photo of Best Buy store and Rockford product display]
Bottom left: Global Fanatics
[Photo of car audio contestants] Gen Y consumers show off car audio in
Israel
[Photo of vehicle with Rockford logos and wolf] Show cars with wolf
attitude in Germany
[Photo of boys with car audio trophy] Gen Y Americans fly Team RF colors
[Photo of vehicle with Rockford wolf] Japanese consumers using Rockford
Fosgate products from the USA
Upper center: Rockford Worldwide Distribution
[Map naming countries where Rockford Fosgate products are distributed]
Upper right: [Photo of Rockford Fosgate demo truck]
Rockford Fosgate Demo Truck and Car Audio System Layout
[Photos and description of specific products, including source unit,
crossovers, amplifiers, full-range speakers, and woofers]
Over 6000 watts
Lower right: www.rockfordfosgate.com
[images of wolf logo and product information from our website]
Text in center: In 1973, Fosgate, the first glimmer of hope in high performance
car audio, emerged from the primordial soup of 8 tracks and wax paper speakers.
In 1998, Rockford Fosgate redefined the evolution of the car audio industry. If
you haven't heard of us, you've HEARD us. If you haven't seen us, you've HEARD
us. If you haven't been annoyed by what we do, you'll be intrigued by how we do
it. To understand what Rockford Corporation is all about, you only need to
understand our customers. They are young adults who are passionate about their
lifestyle. Typically customers begin as hobbyists who become enthusiasts:
possessed by the dream of evolving to the fanatic fringe. They are loud, they
are proud, and most importantly, we believe they are brand loyal to the cult
extreme. They choose Rockford Fosgate!
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Forward-Looking Statements.................................. 15
Ownership of Intellectual Property.......................... 15
Use of Proceeds............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Dividend Policy............................................. 19
Selected Consolidated Financial Data........................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 31
Management.................................................. 43
Certain Transactions........................................ 50
Principal and Selling Shareholders.......................... 52
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 59
Underwriting................................................ 61
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find More Information......................... 63
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS
PROSPECTUS MAY ONLY BE ACCURATE AS OF THE DATE OF THIS PROSPECTUS.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights only selected information contained elsewhere in
this prospectus. Before investing in our common stock, you should read the
entire prospectus carefully, including the "Risk Factors" section and the
financial statements and the notes to those statements.
ROCKFORD
We are a leading designer, manufacturer and distributor of high-performance
car audio systems. Our car audio products are sold in the worldwide car audio
aftermarket to consumers who want to improve their existing car audio systems.
We market our car audio amplifiers, speakers, source units and accessories under
our Rockford Fosgate brand name. We also sell professional audio products under
our Hafler brand name.
For nearly 20 years, Rockford Fosgate has been the brand of choice among
our core consumers, 16-24 year old males. We believe our core consumers, part of
the 10-24 year old demographic group known as Generation Y, perceive our
Rockford Fosgate brand as the "coolest" car audio brand. Many of our core
consumers are extremely, almost fanatically, loyal to our Rockford Fosgate
brand, and proudly display our logos on their cars, clothing and even their
bodies.
We enhance our brand image by using hard-hitting, "in your face" marketing
combined with cutting-edge technology and innovation. We believe our efforts
have generated loyalty among both our core consumers, who devote a significant
portion of their time and disposable income to their car audio systems, and
among the independent retailers who use our brand, products and distinctive
marketing programs to attract Generation Y and other consumers.
We believe our ability to deliver innovative products to market quickly
appeals to our core consumers' desire for distinctive, "leading edge" products
and powerful, high quality sound. To maintain and further enhance our unique
heritage, we continue to develop new products that are reliable, durable,
technologically advanced and designed to set industry standards in their product
categories. Our Rockford Fosgate and Hafler products have won numerous consumer
and industry awards.
We believe that total worldwide factory sales of car audio products were
approximately $14.7 billion in 1998, of which $6.3 billion represented
aftermarket sales. The international market for car audio products is more than
twice the size of the U.S. market.
We currently sell our car audio products in the U.S. through a network of
over 1,500 independent retail stores. Internationally, we sell our car audio
products in over 60 countries through independent distributors and sales
representatives. We distribute our car audio products to consumers primarily
through specialty dealers, audio/video retailers, national consumer electronics
chains and catalog merchants. Historically, specialty dealers have dominated the
retail distribution of car audio aftermarket products.
Over the last several years, as a result of changing consumer buying
patterns, the audio/ video and consumer electronics retailers have been the
fastest growing distribution channels for car audio products, increasing their
combined market share from 34.5% in 1987 to 50% in 1997. To capitalize on
changing industry dynamics, in early 1999, we began distributing our products
through Best Buy, one of the largest national consumer electronics chains, in
all of its more than 300 stores nationwide.
4
<PAGE> 6
Our goal is to design, produce and distribute the best engineered and most
recognized and respected brands of high-performance car and professional audio
products in the world. Each element of our strategy is intended to enhance and
reinforce the global brand images of Rockford Fosgate and Hafler among consumers
and retailers. Key elements of our growth strategy are to:
- Expand Channels of Distribution. We intend to broaden the distribution
channels through which we market our products. For example, in August
1998 we began selling our products to Crutchfield, a car and home audio
catalog retailer in the U.S., and in early 1999 we began distributing our
car audio products through Best Buy, a leading consumer electronics and
car audio retailer. At the same time, we intend to continue our strategy
of selective distribution, which we believe increases brand loyalty,
enhances retailers' profit margins and encourages retailers to carry a
broad range of our products.
- Develop a Second Brand. We intend to develop a second brand of car audio
products to be sold at lower price points. In June 1999, we acquired
Lightning Audio, a manufacturer and distributor of car audio accessories.
We intend to introduce a line of moderately priced, high-performance
amplifiers and subwoofers under the Lightning Audio brand name in 2000.
- Capitalize on International Opportunities. We believe the Rockford
Fosgate brand name is as widely recognized in many foreign countries as
it is in the U.S. We intend to aggressively expand our marketing efforts
and strengthen our distribution in order to increase sales of Rockford
Fosgate, Lightning Audio and Hafler products in international markets.
- Introduce New and Innovative Products. We believe our ability to quickly
deliver innovative products to market appeals to consumers' desire for
"leading edge" products and provides a significant competitive advantage.
Our objective is to introduce new products or re-engineer approximately
one-third of our existing product line annually. We also intend to take
advantage of the strength of our brand names to expand our product lines.
- Promote Our Unique Brand Image. We intend to continue to enhance the
Rockford Fosgate, Lightning Audio and Hafler brands by projecting an
image that appeals to consumers who appreciate brand authenticity and
value.
As a result of our growth strategy, we believe we can significantly grow our
business and become a much larger participant in the $6.3 billion car audio
aftermarket industry worldwide.
------------------------
Our principal executive offices are located at 546 South Rockford Drive,
Tempe, Arizona 85281, and our telephone number is (480) 967-3565. Our corporate
Web site is located at www.rockfordcorp.com. Information contained on our Web
site does not constitute a part of this prospectus.
5
<PAGE> 7
THE OFFERING
Except as otherwise indicated, all information in this prospectus assumes a
4.3-for-1 split of the common stock to be effected prior to the completion of
this offering and assumes no exercise of the underwriters' over-allotment
option.
Common stock offered by Rockford.......... 2,500,000 shares
Common stock offered by selling
shareholders.............................. 887,824 shares
Use of proceeds........................... For repayment of debt, working
capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.... ROFO
OWNERSHIP AFTER THE OFFERING
After the offering, we will have 7,363,861 shares outstanding, including:
- 4,735,201 shares outstanding on June 30, 1999 and immediately before the
offering;
- 2,500,000 shares issued in the offering; and
- 128,660 shares we will issue to selling shareholders who currently own
our 8.5% convertible subordinated debentures or warrants and who will
convert them into shares in order to sell the shares in this offering.
The converted securities will include $278,953 of our debentures, which
will convert into 114,236 shares, and warrants for 14,424 shares.
In addition, we will have 2,437,515 shares reserved for issuance to holders
of outstanding options and convertible securities that may dilute the percentage
of common stock you own. These include:
- 293,123 shares of common stock that we will issue upon conversion of the
8.5% convertible subordinated debentures, assuming conversion of $278,953
of debentures into 114,236 shares in this offering;
- 1,995,981 shares of common stock that we will issue upon exercise of
outstanding options, with a weighted average exercise price of $3.33 per
share;
- 64,500 shares of common stock that we will issue upon exercise of
outstanding options, with an exercise price of the per share price of
this offering; and
- 83,911 shares of common stock that we will issue upon exercise of
outstanding warrants, with a weighted average exercise price of $1.25 per
share.
We have also reserved 336,984 shares of common stock for future issuance of
options under our 1994 and 1997 stock option plans and 361,200 shares of common
stock for future issuance under our 1999 employee stock purchase plan.
The following table shows ownership of our outstanding shares and of our
outstanding options and convertible securities immediately after the offering:
<TABLE>
<CAPTION>
OPTIONS AND
OUTSTANDING CONVERTIBLE
SHARES SECURITIES(1) TOTAL
----------- ------------- ---------
<S> <C> <C> <C>
Officers, directors and employees.............. 3,409,275 2,287,774 5,697,049
Other existing shareholders.................... 566,762 149,741 716,503
New shareholders............................... 3,387,824 0 3,387,824
--------- --------- ---------
Total........................................ 7,363,861 2,437,515 9,801,376
========= ========= =========
</TABLE>
- ---------------
(1) Includes all options and convertible securities, even if they are not then
exercisable.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the following summary consolidated financial data in
conjunction with our financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. Set forth below are summary
consolidated statements of operations data for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999. Also set
forth below is summary consolidated balance sheet data as at June 30, 1999, on
an actual, pro forma and pro forma as adjusted basis. The pro forma data gives
effect to the conversion of $278,953 of the 8.5% convertible subordinated
debentures into 114,236 shares of common stock and to the issuance of 14,424
shares upon exercise of warrants, both to occur upon completion of this
offering. The pro forma as adjusted data gives effect to the sale by us of
2,500,000 shares in this offering at an assumed initial public offering price of
$12 per share, our receipt of the estimated proceeds of that sale after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, and the application of the net proceeds therefrom. See
"Capitalization."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Sales............................... $82,937 $87,423 $87,577 $45,923 $65,911
Cost of goods sold.................. 57,057 57,321 55,146 28,783 40,221
------- ------- ------- ------- -------
Gross profit........................ 25,880 30,102 32,431 17,140 25,690
Operating income.................... 725 4,646 5,523 3,114 7,071
Net income (loss)................... $ (932) $ 1,632 $ 2,305 $ 1,351 $ 3,820
======= ======= ======= ======= =======
Net income (loss) per share:
Basic............................. $ (0.23) $ 0.37 $ 0.52 $ 0.31 $ 0.85
======= ======= ======= ======= =======
Diluted........................... $ (0.23) $ 0.31 $ 0.41 $ 0.25 $ 0.64
======= ======= ======= ======= =======
Shares used to calculate net income
(loss) per share:
Basic............................. 4,114 4,401 4,412 4,411 4,508
======= ======= ======= ======= =======
Diluted........................... 4,114 5,688 5,951 5,725 6,081
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................ $18,150 $18,191 $30,829
Total assets........................................... 52,859 52,900 64,108
Long-term debt and capital lease obligations........... 16,132 15,853 1,391
Total liabilities...................................... 42,977 42,698 27,066
Shareholders' equity................................... 9,882 10,202 37,042
</TABLE>
7
<PAGE> 9
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
risks, including those described below. You should consider carefully these risk
factors, together with all of the other information included in this prospectus,
before you decide to purchase shares of our common stock.
THE CAR AUDIO INDUSTRY IS RAPIDLY EVOLVING AND OUR PRODUCTS MAY NOT SATISFY
SHIFTING CONSUMER DEMAND OR COMPETE SUCCESSFULLY WITH COMPETITORS' PRODUCTS.
Our business is based on the demand for car audio products and our ability
to introduce distinctive new products that anticipate and capitalize upon
emerging technologies and changing consumer demands. If we do not introduce new
products, misinterpret consumer preferences or fail to respond to changes in the
marketplace, consumer demand for our products could decrease and our brand image
could suffer. In addition, our competitors may introduce superior designs or
business strategies, undermining our distinctive image and our products'
desirability. Any of these events could cause our sales to decline.
WE MAY LOSE MARKET SHARE AND ERODE OUR BRAND IMAGE AS WE TRY TO ADAPT TO
CHANGING DISTRIBUTION CHANNELS FOR CAR AUDIO PRODUCTS.
We must successfully capitalize on new distribution strategies because the
principal distributors of our products are losing market share. We historically
distributed our products primarily through specialty dealers who sold only car
audio products. Over the last several years, specialty dealers have lost market
share to audio/video retailers and large consumer electronics retailers. We
believe this trend is likely to continue and we are now increasing distribution
of our products through these emerging distribution channels. This change in
distribution channels creates significant risks that:
- We may alienate our specialty dealer base. Some specialty dealers may
react to our new strategy by reducing their purchases or even replacing
our products with competing product lines. Reduced specialty dealer
loyalty could reduce our market share because specialty dealers continue
to hold a large share of the market and contribute substantially to our
brand image among our core consumers; and
- Our brand image may erode. Selling in less-specialized distribution
channels may erode our brand image, which could decrease our product
prices and profit margins.
Our inability to manage our new distribution channels in a way that mitigates
these risks may reduce our profitability.
ANY DECREASE IN DEMAND FOR OUR AMPLIFIERS OR SPEAKERS COULD SIGNIFICANTLY
DECREASE OUR SALES.
A significant portion of our future revenue depends upon sales of our
amplifier and speaker products. These two product lines collectively accounted
for approximately 78% of our sales in calendar year 1996, 79% in 1997 and 82% in
1998. If sales of either of these two product lines decline significantly, our
results of operations will be adversely affected.
THE LOSS OF BEST BUY AS A CUSTOMER OR SIGNIFICANT REDUCTIONS IN ITS PURCHASES OF
OUR PRODUCTS WOULD REDUCE OUR SALES.
Best Buy is a significant customer that we could lose at any time.
Including Best Buy's $4.4 million initial purchase of our products to stock its
distribution channel, Best Buy accounted for 22.7% of our sales for the six
months ended June 30, 1999. We anticipate that Best Buy will continue to account
for a significant portion of our sales for the foreseeable future. Best Buy is
not obligated to any long-term purchases of our products and has
8
<PAGE> 10
considerable discretion to reduce, change or terminate its purchases of our
products. Further, our relationship with Best Buy is recent, as we shipped our
first products to Best Buy in January 1999. We cannot be certain that we will
retain this customer or maintain a relationship as favorable as currently
exists.
WE MAY LOSE MARKET SHARE IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY AGAINST OUR
CURRENT AND FUTURE COMPETITORS.
Competition could result in reduced margins on our products and loss of
market share. Our markets are very competitive, highly fragmented, rapidly
changing and characterized by price competition and, in the car audio market,
rapid product obsolescence. Our principal car audio competitors include Alpine,
Clarion, Fujitsu Eclipse, JL Audio, Kicker, MTX, Orion, Panasonic, Phoenix Gold,
Pioneer and Sony. We also compete indirectly with automobile manufacturers, who
may improve the quality of original equipment sound systems, reducing demand for
our aftermarket car audio products, or change the designs of their cars to make
installation of our products more difficult or expensive.
Some of our competitors have greater financial, technical and other
resources than we do and many seek to offer lower prices on competing products.
To remain competitive, we believe we must regularly introduce new products, add
performance features to existing products and limit increases in prices or even
reduce them.
SEASONALITY OF CAR AUDIO SALES CAUSES OUR QUARTERLY SALES TO FLUCTUATE AND MAY
AFFECT THE TRADING PRICE OF OUR STOCK.
Our sales are generally greater during the second and third quarters of
each calendar year and lower during the first and fourth quarters, with our
lowest sales typically occurring during the fourth quarter. As a result, after
the announcement of our results of operations for the first and fourth quarters,
our stock price may be lower than at other times of the year. We experience this
seasonality because consumers tend to buy car audio products during the spring
and summer when students are on semester breaks and generally more favorable
weather facilitates installation of our products.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY, MAKING FINANCIAL
FORECASTING DIFFICULT AND MAKING OUR STOCK PRICE VOLATILE.
Our quarterly results of operations are difficult to predict and may
fluctuate significantly from quarter to quarter. In some quarters, our operating
results may fall below the expectations of public market analysts and investors.
Our quarterly operating results are difficult to forecast for many reasons, some
of which are outside of our control, including:
- the level of product, price and dealer competition;
- size and timing of product orders and shipments, particularly by
significant customers such as Best Buy;
- our ability to develop new products and product enhancements that respond
to changes in technology and consumer needs and preferences while
controlling costs;
- weather conditions, which affect our consumers' ability to install our
products;
- capacity and supply constraints or difficulties; and
- timing of marketing programs.
As a result, you should not rely on historical results as an indication of our
future performance. In addition, some of our expenses are fixed and cannot be
reduced in the short term. Accordingly, if sales do not meet our expectations,
our results of operations are likely
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<PAGE> 11
to be negatively and disproportionately affected. In this event, our stock price
may fall dramatically.
A DECLINE IN DISCRETIONARY SPENDING WOULD LIKELY REDUCE OUR SALES.
Because car audio sales are highly discretionary, a recession in the
general economy or a general decline in consumer spending would likely have a
material adverse effect on our sales. Consumer spending is volatile and is
affected by certain economic conditions, such as:
- general business conditions;
- employment levels, especially among our core consumers;
- consumer confidence in future economic conditions; and
- interest and tax rates.
IF WE FAIL TO EXECUTE OUR GROWTH STRATEGY SUCCESSFULLY, OUR FINANCIAL CONDITION
COULD BE SERIOUSLY HARMED.
Our growth has placed, and our anticipated future growth would continue to
place, a significant strain on our resources and capacity. To manage our growth,
we must:
- retain and hire skilled, competent employees;
- continue to improve coordination among our technical, product
development, manufacturing, sales and financial departments; and
- maintain our financial, operational and managerial systems and controls.
We cannot be certain that we will achieve our objectives through internal
growth, acquisitions or other means. Acquisitions carry significant risks, since
negotiations of potential acquisitions and their subsequent integration could
divert management's time and resources from our core business. Potential
acquisitions could require us to issue dilutive equity securities, incur debt or
contingent liabilities, amortize goodwill and other intangible expenses or incur
other acquisition-related costs. Further, we may be unable to integrate
successfully any acquisition and we may not obtain the intended benefits of that
acquisition.
IF WE DO NOT CONTINUE TO DEVELOP, INTRODUCE AND ACHIEVE MARKET ACCEPTANCE OF NEW
AND ENHANCED PRODUCTS, OUR SALES MAY DECREASE.
We must maintain and improve existing products, while successfully
developing and introducing new products, in order to increase sales in current
markets and gain footholds in new markets. Our new and enhanced products must
respond to technological developments and changing consumer needs and
preferences. We may experience difficulties that delay or prevent the
development, introduction or market acceptance of new or enhanced products.
Furthermore, despite extensive testing, we may not be able to detect and correct
defects in our products before we ship them to our customers. This may result in
loss of sales or delays in market acceptance. Even after we introduce them, our
new or enhanced products may not satisfy consumer preferences and product
failures may cause consumers to reject our products. As a result, these products
may not achieve market acceptance. In addition, our competitors' new products
and product enhancements may cause consumers to defer or forego purchases of our
products.
IF WE FAIL TO MANAGE OUR INVENTORY EFFECTIVELY, WE COULD INCUR ADDITIONAL COSTS
OR LOSE SALES.
Our dealers have many brands to choose from when they decide to order
products and if we cannot deliver products quickly and reliably, they will
likely order from one of our
10
<PAGE> 12
competitors. We must stock enough inventory to fill orders promptly, which
increases our financing requirements and the risk of inventory obsolescence.
Because competition has required us to shorten our product life cycle and more
rapidly introduce new and enhanced products, there is a growing and significant
risk that our inventory could become obsolete.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR
FINANCIAL CONDITION.
The risks inherent in international trade may reduce our international
sales and harm the businesses of our distributors and suppliers. These risks
include:
- changes in tariff regulations;
- political instability, war, terrorism and other political risks;
- foreign currency exchange rate fluctuations;
- establishing and maintaining relationships with local distributors and
dealers;
- lengthy shipping times and accounts receivable payment cycles;
- import and export licensing requirements;
- compliance with a variety of foreign laws and regulations, including
unexpected changes in taxation and regulatory requirements;
- greater difficulty in safeguarding intellectual property than in the
U.S.; and
- difficulty in staffing and managing geographically dispersed operations.
These and other risks may increase the relative price of our products compared
to those manufactured in other countries, reducing the demand for our products.
Beginning in the last six months of 1997 and continuing into 1999, countries in
Asia and Latin America have experienced unstable local economies and significant
devaluations of local currencies. These instabilities may continue or worsen,
which could have a material adverse effect on our business, financial condition,
and results of operations. Our sales in Asia and Latin America, collectively,
constituted 10.7% of total sales for 1998 and 5.2% of sales for the six months
ended June 30, 1999.
LOSS OF AN INTERNATIONAL DISTRIBUTOR MAY DISRUPT OUR SALES.
International customers accounted for 27.9% of our sales in calendar year
1996, 26.5% in 1997 and 20.1% in 1998. To continue our growth and profitability,
we will need to expand our sales in international markets. We rely on
distributors, each of whom is responsible for one or more countries, to purchase
and resell our products in their territories. When we have disputes with a
distributor, or decide we must change our relationship with a distributor, we
may disrupt the market for our products in that country and lose sales. If we
change a relationship with a distributor, we may repurchase that distributor's
inventory, which would reduce our sales proportionately.
WE MAY INCUR ADDITIONAL COSTS AS WE CHANGE TO A "ONE-STEP" DISTRIBUTION SYSTEM
IN INTERNATIONAL MARKETS.
Recently, we initiated a strategy of moving to a "one-step" distribution
system in larger markets by converting selected distributors into independent
sales representatives, allowing us to sell directly to retailers. To the extent
we extend this one-step strategy into additional markets, we would incur higher
operating expenses than we would under our current distribution system because
we would be directly responsible for costs such as sales commissions, warranty
costs, bad debt and customer service expenses. We would also have
11
<PAGE> 13
higher working capital requirements and risks than we would under our current
distributor system because we, rather than our distributors, would have to carry
inventory and accounts receivable.
CURRENCY FLUCTUATIONS MAY REDUCE OUR PROFITABILITY OF FOREIGN SALES.
In early 1999, we began making sales to Canadian and German dealers in
their respective currencies. Previously, all our international sales were
denominated solely in U.S. dollars and, accordingly, we were not directly
exposed to fluctuations in foreign currency exchange rates. An increasing
portion of our international sales will likely be denominated in currencies
other than U.S. dollars, increasing our exposure to gains and losses on foreign
currency transactions. We currently do not trade in derivatives or other
financial instruments to reduce currency risks; however, we attempt to create
"natural" hedges when possible by matching our assets and liabilities in a given
currency. We may not be able to execute this strategy and it may not protect us
in the event of substantial currency fluctuations. We may in the future try to
limit our foreign currency exposure by engaging in more aggressive hedging
strategies.
IF OUR SUPPLY OF COMPONENTS IS INTERRUPTED, WE MAY BE UNABLE TO DELIVER OUR
PRODUCTS TO OUR CUSTOMERS.
Our manufacturing processes recently have become more dependent on
"just-in-time" suppliers who are globally sourced. Our exposure to supply
restrictions has increased because the just-in-time process does not provide a
backlog of components and materials to satisfy short lead-time orders, to
compensate for potential halts in supply, or to replace components that do not
conform to our quality standards. We do not have any long-term price commitments
from our suppliers and any cost increases may reduce our margins or require us
to raise our prices to protect our margins. We cannot be certain that we could
locate, within reasonable time frames, alternative sources of components and
materials at similar prices and quality levels of our current suppliers. This
failure could result in increased costs, delays to our manufacturing process, an
inability to fill purchase orders on a timely basis and a decrease in product
availability at the retail level. This could cause us to lose sales and damage
our customer relationships.
Starting in 1999, Hyundai Electronics, a large Korean company, began
supplying us with all of the source units we resell under the Rockford Fosgate
brand name. If Hyundai refuses or is unable to supply source units that meet our
quality standards and specified quantities, we believe we would require a
substantial amount of time to identify and begin receiving source units with
acceptable features and quality from another supplier. During the interim, we
would not have any supply of source units and our sales of source units would be
significantly reduced.
We rely on Avnet for over 10% of our purchases of electronic components and
parts. If Avnet refuses or is unable to continue to supply us, we would require
substantial time to identify an alternative supplier and could face a shortage
of electronic components and parts.
WE MAY BE UNABLE TO RETAIN AND ATTRACT KEY EMPLOYEES, WHICH COULD IMPAIR OUR
BUSINESS.
We operate in highly competitive employment markets and cannot guarantee
our continued success in retaining and attracting the employees we need to
develop, manufacture and market our products and manage our operations. Our
business strategy and operations depend, to a large extent, on our senior
management team, particularly Gary Suttle, our President and Chief Executive
Officer. We do not have key-person life insurance on or employment contracts
with any of our key employees, other than Mr. Suttle. The terms of
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<PAGE> 14
Mr. Suttle's employment contract are limited and if Mr. Suttle or other key
members of our management team are unable or unwilling to continue in their
present positions, our ability to develop, introduce and sell our products could
be negatively impacted.
IF WE ARE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF OUR INTELLECTUAL
PROPERTY, OUR BUSINESS MAY DECLINE.
Our future success will depend, in substantial part, on our intellectual
property. We seek to protect our intellectual property rights, but our actions
may not adequately protect the rights covered by our patents, patent
applications, trademarks and other proprietary rights, and prosecution of our
claims could be time consuming and costly. In addition, the intellectual
property laws of some foreign countries do not protect our proprietary rights as
do the laws of the U.S. Despite our efforts to protect our proprietary
information, third parties may obtain, disclose or use our proprietary
information without our authorization which could adversely affect our business.
From time to time, third parties have alleged that we infringe their
proprietary rights. In particular, we have exchanged correspondence with
Integrated Electronic Technologies regarding our alleged infringement of patents
held by that company. We believe that our products do not infringe any valid
patents cited in the correspondence. Nonetheless, these claims or similar future
claims could subject us to significant liability for damages, result in the
invalidation of our proprietary rights, limit our ability to use infringing
intellectual property or force us to license third-party technology rather than
dispute the merits of any infringement claim. Even if we prevail, any associated
litigation could be time-consuming and expensive and could result in the
diversion of our time and resources.
OUR SHARES HAVE NEVER BEEN PUBLICLY TRADED, SO WE CANNOT PREDICT THE EXTENT TO
WHICH A TRADING MARKET WILL DEVELOP FOR OUR SHARES.
This is our initial public offering and there has not been a public market
for our common stock. We cannot predict whether a trading market will develop or
how liquid that market may become. We and the selling shareholders will
establish the initial public offering price based on our negotiations with the
underwriters. That price may not be indicative of the price that will develop in
the trading market.
YEAR 2000 ISSUES MAY CAUSE US TO LOSE SALES, INCREASE OUR COSTS OR DISRUPT OUR
OPERATIONS.
If our computer and information technology systems, or those of any
material third party, are not Year 2000 compliant, their failure could have a
material adverse effect on our business, financial condition and results of
operations. We may fail to discover Year 2000 compliance problems, even though
we have tested most of our systems and have commenced a survey of our material
suppliers' Year 2000 compliance efforts. If there are compliance problems, our
systems may require substantial revisions or replacements and our third-party
suppliers may not be able to deliver products or services to us.
In addition, governmental agencies, utility companies, third-party service
providers and others outside our control may not be Year 2000 compliant. This
could result in a systemic failure beyond our control, including, for example, a
prolonged telecommunications or electrical failure, which could also prevent us
from communicating with our customers and manufacturing and shipping our
products. We are engaged in an ongoing Year 2000 assessment and have not
developed any contingency plans over and above our normal business operation
contingency plans. We will take into account the results of our Year 2000
simulation testing and the results of our third-party surveys in determining the
need for, and nature and extent of, any contingency plans. Our inability to
correct a significant Year 2000
13
<PAGE> 15
problem, if one develops, could result in an interruption in, or a failure of,
our normal business activities or operations. Any material Year 2000 problem
could require us to incur significant unanticipated expenses to remedy, could
divert our management's time and attention and could have a material adverse
effect on our business, financial condition and results of operations.
OUR CURRENT SHAREHOLDERS WILL RETAIN CONTROL WHICH MAY LIMIT THE LIQUIDITY AND
MARKET PRICE OF OUR COMMON STOCK.
After the offering, Mr. Suttle and various shareholders affiliated with or
related to two of our directors, Nicholas G. Bartol and Timothy C. Bartol, will
collectively hold 45.4% of our outstanding shares. These shareholders, if they
act together, will be able to control the outcome of all matters submitted for
shareholder action, including the election of our board of directors and the
approval of significant corporate transactions. Consequently, these shareholders
will effectively control our management and affairs, which may limit the
liquidity of our shares, discourage acquisition bids for Rockford and limit the
price some investors might be willing to pay for our shares.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY NOT USE THE PROCEEDS EFFECTIVELY.
We plan to use approximately $11.5 million of the estimated net proceeds of
the offering for working capital and other general corporate purposes. Our
management will have broad discretion in the use of these proceeds and they may
be used for corporate purposes that do not increase our profitability or market
value. The ineffective use of these proceeds could lead to financial losses and
a drop in our stock price.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase shares from us in this offering, you will incur immediate
and substantial dilution in pro forma net tangible book value per share of
$7.21. You will pay a price per share which substantially exceeds the value of
our assets after subtracting our liabilities. You and the other investors in
this offering will contribute 89.3% of the total amount paid to us for our
common stock, but will own only 33.9% of our outstanding shares. To the extent
outstanding options or warrants to purchase our shares are exercised, you will
suffer further dilution.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
Following this offering, we will have a large number of shares of common
stock outstanding and available for resale immediately and also at various
points in time in the future. Immediately following the completion of this
offering, the holders of a majority of our outstanding shares of common stock
will be limited in their ability to resell their shares either because the
shares are "restricted stock" under securities laws or the shareholders have
entered into lock-up agreements. The market price of our common stock could
decline as a result of sales of a large number of shares in the market following
this offering, or the perception that those sales could occur. If the market
price of our common stock declines it would be more difficult for us to sell
equity securities in the future at a time and price that we deem appropriate.
OUR ANTI-TAKEOVER PROVISIONS COULD AFFECT THE VALUE OF OUR STOCK.
Our articles of incorporation and bylaws and Arizona law contain provisions
which could discourage potential acquirors from attempting to acquire us. For
example, our board of directors may issue additional shares of common stock to
an investor that supports the incumbent directors in order to make a takeover
more difficult. This could deprive our
14
<PAGE> 16
shareholders of opportunities to sell our stock at above-market prices typical
in many acquisitions.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, 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. These statements may be identified by the use of forward-looking
terminology such as "may," "will," "believe," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, and may contain projections of results of operations or of
financial condition or state other forward-looking information. When considering
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus. The risk factors noted above, and
other factors noted throughout this prospectus, could cause our actual results
to differ significantly from those contained in any forward-looking statement.
OWNERSHIP OF INTELLECTUAL PROPERTY
Rockford Fosgate(R), The Punch(R), Connecting Punch(R), Punch Sport(R),
Practice Safe Sound(R), Car Audio for Fanatics(R), Lightning Audio(R),
Storm(TM), Bolt(TM), Strike(TM), Hafler(R) and our "Diamond R" logo are
registered trademarks of Rockford. This prospectus also includes other trade
names, trademarks and service marks of Rockford and of other companies.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to us from the sale of the 2,500,000 shares of common
stock offered by this prospectus are estimated to be $27.1 million, or $32.7
million if the underwriters' over-allotment option is exercised in full, in each
case assuming an initial public offering price of $12.00 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us. We will not receive any proceeds from the sale of shares of
common stock by the selling shareholders.
We plan to use the net proceeds from this offering as follows:
- $15.6 million to fully repay the outstanding balance of our credit
facility; and
- $11.5 million for working capital and other general corporate purposes,
including new product development and marketing expansion. We may also
use a portion of these proceeds to acquire or invest in complementary
businesses, products or technologies; however, we have not at this time
identified a specific acquisition or allocated a specific amount for this
purpose.
Pending use of the net proceeds, we plan to invest them in short-term,
interest bearing investment-grade securities.
Our credit facility consists of a revolving line-of-credit, a term loan and
an equipment financing arrangement. The revolving line-of-credit has a blended
variable interest rate per annum of LIBOR plus 300 basis points and prime plus
75 basis points. The term loan has a fixed interest rate of 10.67% per annum.
The equipment financing arrangement has, at our option three days prior to the
time used, a fixed interest rate per annum based on five-year U.S. Treasury
Notes plus 425 basis points or a variable interest rate per annum based on the
bank's base rate plus 125 basis points. To date, we have not used this equipment
financing arrangement. As at June 30, 1999, the credit facility had a combined
interest rate of 8.31% per annum. The credit facility matures on June 20, 2001.
16
<PAGE> 18
CAPITALIZATION
The following table shows our capitalization as at June 30, 1999, on an
actual, pro forma and pro forma as adjusted basis. The pro forma data gives
effect to the conversion of $278,953 of the 8.5% convertible subordinated
debentures into 114,236 shares of common stock and the issuance of 14,424 shares
upon exercise of warrants, both to occur concurrently with this offering. The
pro forma as adjusted data gives effect to:
- the sale by us of 2,500,000 shares in this offering at an assumed initial
public offering price of $12.00 per share;
- our receipt of the estimated proceeds of that sale after deducting
underwriting discounts and commissions and estimated offering expenses
payable by us; and
- the application of the net proceeds.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long term debt and capital lease
obligations............................................ $ 2,588 $ 2,588 $ 1,418
======= ======= =======
Credit facility debt, less current portion............... $14,462 $14,462 $ 0
8.5% convertible subordinated debentures................. 995 716 716
Capital lease obligations, less current portion.......... 598 598 598
Other long-term debt..................................... 77 77 77
Shareholders' equity:
Common stock, $0.01 par value; 40,000,000 shares
authorized, 4,735,201 shares issued and outstanding
actual; 4,863,861 shares issued and outstanding pro
forma; and 7,363,861 shares issued and outstanding
pro forma as adjusted............................... 47 49 74
Additional paid-in capital............................. 3,217 3,535 30,610
Retained earnings(1)................................... 6,433 6,433 6,173
Accumulated other comprehensive income................. 185 185 185
------- ------- -------
Total shareholders' equity.......................... 9,882 10,202 37,042
------- ------- -------
Total capitalization........................... $26,014 $26,055 $38,433
======= ======= =======
</TABLE>
- ---------------
(1) If we terminate our credit facility after repaying the outstanding balance
with the proceeds of this offering, we would expense approximately $260,000
of deferred loan fees included in other assets as at June 30, 1999 which
were incurred at the time of the loan.
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<PAGE> 19
DILUTION
Our pro forma net tangible book value as at June 30, 1999, after giving
effect to the conversion of $278,953 of the 8.5% convertible subordinated
debentures into 114,236 shares of common stock and the issuance of 14,424 shares
upon exercise of warrants, both to occur upon completion of this offering, was
$8.4 million, or $1.73 per share of common stock. Pro forma net tangible book
value is equal to total pro forma tangible assets less total liabilities. Pro
forma net tangible book value per share is determined by dividing the number of
outstanding shares of common stock into the pro forma net tangible book value.
Our pro forma net tangible book value as at June 30, 1999 would have been $35.3
million, or $4.79 per share, after giving effect to:
- the sale by us of 2,500,000 shares in this offering at an assumed initial
public offering price of $12.00 per share;
- our receipt of the estimated proceeds of that sale after deducting
underwriting discounts and commissions and estimated offering expenses
payable by us; and
- the application of the net proceeds.
This represents an immediate increase in pro forma tangible book value of $3.06
per share to existing shareholders and an immediate dilution of $7.21 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $12.00
Pro forma net tangible book value as at June 30,
1999................................................ $1.73
Increase in pro forma net tangible book value
attributable to new investors....................... 3.06
-----
Pro forma net tangible book value after this offering....... 4.79
------
Pro forma dilution per share to new investors............... $ 7.21
======
</TABLE>
The following table summarizes, on a pro forma basis as at June 30, 1999,
giving effect to the above conversions and warrant exercises, the total number
of shares of common stock purchased from us, the total consideration paid to us
and the average consideration paid per share by existing shareholders and by new
investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders........ 4,863,861 66.1% $ 3,584,000 10.7% $ 0.74
New investors................ 2,500,000 33.9 30,000,000 89.3 $12.00
--------- ----- ----------- -----
Total.............. 7,363,861 100.0% $33,584,000 100.0%
========= ===== =========== =====
</TABLE>
The above discussion and table assume no exercise of outstanding
debentures, options and warrants to purchase our common stock other than the
conversion of $278,953 of the 8.5% convertible subordinated debentures and
issuance of 14,424 shares upon exercise of warrants, both to occur upon
completion of this offering. As at June 30, 1999, there were outstanding:
- 293,123 shares of common stock that we will issue upon conversion of the
8.5% convertible subordinated debentures, assuming conversion of 114,236
shares in this offering;
- 1,995,981 shares of common stock that we will issue upon exercise of
outstanding options, with a weighted average exercise price of $3.33 per
share;
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<PAGE> 20
- 64,500 shares of common stock that we will issue upon exercise of
outstanding options, with an exercise price of the per share price of
this offering; and
- 83,911 shares of common stock that we will issue upon exercise of
outstanding warrants, with a weighted average exercise price of $1.25 per
share.
We have also reserved 336,984 shares of common stock for future issuance of
options under our 1994 and 1997 stock option plans and 361,200 shares of common
stock for future issuance under our 1999 employee stock purchase plan. To the
extent these dilutive securities are exercised or converted, new investors will
experience further dilution.
DIVIDEND POLICY
We have never paid any cash dividends. We currently intend to retain
earnings, if any, to fund the development and growth of our business and do not
anticipate declaring or paying cash dividends in the foreseeable future. Our
credit facility does not permit the payment of cash dividends. Our board of
directors will decide whether to pay future dividends, if any, at its discretion
taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
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<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The following table contains
our selected consolidated financial data for the years ended September 30, 1994
and 1995 derived from audited consolidated financial statements, which are not
included in this prospectus. The selected consolidated financial data for the
year ended September 30, 1996, the three months ended December 31, 1996, when we
changed our fiscal year-end to December 31, and the years ended December 31,
1997 and 1998 are derived from our audited consolidated financial statements,
which are included elsewhere in this prospectus. The selected consolidated
financial data for the year ended December 31, 1996 are derived from unaudited
financial statements, which are not included in this prospectus. The selected
financial data for the six months ended June 30, 1998 and 1999 are derived from
unaudited financial statements, which are included elsewhere in this prospectus.
The unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for those
periods.
<TABLE>
<CAPTION>
THREE SIX MONTHS
MONTHS ENDED
YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- DEC. 31, --------------------------- -----------------
1994 1995 1996 1996 1996 1997 1998 1998 1999
------- ------- ------- -------- ------- ------- ------- ------- -------
STATEMENTS OF CONSOLIDATED (IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................................ $63,051 $73,915 $81,144 $16,448 $82,937 $87,423 $87,577 $45,923 $65,911
Cost of goods sold................... 39,565 49,803 56,761 11,020 57,057 57,321 55,146 28,783 40,221
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit......................... 23,486 24,112 24,383 5,428 25,880 30,102 32,431 17,140 25,690
Operating expenses:
Sales and marketing................. 10,749 11,251 15,218 2,814 15,627 14,530 14,821 8,097 10,971
General and administrative.......... 6,439 7,659 8,552 1,983 8,156 9,350 10,211 5,059 6,675
Research and development............ 1,347 1,404 1,448 292 1,372 1,576 1,876 870 973
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 18,535 20,314 25,218 5,089 25,155 25,456 26,908 14,026 18,619
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss).............. 4,951 3,798 (835) 339 725 4,646 5,523 3,114 7,071
Interest and other expense, net...... 1,689 1,660 2,193 377 2,064 2,055 1,501 757 845
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before tax............. 3,262 2,138 (3,028) (38) (1,339) 2,591 4,022 2,357 6,226
Income tax expense (benefit)......... (1,594) 598 (1,025) (19) (407) 959 1,717 1,006 2,406
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 4,856 $ 1,540 $(2,003) $ (19) $ (932) $ 1,632 $ 2,305 $ 1,351 $ 3,820
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic............................... $ 1.85 $ 0.48 $ (0.50) $ (0.01) $ (0.23) $ 0.37 $ 0.52 $ 0.31 $ 0.85
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted............................. $ 1.83 $ 0.46 $ (0.50) $ (0.01) $ (0.23) $ 0.31 $ 0.41 $ 0.25 $ 0.64
======= ======= ======= ======= ======= ======= ======= ======= =======
Shares used to calculate net income
(loss) per share:
Basic............................... 2,619 3,226 4,040 4,394 4,114 4,401 4,412 4,411 4,508
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted............................. 2,649 3,392 4,040 4,394 4,114 5,688 5,951 5,725 6,081
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, JUNE 30,
--------------------------- --------------------------- -----------------
1994 1995 1996 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital...................... $ 7,407 $12,560 $11,063 $12,369 $ 9,592 $13,488 $12,724 $18,150
Total assets......................... 22,905 29,848 34,423 31,420 29,234 37,307 36,016 52,859
Long-term debt and capital lease
obligations......................... 10,829 15,352 16,033 16,720 12,230 14,292 13,479 16,132
Total liabilities.................... 22,700 28,054 33,644 30,629 26,766 32,369 32,074 42,977
Shareholders' equity................. 205 1,794 779 791 2,463 4,907 3,942 9,882
</TABLE>
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<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
OVERVIEW
History
Rockford was incorporated in 1980 to continue a high-performance car audio
business founded in 1973 by car audio enthusiast Jim Fosgate. While Rockford
developed a reputation for technical excellence, in the early 1990s, Rockford's
financial performance deteriorated for a variety of reasons. Inefficient
management and manufacturing resulted in high and volatile costs, excessive
inventory, obsolete materials and finished goods and significant delays in new
product development and delivery. In addition, Rockford had begun to diversify
into home and professional audio products. This diversification initially failed
to enhance Rockford's competitive position, adversely impacted financial
performance and distracted management away from its core business.
Beginning in 1992, Rockford recruited a new management team, including Gary
Suttle, our President and Chief Executive Officer. Mr. Suttle and his new
management team:
- hired a number of experienced senior executives and mid-level managers;
- focused on profitability by establishing and implementing specific
financial objectives through improved business processes and
sophisticated management information systems;
- increased the number of new product introductions from seven in 1991 to
67 in 1998 while keeping the number of design engineers relatively
constant;
- implemented new sourcing and manufacturing strategies, reducing product
development time-to-market from up to 24 months to approximately six to
nine months;
- implemented a more focused advertising and marketing strategy to further
enhance the Rockford Fosgate and Hafler brand images; and
- discontinued or redesigned a number of unprofitable and marginally
profitable product lines.
Primarily as a result of these initiatives, Rockford regained profitability in
the fiscal year ended September 30, 1994. For the fiscal years ended September
30, 1995 and 1996, we experienced decreases in both operating and net income.
These decreases were primarily related to warranty costs resulting from product
quality issues and investments in our infrastructure, including (1) the
reengineering of our speaker facility, (2) our system conversion to Oracle
applications and databases and (3) investments in personnel. In addition, for
the year ended September 30, 1996, sales and marketing expenses increased
significantly primarily due to (1) increased promotional expenses, (2) an
increase in bad debt expenses and (3) higher commissions resulting from
increased sales volume. Beginning in 1997, we began to realize the benefits of
our investments in our infrastructure, resulting in subsequent increases in both
operating and net income. We believe that we have the people, processes and
systems in place to enable us to continue to grow profitably.
Business
We generate a substantial portion of our sales from our car audio products.
We recognize revenues from sales when we ship products to the distributor or
dealer. Sales are reported
21
<PAGE> 23
net of discounts and returns. Related expenses, such as commissions, bonuses,
cooperative advertising allowances to dealers and other program expenses,
warranty expenses and bad debt expenses, are accrued when the related sales are
recognized. We have no significant obligations subsequent to shipment, as we do
not install our products, and returns have not been significant to date.
In the U.S., we sell our car audio products using commissioned independent
sales representative firms who are supported by our employee regional managers.
Internationally, we sell products through a majority owned subsidiary in Japan,
in over 60 other countries through distributors and, since the beginning of
1999, through commissioned independent sales representatives in Canada and
Germany. Unlike in the U.S., we have established relationships with distributors
in certain international markets who purchase our products and resell them to
retailers.
In 1999, we launched our distribution program with Best Buy. Including its
$4.4 million initial purchase of our products to stock its distribution channel,
Best Buy accounted for 22.7% of our sales for the six months ended June 30,
1999. Our growth plan contemplates that Best Buy will continue to account for a
significant portion of our sales for the foreseeable future.
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, selected consolidated
statements of operations data expressed as a percentage of sales:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 68.8 65.6 63.0 62.7 61.0
----- ----- ----- ----- -----
Gross profit.................................... 31.2 34.4 37.0 37.3 39.0
Operating expenses:
Sales and marketing........................... 18.8 16.6 16.9 17.6 16.7
General and administrative.................... 9.8 10.7 11.7 11.0 10.1
Research and development...................... 1.7 1.8 2.1 1.9 1.5
----- ----- ----- ----- -----
Total operating expenses................... 30.3 29.1 30.7 30.5 28.3
----- ----- ----- ----- -----
Operating income................................ 0.9 5.3 6.3 6.8 10.7
Interest and other expense, net................. 2.5 2.3 1.7 1.7 1.3
----- ----- ----- ----- -----
Income (loss) before tax........................ (1.6) 3.0 4.6 5.1 9.4
Income tax expense (benefit).................... (0.5) 1.1 2.0 2.2 3.6
----- ----- ----- ----- -----
Net income (loss)............................... (1.1)% 1.9% 2.6% 2.9% 5.8%
===== ===== ===== ===== =====
</TABLE>
Cost of goods sold primarily consists of raw materials, direct labor and
manufacturing costs associated with production of our products as well as
warranty, 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 the business. Research
and development expenses primarily consist of salaries associated with our
research and development personnel.
22
<PAGE> 24
Geographic Distribution of Sales
Since 1996, our sales by geographic region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales
United States.......................... $59,804 $64,252 $70,016 $36,545 $56,172
Other Americas......................... 5,866 7,005 4,905 3,732 3,355
Europe................................. 10,001 7,819 6,599 3,023 3,929
Asia................................... 7,266 8,347 6,057 2,623 2,455
------- ------- ------- ------- -------
Total sales(1).............................. $82,937 $87,423 $87,577 $45,923 $65,911
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Sales are attributed to geographic regions based on the location of
customers. No single foreign country accounted for greater than 10% of our
sales.
In the following discussion, certain increases or decreases may differ due
to rounding.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Sales. Sales increased by $20.0 million, or 43.5%, to $65.9 million for
the six months ended June 30, 1999 from $45.9 million for the six months ended
June 30, 1998. The increase in sales was primarily attributable to our initial
sales to Best Buy. Including Best Buy's $4.4 million initial purchase of our
products to stock its distribution channel, Best Buy accounted for $15.0
million, or 22.7%, of our sales for the six months ended June 30, 1999. In
addition, sales to car audio specialty dealers increased by $3.6 million, or
9.2%, to $42.8 million for the six months ended June 30, 1999 from $39.2 million
for the six months ended June 30, 1998. This increase is due to improved market
conditions, enhanced incentive programs and the launch of a competitively priced
line of amplifiers and speakers.
U.S. sales increased by $19.6 million, or 53.7%, to $56.2 million for the
six months ended June 30, 1999 from $36.5 million for the six months ended June
30, 1998. International sales increased by $0.4 million, or 3.8%, to $9.7
million for the six months ended June 30, 1999 from $9.4 million for the six
months ended June 30, 1998. A decrease in sales to certain countries in Latin
America as a result of the region's deteriorating economic conditions was offset
by increased sales in Europe and Canada.
Cost of Goods Sold. Cost of goods sold increased by $11.4 million, or
39.7%, to $40.2 million for the six months ended June 30, 1999 from $28.8
million for the six months ended June 30, 1998. Substantially all of the
increase was due to increased sales. As a percent of sales, cost of goods sold
decreased to 61.0% for the six months ended June 30, 1999 from 62.7% for the six
months ended June 30, 1998. The primary reasons for the decrease as a percent of
sales included improvement in global sourcing of raw materials and leveraging of
fixed overhead due to increased production volume.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$2.9 million, or 35.5%, to $11.0 million for the six months ended June 30, 1999
from $8.1 million for the six months ended June 30, 1998. The increase was
primarily related to increased sales commissions as a direct result of higher
U.S. sales. U.S. sales are direct to dealers and require commissions to be paid
to our independent sales representatives. International sales have a higher
portion of sales directly to resellers and, while those sales generally have a
lower gross margin, they do not require commission payments. As a percent of
sales, these expenses decreased to 16.7% for the six months ended June 30, 1999
from 17.6% for the six months
23
<PAGE> 25
ended June 30, 1998. The decrease as a percent of sales was primarily because
some expenses in this category are fixed and do not fluctuate with sales.
General and Administrative Expenses. General and administrative expenses
increased by $1.6 million, or 31.9%, to $6.7 million for the six months ended
June 30, 1999 from $5.1 million for the six months ended June 30, 1998. The
primary reason for the increase was an increase in our financial
performance-based employee incentive program. As a percent of sales, these
expenses decreased to 10.1% for the six months ended June 30, 1999 from 11.0%
for the six months ended June 30, 1998. The decrease as a percent of sales was
primarily because some expenses in this category are fixed and do not fluctuate
with sales.
Research and Development Expenses. Research and development expenses
increased by $0.1 million, or 11.8%, to $1.0 million for the six months ended
June 30, 1999 from $0.9 million for the six months ended June 30, 1998. As a
percent of sales, these expenses decreased to 1.5% for the six months ended June
30, 1999 from 1.9% for the six months ended June 30, 1998.
Operating Income. Operating income increased by $4.0 million, or 127.1%,
to $7.1 million for the six months ended June 30, 1999 from $3.1 million for the
six months ended June 30, 1998. This increase was primarily attributable to our
initial sales to Best Buy. As a percent of sales, operating income increased to
10.7% for the six months ending June 30, 1999 from 6.8% for the six months ended
June 30, 1998. The primary reasons for this increase are mentioned above.
Interest and Other Expense, Net. Interest and other expense, net primarily
consists of interest expense. These expenses remained level at $0.8 million for
the six months ended June 30, 1999 and 1998. Interest expense was similar for
both periods due to relatively constant levels of debt and interest rates. Upon
completion of this offering, we anticipate repaying all of the amounts due under
our credit facility which would result in recording approximately $260,000 of
expense relating to the deferred loan fees being amortized over the related loan
term.
Income Tax Expense (Benefit). Income tax expense increased by $1.4 million
to $2.4 million for the six months ended June 30, 1999 from $1.0 million for the
six months ended June 30, 1998. The effective income tax rates were 38.6% for
the six months ended June 30, 1999 and 42.7% for the six months ended June 30,
1998. The primary reason for the higher effective tax rate for the six months
ended June 30, 1998 was the impact of relatively fixed, non-deductible items for
income tax accounting purposes on a much lower amount of net income. The lower
effective tax rate for the six months ended June 30, 1999 was primarily
attributable to the lower effective tax rate in Michigan, where we experienced
significant increased income from operations without a corresponding increase in
tax expense.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Sales. Sales increased by $0.2 million, or 0.2%, to $87.6 million for 1998
from $87.4 million for 1997. U.S. sales increased by $5.8 million, or 9.0%, to
$70.0 million for 1998 from $64.3 million for 1997 due to market acceptance by
our dealers of our newly redesigned speakers. International sales decreased by
$5.6 million, or 24.2%, to $17.6 million for 1998 from $23.2 million for 1997,
primarily due to economic instability in Latin America and Asia and weakness in
business conditions in Europe.
Cost of Goods Sold. Cost of goods sold decreased by $2.2 million, or 3.8%,
to $55.1 million for 1998 from $57.3 million for 1997. Cost of goods sold as a
percent of sales decreased to 63.0% for 1998 from 65.6% for 1997. The primary
reasons for the decrease as a percent of sales included the launch of our raw
material global sourcing strategy, leveraging
24
<PAGE> 26
of fixed overhead due to increased production volume as we prepared for initial
shipments to Best Buy and shifting of sales away from lower margin source units.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$0.3 million, or 2.0%, to $14.8 million for 1998 from $14.5 million for 1997.
The increase was primarily related to increased sales commissions as a direct
result of higher U.S. sales. As a percent of sales, these expenses increased to
16.9% for 1998 from 16.6% for 1997.
General and Administrative Expenses. General and administrative expenses
increased by $0.9 million, or 9.2%, to $10.2 million for 1998 from $9.4 million
for 1997. This increase was primarily due to the write-off of a $0.4 million
note from our German distributor in 1998 following the distributor's change in
ownership because of the owner's death. The new owner indicated the repayment
would be doubtful based upon deteriorating operating results and a desire to
terminate the relationship. As a percent of sales, these expenses increased to
11.7% for 1998 from 10.7% for 1997.
Research and Development Expenses. Research and development expenses
increased by $0.3 million, or 19.0%, to $1.9 million for 1998 from $1.6 million
for 1997. This increase primarily related to increased personnel and product
certification costs. As a percent of sales, these expenses increased to 2.1% for
1998 from 1.8% for 1997.
Operating Income. Operating income increased by $0.9 million, or 18.9%, to
$5.5 million for 1998 from $4.6 million for 1997. As a percent of sales,
operating income increased to 6.3% for 1998 from 5.3% for 1997. The primary
reasons for these increases are mentioned above.
Interest and Other Expense, Net. Interest and other expense, net decreased
by $0.6 million, or 27.0%, to $1.5 million for 1998 from $2.1 million for 1997.
This decrease primarily related to a decrease in interest expense resulting from
our June 1997 change in lenders, consolidation of various debt instruments and
lower overall effective interest rates, the impact of which was fully realized
in 1998.
Income Tax Expense (Benefit). Income tax expense increased by $0.8 million
to $1.7 million for 1998 from $1.0 million for 1997. Our effective income tax
rates were 42.5% in 1998 and 37.0% in 1997. The primary reason for the higher
effective rate in 1998 was higher effective foreign tax rates coupled with a
higher than expected credit for certain foreign sales in 1997 made through our
foreign sales corporation.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales increased by $4.5 million, or 5.4%, to $87.4 million for 1997
from $82.9 million for 1996. Substantially all of the increase in sales was due
to increased sales in the U.S., where we experienced favorable results from our
dealer incentive programs and the launch of a new speaker and amplifier design.
U.S. sales increased by $4.4 million, or 7.4%, to $64.3 million for 1997 from
$59.8 million for 1996. International sales remained relatively unchanged at
$23.2 million for 1997 and $23.1 million for 1996. However, within the
international regions, sales increased in Asia and Latin America, which were
offset by a decrease in sales to European customers due to less favorable
economic conditions in Europe and the strengthening of the U.S. dollar versus
European currencies.
Cost of Goods Sold. Cost of goods sold increased by $0.3 million, or 0.5%,
to $57.3 million for 1997 from $57.1 million for 1996. Substantially all of the
increase was due to increased sales. Cost of goods sold as a percent of sales
decreased to 65.6% for 1997 from 68.8% for 1996. The primary reasons for the
decrease as a percent of sales were the completion of our speaker plant
reengineering resulting in lower manufacturing costs.
25
<PAGE> 27
Sales and Marketing Expense. Sales and marketing expenses decreased by
$1.1 million, or 7.0%, to $14.5 million for 1997 from $15.6 million for 1996.
The decrease was primarily related to a planned reduction of marketing
expenditures, specifically advertising and trade shows, to lower our costs. As a
percent of sales, these expenses decreased to 16.6% for 1997 from 18.8% for
1996.
General and Administrative Expenses. General and administrative expenses
increased by $1.2 million, or 14.6%, to $9.4 million for 1997 from $8.2 million
for 1996. The primary reason for the increase was costs related to our financial
performance-based employee incentive program, which had no payouts in 1996. As a
percent of sales, these expenses increased to 10.7% for 1997 from 9.8% for 1996.
Research and Development Expenses. Research and development expenses
increased by $0.2 million, or 14.9%, to $1.6 million for 1997 from $1.4 million
for 1996. This increase was primarily related to increased personnel and product
certification costs. As a percent of sales, these expenses increased to 1.8% for
1997 from 1.7% for 1996.
Operating Income. Operating income increased by $3.9 million, or 540.8%,
to $4.6 million for 1997 from $0.7 million for 1996. As a percent of sales,
operating income increased to 5.3% for 1997 from 0.9% for 1996. The primary
reasons for these increases are mentioned above.
Interest and Other Expense, Net. Interest and other expense, net remained
flat at $2.1 million for both 1997 and 1996.
Income Tax Expense (Benefit). Income tax expense increased by $1.4 million
for 1997 to $1.0 million from an income tax benefit of $0.4 million in 1996. Our
effective tax rates were 37.0% in 1997 and 30.4% in 1996. The lower effective
tax rate in 1996 was due to the absence of a tax benefit for the portion of the
1996 loss relating to state taxes.
QUARTERLY RESULTS OF OPERATIONS
Our sales on a quarterly basis reflect the seasonality of the car audio
aftermarket business. Sales are generally greater during the second and third
quarters of each calendar year and lower during the first and fourth quarters,
with our lowest sales typically occurring during the fourth quarter. During the
first quarter of 1999, we launched our distribution program with Best Buy.
Including Best Buy's $4.4 million initial purchase of our products to stock its
distribution channel, Best Buy accounted for 26.5% of our sales in the three
months ended March 31, 1999 and 19.1% in the three months ended June 30, 1999.
The following tables show selected consolidated quarterly statements of
operations data that were derived from unaudited financial statements for each
of the nine quarters ended June 30, 1999, and also show that data expressed as a
percent of sales for the periods indicated. We believe these unaudited financial
results were prepared on a basis consistent with our audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of our consolidated results of
operations for those periods. The results of operations for any quarter are not
necessarily indicative of the results of any future period.
26
<PAGE> 28
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1997 1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.......................... $26,360 $21,533 $17,366 $20,504 $25,419 $22,564 $19,090 $31,798 $34,113
Cost of goods sold............. 17,007 14,481 11,718 13,148 15,635 13,693 12,670 19,567 20,654
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................... 9,353 7,052 5,648 7,356 9,784 8,871 6,420 12,231 13,459
Operating expenses:
Sales and marketing.......... 4,038 3,887 2,835 3,873 4,224 3,976 2,748 5,388 5,583
General and administrative... 2,764 1,965 2,275 2,290 2,769 2,495 2,657 3,018 3,657
Research and development..... 413 409 421 404 466 498 508 501 472
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 7,215 6,261 5,531 6,567 7,459 6,969 5,913 8,907 9,712
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income............... 2,138 791 117 789 2,325 1,902 507 3,324 3,747
Interest and other expense,
net.......................... 469 548 584 357 400 619 125 431 414
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before tax....... 1,669 243 (467) 432 1,925 1,283 382 2,893 3,333
Income tax expense (benefit)... 618 90 (173) 174 832 548 163 1,091 1,315
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).............. $ 1,051 $ 153 $ (294) $ 258 $ 1,093 $ 735 $ 219 $ 1,802 $ 2,018
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic........................ $ 0.24 $ 0.03 $ (0.07) $ 0.06 $ 0.25 $ 0.17 $ 0.05 $ 0.41 $ 0.44
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted...................... $ 0.19 $ 0.03 $ (0.07) $ 0.05 $ 0.19 $ 0.13 $ 0.04 $ 0.29 $ 0.33
======= ======= ======= ======= ======= ======= ======= ======= =======
Shares used to calculate net
income (loss) per share:
Basic........................ 4,395 4,403 4,412 4,412 4,412 4,412 4,412 4,412 4,604
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted...................... 5,575 5,659 4,412 5,725 5,957 6,051 6,051 6,275 6,176
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF SALES FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1997 1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............. 64.5 67.2 67.5 64.1 61.5 60.7 66.4 61.5 60.5
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................... 35.5 32.8 32.5 35.9 38.5 39.3 33.6 38.5 39.5
Operating expenses:
Sales and marketing.......... 15.3 18.1 16.3 18.9 16.6 17.6 14.4 16.9 16.4
General and administrative... 10.4 9.1 13.1 11.2 10.9 11.1 13.9 9.5 10.7
Research and development..... 1.5 1.9 2.4 2.0 1.8 2.2 2.7 1.6 1.4
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 27.4 29.1 31.8 32.1 29.3 30.9 31.0 28.0 28.5
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income............... 8.1 3.7 0.7 3.8 9.2 8.4 2.6 10.5 11.0
Interest and other expense,
net.......................... 1.8 2.6 3.4 1.7 1.6 2.7 0.6 1.4 1.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before tax....... 6.3 1.1 (2.7) 2.1 7.6 5.7 2.0 9.1 9.8
Income tax expense (benefit)... 2.3 0.4 (1.0) 0.8 3.3 2.4 0.9 3.4 3.9
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).............. 4.0% 0.7% (1.7)% 1.3% 4.3% 3.3% 1.1% 5.7% 5.9%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
27
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, we have financed our business primarily using cash flows from
operations, borrowings from shareholders and bank borrowings. We had working
capital of $18.2 million at June 30, 1999, compared with $13.5 million at
December 31, 1998. At June 30, 1999, we maintained minimal cash and cash
equivalent balances.
We currently have a $20.0 million credit facility which is collateralized
by substantially all of our assets, and consists of a revolving line-of-credit,
a term loan and an equipment financing arrangement. At June 30, 1999 the amounts
outstanding under the credit facility consisted of approximately $14.5 million
on the revolving line-of-credit, and approximately $1.2 million on the term
loan. The revolving line-of-credit has a blended variable interest rate per
annum of LIBOR plus 300 basis points and prime plus 75 basis points. The term
loan has a fixed interest rate of 10.67% per annum. The equipment financing
arrangement has, at our option three days prior to the time used, a fixed
interest rate per annum based on five-year U.S. Treasury Notes plus 425 basis
points or a variable interest rate per annum based on the bank's base rate plus
125 basis points. To date, we have not used this equipment financing
arrangement. As at June 30, 1999, the credit facility had a combined interest
rate of 8.31% per annum. The credit facility matures on June 20, 2001. The
credit facility contains restrictions on financial ratios, levels of debt and
capital expenditures.
We also have a $2.0 million capital lease credit facility under which
leases can be funded up until September 30, 1999 at which time the availability
to enter into additional leases expires. We use the capital lease credit
facility for the purchase of capital equipment under agreements structured as
three-year capital lease obligations. As at June 30, 1999, the capital lease
credit facility had an outstanding balance of $1.1 million with a weighted
average interest rate of 8.0%.
We also have $995,000 of 8.5% convertible subordinated debentures
outstanding of which $278,953 will be converted into 114,236 shares of common
stock upon completion of the initial public offering. The remainder is due in
May 2002 with interest payable quarterly. We are not permitted to repay the
debentures prior to their due date unless our stock becomes public and trades
for 30 days at a price above $3.66 per share. The debenture holders may convert
the debt to common stock at any time prior to the due date at the rate of $2.44
per share. We also assumed a $450,000 line-of-credit in our acquisition of
Lightning Audio which was repaid after June 30, 1999.
Net cash provided by (used in) operating activities was negligible for
1998, $6.5 million for 1997 and ($0.2) million for 1996. Net cash provided by
(used in) operating activities was $1.2 million for the six months ended June
30, 1999 and ($0.1) million for the six months ended June 30, 1998. The primary
contributing factor to the growth in our working capital requirements has been
the effect of adding Best Buy as a customer, which has increased our inventory
levels and accounts receivable.
Net cash used in investing activities was $1.3 million for 1998, $2.1
million for 1997 and $1.8 million for 1996. Net cash used in investing
activities was $2.6 million for the six months ended June 30, 1999 and $0.5
million for the six months ended June 30, 1998. Net cash used in investing
activities was primarily related to purchases of property and equipment, and
during the six months ended June 30, 1999 for our acquisition of Lightning
Audio. We paid for the Lightning Audio acquisition with amounts available under
our line-of-credit.
Net cash provided by (used in) financing activities was $1.3 million for
1998, ($4.4) million for 1997 and $2.3 million for 1996. Net cash provided by
financing activities was $2.3 million for the six months ended June 30, 1999 and
$1.2 million for the six months ended June 30, 1998. Net cash provided by (used
in) financing activities was primarily related to borrowings and repayments of
our credit facilities and other debt obligations, including
28
<PAGE> 30
repayments of various senior notes and other debt obligations during 1997, at
the time our $20.0 million credit facility was established.
We may pursue acquisitions of businesses, products or technologies that
could complement or expand our business and product offerings. Any material
acquisition could result in an increase in our working capital requirements
depending on the amount, timing and nature of the consideration to be paid.
We believe that the net proceeds to be received by us from this offering,
together with potential cash flows from operations, will be sufficient to meet
our anticipated cash needs for working capital, capital expenditures and other
activities for at least the next twelve months. Thereafter, if current sources
are not sufficient to meet our needs, we may seek additional equity or debt
financing. In addition, any material acquisition of complementary businesses,
products or technologies could require us to obtain additional equity or debt
financing. There can be no assurance that additional financing would be
available on acceptable terms, if at all.
IMPACT OF THE YEAR 2000
Readiness. We use and rely on a variety of information technologies,
computer systems and scientific and manufacturing equipment containing
computer-related components, such as programmable logic controllers and other
embedded systems. We have a Year 2000 project to address the impact of Year 2000
issues on our computer systems and scientific and manufacturing equipment and
the readiness of our critical third parties. Our Year 2000 project is designed
to:
- take inventory of and prioritize business critical systems;
- analyze each system's Year 2000 compliance;
- undertake remedial activities, including repairing or replacing
identified systems;
- test the effectiveness of any remedial activities;
- identify and analyze compliance of critical third parties that provide
goods and services to us; and
- develop contingency plans, if internal or external systems fail.
We believe that approximately 90% of our Year 2000 compliance work is complete
with the remaining work scheduled for completion by the end of the third quarter
of 1999.
Information and Operation Systems. In 1994, we invested in a new
Enterprise Resource Planning (ERP) system that was Year 2000 compliant. Since
1994, we have monitored our internal environment to evaluate whether all
products added to our system are also Year 2000 compliant. In 1997, we performed
a physical inventory of all process equipment containing embedded chips,
software products, operating systems, telecommunications products and hardware
products. We then assigned Year 2000 compliance responsibility for each category
to a specific internal group. The process-engineering group addressed the
process equipment category which contains embedded chips by contacting each
supplier and confirming that the equipment supplied was Year 2000 compliant.
In June 1997, our information system department upgraded our business
applications to 10.7 of Oracle's ERP Application Suite, which Oracle has
certified as Year 2000 complaint. The business application suite is our
informational backbone.
In May 1999, we upgraded to release 11 of the Oracle ERP Application Suite
and successfully performed a Year 2000 audit on the new release. Additionally,
we sponsored an
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external audit of the Oracle ERP Application Suite which did not reveal any Year
2000 problems.
We use Novell Network Management Products 4.11 and 5.0 to manage our
telecommunications, and Novell has certified both products as Year 2000
compliant. Additionally, we run the software programs "Check 2000" and "Zen Y2K"
to monitor our desktop computers and test Year 2000 compliance in our network.
To date, we are 95% complete with our inventory, compliance analysis and testing
of business critical financial, information and operational systems, including
manufacturing control systems.
Third Party Year 2000 Compliance. We have taken the following steps to
assess the Year 2000 readiness of our third parties. For our suppliers, we sent
a general inquiry letter in March 1998 to which all of our critical suppliers
responded that they were or would be Year 2000 compliant before the Year 2000.
In June 1999, we sent a follow-up detailed questionnaire to our 51 critical
inventory suppliers requesting information of their Year 2000 assessment,
planning, testing, supply chain and contingency plans. We are beginning to
receive and analyze the responses to these surveys. For our equipment
manufacturers, we sent written inquiries requesting confirmation of Year 2000
compliance and received positive responses from each major manufacturer. For
communications, utilities, shipping vendors, financial institutions and
professional services, we have either contacted directly or reviewed Web sites
to confirm Year 2000 compliance of 90% of these entities. To date, we have not
discovered any third party Year 2000 compliance issues and have targeted August
31, 1999 for our completion of this process.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. The total costs of the Year 2000 systems
assessments and conversions are currently funded through cash flows from
operating activities and we are expensing these costs as they are incurred. Most
of our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters in general. Most of these costs have
already been incurred and we do not anticipate significant future costs with
respect to the remaining efforts. To date, we have not deferred any information
technology initiatives as a result of our Year 2000 project.
Risks. We believe that the chance that our computer systems and
manufacturing equipment are not Year 2000 compliant is minimal. Third-party
goods or services incorporated into our products may need to be revised or
replaced, which could be time consuming and expensive. Our inability to fix any
Year 2000 compliance problems on a timely basis could result in lost sales,
increased operating costs and other business interruptions, any of which could
have a material adverse effect on our business, financial condition and results
of operations. In addition, governmental agencies, utility companies,
third-party service providers and others outside our control may not be Year
2000 compliant and their failures could result in an internal failure beyond our
control, which could have a material adverse effect on our business, financial
condition and results of operations. We believe the most likely worst-case
scenario would involve a complete failure by our electricity providers, since
all of our operations would be disrupted in that event.
Contingency Plan. We are engaged in an ongoing Year 2000 assessment and
intend to implement, no later than August 31, 1999, a contingency plan to
address:
- inventory requirements;
- secondary sources for critical inventory supplies, communications and
manufacturing equipment; and
- a back-up computer system.
We will take into account the results of our Year 2000 simulation testing and
the results of our third-party surveys in determining the nature and extent of
our contingency plans.
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BUSINESS
OUR BUSINESS
We design, manufacture and distribute high-performance car audio and
professional audio systems. Our car audio products include technologically
advanced amplifiers, speakers, source units and accessories marketed under our
Rockford Fosgate brand name. We sell these products in the car audio aftermarket
to consumers who are upgrading their car audio systems. We market our
professional audio amplifiers and speakers under our Hafler brand name.
Rockford Fosgate is one of the world's premier high-performance car audio
brands and for nearly 20 years, it has been the brand of choice among our core
consumers, particularly 16-24 year old males. We believe our brand appeals to
our Generation Y core consumers because they view Rockford Fosgate as the
"coolest" car audio brand. Many of our core consumers are extremely, almost
fanatically, loyal to our Rockford Fosgate brand, and proudly display our logos
on their cars, clothing and even their bodies.
Our marketing and product development efforts are designed to enhance our
brand image and generate increased loyalty among our core consumers and the
retailers who sell our products. We believe our core Generation Y consumers, who
devote much of their time and disposable income to their car audio systems,
desire distinctive "leading edge" products and powerful, high quality sound.
In addition, we believe our hard-hitting, "in your face" advertising
combined with cutting-edge technology and product innovation allows the
retailers who sell our products to appeal to Generation Y and other consumers
who are attracted by our brand, products and distinctive marketing programs. To
maintain and further enhance our unique heritage, we continue to develop new
products that are reliable, durable, technologically advanced and designed to
set industry standards in their product categories. Our Rockford Fosgate and
Hafler products have won numerous consumer and industry awards. We are committed
to maintaining our premier position in car and professional audio by working
closely with distributors, retailers and consumers to satisfy their needs and
preferences.
The chart below shows our corporate structure and the division of our
operations among us and our subsidiaries.
[SUBSIDIARY FLOW CHART]
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OUR INDUSTRY
Car Audio
We believe that total worldwide factory sales of car audio products were
approximately $14.7 billion in 1998, of which $6.3 billion represented
aftermarket sales. We also believe total factory sales of car audio products in
the U.S. were approximately $4.4 billion in 1998, of which approximately $1.9
billion represented aftermarket sales. The international car audio market is
significantly larger, with estimated factory sales of car audio products of
approximately $10.3 billion in 1998, of which $4.4 billion represented
aftermarket sales.
The U.S. car audio aftermarket industry is mature and highly fragmented
with many companies competing for market share. Competition comes predominantly
from specialty audio suppliers that generally compete in specific market niches
on the basis of brand image, quality and technology, and large consumer
electronics suppliers that offer car audio products as part of their broad
consumer electronics lines. The larger specialty audio suppliers and consumer
electronics suppliers have been increasing their market share at the expense of
the smaller specialty audio suppliers, who often lack the capital and other
resources necessary to satisfy the demands of retailers. As a result, industry
consolidation is accelerating, with more efficient vendors capturing incremental
market share and further leveraging costs.
Car audio aftermarket products are typically distributed to consumers
through the following channels:
- Specialty dealers: Retail stores specializing in car audio products;
- Audio/video retailers: Retail stores specializing in car audio, home
audio and video products;
- Consumer electronics retailers: National consumer electronics chains,
such as Best Buy and Circuit City;
- Catalog merchants: Mail order retailers, such as Crutchfield;
- Mass merchants: National mass merchandisers, such as K-Mart, Target and
Wal-Mart; and
- Automotive retailers: Auto parts retailers, such as AutoZone and Pep
Boys.
Historically, specialty dealers have dominated the retail distribution of car
audio aftermarket products. Over the last several years, as a result of changing
consumer buying patterns, the audio/video and consumer electronics retailers
have been the fastest growing distribution channels for car audio products
increasing their combined market share from 34.5% in 1987 to 50% in 1997.
Professional Audio
The professional audio market is focused on consumers who use audio
equipment in commercial applications. Professional audio products are used in
recording studios, movie theaters, concert facilities, stadiums, traveling bands
and broadcast studios. The professional audio market requires technical
information to assist buyers in the sales process and has become increasingly
price competitive. To reduce costs, many manufacturers have shifted to overseas
component suppliers.
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OUR CONSUMERS
Car Audio
Historically, 16-24 year old males have been the primary consumers of
high-end car audio aftermarket products. Generation Y consumers possess
substantial disposable income and devote much of their time and money to their
music and cars. They are part of Generation Y, the 10-24 year old age group that
is one of the fastest growing segments of the U.S. population. According to U.S.
Census Bureau, Generation Y is estimated to grow from 57.0 million in 1998 to
61.6 million in 2005. This growth rate would outpace the estimated general
population growth by 56.7%.
Today's 16-24 year old male consumers have an increasing preference for
brand names, durability and high-performance products and are more knowledgeable
about car audio products than prior generations. Consumer electronics retailers
devote significant square footage to car audio products because they have found
the category to be a very important traffic driver, particularly of Generation Y
consumers.
Our newly acquired Lightning Audio brand is positioned to offer our
consumers an alternative that is cool to own but more moderately priced than our
premium Rockford Fosgate brand. We believe this will enable us to sell to an
even larger number of consumers.
Professional Audio
Our professional audio consumers are typically more technically oriented
and drawn from a broader range of age groups. These consumers use our products
primarily for commercial applications and in their professional activities.
OUR GROWTH STRATEGY
Our goal is to design, produce and distribute the best engineered and most
recognized and respected brands of high-performance car and professional audio
products in the world. Each element of our strategy is intended to enhance and
reinforce the global brand images of Rockford Fosgate and Hafler among consumers
and retailers. Key elements of our growth strategy are to:
Expand Channels of Distribution. We believe our selective distribution
increases brand loyalty, enhances retailers' profit margins and encourages
retailers to carry a broad range of our products. We have recently increased our
channels of distribution, focusing on some of the fastest growing and most
efficient retailers in the U.S. and selected international markets. For example,
in early 1999, we began distributing our car audio products through Best Buy, a
leading consumer electronics and car audio retailer, with more than 300 stores
in the U.S. Best Buy concentrates its in-store merchandising on a few high
quality suppliers in each of its product categories and has devoted selling
space and financial and operating resources to promote and sell our products. In
addition, in August 1998, we began selling our products to Crutchfield, a car
and home audio catalog retailer in the U.S., as well as continuing to sell
through the Autobacs and Yellow Hat consumer electronics chains in Japan.
Develop a Second Brand. In response to requests from our retailers and
international distributors, we intend to develop a second brand to be sold at
more moderate price points than our current products. Consistent with our
Rockford Fosgate and Hafler brand images, however, we expect that these products
will continue to offer the highest performance and quality standards in their
categories. In June 1999, we acquired Lightning Audio, a manufacturer and
distributor of car audio accessories. We intend to introduce a line of
moderately priced, high-performing amplifiers and subwoofers under the Lightning
Audio brand name in 2000. We believe the addition of a second brand will help us
enhance and expand our product offerings and increase our distribution
capabilities.
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Capitalize on International Opportunities. We believe that the Rockford
Fosgate brand name is as widely recognized in many foreign countries as it is in
the U.S. We intend to aggressively expand Rockford Fosgate, Lightning Audio and
Hafler in international markets. We currently sell our car audio products
directly to retailers in Canada, Germany and Japan, and through independent
distributors, to over 60 other countries. Unlike in the U.S., we have
established relationships with distributors in certain international markets who
purchase our products and resell them to retailers. Recently, we initiated a
strategy of moving to a "one-step" distribution system in larger international
markets by converting selected distributors into independent sales
representatives, allowing us to sell directly to retailers. We expect these
measures to substantially increase our sales in these markets by allowing us to
better compete through lower distribution costs and reduced prices to the
consumer.
Introduce New and Innovative Products. We intend to take advantage of the
strength of the Rockford Fosgate and Hafler brands by continuing to introduce
new and innovative products. We believe our ability to quickly deliver
innovative products to market appeals to consumers' desire for "leading edge"
products and provides a significant competitive advantage. In recent years, this
strategy has been effective both in launching our new products and increasing
sales of our core products. For example, we recently introduced new source units
and mid-range speakers for the Rockford Fosgate brand, and are developing home
theater products under the Hafler brand.
Promote Our Unique Brand Image. We believe our core consumer, the
Generation Y 16-24 year old male, perceives our brand as the "coolest" in the
car audio product category. We intend to continue to enhance the Rockford
Fosgate, Lightning Audio and Hafler brands by projecting an image that appeals
to consumers who appreciate brand authenticity and value. We believe that the
combination of our hard-hitting advertising campaigns with our rugged and
durable products has created worldwide recognition and loyalty among our core
consumers. Many of our consumers proudly display our logos on their cars,
clothing and even on their bodies. In addition, we believe demand for our brand
and products provides retailers with a powerful tool to expand their customer
base by generating increased foot traffic of Generation Y and other consumers.
OUR PRODUCTS
Percent of Sales by Product Class
Our sales since 1996 were divided among our principal product classes as
shown in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------- JUNE 30,
1996 1997 1998 1999
----- ----- ----- ----------------
<S> <C> <C> <C> <C>
Amplifiers..................................... 51.3% 49.3% 49.9% 48.6%
Speakers....................................... 27.1 30.1 32.5 34.0
Others(1)...................................... 21.6 20.6 17.6 17.4
----- ----- ----- -----
Total..................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
- ---------------
(1) No other single product class accounted for more than 10% of our sales in
any of these periods.
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Car Audio
We offer a full line of high-performance car audio products. The following
table provides examples of specific products within each of our product lines:
<TABLE>
<S> <C>
Amplifiers.............. Two channel amplifiers; multi-channel amplifiers; mono
(single channel) amplifiers; signal processors
Speakers................ Subwoofers; woofers; mid-range separates; full range
speakers; speaker enclosures; tweeters
Source Units............ AM/FM/CD players; compact disc changers
Accessories............. Amplifier installation kits; power, ground and speaker wire;
RCA cables; connectors; adaptors; stiffening caps;
miscellaneous electrical components; installation
accessories; Punch Sport brand promotional materials and
clothing
</TABLE>
Amplifiers. Amplifiers increase the voltage and current coming from the
source unit, providing more power than possible from a source unit alone.
Amplifiers are essential for a high-performance car audio system and are
typically not part of a standard factory installed system. We sell 21 different
models of amplifiers under our Punch brand, with rated power from 100 to 1,100
watts and with minimum advertised prices ranging from $179.95 to $1,329.95. Our
amplifiers provide 1, 2, 4 and 5 channel alternatives, giving consumers the
ability to select an optimum configuration for their system. For specialized
applications, we also sell stand-alone signal processors that accept input from
a source unit, modify the signal to provide the consumer with enhanced
performance and deliver the signal to one or more amplifiers.
Speakers. Speakers accept a signal from a source unit or amplifier and
translate it into sound. There are two categories of speakers: those eight
inches or greater in diameter are considered subwoofers and are designed to play
lower (bass) frequencies; and those less than eight inches in diameter are
considered speakers and are designed for higher frequencies. Aftermarket
speakers and subwoofers provide dramatically improved sound quality compared to
most factory installed car audio systems and are often the single most important
improvement consumers can make to their car audio sound system. We sell 88
different models of car audio speakers under our Punch brand with minimum
advertised prices ranging from $59.95 to $549.95.
Source Units. Source units are the control center for a car audio system.
Typically mounted in the dash of the car, source units provide input signals,
including AM/FM radio and compact disc players. Most of our units have the
ability to control a CD changer. We sell three different models of source units
under the Rockford Fosgate brand with minimum advertised prices ranging from
$249.95 to $349.95. Additionally, we sell 8-disc CD changers with a minimum
advertised price of $299.95.
Accessories. We sell over 400 different types of accessories under the
Connecting Punch brand, including amplifier installation kits, RCA cables and
carpet/fabric/surface applications. We also sell over 1,000 different types of
accessories under the Lightning Audio brand, including stiffening capacitors,
battery clamps, RCA and speaker cables. We also sell promotional materials and
clothing under the Punch Sport brand.
Our Rockford Fosgate products have won numerous consumer and industry
awards, including Autosound Grand Prix awards in every year from 1987 through
1999, Innovations awards at the Consumer Electronics Shows in 1997, 1998 and
1999 and European Car Audio Press awards in 1997 and 1998.
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Professional Audio
We sell professional audio amplifiers and speakers under the Hafler brand
name. Suggested retail prices range from $569.00 to $2,200.00. Our professional
audio products are used in recording studios, movie theaters, concert
facilities, stadiums, traveling bands and broadcast studios. Due to
manufacturing and technical similarities with the Rockford Fosgate brand, many
processes and technologies are shared and developed across both brands. Our
Hafler products won awards from Pro Audio Review in 1996 and 1997, Mix Magazine
in 1996 and 1998 and Canadian Music-Music Week Magazine in 1999, as well as
receiving the EQ Award in 1997 and Electronic Musician Editor's Choice Award in
1999.
RESEARCH AND DEVELOPMENT
Research and development is a primary focus of our business because of the
heavy demand by our core consumers for leading-edge products. We focus our
research and development efforts primarily on enhancing current products and
developing new products. Our engineering processes involve a coordinated effort
across multiple areas of our company. As at June 30, 1999, our research and
development staff consisted of eleven design engineers, as well as other support
staff, dedicated to project development and who coordinate their efforts with:
- our sales group to identify features consistent with market requirements
and our brand image;
- our manufacturing staff to develop and build products more efficiently;
- our product support staff to identify weaknesses in our existing products
and to help re-design them; and
- our customers -- both at the retailer and consumer level -- to help us
better understand their needs and preferences and incorporate them into
our products.
As a result of these efforts, we have reduced product development
time-to-market from up to 24 months to an average of six to nine months, as
compared to over twelve months for many of our competitors. Our objective is to
introduce new products or re-engineer approximately one-third of our existing
product line annually. In 1998, more than 60% of our sales were generated from
new or re-engineered products.
Part of our research and development efforts seek to create a reserve base
of technologies and innovations that are available to our engineers for use in
the product development process. As a result, we can readily respond to changing
demand and effectively execute our marketing plans by introducing new products
and by adding features to our existing products. Examples of product innovations
that have been or are being developed from this reserve technology base include:
- powered speakers, which are speakers that include an integrated
amplifier;
- remote bass and speaker controls;
- active cross-overs that allow consumers to tailor our amplifiers to their
systems' needs;
- class BD amplifiers that incorporate a more efficient circuit design;
- more reliable mechanical components;
- materials improvements that increase the durability and performance of
our products; and
- digital signal processing.
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SALES, MARKETING AND DISTRIBUTION
Our sales and marketing efforts are designed to enhance our brands by
projecting an image that appeals to consumers who appreciate brand authenticity
and value. We believe that the combination of our hard-hitting advertising
campaigns with our rugged and durable product offerings has created worldwide
recognition and loyalty among our core consumers. We promote our products with
monthly, bi-monthly and quarterly full page advertisements in fourteen car audio
magazines and publications. We participate in six annual trade and consumer
shows and contests, and supply promotional prices and giveaways. We publish a
complete set of full color brochures and promotional literature detailing each
of our products. Our products also appear in advertisements on television,
newspapers and the Internet. We also help promote concerts and compact discs
that were produced using Hafler products.
Our sales and marketing activities are listed below in their order of
importance:
- making regular calls to dealers and providing them with demonstration
products, point-of-purchase displays and other marketing materials;
- initiating targeted advertising in periodicals read by our potential
consumers;
- training dealer installation personnel at our Rockford Technical Training
Institute;
- participating in rule making for, and providing technical and product
support to, auto sound competitions; and
- participating in related professional and consumer trade shows.
We consider our advertising to be both hard-hitting and "in your face"
because our advertisements are intense, frequent and intended to excite our core
consumer. We use the explosive imagery of the wolf in our visual advertisements
and booming sound bites in our audio campaign to promote the power, quality and
intensity of our products.
Our corporate Web site, located at www.rockfordcorp.com, offers consumers
and retailers reliable and comprehensive information about our product offerings
and consumer services. Because our core consumers are among the most
enthusiastic users of the Internet, we believe expanded Internet-based marketing
will broaden our consumer reach, enhance our brand image and direct potential
consumers to our retailers. Our Web site offers retailers, sales representatives
and distributors an efficient method to track order status, accounts receivable
and sales history and to access marketing and advertising materials. Consumers
can currently purchase Punch Sport promotional materials and clothing from our
corporate Web site. In addition, we intend to sell our upcoming Hafler home
theater products over the Internet.
Lightning Audio has a separate Web site at www.lightningaudio.com, which
features comprehensive information about Lightning products, dealers and
promotions.
Car Audio Distribution
We currently sell our Rockford Fosgate car audio products in the U.S.
through a network of over 1,500 retail stores and 18 independent sales
representative firms who identify, recruit and sell to dealers in their regions.
Our representative firms, serviced by our three in-house regional managers,
employ a total of approximately 60 field personnel who make regular calls on
dealers in their region. We have entered into one-year agreements with each of
these firms under which we appoint them our sales representative for a specific
territory and specific products under varying terms.
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Our U.S. distribution system is composed of independent specialty dealers,
audio/video retailers, consumer electronics chains and catalog merchants. Our
dealers and distributors sign agreements under which we appoint them to serve a
specific territory to distribute our products under varying terms. In early
1999, we launched our distribution program with Best Buy, one of the larger
consumer electronics retailers. Best Buy sells our products in all of its more
than 300 stores nationwide. Our expansion into Best Buy represents an evolution
in our strategy to distribute through additional channels. We believe our
expansion into Best Buy will:
- further increase recognition of the Rockford Fosgate brand;
- distribute our products to a more diverse set of consumers, including
females and older males;
- expand market share among our core consumers since many of them shop at
Best Buy stores;
- expand our sales into geographic markets where we currently have little
presence; and
- allow our specialty dealers to grow their sales by taking advantage of
increased product visibility created by Best Buy's advertising programs.
We currently sell our car audio products in over 60 other countries through
independent distributors and sales representatives. Selling through distributors
has allowed us to expand into international markets while minimizing cultural
differences and local marketing issues, such as warranty service. In Japan, we
sell to independent distributors through our majority owned subsidiary.
During 1999, we initiated a program to convert selected foreign markets to
a "one-step" distribution system by switching to independent sales
representatives. This system allows us to sell directly to retailers rather than
to distributors who further mark-up our products before selling them. We expect
this transition to substantially increase our penetration in these markets by
reducing prices to the consumer while providing us with a higher gross margin.
Because relatively high sales volumes are needed to justify the use of
independent sales representatives, we anticipate converting some higher volume
territories over time while continuing to distribute through distributors in
smaller territories. To date, we have successfully completed the conversion to
the one-step distribution system in Canada and Germany.
We sell Lightning Audio products in the United States through a network of
15 independent distributors and over 400 independent retailers. We also sell
Lightning Audio products internationally through 123 independent distributors
who sell our products in 30 countries.
Professional Audio Distribution
In the U.S., sales of professional audio products primarily are made
through sales representatives to small specialty dealers and larger retail
chains, such as Guitar Center and Sam Ash. Internationally, sales are primarily
made through approximately 28 independent distributors in over 30 countries. We
also plan to sell Hafler home theater products directly over the Internet in the
future.
PRODUCT SUPPORT
To maintain and enhance our relationships with retailers, we provide
numerous support services, including product and installation training, sales
training, technical and customer service support and advanced information
systems, including an interactive Web site. Our
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Web site provides comprehensive and valuable information for dealers and
distributors, including product schematics, ad layouts and logos. Our Rockford
Technical Training Institute, one of the first and most advanced of its kind in
our industry, trains over 700 retailer sales and installation personnel per year
on our special methods and unique culture. In addition, our instructors and
demonstration vehicles travel worldwide hosting dealer instruction seminars.
Our products carry standard warranties against defects in material and
workmanship, and we will either repair or replace any product that fails to meet
this warranty. Repair services are available for products which are no longer
covered under the original warranty. For our U.S. customers, we have in-house
customer service, repair and technical support personnel who provide general
company information, installation support, troubleshooting, and system design
assistance. We provide a unique rapid factory direct repair program that repairs
and ships products within 24 hours of receipt, reducing retailer and consumer
inconvenience if our products fail to perform properly. For our international
customers, our distributors provide customer service and warranty support.
MANUFACTURING
We believe our efficient production, sourcing and distribution capabilities
make us one of the preferred suppliers in the car audio aftermarket.
We manufacture amplifiers, signal processors and various accessories at our
facilities in Tempe, Arizona and mid-range speakers, woofers and subwoofers at
our facility in Grand Rapids, Michigan. In 1999, Hyundai Electronics signed a
four-year joint development agreement with us to supply all of the source units
we resell under the Rockford Fosgate brand name in accordance with our
specifications. Other third parties manufacture our full-range speakers and
various components according to our design specifications. We use cellular
manufacturing processes and just-in-time supply management in all our
manufacturing facilities. Cellular manufacturing provides flexibility and
efficiency because any cell can manufacture any product, depending on market
demand. Lot sizes are small and feedback from the manufacturing process is
quick. We use advanced surface mount technology in our electronics
manufacturing. Surface mount technology is accurate, increases the density of
circuits and reduces labor content. Our flexible manufacturing and in-house
engineering capabilities are a key part of our efforts to shorten lead times
from concept to production, respond rapidly to changing demand and reduce our
parts and raw materials inventory. Both of our facilities focus on continuous
improvement, with quality control embedded in the manufacturing process. The
result has been improved flexibility, increased efficiency and greatly improved
cycle times.
We recently shifted from purchasing parts and materials solely in the U.S.
to purchasing from the best suppliers available to us worldwide. This global
sourcing initiative was a critical shift in our raw materials strategy, allowing
us to deliver high quality, low-cost goods that are competitive with those
offered by our U.S. and international competitors. Global sourcing of our
component parts provides us the best total cost suppliers and introduces us to
worldwide technologies and materials.
COMPETITION
Our markets are very competitive, highly fragmented, rapidly changing and
characterized by price competition and, in the car audio market, rapid product
obsolescence. Rockford competes in the car audio market on the basis of brand
recognition, innovation and
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technology, quality and reliability, breadth of product line, distribution
capabilities and price. Competition comes predominantly from two categories:
- Specialty audio suppliers. These companies generally compete in specific
market niches on the basis of brand image, quality and technology.
However, many of these companies are undercapitalized, lack the buying
power necessary to develop cost efficiencies and lack the infrastructure
to efficiently source raw materials, manufacture components and systems,
and distribute finished products.
- Large consumer electronics companies. These companies offer car audio
products as part of their broad consumer electronics lines. They have
efficient operations but are volume-driven and generally do not respond
as quickly to changing consumer preferences as do smaller specialty
suppliers. Consumer perception of the quality of their products is often
not as high, frequently resulting in lower brand image and profit
margins. These companies tend to focus on the larger market segments,
such as source units, and generally do not focus on the smaller market
segments, such as amplifiers and subwoofers.
Some of our competitors have greater financial, technical and other
resources than we do and many seek to offer lower prices on competing products.
To remain competitive, we believe we must regularly introduce new products, add
performance features to existing products and limit increases in prices or even
reduce them. Our principal competitors within our product lines are listed
below:
- Car Audio Amplifiers: Alpine, Kenwood, Kicker, MTX, Orion, Phoenix Gold
and PPI;
- Car Audio Speakers: Blaupunkt, Boston Acoustics, Infinity, JBL, JL
Audio, Kenwood, Kicker, Pioneer and Polk;
- Car Audio Source Units: Alpine, Blaupunkt, Clarion, Fujitsu Eclipse,
Kenwood, Nakamichi, Pioneer and Sony;
- Car Audio Accessories: Monster Cable, Phoenix Gold and Stinger; and
- Professional Audio Amplifiers and Speakers: Cress, Crown, Eastern
Acoustic Works, Mackie Designs, Peavy, QSC and Tannoy.
We believe we rank first among our competitors in car audio amplifiers and
are in the top five among our competitors in car audio speakers and accessories.
We believe we are a relatively minor competitor in car audio source units and
are new to the professional audio speaker market. We believe we rank first in
the recording studio segment of professional audio amplifiers and that we are a
small player in the remaining part of the professional audio market.
We also compete indirectly with automobile manufacturers, who may improve
the quality of original equipment sound systems, reducing demand for aftermarket
car audio products. They may also change the designs of their cars to make
installation of our products more difficult or expensive.
INFORMATION SYSTEMS
We have a fully integrated system based on a Novell network, Oracle
applications and databases, Microsoft Office applications and a Cisco
infrastructure. We also created a three tier open architecture with
plug-and-play and open interface tables.
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<PAGE> 42
Our information systems are designed to respond quickly to inquiries from
our managers, employees, suppliers and customers. They are designed to support
our efforts to:
- produce high quality products;
- reduce working capital requirements;
- decrease the time to market for new products;
- deliver orders faster; and
- provide accurate and timely information.
Our information systems assist us in producing high quality products
quickly and affordably by providing immediate quality information about our
business. Our advanced messaging systems collect feedback about product quality
from our customer service department that we send directly to our engineering
and manufacturing groups. This early customer feedback permits prompt
adjustments and serves as an immediate indicator of our products' market
acceptance. Our common drive is accessible to authorized employees for new
product information and timely updates. Management has access to secured
databases regarding the status, cost and projections for pending projects,
enabling quick adjustments to scheduling and use of resources.
We have implemented Web-based systems to provide accurate and timely
information and allow our representatives, dealers and distributors to check the
status of their orders at our secure Internet site. We also have designed and
tested systems to accept orders from consumers over the Internet in preparation
for distribution of our Hafler home theater products.
INTELLECTUAL PROPERTY
We rely upon a combination of trade secret and trademark laws,
non-disclosure agreements and patents to protect our proprietary rights. We have
registered many trademarks and trade names both in the U.S. and internationally
and are committed to maintaining and protecting them. We believe our trademarks
and trade names are material to our business and are well known among consumers
in our principal markets. Our principal trademarks and trade names include:
- Rockford Fosgate(R);
- The Punch(R);
- Connecting Punch(R);
- Punch Sport(R);
- Practice Safe Sound(R);
- Car Audio for Fanatics(R);
- Lightning Audio(R);
- Storm(TM);
- Bolt(TM);
- Strike(TM);
- Hafler(R); and
- Our "Diamond R" logo.
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<PAGE> 43
EMPLOYEES
As at June 30, 1999, we had 428 total employees. At that date, in the U.S.,
288 were engaged in manufacturing, 34 in research and development, 39 in sales
and marketing and 49 in administration. We also had 18 employees working outside
of the U.S. in various functions. We have never had a work stoppage and none of
our employees are unionized. We believe our employee relations are good.
FACILITIES
Our corporate headquarters and electronics manufacturing facilities are
located in Tempe, Arizona. We manufacture speakers at our facility in Grand
Rapids, Michigan. We use warehouses strategically located in the U.S., Japan,
Singapore and Germany that enhance our ability to serve our markets faster and
more cost effectively than many of our competitors. The following table contains
information about our facilities, all of which are leased:
<TABLE>
<CAPTION>
APPROXIMATE
FUNCTION LOCATION SQUARE FOOTAGE LEASE EXPIRATION
- ------------------------------- ---------------------- -------------- -----------------
<S> <C> <C> <C>
Corporate headquarters......... Tempe, Arizona 15,000 December 31, 2000(1)
Manufacturing, research and
development, and
purchasing................... Tempe, Arizona 22,000 December 31, 2000(1)
Warehousing, sales and customer
service...................... Tempe, Arizona 25,000 December 31, 2000(1)
Warehousing and sales.......... Tempe, Arizona 6,600 December 31, 1999
Warehousing and sales.......... Tempe, Arizona 29,000 July 15, 2001
Manufacturing, research and
development, purchasing and
administration............... Grand Rapids, Michigan 81,000 March 31, 2001
Warehousing and sales.......... Japan 6,400 March 29, 2004
Warehousing.................... Singapore 10,000 November 15, 2000
Warehousing.................... Germany 17,000 December 30, 2006
-------
Total................ 212,000
</TABLE>
- ---------------
(1) We have the right to extend these leases for two additional one-year terms.
ENVIRONMENTAL COMPLIANCE
Whenever possible, we avoid using hazardous materials in our production
processes. Two chemicals used in our basic processes, lacquer and flux, are
listed as hazardous materials by the U.S. Environmental Protection Agency. We
use them in limited quantities in our production facility, taking care to see
that they are stored, used and disposed of in the proper manner. We believe that
compliance with federal, state, local and foreign provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, will not have a material effect upon our capital
expenditures, earnings and competitive position. We do not anticipate material
capital expenditures for environmental control facilities for the remainder of
the current fiscal year, or the succeeding fiscal year.
LEGAL PROCEEDINGS
In 1998, Integrated Electronic Technologies (IET) alleged in correspondence
that our patented TOPAZ circuit design infringed a patent of IET. The TOPAZ
circuit is used in our higher-priced "Punch" line of car audio amplifiers and in
our Hafler professional amplifiers. We believe that IET's allegations are
without merit. IET has not initiated any legal proceedings relating to this
claim and has not communicated with us about it since September 1998.
In addition to the above, we are and may continue to be a party to various
lawsuits and arbitrations from time to time. As of June 30, 1999 we were not a
party to any legal proceedings that we believe are material.
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table contains information regarding our executive officers
and directors as of the date of this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
W. Gary Suttle(1)......................... 59 President, Chief Executive Officer and Director
David A. Boshes........................... 45 Vice President of Operations
Daniel C. McLeod.......................... 45 Vice President of Sales
David L. Richards......................... 52 Vice President of Information Technology
James C. Strickland....................... 61 Vice President of Engineering
James M. Thomson.......................... 52 Vice President of Finance, Chief Financial
Officer and Secretary
Ronald N. Trout........................... 40 Vice President of New Products
Alan R. Zimmerman......................... 42 Vice President of Product Design and Development
Jerry E. Goldress(1)(2)(3)................ 68 Chairman of the Board
Nicholas G. Bartol........................ 45 Director
Timothy C. Bartol(1)(2)(3)................ 43 Director
Ralph B. Godfrey(2)....................... 59 Director
John P. Lloyd(3).......................... 47 Director
</TABLE>
- ---------------
(1) Member of the executive committee.
(2) Member of the nominating and compensation committee.
(3) Member of the audit and finance committee.
W. Gary Suttle has served as President and Chief Executive Officer since
August 1992. From that time through December 31, 1998, he simultaneously served
as a partner in Grisanti, Galef & Goldress, a turnaround, growth and profit
improvement firm and provided his services to us through that firm under a
consulting agreement. From 1982 until 1992, Mr. Suttle was a partner in
Grisanti, Galef & Goldress and was involved in consulting and management for
various manufacturing and retail firms. From 1980 to 1982, Mr. Suttle was a
consultant with The Boston Consulting Group. He also served as a captain in the
U.S. Marine Corps where he was involved in special operations. Mr. Suttle holds
a B.S. in Electrical Engineering from Auburn University, an M.S. in Electrical
Engineering from the Georgia Institute of Technology and an M.B.A. from The
Harvard Graduate School of Business Administration.
David A. Boshes has served as Vice President of Operations since 1996 and
has served us in various positions since 1993, beginning as Production
Engineering Manager. From 1976 until 1993, Mr. Boshes held various technical
positions with Digital Equipment, ranging from Product Test Engineer to Plant
Engineering Manager. Mr. Boshes holds a B.S. in Electrical Engineering from
Northern Arizona University.
Daniel C. McLeod has served as Vice President of Sales since 1991 and has
served us in various sales positions since 1985. From 1982 to 1985, Mr. McLeod
operated a manufacturers representative firm selling consumer electronics. From
1975 to 1982, Mr. McLeod was a retail store manager for the Minneapolis-based
chain of Team Electronics.
David L. Richards has served as Vice President of Information Technology
since 1996 and, prior to that, as Director of Information Technology beginning
in 1993. From 1976 until 1993, Mr. Richards held a number of MIS management
positions for Digital Equipment with
43
<PAGE> 45
responsibility for systems and programming implementation. Mr. Richards also
served in the U.S. Army.
James C. Strickland has served as Vice President of Engineering since 1992
and has served us in other engineering and research positions since 1987. Prior
to joining us in 1987, he served in various engineering capacities with Sony,
MCI, Acoustat and The David Hafler Company. Mr. Strickland holds a B.S. in
Mathematics from the University of Miami (Florida). Mr. Strickland holds seven
U.S. patents, three of which have been assigned to Rockford, involving circuitry
used in home and auto amplifiers.
James M. Thomson has served as Vice President of Finance and Chief
Financial Officer since joining us in 1993. Prior to 1993, Mr. Thomson held
positions as Operations Finance Manager, Corporate Controller of Corporate
Planning and Director of Finance and Customer Administration for The Toro
Company Worldwide Irrigation Division. He was also a Senior Financial Analyst
for Litton Industries and operated his own consulting company. Mr. Thomson also
served in the U.S. Navy. Mr. Thomson holds a B.S. and M.S. in Applied Economics
from the University of Wisconsin - Madison.
Ronald N. Trout has served as Vice President of New Products since 1991
and, since 1987, he has served us in various positions, beginning as Customer
Service Manager, where he developed our technical training school, Rockford
Technical Training Institute. Mr. Trout attended Arizona State University where
he studied Mass Communications.
Alan R. Zimmerman has served as Vice President of Product Design and
Development since 1998 and has served us in various positions since 1988. Mr.
Zimmerman was with Honeywell from 1980 to 1988 where he held various positions
in cost and inventory accounting, manufacturing financial analysis and business
planning. Mr. Zimmerman holds a B.S. in Accounting and an M.B.A. from Arizona
State University.
Jerry E. Goldress has served as Chairman of the Board since 1998. Mr.
Goldress served as an advisory director to us from 1992 until 1998. Since 1981,
Mr. Goldress has served as Chairman and Chief Executive Officer of Grisanti,
Galef & Goldress. Mr. Goldress is also a director of Applied Magnetics, a
publicly held supplier of magnetic recording heads and head stack assemblies for
disc drives, and of K2, Inc., a publicly held manufacturer of snow ski
equipment. Mr. Goldress has a B.S. and M.S. in Industrial Engineering from
Pennsylvania State University.
Nicholas G. Bartol has served as a director since 1985, except for a
two-year period from 1991 to 1993. Mr. Bartol was employed by EFW, a defense
contractor, from 1985 until April 1999. Mr. Bartol holds an A.B. from Brown
University, an M.B.A. from Southern Methodist University and a Master of
Theology from Dallas Theological Seminary. Mr. Bartol is the brother of Timothy
C. Bartol.
Timothy C. Bartol has served as a director since 1997 and served as our
Chairman in 1997 and 1998. Mr. Bartol has been employed since 1994 by Phillips
Publishing and, since 1997, has served as Director of Applications Development.
Mr. Bartol holds a B.A. from Stanford University, and an M.B.A. and M.S./M.I.S.
from Boston University. Mr. Bartol is the brother of Nicholas G. Bartol.
Ralph B. Godfrey has served as a director since April 1999. Mr. Godfrey has
been employed since 1990 by 3Com, a publicly held manufacturer of computer
networking products. He has held various sales positions including Senior Vice
President of Americas Sales. He is currently managing 3Com's electronic business
operations as Vice President of E-Business. Mr. Godfrey holds a B.S.E.E. and an
M.S. in Electrical Engineering from Auburn University.
44
<PAGE> 46
John P. Lloyd has served as a director since 1988. Mr. Lloyd has worked
since 1994 as a Managing Director in the Investment Management Group of Aetna.
Mr. Lloyd is a Chartered Financial Analyst and has a B.S. in Finance from
Villanova University and an M.B.A. in Investments from Drexel University.
COMMITTEES OF THE BOARD OF DIRECTORS
The executive committee of the board of directors meets periodically to
advise upon and approve Rockford's business and affairs that may arise between
the regularly scheduled board meetings. The current members of the executive
committee are Messrs. Goldress (Chair), T. Bartol and Suttle.
The nominating and compensation committee of the board of directors
recommends officers and directors to the board of directors and reviews and
approves the amount and type of compensation paid to senior management. The
current members of the nominating and compensation committee are Messrs. T.
Bartol (Chair), Godfrey and Goldress.
The audit and finance committee of the board of directors reviews our
accounting controls and recommends to the board of directors the engagement of
our outside auditors. The current members of the audit and finance committee are
Messrs. Lloyd (Chair), T. Bartol and Goldress.
DIRECTOR COMPENSATION
We compensate our non-executive directors by paying them $1,000 per
quarter. In addition to compensation, we reimburse directors for their
reasonable travel expenses incurred in attending board and committee meetings.
We have also customarily granted to our non-executive directors options
under our 1994 and 1997 Stock Option Plans. The following table sets forth all
information pertinent to such grants to our current board of directors.
<TABLE>
<CAPTION>
TERM
NAME NUMBER OF SHARES EXERCISE PRICE (YRS)
- ---- ---------------- ---------------- -----
<S> <C> <C> <C>
Jerry E. Goldress............................... 34,400 $2.44 10
John P. Lloyd................................... 73,100 $2.44 10
Nicholas G. Bartol.............................. 8,600 $2.44 5
Timothy C. Bartol............................... 8,600 $2.44 5
Ralph B. Godfrey(1)............................. -- -- --
</TABLE>
- ---------------
(1) On the effective date of this offering, we plan to grant to Mr. Godfrey an
option to purchase 64,500 shares at an exercise price equal to the price in
this offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, executive compensation decisions were made by our board's
nominating and compensation committee which consisted of Messrs. T. Bartol,
Goldress and Suttle. During that time, Mr. Suttle was an executive officer of
Rockford and Mr. Goldress' firm of Grisanti, Galef & Goldress had a consulting
agreement with us. None of our directors serve on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of our board of directors or nominating and compensation
committee.
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<PAGE> 47
EMPLOYMENT AGREEMENTS
Except for Mr. Suttle, none of our executive officers has a written
employment agreement. See "Certain Transactions -- Suttle Employment Agreement"
for a description of Mr. Suttle's employment agreement. We maintain a $1.0
million key-person life insurance policy on Mr. Suttle.
EXECUTIVE COMPENSATION
The following table shows all compensation earned during 1998 by our
President and Chief Executive Officer and our other four most highly compensated
executive officers whose salaries and bonuses in aggregate exceeded $100,000 in
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ---------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY(1) BONUS STOCK OPTIONS
- --------------------------- --------- -------- ---------------------
<S> <C> <C> <C>
W. Gary Suttle................................. $360,000 $120,000 --
President and Chief Executive Officer(2)
David A. Boshes................................ 137,458 26,000 17,200
Vice President of Operations
Daniel C. McLeod............................... 175,107 23,000 24,725
Vice President of Sales
David L. Richards.............................. 136,964 26,000 17,200
Vice President of Information Technology
James M. Thomson............................... 137,500 23,000 21,500
Vice President of Finance and Chief Financial
Officer
</TABLE>
- ---------------
(1) Amounts listed are annual base salaries, with the exception of Mr. McLeod,
who is paid commissions based on our sales. Mr. McLeod's commissions are
included in the salary column. Amounts listed include amounts deferred under
any Rockford deferred salary plan.
(2) All compensation for Mr. Suttle's services was paid to Grisanti, Galef &
Goldress, under a consulting agreement with that firm. Mr. Suttle's services
under the consulting agreement ended and he became a Rockford employee on
January 1, 1999.
1998 STOCK OPTION GRANTS
The following table summarizes the stock options we granted to our officers
listed on the Summary Compensation Table for 1998. We have never granted any
stock appreciation rights.
The Securities and Exchange Commission requires that we use the assumed
annual compounded rates of stock price appreciation of 5% and 10% shown in this
table. These rates are only an illustration and are not based on our anticipated
results. Our stock price may increase or decrease, based on market conditions,
our performance and many other factors. You should not rely on the amounts in
this table as a projection of our performance over any time period.
46
<PAGE> 48
INDIVIDUAL GRANT(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
GRANTED TO EXERCISE OPTION TERM(2)
NUMBER OF EMPLOYEES IN PRICE PER --------------------
NAME SHARES 1998 SHARE EXPIRATION DATE 5% 10%
- ---- --------- ------------- --------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
W. Gary Suttle......... -- -- -- -- -- --
David A. Boshes........ 17,200 11.5% $5.81 8/31/08 $62,889 $159,400
Daniel C. McLeod....... 21,500 14.4 5.81 8/31/08 78,612 199,218
3,225 2.2 4.19 2/01/08 8,490 21,516
David L. Richards...... 17,200 11.5 5.81 8/31/08 62,889 159,374
James M. Thomson....... 21,500 14.4 5.81 8/31/08 78,612 199,218
</TABLE>
- ---------------
(1) All options were granted under our 1997 Stock Option Plan. 25% of the option
shares are exercisable on the day of the grant and 25% become exercisable on
each of the first three anniversaries of the grant date.
(2) This column represents the hypothetical gain if (1) the employee exercises
the options at the end of the option term, (2) the shares had a fair market
value on the date of grant equal to the option price and (3) the shares
appreciate at the assumed rates of compounded annual growth. The employee's
actual gain, if any, will depend on the performance of our stock and on
market conditions. It may be more or less than the assumed amounts.
1998 OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table contains information concerning the exercise of stock
options during the fiscal year ended December 31, 1998 by our officers listed on
the Summary Compensation Table:
- the shares that our executive officers purchased during 1998 by
exercising their stock options; and
- the number and value of unexercised options our officers listed on the
Summary Compensation Table held at December 31, 1998. Value is determined
by subtracting the exercise price from our board's deemed fair market
value at that date.
<TABLE>
<CAPTION>
VALUE OF
1998 OPTION UNEXERCISED IN-THE-MONEY
EXERCISES UNEXERCISED OPTIONS AT OPTIONS AT
------------------- DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES VALUE ----------------------------- -----------------------------
ACQUIRED REALIZED EXERCISABLE NOT EXERCISABLE EXERCISABLE NOT EXERCISABLE
-------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
W. Gary Suttle........ -- -- 38,700 -- $202,446 $ --
David A. Boshes....... -- -- 64,500 21,500 349,091 55,151
Daniel C. McLeod...... -- -- 62,621 23,379 339,608 55,272
David L. Richards..... -- -- 60,200 25,800 307,097 70,145
James M. Thomson...... -- -- 63,425 22,575 343,593 53,650
</TABLE>
STOCK OPTION PLANS
We have two stock option plans, the 1994 Stock Option Plan and the 1997
Stock Option Plan. The plans are substantially similar. Both provide for the
grant of incentive stock options and non-qualified stock options to our
consultants, directors, officers and key employees. The purpose of the plans are
to:
- attract and retain skilled and qualified officers, directors and key
employees;
47
<PAGE> 49
- motivate them to achieve our long-range goals; and
- align their interests with the interests of our shareholders.
The board of directors adopted the 1994 Stock Option Plan on January 26,
1995 and the 1997 Stock Option Plan on April 22, 1998. The shareholders approved
the 1994 plan on April 25, 1995 and the 1997 plan on April 22, 1998.
We have reserved a total of 2,150,000 shares for issuance under both plans.
As at June 30, 1999, we had:
- issued 32,034 shares under the plans;
- outstanding options to purchase 1,780,981 shares under the plans at a
weighted average exercise price of $3.55 per share; and
- 336,984 shares still available for future grant.
Shares of common stock reserved for issuance upon the exercise of options under
a plan are available for future reissuance under the plan if the options expire
or terminate without being exercised. Under the 1997 plan, the maximum number of
shares any individual may receive during a calendar year is 430,000 shares.
There is no similar maximum under the 1994 plan. Under both plans, in the case
of incentive stock options, the aggregate fair market value of stock that is
exercisable for the first time by any individual during any calendar year may
not exceed $100,000.
The nominating and compensation committee of the board of directors
administers the plans. The committee has discretion to determine:
- who should receive options;
- how many shares to include in each grant;
- the exercise price for each option;
- whether an option should be an incentive option or a non-statutory option
under the federal tax laws (except that only our employees may receive
incentive options);
- the vesting schedule for each option;
- the term of each option; and
- other material terms of the options granted.
Option holders may pay the exercise price for options in cash or, at the
committee's discretion, in shares of common stock. Also at the committee's
discretion, option holders may exercise on a cashless basis through the same-day
sale of the purchased shares.
The vesting schedule for all options awarded to date provides for 25% of
the option shares granted to vest on the date of grant and 25% to vest on each
of the first three anniversaries of the grant date. The options also fully vest
if we agree to sell all or substantially all of our assets or shares or to merge
with another company if our shareholders do not have a controlling interest in
the surviving entity.
Prior to expiration of the 1994 plan on December 22, 2004 and the 1997 plan
on October 28, 2007, the board of directors may terminate, amend or modify
either plan at any time; however, no termination, amendment or modification may
adversely change the rights of holders of outstanding options without their
consent.
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<PAGE> 50
OTHER OPTIONS
We also granted options to Grisanti, Galef and Goldress before the adoption
of the 1994 plan as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
---------------- -------------- ---------------
<S> <C> <C>
215,000 $1.51 August 1, 2002
</TABLE>
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted, and the shareholders approved on May 17,
1999, the 1999 Employee Stock Purchase Plan. A total of 361,200 shares of our
common stock are reserved for issuance under the plan, which will become
effective on September 1, 1999.
The plan is intended to qualify under Section 423 of the Internal Revenue
Code and provides for six-month offering periods. Each offering period includes
one purchase period.
Employees are generally eligible to participate if they are employed by us
or a participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the plan does not permit an employee to
participate if the employee either:
- immediately after the grant, owns shares controlling 5% or more of the
total combined voting power of our shares or
- has the right to purchase more than $25,000 worth of our shares under all
of our employee stock purchase plans in each calendar year.
The plan permits employees to purchase common stock through payroll deductions
of up to 10% of the employee's base earnings. The maximum number of shares an
employee may purchase during a single purchase period is 4,300 shares.
The price for shares purchased under the plan is generally 85% of the fair
market value of the shares (1) at the beginning of the offering period or (2) at
the end of the offering period, whichever is less. Employees may end their
participation at any time during a offering period, and we will repay their
payroll deductions as of the date they stop participating. Participation ends
automatically upon termination of employment with us.
Rights granted under the plan are generally not transferable by an employee
other than by will or the laws of descent and distribution. In the event that we
merge with or into another corporation and we are not the surviving corporation
or sell substantially all of our assets, each outstanding right under the plan
will be automatically exercised to the extent of existing payroll deductions as
of the effective date of the merger or asset sale.
The board of directors has the authority to terminate or amend the plan,
however, the shareholders must approve any amendment that will increase the
total number of shares for which rights may be granted. The shareholders must
also approve any amendment that is required by reason of section 423 of the
Internal Revenue Code. The plan will terminate automatically ten years from its
effective date unless it is terminated sooner by the board.
49
<PAGE> 51
CERTAIN TRANSACTIONS
GRISANTI, GALEF & GOLDRESS CONSULTING AGREEMENT
We initially retained Grisanti, Galef & Goldress to provide Mr. Suttle's
consulting services to us under a February 1992 letter agreement. Effective on
August 1, 1992, we named Mr. Suttle our President and Chief Executive Officer
and entered into a consulting agreement with Grisanti, Galef & Goldress. Under
the consulting agreement, we retained Grisanti, Galef & Goldress to provide
services for three years beginning on August 1, 1992. We agreed to pay
consulting fees of $360,000 per year and bonus fees of up to $120,000 per year.
In addition, we granted Grisanti, Galef & Goldress an option to purchase up to
215,000 shares of our common stock at an exercise price of $5.35 per share. In
October 1994, we agreed to reduce the exercise price of the option to $1.51 per
share.
We renewed our agreement with Grisanti, Galef & Goldress effective as of
August 1, 1995, extending the term for five more years. We agreed to continue
paying consulting fees of $360,000 per year and bonus fees up to $120,000 per
year. We paid bonus fees of $120,000 during 1997 and $120,000 during 1998. We
also agreed in 1995 to extend the 215,000-share stock option so that it now
expires on August 1, 2002.
Effective January 1, 1999, the consulting agreement was amended to
discharge our remaining obligation to pay consulting fees or bonuses to
Grisanti, Galef & Goldress, in exchange for a grant to Mr. Goldress of options
to purchase 21,500 shares of our common stock under our 1997 Stock Option Plan.
Also on that date, Mr. Suttle became a Rockford employee under the terms of a
formal employment agreement. The consulting agreement as amended January 1,
1999, gives us the right, but not the obligation, to retain Grisanti, Galef &
Goldress to provide consulting services.
SUTTLE/BARTOL OPTION AGREEMENT
Mr. Suttle holds an option to purchase 795,500 shares of our common stock
from Monument Investors Limited Partnership, a family partnership controlled by
two of our directors, Messrs. N. and T. Bartol. This option was originally
granted to Mr. Suttle effective August 1, 1992 and fully vested on August 1,
1995 as consideration for his agreement to serve as director, Chief Executive
Officer and President of Rockford for a period of not less than three years. On
August 1, 1995, the agreement was amended to extend the option period to August
1, 2002 and to revise the exercise price of the options. In connection with Mr.
Suttle's January 1, 1999 employment agreement, Monument agreed to extend the
term of the option from August 1, 2002 until December 31, 2003. The exercise
price of Mr. Suttle's options increase over time on the following schedule:
<TABLE>
<S> <C>
$0.37 per share.......................... On or before August 1, 1995
$0.41 per share.......................... After August 1, 1995 and on or before
August 1, 1999
$0.70 per share.......................... After August 1, 1999 and on or before
August 1, 2002
$0.81 per share.......................... After August 1, 2002 and on or before
December 31, 2003
</TABLE>
CAROLINE BARTOL NOTE
In March 1996, we borrowed $2.0 million from Caroline Bartol, the mother of
Messrs. N. and T. Bartol. On July 1, 1996, Mrs. Bartol converted $1.0 million of
this loan into 289,562 shares of common stock and extended the $1.0 million
balance of the loan in exchange for our grant of an option to convert this
balance into shares of our common stock at a purchase price of $3.45 per share.
Mrs. Bartol assigned the loan and the option to Boulder Investors
50
<PAGE> 52
Limited Partnership, a partnership owned by the Bartol children, which exercised
the option and converted the note into 289,562 shares on May 1, 1999.
SUTTLE EMPLOYMENT AGREEMENT
The principal terms of our agreement with Mr. Suttle are as follows:
- five-year term ending January 1, 2004;
- initial base salary of $400,000 per year, subject to increases at the
discretion of our nominating and compensation committee;
- bonus potential of up to 50% of salary at the discretion of the board of
directors and the compensation committee based upon our performance;
- participation in our stock option plan, with an initial grant of 86,000
shares at $7.67 per share as of January 1, 1999;
- payment by us of up to $36,000 per year in premiums on a "split dollar"
life insurance policy for Mr. Suttle's benefit; and
- we may terminate the agreement at any time after the first year.
If we terminate without good cause, or if Mr. Suttle terminates for good reason,
we must continue to pay Mr. Suttle's base salary for 18 months after the
termination. Mr. Suttle shall not compete with us, call on any of our customers
or induce any of our employees to work for another business during the term of
the agreement and for twelve months after the later of (1) the termination date
or (2) the day we stop paying severance payments under the employment agreement.
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<PAGE> 53
PRINCIPAL AND SELLING SHAREHOLDERS
This table contains information with respect to the beneficial ownership of
our outstanding common stock as at June 30, 1999, both before and immediately
following this offering by:
- each of our directors and our officers listed on the Summary Compensation
Table;
- all executive officers and directors as a group;
- each person who is known by us to own beneficially more than five percent
of our outstanding common stock; and
- each of the selling shareholders.
The following calculation of the percentage of outstanding shares is based on
4,735,201 shares of common stock outstanding as at June 30, 1999. For beneficial
ownership after the offering, the following calculation assumes conversion of
$278,953 of the 8.5% convertible subordinated debentures into 114,236 shares to
occur upon completion of the offering, conversion of 14,424 of the warrants into
14,424 shares to occur upon completion of the offering, and the issuance of
64,500 options to Ralph Godfrey at the initial public offering price to occur
upon completion of the offering and no exercise of the underwriters' over-
allotment option. Beneficial ownership is determined in accordance with the
Securities and Exchange Commission's rules and generally includes voting or
investment power with respect to securities, subject to community property laws,
where applicable. Shares of common stock subject to options, warrants and
convertible debentures that are exercisable or convertible within 60 days of May
15, 1999 are deemed to be outstanding and beneficially owned by the person
holding the option, warrant or debenture for the purpose of computing the
percentage of ownership of that person, but they are not deemed outstanding for
the purpose of computing the percentage of ownership of any other person.
Except as otherwise noted, each of the persons or entities named in the
table below have sole voting and investment power with respect to all the shares
of common stock beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING NUMBER OF OWNED AFTER OFFERING
---------------------- SHARES ---------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND 5%
SHAREHOLDERS:
Nicholas G. Bartol(1)................ 3,820,031 79.2% 399,900 3,420,131 46.7%
Timothy C. Bartol(2)................. 3,812,555 79.2 399,900 3,412,555 46.7
Monument Investors Limited
Partnership(3)..................... 3,154,016 66.6 3,154,016 43.6
W. Gary Suttle(4).................... 877,200 18.2 877,200 12.0
Boulder Investors Limited
Partnership(5)..................... 579,124 12.7 399,900 202,593 2.8
Jerry E. Goldress(6)................. 241,465 4.8 241,465 3.2
James M. Thomson(7).................. 90,082 1.9 90,082 1.2
David A. Boshes(8)................... 77,812 1.6 77,812 1.1
Daniel C. McLeod(9).................. 68,800 1.4 68,800 *
David L. Richards(10)................ 67,046 1.4 67,046 *
John P. Lloyd(11).................... 30,867 * 30,867 *
Ralph B. Godfrey(12)................. 0 * 16,125 *
ALL EXECUTIVE OFFICERS AND DIRECTORS
AS A GROUP (13 PERSONS)(13)........ 4,237,789 82.4% 399,900 4,253,914 52.2%
</TABLE>
52
<PAGE> 54
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING NUMBER OF OWNED AFTER OFFERING
---------------------- SHARES ---------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
OTHER SELLING SHAREHOLDERS:
Glenn and Pamela Carrio(14)........ 216,435 4.4 119,174 97,261 1.3
Kathryn A. Coffee, Trustee and
Individually.................... 95,459 2.0 48,160 47,299 *
Will Hegarty....................... 64,500 1.4 60,200 4,300 *
Otto Shill......................... 54,966 1.2 54,966 0 *
Robert Langford.................... 37,410 * 37,410 0 *
Kevin Campbell..................... 28,380 * 25,800 2,580 *
Sidney Smith....................... 23,146 * 23,146 0 *
Darrell Chapman.................... 22,678 * 20,528 2,150 *
Vrolyk & Company................... 21,500 * 10,750 10,750 *
Franklin Richards.................. 20,566 * 20,566 0 *
Scott and Kathy Carter............. 20,329 * 20,329 0 *
David Nettleton.................... 10,279 * 10,279 0 *
Gordon MacInnes.................... 9,973 * 4,300 5,673 *
Robert S. Pothier.................. 8,995 * 8,995 0 *
Don Hammerle....................... 8,794 * 8,062 732 *
John P. Frank...................... 6,450 * 6,450 0 *
Larry Ulrich....................... 4,515 * 1,075 3,440 *
Rebecca P. Harris.................. 3,074 * 1,505 1,569 *
Brigham P. Herzfeld................ 3,074 * 1,531 1,543 *
Andy Szabo......................... 1,720 * 1,720 0 *
Mark Quale......................... 1,689 * 1,689 0 *
John Seaver........................ 860 * 860 0 *
Marion Szabo....................... 430 * 430 0 *
</TABLE>
- ---------------
* Represents less than 1%.
(1) Includes 3,154,016 shares held by Monument Investors Limited Partnership,
for which Mr. Bartol serves as general partner; 602,493 shares held by
Boulder Investors Limited Partnership, for which Mr. Bartol serves as
general partner; 31,782 shares held by GST Exempt Trust, a trust in which
Mr. Bartol has a beneficial interest; 15,971 shares underlying convertible
debentures; 4,095 shares underlying convertible debentures held by Mr.
Bartol's wife; and 8,600 shares underlying options. Mr. Bartol disclaims
beneficial ownership of the shares held by his wife. Mr. Bartol's address
is 239 Cove Drive, Coppell, Texas 75019.
(2) Includes 3,154,016 shares held by Monument Investors Limited Partnership,
for which Mr. Bartol serves as general partner; 602,493 shares held by
Boulder Investors Limited Partnership, for which Mr. Bartol serves as
general partner; 31,782 shares held by GST Exempt Trust, a trust in which
Mr. Bartol has a beneficial interest; 11,264 shares underlying convertible
debentures; 6,450 shares underlying options held by Mr. Bartol; and 6,450
shares underlying options held by Mr. Bartol's wife. Mr. Bartol disclaims
beneficial ownership of the shares held by his wife. Mr. Bartol's address
is 9200 Willow Pond Lane, Potomac, Maryland 20854.
(3) Monument Investors Limited Partnership's address is c/o Mr. T. Bartol, 9200
Willow Pond Lane, Potomac, Maryland 20854. It is controlled by Mr. T.
Bartol, Mr. N. Bartol, Pamela Carrio and Ann Farr Butterfield, the four
natural children of John and Caroline Bartol.
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<PAGE> 55
(4) Includes 21,500 shares underlying convertible debentures; 795,500 shares
underlying options granted by Monument Investors Limited Partnership; and
60,200 shares underlying options granted under our stock option plans. Mr.
Suttle's address is c/o Rockford Corporation, 546 Rockford Drive, Tempe,
Arizona 85281.
(5) Includes 23,369 shares that we will issue upon exercise of warrants.
Boulder Investors Limited Partnership's address is c/o Mr. T. Bartol, 9200
Willow Pond Land, Potomac, Maryland 20854. It is controlled by Mr. T.
Bartol, Mr. N. Bartol, Pamela Carrio and Ann Farr Butterfield, the four
natural children of John and Caroline Bartol.
(6) Includes 8,190 shares underlying convertible debentures and 233,275 shares
underlying options.
(7) Includes 20,476 shares underlying convertible debentures and 69,066 shares
underlying options.
(8) Includes 8,206 shares underlying convertible debentures and 69,066 shares
underlying options.
(9) Includes 68,800 shares underlying options.
(10) Includes 1,740 shares underlying convertible debentures and 65,306 shares
underlying options.
(11) Includes 6,142 shares underlying convertible debentures and 24,725 shares
underlying options.
(12) Includes 16,125 shares underlying options to be granted and vested upon
completion of this offering.
(13) Includes 113,220 shares underlying convertible debentures, 55,337 shares
underlying warrants and 727,220 shares underlying options.
(14) Includes 207,835 shares underlying convertible debentures. 204,761 of these
shares are held by Carrio Cabling Corporation, a corporation owned by Mr.
and Mrs. Carrio.
We will bear all of the expenses of this offering, other than the
underwriting discounts and commissions, stock transfer and other taxes
attributable to the shares of common stock sold by the selling shareholders, and
legal and other advisors' fees and expenses incurred by the selling
shareholders, which will be borne by the selling shareholders.
54
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
As at June 28, 1999, we increased our authorized capital stock to
40,000,000 shares of common stock, $.01 par value per share. The following
summary is qualified in its entirety by reference to our articles of
incorporation and bylaws, copies of which are filed as exhibits to the
registration statement of which this prospectus is a part.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders, except for the election of
directors. The holders of common stock have cumulative voting rights with
respect to the election of directors and, as a result, minority shareholders may
be able to elect directors on the basis of their votes alone. Holders of common
stock are entitled to receive pro rata dividends as may be declared by the board
of directors out of funds legally available as dividends. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share pro rata in all assets remaining after payment of liabilities. Holders of
our common stock have no preemptive, conversion or other rights to subscribe for
additional securities. There are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of the offering
will be, validly issued, fully paid and nonassessable.
As at June 30, 1999, assuming the conversion of $278,953 of the 8.5%
convertible subordinated debentures into 114,236 shares and the issuance of
14,424 shares upon exercise of warrants, both to occur upon completion of this
offering, there were outstanding 4,863,861 shares of common stock, options to
purchase 1,995,981 shares of common stock, warrants to purchase 83,911 shares of
common stock and debentures convertible into 293,123 shares of common stock.
Upon completion of this offering, 7,363,861 shares of common stock will be
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise or conversion of options, warrants or convertible debentures after
June 30, 1999.
WARRANTS
As of the date of this prospectus, warrants to purchase 76,835 shares of
common stock at an exercise price of $0.93 per share and warrants to purchase
21,500 shares of common stock at an exercise price of $3.45 per share were
outstanding. The common stock that we will issue upon exercise of the 76,835
warrants is subject to registration rights, which are described below.
DEBENTURES
As of the date of this prospectus, holders of the 8.5% convertible
subordinated debentures had the right to convert their debentures into 407,359
shares of our common stock at a conversion price of $2.44 per share. The common
stock that we will issue upon conversion of these debentures is subject to
registration rights, which are described below.
REGISTRATION RIGHTS
The holders of approximately 76,835 shares of common stock, that we will
issue upon exercise of outstanding warrants, have registration rights for those
shares. Their rights are subject to conditions that are typically imposed on
registration rights. They include "piggyback" registration rights relating to
any public offering we conduct and demand registration rights exercisable on one
occasion. In order to require a demand registration, holders of at least 50% of
the warrants or of common stock obtained by prior conversion of
55
<PAGE> 57
the warrants must request registration and the proposed offering must be
expected to raise proceeds of at least $7.5 million.
The holders of approximately 407,359 shares of common stock, that we will
issue upon conversion of the 8.5% convertible subordinated debentures, have
registration rights for those shares. Their rights are subject to conditions
that are typically imposed on registration rights. They include "piggyback"
registration rights relating to any public offering we conduct and demand
registration rights exercisable on one occasion. In order to require a demand
registration, holders of at least 50% of the debentures or of common stock
issued upon conversion of the debentures must request registration and the
proposed offering must be expected to raise proceeds of at least $15.0 million.
ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BYLAWS AND OPT-OUT
FROM THE ARIZONA CONTROL SHARE ACQUISITION AND BUSINESS COMBINATION STATUTE
Articles of Incorporation and Bylaws. Our board of directors may issue
additional shares of common stock without shareholder approval, to the extent
shares are authorized for issuance in our articles of incorporation. This may
protect the continuity of management because it gives the board of directors
power to discourage an acquisition. The board of directors may exercise this
power, subject to compliance with fiduciary duties, even if our shareholders
would receive a premium over the market price for their shares. For example, if
the board of directors decides that a takeover proposal is not in our best
interest, the board of directors could issue shares that make completion of a
takeover more difficult and more costly by:
- diluting the voting or other rights of the proposed acquiror or insurgent
shareholder group;
- putting a substantial voting block in institutional or other hands that
support the incumbent board of directors; or
- effecting an acquisition that complicates or precludes the takeover.
Our articles of incorporation require approval of any amendments by a
two-thirds vote of the outstanding shares. This requirement limits the ability
of shareholders to change the restrictions described above by voting to amend
our articles of incorporation.
Our bylaws provide for our board to have from two to eleven directors.
Directors are elected at the annual shareholders meeting, with each director
holding office until his or her successor is elected. Our directors are not
classified and are elected annually. Our articles of incorporation require that:
- two-thirds of our board of directors approve any increase in the size of
our board of directors;
- the shareholders may remove a director only for cause; and
- only the board of directors may fill a vacancy on the board of directors.
These requirements may restrict the ability of a hostile bidder to gain control
of our board of directors by limiting the bidder's right to add new directors or
replace existing directors.
Our bylaws provide that special meetings of shareholders may be called only
by our President or a majority of the board of directors. Shareholders may not
call shareholders meetings and, under Arizona law, may act by written consent in
lieu of a meeting only if all shareholders sign the consent. Our bylaws require
that shareholders who wish to place an item on the agenda for a shareholders
meeting, or who wish to nominate a person for election as a director, must give
at least 30 days notice of the proposed agenda item or name of the
56
<PAGE> 58
person nominated. Together, these restrictions may limit proxy contests seeking
to control us by
- limiting shareholders' ability to call a special shareholders meeting,
- making shareholder action by written consent impossible as a practical
matter, and
- giving the board of directors advance notice of hostile annual meeting
proposals.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the policies
formulated by them and to discourage transactions that may involve an actual or
threatened change of control of Rockford. These provisions are designed to
reduce our vulnerability to an unsolicited proposal for takeover that does not
contemplate the acquisition of all of our outstanding shares, or an unsolicited
proposal for the restructuring or sale of all or part of Rockford. These
provisions, however, could discourage potential acquisition proposals and could
delay or prevent a change in control of Rockford. These provisions may also have
the effect of preventing changes in our management.
Opt-out from Arizona Control Share Acquisition and Business Combination
Statute. We have opted out of the Arizona statute regulating control share
acquisitions and business combinations, A.R.S. Title 10, Chapter 23. As a
result, potential bidders are not subject to the statute's restrictions on
control share acquisitions or business combinations with us.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation limit, to the maximum extent permitted by
Arizona law, the liability of our directors for monetary damages arising from a
breach of their duties as directors. The limitation of liability does not affect
the availability of equitable remedies such as injunctive relief or rescission.
Our articles of incorporation require us to indemnify our directors and
officers, to the maximum extent permitted by Arizona law, against liability for
acts or omissions within the scope of their authority as directors or officers.
Indemnification is prohibited if our board of directors finds that the person's
action or omission was willful, grossly negligent, or with fraudulent or
criminal intent, or for liabilities under the Securities Act of 1933. Under
Arizona law, we may indemnify a director or officer against liability incurred
on account of service to us, if the director or officer:
- conducted himself or herself in good faith;
- reasonably believed that his or her conduct (1) if in an official
capacity, was in our best interests or (2) if in any other capacity, was
not opposed to our best interests;
- in the case of any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful; and
- did not improperly receive personal benefit.
Before completing this offering, we intend to enter into indemnification
agreements with each of our directors. These agreements will generally obligate
us to indemnify them for liability incurred by them as a result of their service
as directors, unless (1) their liability arises as a result of their fraud,
deliberate dishonesty or willful misconduct or (2) Arizona law prohibits
indemnification. Prior to completing this offering, we will obtain liability
insurance for our directors.
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<PAGE> 59
LISTING
We have applied for quotation of our common stock on The Nasdaq National
Market under the symbol "ROFO."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is First Chicago
Trust Company of New York and its address is 525 Washington Boulevard, Jersey
City, New Jersey 07310.
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<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
NO PRIOR MARKET
We have not had any public market for our common stock before this
offering. If our shareholders decide to sell many of their shares in the public
market, the price of our shares could go down and we could find it hard to raise
capital by selling more shares.
OUTSTANDING SHARES AND REGISTRATION
After this offering, we will have 7,363,861 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise or conversion of outstanding options, warrants and convertible
debentures after May 15, 1999 other than the conversion of $278,953 of the 8.5%
convertible subordinated debentures into 114,236 shares and the issuance of
14,424 shares upon exercise of warrants, both to occur upon completion of this
offering. Of these shares, the 3,387,824 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, except that shares held by our "affiliates" will be subject to the
restrictions of Rule 144 under the Securities Act of 1933 described below. The
remaining 3,967,037 outstanding shares of common stock will be "restricted
securities" under Rule 144.
LOCK-UP AGREEMENTS
Our directors, executive officers and other shareholders, holding 3,601,919
shares in the aggregate, have agreed that they will not sell, directly or
indirectly, any shares of common stock without the prior written consent of Dain
Rauscher Wessels for a period of 180 days after the date of this prospectus.
Subject to these lock-up agreements, our outstanding shares of common stock will
be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES ELIGIBLE FOR SALE AFTER EXPLANATION
- ---------------- ------------------------------------- -------------------------------------
<C> <S> <C>
3,761,942 Date of this prospectus - Freely tradeable shares sold in
this offering; and
- Shares saleable under Rule 144(k)
that are not subject to the 180-day
lock-up
0 Filing of a registration statement on Option shares that are not subject to
Form S-8 to register for resale the 180-day lock-up
shares issued upon exercise of stock
options
0 90 days from the date of this Shares saleable under Rule 144 that
prospectus are not subject to the 180-day lock-
up or eligible for sale under Rule
701
6,039,434 180 days from the date of this Shares saleable under:
prospectus - Rule 144 or Rule 701 (subject, in
some cases, to volume limitations);
- Rule 144(k); or
- Pursuant to a registration
statement to register for resale
shares of common stock issued upon
the exercise of stock options
0 Over 180 days from the date of this Restricted shares held for less than
prospectus one year and not yet saleable under
Rule 144
</TABLE>
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<PAGE> 61
SALES RESTRICTIONS
In general under Rule 144, if restricted shares were purchased from us (or
any affiliate of ours) more than one year ago, their owner may sell them in
"brokers' transactions" or to market makers. The owner may not sell, in any
three-month period, more than the greater of (1) one percent of our
then-outstanding shares of common stock (approximately shares
immediately after this offering), or (2) the average weekly trading volume in
our common stock during the four calendar weeks before a Form 144 notice of sale
is filed with the Securities Exchange Commission at its principal office in
Washington D.C. and to any national securities exchange on which such securities
are traded. The Form 144 shall be signed by the person for whose account the
securities are to be sold and shall be transmitted for filing concurrently with
either the placing with a broker of an order to execute a sale of securities in
reliance on Rule 144 or the execution directly with a market maker of such a
sale. Neither the filing of such notice nor the failure of the Commission to
comment thereon shall be deemed to preclude the Commission from taking any
action it deems necessary or appropriate with respect to the sale of the
securities referred to in such notice. The owner may make sales only if current
public information is available about us.
If the restricted shares were purchased from us (or any affiliate of ours)
more than two years ago, then their owner may sell them under Rule 144(k)
without regard to the volume limitations or manner of sale, public information
or notice of sale requirements of Rule 144. This does not apply if the owner was
an affiliate of ours at any time during the 90 days before the sale.
STOCK OPTION RESTRICTIONS
Under Rule 701 under the Securities Act of 1933 persons who purchase shares
from us upon exercise of options granted before the date of this prospectus may
sell their shares in the public markets beginning 90 days after the date of this
prospectus. They make the sales in reliance on Rule 144 without having to comply
with its holding period requirements and, if they are not affiliates, without
having to comply with the rule's volume limitations, public information and
notice of sale requirements.
We intend to file one or more registration statements under the Securities
Act of 1933, covering the shares of common stock reserved for issuance under our
1994 and 1997 stock option plans. We plan this filing within 90 days after the
date of this prospectus. The registration statements will become effective upon
filing, thus permitting the resale of option shares in the public markets,
without restriction under the Securities Act of 1933 other than the limitations
applicable to affiliates or the 180-day lock ups described above.
See "Description of Capital Stock -- Registration Rights" for a description
of certain registration rights with respect to our common stock.
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<PAGE> 62
UNDERWRITING
The underwriters named below, acting through their representatives, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and Needham &
Company, Inc. have agreed, subject to the terms and conditions set forth in the
underwriting agreement, to purchase from us and the selling shareholders the
number of shares of common stock listed opposite their names below. The
underwriters are committed to purchase and pay for all such shares if any are
purchased, subject to the conditions stated in the underwriting agreement.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Dain Rauscher Wessels.......................................
Needham & Company, Inc. ....................................
---------
Total............................................. 3,387,824
---------
</TABLE>
The representatives have advised us and the selling shareholders that the
underwriters propose to offer the shares of common stock to the public at the
offering price set forth on the cover page of this prospectus and to selected
dealers at such price less a concession of not in excess of $ per share, of
which $ may be reallowed to other dealers. After this offering, the
public offering price concession and reallowance to dealers may be reduced by
the representatives. No such reduction will change the amount of proceeds to be
received by us and the selling shareholders as set forth on the cover page of
this prospectus.
The underwriting agreement contains covenants of indemnity among the
underwriters, us and the selling shareholders against civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
We have granted an option to the underwriters to purchase up to 508,174
additional shares of common stock. These options may be exercised at any time up
to 30 days after the date of this prospectus. The option entitles the
underwriters to purchase the additional shares of common stock at the same price
per share as the 3,387,824 shares being sold in this offering. If the
underwriters exercise the option, each of the underwriters must purchase
approximately the same percentage of additional shares from us that they
purchased in the primary offering. The underwriters may purchase these shares
only to cover over-allotments made in connection with this offering. If
purchased, the additional shares will be sold by the underwriters on the same
terms as those on which the 3,387,824 shares are being sold.
The price of the shares of common stock purchased by the underwriters will
be the public offering price set forth on the cover page of the prospectus less
the following underwriting discounts and commissions to be paid by us and the
selling shareholders.
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
By Rockford Corporation.......................... $0.84 $2,100,000 $2,526,866
By the selling shareholders...................... $0.84 $ 745,772 $ 745,772
</TABLE>
We will also pay the total expenses of this offering.
Our officers, directors and other shareholders have agreed not to sell,
transfer, grant any third party the right to purchase, or otherwise dispose of
any shares of common stock or other securities that they own or acquire, other
than shares of common stock acquired in open market transactions, for a period
of 180 days after the date of this prospectus without
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<PAGE> 63
the prior written consent of the underwriters. This 180-day period is known as
the lock-up period. The representatives may, without notice and in their sole
discretion, allow any officer or director to dispose of common stock or other
securities prior to the expiration of the lock-up period. There are, however,
currently no agreements between the underwriters and any of our officers or
directors allowing any sale.
In addition, we have agreed that we will not issue, sell, offer to sell, or
otherwise dispose of any shares of our common stock or other securities during
the lock-up period without the prior consent of the underwriters. This agreement
does not include shares of common stock or other securities issued pursuant to
employee stock option plans, employee stock purchase plans, or common stock or
other securities outstanding on the date of this prospectus. However, we have
agreed that employee stock options issued during the lock-up period to our
officers and directors may not be exercised prior to the expiration of the
lock-up period. Any shares of common stock issued to our officers and directors
during the lock-up period pursuant to the exercise of stock options or other
securities outstanding on the date of this prospectus shall bear a restrictive
legend restricting the transfer of those shares during the lock-up period.
The underwriters have advised us that in connection with this offering,
some persons participating in this offering may engage in transactions that may
have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market.
These transactions may include stabilizing bids, syndicate covering transactions
and the imposition of penalty bids. A "stabilizing bid" is a bid for or the
purchase of common stock on behalf of the underwriters for the purpose of
preventing or retarding a decline in the market price of the common stock. A
"syndicate covering transaction" is the bid for or the purchase of the common
stock on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that these transactions may be affected on
the Nasdaq SmallCap Market, Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Steptoe & Johnson LLP, Phoenix, Arizona. Certain legal matters
relating to this offering will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, Austin, Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule as at September 30, 1996, and December 31,
1996, 1997 and 1998, and for the year ended September 30, 1996, the three months
ended December 31, 1996, and for the years ended December 31, 1997 and 1998. We
have included our financial statements and schedule in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
62
<PAGE> 64
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which is part of the registration
statement, does not contain all the information included in this registration
statement. Some information is omitted and you should refer to the registration
statement and its exhibits. With respect to references made in this prospectus
to any contract, agreement or other document of ours, our descriptions are
summaries and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other document. You
may review a copy of our registration statement, including exhibits, at the
Securities and Exchange Commission's public reference room at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, or Seven World Trade Center,
13th Floor, New York, New York 10048 or Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet Web site at http://www.sec.gov, which contains reports,
proxy statements and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission.
63
<PAGE> 65
ROCKFORD CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF ROCKFORD CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and June 30, 1999 (unaudited)............................. F-3
Consolidated Statements of Operations for the year ended
September 30, 1996, the three months ended December 31,
1996, the years ended December 31, 1997 and 1998, and the
six months ended June 30, 1998 and 1999 (unaudited)....... F-4
Consolidated Statements of Shareholders' Equity for the year
ended September 30, 1996, the three months ended December
31, 1996, the years ended December 31, 1997 and 1998, and
the six months ended June 30, 1999 (unaudited)............ F-5
Consolidated Statements of Cash Flows for the year ended
September 30, 1996, the three months ended December 31,
1996, the years ended December 31, 1997 and 1998, and the
six months ended June 30, 1998 and 1999 (unaudited)....... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Rockford Corporation
We have audited the accompanying consolidated balance sheets of Rockford
Corporation and subsidiaries (Rockford) as of December 31, 1997 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year ended September 30, 1996, the three months ended
December 31, 1996, and the years ended December 31, 1997 and 1998. These
consolidated financial statements are the responsibility of Rockford's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Rockford Corporation and subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for the year ended
September 30, 1996, the three months ended December 31, 1996, and the years
ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Phoenix, Arizona
February 5, 1999, except for Note 13
as to which the date is July , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
restatement of the capital accounts described in Note 13 to the financial
statements.
/s/ Ernst & Young LLP
Phoenix, Arizona
July 9, 1999
F-2
<PAGE> 67
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 260 $ 470 $ 1,254
Accounts receivable, less allowances of $918,000,
$1,043,000 and $1,796,000 (unaudited) at December
31, 1997, 1998 and June 30, 1999, respectively..... 11,089 15,097 24,110
Inventories, net...................................... 9,603 12,226 14,642
Prepaid expenses and other............................ 693 688 1,905
Income taxes receivable............................... 85 -- --
Deferred income taxes................................. 2,398 3,084 3,084
------- ------- -------
Total current assets.................................... 24,128 31,565 44,995
Property and equipment, net............................. 3,977 5,007 5,087
Goodwill, net........................................... -- -- 1,783
Other assets............................................ 1,129 735 994
------- ------- -------
Total assets............................................ $29,234 $37,307 $52,859
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 5,409 $ 6,492 $ 9,758
Accrued salaries and incentives....................... 1,773 1,948 2,724
Accrued warranty...................................... 2,911 3,625 3,812
Income taxes payable.................................. -- 30 704
Other accrued expenses................................ 2,710 3,589 7,259
Current portion of notes payable, long-term debt and
capital lease obligations.......................... 1,733 2,393 2,588
------- ------- -------
Total current liabilities............................... 14,536 18,077 26,845
Notes payable and long-term debt, less current
portion............................................... 12,220 13,596 15,534
Capital lease obligations, less current portion......... 10 696 598
Minority interest....................................... 5 31 --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value
Authorized shares -- 40,000,000
Issued shares -- 4,432,775 shares at December 31,
1997 and 1998 and 4,735,201 at June 30, 1999
(unaudited)...................................... 44 44 47
Additional paid-in capital............................ 2,064 2,064 3,217
Retained earnings..................................... 308 2,613 6,433
Accumulated other comprehensive income................ 99 238 185
------- ------- -------
2,515 4,959 9,882
Less treasury stock, 21,500 shares at cost at December
31, 1997 and 1998 and -0- at June 30, 1999
(unaudited)........................................ 52 52 --
------- ------- -------
Total shareholders' equity.............................. 2,463 4,907 9,882
------- ------- -------
Total liabilities and shareholders' equity.............. $29,234 $37,307 $52,859
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 68
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE YEAR ENDED SIX MONTHS ENDED
YEAR ENDED MONTHS ENDED DECEMBER 31, JUNE 30,
SEPTEMBER 30, DECEMBER 31, ----------------- -----------------
1996 1996 1997 1998 1998 1999
------------- ------------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $81,144 $16,448 $87,423 $87,577 $45,923 $65,911
Cost of goods sold................. 56,761 11,020 57,321 55,146 28,783 40,221
------- ------- ------- ------- ------- -------
Gross profit....................... 24,383 5,428 30,102 32,431 17,140 25,690
Operating expenses:
Sales and marketing.............. 15,218 2,814 14,530 14,821 8,097 10,971
General and administrative....... 8,552 1,983 9,350 10,211 5,059 6,675
Research and development......... 1,448 292 1,576 1,876 870 973
------- ------- ------- ------- ------- -------
25,218 5,089 25,456 26,908 14,026 18,619
------- ------- ------- ------- ------- -------
Operating income (loss)............ (835) 339 4,646 5,523 3,114 7,071
Other income (expense):
Interest......................... (1,809) (439) (1,757) (1,434) (763) (779)
Other............................ 104 62 (294) (49) 4 (73)
------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item and income taxes............ (2,540) (38) 2,595 4,040 2,355 6,219
Income tax expense (benefit)....... (864) (19) 959 1,717 1,006 2,406
------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item and minority interest....... (1,676) (19) 1,636 2,323 1,349 3,813
Minority interest.................. -- -- (4) (18) 2 7
------- ------- ------- ------- ------- -------
Net income (loss) before
extraordinary item............... (1,676) (19) 1,632 2,305 1,351 3,820
Extraordinary item -- early
extinguishment of debt, net of
income tax benefit of $161,000... (327) -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income (loss).................. $(2,003) $ (19) $ 1,632 $ 2,305 $ 1,351 $ 3,820
======= ======= ======= ======= ======= =======
Net income (loss) per common share:
Basic............................ $ (0.50) $ (0.01) $ 0.37 $ 0.52 $ 0.31 $ 0.85
======= ======= ======= ======= ======= =======
Diluted.......................... $ (0.50) $ (0.01) $ 0.31 $ 0.41 $ 0.25 $ 0.64
======= ======= ======= ======= ======= =======
Weighted average shares:
Basic............................ 4,040 4,394 4,401 4,412 4,411 4,508
======= ======= ======= ======= ======= =======
Diluted.......................... 4,040 4,394 5,688 5,951 5,725 6,081
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 69
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
--------------- PAID-IN EARNINGS COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) INCOME STOCK TOTAL
------ ------ ---------- --------- -------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995.... 3,480 $35 $ 886 $ 698 $ 227 $(52) $ 1,794
Currency translation........... -- -- -- -- (162) -- (162)
Net loss....................... -- -- -- (2,003) -- -- (2,003)
-------
Comprehensive loss............. (2,165)
Conversion of subordinated debt
to common stock.............. 933 9 1,141 -- -- -- 1,150
----- --- ------ ------- ----- ---- -------
Balance at September 30, 1996.... 4,413 44 2,027 (1,305) 65 (52) 779
Currency translation........... -- -- -- -- 27 -- 27
Net loss....................... -- -- -- (19) -- -- (19)
-------
Comprehensive income........... 8
Exercise of stock options...... 3 -- 4 -- -- -- 4
----- --- ------ ------- ----- ---- -------
Balance at December 31, 1996..... 4,416 44 2,031 (1,324) 92 (52) 791
Currency translation........... -- -- -- -- 7 -- 7
Net income..................... -- -- -- 1,632 -- -- 1,632
-------
Comprehensive income........... 1,639
Exercise of stock options...... 17 -- 33 -- -- -- 33
----- --- ------ ------- ----- ---- -------
Balance at December 31, 1997..... 4,433 44 2,064 308 99 (52) 2,463
Currency translation........... -- -- -- -- 139 -- 139
Net income..................... -- -- -- 2,305 -- -- 2,305
-------
Comprehensive income........... 2,444
----- --- ------ ------- ----- ---- -------
Balance at December 31, 1998..... 4,433 44 2,064 2,613 238 (52) 4,907
Currency translation
(unaudited).................. -- -- -- -- (53) -- (53)
Net income (unaudited)......... -- -- -- 3,820 -- -- 3,820
-------
Comprehensive income
(unaudited).................. 3,767
Conversion of subordinated
promissory note to common
stock (unaudited)............ 289 3 997 -- -- -- 1,000
Exercise of stock options
(unaudited).................. 12 -- 42 -- -- -- 42
Issuance of treasury stock to
acquire minority interest
(unaudited).................. -- -- 113 -- -- 52 165
Exercise of warrants
(unaudited).................. 1 -- 1 -- -- -- 1
----- --- ------ ------- ----- ---- -------
Balance at June 30, 1999
(unaudited).................... 4,735 $47 $3,217 $ 6,433 $ 185 $ -- $ 9,882
===== === ====== ======= ===== ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 70
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
THREE MONTHS YEAR ENDED ENDED
YEAR ENDED ENDED DECEMBER 31, JUNE 30,
SEPTEMBER 30, DECEMBER 31, ----------------- -----------------
1996 1996 1997 1998 1998 1999
------------- ------------ ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................... $ (2,003) $ (19) $ 1,632 $ 2,305 $ 1,351 $ 3,820
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization........... 1,397 431 2,176 2,080 880 810
Loss (gain) on sale of fixed assets..... 127 -- -- (12) 9 (9)
Deferred income tax expense (benefit)... (691) 145 28 (686) -- --
Provision for doubtful accounts......... 653 247 540 561 243 727
Provision for inventory allowances...... 251 79 638 787 482 666
Minority interest....................... -- -- 4 18 4 (21)
Changes in operating assets and
liabilities:
Accounts receivable................... (1,969) 3,304 14 (4,569) (6,439) (8,795)
Inventories........................... (1,553) (1,174) 487 (3,410) (1,131) (2,233)
Prepaid expenses and other............ 305 (29) 121 5 303 (1,136)
Income taxes receivable............... -- (165) 242 85 -- --
Accounts payable...................... 2,929 (2,089) (2,454) 1,083 1,941 2,242
Accrued salaries and incentives....... (608) 421 996 175 (262) 740
Accrued warranty...................... 370 (7) 823 714 424 187
Income taxes payable.................. (158) (4) -- 30 412 670
Other accrued expenses................ 1,219 (1,296) 1,220 879 1,717 3,520
-------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities.............................. 269 (156) 6,467 45 (66) 1,188
INVESTING ACTIVITIES
Purchases of property and equipment....... (2,191) (36) (1,318) (1,728) (717) (847)
Proceeds from sale of property and
equipment............................... 362 -- 118 38 57 10
Acquisitions of business net of cash
acquired................................ -- -- -- -- -- (1,555)
Decrease (increase) in other assets....... 30 20 (939) 388 170 (236)
-------- ------- ------- ------- ------- -------
Net cash used in investing activities..... (1,799) (16) (2,139) (1,302) (490) (2,628)
FINANCING ACTIVITIES
Proceeds from notes payable and long-term
debt.................................... 20,406 5,290 160 1,791 1,455 2,904
Payments on notes payable and long-term
debt.................................... (17,874) (5,196) (3,550) (142) -- (415)
Payments on capital lease obligations..... (494) (134) (1,058) (321) (211) (255)
Proceeds from exercise of stock options... -- 4 33 -- -- 43
-------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities.............................. 2,038 (36) (4,415) 1,328 1,244 2,277
Effect of exchange rate changes on cash... (160) 27 7 139 35 (53)
-------- ------- ------- ------- ------- -------
Net increase (decrease) in cash........... 348 (181) (80) 210 723 784
Cash at beginning of period............... 173 521 340 260 260 470
-------- ------- ------- ------- ------- -------
Cash at end of period..................... $ 521 $ 340 $ 260 $ 470 $ 983 $ 1,254
======== ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Conversion of subordinated debt to common
stock................................... $ 1,150 $ -- $ -- $ -- $ -- $ 1,000
======== ======= ======= ======= ======= =======
Issuance of common stock for minority
interest................................ $ -- $ -- $ -- $ -- $ -- $ 165
======== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 71
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
1. ACCOUNTING POLICIES
Organization and Description of Business
Rockford Corporation and subsidiaries ("Rockford") is a designer,
manufacturer and distributor of high performance car audio systems under the
"Rockford Fosgate" brand name for the worldwide car audio aftermarket. Rockford
also sells professional audio products under the "Hafler" brand name. Rockford
was organized and incorporated under the laws of the State of Arizona on July
22, 1980, and has manufacturing facilities in Tempe, Arizona and Grand Rapids,
Michigan; warehousing operations in Germany and Singapore; and sales and
warehousing operations in Japan.
During April 1999, the Board of Directors authorized Rockford to file a
registration statement for an initial public offering of shares of its common
stock. On June 28, 1999 the shareholders approved an increase in the number of
authorized common shares to 40,000,000.
Interim Financial Information
The consolidated financial statements as of June 30, 1999 and for the six
months ended June 30, 1998 and 1999 are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) that Rockford considers
necessary for a fair presentation of financial position as of such date and
results of operations and cash flows for such period. Operating results for the
six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for any future period.
Principles of Consolidation
The consolidated financial statements include the accounts of Rockford and
its wholly owned subsidiaries in Germany and Singapore and its majority (90
percent) owned subsidiary in Japan. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with remaining maturities of three months or less when acquired and which are
readily convertible to cash. Rockford's investments have consisted of commercial
paper, certificates of deposit with original maturities of three months or less
and money market accounts.
Fair Value of Financial Instruments
At December 31, 1998, Rockford has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses, capital lease obligations, notes payable and long-term debt. The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximates their fair value based on the
liquidity of these financial instruments or based on their short-term nature.
The carrying value of capital lease obligations, notes payable and long-term
debt approximates fair value based on the market interest rates available to
Rockford for debt of similar risk and maturities.
F-7
<PAGE> 72
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
Accounts Receivable
Rockford sells its products principally to car audio and professional audio
dealers primarily in North America, South America, Europe and Asia. At December
31, 1997, 1998 and June 30, 1999, net accounts receivable includes approximately
$3,213,000, $2,958,000 and $4,384,000, respectively, due from overseas
businesses.
Rockford also offers a prompt pay discount for certain invoices paid under
40 to 60 days of issuance and has included in its allowance for accounts
receivable at December 31, 1997, 1998 and June 30, 1999 approximately $162,000,
$262,000 and $418,000, respectively, with respect to accounts using such
discounts after the period-end.
Inventories
Inventories consist principally of raw materials of electronic and
mechanical components used in the manufacturing of amplifier and speaker
systems, and finished goods. Inventories are carried at the lower of cost or
market using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are
computed principally on the straight-line method for financial reporting
purposes over a three-to-five year life. Leasehold improvements are amortized on
the straight-line method over the shorter period of the lease term or the
estimated useful life of the asset.
Research and Development
During the year ended September 30, 1996, the three months ended December
31, 1996, and the years ended December 31, 1997 and 1998, research and
development expenses of approximately $1,448,000, $292,000, $1,576,000 and
$1,876,000, respectively, were charged to expense as incurred.
Advertising
Rockford expenses advertising as incurred. Advertising expenses for the
year ended September 30, 1996, the three months ended December 31, 1996, and the
years ended December 31, 1997 and 1998 were approximately $1,189,000, $313,000,
$1,008,000 and $1,201,000, respectively.
Income Taxes
Rockford accounts for income taxes under the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 109, Accounting for Income Taxes.
Under this method, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Net Sales
Sales are recorded at the time of shipment net of related discounts.
F-8
<PAGE> 73
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
Net Income per Common Share
Rockford reports net income per common share in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 128, Earnings Per Share.
Diluted net income per share includes the dilutive effects of options, warrants
and convertible securities.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with FASB Statement No. 52. All balance sheet
accounts have been translated using the current exchange rates at the balance
sheet date. Statement of operations amounts have been translated using the
average exchange rate for the year. The gains and losses resulting from the
change in exchange rates from year-to-year have been reported separately as a
component of shareholders' equity. The effect on the statement of operations of
transaction gains and losses is insignificant.
Stock Based Compensation
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.
Rockford has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation and
accordingly, recognizes no compensation expense for the employee stock option
grants. Stock option grants to non-employees are charged to expense based upon
the fair value of the options granted.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Comprehensive Income
Effective January 1, 1998, Rockford adopted SFAS No. 130, Reporting
Comprehensive Income. In adopting the new requirements for calculating income,
items of other comprehensive income have been presented in the equity section of
the statement of shareholders' equity.
Segments of an Enterprise and Related Information
Effective January 1, 1998, Rockford adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 superseded FASB
Statement No. 14, Financial Reporting for Segments of a Business Enterprise.
SFAS No. 131 establishes standards for the way that business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
F-9
<PAGE> 74
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
Reclassifications
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the 1998 presentation.
2. ACQUISITIONS
On June 30, 1999 Rockford completed its acquisition of all of the common
stock of Lightning Audio. Under the terms of the acquisition Rockford paid
$1,550,000 in cash and recorded an additional $50,000 of purchase consideration
obligations for a total purchase price of $1.6 million. Under the terms of the
acquisition Rockford could pay up to $600,000 more over the next two years based
upon the subsequent performance of Lightning Audio. Rockford recorded
approximately $1,635,000 of goodwill which it plans to amortize over 15 years.
The purchase price allocation has been based on the best information available
at the time and may be subject to further revisions as management finalizes its
analysis of the assets acquired and liabilities assumed. The acquisition has
been accounted for under the purchase method of accounting and, accordingly, the
results of operations of Lightning Audio will be included in Rockford's
consolidated results of operation beginning on July 1, 1999. The acquisition was
not significant under the requirements of the Securities and Exchange
Commission.
On June 14, 1999 Rockford issued its 21,500 shares of treasury stock in
exchange for the 10% interest in its Japanese subsidiaries not held by Rockford.
The Company accounted for the acquired interest using the estimated fair value
of the common stock issued of $7.67 per share which resulted in the elimination
of minority interest and the recording of approximately $155,000 of goodwill.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials...................................... $ 3,749 $ 4,864 $ 5,689
Work in progress................................... 417 754 871
Finished goods..................................... 6,860 8,512 10,672
------- ------- -------
11,026 14,130 17,232
Less allowances.................................... (1,423) (1,904) (2,590)
------- ------- -------
$ 9,603 $12,226 $14,642
======= ======= =======
</TABLE>
F-10
<PAGE> 75
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Machinery and equipment......................... $ 9,251 $ 10,708 $ 10,323
Tooling equipment............................... 3,185 3,718 4,317
Leasehold improvements.......................... 1,312 1,368 1,382
Furniture and fixtures.......................... 354 905 1,132
In process...................................... 464 849 1,277
-------- -------- --------
14,566 17,548 18,431
Less accumulated depreciation and
amortization.................................. (10,589) (12,541) (13,344)
-------- -------- --------
$ 3,977 $ 5,007 $ 5,087
======== ======== ========
</TABLE>
F-11
<PAGE> 76
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
$17,000,000 revolving line of credit with a lender
collateralized by substantially all assets, interest
payments due monthly based upon a blended rate of LIBOR
plus 3.0 percent (approximately 8.2 percent at December
31, 1998 and 8.37 percent at June 30, 1999) and prime plus
0.75 percent (approximately 8.5 percent at December 31,
1998 and 8.75 percent at June 30, 1999) until June 2001
when all remaining principal and interest is due and
payable. Borrowings under this line of credit are limited
to the borrowing base defined substantially as a
percentage of inventory and accounts receivable, as
defined and adjusted in the agreement. ................... $ 9,410 $11,631 $14,462
$2,000,000 term note payable to a lender collateralized by
substantially all assets, monthly principal payments of
$33,333 plus interest at 10.67 percent until June 2000
when all principal and interest is due and payable. ...... 1,800 1,370 1,170
10.5 percent subordinated senior notes payable, unsecured,
interest payable quarterly until February 1999 when all
remaining principal and interest is due and was paid. In
connection with these senior notes, detachable warrants
were issued to purchase 76,835 shares of Rockford's common
stock at $0.93 per share, expiring February 2000. ........ 415 415 --
9.0 percent subordinated promissory note to related party,
unsecured, converted into 289,562 common shares on May 1,
1999. .................................................... 1,000 1,000 --
8.5 percent convertible subordinated debentures to related
parties, unsecured, interest payable quarterly until May
2002 when all remaining principal and interest is due and
payable, convertible into common shares at $2.44 per
share. ................................................... 995 995 995
$450,000 revolving line of credit with a bank collateralized
by substantially all of Lightning's assets, interest due
monthly at rate of prime plus 5.0 percent (approximately
13.5 percent at June 30, 1999), repaid in July 1999. ..... -- -- 354
Other....................................................... 169 26 647
------- ------- -------
13,789 15,437 17,628
Less current portion........................................ (1,569) (1,841) (2,094)
------- ------- -------
$12,220 $13,596 $15,534
======= ======= =======
</TABLE>
F-12
<PAGE> 77
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
Annual maturities of notes payable and long-term debt for the years
succeeding December 31, 1998 are $1,841,000 in 1999, $12,601,000 in 2000, $-0-
in 2001 and $995,000 in 2002. Interest payments were approximately $1,705,000
and $1,520,000 for the years ended December 31, 1997 and 1998, respectively.
At December 31, 1998, Rockford has $5,999,000 available under its revolving
line of credit and $1,000,000 available for financing equipment under its credit
arrangement with its primary lender.
Rockford's $17,000,000 revolving line of credit, its 10.5 percent
subordinated senior notes payable and its 8.5 percent convertible subordinated
debentures contain covenants which place various restrictions on financial
ratios, levels of indebtedness, and capital expenditures, among other things.
Rockford issued warrants in April of 1997 to purchase 21,500 shares of common
stock at $3.45 in conjunction with this credit facility which expire on June 1,
2007.
During 1996, the Company refinanced its line of credit prior to maturity.
Consequently, a loss on the early extinguishment of debt, consisting of
prepayment premiums, deferred loan costs, and related expenses of $327,000 (net
of tax benefit of approximately $161,000) is reflected as an extraordinary item
in the consolidated statements of operations.
6. LEASES
Rockford leases equipment under capital leases. Capital leases include
leases made under a two million dollar equipment leasing arrangement with a
bank. At December 31, 1998, $1,074,000 had been used under the arrangement and
$926,000 was available for future capital lease fundings through September 30,
1999. Rockford also leases certain manufacturing, warehouse and office
facilities, and computer hardware and software under noncancelable operating
leases that expire in various years through September 2006.
Property and equipment includes the following amounts for leases that have
been capitalized:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1997 1998 1999
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment............................................ $2,002 $3,064 $ 3,169
Less accumulated amortization........................ (895) (955) (1,385)
------ ------ -------
$1,107 $2,109 $ 1,784
====== ====== =======
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
During the year ended September 30, 1996, the three months ended December
31, 1996 and the years ended December 31, 1997 and 1998, Rockford acquired
approximately $949,000, $27,000, $68,000 and $1,394,000 of equipment under
capital leases, respectively.
F-13
<PAGE> 78
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
Future minimum payments under capital leases and noncancelable operating
leases with initial terms of one year or more consisted of the following at
December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
1999........................................ $ 624 $1,140
2000........................................ 413 945
2001........................................ 398 381
2002........................................ -- 246
2003........................................ -- 137
Thereafter.................................. -- 412
------ ------
Total minimum lease payments................ 1,435 $3,261
======
Less amounts representing interest.......... (187)
------
Present value of net minimum lease.......... 1,248
Less current portion........................ (552)
------
$ 696
======
</TABLE>
Total rental expense for all operating leases was approximately $1,812,000,
$420,000, $2,309,000 and $1,957,000 for the year ended September 30, 1996, the
three months ended December 31, 1996 and the years ended December 31, 1997 and
1998, respectively.
7. INCOME TAXES
Significant components of Rockford's deferred tax assets are:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory basis........................................ $ 629 $ 837
Basis in receivables................................... 48 251
Book over tax depreciation............................. 84 125
Accrued warranty....................................... 1,077 1,342
Accrued liabilities and other.......................... 233 529
Alternative minimum tax credit carryforward............ 212 --
Net operating loss carryforwards....................... 115 --
------ ------
Total deferred tax assets................................ $2,398 $3,084
====== ======
</TABLE>
F-14
<PAGE> 79
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
Significant components of the federal and state income tax expense
(benefit) are:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, --------------
1996 1996 1997 1998
------------- ------------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal expense (benefit)................. $ (433) $(195) $779 $1,883
State expense............................. 90 23 116 384
Foreign expense........................... 9 8 36 136
------- ----- ---- ------
Total current expense (benefit)............. (334) (164) 931 2,403
Deferred:
Federal expense (benefit)................. (643) 127 25 (719)
State expense (benefit)................... (48) 18 3 33
------- ----- ---- ------
Total deferred expense (benefit)............ (691) 145 28 (686)
------- ----- ---- ------
$(1,025) $ (19) $959 $1,717
======= ===== ==== ======
</TABLE>
A reconciliation of Rockford's effective income tax rate to the federal
statutory rate follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, --------------
1996 1996 1997 1998
------------- ------------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal statutory rate...................... $(1,029) $(13) $881 $1,374
State tax, net of federal benefit........... 28 27 79 275
Nondeductible items......................... -- -- 36 45
Higher (lower) foreign tax rates............ (30) (17) (43) 17
Foreign sales corporation benefit........... -- -- (98) (65)
Other, net.................................. 6 (16) 104 71
------- ---- ---- ------
Total income tax expense.................... (1,025) (19) 959 1,717
Tax benefit of extraordinary item netted
therein................................... 161 -- -- --
------- ---- ---- ------
Tax expense in statement of operations...... $ (864) $(19) $959 $1,717
======= ==== ==== ======
</TABLE>
Rockford's income attributable to foreign operations amounted to
approximately $105,000 for the year ended September 30, 1996, $65,000 for the
three months ended December 31, 1996, $237,000 for the year ended December 31,
1997 and $350,000 for the year ended December 31, 1998.
For the year ended September 30, 1996, no tax payments were made and
$150,000 of net tax refunds were received. For the three months ended December
31, 1996, no tax payments were made nor were refunds received. For the years
ended December 31, 1997 and 1998, Rockford made tax payments of $694,000 (net of
$460,000 in refunds) and $2,082,000, respectively.
F-15
<PAGE> 80
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
8. COMMON STOCK GRANTS AND OPTIONS
The Board of Directors of Rockford prior to 1995 granted a certain
consulting firm, which provided chief executive officer services to Rockford
until January 1, 1999, options to purchase 215,000 shares of its authorized but
unissued common stock at a price of $1.51 per share, protected against dilution,
as defined, and expiring in August 2002. The price per share exceeded the fair
value at the date of the grant. The stock options are fully vested at December
31, 1998.
Rockford has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of Rockford's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Rockford has provided stock option plans for certain employees and
directors under its 1994 and 1997 stock option plans. Under the plans, options
to purchase common stock of Rockford will be granted to certain employees and
directors at the fair value of the underlying common stock. The options
generally have a term of ten years and become exercisable over three years
commencing on the date of the grant. Options granted prior to December 31, 1996
will vest 100 percent upon an initial public offering or merger or acquisition
of Rockford. Up to 2,150,000 shares are reserved and may be offered under these
plans. Under certain circumstances, Rockford has the right to repurchase common
stock acquired under the options at the fair value price.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if Rockford has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a minimum value
pricing model with the following weighted-average assumptions for each period:
<TABLE>
<S> <C>
Expected life of the award............................... 5 years
Dividend yield........................................... 0 percent
Risk-free interest rate.................................. 6 percent
</TABLE>
F-16
<PAGE> 81
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Rockford's pro
forma information follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, ----------------
1996 1996 1997 1998
------------- ------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss) as reported..... $(2,003) $ (19) $1,632 $2,305
Pro forma Statement 123
expense......................... (25) (9) (76) (110)
------- ------ ------ ------
Pro forma net income (loss)....... $(2,028) $ (28) $1,556 $2,195
======= ====== ====== ======
Pro forma net income (loss) per
common share:
Basic........................... $ (0.50) $(0.01) $ 0.35 $ 0.50
======= ====== ====== ======
Diluted......................... $ (0.50) $(0.01) $ 0.29 $ 0.39
======= ====== ====== ======
</TABLE>
Option activity under the 1994 and 1997 stock option plans during the year
ended September 30, 1996, the three months ended December 31, 1996, the years
ended December 31, 1997 and 1998 and the six months ended June 30, 1999 follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
SHARES AVAILABLE WEIGHTED-AVERAGE
UNDER OPTION SHARES EXERCISE PRICE
---------------- --------- ----------------
<S> <C> <C> <C>
Outstanding at September 30, 1995..... 534,472 540,527 $1.51
Granted............................... (422,475) 422,475 2.44
Exercised............................. -- -- --
Expired or cancelled.................. 62,350 (62,350) 1.51
--------- --------- -----
Outstanding at September 30, 1996..... 174,347 900,652 1.95
Granted............................... (12,900) 12,900 3.45
Exercised............................. -- (3,225) 1.51
Expired or cancelled.................. -- -- --
--------- --------- -----
Outstanding at December 31, 1996...... 161,447 910,327 1.97
Reserve shares........................ 1,075,000 -- --
Granted............................... (672,103) 672,103 4.04
Exercised............................. -- (16,662) 1.99
Expired or cancelled.................. 62,888 (62,888) 2.15
--------- --------- -----
Outstanding at December 31, 1997...... 627,232 1,502,880 2.89
Granted............................... (158,025) 158,025 5.38
--------- --------- -----
Outstanding at December 31, 1998...... 469,207 1,660,905 3.12
Granted............................... (172,000) 172,000 7.67
Exercised............................. -- (12,147) 3.45
Expired or cancelled.................. 39,777 (39,777) 3.45
--------- --------- -----
Outstanding at June 30, 1999.......... 336,984 1,780,981 $3.55
========= ========= =====
</TABLE>
F-17
<PAGE> 82
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
The weighted-average fair value of options granted during the year ended
September 30, 1996, the three months ended December 31, 1996, the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1999 was $0.67,
$0.90, $0.90, $1.08 and $1.99, respectively.
The following table summarizes information about stock options under the
plans outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE NUMBER REMAINING AVERAGE NUMBER AVERAGE
OF EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE OUTSTANDING AT EXERCISE
PRICES DECEMBER 31, 1998 LIFE PRICE DECEMBER 31, 1998 PRICE
- ------------- ----------------- ----------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
$1.51 465,277 6.0 years $1.51 465,277 $1.51
$2.44 - $3.45 552,550 7.6 years 2.90 442,900 $2.77
$4.19 526,978 9.1 years 4.19 255,695 $4.19
$5.81 116,100 9.3 years 5.81 -- --
</TABLE>
9. EARNINGS PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS
THREE MONTHS YEAR ENDED ENDED
YEAR ENDED ENDED DECEMBER 31, JUNE 30,
SEPTEMBER 30, DECEMBER 31, --------------- ---------------
1996 1996 1997 1998 1998 1999
------------- ------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).................. $(2,003) $ (19) $1,632 $2,305 $1,351 $3,820
Effect of dilutive securities
Interest impact of convertible
debentures.................... -- -- 110 110 55 46
------- ------ ------ ------ ------ ------
Numerator for diluted net income
(loss) per share -- income
available to common stockholders
after assumed conversions.......... $(2,003) $ (19) $1,742 $2,415 $1,406 $3,866
======= ====== ====== ====== ====== ======
Denominator:
Denominator for basic net income
(loss) per share -- weighted --
average shares.................. 4,040 4,394 4,401 4,412 4,411 4,508
Effect of dilutive securities
Employee stock options.......... -- -- 529 772 553 1,086
Warrants........................ -- -- 61 70 64 80
Convertible debentures.......... -- -- 697 697 697 407
------- ------ ------ ------ ------ ------
Dilutive potential common shares... 4,040 4,394 1,287 1,539 1,314 1,573
------- ------ ------ ------ ------ ------
</TABLE>
F-18
<PAGE> 83
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
THREE MONTHS YEAR ENDED ENDED
YEAR ENDED ENDED DECEMBER 31, JUNE 30,
SEPTEMBER 30, DECEMBER 31, --------------- ---------------
1996 1996 1997 1998 1998 1999
------------- ------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Denominator for diluted net income
(loss) per share -- adjusted
weighted-average shares and assumed
conversions........................ 4,040 4,394 5,688 5,951 5,725 6,081
======= ====== ====== ====== ====== ======
Basic net income (loss) per share.... $ (0.50) $(0.01) $ 0.37 $ 0.52 $ 0.31 $ 0.85
======= ====== ====== ====== ====== ======
Diluted net income (loss) per
share.............................. $ (0.50) $(0.01) $ 0.31 $ 0.41 $ 0.25 $ 0.64
======= ====== ====== ====== ====== ======
</TABLE>
10. CONTINGENCIES
Rockford is a party to legal proceedings which arise out of the ordinary
course of business. Based upon advice from outside legal counsel, management is
of the opinion that these matters will have no material effect on Rockford's
consolidated financial position, results of operations or cash flows.
11. EMPLOYEE BENEFIT PLANS
Rockford has a 401(k) Retirement Savings Plan (the Plan) covering
substantially all employees who have completed six consecutive months of service
without regard to hours of service. Under the terms of the Plan, employees may
make voluntary contributions, subject to Internal Revenue Service limitations.
Rockford will match employee contributions up to three percent of the employee's
annual compensation. Additional contributions to the Plan can be made at the
discretion of the Board of Directors. Contributions to the Plan during the year
ended September 30, 1996, the three months ended December 31, 1996 and the years
ended December 31, 1997 and 1998 were approximately $219,000, $46,000, $237,000
and $296,000, respectively.
On May 17, 1999 the shareholders approved the adoption of the 1999 Employee
Stock Purchase Plan to be effective September 1, 1999. Under the Plan, 361,200
shares of common stock have been reserved for issuance.
12. SEGMENT INFORMATION
Rockford operates its business under the car audio and professional audio
product lines. For each of the years ended December 31, 1997 and 1998, the
professional audio line was not
F-19
<PAGE> 84
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(The information for the six months ended
June 30, 1998 and 1999 is unaudited)
significant and, accordingly, no additional disclosures of revenue information
about products are required. Below is geographic information for revenues of
Rockford:
<TABLE>
<CAPTION>
THREE
MONTHS YEAR ENDED SIX MONTHS ENDED
YEAR ENDED ENDED DECEMBER 31, JUNE 30,
SEPTEMBER 30, DECEMBER 31, ----------------- -----------------
1996 1996 1997 1998 1998 1999
------------- ------------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales from external
customers(a)
United States............ $58,977 $11,518 $64,252 $70,016 $36,545 $56,172
Export:
Americas.............. 4,880 1,560 7,005 4,905 3,732 3,355
Europe................ 10,326 1,503 7,819 6,599 3,023 3,929
Asia.................. 6,961 1,867 8,347 6,057 2,623 2,455
------- ------- ------- ------- ------- -------
Total sales from external
customers................ $81,144 $16,448 $87,423 $87,577 $45,923 $65,911
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Revenues are attributed to geographic regions based on the location of
customers.
Rockford had no customers who accounted for more than 10 percent of net
sales for all periods presented except for the six months ended June 30, 1999 in
which sales to one customer accounted for 22.7 percent of that period's net
sales. Rockford's long-lived assets outside of the United States are not
significant.
13. SUBSEQUENT EVENTS
Effective , 1999, Rockford executed a 4.3-for-1 common stock
split. All share information in the financial statements has been restated to
reflect the effect of the stock split.
Effective with the successful completion of its initial public offering,
Rockford plans to grant options to purchase 64,500 shares of common stock at the
offering price to a newly elected member of its board of directors.
F-20
<PAGE> 85
Inside back cover
Upper half of page highlights Hafler:
Upper left: [Hafler logo]
Upper right: [Photo of Hafler studio monitor]
Middle right: [Photo of Hafler power amplifier]
Center: www.hafler.com
[Photo of Hafler website]
Text in upper left: There is a human filter in the world of music. Sitting
somewhere between the creative musician in the recording studio, and the
passionate listener in a living room or vehicle. That filter is the professional
sound engineer, the person that makes a living recording, mixing, or
broadcasting the music and movie soundtracks that we hear everyday. We believe
Hafler is the brand of choice among these working professionals and the aspiring
professionals.
Moving beyond the amplifier niche, in 1996 Hafler introduced the TRM Series of
powered monitors and powered subwoofers. Amplifier electronics manufactured in
Tempe and speaker components in Grand Rapids.
Bottom half of page highlights Lightning Audio:
Center of page: [Lightning Audio logo]
Lower left: [male model using Lightning battery clamp to hold auto battery;
Lightning bolts coursing up arms and out of eyes]
Bottom left: www.lightningaudio.com
[Photo of Lightning Audio web site]
Bottom right: [Photos of Lightning Audio accessory products]
Text in middle right: Lightning Audio assaults the car audio accessory business
with battery clamps, capacitors, and speaker wire. Pretty boring stuff, but not
with Lightning Audio. Gen Y consumers now have a brand that is cool to own, but
less costly than Rockford Fosgate. We believe that Lightning Audio consumers
are proud to claim us as "their brand" and show off what is underneath carpets,
inside trunks, or under the hood of their car or truck.
We believe Lightning Audio will allow Rockford to grow by expanding the
Lightning Audio product mix into the amplifier and speaker categories at lower
price points than Rockford Fosgate and by capitalizing on new distribution
channels.
<PAGE> 86
3,387,824 SHARES
[ROCKFORD CORPORATION LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
<TABLE>
<S> <C>
DAIN RAUSCHER WESSELS NEEDHAM & COMPANY, INC.
a division of Dain
Rauscher Incorporated
</TABLE>
---------------------------
, 1999
---------------------------
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We expect to incur the following estimated expenses (other than
underwriting discounts and commissions) in connection with the issuance and
distribution of the securities which we are registering under this statement:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,080
NASD filing fee............................................. 5,565
Nasdaq National Market listing fee.......................... 48,750
Printing and engraving...................................... 153,000
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses (including legal fees)........... *
Transfer agent fees......................................... *
Miscellaneous............................................... *
--------
Total............................................. $800,000
========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation limit, to the maximum extent permitted by
Arizona law, the liability of our directors for monetary damages arising from a
breach of their duties as directors. The limitation of liability does not affect
the availability of equitable remedies, such as injunctive relief or rescission.
Our articles of incorporation require us to indemnify our directors and
officers, to the maximum extent permitted by Arizona law, against liability
arising against them for acts or omissions within the scope of their authority
as directors or officers. Indemnification is prohibited if our board of
directors finds that the person's action or omission was willful, grossly
negligent, or with fraudulent or criminal intent, or for liabilities under the
Securities Act of 1933. Under Arizona law, we may indemnify a director or
officer against liability incurred on account of service to us, if the director
or officer:
- conducted himself or herself in good faith;
- reasonably believed that his or her conduct (1) if in an official
capacity, was in our best interests or (2) if in any other capacity, was
not opposed to our best interests;
- in the case of any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful; and
- did not improperly receive personal benefit.
Before completing this offering, we intend to enter into indemnification
agreements with each of our directors. These agreements will generally obligate
us to indemnify them for liability incurred by them as a result of their service
as directors, unless (1) their liability arises as a result of their fraud,
deliberate dishonesty or willful misconduct or (2) Arizona law prohibits
indemnification. Prior to completing this offering on the effective date of this
registration statement, we will have obtained liability insurance for our
directors.
Reference is made to Section 7 of the underwriting agreement to be filed as
an exhibit to the registration statement, indemnifying our officers and
directors against certain liabilities.
II-1
<PAGE> 88
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since May 1, 1996, we have issued and sold or otherwise transferred the
below listed unregistered securities. These issuances were deemed exempt from
registration under the Securities Act of 1933 in reliance on Rule 701 under such
Act or Section 4(2) of such Act because they were made either under a written
compensatory benefit plan established by us for the participation of our
employees or transactions by us not involving a public offering.
1. In 1996 and 1997, we issued 19,887 shares to several employees who
exercised stock options pursuant to our 1994 and 1997 Stock Option Plans.
2. In March 1996, we borrowed $2.0 million from Caroline Bartol. On
July 1, 1996 she converted $1.0 million of this loan into 289,562 shares of
Common Stock.
3. On May 1, 1999, we issued 289,562 shares of our Common Stock to an
entity controlled by two of our directors in connection with the conversion
of a $1,000,001 loan.
4. On April 23, 1997, we issued to Vrolyk Partnership 97-A a warrant
for 21,500 shares with an exercise price of $3.45 per share, as
compensation for services rendered in connection with arranging our $20.0
million credit facility.
5. During May and June, 1999 we issued 12,147 shares to two employees
who exercised stock options pursuant to our 1994 and 1997 stock option
plans.
6. During June 1999 we issued 748 shares to a warrantholder who
exercised his warrant conversion rights.
7. During June 1999 we issued 21,500 shares to the owner of 10% of
our Japanese subsidiary in order to purchase his interest. As a result of
this issuance, we now own 100% of our Japanese subsidiary.
8. We have, from time to time, granted stock options to employees.
The following table sets forth certain information regarding such grants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ---------------
<S> <C> <C>
January 1, 1996 through December 31, 1996................... 64,500 $2.44 - $3.45
January 1, 1997 through December 31, 1997................... 672,103 $3.45 - $4.19
January 1, 1998 through December 31, 1998................... 158,025 $4.19 - $5.81
January 1, 1999 through the date of this prospectus......... 172,000 $7.67
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1 Underwriting Agreement*
3.1 Articles of Incorporation+
3.2 Restated Bylaws+
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+
3.6 Amendments to Bylaws adopted by the board of directors on
May 14, 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 3.6 for a description
of the rights of the holders of Common Stock.
5 Form of Opinion of Steptoe & Johnson LLP
10.1 1994 Stock Option Plan+
10.2 1997 Stock Option Plan+
10.3 1999 Employee Stock Purchase Plan as amended and restated
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.4 Employment Agreement by and between Rockford Corporation and
W. Gary Suttle+
10.5 Indemnity Agreement by and between Rockford Corporation and
W. Gary Suttle+
10.6 Letter Agreement by and between Rockford Corporation and
Best Buy Corporation**+
10.7 Joint Development and Supply Agreement by and between
Rockford Corporation and Hyundai Electronics Industries Co.,
Ltd.**+
10.8 Form of Dealership Agreements+
10.9 Standard Industrial Commercial Multi-Tenant Lease -- Gross
American Industrial Real Estate Association Lease, and
amendments and addendum thereto, by and between Rockford
River LLC and Rockford Corporation
10.10 Standard Industrial Lease -- Gross, and amendments and
addendum thereto, by and between Cloyce Clark and Rockford
Corporation+
10.11 Lease Agreement, and addenda thereto, by and between
Carbonneau Industries, Inc. and Rockford Corporation
10.12 Master Lease Agreement and amendments thereto, by and
between Banc One Leasing Corporation and Rockford
Corporation+
10.13 Loan and Security Agreement by and between Rockford
Corporation and FINOVA Capital Corporation+
10.14 Employee 401(k) Deferred Compensation Plan and amendments
thereto,+
10.15 Manufacturing and Distribution Agreement by and between Path
Group, Inc. Incorporated and Rockford Corporation**
10.16 Product Sales Agreement by and between Rockford Corporation
and Avnet Electronics Marketing**+
10.17 Convertible Subordinated Debenture Amendment Agreement and
Agreement to Rename as Senior Notes
10.18 Form of Senior Note due February 3, 1999 and Warrant+
10.19 Schedule for Senior Notes and Warrants+
10.20 Convertible Subordinated Debenture Purchase Agreement
10.21 Form of 8.5% Convertible Subordinated Debenture due May 1,
2002+
10.22 Schedule for 8.5% Convertible Subordinated Debentures
10.23 Warrant issued to the Vrolyk Partnership 97-A to expire June
1, 2007+
10.24 Services and Option Agreement by and between W. Gary Suttle,
Caroline S. Bartol, individually and as representative of
the estate of John G. Bartol and Rockford Corporation+
10.25 Amendment of Services and Option Agreement by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.26 Amendment of Services and Option Contract by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.27 Consulting and Option Contract by and between Rockford
Corporation and Grisanti, Galef & Goldress, Inc.+
10.28 Amendment and Renewal of Consulting and Option Contract by
and between Rockford Corporation and Grisanti, Galef &
Goldress, Inc.+
10.29 Amendment of Consulting and Option Contract by and between
Rockford Corporation and Grisanti, Galef & Goldress, Inc.+
10.30 Letter from Timothy Bartol, General Partner for the Boulder
Investors Partnership exercising rights under Bridge Loan
Conversion and Extension Agreement by and between Rockford
Corporation and Boulder Investors Ltd. Partnership, as
successor to Caroline S. Bartol+
10.31 Fifth Amendment to Bridge Loan Conversion and Extension
Agreement by and between Rockford Corporation and Boulder
Investors Ltd. Partnership, as successor to Caroline S.
Bartol+
10.32 Bridge Loan Conversion and Extension Agreement by and
between Rockford Corporation and Caroline S. Bartol
</TABLE>
II-3
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.33 Bridge Loan Agreement by and between Rockford Corporation
and Caroline S. Bartol
10.34 1990 Restricted Stock Grant and Tax Loan Agreement and
Promissory Note+
10.35 Form of Indemnity Agreement*
10.36 FINOVA -- Schedule of Loan and Security Agreement
21 List of Subsidiaries of Rockford Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Steptoe & Johnson, LLP*
24 Power of Attorney. Reference is made to the signature page
of this registration statement which includes the power of
attorney+
27.1 Financial Data Schedule for six months ended June 30, 1999+
27.2 Financial Data Schedule for year ended December 31, 1998+
</TABLE>
- ---------------
* To be filed by amendment
** Confidential treatment requested
+ Previously filed
Financial Statement Schedule: Schedule II -- Valuation and Qualifying
Accounts.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ROCKFORD CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------------- ---------- -------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------------------------- ------------ ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Receivable allowances...... $ 918 $561 $-- $436(1) $1,043
Inventory reserve.......... 1,423 787 -- 306(2) 1,904
December 31, 1997
Receivable allowances...... 699 540 -- 321(1) 918
Inventory reserve.......... 785 638 -- -- 1,423
December 31, 1996
Receivable allowances...... 551 247 -- 99(1) 699
Inventory reserve.......... 944 79 -- 238(2) 785
September 30, 1996
Receivable allowances...... 525 653 -- 627(1) 551
Inventory reserve.......... 914 251 -- 221(2) 944
</TABLE>
- ---------------
(1) Accounts written off net of recoveries.
(2) Reserved inventory sold or scrapped.
Other financial statement schedules have not been presented, as they are
not applicable.
II-4
<PAGE> 91
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriter at the closing specified
in the underwriting agreements certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to our directors, officers and controlling
persons pursuant to the Act, our articles of incorporation or our bylaws, the
underwriting agreement or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by
one of our directors, officers or controlling persons in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
we will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed by the
final adjudication of such issue.
We hereby undertake that for purposes of determining any liability under
the Securities Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by us pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
be deemed to be part of this registration statement as of the time it was
declared effective. We further undertake that for the purpose of determining any
liability under the Securities Act of 1933, as amended, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
II-5
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this amendment no. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Phoenix, State of Arizona, on July 9, 1999.
ROCKFORD CORPORATION
By: /s/ W. GARY SUTTLE
------------------------------------
W. Gary Suttle
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints W. Gary Suttle and James M. Thomson, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to sign any registration statement for the
same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, as amended, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ W. GARY SUTTLE President, Chief Executive May 25, 1999
- --------------------------------------------------- Officer, and Director (Principal
W. Gary Suttle Executive Officer)
/s/ JAMES M. THOMSON Vice President of Finance and May 25, 1999
- --------------------------------------------------- Chief Financial Officer,
James M. Thomson Secretary (Principal Financial
Officer)
/s/ D. LYNN THROWER Corporate Controller (Principal May 25, 1999
- --------------------------------------------------- Accounting Officer)
D. Lynn Thrower
/s/ JERRY E. GOLDRESS Director May 25, 1999
- ---------------------------------------------------
Jerry E. Goldress
/s/ TIMOTHY C. BARTOL Director May 25, 1999
- ---------------------------------------------------
Timothy C. Bartol
</TABLE>
II-6
<PAGE> 93
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ NICHOLAS G. BARTOL Director May 25, 1999
- ---------------------------------------------------
Nicholas G. Bartol
/s/ RALPH B. GODFREY Director May 26, 1999
- ---------------------------------------------------
Ralph B. Godfrey
/s/ JOHN P. LLOYD Director May 25, 1999
- ---------------------------------------------------
John P. Lloyd
</TABLE>
II-7
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1 Underwriting Agreement*
3.1 Articles of Incorporation+
3.2 Restated Bylaws+
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+
3.6 Amendments to Bylaws adopted by the board of directors on
May 14, 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 3.6 for a description
of the rights of the holders of Common Stock.
5 Form of Opinion of Steptoe & Johnson LLP
10.1 1994 Stock Option Plan+
10.2 1997 Stock Option Plan+
10.3 1999 Employee Stock Purchase Plan as amended and restated
10.4 Employment Agreement by and between Rockford Corporation and
W. Gary Suttle+
10.5 Indemnity Agreement by and between Rockford Corporation and
W. Gary Suttle+
10.6 Letter Agreement by and between Rockford Corporation and
Best Buy Corporation**+
10.7 Joint Development and Supply Agreement by and between
Rockford Corporation and Hyundai Electronics Industries Co.,
Ltd.**+
10.8 Form of Dealership Agreements+
10.9 Standard Industrial Commercial Multi-Tenant Lease -- Gross
American Industrial Real Estate Association Lease, and
amendments and addendum thereto, by and between Rockford
River LLC and Rockford Corporation
10.10 Standard Industrial Lease -- Gross, and amendments and
addendum thereto, by and between Cloyce Clark and Rockford
Corporation+
10.11 Lease Agreement, and addenda thereto, by and between
Carbonneau Industries, Inc. and Rockford Corporation
10.12 Master Lease Agreement and amendments thereto, by and
between Banc One Leasing Corporation and Rockford
Corporation+
10.13 Loan and Security Agreement by and between Rockford
Corporation and FINOVA Capital Corporation+
10.14 Employee 401(k) Deferred Compensation Plan and amendments
thereto,+
10.15 Manufacturing and Distribution Agreement by and between Path
Group, Inc. Incorporated and Rockford Corporation**
10.16 Product Sales Agreement by and between Rockford Corporation
and Avnet Electronics Marketing**+
10.17 Convertible Subordinated Debenture Amendment Agreement and
Agreement to Rename as Senior Notes
10.18 Form of Senior Note due February 3, 1999 and Warrant+
10.19 Schedule for Senior Notes and Warrants+
10.20 Convertible Subordinated Debenture Purchase Agreement
10.21 Form of 8.5% Convertible Subordinated Debenture due May 1,
2002+
10.22 Schedule for 8.5% Convertible Subordinated Debentures
10.23 Warrant issued to the Vrolyk Partnership 97-A to expire June
1, 2007+
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.24 Services and Option Agreement by and between W. Gary Suttle,
Caroline S. Bartol, individually and as representative of
the estate of John G. Bartol and Rockford Corporation+
10.25 Amendment of Services and Option Agreement by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.26 Amendment of Services and Option Contract by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.27 Consulting and Option Contract by and between Rockford
Corporation and Grisanti, Galef & Goldress, Inc.+
10.28 Amendment and Renewal of Consulting and Option Contract by
and between Rockford Corporation and Grisanti, Galef &
Goldress, Inc.+
10.29 Amendment of Consulting and Option Contract by and between
Rockford Corporation and Grisanti, Galef & Goldress, Inc.+
10.30 Letter from Timothy Bartol, General Partner for the Boulder
Investors Partnership exercising rights under Bridge Loan
Conversion and Extension Agreement by and between Rockford
Corporation and Boulder Investors Ltd. Partnership, as
successor to Caroline S. Bartol+
10.31 Fifth Amendment to Bridge Loan Conversion and Extension
Agreement by and between Rockford Corporation and Boulder
Investors Ltd. Partnership, as successor to Caroline S.
Bartol+
10.32 Bridge Loan Conversion and Extension Agreement by and
between Rockford Corporation and Caroline S. Bartol
10.33 Bridge Loan Agreement by and between Rockford Corporation
and Caroline S. Bartol
10.34 1990 Restricted Stock Grant and Tax Loan Agreement and
Promissory Note+
10.35 Form of Indemnity Agreement*
10.36 FINOVA -- Schedule of Loan and Security Agreement
21 List of Subsidiaries of Rockford Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Steptoe & Johnson, LLP*
24 Power of Attorney. Reference is made to the signature page
of this registration statement which includes the power of
attorney+
27.1 Financial Data Schedule for six months ended June 30, 1999+
27.2 Financial Data Schedule for year ended December 31, 1998+
</TABLE>
- ---------------
* To be filed by amendment
** Confidential treatment requested
+ Previously filed
<PAGE> 1
Exhibit 3.7
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
ROCKFORD CORPORATION
1. The name of the corporation is ROCKFORD CORPORATION.
2. The amendment adopted by action of the directors and shareholders is to
amend the corporation's articles of incorporation as follows:
Amend Article IV so that it reads in its entirety as follows:
The corporation shall have authority to issues 40,000,00
shares of common stock of the par value of $.01 per share.
3. The date of adoption of the amendment by the shareholders was June 28,
1999.
4. The number of shares of the corporation outstanding and the number of
shares entitled to vote thereon were 1,093,218.
5. The number of shares voting in favor of adopting the amendment was
1,043,996, and the number of shares voting against the adoption was
zero (0).
DATED as of June 28, 1999.
ROCKFORD CORPORATION
By /s/ W. Gary Suttle
-----------------------------
W. Gary Suttle, President
By /s/ James M. Thomson
-----------------------------
James M. Thomson, Secretary
<PAGE> 2
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 28th
day of June, 1999, by W. Gary Suttle, President of ROCKFORD CORPORATION, an
Arizona corporation, on behalf of the corporation.
/s/ Victoria Lynn Hodson
-----------------------------
Notary Public
(Notary Seal)
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 28th
day of June, 1999, by James M. Thomson, Secretary of ROCKFORD CORPORATION, an
Arizona corporation, on behalf of the corporation.
/s/ Victoria Lynn Hodson
-----------------------------
Notary Public
(Notary Seal)
-2-
<PAGE> 1
FORM OF LEGAL OPINION
July 8, 1999
Rockford Corporation
648 South River Drive
Tempe, Arizona 85281
Re: Registration Statement on Form S-1 (No. 333-79285)
Gentlemen:
In connection with the registration under the Securities Act
of 1933, as amended, of 3,895,998 shares of Common Stock, par value $0.01 per
share, of Rockford Corporation (the "Company"), including 508,174 shares as to
which the Underwriters have the option to purchase to cover overallotments, if
any, we have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on May 26, 1999 (No. 333-79285), as
amended through the date hereof (the "Registration Statement"), corporate
records, certificates of public officials, Company officers and such other
documents as we deemed appropriate or necessary for the purpose of rendering
this opinion.
Based on the foregoing, it is our opinion that the 3,895,998
shares of Common Stock of the Company covered by the Registration Statement have
been duly authorized and, when the 3,895,998 shares to be sold by the Company
and the Selling Stockholders identified therein have been issued and sold in
accordance with the terms set forth in the Registration Statement, will be
validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
STEPTOE & JOHNSON
<PAGE> 1
EXHIBIT 10.3
ROCKFORD CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT OF PLAN.
Rockford Corporation, an Arizona corporation (the "Company"),
proposes to grant options ("Options") for purchase of the Company's common
stock, $1 par value ("Common Stock"), to eligible employees of the Company and
its Designated Subsidiaries (as hereinafter defined) pursuant to this 1999
Employee Stock Purchase Plan (this "Plan"), as amended and restated on May 17,
1999. For purposes of this Plan, "parent corporation" and "subsidiary"
(collectively, "Subsidiaries") shall have the same meanings as "parent
corporation" and "subsidiary corporation" set forth in Sections 424(e) and
424(f), respectively, of the Internal Revenue Code of 1986, as amended (the
"Code"). The Company intends this Plan to qualify as an "employee stock purchase
plan" under Section 423 of the Code (including any amendments or successor
provisions to such Section), and this Plan shall be so construed. Any term not
expressly defined in this Plan but defined for purposes of Section 423 of the
Code shall have the same definition therein.
2. STOCK SUBJECT TO PLAN.
A total of 84,000 shares of the Common Stock is reserved for
issuance under this Plan. Such number shall be subject to adjustments effected
in accordance with Section 16 of this Plan. Any shares of Common Stock that have
been made subject to an Option that cease to be subject to the Option (other
than by means of exercise of the Option), including, without limitation, in
connection with the cancellation or termination of an Option, shall again be
available for issuance in connection with future grants of Options under this
Plan.
<PAGE> 2
3. PURPOSE.
The purpose of this Plan is to provide employees of the
Company and its designated subsidiaries, as that term is defined in Section 5 of
this Plan ("Designated Subsidiaries"), with a convenient means of acquiring an
equity interest in the Company through payroll deductions, to enhance such
employees' sense of participation in the affairs of the Company and
Subsidiaries, and to provide an incentive for continued employment.
4. ADMINISTRATION.
This Plan shall be administered by the Compensation Committee
("Committee") appointed by the Company's Board of Directors (the "Board").
Subject to the provisions of this Plan and the limitations of Section 423 of the
Code or any successor provision in the Code, the Committee shall have exclusive
authority, in its discretion, to determine all matters relating to Options
granted under this Plan, including all terms, conditions, restrictions, and
limitations of Options; provided, however, that all participants granted Options
under an offering pursuant to this Plan shall have the same rights and
privileges within the meaning of Code Section 423(b)(5) except as required by
applicable law. The Committee shall also have exclusive authority to interpret
this Plan and may from time to time adopt rules and regulations of general
application for this Plan's administration. The Committee's exercise of
discretion and interpretation of this Plan, its rules and regulations, and all
actions taken and determinations made by the Committee pursuant to this Plan,
shall be conclusive and binding on all parties involved or affected. The
Committee may delegate administrative duties to such of the Company's officers
or employees as it so determines (provided that no such delegation may be made
that would cause the purchase of Common Stock by participants under this Plan to
cease to be exempt from Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")). All expenses incurred
-2-
<PAGE> 3
in connection with the administration of this Plan shall be paid by the Company
and the Designated Subsidiaries; provided, however, that the Committee may
require a participant to pay any costs or fees in connection with the sale by
the participant of shares of Common Stock acquired under this Plan or in
connection with the participant's request for the issuance of a certificate for
shares of Common Stock held in the participant's account under the Plan.
5. ELIGIBILITY.
Any employee of the Company or the Designated Subsidiaries is
eligible to participate in the Plan for any Offering Period (as hereinafter
defined) under this Plan except the following:
(a) employees who have not been continuously employed by the
Company or Subsidiaries from the date of hire or rehire or of return from an
unapproved leave of absence for a period of at least 60 days before the
beginning of such Offering Period;
(b) employees who are customarily employed for less than 20
hours per week;
(c) employees who are customarily employed for not more than
five months in a calendar year;
(d) employees who, together with any other person whose stock
would be attributed to such employee pursuant to Section 424(d) of the Code, own
stock or hold options to purchase stock possessing five percent or more of the
total combined voting power or value of all classes of stock of the Company or
any of its Subsidiaries or who, as a result of being granted Options under this
Plan, would own stock or hold options to purchase stock possessing five percent
or more of the total combined voting power or value of all classes of stock of
the Company or any of its Subsidiaries; and
-3-
<PAGE> 4
(e) employees who are citizens of a foreign country which
prohibits foreign corporations from granting stock options to any of its
citizens.
For all purposes of this Plan, the term Designated
Subsidiaries shall mean all Subsidiaries (including the Company); provided that
any Designated Subsidiary shall cease to be a Designated Subsidiary on the
earlier of (i) the date such Designated Subsidiary ceases for any reason to be a
"parent corporation" or "subsidiary corporation" as defined in Sections 424(e)
and 424(f), respectively, of the Code, or (ii) the date the Committee or the
Board determines that such Subsidiary shall no longer be a Designated Subsidiary
for purposes of the Plan.
6. OFFERING AND OFFERING PERIODS.
(a) For purposes of this Plan, the Offering Periods of this
Plan (an "Offering Period") shall be of periods not to exceed the maximum period
permitted by Section 423 of the Code.
(b) Until determined otherwise by the Committee or the Board,
or unless paragraph (c) applies, Offering Periods shall be of six months'
duration, and the first Offering Period shall begin on September 1, 1999. The
first day of each Offering Period is referred to as the "Offering Date." The
last day of each Offering Period is referred to as the "Purchase Date." Unless
determined otherwise by the Committee or the Board, Offering Periods shall begin
on the first day of the month every 6 months after the first day of the prior
Offering Period. During an Offering Period, payroll deductions of the
participants are accumulated under this Plan. Subject to the requirements of
Section 423 of the Code, the Committee or the Board shall have the power to
change the duration of Offering Periods with respect to future offerings if such
change is announced at least 30 days prior to the first day of the first
Offering Period to be affected by such change.
-4-
<PAGE> 5
7. PARTICIPATION IN THIS PLAN.
Eligible employees may become participants in an Offering
Period under this Plan on the first Offering Date after satisfying the
eligibility requirements by delivering an enrollment form provided by the
Company at the time and in the manner required by the Committee, under such
rules as are consistently applied to all eligible employees with respect to a
given Option. Once an employee becomes a participant in the Plan with respect to
an Offering Period, such employee will automatically participate in the Offering
Period commencing immediately following the last day of the prior Offering
Period unless the employee withdraws from this Plan or terminates further
participation in the Offering Period as set forth in Sections 13 and 14 below,
or otherwise becomes ineligible to participate. Such participant is not required
to file any additional enrollment form in order to continue participation in
this Plan, except that the Committee may require the filing of new enrollment
forms by participants who transfer to another division of the Company or a
Designated Subsidiary.
8. GRANT OF OPTION ON ENROLLMENT.
Subject to the limitations of the Plan, enrollment by an
eligible employee in this Plan with respect to an Offering Period will
constitute the grant by the Company to such employee of an Option to purchase on
each Purchase Date up to that whole number of shares of Common Stock of the
Company, determined by dividing (a) the amount accumulated in such employee's
payroll deduction account during the Offering Period ending on such Purchase
Date by (b) the Purchase Price as that term is defined in Section 9.
Fractional shares shall not be issued under this Plan.
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<PAGE> 6
9. PURCHASE PRICE.
The purchase price per share (the "Purchase Price") at which a
share of Common Stock will be sold in any Offering Period shall be the lower of
(a) 85 percent of the fair market value of such share on the first day of the
Offering Period or (b) 85 percent of the fair market value of such share on the
Purchase Date; provided, however, that in no event may the purchase price per
share of Common Stock be below the par value per share of Common Stock.
For purposes of this Plan, the term "fair market value" on a
given date shall be the mean between the highest and lowest reported sales
prices of the Common Stock on the New York Stock Exchange Composite Tape or, if
the Common Stock is not listed on such exchange, any other national securities
exchange on which the Common Stock is listed or on NASDAQ. If there is no
reported sale price of the Common Stock on such date, then the "fair market
value" shall be measured on the next preceding trading day for which such
reported sale price is available. If there is no regular trading market for the
Common Stock, the fair market value of the Common Stock shall be as determined
by the Committee in its sole discretion, exercised in good faith. The Committee
may change the manner in which the Purchase Price is determined with respect to
future offerings (provided such determination does not have the effect of
lowering the Purchase Price to an amount less than that which would be computed
utilizing the method for determining the Purchase Price set forth in the first
paragraph of this Section 9) if such changed manner of computation is announced
at least 30 days prior to the first day of the first Offering Period to be
affected by such change.
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<PAGE> 7
10. PURCHASE OF SHARES; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF
SHARES.
(a) Funds contributed by each participant for the purchase of
shares under this Plan shall be accumulated by regular payroll deductions made
during each Offering Period. The deductions shall be made as a percentage of the
participant's Compensation in 1 percent increments comprising not less than 1
percent and not more than a total of 10 percent of Compensation with respect to
each Offering Period. As used herein, "Compensation" shall mean only the
participant's base salary, excluding cash bonuses, commissions, overtime and
similar items; provided, however, that, for purposes of determining a
participant's Compensation, any election by such participant to reduce his or
her regular cash remuneration under Sections 125, 401(k), or 132(f) of the Code
shall be treated as if the participant did not make such election.
"Compensation" does not include severance pay, hiring and relocation allowances,
pay in lieu of vacation, automobile allowances, imputed income arising under any
Company group insurance or benefit program, income received in connection with
stock options, or any other special items of remuneration. Payroll deductions
shall commence on the first payday following the Offering Date and shall
continue through the last payday of the Offering Period unless sooner altered or
terminated as provided in this Plan.
(b) A participant may lower (but not increase) the rate of
payroll deductions once during any six-month Offering Period and may increase or
decrease the rate of payroll deductions as of the start of any Offering Period.
Notwithstanding the foregoing, a participant may lower the rate of payroll
deductions to zero for the remainder of an Offering Period. Such changes may be
made by filing a new authorization for payroll deductions, at the time and in
the manner specified by the Committee, in which case the new rate shall continue
for the remainder
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<PAGE> 8
of the Offering Period unless changed as described herein or unless a
participant withdraws from or terminates participation in the Plan as set forth
in Section 13 or 14, in which case a new election must be made. A participant
who has decreased the rate of withholding to zero will be deemed to continue as
a participant in the Plan until the participant withdraws from the Plan in
accordance with the provisions of Section 13 or his or her participation is
terminated in accordance with the provisions of Section 14. A participant shall
have the right to withdraw from this Plan in the manner set forth in Section 13
regardless of whether the participant has exercised his or her right to lower
the rate at which payroll deductions are made during the applicable Offering
Period.
(c) All payroll deductions made for a participant will be
credited to his or her account under this Plan and deposited with the general
funds of the Company. No interest will accrue on payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose, and the Company shall not be obligated to segregate such
payroll deductions.
(d) On each Purchase Date, provided that the participant has
not terminated employment in accordance with Section 14 or has not submitted a
signed and completed withdrawal form, by the time and in the manner required by
the Committee consistently applied to all eligible employees with respect to a
given Option, or the Plan has not been terminated prior to the 15th day (or if
such date is not a business day, on the immediately preceding business day) of
the last month of the Offering Period, the Company shall apply the funds then in
the participant's account to the purchase at the Purchase Price of whole shares
of Common Stock issuable under the Option granted to such participant with
respect to the Offering Period to the extent that such Option is exercisable on
the Purchase Date.
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<PAGE> 9
(e) Fractional shares cannot be purchased under this Plan and
any accumulated payroll deductions which would have been used to purchase
fractional shares during the Offering Period will be held in the participant's
account and used to purchase shares in the next Offering Period. Amounts in a
participant's account remaining after whole shares are purchased with a
participant's account will be returned to the participant promptly, without
interest, upon the earlier of the termination of the termination of the Plan or
the withdrawal of the participant from the Plan.
(f) During a participant's lifetime, such participant's Option
to purchase shares hereunder is exercisable only by him or her. The participant
will have no interest or voting right in shares covered by his or her Option
until such Option has been exercised.
11. LIMITATIONS ON RIGHTS TO PURCHASE.
(a) No employee shall be granted an Option to purchase Common
Stock under this Plan at a rate which, when aggregated with his or her rights to
purchase stock under all other employee stock purchase plans of the Company or
any Subsidiary which is intended to meet the requirements of Code Section 423,
exceeds $25,000 in fair market value, determined as of the applicable date of
the grant of the Option, for each calendar year in which the employee
participates in this Plan (or any other employee stock purchase plan described
in this Section 11(a)).
(b) The number of shares that may be purchased by any employee
with respect to an Offering Period shall not exceed 1,000 shares; provided, that
in the event the Committee or Board may specify a different limitation to be
applied in lieu of the foregoing limitation for a future Offering Period, the
number of shares that may be purchased by any employee during an Offering Period
may not exceed such other limitation.
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<PAGE> 10
(c) If the number of shares to be purchased on a Purchase Date
by all employees participating in this Plan exceeds the number of shares then
available for issuance under this Plan, then the Company will make a pro rata
allocation of the remaining shares in as uniform a manner as shall be reasonably
practicable and as the Committee shall determine to be equitable. In such event,
the Company shall give written notice of such reduction of the number of shares
to be purchased under a participant's Option to each participant affected
thereby.
(d) Any payroll deductions accumulated in a participant's
account which are not used to purchase stock due to the limitations in this
Section 11 shall be returned to the participant as soon as practicable after the
end of the applicable Offering Period without interest.
12. EVIDENCE OF STOCK OWNERSHIP.
(a) Promptly following each Purchase Date, the number of
shares of Common Stock purchased by each participant shall be deposited into an
account established in the participant's name at a stock brokerage or other
financial services firm designated or approved by the Committee (the "Plan
Financial Agent"). In the event a participant or former participant shall have
an account balance of less than one full share with the Plan Financial Agent as
of the first day of any Offering Period for which such participant has elected
not to participate in the Plan, the Plan Financial Agent shall cause such
fractional share to be sold as promptly as possible and the cash proceeds from
such sale to be paid to the account holder with no interest.
(b) Following termination of a participant's employment for
any reason, the participant shall have a period of 60 days to notify the Plan
Financial Agent whether such participant desires (i) to receive a certificate
representing all full shares then in the participant's account with the Plan
Financial Agent and cash in lieu of any fractional share interest or (ii) to
sell the shares, including any fractional share, in the participant's account
through the Plan
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<PAGE> 11
Financial Agent. If the terminated participant fails to file such notice with
the Plan Financial Agent within 60 days after termination, or within such other
time as established by the Committee, he or she shall be deemed to have elected
the alternative set forth in clause (i) above.
13. WITHDRAWAL.
(a) Each participant may withdraw from an Offering Period
under this Plan by signing and delivering to the person designated by the
Committee a written notice to that effect on a form provided for such purpose.
Such withdrawal may be elected at any time on or prior to the 15th day of the
last month (or if such date is not a business day, the immediately preceding
business day) of an Offering Period, unless a different time is set by the
Committee with respect to all eligible employees with respect to an Offering
Period.
(b) Upon withdrawal from this Plan, the accumulated payroll
deductions of the participant not theretofore utilized for the purchase of
shares of Common Stock on a Purchase Date shall be returned to the withdrawing
participant, without interest. In the event a participant voluntarily elects to
withdraw from this Plan, he or she may not resume his or her participation in
this Plan during the same Offering Period, but he or she may participate in any
subsequent Offering Period by filing a new authorization for payroll deductions
in the same manner as set forth above for initial participation in this Plan.
14. TERMINATION OF EMPLOYMENT; LEAVE OF ABSENCE.
Termination of a participant's employment for any reason,
including retirement, death, or the failure of a participant to remain an
eligible employee, immediately terminates his or her participation in this Plan.
In such event, except as provided in Section 15, the payroll deductions credited
to the participant's account will be returned to him or her or, in the case of
his or her death, to his or her beneficiary or heirs, without interest. For
purposes of this Section
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<PAGE> 12
14, an employee will not be deemed to have terminated employment or failed to
remain in the continuous employ of the Company in the case of any leave of
absence approved by the Company or Designated Subsidiary.
15. RETURN OF PAYROLL DEDUCTIONS.
In the event a participant's interest in this Plan is
terminated by withdrawal, termination of employment, or otherwise, or in the
event this Plan is terminated by the Board, the Company shall promptly deliver
to the participant all contributions of the participant to the Plan which have
not yet been applied to the purchase of stock unless such termination of
participation occurs later than the 15th day of the final month of the Offering
Period (or if such date is not a business day, on the preceding business day) or
such later date established by the Committee in a uniform and consistent manner,
in which event such contributions will be utilized to purchase Common Stock for
the participant. No interest shall accrue on the payroll deductions of a
participant in this Plan.
16. CHANGE OF OWNERSHIP AND CAPITAL CHANGES.
(a) If the Company is acquired, whether by merger,
consolidation, or sale of substantially all of its assets, all payroll
deductions for the period in which such acquisition occurs will automatically be
applied to the purchase of Company shares immediately prior to the effective
date of such acquisition.
(b) In the event that at any time or from time to time a stock
dividend, stock split, spin-off, combination or exchange of shares,
recapitalization, merger, consolidation, distribution to stockholders other than
a normal cash dividend, or other change in the Company's corporate or capital
structure results in (a) the outstanding shares of Common Stock or any
securities exchanged therefor or received in their place being exchanged for a
different number
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<PAGE> 13
or class of securities of the Company or of any other corporation or (b) new,
different, or additional securities of the Company or of any other corporation
being received by the holders of shares of Common Stock, then the Committee, in
its sole discretion, shall make such equitable adjustments as it shall deem
appropriate in the circumstances in the maximum number and kind of shares of
stock subject to this Plan as set forth in the Plan, the number and kind of
shares subject to purchase under outstanding Options, and the Purchase Price.
The determination by the Committee as to the terms of any of the foregoing
adjustments shall be conclusive and binding.
17. NONASSIGNABILITY.
Neither payroll deductions credited to a participant's account
nor any rights with regard to the exercise of an Option or to receive shares
under this Plan may be assigned, transferred, pledged, or otherwise disposed of
in any way (other than by will, the laws of descent and distribution, or as
provided in Section 24 hereof by the participant). Any such attempt at
assignment, transfer, pledge, or other disposition shall be void and without
effect.
18. REPORTS AND STATUS OF ACCOUNTS.
Individual accounts will be maintained by the Plan Financial
Agent for each participant in this Plan. The Participant shall have all
ownership rights with respect to shares of Common Stock held in his or her
account by the Plan Financial Agent, including the right to vote such shares and
to receive any dividends or distributions which may be declared thereon by the
Board. The Plan Financial Agent shall send to each participant promptly after
the end of each Offering Period a report of his or her account setting forth
with respect to such Offering Period the total payroll deductions accumulated,
the number of shares purchased, and the per share price thereof, and also
setting forth the total number of shares then held in his or her account.
Neither
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<PAGE> 14
the Company nor any Designated Subsidiary shall have any liability for any error
or discrepancy in any such report.
19. NO RIGHTS TO CONTINUED EMPLOYMENT; NO IMPLIED RIGHTS.
Neither this Plan nor the grant of any Option hereunder shall
confer any right on any employee to remain in the employ of the Company or any
Subsidiary or restrict the right of the Company or any Subsidiary to terminate
such employee's employment. The grant of any Option hereunder during any
Offering Period shall not give a participant any right to similar grants
thereafter.
20. EQUAL RIGHTS AND PRIVILEGES.
All eligible employees shall have equal rights and privileges
with respect to this Plan except as required by applicable law so that this Plan
qualifies as an "employee stock purchase plan" within the meaning of Section 423
or any successor provision of the Code and the related regulations. Any
provision of this Plan which is inconsistent with Section 423 or any successor
provision of the Code shall, without further act or amendment by the Company,
the Board, or the Committee, be reformed to comply with the requirements of
Section 423. This Section 20 shall take precedence over all other provisions in
this Plan.
21. NOTICES.
All notices or other communications by a participant to the
Company under or in connection with this Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
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<PAGE> 15
22. AMENDMENT OF PLAN.
The Board may amend this Plan in such respects as it shall
deem advisable; however, stockholder approval will be required for any amendment
that will increase the total number of shares as to which Options may be granted
under this Plan, or, but for such shareholder approval, cause this Plan to fail
to continue to qualify as an "employee stock purchase plan" under Section 423 of
the Code or cause the purchase of shares thereunder to fail to be exempt from
the provisions of Section 16(b) of the Exchange Act.
23. TERMINATION OF THE PLAN.
The Board may suspend or terminate this Plan at any time.
Unless this Plan shall theretofore have been terminated by the Board, this Plan
shall terminate on, and no Options shall be granted after, June 30, 2009. No
Options shall be granted during any period of suspension of this Plan.
24. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under this Plan in the event of such participant's death
prior to delivery to him or her (or to the Plan Financial Agent on his or her
behalf) of such shares and cash.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under this
Plan who is living at the time of such participant's death, the Company shall
deliver such shares or cash to the executor or administrator of the estate of
the participant, or if no such executor or administrator has been appointed (to
the knowledge of the Company), the Company, in its discretion, may deliver such
shares or cash to the spouse or to any one or more dependents or relatives of
the participant or, if no spouse,
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<PAGE> 16
dependent, or relative is known to the Company, to such other person as the
Company may in good faith determine to be the appropriate designee.
25. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF
SHARES.
Shares shall not be issued with respect to an Option unless
the exercise of such Option and the issuance and delivery of such shares
pursuant thereto shall comply with all applicable provisions of law, domestic or
foreign, including, without limitation, the Securities Act of 1933, as amended,
the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or automated quotation system upon which the
shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
26. EFFECTIVE DATE.
This plan was initially adopted May 17, 1999, by the
shareholders of the Company, and is to be effective September 1, 1999.
27. GOVERNING LAW.
Except to the extent that provisions of this Plan are governed
by applicable provisions of the Code or any other substantive provision of
federal law, this Plan shall be construed in accordance with, and shall be
governed by, the substantive laws of the State of Arizona without regard to any
provisions of Arizona law relating to the conflict of laws.
- ----------------------------------- -----------------------------------
Witness ROCKFORD CORPORATION
-----------------------------------
By
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<PAGE> 1
EXHIBIT 10.9
AMENDMENT TO STANDARD INDUSTRIAL COMMERCIAL
MULTI-TENANT-GROSS
This Amendment to Lease dated as of June 26, 1998 is entered into by and between
Rockford River, L.L.C., an Arizona Limited Liability Company ("Lessor"), and
Rockford Corporation, an Arizona Corporation ("Lessee"), with reference to the
following facts:
A. Lessor and Lessee entered into a Standard Industrial
Commercial Multi-Tenant Lease Gross dated March 7, 1998, (the
"Lease") which affects certain leasable space designated as
approximately 15,000 square feet located at 636, 644 and 648
South River Drive, Tempe, Arizona 85281.
B. The Lease is in full force and effect, and neither Lessee nor
Lessor has actual knowledge of any default or breach by the
other under the Lease.
C. Lessor and Lessee desire to amend the Lease as provided in
this Amendment.
NOW, THEREFORE FOR VALUABLE CONSIDERATION, receipt of which is hereby
acknowledged, Lessor and Lessee hereby agree as follows:
ARTICLE 1 - AMENDMENTS
1.1 The lease term shall be extended for an additional twelve (12)
months. The Expiration Date of December 31, 1999 shall be
deleted and the new Expiration Date shall be December 31,
2000.
1.2 Beginning January 1, 2000 through December 31, 2000, the
monthly base rent payable shall be $12,051.00 per month
(equivalent to $.8034 per square foot) plus estimated Common
Area Operating Expenses, subject to change, plus applicable
sales taxes, subject to change, and other sums which may be
due under the terms of the Lease.
Initial_________
_________
Industrial/Commercial Multi-Tenant Lease - Gross
Page 1 of 34
<PAGE> 2
ARTICLE 2 - GENERAL PROVISIONS
2.1 The effective date of this Amendment shall be June 26, 1998.
2.2 The Lease, as amended by this Amendment, is hereby confirmed.
All other terms and conditions of the Lease shall remain in
full force and effect. In the event of a conflict between the
terms and provisions of the Lease and this Amendment, this
Amendment shall control.
IN WITNESS WHEREOF, this Amendment has been executed as of the date
first above set forth.
LESSEE: Rockford Corporation, an LESSOR: Rockford River, L.L.C. an
Arizona Corporation Arizona Limited Liability Company
By: /s/ By: Yale, Inc.
-------------------------------- --------------------------------
W. Gary Suttle
Its: President and CEO Its: Manager
-------------------------------- --------------------------------
By: /s/
--------------------------------
Reginald Winssinger
Its: President
--------------------------------
Initial-------
-------
Industrial/Commercial Multi-Tenant Lease - Gross
Page 2 of 34
<PAGE> 3
STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT LEASE-GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, March 7, 1997, is made by and between ROCKFORD RIVER, LLC, an Arizona
Limited Liability Company ("LESSOR") and Rockford Corporation, an Arizona
Corporation ("LESSEE") (collectively the "PARTIES," or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
Improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 636, 644 and 648 South River Drive,
located in the City of Tempe, County of Maricopa, State of Arizona, with zip
code 85281 as outlined on Exhibit A attached hereto ("PREMISES"). The "BUILDING"
is that certain building containing the Premises and generally described as
(describe briefly the nature of the Building): Multi-Tenant office/warehouse
Industrial Building. The leased premises consist of approximately 15,000 square
feet.
In addition to Lessee's rights to use and occupy the Premises as
hereinafter specified, Lessee shall have non-exclusive rights to the Common
Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall
not have any rights to the roof, exterior walls or utility raceways of the
Building or to any other buildings in the Industrial Center. The Premises, the
Building, the Common Areas, the land upon which they are located, along with all
other buildings and Improvements thereon, are herein collectively referred to as
the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: Open unreserved vehicle parking spaces ("UNRESERVED
PARKING SPACES"); and reserved vehicle parking spaces ("RESERVED PARKING
SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: Two (2) years and Zero (0) months ("ORIGINAL TERM")
commencing January 1998 ("Commencement Date") and ending December 31, 1999
("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: Existing Tenant ("EARLY POSSESSION DATE").
(Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $11,700.00 per month ("BASE RENT"), payable on the
First(1st) day of each month commencing January 1, 1998 (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be adjusted
per Addendum _____ attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $ 0 as Base Rent for the period
________________________.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: Fourteen
point six-seven percent (14.67%) ("LESSEE'S SHARE") as determined by
[X] prorata square footage of the Premises as compared to the total square
footage of the Industrial Center or
[X] other criteria as described in Addendum _____
1.7 SECURITY DEPOSIT: $6,300.00 (currently on deposit with
Lessor), ("SECURITY DEPOSIT"). (Also see Paragraph 5.)
1.8 PERMITTED USE: General Office ("PERMITTED USE") (Also see
Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist In this
transaction and are consented to by the Parties (check applicable boxes):
[X] Horizon Real Estate Group, Inc. represents Lessor exclusively ("LESSOR'S
BROKER");
[_] represents Lessee exclusively ("LESSEE'S BROKER"); or
[_] represents both Lessor and Lessee ("DUAL AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate In writing, a fee as set forth In a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $ ) for
brokerage services rendered by said Broker(s) in connection with this
transaction.
Initial_________
_________
Industrial/Commercial Multi-Tenant Lease - Gross
Page 3 of 34
<PAGE> 4
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by ____________________________ ("GUARANTOR") (Also see
Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs 49 through 50, and Exhibits A through B, all of
which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean
and free of debris on the Commencement date and warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be In good operating condition on
the Commencement Date. If a non-compliance with said warranty exists as of the
Commencement Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If Lessee does not give Lessor written notice of a
noncompliance with this warranty within thirty (30) days after the Commencement
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants that any improvements (other than those constructed by Lessee or
at Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a Commencement Date. Said
warranty shall not apply to any Alterations or Utility Installations (defined in
Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply
with said warranties, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee given within six (6) months
following the Commencement Date and setting forth with specificity the nature
and extent of such non-compliance, take such action, at Lessor's expense, as may
be reasonable or appropriate to rectify the non-compliance. Lessor makes no
warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises
under Applicable Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and Me
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record (collectively,
"APPLICABLE LAWS") and the present and future suitability of the Premises for
Lessee's intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, Is satisfied with reference thereto,
and assumes all responsibility therefore as the same relate to Lessee's
occupancy of the Premises and/or the terms of this Lease', and (c) that neither
Lessor, nor any of Lessor's agents, has made any oral or written representations
or warranties with respect to said matters other than as set forth in this
Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor
in this Paragraph 2 shall be of no force or effect if immediately prior to the
date set forth In Paragraph 1.1 Lessee was the owner or occupant of the
Initial_________
_________
Industrial/Commercial Multi-Tenant Lease - Gross
Page 4 of 34
<PAGE> 5
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles" no larger than
full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that
belong to or are controlled by Lessee or Lessee's employees, suppliers,
shippers, customers, contractors or invitees to be loaded, unloaded, or parked
in areas other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then or shall have the right,
without notice, in addition to such other rights and remedies that It may have,
to remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease,
provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS-DEFINITION. The term "COMMON AREAS" is defined as
all areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and interior utility raceways within the Promises
that are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
Invitees, including parking areas. Loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS-LESSEE'S RIGHTS. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights. powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice. In addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be Immediately payable upon demand by Lessor.
2.9 COMMON AREAS-RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect thereto
in accordance with Paragraph 40. Lessee agrees to abide by and conform to all
such Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
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2.10 COMMON AREAS-CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including,
without limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and unloading
areas, ingress, egress, direction of traffic, landscaped areas, walkways and
utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas,
(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged In making
additional improvements, repairs or alterations to the Industrial Center, or any
portion thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this lease in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
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4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in lawful
money of the United States, without offset or deduction, on or before the day on
which it is due under the terms of this Lease. Base Rent and all other rent and
charges for any period during the term hereof which Is for less than one full
month shall be prorated based upon the actual number of days of the month
involved. Payment of Base Rent and other charges shall be made to Lessor at its
address stated herein or to such other persons or at such other addresses as
Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b) of any increase in all Common Area Operating
Expenses, over and above all Common Area Operating Expenses in the calendar year
during which the lease commences, as hereinafter defined, in accordance with the
following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for
purposes of this Lease, as all costs incurred by Lessor relating to the
ownership and operation of the Industrial Center, including, but not limited to,
the following:
(i) The operation, repair and maintenance, in
neat, clean, good order and condition, of the following:
(aa) The Common Areas, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler
systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Trash disposal, property management
administrative cost and security services and the costs of any environmental
inspections.
(iv) Reserves set aside for maintenance and
repair of Common Areas.
(v) Any increase above the Base Real Property
Taxes (as defined In Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any 'Insurance Cost Increase' (as defined in
Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with
respect to the Common Areas.
(viii) Any deductible portion of an insured loss
concerning the Building or the Common Areas.
(ix) Any other services to be provided by Lessor
that are stated elsewhere in this Lease to be a Common Area Operating Expense.
(x) Air conditioning, heating and ventilating
system.
(b) Any Common Area Operating Expenses and Real Property
Taxes that are specifically attributable to the Building or to any other
building in the Industrial Center or to the operation, repair and maintenance
thereof, shall be allocated entirely to the Building or to such other building.
However, any Common Area Operating expenses and Real Property Taxes that are not
specifically attributable to the Building or to any other building or to the
operation, repair and maintenance thereof, shall be equitably allocated by
Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities or to
provide-those services unless the Industrial Center already has the same, Lessor
already provides the services, or Lessor has agreed elsewhere in this Lease to
provide the same of them.
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(d) Lessee's Share of Common Area Operating Expenses
shall be payable by Lessee within ten (10) days after a reasonably detailed
statement of actual expenses is presented to Lessee by Lessor. At Lessor's
option, however, an amount may be estimated by Lessor from time to time of
Lessee's Share of Annual Common Area Operating Expenses and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each 12-month
period of the Lease term, on the same day as the Base Rent is due hereunder.
Lessor shall deliver to Lessee within sixty (60) days after the expiration of
each calendar year in a reasonably detailed statement showing Lessee's Share of
the actual Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed
Lessee's Share as indicated on said statement, Lessee shall be credited the
amount of such over-payment against Lessee's Share of Common Area Operating
Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(a)
during said preceding year were less than Lessee's Share as indicated on said
statement, Lessee shall pay to Lessor the amount of the deficiency within ten
(10) days after delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security for
Lessee's faithful performance of Lessee's obligations under this Lease. If
Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may
use, apply or retain all or any portion of said Security Deposit for the payment
of any amount due Lessor or to reimburse or compensate lessor for any liability,
cost, expense, loss or damage (including attorneys' fees) which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefore deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. Any time the Base Rent
increases during the term of this Lease, Lessee shall, upon written request from
Lessor, deposit additional monies with lessor as an addition to the Security
Deposit so that the total amount of the Security Deposit shall at all times bear
the same proportion to the then current Base Rent as the initial Security
Deposit bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall
not be required to keep all or any part of the Security Deposit separate from
its general accounts. Lessor shall, at the expiration or earlier termination of
the term hereof and after Lessee has vacated the Premises, return to Lessee (or,
at Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. Unless
otherwise expressly agreed in writing by lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other increment for
its use, or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or
delay its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants of Lessee, its assignees
and subtenants, for a modification of said Permitted Use, so long as the same
will not impair the structural integrity of the improvements on the Premises or
in the Building or the mechanical or electrical systems therein, does not
conflict with uses by other lessees, is not significantly more burdensome to the
Premises or the Building and the improvements thereon, and Is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days after such request give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
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<PAGE> 9
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
low theory. Hazardous Substance shall Include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage In any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessors prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor
such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or Injury and/or liability therefor, including but
not limited to the installation (and, at Lessor's option, removal on or before
Lease expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance has come to be located
in, on, under or about the Premises or the Building, other than as previously
consented to by Lessor, Lessee shall immediately give Lessor written notice
thereof, together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
Including but not limited to all such documents as may be involved in any
Reportable Use, Involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground lessor, if
any, and the Premises, harmless from and against any and all damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, loss of
permits and attorneys' and consultants' fees' arising out of or involving any
Hazardous Substance brought onto the Premises by or for Lessee or by anyone
under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation (including consultants' and attorneys' fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release
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<PAGE> 10
Lessee from its obligations under this Lease with respect to Hazardous
Substances, unless specifically so agreed by Lessor in writing at the time of
such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely manner, comply
with all "APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production.
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises. ("LENDERS") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation),
Lessee shall, at Lessee's sole cost and expense and at all times, keep the
Premises and every part thereof in good order, condition and repair (whether or
not such portion of the Premises requiring repair, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when
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<PAGE> 11
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair.
(b) If Lessee fails to perform Lessee's obligations under
this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days'
prior written notice to Lessee (except in the case of an emergency, in which
case no notice shall be required), perform such obligations on Lessee's behalf,
and put the Premises in good order, condition and repair, in accordance with
Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions, and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject
to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition
and repair the foundations, exterior walls, structural condition of interior
bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if
located in the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke detection systems and equipment, fire
hydrants, parking lots, walkways, parkways, driveways, landscaping, fences,
signs and utility systems serving the Common Area and all parts thereof, as well
as providing the services for which there is a Common Area Operating Expense
pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior
or interior surfaces of exterior walls nor shall Lessor be obligated to
maintain, repair or replace windows, doors or plate glass of the Premises.
Lessee expressly waives the benefit of any statute now or hereafter in effect
which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Building, Industrial Center or Common Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alternations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alternations or Utility Installations
that Lessee shall desire to make and which require the consent of the Lessor
shall be presented to Lessor in written form with detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities; (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon; and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and be in compliance with all
Applicable Requirements. Lessee shall promptly upon completion thereof furnish
Lessor with as-built plans and specifications therefor. Lessor, may (but without
obligation to do so) condition its
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consent to any requested Alteration or Utility Installation that costs $2,500,00
or more upon Lessee's providing Lessor with a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such Alteration or
Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. It Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount
equal to one and one-half times the amount of such contested lien claim or
demand, indemnifying Lessor against liability for the same, as, required by law
for the holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to Its best interest
to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the
Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed
per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor
may require at any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
that their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier termination
date, clean and free of debris and in good operating order, condition and state
of repair, ordinary wear and tear excepted, Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water contaminated
by Lessee, all as may then be required by Applicable Requirements and/or good
practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall
be removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
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8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) As used herein, the term "INSURANCE COST INCREASE" is
defined as any increase in the actual cost of the insurance applicable to the
Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b),
8.3(a) and 8.3(b), ("REQUIRED INSURANCE"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "Insurance Cost Increase"
shall include, but not be limited to, requirements of the holder of a mortgage
or deed of trust covering the Premises, increased valuation of the Premises,
and/or a general premium rate increase. The term "Insurance Cost Increase" shall
not, however, include any premium increases resulting from the nature of the
occupancy of any other lessee of the Building. If the parties insert a dollar
amount in Paragraph 1.9, such amount shall be considered the "BASS PREMIUM." If
a dollar amount has not been inserted in Paragraph 1.9, the "Base Premium" shall
be the annual premium applicable in the calendar year during which the lease
commences. If the Building was not fully occupied during such twelve (12) month
period, the "Base Premium" shall be the lowest annual premium reasonably
obtainable for the Required Insurance as of the Commencement Date, assuming the
most nominal use possible of the Building. In no event, however, shall Lessee be
responsible for any portion of the premium cost attributable to liability
insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to
Lessor pursuant to Paragraph 4.2. Premiums for policy periods commencing prior
to, or extending beyond, the term of this Lease shall be prorated to coincide
with the corresponding Commencement Date or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "Insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance to be carried by Lessee shall be primary to and not contributory with
any similar insurance carried by Lessor, whose insurance shall be considered
excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss
or damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist
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<PAGE> 14
from time to time, or the amount required by any Lender(s), but in no event more
than the commercially reasonable and available insurable value thereof if, by
reason of the unique nature or a age of the improvements involved, such latter
amount is less than full replacement cost. Lessee-Owned Alterations and Utility
Installations, Trade Fixtures and Lessee's personal property shall be insured by
Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially
appropriate, Lessor's policy or policies shall insure against all risks of
direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender or included in the Base Premium), including coverage
for any additional costs resulting from debris removal and reasonable amounts of
coverage for the, enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building required
to be demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered loss, but not
including plate glass insurance. Said policy or policies shall also contain an
agreed valuation provision in lieu of any co-insurance clause, waiver of
subrogation, and inflation guard protection causing an Increase In the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and any Lender(s), insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor for
one year (including all Real Property Taxes, Insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said insurance may
provide that in the event the Lease is terminated by reason of an insured loss,
the period of indemnity for such coverage shall be extended beyond the date of
the completion of repairs or replacement of the Premises, to provide for one
full year's loss of rental revenues from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, Real Property Taxes, insurance premium
costs and other expenses, if any, otherwise payable, for the next 12-month
period. Common Area Operating Expenses shall include any deductible amount in
the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase
in the premiums for the property insurance of the Building and for the Common
Areas or other buildings in the Industrial Center if said increase is caused by
lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring
Party, Lessor shall not be required to insure Lessee-Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises similar in
coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a).
Such insurance shall be full replacement cost coverage with a deductible not to
exceed $1,000 per occurrence. The proceeds from any such insurance shall be used
by Lessee for the replacement of personal property and the restoration of Trade
Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request
from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth In the most current Issue of "Bests Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7)
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<PAGE> 15
days after the earlier of the Early Possession Date or the Commencement Date,
certified copies of, or certificates evidencing the existence and amounts of,
the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be
cancelable or subject to modification except after thirty (30) days' prior
written notice to Lessor. Lessee shall at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether said injury or damage results from conditions arising upon
the Promises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than fifty
percent (50%) of the then Replacement Cost (as defined in paragraph 9.1(d) of
the Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
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(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty percent
(50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on,
or under the Premises.
9.2 PROMISES PARTIAL DAMAGE-INSURED LOSS. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessees Trade Fixtures or Lessee-Owned Alterations
and Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise agreed, Losses shall in no event have
any right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 PARTIAL DAMAGE-UNINSURED LOSS. If Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessors
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the
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<PAGE> 17
occurrence of such damage of Lessee's desire to terminate this Lease as of the
date sixty (60) days following the date of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following such commitment from Lessee. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible after the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of the term of this Lease there is damage for which the cost to
repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor
may, at Lessor's option, terminate this Lease effective sixty (60) days
following the date of occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then Lessee
may preserve this Lease by (a) exercising such option, and (b) providing Lessor
with any shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is ten (10)
days after Lessee's receipt of Lessor's written notice purporting to terminate
this Lease, or (ii) the day prior to the date upon which such option expires. If
Lessee duly exercises such option during such period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee falls to exercise such option and provide such funds or assurance during
such period, then this Lease shall terminate as of the date set forth in the
first sentence of this Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired, but not in excess
of proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. It Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty
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(30) days after receipt of such notice, this Lease shall terminate as of the
date specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after the receipt of such
notice, this Lease shall continue in full force and effect. "COMMENCE" as used
in this Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans or the beginning of the actual work on the
Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which case
Lessee shall make the investigation and remediation thereof required by
Applicable Requirements and this Lease shall continue in full force and effect,
but subvert to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor
may at Lessor's option either (i) investigate and remediate such Hazardous
Substance Condition, if required, as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) if the estimated cost to investigate and remediate such condition exceeds
twelve (12) times the then monthly Base Rent, or $100,000 whichever is greater,
give written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the date
of such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the excess costs of (a) investigation and
remediation of such Hazardous Substance Condition to the extent required by
Applicable Requirements, over (b) an amount equal to twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor
with the funds required of Lessee or satisfactory assurance thereof within
thirty (30) days following said commitment by Lessee. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
investigation and remediation as soon as reasonably possible after the required
funds are available. If Lessee does not give such notice and provide the
required funds or assurance thereof within the time period specified above, this
Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.8 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises and the Building with respect to the termination of this Lease and
hereby waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall
include any form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
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income therefrom, and/or Lessor's business of leasing the Premises. The term
"REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "BASE REAL PROPERTY TAXES"
shall be the amount of Real Property Taxes, which are assessed against the
Premises, Buildings or Common Areas in the Industrial Center in the calendar
year during which the Lease commences. In calculating Real Property Taxes for
any calendar year, the Real Property Taxes for any real estate tax year shall be
included in the calculation of Real Property Taxes for such calendar year based
upon the number of days which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall
not include Real property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable proportion
of the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"assign") or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to the
terms of Paragraph 36.
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(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the
time of full execution and delivery of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Lessee was or is greater, shall be considered
an assignment of this Lease by Lessee to which Lessor may reasonably withhold
its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net
worth of Lessee (excluding any Guarantors) established under generally accepted
accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in
this Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a De-fault curable after notice per Paragraph 13.1, or a non-curable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a non-curable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base
Rent for the Premises to the greater of the then fair market rental value of the
Premises, as Reasonably determined by Lessor, or one hundred ten percent (110%)
of the Base Rent then in effect. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation or obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease terms shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessors Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1
by Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's
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right to exercise its remedies for the Default or Breach by Lessee of any of the
terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent sublettings and
assignments or the sublease or any amendments or modifications thereto without
notifying Lessee or anyone else liable under this Lease or the sublease and
without obtaining their consent, and such action shall not relieve such persons
from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the Lessee's
obligations under this Lease, including any sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or
subletting shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a non-refundable deposit of $1,000 or ten percent (10%) of the
monthly Base Rent applicable to the portion of the Premises which is the subject
of the proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for consent.
Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease
shall, by reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such obligations as are contrary to or inconsistent with provisions
of an assignment or sublease to which Lessor has specifically consented in
writing.
(g) The occurrence of a transaction described in
Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to
require that the Security Deposit be increased by an amount equal to six (6)
times the then monthly Base Rent, and Lessor may make the actual receipt by
Lessor of the Security Deposit increase a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment schedule of
the rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Promises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease. Lessor shall not, by reason of the
foregoing provision or any other assignment of
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such sublease to Lessor, nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a Breach exists in the
performance of Lessee's obligations under this Lease, to pay to Lessor the rents
and other charges due and to become due under the sublease. Sublessee shall rely
upon any such statement and request from Lessor and shall pay such rents and
other charges to Lessor without any obligation or right to inquire as to whether
such Breach exists and notwithstanding any notice from or claim from Lessee to
the contrary. Lessee shall have no right or claim against such sublessee, or,
until the Breach has been cured, against Lessor, for any such rents and other
charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance
of Its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor
shall further assign or sublet all or any part of the Premises without Lessor's
prior written consent.
(e) Lessor shall deliver a copy of any notice of Default
or Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
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(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1 (b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this lease, where any such failure continues for a
period of ten (10) days following written notice by or on behalf of Lessor to
Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under Paragraph
40 hereof that are to be observed, compiled with or performed by Lessee, other
than those described in Subparagraphs 13.1 (a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice thereof
by or on behalf of Lessor to Lessee; provided, however, that if the nature of
Lessee's Default is such that more than thirty (30) days are reasonably required
for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee
if Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i)
the making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1 (e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor at any financial statement of
Lessee or of any Guarantor, given to Lessor by lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed; (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurances of security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including, but not limited to the obtaining of reasonably required
bonds, insurance policies, or governmental licenses, permits or approvals. The
costs and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is
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drawn, Lessor, at its own option, may require all future payments to be made
under this Lease by Lessee to be made only by cashier's check. In the event of a
Breach of the Lease by Lessee (as defined in Paragraph 13.1), with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lesseee: (i) the
worth at the time of the award of the unpaid rent which had been earned at the
time of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease for which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alternation of the Premises, reasonable attorney's fees and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor,
may reserve the right to recover all or any part thereof in a separate suit for
such rent and/or damages. If a notice and grace period required under
Subparagraph 13.1 (b), (c) or (d) was not previously given, a notice to pay rent
or quit, or to perform or quit, as the case may be, given to Lessee under any
statute authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1 (b),(c) or (d). In such case, the applicable grace period
under the unlawful detainer statue shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two (2) such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession
in effect (in California under California Civil Code Section 1951.4) after
Lessee's Breach and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. Lessor and
Lessee agree that the limitations on assignment and subletting in this Lease are
reasonable. Acts of maintenance or preservation. efforts to relet the Premises,
or the appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or
the termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for free or abated rent or other charges applicable to the Premises, or
for the giving or paying by Lessor to or for Lessee of any cash or other
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bonus, inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall
be deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed, or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days after
such amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a late charge equal to six percent (6%) of such
overdue amount. The parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event constitute
a waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and address shall have been furnished to
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnations"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
portion of the Common Areas designated for Lessee's parking, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing within
ten (10) days after Lessor shall have given Lessee written notice of such taking
(or in the absence of such notice, within ten (10) days after the condemning
authority shall have taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the Base
Rent shall be reduced in the same proportion as the rentable floor area of the
Premises taken bears to the total rentable floor area of the Premises. No
reduction of Base Rent shall occur if the condemnation does not apply to any
portion of the Premises. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of
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such power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. in the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are
the procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise
agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined In Paragraph 39.1) granted under this Lease or any Option subsequently
granted, or (b) if Lessee acquires any rights to the Premises or other premises
in which Lessor has an interest, or (c) if Lessee remains in possession of the
Premises with the consent of Lessor after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation of
an escalation clause herein, then as to any of said transactions, Lessor shall,
pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in
effect at the time of the execution of this Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
Interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessors obligation under this Paragraph 15.
Each Broker shall be an intended third party beneficiary of the provisions of
Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any person,
firm, broker or finder other than as named in Paragraph 1.10(a) in connection
with the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall
within ten (10) days after written notice from the other Party (the ("REQUESTING
PARTY") execute, acknowledge and deliver to the Requesting Party a statement in
writing in a form similar to the then most current "TENANCY STATEMENT" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance,
or sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated
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<PAGE> 27
by Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit)
any unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned
herein, and no other prior or contemporaneous agreement or understanding shall
be effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this Lease
and as to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default to breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or registered
mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses noted
adjacent to a Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written notice to
the other specify a different address for notice purposes, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for the purpose of mailing or delivering notices to Lessee. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
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<PAGE> 28
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail, the notice shall be deemed given forty-eight
(48) hours after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail or overnight
courier that guarantees next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the United States Postal Service or courier.
If any notice is transmitted by facsimile transmission or similar means, the
same shall be deemed served or delivered upon telephone or facsimile
confirmation of receipt of the transmission thereof, provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday or a Sunday
or a legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent
or similar act by Lessee, or be construed as the basis of an estoppel to enforce
the provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any Default or Breach by
Lessee of any provision hereof. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated In the
county in which the Promises are located.
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<PAGE> 29
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any options
to extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter define) in any such proceeding, action, or appeal thereon, shall
be entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or
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<PAGE> 30
about the Premises or Building any ordinary "For Sale" signs and Lessor may at
any time during the last one hundred eighty (180) days of the term hereof place
on or about the Premises any ordinary "For Lease" signs. All such activities of
Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions of
Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations). Unless otherwise expressly agreed herein, Lessor reserves all
rights to the use of the roof of the Building, and the right to install ,
advertising signs on the Building, including the roof, which do not unreasonably
interfere with the conduct of Lessee's business; Lessor shall be entitled to all
revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a Party is
required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses
(including but not limited to architects', attorneys', engineers' and other
consultants' fees) incurred in the consideration of, or response to, a request
by Lessee for any Lessor consent pertaining to this Lease or the Premises,
including but not limited to consents to an assignment a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon
receipt of an invoice and supporting documentation therefor. In addition to the
deposit described in Paragraph 12.2 (e), Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with Lessor
an amount of money (in addition to the Security Deposit held under Paragraph 5)
reasonably calculated by Lessor to represent the cost Lessor will incur in
considering and responding to Lessee's request. Any unused portion of said
deposit shall be refunded to Lessee without interest. Lessor's consent to any
act, assignment of this Lease or subletting of the Premises by Lessee shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular matter for which consent
is being given.
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<PAGE> 31
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this
Lease per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this Lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or refuses,
upon reasonable request by Lessor to give: (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the Guarantor
(and of the party signing on Guarantor's behalf) to obligate such Guarantor on
said guaranty, and resolution of its board of directors authorizing the making
of such guaranty, together with a certificate of incumbency showing the
signatures of the persons authorized to sign on its behalf, (b) current
financial statements of Guarantor as may from time to time be requested by
Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty
is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, Lessee shall have
quiet possession of the Premises for the entire term hereof subject to all of
the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
lessee are not assignable, either as part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or
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more notices of separate Defaults under Paragraph 13.1 during the twelve (12)
month period immediately preceding the exercise of the Option, whether or not
the Defaults are cured.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an
Option shall terminate and be of no further force or effect, notwithstanding
Lessee's due and timely exercise of the Option, if, after such exercise and
during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary
obligation of Lessee for a period of thirty (30) days after such obligation
becomes due (without any necessity of Lessor to give notice thereof to Lessee),
or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults
under Paragraph 13.1 during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep
and observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
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<PAGE> 33
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification The Parties shall amend this
Lease from time to time to reflect any adjustments that are made to the Base
Rent or other rent payable under this Lease. As long as they do not materially
change Lessee's obligations hereunder, Lessee agrees to make such reasonable
non-monetary modifications to this Lease as may be reasonably required by an
institutional insurance company or pension plan Lender in connection with the
obtaining of normal financing or refinancing of the property of which the
Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: 2999 North 44th Street, Suite 450, Phoenix Executed at: 648 South River, Tempe
-------------------------------------------- -----------------------------------------
on: March , 1997 on: March , 1997
----------------------------------------------------- --------------------------------------------------
By LESSOR: By: LESSEE:
Rockford River, LLC an Arizona Limited Liability Company Rockford Corporation,
- -------------------------------------------------------- -----------------------------------------------------
By: Yale, Inc., Manager an Arizona Corporation
----------------------------------------------------- -----------------------------------------------------
By: /s/ By: /s/
----------------------------------------------------- --------------------------------------------------
</TABLE>
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<PAGE> 34
<TABLE>
<S> <C>
Name Printed: Reginald Winssinger, President Name Printed: W. Gary Suttle
------------------------------------------- ----------------------------------------
Title: Title: President and CEO
-------------------------------------------------- -----------------------------------------------
By: By:
----------------------------------------------------- --------------------------------------------------
Name Printed: Name Printed:
------------------------------------------- ----------------------------------------
Title: Title:
-------------------------------------------------- -----------------------------------------------
By: By:
----------------------------------------------------- --------------------------------------------------
Address: 2999 North 44th Street, Suite 450 Address: 648 South River
------------------------------------------------ ---------------------------------------------
Phoenix, Arizona 85018 Tempe, Arizona 85281
- -------------------------------------------------------- -----------------------------------------------------
Telephone: (602) 955-4000 Telephone: (602) 967-3565
---------------------------------------------- -------------------------------------------
Facsimile: (602) 852-3866 Facsimile: (602) 966-3639
---------------------------------------------- -------------------------------------------
BROKER: BROKER:
Executed at: Executed at:
-------------------------------------------- -----------------------------------------
on: on:
----------------------------------------------------- --------------------------------------------------
By: By:
----------------------------------------------------- --------------------------------------------------
Name Printed: Name Printed:
------------------------------------------- ----------------------------------------
Title: Title:
-------------------------------------------------- -----------------------------------------------
By: By:
----------------------------------------------------- --------------------------------------------------
Address: Address:
------------------------------------------------ ---------------------------------------------
- -------------------------------------------------------- -----------------------------------------------------
Telephone: Telephone:
---------------------------------------------- -------------------------------------------
Facsimile: Facsimile:
---------------------------------------------- -------------------------------------------
</TABLE>
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<PAGE> 35
ADDENDUM
This shall serve as the Addendum to that Lease dated March 7, 1997 by and
between ROCKFORD RIVER, LLC, AN ARIZONA LIMITED LIABILITY COMPANY, LESSOR and
ROCKFORD CORPORATION, AN ARIZONA CORPORATION, LESSEE for the building located at
636, 644 and 648 South River Drive, Tempe, Arizona 85281. If there is a conflict
between this Addendum and the Lease Agreement, the provisions of this Addendum
shall prevail.
49. BASE RENTAL: Lessee and Lessor do hereby agree that Lessee's Base
Monthly Rental shall be as follows:
<TABLE>
<S> <C>
Months 1 - 12 of occupancy shall be $11,700.00 per month plus rental tax.
Months 13 - 24 of occupancy shall be $11,700.00 per month plus rental tax.
</TABLE>
* NOTE: Rental Tax due State, County, and City agencies is presently
billed at 3.45% and may increase/decrease over the term of the Lease
and shall be adjusted accordingly.
50. COMPLIANCE: Lessee hereby represents and guarantees that it is in
compliance with City of Tempe Zoning codes and shall remain in
compliance throughout the term of its Lease. Lessee shall be
responsible for obtaining and maintaining any permits or variances
required by the City of Tempe to operate such a business at this
address.
LESSOR: LESSEE:
ROCKFORD RIVER, LLC ROCKFORD CORPORATION,
an Arizona Limited Liability Company an Arizona Corporation
By: Yale, Inc., Manager
By: /s/ By: /s/
------------------------------- -------------------------------
Reginald Winssinger
Its: President Its: President
------------------------------ ------------------------------
Date: 3/21/97 Date: 19 March 97
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EXHIBIT "A"
Exhibit "A" to Lease dated March 7, 1997 between ROCKFORD RIVER, LLC, an Arizona
Limited Liability Company (Lessor) and ROCKFORD CORPORATION, an Arizona
Corporation (Lessee).
Exhibit "A" is intended only to show the general location of the Premises as of
the beginning of the Term of this Lease. It is not to be scaled; any
measurements or distances shown should be taken as approximate.
[UNIVERSITY BUSINESS PARK SITE PLAN PLATMAP]
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EXHIBIT "B"
RULES AND REGULATIONS
Exhibit "B" to Lease dated March 7, 1997, between ROCKFORD RIVER, LLC, AN
ARIZONA LIMITED LIABILITY COMPANY ("Lessor") and ROCKFORD CORPORATION, AN
ARIZONA CORPORATION ("Lessee").
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside or inside of the Building
without the prior written consent of the Lessor. Lessor shall have the right to
remove, at Lessee's expense and without notice, any sign installed or displayed
in violation of this rule. All approved signs or lettering on doors and walls
shall be printed, painted, affixed or inscribed at the expense of Lessee by a
person or vendor chosen by Lessor. In addition, Lessor reserves the right to
change from time to time the format of the signs or lettering and to require
previously approved signs or lettering to be appropriately altered.
2. If Lessor objects in writing to any curtains, blinds, shades or screens
attached to or hung in or used in connection with any window or door of the
Premises, Lessee shall immediately discontinue such use. No awning shall be
permitted on any part of the Premises. Lessee shall not place anything or allow
anything to be placed against or near any glass partitions or doors or windows
which may appear unsightly, in the opinion of Lessor, from outside the Premises.
3. Lessee shall not obstruct any sidewalks, halls, passages, exits,
entrances, elevators, escalators or stairways of the Building. The halls,
passages, exits, entrances, shopping malls, elevators and stairways are not for
the general public, and Lessor shall in all cases retain the right to control
and prevent access thereto of all persons whose presence in the judgment of
Lessor would be prejudicial to the safety, character, reputation and interests
of the Building and its Lessees provided that nothing herein contained shall be
construed to prevent such access to persons with whom any Lessee normally deals
in the ordinary course of its business, unless such persons are engaged in
illegal activities. No Lessee and no employee or invitee of any Lessee shall go
upon the roof of the Building.
4. The directory of the Building will be provided exclusively for the
display of the name and location of Lessees only and Lessor reserves the right
to exclude any other names therefrom.
5. Lessor will furnish Lessee free of charge with two keys of each door
lock in the Premises. Lessor may make a reasonable charge for any additional
keys. Lessee shall not make or have made additional keys, and Lessee shall not
alter any lock or install a new or additional lock or bolt on any door of its
Premises. Lessee, upon the termination of its tenancy, shall deliver to Lessor
the keys of all doors which have been furnished to Lessee, and in the event of
loss of any keys so furnished, shall pay Lessor therefor.
6. If Lessee requires telegraphic, telephonic, burglar alarm or similar
services, it shall first
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obtain, and comply with, Lessor's instructions in their installation.
7. Lessee shall not place a load upon any floor which exceeds the load per
square foot which such floor was designed to carry and which is allowed by law.
Lessor shall have the right to prescribe the weight, size and position of all
equipment, materials, furniture or other property brought into the Building.
Heavy objects shall, stand on such platforms as determined by Lessor to be
necessary to properly distribute the weight. Business machines and mechanical
equipment belonging to Lessee which cause noise or vibration that may be
transmitted to the structure of the Building or to any space therein to such a
degree as to be objectionable to Lessor or to any Lessees shall be placed and
maintained by Lessee, at Lessee's expense, on vibration eliminators or other
devices sufficient to eliminate noise or vibration. The persons employed to move
such equipment in or out of the Building must be acceptable to Lessor. Lessor
will not be responsible for loss of, or damage to, any such equipment or other
property from any cause, and all damage done to the Building by maintaining or
moving such equipment or other property shall be repaired at the expense of
Lessee.
8. Lessee shall not use any method of heating or air conditioning other
than that supplied by Lessor. Lessee shall not waste electricity, water or air
conditioning. Lessee shall keep corridor doors closed.
9. Lessor reserves the right to exclude from the Building between the
hours of 6 p.m. and 7 a.m. the following day, or such other hours as may be
established from time to time by Lessor, and on Sundays and legal holidays any
person unless that person is known to the person or employee is charge of the
Building and has a pass or is properly identified. Lessee shall be responsible
for all persons for whom it requests passes and shall be liable to Lessor for
all acts of such persons. Lessor shall not be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person.
10. Lessee shall close and lock the doors of its Premises and entirely shut
off all water faucets or other water apparatus and electricity, gas or air
outlets before Lessee and its employees leave the Premises. Lessee shall be
responsible for any damage or injuries sustained by other Lessees or occupants
of the Building or by Lessor for noncompliance with this rule.
11. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed, no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the Lessee who, or whose employees or
invitees, shall have caused it.
12. Lessee shall not install any radio or television antenna, loudspeaker
or other device on the roof or exterior walls of the Building. Lessee shall not
interfere with radio or television broadcasting or reception from or in the
Building or elsewhere.
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13. Except as approved by Lessor, Lessee shall not mark, drive nails, screw
or drill into the partitions, woodwork or plaster or in any way deface the
Premises. Lessee shall not cut or bore holes for wires. Lessee shall not affix
any floor covering to the floor of the Premises in any manner except as approved
by Lessor. Lessee shall repair any damage resulting from noncompliance with this
rule.
14. Lessee shall not install, maintain or operate upon the Premises any
vending machine.
15. Lessee shall store all its trash and garbage within it Premises. Lessee
shall not place in any trash box or receptacle any material which cannot be
disposed of in the ordinary and customary manner of trash and garbage disposal.
All garbage and refuse disposal shall be made in accordance with directions
issued from time to time by Lessor.
16. No cooking shall be done or permitted by any Lessee on the Premises,
except that use by the Lessee of Underwriter's Laboratory approved equipment for
brewing coffee, tea, hot chocolate and similar beverages shall be permitted,
provided that such equipment and use is in accordance with all applicable
federal, state and city laws, codes, ordinances, rules and regulations.
17. Lessee shall not use in any space or in the public halls of the
Building any hand trucks except those equipped with the rubber tires and side
guards or such other material handling equipment as Lessor may approve. Lessee
shall not bring any other vehicles of any kind into the Building.
18. Lessee shall not use the name of the Building in connection with or in
promoting advertising the business of Lessee except as Lessee's address.
19. The requirements of Lessee will be attended to only upon appropriate
application to the office of the Building by an unauthorized individual.
Employees of Lessor shall not perform any work or do anything outside of their
regular duties unless under special instructions from Lessor, and no employee of
Lessor will admit any person (Lessee or otherwise) to any office without
specific instructions from Lessor.
20. Lessor may waive any one or more of these Rules and Regulations for the
benefit of any particular Lessee or Lessees, but no such waiver by Lessor shall
be construed as a waiver of such Rules and Regulation in favor of any other
Lessee or Lessees, nor prevent Lessor from thereafter enforcing any such Rules
and Regulations against any or all of the Lessees of the Building.
21. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the Building.
22. Lessor reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for safety and
security, for care and cleanliness of the
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Building and for the preservation of good order therein. Lessee agrees to abide
by all such rules and regulations hereinabove stated and any additional rules
and regulations which are adopted.
23. Lessee shall be responsible for the observance of all of the foregoing
rules by Lessee's employees, agents, clients, customers, invitees and guests.
24. No pets or animals shall be allowed in the premises.
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EXHIBIT 10.11
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease") is made and entered into
this 31st day of October, 1986, but shall become effective as of September 1,
1986, by and between ROCKFORD CORPORATION, an Arizona corporation, of 613 South
Rockford Drive, Tempe, Arizona 85281 ("Lessee") and CARBONNEAU INDUSTRIES, INC.,
a Michigan corporation, of 609 Myrtle, N.W., Grand Rapids, Michigan 49504
("Lessor").
W I T N E S S E T H :
WHEREAS, Lessor is the owner of certain premises located at
609 Myrtle Street, N.W., Grand Rapids, Michigan, improved with a three-story and
basement factory building and appurtenant parking facilities, as shown on the
diagram marked Exhibit A attached hereto and made a part hereof, subject to
easements, restrictions and encumbrances of record ("the Grand Rapids Plant");
and
WHEREAS, Lessor has leased approximately 20,000 square feet in
the Grand Rapids Plant to Lessee for a period of one year from November 7, 1985,
at a rental of $3,000 per month ("the Existing Lease"); and
WHEREAS, Lessor and Lessee desire to resettle and extend until
1991 the terms of the Existing Lease on the Grand Rapids Plant, by terminating
the Existing Lease and entering into a new Lease on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual promises
hereinafter set forth, and intending to be legally bound hereby, Lessee and
Lessor hereby agree that Lessor shall lease to Lessee, and Lessee will rent from
Lessor, the Grand Rapids Plant for a period of five (5) years, commencing
September 1, 1986, and ending August 31, 1991, upon the following terms and
conditions:
1. Termination of Existing Lease. The Existing Lease is hereby
rescinded and terminated effective as of midnight, August 31, 1986.
2. Obligation to Pay Rent. Lessee shall pay rent to Lessor for the term
of this Lease in the sum of Four Hundred Fourteen Thousand Dollars ($414,000),
in monthly installments, in advance, without demand, setoff, deduction or
counterclaim, as follows:
<PAGE> 2
(a) From September 1, 1986, through December 31, 1986, at
the rate of $4,000 per month,
(b) From January 1, 1967, through April 30, 1987, at the
rate of $5,000 per month,
(c) From May 1, 1987, through August 31, 1987, at the rate
of $6,000 per month,
(d) From September 1, 1987, through August 31, 1989, at
the rate of $7,000 per month,
(e) From September 1, 1989, through August 31, 1990, at
the rate of $7,500 per month,
(f) From September 1, 1990, through August 31, 1991, at
the rate of $8,000 per month.
Rent shall be paid to Lessor at its address noted above, or at such other
address as Lessor shall designate by notice to LESSEE. The rental provided for
in this Lease shall be an absolutely net return to Landlord for the term, free
from any losses, expenses or charges with respect to the Grand Rapids Plant,
including, without limitation, maintenance, repairs, cost of replacement of
buildings or improvements, insurance, taxes, assessments or other charges
imposed upon or related to the Grand Rapids Plant, except to the extent
expressly provided by Sections 3 (a), 4 and 5 below. All additional charges
payable hereunder by Tenant shall be deemed "additional rent."
3. Insurance Obligation.
(a) Lessor shall carry and pay for fire, extended coverage and
casualty insurance on the Grand Rapids Plant, for its full replacement
cost in at least the present policy face amounts, under policies naming
as insureds both Lessor and Lessee as their interests may appear, with
the present or mutually acceptable carriers, for the period commencing
September 1, 1986, and ending November 30, 1986. Thereafter, and during
the term of this Lease and any extensions, Lessee shall carry and pay
for such insurance coverages.
(b) Lessee shall maintain workers' compensation insurance
covering all of its employees to at least the statutory limits set
forth under Michigan law, and a policy of general public liability
insurance in an amount at least equal to One Million Dollars
($1,000,000) single limit coverage for property damage, bodily injury
or death. Such policy of general public liability insurance shall name
Lessor as an additional insured and shall be underwritten by a carrier
and on such other terms and conditions as Lessor shall
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approve. It shall provide by endorsement or otherwise that such
insurance may not be cancelled, terminated, amended or modified for any
reason whatsoever, except upon thirty (30) days' prior written notice
to Lessor.
(c) Prior to the time the fire, extended coverage, casualty
and liability insurance required by this Section is first required to
be carried by a party hereto, and thereafter at least fifteen (15) days
prior to the expiration of any such policy, the party responsible for
maintaining- the same shall deliver to the other party either duplicate
originals of the aforesaid policies or a certificate evidencing such
insurance coverage together with evidence of payment for the policies.
In addition, any fire, extended coverage and casualty insurance policy
maintained by Lessor or Lessee with respect to the Grand Rapids Plant
or the content thereof, shall contain a clause or endorsement under
which the insurer waives, or permits the waiver by the insured
thereunder, of all rights of subrogation against the other party
hereto, and its agents, employees, customers, invitees, guests or
licensees, with respect to losses payable under such policy.
Notwithstanding the provisions of Section 8 below, the parties hereto
waive all right of recovery which they might otherwise have against one
another, and their respective agents, employees, customers, invitees,
guests or licensees, for any damage to their respective properties
which is covered by a policy of insurance, notwithstanding that such
damage may result from the negligence or fault of the other party, or
its agents, employees, customers, invitees, guests or licensees.
4. Obligation to Pay Taxes. Lessor shall pay all real estate taxes and
installments of special assessments last due and payable without penalty on the
Grand Rapids Plant during the period commencing September 1, 1986, and ending
December 31, 1987, before the same are delinquent, without proration.
Thereafter, during the term of this Lease and any extensions, Lessee shall pay
all real estate taxes and installments of special assessments with respect to
the Grand Rapids Plant before the same are delinquent, without proration, and
indemnify Lessor against any liability therefor. The party responsible for the
payment of such taxes and assessments shall, upon request, promptly provide
evidence of payment to the other party.
5. Maintenance and Repair Obligation. Lessee shall keep and maintain
the Grand Rapids Plant in good and clean order, condition and repair at all
times during the term of this Lease and any extensions, and will deliver the
same to Lessor at the expiration of the term in as good condition as when
received, except for reasonable use and wear thereof, and as provided in Section
12 below; provided, however, that Lessor shall reimburse Lessee for the
out-of-pocket cost in excess of $500 of any single item of repair or replacement
which was approved in advance by Lessor (which approval shall not be
unreasonably withheld). Lessee shall, at its sole expense, enter into and
maintain during the term of this Lease and any extensions, a contract for the
provision and maintenance of a security system for the Grand Rapids Plant, and
contracts for the regular repair and maintenance of the boiler and elevators
located in the Grand Rapids Plant, all of which shall be in form and substance
reasonably acceptable -to Lessor; provided, however, that Lessee may elect to
have an employee of Lessee maintain the boiler and/or elevators if Lessor first
consents to such arrangement. Lessor shall not unreasonably withhold or delay
such
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consent; provided that Lessee demonstrates to Lessor that the employee is
competent and qualified to perform such repairs and maintenance. Lessee's duties
with respect to the Grand Rapids Plant under this Paragraph shall include,
without limitation, responsibility for: (a) compliance with all applicable laws,
ordinances and regulations; (b) certification of boilers and elevators; (c)
cleaning, lawn maintenance, snowplowing and snow removal; and (d) replacement of
broken windows.
6. Obligation to Pay for Utilities. Lessee shall pay for all costs of
heat, light, power, telephone and other utilities it desires, used at the Grand
Rapids Plant during the term of this Lease and any extensions. Lessor shall not
be liable to Lessee in damages or otherwise for any failure or interruption of
any utility service furnished to the Grand Rapids Plant.
7. Peaceable Enjoyment, Right to Sublet and Office Facility for Lessor.
During the term of this Lease and any extensions, Lessee shall have the sole and
exclusive right to occupancy of the Grand Rapids Plant, and to the peaceable
enjoyment thereof, including the right to sublease all or any portion(s) of the
Grand Rapids Plant to any person(s) of its selection, so long as it is not then
in default of any of its obligations hereunder, and so long as it first obtains
the written consent of Lessor to such subletting, which consent shall not be
unreasonably withheld or delayed; provided, however, that Lessor shall have the
right to continue to occupy its current office facility in the Grand Rapids
Plant or such other space comprising at least 400 to 500 square feet upon which
the parties shall mutually agree, and to continue its exclusive use of the
fireproof room identified in Exhibit A for the storage of its records, as a
subtenant of Lessee, without any obligation for the payment of rent, for the
period ending August 31, 1987, with a right to extend upon terms mutually agreed
upon between Lessor and Lessee. Lessor's consent to any assignment or subletting
shall not be construed as a consent to any further assignment or subletting and
shall in no event release Lessee from any liability hereunder. Lessor shall have
24 hour security clearance with EPS or any other security firm employed by
Lessee for the office area of the Grand Rapids Plant until August 31, 1987.
Thereafter, Lessor shall have access to any portion of the Grand Rapids Plant
occupied or used by it pursuant to this Section during normal business hours
and, with Lessee's prior consent, during non-business hours.
8. Mutual Indemnification. Each party hereto shall indemnify the other
against and hold it harmless from any and all liabilities, obligations, damages,
penalties, claims, costs and expenses, including, without limitation, reasonable
attorneys' fees, paid or incurred as a result of or in connection with (i) such
party's ownership, use or occupancy of the Grand Rapids Plant, (ii) any breach
by such party, any subtenant or any of their agents, contractors, employees,
customers, invitees or licensees, of any covenant or condition of this Lease, or
(iii) the carelessness, negligence or improper conduct of such party, any
subtenant, or any of their contractors, employees, customers, invitees or
licensees. If any action or proceeding is brought against the other party by
reason of such claim, the indemnifying party, upon written notice from the other
party, will, at the indemnifying party's expense, resist or defend such action
or proceeding by counsel approved by the other party in writing.
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9. Use of Grand Rapids Plant. Lessee shall use and occupy the Grand
Rapids Plant for office, warehouse and manufacturing purposes, and for no other
purpose whatsoever. Lessee shall not use the Grand Rapids Plant, or permit the
Grand Rapids Plant to be used, in a manner that constitutes a violation of any
applicable law, ordinance, order or regulation, or that may be dangerous; nor
shall Lessee commit any waste in the Grand Rapids Plant, or permit any
objectionable noise or odor to be emitted, or permit anything to be done in the
Grand Rapids Plant tending to create a nuisance or disturb others.
10. Condition of Grand Rapids Plant. As Lessee has used and occupied
the Grand Rapids Plant for some time, Lessee is quite familiar with the current
condition of the Grand Rapids Plant. Lessee acknowledges that it has inspected
the Grand Rapids Plant, found it to be in satisfactory condition for its
intended use and accepts the Grand Rapids Plant in its current "AS IS"
condition, with no warranties whatsoever concerning its condition or permitted
use.
11. Alterations and Additions. Lessee may not alter or add to the Grand
Rapids Plant without Lessor's prior written consent, which consent shall not be
unreasonably withheld or delayed. Lessor shall have no obligation to make any
alteration or addition to the Grand Rapids Plant during the term. All right,
title and interest to any alterations and additions to the Grand Rapids Plant
during the term, except for trade fixtures and removable equipment, shall be the
property of Lessor and shall be deemed to be a part of the Grand Rapids Plant,
and shall remain on, and be surrendered with the Grand Rapids Plant upon the
termination of this Lease, without cost or expense to Lessor.
12. Restoration.
(a) If the Grand Rapids Plant is damaged or destroyed, in
whole or in part, Lessee shall repair, restore, replace or rebuild the
Grand Rapids Plant, or the part thereof so damaged, as nearly as
possible to the value, condition and character of the Grand Rapids
Plant immediately prior to the occurrence of such damage or
destruction. Lessee shall not be entitled to an abatement of rent
during the construction period.
(b) All insurance proceeds payable as a result of any damage
to or destruction of the Grand Rapids Plant shall be paid to Lessor and
shall be disbursed by Lessor to Lessee as reconstruction work
progresses. If the insurance proceeds are insufficient to pay for all
restoration work, then Lessee shall pay any additional amounts
necessary to restore the Grand Rapids Plant. Upon completion of the
restoration, and payment for all restoration work, all remaining
insurance proceeds shall be retained by Lessor.
(c) Notwithstanding the foregoing provisions of this Section,
if the damage to or destruction of the Grand Rapids Plant cannot be
repaired within one hundred twenty (120) days of the damage, either
Lessor or Lessee may terminate this Lease by giving ten (10) days'
prior written notice to the other party within thirty (30) days after
the damage
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or destruction occurs. If the Lease is terminated pursuant to this
subsection, all insurance proceeds payable as a result of the damage or
destruction shall be retained by Lessor.
(d) The provisions of this Section shall not apply to the
proceeds of any policy of business interruption insurance which Lessee
may place to cover its operations in the Grand Rapids Plant, all
proceeds of which policy shall be and remain the property of the
Lessee.
13. Condemnation. If all or any substantial part of the Grand Rapids
Plant is taken or condemned by a governmental authority, or shall be conveyed by
Lessor under a threat of such taking or condemnation, the rights and obligations
of Lessor and Lessee with respect to such taking or condemnation shall be as
provided in this Section. If twenty-five percent (25%) or more of the gross
floor area within the Grand Rapids Plant is so taken, condemned or conveyed,
this Lease shall terminate as of the date of such taking, condemnation or
conveyance, and rent shall be prorated as of such date. If less than twenty-five
percent (25%) of the gross floor area within the Grand Rapids Plant is taken,
condemned or conveyed, this Lease shall remain in effect; provided, however,
that the rent payable by Lessee shall be reduced for the remainder of the term
in the same proportion which the number of square feet of gross floor area
within the buildings comprising the Grand Rapids Plant following such taking,
condemnation or conveyance bears to the number of square feet of gross floor
area within the buildings comprising the Grand Rapids Plant prior to such
taking, condemnation or conveyance. To the extent that the award made for the
taking is available to Lessor, Lessor shall, at its own cost and expense, make
all necessary repairs or alterations to the Grand Rapids Plant so as to
constitute the portion of the Grand Rapids Plant not taken as a complete unit,
and Lessee shall have no obligation to make any such repairs or alterations.
Lessor shall be entitled to the entire award made for any taking, condemnation
or conveyance, except that Lessee shall not be precluded from pursuing any claim
directly against the condemning authority for its loss.
14. Lessor's Right to Perform. Lessor may perform any obligations of
Lessee hereunder which Lessee has failed to perform. Lessee shall reimburse
Lessor for all payments made and expenses incurred. Such payments and expenses
shall be additional rent which is immediately due and payable, together with
interest thereon at the lesser of the rate of twelve percent (12%) per annum or
the highest legal rate of interest.
15. Default. If default is made by Lessee in the payment of rent or
additional rent or in the performance of any of the conditions or covenants in
this Lease, and if such default shall continue for a period of ten (10) days
after written notice is given to Lessee by Lessor specifying the default, then
Lessor shall have the right to re-enter the Grand Rapids Plant and remove Lessee
and all persons therefrom and shall have the right to terminate this Lease. If
default is made by Lessee and Lessor exercises its option to terminate this
Lease, in addition to all other remedies now or hereafter provided to Lessor,
Lessor may proceed to re-rent the Grand Rapids Plant and collect from Lessee any
deficiency between the rent payable hereunder and the rent received from any
replacement tenant.
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16. Miscellaneous Provisions.
(a) Sale of the Grand Rapids Plant. If Lessor sells the Grand
Rapids Plant during the term of this Lease or any extensions, Lessor
shall require the purchaser to honor Lessee's rights under this Lease
Agreement, subject to Lessee making all required rental and other
payments falling due thereafter, and complying with all the terms and
conditions of this Lease.
(b) Extension of Lease. Lessor or Lessee shall give ninety
(90) days' notice to the other if either wishes to terminate this Lease
at the end of its term, or at any time thereafter; and until the
passage of ninety (90) days after such giving of notice, this Lease
shall continue on a month-to-month basis.
(c) Notices. All notices herein required shall be given in
writing upon the parties at the addresses indicated on page 1 hereof.
Any notice shall be deemed to have been given when personally delivered
or when sent by certified mail, return receipt requested and postage
prepaid. The addresses specified for notices herein may from time to
time be changed by the written notice of one party to the other.
(d) Remedies Cumulative; Waiver. All rights and remedies
hereunder are cumulative, and not exclusive, and shall be in addition
to all other rights and remedies provided by applicable law. Failure to
exercise or delay in exercising any right or remedy hereunder shall not
operate as a waiver thereof, nor excuse future performance. No waiver,
discharge or renunciation of any claim or right arising out of a breach
of these terms and conditions shall be effective unless in a writing
signed by the party so waiving. Any waiver of any breach shall be a
waiver of that breach only and not any other breach, whether prior or
subsequent thereto.
(e) Successors and Assigns. Subject to Section 7 hereof, this
Lease shall be binding upon and inure to the benefit of the parties
hereto and their respective personal representatives, heirs, successors
and assigns.
(f) Legal Expenses. The losing party shall pay all reasonable
attorney's fees and expenses incurred by the winning party in enforcing
any provision of this Lease.
(g) Entire, Agreement Lessor and Lessee agree that this Lease
shall constitute the entire agreement between them and that all prior
negotiations, discussions,- correspondence and documentation are hereby
merged into this Lease and shall exist as finally defined herein.
(h) Applicable Law. This Lease Agreement is entered into, and
shall be interpreted and enforced, under the laws of the State of
Michigan.
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(i) Other and Confirmatory Documents. Each party hereto
agrees, upon the reasonable request of the other, to execute and
acknowledge all such other and confirmatory documents as may be needed
to give formal evidence of the consummation of the transactions
provided for in this Lease.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Lease
Agreement to be executed by their duly authorized officers on the day, month and
year first above appearing.
ROCKFORD CORPORATION
By /s/
-------------------------------
Robert F. Pothier
Its President
CARBONNEAU INDUSTRIES, INC.
By /s/
-------------------------------
James Carbonneau
Its President
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AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE is made as of the lst day of October
1988, by and between CARBONNEAU INDUSTRIES, INC., a Michigan corporation, of 609
Myrtle, N.W., Grand Rapids, Michigan 49504 (the "Lessor"), and ROCKFORD
CORPORATION, an Arizona corporation, of 613 South Rockford Drive, Tempe, Arizona
85281 (the "Lessee").
R E C I T A L S :
A. On October 27, 1986, Lessor and Lessee entered into a
certain Lease Agreement (the "Lease"), effective as of September 1, 1986, for
the demise of certain premises commonly known as 609 Myrtle Street, N.W., Grand
Rapids, Michigan (the "Existing Plant").
B. Lessee desires to expand its operations by contracting with
Lessor for the construction by Lessor and lease to Lessee, on real estate
commonly known as 600 Webster, N.W., Grand Rapids, Michigan, and adjoining the
Existing Plant, additional space for Lessee's operations (the "New Plant"). The
Existing Plant and New Plant are collectively referred to in the Lease, as the
"Grand Rapids Plant".
C. To accomplish such purposes, Lessor and Lessee desire to
amend the Lease as provided herein.
NOW, THEREFORE, LESSOR AND LESSEE, IN CONSIDERATION OF THE
MUTUAL COVENANTS CONTAINED HEREIN, AMEND THE LEASE AS FOLLOWS:
1. Term. The fifth introductory paragraph of the Lease is
amended in part to provide that the Lease shall be "for a period commencing
September 1, 1986, and ending ten (10) years after the New Plant Completion Date
(as hereinafter defined)".
2. Rent.
(a) The initial sentence of Paragraph 2 is amended in
part to read:
"Lessee shall pay rent to Lessor for the Existing Plan for the
terms of this Lease, in monthly installments, in advance,
without demand, setoff, deduction or counterclaim, as follows:
<PAGE> 10
(b) Paragraph 2(f) is amended in its entirety to
substitute the following subparagraphs:
"(f) From September 1, 1990, through August 31, 1992, at the
rate of $8,000 per month,
(g) From September 1, 1992, through August 31, 1994, at the
rate of $8,500 per month,
(h) From September 1, 1994, through August 31, 1996, at the
rate of $9,000 per month,
(i) From September 1, 1996, through August 31, 1998, at the
rate of $9,500 per month, and
(j) From September 1, 1998, through the balance of the term,
at the rate of $10,000 per month.
Lessee shall pay rent to Lessor for the New Plant for the term of this
Lease, in monthly installments, in advance, without demand, setoff,
deduction or counterclaim, as follows:
At the rate of $3.35 per square foot for the first two (2)
years following the New Plant Completion Date,
(l) At the rate of $3.65 per square foot for the third and
fourth years following the new Plant Completion Date,
(m) At the rate of $3.98 per square foot for the fifth and
sixth years following the New Plant Completion Date, and
(n) At the rate of $4.34 per square foot for the seventh an
eighth years following the New Plant Completion Date, and
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<PAGE> 11
(o) At the rate of $4.73 per square foot for the ninth and
tenth years following the New Plant Completion Date."
3. Maintenance. The proviso set forth in the initial sentence
of Paragraph 5 of the Lease shall be amended to read "provided, however, that
Lessor shall reimburse Lessee for the out-of-pocket cost in excess of $1,000 of
any single item of repair or replacement which was approved in advance by Lessor
(which approval shall not be unreasonably withheld) and was not the result of
the intentional act or negligence of Lessee, its employees, agents or invitees."
4. Construction of New Plant. A new Paragraph 17, with respect
to the construction of the New Plant, is added to the Lease, as follows:
"17. Construction and Occupation of the New Plant.
(a) Lessor shall diligently proceed to have the New Plant
constructed by contractors and suppliers selected by it, in
accordance with Exhibit B attached hereto, and place the
heating and ventilation equipment in good working order as of
the date of delivery of possession to Lessee (hereinafter
sometimes referred to as "Lessor's Work"). All Lessor's Work
shall be fully inspected by Lessee and shall not carry any
warranty from Lessor whatsoever, whether express or implied.
However, Lessee shall have the right to claim directly against
Lessor's contractors and suppliers for the breach of their
warranties.
(b) Other than Lessor's Work, any alterations, improvements,
additions, physical changes or other work necessary or
desirable to place the New Plant in a condition suitable for
Lessee's business purposes ("Lessee's Work") shall be
performed in a good and workmanlike manner by and for Lessee
at Lessee's sole cost and expense on or before thirty (30)
days following the completion of Lessor's Work. No
construction or installation by Lessee shall begin until
Lessor has approved the plans therefor, which approval shall
not be unreasonably withheld or delayed.
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<PAGE> 12
All construction shall be performed in accordance with the
approved plans, at Lessee's sole cost and expense, by a
contractor or contractors first approved in writing by Lessor
(which approval shall not be unreasonably withheld or
delayed). Lessee's Work shall fully conform to all applicable
statutes, ordinances, regulations and codes. Prior to
commencing any work, Lessee shall require its contractors and
subcontractors to furnish Lessor with evidence of such
insurance coverage in such amounts as may be required by
Lessee.
(c) Upon the substantial completion of the Lessor's Work and
the Lessee's Work, the Lease term shall commence with respect
to the New Plant (the "New Plant Completion Date"). Once the
New Plant Completion Date has been determined, the parties
hereto agree to execute an addendum to this Lease setting
forth the actual New Plant Completion Date, the resultant
expiration date of this Lease, the square footage of the New
Plant, and the resultant rental rate payable with respect
thereto.
(d) The target New Plant Completion Date is April 1, 1989. If
possession of the New Plant shall for any reason not be
delivered to Lessee on such date, this Lease shall
nevertheless continue in full force and effect, and no
liability whatsoever shall arise against Lessor out of any
delay other than the abatement of rent, at the rate of
one-thirtieth (1/30th) of the monthly installment of rent for
the New Plant for each day of delay, until the Lessor's Work
and the Lessee's Work is completed.
(e) Lessor has entered into agreements, subject to customary
contingencies, for the construction of the New Plant and the
financing of such construction on terms satisfactory to
Lessor. Lessor shall comply with those agreements and exercise
every reasonable effort to obtain the construction and
financing of the New Plant in accordance with the terms of
those agreements. However, if Lessor is unable to do so for
any
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<PAGE> 13
cause beyond its reasonable control, Lessor may terminate this
Amendment by notice to Lessee and neither party shall have any
further liability hereunder.
5. Ratification. Except as expressly amended hereby, the Lease
shall continue in full force and effect, as written.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment to Lease as of the date first above written.
WITNESSES: CARBONNEAU INDUSTRIES
__________________________ By /s/ _________________________
Daniel N. Grzywacz
Owner
__________________________ Its ____________________________
Nancy A. Panfil "Lessor"
ROCKFORD CORPORATION
/s/ ______________________
By /s/ Robert F. Pothier
_____________________________
Its
President
/s/ ______________________ ______________________________
"Lessee"
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<PAGE> 14
EXHIBIT A
ROCKFORD/CARBONNEAU
Legal Description:
All of Lots 443, 445 & 447 & all that part of Lots 440, 442, 444, 446 & 448
lying E of E line P M RR Co S Rt of Way* Leonard & Co S Addition* also part of
SW 1/4 of Sec 13 T 7 N R 12 W Com at SE cor lot 440 Leonard & Co S addition th N
263 ft E 66 ft S 159 ft W 33 ft S 104 ft th W 33 ft to beg.
P.P. #41-13-13-330-004
609 Myrtle Street, N.W.
[Map]
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<PAGE> 15
AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE ("Amendment") is made as of October 5, 1998, by
and between CARBONNEAU FAMILY LIMITED PARTNERSHIP, a Michigan limited
partnership, of 133 Robinhood Drive, S.E., Grand Rapids, Michigan 49546
("Lessor"), and ROCKFORD CORPORATION, an Arizona corporation, of 613 South
Rockford Drive, Tempe, Arizona 85281 ("Lessee") based on the following facts:
A. Lessor's predecessor in title, Carbonneau Industries, Inc., and
Lessee, entered into a certain Lease Agreement dated October 27, 1986, effective
as of September 1, 1986 and amended as of October 1, 1988 (collectively,
"Lease") for the demise of certain premises commonly known as 609 Myrtle Street,
N.W., and 600 Webster, N.W., Grand Rapids, Michigan (collectively, "Grand Rapids
Plant").
B. By its terms, the Lease is scheduled to terminate as of midnight,
March 31, 1999, which is ten years after the "New Plant Completion Date," as
defined in the Lease. However, Lessor and Lessee desire to extend the Lease
term, and provide Lessee with additional options to renew the Lease.
C. To accomplish such purposes, Lessor and Lessee desire to amend the
Lease as provided in this Agreement.
NOW, THEREFORE, Lessor and Lessee amend the Lease as follows:
1. TERM. The fifth introductory paragraph of the Lease is amended in
part to provide that the Lease shall be "for a period commencing September 1,
1986, and ending march 31, 2001."
2. RENT.
(a) Paragraph 2(j) of the Lease is amended in its entirety to
substitute the following paragraphs:
(j-1) From September 1, 1998, through March 31, 1999, at the
rate of $10,000 per month.
(j-2) From April 1, 1999, through March 31, 2001, at the rate
of $11,000 per month.
(b) Paragraph 2(o) is amended in its entirety to substitute
the following subparagraph:
(o) At the rate of $4.73 per square foot from April 1, 1997,
through March 31, 2001.
<PAGE> 16
3. RENEWAL OPTIONS. The following additional subparagraph is added to
Paragraph 16 of the Lease.
(j) Options to Renew. So long as Lessee is not then in default
under this Lease, Lessee shall have three (3) options to renew this
Lease for additional terms of one (1) year each, upon giving Lessor at
least one hundred eighty (180) days written notice of the exercise of
such option prior to the then scheduled termination date of the Lease.
Each such renewal shall be on the same terms and conditions as set
forth in this Lease, with the exception that the Rent payable under
this Lease shall be increased at the commencement of each such renewal
term by three percent (3%) over the Rent payable for the period
immediately prior to such renewal.
4. RATIFICATION. Except as expressly amended by this Amendment, the
Lease shall continue in full force and effect, as written.
Lessor and Lessee have signed and delivered this Amendment to Lease as
of the date set forth above.
WITNESSES: CARBONNEAU FAMILY LIMITED PARTNERSHIP
[NOTARY SEAL]
/s/ By: /s/
- ------------------------ -----------------------------
James T. Carbonneau
Its General Partner
Lessor
/s/
- ------------------------
ROCKFORD CORPORATION
/s/
- ------------------------
By: /s/ David Richards
------------------------------------------
/s/ Its Vice President Information Technology
- ------------------------
Lessee
[NOTARY SEAL]
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EXHIBIT 10.15
MANUFACTURING AND
DISTRIBUTION AGREEMENT
This Agreement is between Rockford Corporation, an Arizona
corporation ("Rockford"), and Path Group Inc., an Arizona corporation ("Path").
Rockford and Path agree as follows:
1. BACKGROUND.
1.1 Rockford Business. Rockford is a manufacturer of high quality
consumer electronic products used in automotive, professional,
and home sound reproduction systems.
1.2 Path Business and Experience. Path was formerly known as
"American Connection Incorporated," and is an affiliate of
Path Group PLC, a British corporation ("Path UK"). Path is a
successor to American Connection, Ltd., a British corporation
("ACL"), and is a manufacturer and supplier of accessory
products that may be used in the installation of Rockford's
products and other company's products. All references to Path
in this Agreement include Path and ACL.
1.3 Past Relationship. Rockford and Path are parties to agreements
relating to Rockford's distribution of Path products in
Europe, the United States, the Americas, and Asia as listed on
Exhibit D, Prior Agreements (the "Prior Agreements").
1.4 New Relationship. Rockford and Path desire to renew and revise
their existing agreements relating to Rockford's distribution
of Path products. Under the new agreement, Path will
manufacture (or purchase) and warehouse accessory products
(the "Products"). Rockford will solicit sales of the Products
to Rockford's authorized dealers and distributors throughout
the world ("Dealers"). The Products covered by this Agreement
are identified on Exhibit A; the parties may at any time add
other products to those identified by amending Exhibit A and
the added products will then be treated for all purposes as
"Products."
1.5 License. In connection with this Agreement, Rockford will
license Path to place certain Rockford trademarks and
tradenames (the "Names") on the Products, solely for sales of
the Products to Dealers. The Names are identified on Exhibit
B, which may be amended by the parties from time to time.
1.6 Purpose. The purpose of this Agreement is to replace the Prior
Agreements. This Agreement states the terms of the agreement
between Path and Rockford relating to sales of the Products to
Rockford's Dealers.
Confidential Treatment Requested
<PAGE> 2
2. DISTRIBUTION OF THE PRODUCTS. Path will manufacture (or purchase) and
warehouse the Products. Rockford will solicit sales of the Products
and, upon receipt of orders, will ship the Products to Rockford's
Dealers throughout the world. The parties will undertake these
activities on the following basis:
2.1 Inventory Locations. Path will manufacture or purchase the
Products and will maintain an inventory of the Products at its
own warehouses and at selected Rockford warehouse locations.
Path must insure the Products against casualty loss prior to
their shipment to Dealers.
(a) Duty and Freight. Path is responsible for payment of
applicable duty and freight to deliver the Products
to each warehouse location.
(b) Changes to Locations. Path is responsible for costs
and systems improvements at its own warehouse
locations and at Rockford's warehouse locations (to
the extent needed to keep Path inventory at such
locations), including equipment and license fees to
operate the locations. Rockford is not responsible
for any equipment or license fees related to any
changes to warehouse locations (including movements
into Rockford warehouses).
(c) Europe and Singapore. In Europe and Singapore, Path
will own Products and locate them at Rockford's
warehouse in Germany and Singapore until their sale
to Dealers.
(d) Germany. Path shall pay the value added tax (VAT)
upon entry of goods into the warehouse in Germany and
shall charge the VAT to Rockford on sales from the
warehouse in Germany.
2.2 Inventory Levels. Path will maintain inventory at a level that
is sufficient to satisfy reasonably expected demand for the
Products.
(a) Representatives of Rockford and Path will meet
regularly to discuss anticipated demand for the
Products and the level of inventory appropriate to
allow Rockford and Path to meet that demand.
(b) Path is responsible for end-of-life ("EOL") inventory
management, including inventory levels and EOL
discounts. If Path wants to offer EOL discounts to
help manage inventory, Rockford will arrange to offer
the discounts to Dealers using free goods or other
means consistent with Rockford's sales practices for
its own products.
(c) Upon termination of this Agreement, Rockford will in
good faith assist Path to liquidate Path's reasonable
inventory of the Products. These good faith efforts
will include Rockford's continued ordering of the
Products
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<PAGE> 3
from Path until the reasonable inventory of each
Product is exhausted, but only to the extent Rockford
has orders from Dealers for the Products.
2.3 Responsibilities of the Parties.
(a) Rockford. Rockford will manage sales of the Products,
including order taking, shipping from Rockford
warehouses, invoicing to Rockford's customers, terms
offered to Rockford's customers, bad debts, and
marketing programs. Rockford will solicit sales of
the Products to Rockford's Dealers and will use the
sales methods it deems appropriate, which may (but
are not required to) include dealer visits,
telemarketing, direct mail, and advertising.
(b) Path. Path will ship Products from its own warehouses
to fill orders submitted to it by Rockford and will
follow Rockford's established procedures for
confirming to Rockford the quantities and dates of
shipment (including submission of entries to
Rockford's information systems) so that Rockford can
timely invoice its Dealers. Path will not make any
independent sales of the Products, but will:
(1) assist Rockford's sales staff and sales
representatives in their efforts to sell the
Products;
(2) make available to Rockford's Dealers
point-of-purchase materials, including
product displays (subject to Rockford's
approval and reasonable budgetary
constraints established by Path); and
(3) provide support as necessary in the form of
technical information or advisory personnel.
(c) Promotional Literature. Rockford is responsible for
development, production, and distribution of all
literature regarding the Products and for the cost
associated with exhibits, booths, and audio-visual
presentations at trade shows. Path is responsible for
development, production, and distribution of display
and point of sale materials for Dealer sites and
written material used for Dealer training. Rockford
and Path will consult with each other with respect to
the content and appearance of such materials.
(d) Cooperation. Path will cooperate with Rockford's
efforts so that, for all purposes, Dealers are
encouraged to treat the Products as Rockford products
and to deal directly with Rockford on all matters
related to the Products.
2.4 Orders and Delivery. Rockford may remove the Products from
Path's inventory at Rockford's warehouses and deliver the
Products to Rockford's Dealers upon
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<PAGE> 4
receipt of orders for the Products. Rockford will promptly
give Path notice of the shipment of Products from Rockford's
warehouses.
2.5 Price and Payment.
(a) Price. After consultation with Rockford, Path will
establish Dealer Prices and suggested retail prices
for each Product in each region or territory.
Rockford will sell the Products at the applicable
Dealer Price, subject to reasonable payment, volume,
and other sales incentives that are consistent with
the incentives Rockford offers on its own products.
(b) Payments by Dealers and Credit Risk. Rockford is
solely responsible for collecting amounts due for
sales of Products. Rockford is also responsible for
managing its credit relationship with its Dealers and
may establish, in connection with its acceptance of
orders and shipment of Products, reasonable credit
policies including, as it deems necessary,
requirements for COD sales only.
(c) Payments by Rockford to Path. Path will submit
invoices to Rockford for all Products shipped in the
amounts established under Exhibit C. Rockford will
make payments in accordance with the terms set forth
on Exhibit C. All payments will be in U.S. Dollars at
the Path location designated by Path.
(d) Returns. Rockford will accept returns of Products on
a basis consistent with Rockford's policies for
returns. Rockford will deliver returned Product to
Path and is entitled to a credit for the net amount
Rockford paid Path for the returned Product.
(e) Discounts. (Confidential treatment has been requested
and redacted portions of this document have been
filed separately with the Commission.)
2.6 Additional Names and Products. At its execution, this
Agreement covers only Products sold in connection with
Rockford's "Rockford-Fosgate" line of car audio products. The
parties are discussing an arrangement for sales of Products in
connection with Rockford's "Hafler" line of professional audio
products. If the parties agree on terms for such an
arrangement, they may execute a separate agreement covering
that arrangement or they may amend Exhibits A, B, and C to add
the Hafler related Products to this Agreement with appropriate
variations in the terms of those Exhibits.
3. DEVELOPMENT AND ADDITION OF PRODUCTS.
3.1 Development of Products. Rockford and Path will cooperate to
improve existing Products and develop new Products that will
satisfy the needs of Rockford's Dealers, and their customers.
Path is principally responsible for development of
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Confidential Treatment Requested
<PAGE> 5
improvements to existing Products and new Products. Before the
development of new or improved Products the parties will meet
and agree upon:
(a) the anticipated role of each party in development of
the Product;
(b) any change in the marketing and administrative fees
or royalty necessary for the Product; and
(c) ownership of patents, trade secrets, copyrights and
other intellectual property associated with the
Product (other than the Names, which will remain
Rockford's exclusive property).
3.2 Addition of Products. Path will not produce or sell any
Products, and will not use the Names in connection with any
Products, until Rockford has approved such Products and added
them to Exhibit A as approved Products. When a Product is
approved and added to Exhibit A, Rockford and Path will also
agree whether the Product is to be "exclusive" under the terms
of this Agreement. Except as otherwise specifically agreed by
Rockford and Path, all Products will be exclusive.
3.3 Deletion of Products. Rockford and Path will discontinue
Products as they reasonably determine is necessary because of
obsolescence, inadequate sales, or new product developments.
3.4 Use of Products After Termination. Upon termination of this
Agreement, Path may manufacture, sell, and distribute
products, including tools, that were principally or
exclusively marketed through Rockford during the term of this
Agreement, except for products protected by Rockford patents
and products produced using Rockford's trade secrets,
confidential information, or other intellectual property. Path
may not use the Names in connection with any such products.
Path and its affiliates will own patents, trade secrets,
confidential information, and other intellectual property
associated with all Products Path or its affiliates develop
exclusively for Rockford. For example:
(a) all tools and dies, sketches, designs, drawings,
forms, software, software manuals, source codes, and
other information and tangible property associated
with development of or manufacturing of the Products
Path or its affiliates develop exclusively for
Rockford will remain the property of Path unless Path
grants licenses or other rights to Rockford; and
(b) the "Gamma Geometry" cable designed by Ixos (patents
applied for), which Path is licensed to manufacture
for certain Products, will remain the property of
Path's affiliate, Ixos, Ltd.
4. USE OF NAMES.
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<PAGE> 6
4.1 Limited License of Names. Rockford grants Path a right to use
the Names solely during the term of this Agreement and solely
in connection with sales of the Products to Rockford's
Dealers.
4.2 Approval of Uses. Path will use the Names only in a manner and
form approved before use in writing by Rockford. If Path
wishes to propose a new use or form of the Names, it must
submit its proposal in writing to Rockford. Rockford will
promptly review the proposed use and indicate its approval or
disapproval in writing. Any proposed use will be deemed
approved if Rockford does not object within 30 business days
after Path submits it to Rockford in writing together with a
written request for approval.
4.3 Quality of Products. Path will provide Rockford with initial
samples of each Product before any sale and Rockford must
approve the initial samples before any sale of a Product. Path
will provide Rockford with production samples from time to
time, as requested by Rockford, so that Rockford may confirm
that the Products conform to the approved samples and to
Rockford's requirements as to quality. All Products supplied
by Path will be of a quality at least equal to the initial
samples supplied to Rockford.
4.4 Goodwill and Ownership of Names. All goodwill generated by the
use of the Names or promotion of the Products will accrue to
Rockford's benefit. Path disclaims any ownership rights in the
Names and goodwill of Rockford, acknowledges that the Names
are the sole and exclusive property of Rockford, and agrees
that it will not take any action challenging Rockford's
ownership and rights in the Names. Path will not (a) take any
action that would interfere with Rockford's use of the Names
or (b) file applications for registration of the Names
anywhere in the world.
4.5 Infringements. If Path believes any other party is infringing
on Rockford's rights in the Names, then Path will promptly
notify Rockford and will cooperate with Rockford in any action
Rockford chooses to take to protect its rights in the Names.
Rockford will have sole and exclusive control of any actions
relating to such infringements.
4.6 No Use after Termination. Upon expiration or termination of
this Agreement, Path will immediately cease using the Names
other than for sales permitted after termination under the
termination provisions of this Agreement.
5. EXCLUSIVITY AND NON-COMPETE.
5.1 Mutual Exclusivity. In connection with "exclusive" Products
(including those identified on Exhibit A and others deemed
exclusive under section 3.2) and solely during the term of
this Agreement:
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<PAGE> 7
(a) Rockford will not sell (or license others to sell)
products that compete with the exclusive Products;
and
(b) Neither Path nor any affiliate of Path will sell (or
license others to sell) products that compete with
the exclusive Products.
The parties may agree that a Product is exclusive only in part
of the world, in which case the restrictions in (a) and (b)
will apply only in the part of the world where the product is
exclusive.
5.2 Non-Compete. Neither Path nor its affiliates will:
(a) during the term of this Agreement (and for one year
after its termination if termination is a result of
any breach by Path or a result of Path's election not
to renew this Agreement), either directly or through
any affiliate, offer for sale any products that are
competitive with an exclusive Product (for a Product
that is exclusive in only part of the world, this
restriction applies only in the part of the world
where the Product is exclusive); and
(b) during or at any time after the term of this
Agreement, offer for sale any products using the
Names, or using names, marks, or other trade dress
that are confusingly similar to the Names, other than
Products sold under this Agreement.
6. MANAGEMENT MEETINGS. Management of Rockford and Path will meet
quarterly at Rockford's headquarters in Tempe, Arizona, to discuss the
business relationship and resolve issues arising between the parties.
7. WARRANTY, TITLE, AND INDEMNITY.
7.1 Warranty to Dealers. Rockford will offer warranties for the
Products consistent with the warranties offered by Rockford
for its own products. Rockford will require that Dealers and
their customers return Products requiring warranty service to
Rockford.
7.2 Path Warranty and Service Procedures. Path warrants that the
Products will be free from defects in material and workmanship
for the period of the warranty offered by Rockford. Rockford
will deliver Products requiring warranty service to Path, Path
will repair or exchange returned Products, and Path will
return the Products to Rockford's Dealers, or their customers,
at its sole expense.
7.3 Encumbrances, Title, and Risk of Loss. Path warrants that the
Products, upon shipment, will be free from any security
interest, lien, or other encumbrance. Path will transfer title
to the Products free and clear of all security interests,
liens, and other encumbrances. Risk of loss from any casualty
to the Products will be on Path until their receipt and
acceptance by Rockford's Dealers.
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<PAGE> 8
7.4 Indemnification and Insurance.
(a) Indemnity by Rockford. Rockford will defend,
indemnify and hold harmless Path, and its officers,
directors, employees, and agents, from:
(1) all fines, suits, proceedings, claims,
demands, debts, obligations, liabilities or
actions of any kind by anyone (including
reasonable attorneys' fees and costs) (a
"Loss") arising from or connected with the
activities or operations of Rockford or its
officers, directors, employees, or agents;
(2) all Loss arising out of claims by third
parties that Path's authorized use of the
Names infringed on the marks or other rights
of such third parties; and
(3) all Loss in product liability actions
brought against Path involving the defective
manufacture or design of Rockford products.
Rockford will maintain product liability insurance
with insurers and in amounts reasonably satisfactory
to Path. Such insurance will name Path as an
additional insured on a form reasonably approved by
Path and will be cancelable by the insurer only after
30 days notice to Path.
(b) Indemnity by Path; Product Liability Insurance. Path
will defend, indemnify and hold harmless Rockford,
and its officers, directors, employees, and agents,
from:
(1) all Loss arising from or connected with the
activities or operations of Path or its
officers, directors, affiliates, employees,
or agents; and
(2) all Loss in product liability actions
brought against Rockford involving the
defective manufacture or design of Products;
except that Path will have no obligation to
defend, indemnify, or hold harmless from
liability resulting from Rockford's acts or
omissions in the design of the Products.
Path will maintain product liability insurance with
insurers and in amounts reasonably satisfactory to
Rockford. Such insurance will name Rockford as an
additional insured on a form reasonably approved by
Rockford and will be cancelable by the insurer only
after 30 days notice to Rockford.
(c) Procedure. A party must give notice to the other
party of any claim as to which it intends to seek
indemnity under this Agreement promptly after the
indemnified party learns of the claim. The
indemnifying party is entitled to assume the defense
of any claim and, if it does so, is not
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<PAGE> 9
thereafter responsible for the expenses of
independent counsel retained by the indemnified
party. The indemnified party will cooperate in the
defense of the claim and will not settle or
compromise any claim without the indemnifying party's
consent.
8. TERM AND TERMINATION.
8.1 Initial Term. This Agreement is for an initial term from July
1, 1998 until July 31, 2001.
8.2 Renewal Term. On or before January 31, 2001, Rockford and Path
will meet to evaluate the business relationship and to decide
whether to continue the relationship for two additional years.
The Agreement will renew unless either Rockford or Path gives
written notice that they elect not to extend the term of the
Agreement. If the Agreement is extended, the Agreement will
renew for one additional two year renewal term.
8.3 Additional Renewal. After the renewal term, the parties may
renew this Agreement each year for additional two year terms,
but only if both parties give written notice of renewal at
least 180 days before a scheduled expiration.
8.4 Termination. A party may terminate this Agreement, at any time
and upon written notice to the other, in any of the following
events:
(a) If the other party breaches any material term of this
Agreement, and fails to correct such breach within 30
days after notice from the party;
(b) If the other party suspends payment of its debts,
enters into or becomes subject to corporate
reorganization or rehabilitation procedures,
liquidation, dissolution, or bankruptcy proceedings,
or makes a composition with creditors, or makes an
assignment for the benefit of creditors, or seeks
relief under bankruptcy or other similar laws for
debtor's relief; or
(c) If the performance of the Agreement by either party
is prevented by force majeure, and the condition
continues to prevent performance for 90 days.
8.5 Specific Performance. In addition to its right to terminate,
Rockford has the right to obtain temporary and permanent
injunctive relief to prevent any breach or threatened breach
by Path or its affiliates of sections 4, 5 or 9 of this
Agreement. Path has the right to obtain temporary and
permanent injunctive relief to prevent any breach or
threatened breach by Rockford or its affiliates of sections 5
or 7 of this Agreement.
8.6 Termination Events. Upon expiration or termination of this
Agreement:
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(a) the parties will settle any amounts due between them
within 30 days;
(b) Path will cease to make, use, or sell the Rockford
branded Products, except that Path may continue to
sell such Products pursuant to sales orders submitted
to it by Rockford on behalf of its Dealers. Path may
make such sales only out of inventory held by Path at
the time of termination or shipped to Path as a
result of orders outstanding at the time of
termination. Rockford will in good faith assist Path
to liquidate Path's reasonable inventory of the
Products. These good faith efforts will include
Rockford's continued ordering of the Products from
Path until the reasonable inventory of each Product
is exhausted, but only to the extent Rockford has
orders from Dealers for the Products;
(c) Path will continue to honor warranty claims and
returns of Products sold by Rockford and delivered to
Rockford's Dealers and their customers; and
(d) Path will maintain inventories of service parts for
the periods required by law.
Termination or expiration will not limit or exclude any and
all other rights of the parties (including rights to recover
damages, to offset damages against any amounts due, and to
equitable relief) and will not act as an election of remedies.
9. CONFIDENTIAL INFORMATION. Rockford will maintain in confidence all
Confidential Information of Path, and Path will maintain in confidence
all Confidential Information of Rockford, on the following terms:
9.1 Definitions. In this Agreement:
(a) "Information" means information about:
(1) business or marketing plans, strategies,
concepts, and data (including costs and
pricing);
(2) research and development activities;
(3) products, product plans, technical
specifications, technology, hardware,
software, systems, and designs;
(4) trade secrets, formulas, copyrighted
materials, packaging, and Marks;
(5) manufacturing processes and methods
(including line speeds, manning requirements
and layout);
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(6) existing or potential customers, suppliers,
methods, and techniques; and
(7) other accumulated technical knowledge or
information.
(b) "Confidential Information" means Information of one
party which is disclosed to the other and is
identified as confidential when disclosed.
Confidential Information does not include Information
that
(1) is or becomes publicly known through no
wrongful act of the receiving party;
(2) is, at the time of disclosure, already known
to the receiving party;
(3) is rightfully and without breach of this
Agreement in the receiving party's
possession without any obligation
restricting use or disclosure;
(4) is independently developed by the receiving
party without breach of this Agreement or
reference in any way to Confidential
Information; or
(5) is furnished by the disclosing party to a
third party without a similar restriction on
the third party's rights.
9.2 Maintaining Confidence. Each party will retain the other's
Confidential Information in confidence and will not reproduce,
copy, or disclose Confidential Information to any third party.
Each party will exercise at least the same care to preserve
the confidentiality of Confidential Information as it uses to
preserve the confidentiality of its own information of like
importance.
9.3 Use of Confidential Information. Each party will use the
other's Confidential Information only in connection with the
manufacture and distribution of the Products. Rockford will
not use Path's Confidential Information for its own direct
benefit (other than in the sale of Products as specifically
permitted by this Agreement) or to benefit any third party
other than Path. Path will not use Rockford's Confidential
Information for its own direct benefit (other than in the
manufacture of Products as specifically permitted by this
Agreement) or to benefit any third party other than Rockford.
9.4 Rights to Disclose. Each party may disclose the other's
Confidential Information only to the extent disclosure is
either:
(a) required by law (except that, to the extent permitted
by law, each party must first give the other notice
and a reasonable time to obtain a protective order
limiting disclosure and use of the information); or
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(b) released with the other's written consent.
9.5 Return of Confidential Information. Each party will, upon the
other's request, return all the requesting party's
Confidential Information and deliver to the requesting party
all notes, memoranda, and analyses relating to or derived from
the requesting party's Confidential Information. Neither party
will keep or use for itself, or disclose to any third party,
copies of the other's Confidential Information except with the
other's written consent.
9.6 No License. No license in Confidential Information is granted
to the other party, other than to use Confidential Information
in the manner and to the extent authorized by this Agreement.
Each party will retain title and full ownership rights to all
of its Confidential Information.
10. INDEPENDENT CONTRACTOR RELATIONSHIP. Path and Rockford are independent
contractors responsible for hiring their own employees, exercising sole
and absolute discretion, judgment and control over the management and
day-to-day operations of their respective businesses, and achieving the
objectives of their businesses. This Agreement does not create a
relationship of principal and agent, franchisor and franchisee, joint
venture, partnership or employment. Neither party is liable for any
obligations incurred by the other except as expressly provided in this
Agreement. Neither party will act or represent itself, directly or by
implication, as an agent of the other with any authority other than as
set forth expressly in this Agreement.
11. NOTICES. Notices under this Agreement must be in writing and are
effective upon delivery, in person or by facsimile, or three days after
mailing, first class mail, postage prepaid and return receipt
requested, to the addresses stated on the signature page of this
Agreement (which may be changed by notice). Notices sent by facsimile
must be confirmed by mailing (in the same manner as mailed notices),
but are effective upon receipt of the facsimile transmission.
12. AMENDMENT AND WAIVER. This Agreement is the entire agreement of the
parties, and supersedes all prior agreements and undertakings with
respect to its subject matter. This Agreement may be amended only by a
written document signed by both parties. The delay or failure of a
party to exercise any rights under this Agreement, or a partial
exercise of such rights, will not constitute a waiver of such rights.
Any waiver of a right, obligation or default must be in writing and
signed by all parties. A waiver of one right, obligation or default
will not be construed as a waiver of any other or subsequent right,
obligation or default.
13. GOVERNING LAW. Arizona substantive law will govern this Agreement and
any dispute arising out of or in any way relating to this Agreement or
the parties' relationship under this Agreement.
14. JURISDICTION AND VENUE. The exclusive jurisdiction and venue for any
dispute arising out of or in any way relating to this Agreement or the
parties' relationship under this
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Agreement is in the Superior Court for Maricopa County, Arizona, or in
the Federal District Court for the District of Arizona. Each party
consents to the jurisdiction of such courts for this purpose.
15. WAIVER OF JURY TRIAL. Any dispute arising out of or in any way relating
to this Agreement or the parties' relationship under this Agreement
will be tried to the court, without a jury, and each party hereby
irrevocably waives any right to request a jury trial in connection with
such a dispute.
16. DISCLAIMER OF DAMAGES. Path and Rockford irrevocably waive and
relinquish any right to recover incidental, consequential, or punitive
damages in any dispute arising out of or in any way relating to this
Agreement or the parties' relationship under this Agreement.
17. ATTORNEYS' FEES. In any proceeding arising out of this Agreement, the
prevailing party is entitled to reasonable attorneys' fees, costs and
other expenses incurred in connection with such proceeding.
18. SEVERABILITY. If any provision of this Agreement is deemed contrary to,
prohibited by, or invalid under applicable law, or is inoperative for
any reason, that provision will be deemed modified to the extent
necessary to make it valid and operative, or if it cannot be so
modified, then severed. The remainder of this Agreement will continue
in full force and effect as if the Agreement had been signed with the
invalid provision so modified or eliminated.
19. NO THIRD PARTY BENEFICIARIES. This Agreement will not create any third
party beneficiary rights.
20. TERMINATION OF PRIOR AGREEMENTS. Rockford and Path are parties to two
existing agreements governing distribution of Products in,
respectively, Europe (for the first agreement) and the United States,
Americas, and Pacific Rim. This Agreement replaces and supercedes both
of the earlier agreements, which are terminated when this Agreement is
effective. Both parties acknowledge that this Agreement makes
significant changes in the business arrangements relating to
distribution of the Products.
21. EXECUTION AND EFFECTIVE DATE. This Agreement is executed and accepted
in Tempe, Arizona, on June 11, 1998, and is effective on July 1, 1998.
Path Group Inc., an Arizona corporation
By /s/
Its: President
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Address: Path Group Inc.
c/o Path Group PLC
Attn: Adrian Towland
Unit 2, Desborough Industrial Park
Desborough Park Road, High
Wycombe
Buckinghamshire, England
HP12 3BG
Fax:
Rockford Corporation, an Arizona corporation
By /s/ James M. Thomson
Its: Vice President Finance & CFO
Address: Rockford Corporation
Attn: Gary Suttle
546 S. Rockford Drive
Tempe, Arizona 85281
United States of America
Fax:
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EXHIBIT A
PRODUCTS
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EXHIBIT B
LICENSED ROCKFORD NAMES
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EXHIBIT C
SCHEDULE OF INVOICES AND PAYMENTS
Amount Due. Rockford will pay Path, and Path may invoice Rockford for, the
Dealer Price less:
(1) (Confidential treatment requested and redacted portions of the
document have been filed separately with the Commission.)
(2) (Confidential treatment requested and redacted portions of the
document have been filed separately with the Commission.)
(3) (Confidential treatment requested and redacted portions of the
document have been filed separately with the Commission.)
Due Date. Rockford will pay Path the amount of the invoice within 7 days after
Path submits the invoice to Rockford.
Net Payments. Rockford may net the amount due from Path to Rockford on account
of returns or for other matters against Path's invoices.
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EXHIBIT D
PRIOR AGREEMENTS
[List prior agreements superseded by this agreement]
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ROCKFORD CORPORATION
CONVERTIBLE SUBORDINATED DEBENTURE
AMENDMENT AGREEMENT
AND
AGREEMENT TO RENAME AS SENIOR NOTES
OCTOBER 28, 1994
Provident Mutual Life
Insurance Company of Philadelphia
1600 Market Street
Philadelphia, PA. 19103
Ladies and Gentlemen:
The undersigned, Rockford Corporation, an Arizona corporation
(the "Company"), hereby agrees with you as follows:
1. AMENDMENT OF DEBENTURES AND REPLACEMENT WITH SENIOR NOTE.
1.1 Sale of Debentures by the Company. The Company issued and
sold to you (or your predecessor) as of January 12, 1988, $2,000,000 of its 10%
Convertible Subordinated Debentures (the "Debentures"), which had the terms and
granted to you the rights set forth in (1) the Convertible Subordinated
Debenture Purchase Agreement dated January 12, 1988 (the "Debenture Purchase
Agreement") and (2) the form of the Debentures.
1.2 Agreement to Amend. Subject to the terms and conditions of
this Agreement, and on the basis of the representations and warranties set forth
herein, you have agreed with the Company to amend the Debentures by renaming
them as Senior Notes (the "Senior Notes"), in principal amount equal to the
Debentures, bearing interest at the same rate as the Debentures, maturing at the
same time as the Debentures, and with amended terms as set forth in this
Agreement. The amendment is intended to effect the following substantive changes
to the Debentures:
(a) Renaming to Senior Notes. The Debentures
shall be renamed as "Senior Notes" in principal amount equal to the Debentures,
bearing interest at the same rate as the Debentures, maturing at the same time
as the Debentures, in the form of Exhibit A to this Agreement, and with amended
terms as set forth in this Agreement and in Exhibit A. The right of holders of
the Debentures to convert the Debentures into the Company's common stock shall
terminate and the Senior Notes shall not be convertible into other securities of
the Company.
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(b) Delivery of Warrants. Upon renaming of the
Debentures as Senior Notes and termination of the conversion rights, the Company
shall deliver to each holder of the Senior Notes warrants (the "Warrants"),
detachable at any time at the election of the holder, which shall entitle the
holder to purchase shares of Company's Common Stock. The Warrants (1) shall be
in the form of Exhibit B to this Agreement; (2) shall require payment of $6.50
per share in cash upon exercise (subject to adjustment as set forth in the
Warrants); (3) shall expire if not exercised before the close of business on
February 3, 2000; and (4) shall be exercisable to purchase 167,400 shares, a
number of shares equal to the number of shares into which the Debentures could
have been converted on the date when they are renamed as Senior Notes and
amended.
The Warrants shall be treated for all purposes as if they had been issued when
the Debentures were issued and shall represent the same right to acquire shares
of common stock as were established in the Debentures. The intended substantive
effect of the renaming of the Debentures as Senior Notes, the amendment of the
Senior Notes, and the delivery of the Warrants is (i) to separate the right to
purchase the Company's common shares, currently attached to the Debentures, into
a security that may be separately held, (ii) to extend the period to exercise
the Warrants from the maturity date of the Debentures to February 3, 2000, and
(iii) to reduce the price of the common shares issuable upon exercise of the
Warrants from $11.9474 per share to $6.50 per share.
(a) Replacement of Covenants. The
representations and warranties, affirmative covenants, and other matters set
forth in the original Debenture Purchase Agreement shall be replaced by the
corresponding representations and warranties, affirmative covenants, and other
matters set forth in this Agreement. The new financial covenants are
substantially the same as the covenants established in the revolving credit
facility entered into between the Company and Norwest Business Credit, Inc.
("NBCI") as of May 1994. This replacement will allow the Company to operate on
financial covenants consistent with the Company's financial projections and will
supersede the existing debt covenants with which the Company is currently unable
to comply.
1.3 Closing of Amendment.
(a) Offer to Holders. In order to accept the
Amendment, you must deliver this Agreement, duly executed by you, to Company
along with the original Debenture held by you.
(b) Closing Date. The closing of this Agreement
(the "Closing") shall take place on the date when Company has received this
Agreement executed by you, the Debentures or such other hour and date as you and
the Company shall agree in writing (the "Closing Date"). On or as soon as
possible after the Closing Date, the Company shall deliver to you (i) a Senior
Note registered in your name in principal amount equal to the principal amount
of the Debenture surrendered and (ii) a Warrant exercisable for the
corresponding number of shares.
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(c) Effect of Closing. As of the Closing Date,
the Debentures held by you shall be renamed for all purposes as the Senior
Notes, the Debentures and Debenture Purchase Agreement shall have no further
force or effect and shall be replaced, superseded, and amended in their entirety
by this Agreement, the Senior Notes, and the Warrants.
2. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to you as follows:
2.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Arizona.
The Company has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now conducted and as
proposed to be conducted. On the Closing Date the Company will be duly qualified
or authorized to do business and in good standing in each jurisdiction where the
character of the property owned or leased or the nature of the business
transacted makes such qualification or authorization necessary.
2.2 Capitalization. The authorized and outstanding capital
stock of the Company, and the options, warrants, agreements or similar rights
granted by the Company for the issue or sale by it of any securities, is as set
forth on Exhibit C. All of the issued and outstanding shares of the Common Stock
of the Company have been duly authorized and are validly issued, fully paid and
nonassessable. The Company has reserved 167,400 shares of its Common Stock for
issuance upon exercise of the Warrants. All outstanding shares of the Common
Stock of the Company were issued in compliance with all applicable Federal and
state securities or "blue sky" laws. There are in existence or contemplated no
options, warrants, agreements or similar rights granted by the Company for the
issue or sale by it of any securities, other than the transactions contemplated
by this Agreement and the transactions disclosed in Exhibit C.
2.3 Financial Position. The Company's Balance Sheets as at
September 30, 1993 and Statements of Income and Retained Earnings and of changes
in Financial Position for its fiscal year then ended, as audited by Ernst &
Young and as set forth in Exhibit D, are true and correct in all material
respects as at such dates and for the periods then ended.
2.4 Duly Issued. The shares of the Common Stock issuable upon
exercise of the Warrants, upon such exercise and upon payment of the Warrant
Price provided therein, will be validly issued, fully paid and nonassessable.
2.5 Authorization. This Agreement has been duly authorized,
executed and delivered by and on behalf of the Company, and constitutes the
valid and binding agreement of the Company, enforceable in accordance with its
terms. The Company has full power and lawful authority (1) to amend the
Debentures and rename them as the Senior Notes, (2) to deliver the Warrants on
the terms and conditions set forth in this Agreement, and (3) to issue the
Common Stock issuable upon exercise of the Warrants.
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2.6 Compliance with Laws. The Company is in compliance with
all laws, regulations and orders applicable to its business and properties, and
has all necessary permits and licenses.
2.7 Governmental Consents. Neither the execution and delivery
of this Agreement, nor the performance of the terms or consummation of the
transactions contemplated by the Company under this Agreement require any
consent, approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body, or any filings pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), or the securities
laws of any state other than those obtained prior to and effective as of the
Closing Date. Neither the Company nor any agent acting on its behalf has
offered, or will offer, to sell (or has solicited or will solicit any offer to
buy) the Debentures, the Senior Notes, the Warrants, or any shares of the Common
Stock of the Company issuable upon the exercise of the Warrants, so as to
require the registration of any of such securities under the Securities Act
other than as contemplated by Article 4 of this Agreement. Based in part on your
representations which are set forth in Article 3 of this Agreement, the offer,
sale and issuance of the Debentures pursuant to the Debenture Purchase
Agreement, the renaming of the Debentures as Senior Notes and amendment of the
Senior Notes, the delivery of the Warrants, and the offer, sale and issuance of
shares of the Common Stock to be issued upon exercise of the Warrants are exempt
from the registration requirements of the Securities Act.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
3.1 Investment Representation. You represent and warrant, and
in making the original sale to you of the Debentures, the renaming of the
Debentures as Senior Notes and amendment of the Senior Notes, and the delivery
to you of the Warrants it is specifically understood and agreed, that you
acquired the Debentures, that you agreed to the renaming and amendment of the
Senior Notes, that you are accepting the Warrants, and that you will (if you
choose to exercise the Warrants) acquire the shares of the Common Stock issuable
upon the exercise of the Warrants, for your own account and not with a view to
or for sale in connection with any distribution, and that you have no present
intention of distributing any of the same.
3.2 Stock Not Registered. You represent and acknowledge that
neither the Debentures, the Senior Notes, the Warrants, nor the shares of the
Common Stock issuable upon exercise of the Warrants have been registered under
the Securities Act or applicable state securities laws on the ground that the
original sale of the Debentures and the amendment, renaming, and delivery
provided for in this Agreement were and are exempt from registration under the
Securities Act. You acknowledge that the Company's reliance on such exemption is
predicated on your representations. You understand that the Senior Notes,
Warrants, and shares of Common Stock must be held indefinitely unless the offer
and sale are registered under the Securities Act and applicable state securities
laws or an exemption from registration is available. In particular, you are
aware that the Senior Note and Warrants, and any Common Stock issued on exercise
of the Warrants, may not be sold pursuant to Rule 144 promulgated under the
Securities Act unless all of the conditions of such rule are met. Among the
conditions for use of Rule 144 is the availability to the public of current
information about the Company. Such information is not now available and the
Company has no present plans to make such
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information available. You represent that, in the absence of an effective
registration statement covering the Senior Notes, Warrants, or any Common Stock
issued on exercise of the Warrants, you will sell, transfer, or otherwise
dispose of the Senior Notes, Warrants, or any Common Stock issued on exercise of
the Warrants, only in a manner consistent with your representations and then
only in accordance with the provisions of Section 4.1 of this Agreement. You
further represent and acknowledge that any certificate representing the Senior
Notes, Warrants, or the shares of the Common Stock issuable upon exercise of the
Warrants, will bear the legend set forth in Section 4.2 and that the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
with respect to such shares or make appropriate notations to such effect in its
own stock transfer records. You further represent and acknowledge that any
certificate representing the Senior Notes, Warrants, or the shares of the Common
Stock issuable upon exercise of the Warrants, may bear any legends required by
applicable state securities laws.
3.3 Investment Experience Etc. You represent that you (1) have
such knowledge and experience in financial and business matters that you are
capable of evaluating the merits and risks of the purchase of the Debentures, of
their renaming as Senior Notes and amendment, and of the acceptance of the
Warrants, (2) have a net worth significantly in excess of the amount of your
investment in the Debentures and are able to bear the economic risk of the
purchase of the Debentures and of the holding of the Senior Notes and Warrants,
(3) have had access to information with respect to the Company necessary to
permit you to make an informed investment decision, and (4) are an "accredited
investor" as that term is defined in paragraph (a) of Rule 501 of Regulation D
promulgated under the Securities Act.
3.4 Organization Etc. You represent and warrant to the Company
that, on the date hereof and on the Closing Date, (1) if you are a corporation,
you are duly organized and validly existing under the laws of your state of
incorporation, you are and will be in good standing under such laws and you have
the requisite corporate power and authority to enter into this Agreement, (2) if
you are a general or limited partnership, you are and will be a general or
limited partnership duly organized and validly existing under the laws of your
state of formation, and you are and will be in good standing under such laws,
and you have and will have all requisite partnership power and authority to
enter into this Agreement, (3) this Agreement has been duly authorized, executed
and delivered by you to the Company, and (4) upon execution and delivery by the
Company, this Agreement constitutes your valid and binding agreement,
enforceable in accordance with its terms.
4. SECURITIES ACT AND RELATED MATTERS.
4.1 Transfer Restrictions. You agree that you will not offer
for sale, sell or transfer all or any part of the Senior Notes or Warrants, or
the shares of the Common Stock or other securities issuable upon exercise of the
Warrants, unless and until (1) the sale of such securities is registered under
the Securities Act and all other qualifications and proceedings under other
state or federal laws or regulations required in connection with such sale or
transfer have been obtained or taken or (2) such securities are sold or
transferred in accordance with an available exemption from registration or
qualification under the Securities Act and any applicable state securities or
"blue sky" laws and the Company has received an opinion of
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counsel, which opinion and counsel shall each be reasonably satisfactory to the
Company, that registration is not required.
4.2 Legend on Certificate. Each certificate representing the
Senior Notes or Warrants, or any shares of the Common Stock or other securities
issued upon exercise of the Warrants, shall (unless in the opinion of counsel,
which opinion and counsel shall each be reasonably satisfactory to the Company,
the same is not necessary) bear a legend in substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAW OF ANY STATE. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
EFFECTIVE REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT REQUIRED."
Each certificate shall also bear any legends required by applicable state
securities laws. As used herein, "Restricted Security" means the Senior Notes
and Warrants, and shares of the Common Stock or other securities issued upon
exercise of the Warrants, and "Restricted Stock" means shares of Common Stock
issued upon exercise of the Warrants.
4.3 Registration Proposed by Company. If the Company proposes
to register any of its securities under the Securities Act (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 under the Securities Act is applicable or a
registration using any form that does not permit secondary sales of securities)
it will give written notice to every holder of Warrants or Restricted Stock of
its intention to do so. Upon written request of any such holders delivered to
the Company within 30 days after receipt of such written notice (which request
shall state the number of shares of Restricted Stock to be registered and the
intended method of disposition) the Company will use its best efforts in
connection with such registrations of securities to be sold for the Company's
account, at its own expense to the extent provided in Section 4.5, to register
under the Securities Act all shares of Restricted Stock requested to be
registered by holders, all to the extent required to permit disposition in
accordance with the intended method. If such registration relates to an
underwritten public offering by the Company, only shares of Restricted Stock
which the requesting holders agree to include in the underwriting may be
included in the registration and, if the sole or managing underwriter of the
offering determines that the aggregate number of shares of Restricted Stock
requested to be included in the registration should be limited to a lesser
number due to market conditions or the necessity of including in such
underwriting and registration shares to be sold for the account of the Company,
then each holder who has requested that shares of Restricted Stock be included
in such underwriting and registration may sell only a pro rata portion of shares
of Restricted Stock.
4.4 Registration Requested by Purchasers. Upon written request
of the holder or holders of 50% of the Warrants then outstanding (or any
combination of the Warrants and of
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Common Stock issued upon exercise of the Warrants which together, prior to such
conversion, would have constituted 50% of the Warrants) made at any time (a)
prior to the giving of written notice by the Company of its intention to
register any of its securities under the provisions of Section 4.3, which
registration becomes effective within six months following the giving of such
notice, and (b) after the later of (x) January 12, 1990 or (y) 12 months from
the effective date of any prior registration statement covering shares of the
Company's Common Stock, which request demands that the Company file a
registration statement under the Securities Act covering the registration of
Restricted Stock, the expected price to the public of which equals or exceeds
$7,500,000, then the Company will upon one occasion (l) promptly give written
notice of such proposed registration to every other holder of Restricted
Securities and (2) as expeditiously as possible and in any event within 90 days,
use its best efforts, at its own expense to the extent provided in Section 4.5,
to effect registration under the Securities Act of
(a) the sale of the Restricted Stock which the
Company has been requested to register pursuant to the written
request referred to above, and
(b) all other Restricted Stock the holders of which
shall make written request for registration to the Company,
such written request to be delivered to the Company within 30
days after the giving of the above written notice by the
Company,
all to the extent required to permit the disposition by the holders of the
securities so registered. The Company agrees that in-connection with effecting
any registration it will execute any required undertakings to file
post-effective amendments. The Company shall have no further obligations under
this Section 4.4 with respect to any subsequent registrations (1) after one
registration filed pursuant to any holder's request under this Section 4.4 (in
addition to any postponed registration as described below in this Section 4.4)
covering shares of Restricted Stock has become effective or (2) after you and
your permitted transferees hold, in the aggregate, an amount of the Warrants or
securities issued upon exercise of the Warrants, which constitute less than 10%
of the Warrants initially issued and sold pursuant to this Agreement.
Notwithstanding the foregoing if, within ten days following the receipt of the
request referred to in the first sentence of this Section 4.4, the Company shall
furnish to the requesting holder or holders a certificate stating that the
Company has determined to file within 60 days thereafter a registration
statement pertaining to an underwritten public offering of securities for the
account of the Company, then the Company shall not be obligated to effect a
registration pursuant to this Section 4.4 for a period of six months from the
date of such certificate, provided that the Company shall actively employ in
good faith all reasonable efforts to cause the registration statement for the
underwritten public offering to become effective as soon as reasonably
practicable. The Company shall not be entitled to delay the exercise of the
rights of the holders under this Section 4.4 by invoking the provisions of the
preceding sentence on more than one occasion.
4.5 Costs and Expenses. All costs and expenses in connection
with the registration of securities under Sections 4.3 and 4.4, including
Federal and state registration and filing fees, printing expenses (including the
number of preliminary and final prospectuses, post-effective amendments, and
supplements reasonably requested by the holders of Restricted
- 7 -
<PAGE> 8
Stock), and the fees and disbursements of counsel and of independent accountants
and other experts of the Company, shall be borne by the Company; provided,
however, that the Company shall not be obligated to pay underwriter's discounts
and commissions and fees and disbursements of counsel for the holders of
Restricted Stock. The Company will use its best efforts to keep effective any
registration for the period reasonably necessary to effect disposition in
accordance with the intended methods described in the requests for registration,
but if the Company is requested or required to maintain the registration
effective for more than six months, all out-of-pocket expenses of the Company
incurred in maintaining effectiveness after the initial six-month period shall
be borne by the holders of securities who have requested that effectiveness be
maintained in order to continue with the distribution, in such proportions as
they may agree upon.
4.6 Information. The holders of Restricted Stock covered by a
registration statement as provided in Sections 4.3 or 4.4 shall furnish in
writing to the Company such information regarding them, any Restricted Security
held by them, and the intended method of disposition of the Restricted Stock as
the Company shall reasonably request and as shall be required in connection with
the actions to be taken by the Company pursuant to Sections 4.3 or 4.4.
4.7 Blue Sky Registrations. In the case of any registration
under this Article 4 of any shares of Restricted Stock, the Company will use its
best efforts concurrently to register or qualify the same for sale under the
securities laws of those states in which registration or qualification is
required, except that the Company shall not be required to execute a general
consent to service or to qualify to do business in any state.
4.8 Lockup Agreement. In consideration for the Company
agreeing to its obligations under this Article 4, each holder of Restricted
Securities agrees that, in connection with any registration of the Company's
securities, upon the request of the underwriter(s) managing any underwritten
offering of the Company's securities, such holders shall execute an agreement
not to sell, make any short sale of, loan, grant any option for the purchase of,
or otherwise dispose of any Restricted Stock, other than shares included in the
registration, without the prior written consent of the underwriter(s) for the
period of time (not to exceed 90 days) from the effective date of the
registration as the underwriter(s) may specify.
4.9 Transferability. Provided that the requirements of Section
4.1 have been satisfied with respect to the sale or transfer of a Restricted
Security, any transferee shall be entitled to the rights and benefits of, and
shall be subject to the requirements of, Sections 4.2 through 4.8.
5. COMPANY'S AFFIRMATIVE COVENANTS. The Company shall comply with the
following requirements unless holders of not less than 50% in principal amount
of the Senior Notes then outstanding agree otherwise in writing. These
requirements shall terminate upon the earlier of (1) the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offering and sale of Common Stock, or any
security convertible into Common Stock, (other than a registration under which
more than 25% of Restricted Stock is not registered) or (2) the date when less
than 25% of the Senior Notes
- 8 -
<PAGE> 9
initially issued and sold under the Debenture Purchase Agreement and this
Agreement are held by the original holders of the Debentures or their permitted
transferees.
5.1 Reporting Requirements. The Company will deliver, or cause
to be delivered, to you each of the following:
(1) As soon as available, and in any event within 90 days
after the end of each fiscal year of the Company, audited financial statements
of the Company with the unqualified opinion of independent certified public
accountants selected by the Company, which annual financial statements shall
include the balance sheet of the Company as at the end of such fiscal year and
the related statements of income, retained earnings and cash flows of the
Company for the fiscal year then ended, all in reasonable detail and prepared in
accordance with generally accepted accounting principles consistently applied,
together with a certificate of the chief financial officer of the Company
stating (i) that such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied, (ii) whether such
officer has knowledge of the occurrence of any default hereunder and, if so,
stating in reasonable detail the facts with respect thereto, and (iii) all
relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Company is in compliance with the financial covenants set
forth in this Agreement;
(2) As soon as available and in any event within 60 days after
the end of each quarter, an unaudited balance sheet and statements of income and
retained earnings of the Company as at the end of and for such quarter and for
the year to date period then ended, in reasonable detail and stating in
comparative form the figures for the corresponding date and periods in the
previous year, all prepared in accordance with generally accepted accounting
principles consistently applied, subject to year-end audit adjustments and
together with a certificate of the chief financial officer of the Company
stating (i) that such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied, (ii) whether such
officer has knowledge of the occurrence of any default hereunder and, if so,
stating in reasonable detail the facts with respect thereto, and (iii) all
relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Company is in compliance with the financial covenants set
forth in this Agreement;
(3) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Company shall have sent to
its stockholders;
(4) promptly after the sending or filing thereof, copies of
all regular and periodic financial reports which the Company shall file with the
Securities and Exchange Commission or any national securities exchange;
(5) promptly upon knowledge thereof, notice of the violation
by the Company of any law, rule or regulation, the non-compliance with which
could materially and adversely affect its business or its financial condition;
and
(6) from time to time, with reasonable promptness, any and all
other materials, reports, records or information with respect to Company's
financial condition, operations, and affairs as you may request.
- 9 -
<PAGE> 10
5.2 Books and Records; Inspection and Examination. The Company
will keep accurate books, records and accounts pertaining to the Company's
business and financial condition and such other matters as you may from time to
time request in which true and complete entries will be made in accordance with
generally accepted accounting principles consistently applied and, upon your
request, will permit you or your officer, employee, attorney or accountant to
audit, review, make extracts from or copy any and all corporate and financial
books and records of the Company at all times during ordinary business hours and
to discuss the affairs of the Company with any of its directors, officers,
employees or agents.
5.3 Compliance with Laws; Environmental Indemnity. The Company
will (a) comply with the requirements of applicable laws and regulations, the
non-compliance with which would materially and adversely affect its business or
its financial condition and (b) comply with all applicable Environmental Laws
and obtain any permits, licenses or similar approvals required by any such
Environmental Laws. The Company will indemnify, defend and hold you harmless
from and against any claims, loss or damage to which you may be subjected as a
result of any past, present or future existence, use, handling, storage,
transportation or disposal of any hazardous waste or substance or toxic
substance by the Company or on property owned, leased or controlled by the
Company. This indemnification agreement shall survive the termination of this
Agreement and payment of the indebtedness hereunder.
5.4 Payment of Taxes and Other Claims. The Company will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it, prior to the date on which penalties attach thereto, (b) all federal,
state and local taxes required to be withheld by it, and (c) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
or charge upon any properties of the Company; provided, that the Company shall
not be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.
5.5 Maintenance of Properties. The Company will keep and
maintain its properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided, however,
that nothing in this section shall prevent the Company from discontinuing the
operation and maintenance of any of its properties if such discontinuance is in
its judgment desirable in the conduct of the Company's business.
5.6 Insurance. The Company will obtain and at all times
maintain insurance with insurers believed by the Company to be responsible and
reputable, in such amounts and against such risks as is usually carried by
companies engaged in similar business and owning similar properties in the same
general areas in which the Company operates.
5.7 Preservation of Corporate Existence. The Company will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
- 10 -
<PAGE> 11
5.8 Book Net Worth. The Company shall maintain on the last day
of each quarter occurring in each of the periods set forth below, the Book Net
Worth (as that term is defined in the Company's credit agreement with NBCI dated
May 3, 1994) which is greater than or equal to the amount set forth opposite
such period:
<TABLE>
<CAPTION>
PERIOD BOOK NET WORTH
------ --------------
<S> <C>
Date hereof to and including June 29, 1994 ($4,232,000)
June 30, 1994 to and including September 29, 1994 ($3,300,000)
September 30, 1994 to and including December 30, 1994 ($2,850,000)
December 31, 1994 to and including March 30, 1995 ($3,100,000)
March 31, 1995 to and including June 29, 1995 ($2,650,000)
June 30, 1995 to and including September 29, 1995 ($1,000,000)
September 30, 1995 to and including December 30, 1995 ($ 800,000)
December 31, 1995 to and including March 30, 1996 ($ 900,000)
March 31, 1996 to and including June 29, 1996 ($ 400,000)
June 30, 1996 to and including September 29, 1996 $1,000,000
September 30, 1996 and thereafter $1,600,000
</TABLE>
5.9 Earnings Before Interest and Taxes. The Company shall
maintain on each date set forth below operating income determined in accordance
with generally accepted accounting principles but before any deduction for
interest expenses and income taxes and calculated for all dates prior to
September 30, 1994 on a fiscal year to date basis, and thereafter, for the
twelve months ending on such date, which is greater than or equal to the amount
set forth opposite such date:
<TABLE>
<CAPTION>
DATE EBIT
---- ----
<S> <C>
June 30, 1994 $ 700,000
September 30, 1994 $2,500,000
December 31, 1994 $3,400,000
March 31, 1995 $3,500,000
June 30, 1995 $3,600,000
September 30, 1995 $3,800,000
December 31, 1995 $3,800,000
March 31, 1996 $4,000,000
June 30, 1996 $4,300,000
September 30, 1996 and each fiscal quarter
end thereafter $4,300,000
</TABLE>
5.10 Interest Coverage. The Company shall maintain on each
date set forth below, the ratio of (i) the sum of its pre-tax net income, to
(ii) interest expense, in each case determined in accordance with generally
accepted accounting principles, and calculated for all dates prior to September
30, 1994 on a fiscal year to date basis, and thereafter, for the twelve
- 11 -
<PAGE> 12
months ending on such date, which is greater than or equal to the ratio set
forth opposite such date:
<TABLE>
<CAPTION>
DATE RATIO
---- -----
<S> <C>
June 30, 1994 1.65 to 1
September 30, 1994 2.00 to 1
December 31, 1994 2.00 to 1
March 31, 1995 2.00 to 1
June 30, 1995 2.00 to 1
September 30, 1995 2.00 to 1
December 31, 1995 2.00 to 1
March 31, 1996 2.00 to 1
June 30, 1996 2.00 to 1
September 30, 1996 and each fiscal quarter
end thereafter 2.00 to 1
</TABLE>
5.11 Minimum Debt Service Coverage. The Company shall maintain
on each date set forth below, the ratio of (i) the sum of its after-tax net
income, depreciation and amortization expense and interest expense, to (ii) the
sum of its interest, capital expenditures and current maturities of long term
debt (excluding as long term debt, the indebtedness of the Company to NBCI
incurred pursuant to the credit agreement between Company and NBCI, or any
replacement of such indebtedness), in each case determined in accordance with
generally accepted accounting principles, and calculated for all dates prior to
September 30, 1994 on a fiscal year to date basis, and thereafter, for the
twelve months ending on such date, which is greater than or equal to the ratio
set forth opposite such date:
<TABLE>
<CAPTION>
DATE RATIO
---- -----
<S> <C>
June 30, 1994 1.20 to 1
September 30, 1994 1.25 to 1
December 31, 1994 1.50 to 1
March 31, 1995 1.50 to 1
June 30, 1995 1.50 to 1
September 30, 1995 1.50 to 1
December 31, 1995 1.50 to 1
March 31, 1996 1.50 to 1
June 30, 1996 1.50 to 1
September 30, 1996 and each fiscal quarter
end thereafter 1.50 to 1
</TABLE>
6. COMPANY'S NEGATIVE COVENANTS. The Company shall comply with the
following requirements unless holders of not less than 50% in principal amount
of the Senior Notes then outstanding agree otherwise in writing. These
requirements shall terminate upon the earlier of (1) the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offering and sale of Common Stock, or any
- 12 -
<PAGE> 13
security convertible into Common Stock, (other than a registration under which
more than 25% of Restricted Stock is not registered) or (2) the date when less
than 25% of the Senior Notes initially issued and sold under the Debenture
Purchase Agreement and this Agreement are held by the original holders of the
Debentures or their permitted transferees.
6.1 Dividends and Stock Repurchases. The Company will not
declare or pay any dividends (other than dividends payable solely in stock of
the Company) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly; provided,
however, that if the Company is an S Corporation within the meaning of the
Internal Revenue Code of 1986, as amended, or shall become such an S Corporation
with your consent, and after first providing such supporting documentation as
you may request, the Company may pay dividends in an amount equal to the amount
of state and federal income tax which would be due by each shareholder with
respect to income deemed to be received by each shareholder from the Company as
a result of the Company's status as an S Corporation at the highest marginal
income tax rate for federal and state (for the state or states in which each
shareholder is liable for income taxes with respect to such income) income tax
purposes, after taking into account any deduction for state income taxes in
calculating the federal income tax liability.
6.2 Sale of Transfer of Assets; Suspension of Business
Operations. The Company will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary or (ii) all or a substantial part of
its assets to any other Person other than the sale of Inventory in the ordinary
course of business and will not liquidate, dissolve or suspend business
operations. The Company will not in any manner transfer any property without
prior or present receipt of full and adequate consideration.
6.3 Accounting. The Company will not adopt any material change
in accounting principles other than as required by generally accepted accounting
principles. The Company will not adopt, permit or consent to any change in its
fiscal year.
6.4 Change in Ownership. Company will not issue or sell any
stock of the Company or permit or suffer to occur the sale, transfer,
assignment, pledge or other disposition of any shares of stock of the Company if
immediately thereafter Caroline S. Bartol or her lineal descendants are not
beneficial owners of at least 51% of the outstanding capital stock of the
Company.
7. CONDITIONS OF COMPANY'S OBLIGATION. The obligation of the Company to
effect this Agreement at the Closing is subject to the satisfaction, prior to or
at the Closing, of the condition that the representations and warranties
contained in Article 3 of this Agreement shall be correct when made and as of
the time of the Closing.
8. CONDITIONS OF YOUR OBLIGATION. Your obligation to effect this
Agreement at the Closing is subject to the satisfaction, prior to or at the
Closing, of the following conditions:
- 13 -
<PAGE> 14
8.1 Representations and Warranties Correct. The
representations and warranties contained in Article 2 of this Agreement shall be
correct when made and at and as of the time of the Closing.
8.2 Performance. The Company shall have performed and complied
with all agreements and conditions contained in this Agreement and required to
be performed or complied with by it prior to or at the Closing.
9. MISCELLANEOUS.
9.1 Expenses. The parties will each pay all of their own
expenses incurred by them in connection with this Agreement.
9.2 Survival of Representations and Warranties. All covenants,
agreements, representations and warranties made in or otherwise in writing in
connection with this Agreement shall survive the execution and delivery of this
Agreement and the issuance and delivery of the Senior Notes and Warrants.
9.3 Binding Effect Etc. All covenants, agreements,
representations and warranties contained in this Agreement shall bind and inure
to the benefit of the respective heirs, legal representatives, successors and
assigns of the parties. The rights of any transferee of a Restricted Security,
however, are subject to compliance with Section 4.1.
9.4 Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered or
five days after deposit in the United States mail, first class postage prepaid,
addressed as set forth below:
(1) If to the Company:
648 South River Drive
Tempe, Arizona 85281
Attention: President
with a copy to:
Lewis and Roca
40 North Central Avenue, Suite 1500
Phoenix, Arizona 85004
Attention: Kevin Olson, Esq.
- 14 -
<PAGE> 15
(2) If to the Holder:
Provident Mutual Life Insurance Company of Philadelphia
1600 Market Street
Philadelphia, Pennsylvania 19103
Attention: _________________________
Any party may alter the person, officer or address to which
communications or copies are to be sent to it by giving notice.
9.5 Amendments and Waivers. Neither this Agreement nor any of
its terms may be changed, waived, discharged or terminated except in a writing
signed by all parties.
9.6 Controlling Law. This Agreement is being executed and
delivered, and the Senior Notes and Warrants are being delivered, in the State
of Arizona and shall be construed in accordance with and governed by the laws of
such state.
9.7 Counterparts. This Agreement may be executed in several
counterparts and each counterpart, when so executed and delivered and whether or
not each counterpart is executed by all the parties, shall constitute an
original instrument, but all such separate counterparts shall together
constitute this Agreement and be parts of the same instrument.
If you are in agreement with the foregoing, please sign the
form of acceptance appearing at the foot of the enclosed counterpart of this
Agreement and return the same to the Company, whereupon it will become a binding
agreement between you and the undersigned.
Yours very truly,
ROCKFORD CORPORATION
By: /s/ W. Gary Suttle
------------------------
President
Attest /s/James M. Thomson
------------------------
Secretary
- 15 -
<PAGE> 16
The foregoing agreement is accepted as of the date first above
written.
PROVIDENT MUTUAL LIFE INSURANCE COMPANY OF PHILADELPHIA
By: /s/
------------------------------
Title: /s/
------------------------------
Attest /s/
------------------------------
Title: /s/
------------------------------
- 16 -
<PAGE> 17
EXHIBIT A
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAW OF ANY
STATE. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF EFFECTIVE
REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT
REQUIRED."
ROCKFORD CORPORATION
SENIOR NOTE
DUE FEBRUARY 3, 1999
(RENAMING, AMENDING, AND REPLACING
A 10.5% CONVERTIBLE SUBORDINATED DEBENTURE
DUE FEBRUARY 3, 1999)
$1,000.00 October 28, 1994
This is a Senior Note due February 3, 1999 (the "Senior
Note"), issued by Rockford Corporation, an Arizona Corporation (the "Company")
pursuant to the terms of the Convertible Subordinated Debenture Amendment
Agreement and Agreement to Rename as Senior Note of even date herewith between
the Company and the original Holder hereof (the "Agreement"). Terms used and not
otherwise defined shall have the meaning given them in the Agreement.
1. Payment of Principal and Interest.
The Company, for value received, promises to pay to Ron Trout
or transferee (the "Holder") the principal amount of $1,000.00 on February 3,
1999 and to pay interest thereon at the rate of ten and one-half percent (10.5%)
per annum. Interest shall accrue from the date hereof and shall be paid
quarterly, on each January 15th, April 15th, July 15th, and October 15th
hereafter but commencing on April 15, 1989, until the principal is fully paid.
Interest shall be paid on the basis of a 360-day year of twelve 30-day months.
2. Payment Prior to Maturity.
At any time the Company may, at its option, redeem this Senior
Note in whole or in part by paying all interest accrued but unpaid to the date
fixed for redemption plus a redemption price fixed as follows:
- 1 -
<PAGE> 18
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
Before February 2, 1995 105% of Par
February 3, 1995 to February 2, 1996 104% of Par
February 3, 1996 to February 2, 1997 103% of Par
February 3, 1997 to February 2, 1998 102% of Par
February 3, 1998 to February 2, 1999 101% of par
</TABLE>
Notice of any redemption shall be given not less than thirty (30) days, but not
more than ninety (90) days, before the date fixed for redemption. By the date
fixed for redemption, the Holder shall surrender this Senior Note to the Company
at its principal executive offices in exchange for payment therefor. Upon due
tender of the accrued interest through the redemption date plus the redemption
price by the Company, this Senior Note shall not be deemed to be outstanding for
any purpose subsequent to the close of business on the date fixed for
redemption.
3. Subordination and Priority.
The indebtedness evidenced by this Senior Note, including the
principal and accrued interest, is expressly subordinate and subject in right of
payment and upon liquidation to the prior payment in full of all "Senior Debt,"
whether now outstanding or hereafter created, incurred, assumed or guaranteed.
The term "Senior Debt" shall mean the principal of, premium, if any, and
interest on (a) indebtedness (other than this Senior Note or any previously
subordinated indebtedness) of the Company pursuant to the Company's present
credit arrangements with Norwest Business Credit, Inc. ("NBCI") and Bank of
America Arizona ("BofA"), or pursuant to any refinancing or renewal of such
credit arrangements, (b) indebtedness of the Company which holders of not less
than 50% in principal amount of the Senior Notes agree, in writing, shall be
treated as Senior Debt, and (c) indebtedness incurred, assumed or guaranteed by
the Company in connection with the acquisition by it of any property or asset,
in an amount up to the cost of such property or asset, unless, in each case, by
the terms of the instrument creating or evidencing the indebtedness it is
expressly provided that such indebtedness is not superior in right of payment to
this Senior Note.
Senior Debt shall exclude, and the indebtedness evidenced by
this Senior Note is expressly senior and entitled to priority in payment and
upon liquidation with respect to, all capital stock of the Company, any
indebtedness issued after the date of this Debenture and convertible into shares
of the Company's Common Stock, and any other indebtedness that is not Senior
Debt. Senior Debt shall exclude, and the indebtedness evidenced by this Senior
Note is expressly of equal priority in payment and upon liquidation with respect
to, (1) indebtedness outstanding on the original issue date of this Senior Note
and convertible into shares of the Company's Common Stock and (2) a $2,000,000
Senior Note of Company issued to Provident Mutual Life Insurance Company of
Philadelphia.
- 2 -
<PAGE> 19
4. Events of Default.
An Event of Default shall occur upon the occurrence of any of
the following events:
Default in the payment of interest on this Senior Note when it
becomes due and payable, and continuance of such default for a period of ten
(10) days;
Default in the payment of the principal of this Senior Note
when it becomes due and payable;
Default by the Company under an acceleration prior to maturity
of, or the failure to pay at maturity, any third party indebtedness of the
Company aggregating not less than $250,000 for a period of thirty (30) days
after the same may become payable (which shall include any grace period but
shall not exceed 30 days);
The failure of the Company to comply for a period of not less
than thirty (30) consecutive days with any provision of the affirmative or
negative covenants contained in the Agreement;
The failure of the Company to pay final judgments not covered
by insurance or then subject to any appeal aggregating in excess of $250,000 for
thirty (30) days;
The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of or in
respect of the Company under the Federal Bankruptcy Act or any other applicable
Federal or State law, or appointing a receiver, liquidator, assignee, trustee,
or other similar official of the Company or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
thirty (30) consecutive days; or
The institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under Federal or
State law, or the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee or other similar
official of the Company or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Company in furtherance of any such action.
5. Rights Upon Default; Acceleration of Indebtedness. Upon the
occurrence of an Event of Default:
The entire outstanding balance of the Senior Note, including
the entire balance of principal and all accrued interest, shall accelerate and
become immediately due and payable upon written notice to the Company by Holders
of not less than 50% in principal amount of the Senior Notes then outstanding;
and
- 3 -
<PAGE> 20
The Company may not pay dividends or make distributions to
holders of any class of its stock, or redeem or repurchase all or any part of
any class of its stock.
6. Renaming and Replacement of Debenture.
This Senior Note is issued, pursuant to the terms of the
Agreement, to rename and amend the terms of a Debenture issued by the Company
and held by the Holder. This Senior Note shall supersede, replace and amend the
Debenture which shall, upon issuance of this Senior Note, have no further force
or effect.
7. Loss or Destruction of Senior Note.
The Company shall execute and deliver a new Senior Note of
like tenor and date upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Senior Note and, in the
case of loss, theft or destruction, of an indemnity by the original Holder
hereof or in case of any transfer upon such terms as may be satisfactory to the
Company, or, in the case of mutilation, upon surrender and cancellation of this
Senior Note.
8. Status Under Securities Laws.
No Registration. This Senior Note has not been and will not
be, registered under the Securities Act of 1933 (the "1933 Act"), the Arizona
Securities Act (the "Arizona Act") or the securities laws of any other
jurisdiction and must be held indefinitely without any transfer, sale or other
disposition unless subsequently registered under the 1933 Act, the Arizona Act
and the securities laws of any other applicable jurisdiction or, in the opinion
of counsel acceptable to the Company, registration is not required under such
Acts or laws.
Legend. There shall be endorsed on this Senior Note a legend
substantially to the following effect:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAW OF ANY STATE. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
EFFECTIVE REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT
REQUIRED."
Refusal to Transfer. The Company may refuse to effect a
transfer, sale or other disposition of this Senior Note by the Holder or its
successors or assigns otherwise than as expressly permitted by this Senior Note
and the Agreement.
9. Miscellaneous.
Agreement. This Senior Note and the terms of the indebtedness
evidenced hereby are issued and incurred subject to the terms of the Agreement,
the terms and conditions of which shall become binding upon any subsequent
Holder or transferee of this Senior Note.
- 4 -
<PAGE> 21
Governing Law. This Senior Note and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict-of-law provisions to the contrary.
Binding Nature of Senior Note. This Senior Note shall be
binding upon any successors and assigns of the Company and shall inure to the
benefit of the Holder and its successors and assigns, except that the Holder may
not assign or transfer its rights under this Senior Note otherwise than by gift
or bequest, by operation of law, or as expressly permitted by this Senior Note.
Notices. All notices, requests, demands and other
communications required or permitted under this Senior Note shall be in writing
and shall be deemed to have been duly given, made and received when delivered or
five days after they are deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(1) If to the Company:
648 South River Drive
Tempe, Arizona 85281
Attention: President
with a copy to:
Lewis and Roca
40 North Central Avenue, #1500
Phoenix, Arizona 85004
Attention: Kevin Olson, Esq.
(2) If to the Holder:
Ron Trout
4328 East Contessa
Mesa, Arizona 85201
Either party may alter the person, office or address to which
communications or copies are to be sent by giving notice.
10. Execution Date. The Company has caused this Senior Note to
be duly executed on the date written above.
ROCKFORD CORPORATION
By:/s/
----------------------------
President
- 5 -
<PAGE> 22
[Corporate Seal) Attest:
/s/
-----------------------------------------
Assistant Secretary
- 6 -
<PAGE> 23
EXHIBIT B
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAW OF ANY STATE. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED (EXCEPT TO A
COMMERCIAL BANK OR OTHER CORPORATION AFFILIATED WITH
SECURITY PACIFIC BANK ARIZONA) IN THE ABSENCE OF EFFECTIVE
REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL ACCEPTABLE
TO THIS COMPANY THAT REGISTRATION IS NOT REQUIRED."
WARRANT
TO PURCHASE UP TO 43 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M., PHOENIX TIME, ON FEBRUARY 3, 2000
ROCKFORD CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF ARIZONA
This certifies that, for value received, Ron Trout or the
registered holder hereof or assigns (the "Warrantholder") is entitled to
purchase from Rockford Corporation, an Arizona corporation (the "Company"), at
any time before 5:00 p.m., Phoenix time, on February 3, 2000, at the purchase
price per share of $ 6.50 (the "Warrant Price"), up to the number of shares of
Common Stock, no par value, of the Company set forth above (the "Shares"). The
number of Shares purchasable upon exercise of this Warrant and the Warrant Price
per share shall be subject to adjustment from time to time as set forth below.
1. Agreement. This Warrant was originally delivered pursuant
to the terms of the Convertible Subordinated Debenture Amendment Agreement and
Agreement to Rename as Senior Note between the Company and original
Warrantholder (the "Agreement"). In connection with the Agreement the Company
and the original Warrantholder agreed to (1) rename the Company's 10.5%
Convertible Subordinated Debentures due February 3, 1999 as the Company's
"Senior Notes due February 3, 1999" (the "Note") and (2) deliver the original of
this Warrant to purchase the Shares in order to separately evidence the right to
purchase the Shares (previously established in the Debentures) and amend the
terms for purchase of the Shares. This Warrant (i) evidences the right to
purchase the Shares, (ii) is issued under and in accordance with the Agreement,
(iii) is subject to the terms and provisions contained in the Agreement and the
Note, to all of which the Warrantholder by acceptance of this Warrant consents
and (iv) represents and evidences the same right to purchase the Shares
previously embodied in the Debentures (subject only to the changes set forth in
this Warrant or in the Agreement).
- 7 -
<PAGE> 24
Capitalized terms used in this Warrant shall have the meanings ascribed to them
in the Note or Agreement. This Warrant may be exercised at any time after its
issuance and before 5:00 p.m., Phoenix time, on February 3, 2000.
2. Detachment from Note. This Warrant is originally issued
together with the Note; however, it may be transferred independently of the Note
at any time, subject to compliance with the transfer restrictions set forth in
the Agreement.
3. Expiration. Unless earlier exercised or expired, this
Warrants shall expire at 5:00 p.m. Phoenix time on February 3, 2000.
4. Exercise of Warrant.
Exercise. This Warrant may be exercised in whole or
in part by presentation of this Warrant with the Exercise Form on the reverse
side hereof duly executed and simultaneous payment of the Warrant Price (subject
to adjustment) at the principal office of the Company. Payment of such price
shall be made at the option of the Warrantholder in certified funds or by wire
transfer.
Exercise Price and Fractional Shares. This Warrant
is exercisable, at the option of the Warrantholder, to purchase shares of the
Company's Common Stock at the Warrant Price, subject to adjustment as provided
in this Warrant. The Company shall not be required to issue fractional shares of
Common Stock or other capital stock upon exercise of this Warrant and, in lieu
thereof, shall pay a cash adjustment based upon the then current fair market
value of the Common Stock as determined by the Board of Directors as at the last
business day prior to the date of exercise.
Adjustment Based Upon Stock Dividends, Combination of
Shares or Recapitalization. The Warrant Price and the number of Shares shall be
adjusted if the Company shall at any time after the original issuance of this
Warrant (i) pay a stock dividend on its Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares,
(iv) issue by reclassification of its shares of Common Stock any other special
capital stock of the Company, or (v) distribute to all holders of Common Stock
evidences of indebtedness (including indebtedness convertible into Common Stock
or other securities of Company), securities (including common or preferred stock
of Company), or assets (excluding cash dividends) or rights or warrants to
subscribe for Common Stock or other securities of Company (other than those
mentioned above). Upon the occurrence of an event or events requiring adjustment
of the Warrant Price or an adjustment to the number of Shares or other
securities issuable upon exercise of this Warrant, and thereafter, the
Warrantholder upon exercise of this Warrant shall be entitled to receive the
number of shares of Common Stock or other securities of the Company which the
Warrantholder would have owned or have been entitled to receive after the
happening of any of the events described above had this Warrant been exercised
immediately prior to the happening of such event.
- 2 -
<PAGE> 25
Adjustment Based Upon Stock Issuances. The Warrant
Price shall be adjusted if at any time after the original issuance of this
Warrant the Company issues, or issues rights or warrants to subscribe for or
purchase, Common Stock or securities convertible into or exchangeable for Common
Stock at less than the Warrant Price. Upon the occurrence of an event or events
requiring adjustment of the Warrant Price under this section the Warrant Price
shall be adjusted to be equal to the price of the new issue, and thereafter the
Warrantholder upon exercise of this Warrant shall be entitled to purchase the
Shares, or other securities of the Company which the Warrantholder is entitled
to receive, based upon the new Warrant Price per share.
Adjustment Based Upon Merger or Consolidation. In
case of any consolidation or merger to which the Company is a party (other than
a merger in which the Company is the surviving entity and which does not result
in any reclassification of or change in the outstanding Common Stock of the
Company), or in case of any sale or conveyance to another person, firm, or
corporation of the property of the Company as an entirety or substantially as an
entirety, the Warrantholder shall have the right, upon exercise of this Warrant,
to receive the kind and amount of securities and property (including cash)
receivable upon such consolidation, merger, sale or conveyance by a holder of
the number of shares of Common Stock or other securities into which such Warrant
might have been converted immediately prior to the consolidation, merger, sale,
or conveyance.
No Adjustment for Outstanding Exercise and Option
Rights and Certain Other Securities. No adjustment of the Warrant Price or
number of shares issuable upon exercise shall be made upon the issuance by the
Company of (1) Common Stock upon conversion or exchange of securities
convertible or exchangeable into Common Stock and outstanding on or before
February 3, 1989, (2) Common Stock upon exercise of any employee's stock option
outstanding on or before February 3, 1989, or (3) Common Stock or securities
convertible into Common Stock, or options to purchase Common Stock not included
in (1) or (2) above and not amounting to more than 10% of the Company's fully
diluted Common Stock issue, pursuant to an employee benefit plan of the Company.
5. Corporate Status of Shares To Be Issued. All shares of the
Company's Common Stock (or other securities in the event of an adjustment of the
Warrant Price or number of shares issuable upon exercise) which may be issued
upon the exercise of this Warrant shall, upon issuance and payment of the
Warrant Price, be fully paid and nonassessable.
6. Issuance of Stock Certificate. Upon the exercise of this
Warrant, the Company shall forthwith issue to the Warrantholder a certificate or
certificates representing the number of shares of its Common Stock (or other
securities in the event of an adjustment of the Warrant Price or number of
shares issuable upon exercise) to which the Warrant relates.
7. Partial Exercise and Exchange. Upon any partial exercise of
this Warrant, there shall be signed and issued to the Warrantholder a new
Warrant in respect of the Shares as to which this Warrant shall not have been
exercised. This Warrant may be exchanged, at the office of the Company by
surrender of this Warrant properly endorsed for transfer, exercise, or exchange,
for one or more new Warrants for the same aggregate number of Shares as
evidenced by the Warrant or Warrants exchanged.
- 3 -
<PAGE> 26
8. Loss or Destruction of Warrant. The Company shall execute
and deliver a new Warrant of like tenor and date upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, of an indemnity by
the original Warrantholder, or, in case of any transfer, upon such terms as may
be satisfactory to the Company, or, in the case of mutilation, upon surrender
and cancellation of this Warrant.
9. Status of Holder of Warrant. This Warrant shall not entitle
the Warrantholder to any voting rights or other rights as a shareholder of the
Company, and no dividends shall be payable or accrue in respect of this Warrant
or the securities issuable upon exercise, unless and until this Warrant is
exercised. Upon the exercise of this Warrant, the Warrantholder shall, to the
extent permitted by law, be deemed to be the holder of record of the shares of
Common Stock or other securities issuable upon such exercise, notwithstanding
that the stock transfer books of the Company are then closed or that the
certificates representing such shares of Common Stock or other securities are
not then actually delivered.
10. Reservation of Shares. The Company shall reserve out of
its authorized shares of Common Stock (and other securities in the event of an
adjustment of the Warrant Price or number of shares issuable upon exercise) a
number of shares sufficient to enable it to comply with its obligation to issue
the Shares (and other securities in the event of an adjustment of the Warrant
Price or number of shares issuable upon exercise) upon the exercise of this
Warrant.
11. Status Under Securities Laws.
No Registration. This Warrant has not been, and the
securities issuable upon exercise hereof will not be, registered under the
Securities Act of 1933 (the "1933 Act"), the Arizona Securities Act (the
"Arizona Act") or the securities laws of any other jurisdiction and must be held
indefinitely without any transfer, sale or other disposition unless subsequently
registered under the 1933 Act, the Arizona Act and the securities laws of any
other applicable jurisdiction or, in the opinion of counsel acceptable to the
Company, registration is not required under such Acts or laws.
Legend. There shall be endorsed on this Warrant and
on the certificates evidencing any securities issued upon the exercise of this
Warrant a legend substantially to the following effect:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAW OF ANY
STATE. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED (EXCEPT TO A COMMERCIAL
BANK OR OTHER CORPORATION AFFILIATED WITH SECURITY
PACIFIC BANK ARIZONA) IN THE ABSENCE OF EFFECTIVE
REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT
REQUIRED."
- 4 -
<PAGE> 27
Restriction on Other Securities. Except upon certain
limited circumstances, the restrictions on the transfer of this Warrant and any
securities issued upon the exercise of this Warrant will also apply to any and
all shares of capital stock or other securities issued or otherwise acquired on
account of the exercise of the Warrant including, without limitation, shares and
securities issued or acquired as a result of any stock dividend, stock split or
exchange or any distribution of shares or securities pursuant to any corporate
reorganization, reclassification or similar event.
12. Refusal to Transfer. The Company may refuse to effect a
transfer, sale or other disposition of this Warrant or any part thereof by the
Warrantholder or its successors or assigns except as expressly permitted by this
Warrant and the Agreement, which contains additional provisions governing any
transfer of this Warrant. The Company may also refuse to effect a transfer,
sale, or other disposition of any Shares or other securities issued upon
exercise of this Warrant which would be in violation of any express prohibition
in this Warrant or in the Agreement.
13. Governing Law. This Warrant is delivered and is intended
to be performed in the State of Arizona and shall be construed and enforced in
accordance with the laws of such state.
14. Execution. In witness whereof, the Company has caused this
Warrant to be signed by its duly authorized officers on __________, _____.
ROCKFORD CORPORATION
[SEAL)
By:/s/
-----------------------
President
ATTEST:
/s/
- ---------------------------
Assistant Secretary
- 5 -
<PAGE> 28
ROCKFORD CORPORATION
EXERCISE FORM
Rockford Corporation
648 South River Drive
Tempe, Arizona 85281
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Warrant, and to purchase thereunder, 43
shares of Common Stock (the "Shares") provided for therein, and requests that
certificates for the Shares be issued in the name of:
(Please Print Name, Address and Social Security Number)
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Warrantholder or his Assignee as below indicated and delivered to the address
stated below.
Dated:____________________________
Name of Warrantholder or Assignee:_____________________________________
(Please Print)
Address:________________________________________________________________________
________________________________________________________________________
Authorized Signature:___________________________________________________________
Signature Guaranteed:_______________________________________________
Note: The name of the Warrantholder must correspond with
the name as written upon the face of this Warrant
certificate in every particular, without alteration
or enlargement or any change whatever, unless this
Warrant has been assigned.
- 6 -
<PAGE> 29
ASSIGNMENT
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ___________________________________________________________________________
(Please Print Name, Address and Social Security Number)
a Warrant to purchase _________ shares of Common Stock and hereby irrevocably
constituting and appointing ______________________________ Attorney to transfer
said Warrant on the books of the Company, with full power of substitution in the
premises.
___________________________
Name of Registered Holder
Dated: ___________ 19____
___________________________
Authorized Signature
Signature Guaranteed: ___________________________
Note: The signature of this assignment must correspond with the name as written
above upon the fact of this Warrant certificate in every particular, without
alteration or enlargement of any change whatever.
- 7 -
<PAGE> 30
EXHIBIT D
Consolidated Financial Statements
and Other Financial Information
ROCKFORD CORPORATION
September 30, 1994
<PAGE> 31
Rockford Corporation
Consolidated Financial Statements
and Other Financial Information
Years ended September 30, 1994 and 1993
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Stockholders' Equity (Deficit).................. 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6
Other Financial Information
Report of Independent Auditors on Other Financial Information.............. 16
Consolidating Balance Sheet................................................ 17
Consolidating Statement of Operations...................................... 19
</TABLE>
<PAGE> 32
[ERNST & YOUNG LLP letterhead]
Report of Independent Auditors
The Board of Directors and Stockholders
Rockford Corporation
We have audited the accompanying consolidated balance sheets of Rockford
Corporation and subsidiaries as of September 30, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial positions of Rockford
Corporation and subsidiaries at September 30, 1994 and 1993, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 23, 1994
-1-
<PAGE> 33
Rockford Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 120 $ 765
Accounts receivable, less allowances of $715,000 in 1994 and
$733,000 in 1993 10,539 9,601
Inventories, net 5,885 6,289
Prepaid expenses, insurance receivable, and other 634 1,835
Deferred income taxes 2,100 --
-------- --------
Total current assets 19,278 18,490
Property and equipment, net 3,015 3,052
Deferred income taxes 170 --
Other assets, net of accumulated amortization of $683,000 in 1994 and
$506,000 in 1993 282 371
-------- --------
Total assets $ 22,745 $ 21,913
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 300 $ 917
Accounts payable 5,264 6,463
Current portion of notes payable, long-term debt, and capital lease
obligations 1,587 13,240
Accrued payroll, commissions, and other 2,750 2,370
Accrued warrant 1,570 1,300
Income taxes payable 400 231
-------- --------
Total current liabilities 11,871 24,521
Notes payable and long-term debt, less current portion 10,778 2,133
Capital lease obligations, less current portion 51 48
-------- --------
10,829 2,181
Lease commitments and contingencies -- --
Stockholders' equity (deficit):
Common stock, $.01 par value
Authorized shares - 10,000,000
Issued and outstanding shares - 608,061 6 6
Additional paid-in-capital 765 770
Deferred stock grants -- (29)
Accumulated deficit (531) (5,436)
Currency translation adjustments (195) (100)
-------- --------
Total stockholders' equity (deficit) 45 (4,789)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 22,745 $ 21,913
======== ========
</TABLE>
See accompanying notes.
-2-
<PAGE> 34
Rockford Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1994 1993
-------- --------
(In thousands)
<S> <C> <C>
Sales, net of returns and discounts of $12,215,000 in 1994 and
$11,171,000 in 1993 $ 63,051 $ 57,449
Cost of goods sold 39,565 41,479
-------- --------
Gross profit 23,486 15,970
Operating expenses:
Engineering 1,347 1,435
Commissions 4,159 4,010
Marketing expenses 5,076 6,137
Freight programs 1,450 1,465
General and administrative 6,430 5,262
-------- --------
18,462 18,309
-------- --------
Operating income (loss) 5,024 (2,339)
Other income (expense):
Interest expense (1,593) (1,591)
Other (96) 1,048
-------- --------
Income (loss) before benefit (provision) for income taxes and cumulative
effect of a change in accounting for income taxes 3,335 (2,882)
Benefit (provision) for income taxes 1,570 (90)
-------- --------
Income (loss) before cumulative effect of accounting change 4,905 (2,972)
Cumulative effect as of September 30, 1992 of change in method of
accounting for income taxes -- (827)
-------- --------
Net income (loss) $ 4,905 $ (3,799)
======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE> 35
Rockford Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Currency
----------------- Paid-In Stock Accumulated Translation
Shares Amount Capital Grants Deficit Adjustments Total
------ ------ ------- ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1992 608 $ 6 $ 770 $ (58) $(1,637) $ 89 $ (830)
Amortization of deferred stock grants -- -- -- 29 -- -- 29
Currency translation -- -- -- -- -- (189) (189)
Net loss -- -- -- -- (3,799) -- (3,799)
----- ------- ------- ------- ------- ------- -------
Balance at September 30, 1993 608 6 770 (29) (5,436) (100) (4,789)
Amortization of deferred stock grants -- -- -- 24 -- -- 24
Deferred stock grants canceled -- -- (5) 5 -- -- --
Currency translation -- -- -- -- -- (95) (95)
Net income -- -- -- -- 4,905 -- 4,905
----- ------- ------- ------- ------- ------- -------
Balance at September 30, 1994 608 $ 6 $ 765 $ -- $ (531) $ (195) $ 45
===== ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
-4-
<PAGE> 36
Rockford Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1994 1993
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4,905 $ (3,799)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change -- 827
Depreciation and amortization 1,484 1,499
Deferred income taxes (2,270) --
Provision for doubtful accounts -- 753
Provision for inventory allowances 513 1,765
Currency translation (95) (189)
Amortization of deferred stock grants 24 29
Changes in operating assets and liabilities:
Accounts receivable (938) (1,768)
Inventories (109) 92
Prepaid expenses, insurance receivable, and other 1,201 (964)
Bank overdraft (617) 229
Accounts payable 208 2,438
Accrued payroll, bonus, commissions, and other 380 73
Accrued warrant 270 1,100
Discontinued operations -- (240)
Income taxes payable 169 231
-------- --------
Net cash provided by operating activities 5,125 2,076
INVESTING ACTIVITIES
Purchases of property and equipment (1,204) (1,224)
Increase in other assets (88) (26)
-------- --------
Net cash used by investing activities (1,292) (1,250)
FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 8,436 322
Payments on notes payable and long-term debt (12,569) (479)
Payments on capital lease obligations (345) (674)
-------- --------
Net cash used by financing activities (4,478) (831)
-------- --------
Net decrease in cash (645) (5)
Cash at beginning of year 765 770
-------- --------
Cash at end of year $ 120 $ 765
======== ========
</TABLE>
See accompanying notes.
-5-
<PAGE> 37
Rockford Corporation
Notes to Consolidated Financial Statements
September 30, 1994
1. ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Rockford Corporation (Company) is presently engaged in the business of
manufacturing and distributing car audio electronics and speaker systems under
the division names of "Rockford Fosgate," "Rockford Acoustic Designs (formerly
Carbonneau)," "Hafler" and "Perfect Interface." The Company was organized and
incorporated under the laws of the State of Arizona on July 22, 1980, and has
manufacturing facilities in Tempe, Arizona and Grand Rapids, Michigan.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned and majority owned subsidiaries in Germany and Japan.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
RECEIVABLES
The Company sells its products principally to automotive stereo dealers
primarily in the United States, Europe and Asia. At September 30, 1994 and 1993,
net accounts receivable include approximately $475,000 and $247,000,
respectively, due from overseas businesses.
The Company also offers a prompt pay discount for certain invoices paid under 40
days of issuance and has included in its allowance for receivables at September
30, 1994 and 1993, approximately $180,000 with respect to accounts utilizing
such discounts after year-end.
INVENTORIES
Inventories consist principally of raw materials of electronic and mechanical
components used in the manufacturing of amplifier and speaker systems and
finished goods. Inventories are carried at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
computed principally on the straight-line method for financial reporting
purposes over a three to five year life.
-6-
<PAGE> 38
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounted for income taxes under the provisions of Accounting
Principles Board Opinion Number 11 through September 30, 1992. Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" was issued
by the Financial Accounting Standards Board in February 1992 and was adopted by
the Company as of October 1, 1992 (see Note 6).
RESEARCH AND DEVELOPMENT
During the years ended September 30, 1994 and 1993, research and development
expense of approximately $1,347,000 and $1,435,000, respectively, was charged to
expense as incurred.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with FASB Statement No. 52. All balance sheet accounts
have been translated using the current exchange rates at the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year. The gains and losses resulting from the change in exchange rates
from year to year have been reported separately as a component of stockholders'
equity (deficit). The effect on the statement of operations of transaction gains
and losses is insignificant.
RECLASSIFICATIONS
Certain amounts in the 1993 financial statements have been changed to conform
them to the 1994 presentation.
-7-
<PAGE> 39
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories consisted of the following at September 30:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Raw materials $ 4,019 4,847
Work in progress 222 572
Finished goods 3,046 2,835
------- -------
7,287 8,254
Less allowances (1,402) (1,965)
------- -------
5,885 $ 6,289
======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Machinery and equipment $ 6,353 $ 5,842
Furniture and fixtures 191 185
Leasehold improvements 597 477
Vehicles 74 85
Demo equipment 108 108
Drawings and technical data 146 127
Tooling equipment 1,410 817
------- -------
8,879 7,641
Less accumulated depreciation and amortization (5,864) (4,589)
------- -------
$ 3,015 $ 3,052
======= =======
</TABLE>
-8-
<PAGE> 40
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at September 30:
<TABLE>
<CAPTION>
1994 1993
------ ------
(In thousands)
<S> <C> <C>
$12,000,000 line of credit with a lender, paid in full during 1994 $ -- $8,888
$9,500,000 line of credit with a lender collateralized by substantially all
assets, with interest payments due monthly at the prime rate plus three
percent through December 31, 1994 (10.75 percent at September 30, 1994) and
at the prime rate plus two percent effective January 1, 1995 until April 1997
when all remaining principle and interest is due. Borrowings under this line
of credit are limited to the borrowing base defined substantially as a
percentage of inventory, as defined, and 75 percent of eligible accounts
receivable, as defined and adjusted in the agreement 6,848 --
10.5 percent senior note payable to a bank, collateralized by substantially all
assets, payable in monthly installments of $50,243, including interest until
May 31, 1995 when all remaining principal and interest is due and payable. In
connection with this senior note payable, warrants were issued to purchase up
to 39,161 shares of the Company's common stock at $36.00 per share, expiring
June 1995; the exercisable warrants are being reduced pro rata based on
payments on the outstanding loan balance 1,322 1,622
10 percent subordinated, convertible debentures, unsecured, interest payable
semiannually until January 1998 when all remaining principal and interest is
due and payable, convertible into common shares at $11.95 per share
Subsequent to year-end, the subordinated convertible debentures were amended
to senior notes, unsecured, subordinated, no conversion rights, with interest
payable quarterly. In connection with the amendment, detachable warrants were
issued to purchase up to 167,400 shares of the Company's commons stock at
$6.50 per share, expiring February 2000 2,000 2,000
</TABLE>
-9-
<PAGE> 41
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
(In thousands)
<S> <C> <C>
10.5 percent subordinated, convertible debentures, unsecured, interest payable
quarterly until February 1999 when all remaining principal and interest is
due and payable, convertible into common shares at $23.00 per share
Subsequent to year-end, the subordinated convertible debentures were amended
to senior notes, unsecured, subordinated, with no conversion rights. In
connection with the amendment, detachable warrants were issued to purchase up
to 54,696 shares of the Company's common stock at $6.50 per share, expiring
February 2000 $1,258 $1,258
7.5 percent subordinated, convertible debentures to a related parties,
unsecured, interest payable quarterly until January 1995, when all remaining
principal and interest is due and payable, convertible into common shares at
$.75 per share 150 150
7 percent subordinated, convertible debentures to a related parties, unsecured,
interest payable quarterly until March 1996 when all remaining principal and
interest is due and payable, convertible into common shares at rates ranging
from $.01 share to $1 per share 150 150
10.5 percent subordinated, convertible debentures to a related parties,
unsecured, interest payable quarterly until February 1999 when all remaining
principal and interest is due and payable, convertible into common shares at
$23.00 per share. Subsequent to year-end, the subordinated convertible
debentures were amended to senior notes, unsecured, subordinated, with no
conversion rights. In connection with the amendment, detachable warrants were
issued to purchase up to 16,609 shares of the Company's common stock at $6.50
per share, expiring February 2000 382 382
</TABLE>
-10-
<PAGE> 42
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
(In thousands)
<S> <C> <C>
7 percent promissory note to a vendor, paid in full during 1994 $ -- $ 296
8.75 percent note payable to a financing company collateralized by equipment,
payable in monthly installments of $5,576, including interest, until February
1998 when all remaining principal and interest is due and payable 193 241
Other 4 6
------- -------
12,307 15,033
Less current portion 1,529 12,900
------- -------
$10,778 $ 2,133
======= =======
</TABLE>
Maturities of notes payable and long-term debt for the five years succeeding
September 30, 1994 are $1,529,000 in 1995, $200,000 in 1996, $6,896,000 in 1997,
$2,048,000 in 1998, and $1,634,000 in 1999. Interest payments were approximately
$1,490,000 and $1,597,000 for the years ended September 30, 1994 and 1993,
respectively.
During 1994, the Company converted $1,407,000 of vendor payables to short-term
promissory notes in noncash transactions. The promissory notes were paid in full
during the fiscal year ended September 30, 1994.
The Company's $9,500,000 line of credit, its 10.5 percent senior note payable
with an outstanding balance at September 30, 1994 of $1,322,000, and its 10
percent subordinated, convertible debentures contain convenants which place
various restrictions on financial ratios, levels of indebtedness and capital
expenditures, among other things.
5. LEASES
The Company leases equipment under capital leases. The Company also leases
certain manufacturing, warehouse and office facilities and computer hardware and
software under noncancelable operating leases that expire in various years
through April 1999.
-11-
<PAGE> 43
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
5. LEASES (CONTINUED)
Property and equipment includes the following amounts for leases that have been
capitalized at September 30:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Equipment $ 625 $ 2,249
Less accumulated amortization (478) (1,818)
------- -------
$ 147 $ 431
======= =======
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital leases and noncancelable operating leases
with initial terms of one year or more consisted of the following at September
30, 1994:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
(In thousands)
<S> <C> <C>
1995 $ 74 $1,319
1996 25 1,230
1997 24 1,238
1998 -- 601
1999 -- 157
Thereafter -- 111
------ ------
Total minimum lease payments 123 $4,656
======
Amounts representing interest 14
------
Present value of net minimum lease payments (including
current portion of $58,000) $ 109
======
</TABLE>
Total rental expense for all operating leases was approximately $995,000 and
$740,000 for the years ended September 30, 1994 and 1993, respectively.
-12-
<PAGE> 44
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Effective October 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method too the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes" (FAS 109). As permitted under
the new rules, prior years' financial statements have not been restated. The
cumulative effect of adopting FAS 109 as of October 1, 1992 was to increase the
net loss by $827,000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of September 30, 1994 are as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory allowances $ 556 $ 736
Receivables allowances 258 214
Book over tax depreciation 170 124
Accrued liabilities and other 636 485
Research and development 208 219
Alternative minimum tax credit carryforward 244 315
Net operating loss carryforwards - state 198 300
------- -------
Total deferred tax assets 2,270 2,393
Less valuation allowance for deferred tax assets -- (2,393)
Less current portion of deferred tax assets (2,100) --
------- -------
Deferred tax assets long-term $ 170 $ --
======= =======
</TABLE>
The valuation allowance decreased by $2,393,000 during 1994 based upon
management's assessment that a valuation allowance was no longer required with
the recent improvements in the Company's financial results. During 1993, the
valuation allowance was increased by $1,330,000 from the amount existing at
adoption based on that year's losses.
-13-
<PAGE> 45
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the federal and state income tax expense (benefit)
are:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Current:
Federal expense $ 590 $ 50
State expense 110 40
------- -------
Total current 700 90
Deferred:
Federal (benefit) (2,135) --
State (benefit) (135) --
------- -------
Total deferred (benefit) (2,270) --
------- -------
Deferred tax assets long-term $(1,570) $ 90
======= =======
</TABLE>
The Company's effective tax rate differs from the statutory rates primarily due
to the noninclusion of foreign income and (losses) of approximately $223,000,
net, in 1994 and $(159,000), net, in 1993, utilization of net operating loss
carryforwards, as well as the deferred tax asset valuation allowance changes
during 1994 and 1993.
At September 30, 1994, the Company had a net operating loss carryforward of
approximately $3,950,000 for state income tax purposes which expires during 1996
through 1998.
7. COMMON STOCK GRANTS AND OPTIONS
In May 1990, the Board of Directors granted certain officers and employees
common stock grants as compensation and additional incentive to provide
continued services to the Company. The stock was granted at its fair market
value as determined by management at the date of the grant. If the officers' or
employees' employment with the Company is terminated during the four year
incentive period for any reason, the officer or employee shall be required to
forfeit all unvested stock issued under the stock grant program. The Company
charged to expense, under the stock grant program, $24,000 and $29,000 as
compensation in 1994 and 1993, respectively.
The Board of Directors of the Company granted a certain consulting firm, which
is providing executive and other consulting services to the Company, options to
purchase 50,000 shares of its authorized but unissued common stock at a price of
$23 per share (amended to $6.50 per share subsequent to year-end), protected
against dilution, as defined, and expiring in August 1999. The price per share
exceeded the fair market value at the date of the grant. These stock options
shall be contingent upon the Company's stock being publicly traded, or the
Company being
-14-
<PAGE> 46
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK GRANTS AND OPTIONS (CONTINUED)
merged into or acquired by a private or publicly owned concern, and if such
event occurs, the stock options will vest 100 percent and shall be exercisable
only within 90 days after such event. The stock options shall vest 25 percent on
August 1, 1992, and 25 percent each year thereafter provided that the consulting
firm shall be, each vesting date, still performing the services required of
them.
Subsequent to year-end, the Board authorized the implementation of an incentive
stock option plan for certain employees. Under the plan, options to purchase
common stock of the Company will be granted to certain employees at the fair
market value of the underlying common stock. Up to 250,000 shares may be offered
under this plan.
8. LIFE INSURANCE PROCEEDS
During 1993, the Company received proceeds of approximately $1,000,000 from a
claim filed under a key man life insurance policy due to the death of a member
of the Board of Directors. The proceeds are recorded in other income in the 1993
financial statements.
9. CONTINGENCIES
The Company is a party to legal proceedings which arise out of the ordinary
course of business. Based upon advice from outside legal counsel, management is
of the opinion that these matters will have no material effect on the Company's
consolidated financial position.
10. BENEFIT PLAN
During 1990, the Company's Board of Directors elected to establish the Rockford
Corporation 401(k) Retirement Savings Plan (Plan) covering substantially all
employees who have completed six consecutive months of service without regard to
hours of service. Under the terms of the Plan, employees may make voluntary
contributions, subject to Internal Revenue Service limitations. The company will
match employee contributions up to three percent of the employee's annual
compensation. Additional contributions to the Plan can be made at the discretion
of the Board of Directors. Contributions to the Plan during the years ended
September 30, 1994 and 1993 were approximately $140,000 and $71,000,
respectively.
-15-
<PAGE> 47
OTHER FINANCIAL INFORMATION
<PAGE> 48
[ERNST & YOUNG LLP letterhead]
Report of Independent Auditors on
Other Financial Information
The Board of Directors and Stockholders
Rockford Corporation
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The following financial information,
included on pages 17 through 19, is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Ernst & Young LLP
November 23, 1994
-16-
<PAGE> 49
Rockford Corporation
Consolidating Balance Sheet
September 30, 1994
(In thousands)
<TABLE>
<CAPTION>
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 120 $ -- $ 60 $ 34 $ 26
Accounts receivable 11,254 (1,844) 12,604 121 373
Less allowance for doubtful accounts (715) -- (696) (19) --
-------- -------- -------- -------- --------
Net accounts receivable 10,539 (1,844) 11,908 102 373
Inventories 7,287 (109) 7,105 -- 291
Less allowances (1,402) -- (1,402) -- --
-------- -------- -------- -------- --------
Net inventories 5,885 (109) 5,703 -- 291
Prepaid expenses and other 634 -- 522 32 80
Notes receivable -- (564) 564 -- --
Deferred income taxes 2,100 -- 2,100 -- --
-------- -------- -------- -------- --------
Total current assets 19,278 (2,517) 20,857 168 770
Property and equipment, net 3,015 -- 2,895 38 82
Deferred income taxes 170 -- 170 -- --
Other assets, net 282 (175) 377 50 30
-------- -------- -------- -------- --------
Total assets $ 22,745 $ (2,692) $ 24,299 $ 256 $ 882
======== ======== ======== ======== ========
</TABLE>
-17-
<PAGE> 50
Rockford Corporation
Consolidating Balance Sheet -- Continued
September 30, 1994
(In thousands)
<TABLE>
<CAPTION>
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 300 $ -- $ 300 $ -- $ --
Accounts payable 5,264 (1,844) 5,185 1,060 863
Current portion of notes payable, long-term debt, and --
capital lease obligations 1,587 -- 1,587 --
Accrued payroll, bonus, commissions, and other 2,750 -- 2,749 (24) 25
Accrued warranty 1,570 -- 1,570 -- --
Income taxes payable 400 -- 400 -- --
-------- -------- -------- -------- --------
Total current liabilities 11,871 (1,844) 11,791 1,036 888
Notes payable and long-term debt, less current portion 10,778 (564) 10,778 454 110
Capital lease obligations, less current portion 51 -- 51 -- --
-------- -------- -------- -------- --------
10,829 (564) 10,829 454 110
Stockholders' equity (deficit):
Common stock 6 (216) 6 117 99
Additional paid-in capital 765 -- 765 -- --
Deferred stock grants -- -- -- -- --
Retained earnings (accumulated deficit) (531) (68) 980 (1,047) (324)
Currency translation adjustments (195) -- -- (304) 109
-------- -------- -------- -------- --------
Total stockholders' equity (deficit) 45 (284) 1,679 (1,234) (116)
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity (deficit) $ 22,745 $ (2,692) $ 24,299 $ 256 $ 882
======== ======== ======== ======== ========
</TABLE>
-18-
<PAGE> 51
Rockford Corporation
Consolidating Statement of Operations
Year Ended September 30, 1994
(In thousands)
<TABLE>
<CAPTION>
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
<S> <C> <C> <C> <C> <C>
Net sales $ 63,051 $ (1,788) $ 61,804 $ 1,922 $ 1,113
Cost of goods sold 39,565 (1,788) 39,711 969 673
-------- -------- -------- -------- --------
Gross profit 23,486 0 22,093 953 440
Operating expenses:
Engineering 1,347 -- 1,347 -- --
Commissions 4,159 -- 3,964 195 --
Marketing expenses 5,076 -- 4,610 211 255
Freight programs 1,450 -- 1,417 33 --
General and administrative 6,430 -- 5,947 230 253
-------- -------- -------- -------- --------
18,462 -- 17,285 669 508
-------- -------- -------- -------- --------
Operating income (loss) 5,024 -- 4,808 284 (68)
Other income (expense):
Interest expense (1,593) -- (1,577) (16) --
Other (96) -- (119) 23 --
-------- -------- -------- -------- --------
Income (loss) before benefit for income taxes 3,335 -- 3,112 291 (68)
Income tax benefit 1,570 -- 1,570 -- --
-------- -------- -------- -------- --------
Net income (loss) $ 4,905 $ -- $ 4,682 $ 291 $ (68)
======== ======== ======== ======== ========
</TABLE>
-19-
<PAGE> 1
Rockford Corporation Warrant Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Initial Maximum
Senior Note Number of
Group Warrant Holder Principal Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bartol Family GST Exempt Trust $0.93 31,781
Boulder Investors Limited Partnership $0.93 23,371
Current Employees Ron Trout $0.93 185
Former Employees Darrell W. Chapman $0.93 748
Others Graham Humes $0.93 7,478
Francis E. & Suzette E. Baird $0.93 3,741
Gordon A. Jr. & Blair B. MacInnes $0.93 9,348
Sharon Dedrick $0.93 933
Total 21,500
Others The Vrolyk Partnership 97-A 3.45 91,607
</TABLE>
<PAGE> 1
EXHIBIT 10.20
ROCKFORD CORPORATION
CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT
May 1, 1995
To the Purchasers of
Rockford Corporation
Convertible Subordinated Debentures
Identified on Exhibit A Below
Ladies and Gentlemen:
The undersigned Rockford Corporation, an Arizona corporation (the
"Company"), agrees with you as follows:
1. PURCHASE AND SALE OF DEBENTURES.
1.1 Authorization by the Company. The Company has authorized the
issue and sale to you of its 8.5% Convertible Subordinated
Debentures (the "Debentures"), with the terms and rights set
forth in the form of the Debenture attached to this Agreement
as Exhibit B. The Debentures will be in the total principal
amount, and will be divided among you, as shown on Exhibit A.
1.2 Agreement of Purchase and Sale. Subject to the terms and
conditions of this Agreement, and on the basis of the
representations and warranties set forth herein, the Company
will sell to you and you will purchase from the Company, on
the Closing Date, the principal amount of the Debentures set
forth on Exhibit A at a price equal to the principal amount.
The Debentures will be divided among you as set forth on
Exhibit A.
1.3 Closing of Purchase and Sale. The purchase and sale of the
Debentures (the "Closing") will take place at the office of
Lewis and Roca, 40 North Central Avenue, Phoenix, Arizona, on
May 1, 1995 (or on another date if you and the Company agree
in writing) (the "Closing Date"). On the Closing Date, the
Company will deliver to you Debentures against payment of the
purchase price by your certified or cashiers checks payable to
the order of the Company or wire transfer of immediately
available federal funds. The Debentures purchased by you will
be evidenced by appropriate certificates issued to each of
you, in definitive form as set forth in Exhibit B, divided
among you as set forth in Exhibit B, and registered in your
names or the names of your nominee or nominees.
2. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents
and warrants to you as follows:
<PAGE> 2
2.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of
Arizona. The Company has all requisite corporate power and
authority to own, lease, and operate its properties and to
carry on its business as now conducted and as proposed to be
conducted. On the Closing Date the Company will be duly
qualified or authorized to do business and in good standing in
each jurisdiction where the character of the property owned or
leased or the nature of the business transacted makes such
qualification or authorization necessary. The Company has no
subsidiaries or any direct or indirect interest (by way of
stock ownership or otherwise) in any firm or business except
as disclosed in Schedule 2.1. The Company has furnished you
with certified copies of its Certificate of Incorporation and
By-Laws, as amended to the date hereof.
2.2 Capitalization. The Company's authorized and outstanding
capital stock, and the outstanding securities convertible into
the Company's capital stock, is as set forth in Schedule 2.2.
All of the issued and outstanding shares of the Company's
Common Stock are duly authorized, validly issued, fully paid
and nonassessable. The Company has reserved the number of
shares of its Common Stock shown on Exhibit A for issuance
upon conversion of the Debentures. All outstanding shares of
the Common Stock of the Company were issued in compliance with
all applicable Federal and state securities or "blue sky"
laws. There are in existence or contemplated no options,
warrants, agreements or similar rights granted by the Company
for the issue or sale by it of any securities, other than the
transactions contemplated by this Agreement and the
transactions disclosed in Schedule 2.2.
2.3 Financial Position. The Company's Balance Sheets as at
September 30, 1993 and 1994, and Statements of Income and
Retained Earnings and of changes in Financial Position for its
two fiscal years then ended, as audited by Ernst & Young LLP
and in the form set forth in Schedule 2.3, are true and
correct in all material respects as at such dates and for the
periods then ended.
2.4 Duly Issued. The shares of the Common Stock issuable upon
conversion of the Debentures, upon such conversion, will be
validly issued, fully paid and nonassessable.
2.5 Authorization. The Company has duly authorized, executed and
delivered this Agreement. This Agreement constitutes the valid
and binding agreement of the Company, enforceable in
accordance with its terms except as enforcement may be limited
by bankruptcy, insolvency, moratorium and equitable principles
applicable to creditors generally. The Company has full power
and lawful authority to issue and sell the Debentures on the
terms and conditions set forth in this Agreement and to issue
the Common Stock issuable upon conversion of the Debentures.
2.6 Compliance with Laws. The Company is in compliance with all
laws, regulations and orders applicable to its business and
properties, and has all necessary permits and licenses.
-2-
<PAGE> 3
2.7 Governmental Consents. Neither the execution and delivery of
this Agreement, nor the performance of the terms or
consummation of the transactions contemplated by the Company
under this Agreement, require any consent, approval,
authorization, or other order of any court, regulatory body,
administrative agency, or other governmental body, or any
filings pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), or the securities laws of any state
other than those obtained prior to and effective as of the
Closing Date. Neither the Company nor any agent acting on its
behalf has offered, or will offer, to sell (or has solicited
or will solicit any offer to buy) the Debentures or any shares
of the Common Stock of the Company issuable upon the
conversion of the Debentures so as to require the registration
of any of such securities under the Securities Act other than
as contemplated by Article 4 of this Agreement. Based in part
on your representations which are set forth in Article 3 of
this Agreement, the offer, sale, and issuance of the
Debentures pursuant to this Agreement and the shares of the
Common Stock of the Company to be issued upon conversion of
the Debentures are exempt from the registration requirements
of the Securities Act.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. You represent and warrant
to the Company and to the other purchasers of the Debentures:
3.1 Investment Representation. You are acquiring the Debentures,
together with the shares of the Common Stock issuable upon the
conversion of the Debentures, for your own account and not
with a view to or for sale in connection with any
distribution. You have no present intention of distributing
the Debentures or the shares of the Common Stock issuable upon
the conversion of the Debentures.
3.2 Stock Not Registered. You acknowledge that;
(a) neither the Debentures nor the shares of the Common
Stock issuable upon conversion of the Debentures have
been registered under the Securities Act or
applicable state securities laws on the ground that
the issuance to you is exempt from registration under
the Securities Act;
(b) the Company's reliance on such exemption is
predicated on your representations;
(c) the Debentures and shares of Common Stock must be
held indefinitely unless the offer and sale are
registered under the Securities Act, and applicable
state securities laws, or an exemption from
registration is available. In particular, you
acknowledge that the Debentures, and any Common Stock
issued on conversion, may not be sold pursuant to
Rule 144 promulgated under the Securities Act unless
all of the conditions of such rule are met. Among the
conditions for use of Rule 144 is the availability to
the public of current information about the Company.
Such information is not now available and the Company
has no present plans to make such information
available;
-3-
<PAGE> 4
(d) in the absence of an effective registration statement
covering the Debentures, or any Common Stock issued
on conversion thereof, you will sell, transfer, or
otherwise dispose of the Debentures, or any Common
Stock issued on conversion, only in a manner
consistent with your representations and then only in
accordance with the provisions of Section 4.1 of this
Agreement;
(e) any certificate representing the Debentures, and the
shares of the Common Stock issuable upon conversion
of the Debentures, will bear the legend set forth in
Section 4.2 and that the Company may issue
appropriate "stop transfer" instructions to its
transfer agent, if any, with respect to such shares
or make appropriate notations to such effect in its
own stock transfer records; and
(f) any certificate representing the Debentures, and the
shares of the Common Stock issuable upon conversion
of the Debentures, may bear any legends required by
applicable state securities laws.
3.3 Investment Experience. You (a) have such knowledge and
experience in financial and business matters that you are
capable of evaluating the merits and risks of the purchase of
the Debentures, (b) have a net worth significantly in excess
of the amount of your investment in the Debentures and are
able to bear the economic risk of the purchase of the
Debentures, and (c) have had access to information with
respect to the Company necessary to permit you to make an
informed investment decision.
3.4 Organization. On the date of this Agreement, and on the
Closing Date, (a) if you are a corporation, you are duly
organized and validly existing under the laws of your state of
incorporation, you are and will be in good standing under such
laws and you have the requisite corporate power and authority
to enter into this Agreement, (b) if you are a general or
limited partnership, you are and will be a general or limited
partnership duly organized and validly existing under the laws
of your state of formation, and you are and will be in good
standing under such laws, and you have and will have all
requisite partnership power and authority to enter into this
Agreement, (c) you have duly authorized, executed and
delivered this Agreement to the Company, and (4) upon
execution and delivery by the Company, this Agreement
constitutes your valid and binding agreement, enforceable in
accordance with its terms. Enforceability of any agreement may
be limited by bankruptcy, insolvency, moratorium and equitable
principles applicable to creditors generally.
4. SECURITIES ACT AND RELATED MATTERS.
4.1 Transfer Restrictions. You will not offer for sale, sell or
transfer all or any part of the Debentures, or the shares of
the Common Stock or other securities into which the Debentures
are convertible, unless (1) the sale is registered under the
Securities Act, and all other qualifications and proceedings
required under other
-4-
<PAGE> 5
state or federal laws or regulations have been obtained or
taken, or (2) an exemption from registration or qualification
under the Securities Act and any applicable state securities
or "blue sky" laws is available and the Company has received
an opinion of counsel reasonably satisfactory to the Company
that registration is not required.
4.2 Legend on Certificate. Each certificate representing the
Debentures, or any shares of the Common Stock or other
securities issued upon conversion of the Debentures, will bear
a legend in substantially the following form (unless the
Company has received in the opinion of counsel reasonably
satisfactory to the Company that a legend is not necessary):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAW OF ANY STATE. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF EFFECTIVE REGISTRATION
STATEMENTS OR AN OPINION OF COUNSEL ACCEPTABLE TO
THIS COMPANY THAT REGISTRATION IS NOT REQUIRED."
Each certificate will also bear any legends required by
applicable state securities laws. In this Agreement
"Restricted Security" means the Debentures and shares of the
Common Stock or other securities issued upon conversion of the
Debentures and represented by certificates bearing the legend
set forth in this Section 4.2 and "Restricted Stock" means
shares of Common Stock issued upon conversion of the
Debentures and represented by certificates bearing the legend
set forth in this Section 4.2.
4.3 Registration Proposed by Company.
(a) Notice of Registration. If the Company proposes to
register any of its securities under the Securities
Act it will give written notice to every holder of a
Restricted Security except that the Company need not
give notice of (1) a registration solely to implement
an employee benefit plan, (2) a transaction to which
Rule 145 under the Securities Act is applicable, or
(3) a registration using any form that does not
permit secondary sales of securities.
(b) Participation by Holders. If any holder of a
Restricted Security delivers to the Company, within
30 days of the Company's notice to the holders, a
notice stating the number of shares of Restricted
Stock to be registered and the intended method of
disposition, the Company will use its best efforts to
register under the Securities Act the shares of
Restricted Stock requested to be registered (1) in
connection with the registrations of securities to be
sold for the Company's account, (2) at its own
expense to
-5-
<PAGE> 6
the extent provided in Section 4.5, and (3) to the
extent required to permit disposition in accordance
with the intended method.
(c) Limitations on Company's Obligation. If the Company's
proposed registration relates to an underwritten
public offering by the Company, the Company is not
required to register shares of Restricted Stock
unless the requesting holders agree to include them
in the underwriting. If the sole or managing
underwriter of the offering determines that the
aggregate number of shares of Restricted Stock
included in the registration should be limited due to
market conditions or the necessity of including
shares to be sold for the account of the Company,
then each holder who has requested that shares of
Restricted Stock be included may sell only a prorata
portion of shares of Restricted Stock.
4.4 Registration Requested by Purchasers.
(a) Request for Registration. The holder or holders of
50% of the Restricted Securities may request that
the Company register Restricted Stock at any time
(1) before the Company gives written notice of its
intention to register its securities under Section
4.3 (but only if the registration becomes effective
within six months after the Company gives the
notice) and (2) after the later of (i) May ___, 1997
or (ii) 12 months after the effective date of any
prior registration statement covering shares of the
Company's stock. In determining whether 50% of the
holders of Restricted Securities have made a
request, Restricted Stock and other securities
issued upon conversion of the Debentures will be
counted on the basis of the amount of Debentures
from which they were converted.
(b) Content of Request. The request must state the
number of shares of Restricted Stock to be
registered and the intended method of disposition.
The Company is not obligated to file a registration
statement if the expected price to the public of the
offering of Restricted Stock is less than
$15,000,000.
(c) Required Registration. Upon receipt of a request
that satisfies the requirements stated above, the
Company will upon one occasion (1) promptly give
written notice of the proposed registration to every
other holder of Restricted Securities and (2) as
expeditiously as possible (and in any event within
90 days) use its best efforts, at its own expense to
the extent provided in Section 4.5, to effect
registration under the Securities Act of
(i) the sale of the Restricted Stock which is
the subject of the written request referred
to above, and
-6-
<PAGE> 7
(ii) all other Restricted Stock whose holders
make written request for registration to the
Company within 30 days after the Company
gives them notice of the proposed
registration
all to the extent required to permit the disposition by the
holders of the securities so registered. In connection with
any registration, the Company will execute any required
undertakings to file post-effective amendments.
(d) Limitations on Company's Obligation. The Company is
not obligated under this Section 4.4 after (1) one
registration, filed pursuant to any holder's request
under this Section 4.4 (other than a delayed
registration as described below), has become
effective or (2) you and your permitted transferees
hold less than 10% of the Restricted Securities
initially issued and sold pursuant to this Agreement.
(e) Delay of Registration. If, within ten days after the
Company receives a request for registration under
subsection (a), the Company furnishes a certificate
stating that the Company intends to file within 60
days a registration statement for an underwritten
public offering of securities for the Company's
account, then the Company is not obligated to file a
registration under this Section 4.4 for six months
from the date of the Company's certificate. The
Company must make all reasonable efforts to cause the
registration statement for the underwritten public
offering to become effective as soon as reasonably
practicable. The Company may invoke this subsection,
and delay a registration requested under Section 4.4,
only one time.
4.5 Costs and Expenses. The Company will pay all its costs and
expenses in connection with a registration of securities under
Sections 4.3 or 4.4, including Federal and state registration
and filing fees, printing expenses (including a reasonable
number of preliminary and final prospectuses, post-effective
amendments, and supplements requested by the holders of
Restricted Stock), and the fees and disbursements of counsel,
independent accountants, and other experts of the Company. The
Company will not pay underwriter's discounts and commissions
or the fees and disbursements of counsel, independent
accountants, or other experts of the holders of Restricted
Stock. The Company will use its best efforts to keep effective
any registration for the period reasonably necessary to effect
disposition in accordance with the intended methods described
in the requests for registration. If the Company is requested
or required to maintain the registration effective for more
than six months the holders of securities who have requested
that effectiveness be maintained, in order to continue with
the distribution, will pay (in such proportions as they may
agree upon) all out-of-pocket expenses of the Company incurred
in maintaining effectiveness after the initial six-month
period.
4.6 Information. The holders of Restricted Stock covered by a
registration statement under Sections 4.3 or 4.4 will furnish
to the Company (in writing) any
-7-
<PAGE> 8
information regarding them, Restricted Securities held by
them, and the intended method of disposition of the Restricted
Stock as the Company reasonably requests or as is required in
connection with the registrations under Sections 4.3 or 4.4.
4.7 Blue Sky Registrations. In any registration under this Section
4, the Company will use its best efforts to register or
qualify the Restricted Stock for sale under the securities
laws of those states in which registration or qualification is
required, except that the Company is not required (a) to
execute a general consent to service or (b) to qualify to do
business in any state.
4.8 Lockup Agreement. In connection with any registration of the
Company's securities, upon request of the underwriters
managing the offering, each holder of Restricted Securities
will execute an agreement not to sell, make a short sale of,
loan, grant an option for the purchase of, or otherwise
dispose of any Restricted Stock (other than shares included in
the registration or shares sold with the underwriters' prior
written consent) for up to 90 days after the effective date of
the registration.
4.9 Transferability. If the requirements of Section 4.1 have been
satisfied for the sale or transfer of a Restricted Security,
the transferee will be entitled to the rights and benefits of,
and will be subject to the requirements of, Sections 4.1
through 4.8.
5. COMPANY'S AFFIRMATIVE COVENANTS. The Company will comply with the
following requirements unless holders of more than 50% of the
outstanding Restricted Securities agree otherwise in writing. These
requirements will terminate upon the earlier of (1) the closing date of
an underwritten public offering of the Company's common stock pursuant
to an effective registration statement under the Securities Act or (2)
the date when less than 25% of the Restricted Securities are held by
the original holders of the Debentures or their permitted transferees.
These requirements may be amended by a written agreement between the
Company and holders of more than 50% of the outstanding Restricted
Securities. The financial covenants below are substantially the same as
the covenants established in the revolving credit facility entered into
between the Company and Norwest Business Credit, Inc. ("NBCI") as of
May 1994; you agree that, upon any revision or refinancing of the
Company's principal credit facility it is your intention to consent to
the amendment of the financial covenants in this Agreement so that they
are consistent with the terms of the new or revised credit facility.
5.1 Reporting Requirements. The Company will deliver to you each
of the following:
(a) Annual Financial Statements. No later than 90 days
after the end of each Company fiscal year, audited
financial statements including
(1) the Company's balance sheet as at the end of
the fiscal year, and
(2) the related statements of income, retained
earnings, and cash flows of the Company for
the fiscal year.
-8-
<PAGE> 9
The financial statements will be in reasonable detail
and prepared in accordance with generally accepted
accounting principles consistently applied. The
financial statements will be accompanied by the
unqualified opinion of independent public accountants
selected by the Company and a certificate of the
Company's chief financial officer stating (i) that
the financial statements were prepared in accordance
with generally accepted accounting principles
consistently applied, (ii) whether such officer has
knowledge of the occurrence of any default under this
Agreement and, if so, a statement in reasonable
detail of the nature of the default, and (iii)
computations showing whether the Company is in
compliance with the financial covenants set forth in
this Agreement;
(b) Shareholder Information. Promptly upon their
distribution, copies of all financial statements,
reports and proxy statements the Company sends to its
stockholders;
(c) SEC Filings. Promptly after their filing, copies of
all regular and periodic financial reports the
Company files with the Securities and Exchange
Commission or any national securities exchange;
(d) Notice of Violations. Promptly upon knowledge
thereof, notice of the Company's violation of any
law, rule or regulation which could materially and
adversely affect the Company's business or financial
condition; and
(e) Other Information. From time to time, with reasonable
promptness, all other materials, reports, records, or
information relating to Company's financial
condition, operations, or affairs as you may
reasonably request.
5.2 Books and Records. The Company will keep accurate books,
records, and accounts of the Company's business and financial
condition.
5.3 Compliance with Laws; Environmental Indemnity. The Company
will
(a) comply with the requirements of applicable laws and
regulations whose violation would materially and
adversely affect the Company's business or financial
condition, and
(b) comply with all applicable Environmental Laws and
obtain any permits, licenses, or approvals required
by any such Environmental Laws. The Company will
indemnify, defend, and hold you harmless from and
against any claims, loss, or damage resulting from
any past, present, or future existence, use,
handling, storage, transportation, or disposal of any
hazardous waste, hazardous substance, or toxic
substance by the Company or on property owned,
leased, or controlled by the Company. This
indemnification agreement will survive the
termination of this Agreement and payment of the
indebtedness hereunder.
-9-
<PAGE> 10
5.4 Payment of Taxes and Other Claims. The Company will pay or
discharge, when due,
(a) all taxes, assessments, and governmental charges
levied or imposed upon it, upon its income or
profits, or upon any properties belonging to it. Such
amounts will be paid before the date when penalties
attach thereto,
(b) all federal, state, and local taxes required to be
withheld by it, and
(c) all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a lien or
charge upon any properties of the Company.
The Company is not required to pay any tax, assessment,
charge, or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
5.5 Maintenance of Properties. The Company will maintain the
properties used in its business in good condition, repair, and
working order (normal wear and tear excepted). The Company
will replace or repair worn, defective, or broken parts, but
nothing in this section prevents the Company from
discontinuing the operation and maintenance of any of its
properties if such discontinuance is in its judgment
desirable.
5.6 Insurance. The Company will obtain and at all times maintain
insurance with insurers believed by the Company to be
responsible and reputable, in such amounts and against such
risks as is usually carried by companies engaged in similar
business and owning similar properties in the same general
areas in which the Company operates.
5.7 Preservation of Corporate Existence. The Company will preserve
and maintain its corporate existence and all rights,
privileges, and franchises necessary or desirable in the
conduct of its business. The Company will conduct its business
in an orderly, efficient, and regular manner.
5.8 Book Net Worth. The Company will maintain on the last day of
each quarter occurring in each of the periods set forth below,
a Book Net Worth (as that term is defined in the Company's
credit agreement with NBCI dated May 3, 1994) greater than or
equal to the amount set forth opposite such period:
<TABLE>
<CAPTION>
PERIOD BOOK NET WORTH
------ --------------
<S> <C>
Through June 29, 1995 ($2,650,000)
June 30, 1995 through September 29, 1995 ($1,000,000)
September 30, 1995 through December 30, 1995 ($ 800,000)
December 31, 1995 through March 30, 1996 ($ 900,000)
March 31, 1996 through June 29, 1996 ($ 400,000)
June 30, 1996 through September 29, 1996 $1,000,000
</TABLE>
-10-
<PAGE> 11
<TABLE>
<S> <C>
September 30, 1996 and thereafter $1,600,000
</TABLE>
5.9 Earnings Before Interest and Taxes. The Company will maintain
on each date set forth below operating income (determined in
accordance with generally accepted accounting principles but
before any deduction for interest expenses and income taxes
and calculated for the twelve months ending on such date)
greater than or equal to the amount set forth opposite such
date:
<TABLE>
<CAPTION>
DATE EBIT
<S> <C>
June 30, 1995 $3,600,000
September 30, 1995 $3,800,000
December 31, 1995 $3,800,000
March 31, 1996 $4,000,000
June 30, 1996 $4,300,000
September 30, 1996 and each fiscal quarter $4,300,000
end thereafter
</TABLE>
5.10 Interest Coverage. The Company will maintain on each date set
forth below, the ratio of (i) the sum of its pre-tax net
income, to (ii) interest expense (in each case determined in
accordance with generally accepted accounting principles, and
calculated for the twelve months ending on such date) greater
than or equal to the ratio set forth opposite such date:
<TABLE>
<CAPTION>
DATE RATIO
---- -----
<S> <C>
June 30, 1995 2.00 to 1
September 30, 1995 2.00 to 1
December 31, 1995 2.00 to 1
March 31, 1996 2.00 to 1
June 30, 1996 2.00 to 1
September 30, 1996 and each fiscal quarter 2.00 to 1
end thereafter
</TABLE>
5.11 Minimum Debt Service Coverage. The Company will maintain on
each date set forth below, the ratio of (i) the sum of its
after-tax net income, depreciation, and amortization expense
and interest expense, to (ii) the sum of its interest, capital
expenditures, and current maturities of long term debt
(excluding as long term debt, the indebtedness of the Company
to NBCI incurred pursuant to the credit agreement between
Company and NBCI, or any replacement of such indebtedness) (in
each case determined in accordance with generally accepted
accounting principles, and calculated for the twelve months
ending on such date) greater than or equal to the ratio set
forth opposite such date:
-11-
<PAGE> 12
<TABLE>
<CAPTION>
DATE RATIO
---- -----
<S> <C>
June 30, 1995 1.50 to 1
September 30, 1995 1.50 to 1
December 31, 1995 1.50 to 1
March 31, 1996 1.50 to 1
June 30, 1996 1.50 to 1
September 30, 1996 and each fiscal quarter 1.50 to 1
end thereafter
</TABLE>
6. COMPANY'S NEGATIVE COVENANTS. The Company will comply with the
following requirements unless holders of more than 50% of the
outstanding Restricted Securities agree otherwise in writing. These
requirements will terminate upon the earlier of (1) the closing date of
an underwritten public offering of the Company's common stock pursuant
to an effective registration statement under the Securities Act or (2)
the date when less than 25% of the Restricted Securities are held by
the original holders of the Debentures or their permitted transferees.
These requirements may be amended by a written agreement between the
Company and holders of more than 50% of the outstanding Restricted
Securities.
6.1 Dividends and Stock Repurchases. The Company will not declare
or pay any dividends (other than dividends payable solely in
stock of the Company) on any class of its stock or make any
payment on account of the purchase, redemption or other
retirement of any shares of such stock or make any
distribution in respect thereof, either directly or
indirectly. If the Company becomes an S Corporation (with your
consent and after first providing such supporting
documentation as you may request) the Company may pay
dividends equal to the amount of state and federal income tax
which would be due for each shareholder with respect to income
allocated to each shareholder as a result of the Company's
status as an S Corporation at the highest marginal income tax
rate for federal and state income tax purposes (after taking
into account any deduction for state income taxes in
calculating the federal income tax liability and for the state
or states in which each shareholder is liable for income
taxes).
6.2 Sale or Transfer of Assets; Suspension of Business Operations.
The Company will not sell, lease, assign, transfer, or
otherwise dispose of (a) the stock of any domestic Subsidiary
or (b) all or a substantial part of its assets to any other
person (other than the sale of Inventory in the ordinary
course of business) and will not liquidate, dissolve or
suspend business operations. The Company will not transfer any
material property without receipt of full and adequate
consideration. This Agreement does not restrict any sale or
other disposition of Company subsidiaries organized in
connection with the Company's operations outside the United
States.
6.3 Accounting. The Company will not adopt any material change in
accounting principles other than as required by generally
accepted accounting principles. The Company will not adopt,
permit or consent to any change in its fiscal year.
7. CONDITIONS OF OBLIGATION TO ISSUE AND SELL. The obligation of the
Company to issue and sell the Debentures to you at the Closing is
subject to the condition that the
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<PAGE> 13
representations and warranties stated in Article 3 of this Agreement
must be correct when made and as of the time of the Closing.
8. CONDITIONS OF OBLIGATION TO PURCHASE. Your obligation to purchase and
pay for the Debentures at the Closing is subject to the following
conditions:
8.1 Representations and Warranties Correct. The representations
and warranties contained in Article 2 of this Agreement must
be correct when made and as of the time of the Closing.
8.2 Performance. The Company must have performed and complied with
all agreements and conditions contained in this Agreement and
required to be performed or complied with by it prior to or at
the Closing.
8.3 Closing Certificate. The Company must have delivered to you a
certificate, dated the Closing Date, certifying that the
conditions specified in Sections 8.1 and 8.2 have been
fulfilled.
8.4 Directors and Officers. The persons named in Schedule 8.4 must
have been duly elected to the respective positions of
directors and officers of the Company as set forth in Schedule
8.4.
8.5 Opinion of Counsel. The Company must have delivered to you the
opinion of Lewis and Roca in substantially the form set forth
in Schedule 8.5.
9. MISCELLANEOUS.
9.1 Expenses. The parties will each pay their own expenses
incurred in connection with the purchase and sale of the
Debentures.
9.2 Survival of Representations and Warranties. All covenants,
agreements, representations and warranties made in writing in
this Agreement will survive the execution and delivery of this
Agreement and the issuance, sale, and delivery of the
Debentures.
9.3 Binding Effect. All covenants, agreements, representations,
and warranties in this Agreement bind, and inure to the
benefit of, the respective heirs, legal representatives,
successors, and assigns of the parties. The rights of any
transferee of a Restricted Security, however, are subject to
compliance with Section 4.1.
9.4 Notices. All notices and other communications under this
Agreement must be in writing. They will be deemed given and
received when delivered or five days after deposit in the
United States mail, first class postage prepaid, addressed to
Company at:
648 South River Drive
Tempe, Arizona 85281
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<PAGE> 14
Attention: President
with a copy to:
Lewis and Roca
40 North Central Avenue, Suite 1500
Phoenix, Arizona 85004
Attention: Kevin Olson, Esq.
and addressed to you at the address stated in Exhibit A. Any
party may change the person, officer, or address to which
notices and communications are to be sent to it by giving
notice.
9.5 Amendments and Waivers. Neither this Agreement nor any of its
terms may be changed, waived, discharged, or terminated except
in a writing signed by the Company and by holders of more than
50% of the outstanding Restricted Securities.
9.6 Controlling Law. This Agreement is being executed and
delivered, and the Debentures are being delivered, in Arizona
and will be governed by the laws of Arizona.
9.7 Counterparts. This Agreement may be executed in several
counterparts and each counterpart, when executed and delivered
and whether or not each counterpart is executed by all the
parties, will constitute an original instrument. All the
separate counterparts will together constitute this Agreement
and are parts of the same instrument.
If you are in agreement with the foregoing, please sign the form of
acceptance appearing as part of the Subscription Agreement for purchase of the
Debentures and return the same to the Company. This Agreement will become a
binding agreement between you and the undersigned upon the Company's acceptance
of your executed Subscription Agreement for the Debentures.
Yours very truly,
-14-
<PAGE> 15
ROCKFORD CORPORATION
By: /s/
--------------------------------
President
Attest /s/
-----------------------------
Assistant Secretary
<PAGE> 16
EXHIBIT A
LIST OF DEBENTURE PURCHASERS AND AMOUNTS PURCHASED
<TABLE>
<CAPTION>
NUMBER OF
NAME OF PRINCIPAL AMOUNT SHARES UPON
PURCHASER ADDRESS OF DEBENTURES CONVERSION
- --------- ------- ------------- ----------
<S> <C> <C> <C>
</TABLE>
<PAGE> 17
EXHIBIT B
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAW OF ANY STATE. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF EFFECTIVE REGISTRATION
STATEMENTS OR AN OPINION OF COUNSEL ACCEPTABLE TO
THIS COMPANY THAT REGISTRATION IS NOT REQUIRED."
ROCKFORD CORPORATION
8.5% CONVERTIBLE SUBORDINATED DEBENTURE DUE MAY 1, 2002
$1,760.00 May 1, 1995
1. PAYMENT OF PRINCIPAL AND INTEREST. Rockford Corporation, an Arizona
corporation (the "Company"), for value received, promises to pay to
Mark Albers or transferee, (the "Holder") the principal amount of
$1,760.00 on May 1, 2002 and to pay interest thereon at the rate of
eight and one-half percent (8.5%) per annum. Interest will accrue from
the date hereof and will be paid quarterly, on each January 15th, April
15th, July 15th, and October 15th hereafter (commencing on July 15,
1995) until the principal is fully paid. Interest will be paid on the
basis of a 360-day year of twelve 30-day months.
2. REDEMPTION PRIOR TO MATURITY. Subject to the following conditions, the
Company may, at its option, redeem all or part of this Debenture prior
to maturity at a redemption price of par (plus any interest accrued but
unpaid to the date fixed for redemption).
2.1 Conditions. The Company may redeem this Debenture only after
(a) the Company's Common Stock becomes publicly traded and
trades at a bid or closing price at least equal to one hundred
fifty percent (150%) of the then applicable Conversion Price
of this Debenture for a period of 30 consecutive trading days
or (b) the sale of all or substantially all of the Company's
business and assets to, or the merger or consolidation of the
Company with or into, any company whose stock is publicly
traded and whose stock trades at a bid or closing price at
least equal to one hundred fifty percent (150%) of the then
applicable Conversion Price of this Debenture for a period of
30 consecutive trading days.
2.2 Notice of Redemption. The Company must give notice of a
redemption not less than thirty (30) days, but not more than
ninety (90) days, before the date fixed for redemption. By the
date fixed for redemption, the Holder must surrender this
Debenture to the Company at its principal executive offices in
exchange for payment therefor. Upon due tender of the
redemption price by the Company, this Debenture will not be
deemed to be outstanding for any purpose subsequent to the
close of business on the date fixed for redemption.
-1-
<PAGE> 18
3. SUBORDINATION AND PRIORITY. The indebtedness evidenced by this
Debenture, including the principal and accrued interest, is expressly
subordinate and subject in right of payment and upon liquidation to the
prior payment in full of all "Senior Debt," whether now outstanding or
hereafter created, incurred, assumed, or guaranteed.
3.1 Definition of "Senior Debt". The term "Senior Debt" means the
principal, premium (if any), and interest on (a) indebtedness
(other than this Debenture or any previously subordinated
debenture) of the Company evidenced by notes or similar
obligations for money borrowed from or guaranteed to persons,
firms, or corporations which engage in lending money,
including, but without limitation, individuals, banks, trust
companies, insurance companies and other financing
institutions, and charitable trusts, pension trusts, and other
investing entities or organizations, (b) indebtedness of the
Company evidenced by notes or debentures issued under the
provisions of an indenture or similar instrument between the
Company and a bank or trust company, (c) the indebtedness of
the Company evidenced by the Company's Senior Notes in an
aggregate principal amount of $2,000,000 (due January 12,
1998) and $1,680,000 (due February 3, 1999), and (d)
indebtedness incurred, assumed or guaranteed by the Company in
connection with the acquisition by it of any property or asset
unless, in each case, by the terms of the instrument creating
or evidencing the indebtedness it is expressly provided that
such indebtedness is not superior in right of payment to this
Debenture.
3.2 Exclusions from Senior Debt. Senior Debt excludes, and the
indebtedness evidenced by this Debenture is expressly senior
and entitled to priority in payment and upon liquidation with
respect to, all capital stock of the Company. Senior Debt
excludes, and the indebtedness evidenced by this Debenture is
expressly of equal priority in payment and upon liquidation
with respect to, (a) indebtedness outstanding on the original
issue date of this Debenture and convertible into shares of
the Company's Common Stock and (b) any indebtedness issued
after the date of this Debenture and convertible into shares
of the Company's Common Stock.
4. EVENTS OF DEFAULT. An Event of Default will be deemed to occur upon the
occurrence of any of the following events:
4.1 Default in the payment of interest on this Debenture when it
becomes due and payable, and continuance of such default for a
period of ten (10) days after notice;
4.2 Default in the payment of the principal of this Debenture when
it becomes due and payable;
4.3 Default by the Company under an acceleration prior to maturity
of, or the failure to pay at maturity, any third party
indebtedness of the Company aggregating $250,000 or more for a
period of thirty (30) days after the same may become payable;
-2-
<PAGE> 19
4.4 The failure of the Company to comply, for a period of 30 days
after notice of default, with any affirmative or negative
covenant contained in the Purchase Agreement of even date
herewith between the Company and the original Holder hereof;
4.5 The failure of the Company to pay final judgments (not covered
by insurance or then subject to any appeal) aggregating
$500,000 or more for 30 days;
4.6 The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment, or composition of or in respect of the Company
under the Federal Bankruptcy Act or any other applicable
Federal or State law, or appointing a receiver, liquidator,
assignee, trustee, or other similar official of the Company or
of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and the continuance
of any such decree or order unstayed and in effect for a
period of 60 days; or
4.7 The institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to
the institution of bankruptcy or insolvency proceedings
against it, or the filing by it of a petition or answer or
consent seeking reorganization or relief under Federal or
State law, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator,
assignee, trustee, or other similar official of the Company or
of any substantial part of its property, or the making by it
of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts
generally as they become due, or the taking of corporate
action by the Company in furtherance of any such action.
5. RIGHTS UPON DEFAULT; ACCELERATION OF INDEBTEDNESS. Upon the occurrence
of an Event of Default:
5.1 The entire outstanding balance of the Debenture, including the
entire balance of principal and all accrued interest, will
accelerate and become immediately due and payable upon written
notice to the Company by the Holder; and
5.2 The Company may not pay dividends or make distributions to
holders of any class of its stock, or redeem or repurchase all
or any part of any class of its stock.
6. CONVERSION OF DEBENTURE. This Debenture is convertible, at the option
of the Holder, into shares of the Company's Common Stock on the
following basis:
6.1 Conversion Price. A conversion may be made, at any time before
the close of business on the business day before the maturity
or redemption date, at the rate of $10.50 per share, subject
to adjustment as provided in this Debenture (the "Conversion
Price"). The Company is not required to issue fractional
shares of Common Stock or other capital stock upon conversion
of this Debenture and, in lieu thereof, will pay a cash
adjustment based upon the then current fair market
-3-
<PAGE> 20
value of the Common Stock as determined by the Board of
Directors on the last business day before the date of
conversion.
6.2 Adjustment Based Upon Stock Dividends Combination of Shares or
Recapitalization. The Conversion Price and the number of
Shares will be adjusted if the Company, at any time after the
original issuance of this Debenture,
(a) pays a stock dividend on its Common Stock,
(b) subdivides its outstanding shares of Common Stock
into a greater number of shares,
(c) combines its outstanding shares of Common Stock into
a smaller number of shares,
(d) issues by reclassification of its shares of Common
Stock any other special capital stock of the Company,
or
(e) distributes to all holders of its Common Stock
evidences of indebtedness or assets (excluding cash
dividends) or rights or warrants to subscribe for
Common Stock (other than those mentioned above).
On or after the occurrence of an event or events requiring
adjustment of the Conversion Price, the Holder upon surrender
of this Debenture for conversion will be entitled to receive
the number of shares of Common Stock or other securities of
the Company which the Holder would have owned or been entitled
to receive had this Debenture been converted immediately
before the happening of the event requiring adjustment of the
Conversion Price.
6.3 Adjustment Based Upon Stock Issuances. The Conversion Price
will be adjusted if, at any time after the original issuance
of this Debenture, the Company issues Common Stock, issues
rights or warrants to subscribe for or purchase Common Stock,
or issues securities convertible into or exchangeable for
Common Stock at less than the Conversion Price. Upon the
occurrence of an event or events requiring adjustment of the
Conversion Price under this section the Conversion Price will
be adjusted to be equal to the price of the new issue. An
adjustment under this section will not increase the number of
shares of Common Stock, or other securities, which the Holder
will be entitled to receive upon surrender of this Debenture
for conversion, but will only reduce the Conversion Price
which the Holder must pay to acquire such Common Stock or
other securities. Any amount of this Debenture not required to
be used in a conversion, because of an adjustment of the
Conversion Price under this section, must be paid by the
Company to the Holder upon any redemption or upon maturity of
this Debenture.
6.4 Adjustment Based Upon Merger or Consolidation. In case of any
consolidation or merger to which the Company is a party (other
than a merger in which the Company is the surviving entity and
which does not result in any reclassification
-4-
<PAGE> 21
of or change in the outstanding Common Stock of the Company)
or in case of any sale or conveyance to another person, firm,
or corporation of the property of the Company as an entirety
or substantially as an entirety, the Holder will have the
continuing right to convert this Debenture into the kind and
amount of securities and property (including cash) receivable
upon such consolidation, merger, sale, or conveyance by a
holder of the number of shares of Common Stock into which this
Debenture might have been converted immediately before the
consolidation, merger, sale, or conveyance.
6.5 No Adjustment for Outstanding Conversion and Option Rights and
Certain Other Securities. Notwithstanding any other section of
this Agreement, no adjustment of the Conversion Price will be
made upon the issuance by the Company of
(a) Common Stock upon conversion or exchange of
securities convertible or exchangeable into Common
Stock and outstanding on or before the date of this
Debenture,
(b) Common Stock upon exercise of any employee's stock
option outstanding on or before the date of this
Debenture, or
(c) Common Stock or securities convertible into Common
Stock, not amounting to more than 10% of the
Company's issued and outstanding Common Stock, issued
after the date of this Debenture pursuant to an
employee benefit plan of the Company.
6.6 Exercise of Conversion Privilege. The Conversion Privilege is
exercisable by the Holder upon written notice to the Company
(or its successor) and the surrender of this Debenture in
exchange for the number of shares of Common Stock (or other
securities and property, including cash, in the event of an
adjustment of the Conversion Price) into which this Debenture
is convertible based upon the Conversion Price. Conversion
rights will expire at the close of business on the business
day before the maturity or redemption date.
7. CORPORATE STATUS OF SHARES TO BE ISSUED. All shares of the Company's
Common Stock (or other securities in the event of an adjustment of the
Conversion Price) issued upon the conversion of this Debenture will,
upon issuance, be fully paid and nonassessable.
8. ISSUANCE OF STOCK CERTIFICATE. Upon conversion of this Debenture, the
Company will forthwith issue to the Holder a certificate or
certificates representing the number of shares of its Common Stock (or
other securities in the event of an adjustment of the Conversion Price)
to which the conversion relates.
9. STATUS OF HOLDER OF DEBENTURE. This Debenture does not entitle the
Holder to any voting rights or other rights as a shareholder of the
Company. No dividends are payable or accrue in respect of this
Debenture, or the securities issuable upon conversion, unless and until
this Debenture is converted. Upon the conversion of this Debenture, the
Holder will (to the extent permitted by law) be deemed to be the holder
of record of the shares of
-5-
<PAGE> 22
Common Stock issuable upon conversion, notwithstanding that the stock
transfer books of the Company are then closed or that the certificates
representing the shares of Common Stock are not then actually
delivered.
10. LOSS OR DESTRUCTION OF DEBENTURE. The Company will execute and deliver
a new debenture of like tenor and date upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction, or
mutilation of this Debenture and (a) in the case of loss, theft, or
destruction, of an indemnity by the Holder, (b) in case of any
transfer, upon such terms as are satisfactory to the Company, or (c) in
the case of mutilation, upon surrender and cancellation of this
Debenture.
11. RESERVATION OF SHARES. The Company will reserve out of its authorized
shares of Common Stock (and other securities in the event of an
adjustment of the Conversion Price) a number of shares sufficient to
enable it to comply with its obligation to issue shares of Common Stock
(and other securities in the event of an adjustment of the Conversion
Price) upon the conversion of this Debenture.
12. STATUS UNDER SECURITIES LAWS.
12.1 No Registration. This Debenture has not been, and the
securities issuable upon conversion hereof will not be,
registered under the Securities Act of 1933 (the "1933 Act"),
the Arizona Securities Act (the "Arizona Act") or the
securities laws of any other jurisdiction. This Debenture, and
such securities, must be held indefinitely without any
transfer, sale, or other disposition unless (a) subsequently
registered under the 1933 Act, the Arizona Act and the
securities laws of any other applicable jurisdiction or (b) in
the opinion of counsel acceptable to the Company, registration
is not required under such Acts or laws.
12.2 Legend. There will be endorsed on this Debenture, and on the
certificates evidencing any securities issued upon the
conversion of this Debenture, a legend substantially to the
following effect:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAW OF ANY STATE. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF EFFECTIVE REGISTRATION
STATEMENTS OR AN OPINION OF COUNSEL ACCEPTABLE TO
THIS COMPANY THAT REGISTRATION IS NOT REQUIRED."
12.3 Restriction on Other Securities. Except in certain limited
circumstances, the restrictions on the transfer of this
Debenture will also apply to (a) securities issued upon
conversion of this Debenture and (b) shares of capital stock
or other securities issued or otherwise acquired on account of
the Debenture (or securities issued upon conversion of the
Debenture) including, without limitation, shares
-6-
<PAGE> 23
and securities issued or acquired as a result of a stock
dividend, stock split or exchange, or any distribution of
shares or securities pursuant to any corporate reorganization,
reclassification, or similar event.
12.4 Refusal to Transfer. The Company may refuse to effect a
transfer, sale or other disposition of this Debenture, or the
shares issuable upon conversion, by the Holder or its
successors or assigns otherwise than as expressly permitted by
this Debenture.
13. MISCELLANEOUS.
13.1 Purchase Agreement. This Debenture, and the indebtedness
evidenced hereby, is issued and incurred subject to the terms
of the Purchase Agreement between the Company and the original
Holder, the terms and conditions of which are binding upon any
subsequent Holder or transferee of this Debenture.
13.2 Governing Law. This Debenture, and all questions relating to
its validity, interpretation, performance, and enforcement is
governed by and will be construed in accordance with the laws
of Arizona, notwithstanding any Arizona or other
conflict-of-law provisions to the contrary.
13.3 Binding Nature of Debenture. This Debenture is binding upon
any successors and assigns of the Company and will inure to
the benefit of the Holder and its successors and assigns,
except that the Holder may not assign or transfer its rights
under this Debenture otherwise than by gift or bequest, by
operation of law, or as expressly permitted by this Debenture.
13.4 Notices. All notices and other communications under this
Debenture must be in writing and will be deemed given and
received when delivered or five days after they are deposited
in the United States mails, first class postage prepaid
addressed as set forth in the Purchase Agreement. Either party
may alter the person, office or address to which
communications or copies are to be sent by giving notice.
13.5 Amendment and Waivers. Neither this Agreement nor any of its
terms may be changed, waived, discharged, or terminated except
in a writing signed by the Company and by holders of more than
50% of the outstanding Restricted Securities (as that term is
defined in the Purchase Agreement).
-7-
<PAGE> 24
14. EXECUTION DATE. The Company has caused this Debenture to be duly
executed on the date written above.
ROCKFORD CORPORATION
By:/s/
------------------------------------------
President
Attest: /s/
------------------------------------------
Secretary
-8-
<PAGE> 25
[ROCKFORD LOGO]
Schedule 2.1
Rockford Corporation
Subsidiaries
1. Rockford Europe b.v.
2. Rockford Foreign Corporation
3. Rockford Hong Kong
4. Rockford Europe Elektonik Vertriebs GmbH
5. Rockford Japan Corporation
<PAGE> 26
SCHEDULE 2.2
AUTHORIZED AND OUTSTANDING STOCK
AND
CONVERTIBLE SECURITIES
AUTHORIZED STOCK: 10,000,000 Shares of Common Stock, par value $0.01
per shares
OUTSTANDING COMMON STOCK: 809,011 Shares
CONVERTIBLE SECURITIES:
$150,000 7% Convertible Subordinated Debentures,
due March 31, 1996, convertible into
15,000 Shares of Common Stock
$2,000,000 Senior Note, due January 12, 1998, with associated
warrants to purchase 167,400 Shares of Common Stock
$1,640,000 Senior Notes, due February 3, 1999, with
associated warrants to purchase 71,305
Shares of Common Stock
$1,640,000 Senior Notes, due February 3, 1999, with
associated warrants to purchase 71,305
Shares of Common Stock
Warrants to purchase 39,161 Shares of Common
Stock, issued to Bank of America Arizona
Option to purchase 50,000 Shares of Common
Stock, issued to Grisanti, Galef & Goldress
Options to purchase 133,204 Shares of Common
Stock, issued under the Company's 1994
Stock Option Plan
Total Common Stock issuable if all debentures, warrants and options were
converted: 611,070 Shares
Fully diluted Common Stock: 1,420,081 Shares
<PAGE> 27
SCHEDULE 2.3
Consolidated Financial Statements
and Other Financial Information
ROCKFORD CORPORATION
September 30, 1994
<PAGE> 28
Rockford Corporation
Consolidated Financial Statements
and Other Financial Information
Years ended September 30, 1994 and 1993
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Stockholders' Equity (Deficit).................. 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6
Other Financial Information
Report of Independent Auditors on Other Financial Information.............. 16
Consolidating Balance Sheet................................................ 17
Consolidating Statement of Operations...................................... 19
</TABLE>
<PAGE> 29
[ERNST & YOUNG LLP letterhead]
Report of Independent Auditors
The Board of Directors and Stockholders
Rockford Corporation
We have audited the accompanying consolidated balance sheets of Rockford
Corporation and subsidiaries as of September 30, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial positions of Rockford
Corporation and subsidiaries at September 30, 1994 and 1993, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 23, 1994
-1-
<PAGE> 30
Rockford Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 120 $ 765
Accounts receivable, less allowances of $715,000 in 1994 and
$733,000 in 1993 10,539 9,601
Inventories, net 5,885 6,289
Prepaid expenses, insurance receivable, and other 634 1,835
Deferred income taxes 2,100 --
-------- --------
Total current assets 19,278 18,490
Property and equipment, net 3,015 3,052
Deferred income taxes 170 --
Other assets, net of accumulated amortization of $683,000 in 1994 and
$506,000 in 1993 282 371
-------- --------
Total assets $ 22,745 $ 21,913
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 300 $ 917
Accounts payable 5,264 6,463
Current portion of notes payable, long-term debt, and capital lease
obligations 1,587 13,240
Accrued payroll, commissions, and other 2,750 2,370
Accrued warrant 1,570 1,300
Income taxes payable 400 231
-------- --------
Total current liabilities 11,871 24,521
Notes payable and long-term debt, less current portion 10,778 2,133
Capital lease obligations, less current portion 51 48
-------- --------
10,829 2,181
Lease commitments and contingencies -- --
Stockholders' equity (deficit):
Common stock, $.01 par value
Authorized shares - 10,000,000
Issued and outstanding shares - 608,061 6 6
Additional paid-in-capital 765 770
Deferred stock grants -- (29)
Accumulated deficit (531) (5,436)
Currency translation adjustments (195) (100)
-------- --------
Total stockholders' equity (deficit) 45 (4,789)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 22,745 $ 21,913
======== ========
</TABLE>
See accompanying notes.
-2-
<PAGE> 31
Rockford Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1994 1993
-------- --------
(In thousands)
<S> <C> <C>
Sales, net of returns and discounts of $12,215,000 in 1994 and
$11,171,000 in 1993 $ 63,051 $ 57,449
Cost of goods sold 39,565 41,479
-------- --------
Gross profit 23,486 15,970
Operating expenses:
Engineering 1,347 1,435
Commissions 4,159 4,010
Marketing expenses 5,076 6,137
Freight programs 1,450 1,465
General and administrative 6,430 5,262
-------- --------
18,462 18,309
-------- --------
Operating income (loss) 5,024 (2,339)
Other income (expense):
Interest expense (1,593) (1,591)
Other (96) 1,048
-------- --------
Income (loss) before benefit (provision) for income taxes and cumulative
effect of a change in accounting for income taxes 3,335 (2,882)
Benefit (provision) for income taxes 1,570 (90)
-------- --------
Income (loss) before cumulative effect of accounting change 4,905 (2,972)
Cumulative effect as of September 30, 1992 of change in method of
accounting for income taxes -- (827)
-------- --------
Net income (loss) $ 4,905 $ (3,799)
======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE> 32
Rockford Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Currency
----------------- Paid-In Stock Accumulated Translation
Shares Amount Capital Grants Deficit Adjustments Total
------ ------ ------- ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1992 608 $ 6 $ 770 $ (58) $(1,637) $ 89 $ (830)
Amortization of deferred stock grants -- -- -- 29 -- -- 29
Currency translation -- -- -- -- -- (189) (189)
Net loss -- -- -- -- (3,799) -- (3,799)
----- ------- ------- ------- ------- ------- -------
Balance at September 30, 1993 608 6 770 (29) (5,436) (100) (4,789)
Amortization of deferred stock grants -- -- -- 24 -- -- 24
Deferred stock grants canceled -- -- (5) 5 -- -- --
Currency translation -- -- -- -- -- (95) (95)
Net income -- -- -- -- 4,905 -- 4,905
----- ------- ------- ------- ------- ------- -------
Balance at September 30, 1994 608 $ 6 $ 765 $ -- $ (531) $ (195) $ 45
===== ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
-4-
<PAGE> 33
Rockford Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1994 1993
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4,905 $ (3,799)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change -- 827
Depreciation and amortization 1,484 1,499
Deferred income taxes (2,270) --
Provision for doubtful accounts -- 753
Provision for inventory allowances 513 1,765
Currency translation (95) (189)
Amortization of deferred stock grants 24 29
Changes in operating assets and liabilities:
Accounts receivable (938) (1,768)
Inventories (109) 92
Prepaid expenses, insurance receivable, and other 1,201 (964)
Bank overdraft (617) 229
Accounts payable 208 2,438
Accrued payroll, bonus, commissions, and other 380 73
Accrued warrant 270 1,100
Discontinued operations -- (240)
Income taxes payable 169 231
-------- --------
Net cash provided by operating activities 5,125 2,076
INVESTING ACTIVITIES
Purchases of property and equipment (1,204) (1,224)
Increase in other assets (88) (26)
-------- --------
Net cash used by investing activities (1,292) (1,250)
FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 8,436 322
Payments on notes payable and long-term debt (12,569) (479)
Payments on capital lease obligations (345) (674)
-------- --------
Net cash used by financing activities (4,478) (831)
-------- --------
Net decrease in cash (645) (5)
Cash at beginning of year 765 770
-------- --------
Cash at end of year $ 120 $ 765
======== ========
</TABLE>
See accompanying notes.
-5-
<PAGE> 34
Rockford Corporation
Notes to Consolidated Financial Statements
September 30, 1994
1. ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Rockford Corporation (Company) is presently engaged in the business of
manufacturing and distributing car audio electronics and speaker systems under
the division names of "Rockford Fosgate," "Rockford Acoustic Designs (formerly
Carbonneau)," "Hafler" and "Perfect Interface." The Company was organized and
incorporated under the laws of the State of Arizona on July 22, 1980, and has
manufacturing facilities in Tempe, Arizona and Grand Rapids, Michigan.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned and majority owned subsidiaries in Germany and Japan.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
RECEIVABLES
The Company sells its products principally to automotive stereo dealers
primarily in the United States, Europe and Asia. At September 30, 1994 and 1993,
net accounts receivable include approximately $475,000 and $247,000,
respectively, due from overseas businesses.
The Company also offers a prompt pay discount for certain invoices paid under 40
days of issuance and has included in its allowance for receivables at September
30, 1994 and 1993, approximately $180,000 with respect to accounts utilizing
such discounts after year-end.
INVENTORIES
Inventories consist principally of raw materials of electronic and mechanical
components used in the manufacturing of amplifier and speaker systems and
finished goods. Inventories are carried at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
computed principally on the straight-line method for financial reporting
purposes over a three to five year life.
-6-
<PAGE> 35
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounted for income taxes under the provisions of Accounting
Principles Board Opinion Number 11 through September 30, 1992. Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" was issued
by the Financial Accounting Standards Board in February 1992 and was adopted by
the Company as of October 1, 1992 (see Note 6).
RESEARCH AND DEVELOPMENT
During the years ended September 30, 1994 and 1993, research and development
expense of approximately $1,347,000 and $1,435,000, respectively, was charged to
expense as incurred.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with FASB Statement No. 52. All balance sheet accounts
have been translated using the current exchange rates at the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year. The gains and losses resulting from the change in exchange rates
from year to year have been reported separately as a component of stockholders'
equity (deficit). The effect on the statement of operations of transaction gains
and losses is insignificant.
RECLASSIFICATIONS
Certain amounts in the 1993 financial statements have been changed to conform
them to the 1994 presentation.
-7-
<PAGE> 36
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories consisted of the following at September 30:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Raw materials $ 4,019 4,847
Work in progress 222 572
Finished goods 3,046 2,835
------- -------
7,287 8,254
Less allowances (1,402) (1,965)
------- -------
5,885 $ 6,289
======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Machinery and equipment $ 6,353 $ 5,842
Furniture and fixtures 191 185
Leasehold improvements 597 477
Vehicles 74 85
Demo equipment 108 108
Drawings and technical data 146 127
Tooling equipment 1,410 817
------- -------
8,879 7,641
Less accumulated depreciation and amortization (5,864) (4,589)
------- -------
$ 3,015 $ 3,052
======= =======
</TABLE>
-8-
<PAGE> 37
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at September 30:
<TABLE>
<CAPTION>
1994 1993
------ ------
(In thousands)
<S> <C> <C>
$12,000,000 line of credit with a lender, paid in full during 1994 $ -- $8,888
$9,500,000 line of credit with a lender collateralized by substantially all
assets, with interest payments due monthly at the prime rate plus three
percent through December 31, 1994 (10.75 percent at September 30, 1994) and
at the prime rate plus two percent effective January 1, 1995 until April 1997
when all remaining principle and interest is due. Borrowings under this line
of credit are limited to the borrowing base defined substantially as a
percentage of inventory, as defined, and 75 percent of eligible accounts
receivable, as defined and adjusted in the agreement 6,848 --
10.5 percent senior note payable to a bank, collateralized by substantially all
assets, payable in monthly installments of $50,243, including interest until
May 31, 1995 when all remaining principal and interest is due and payable. In
connection with this senior note payable, warrants were issued to purchase up
to 39,161 shares of the Company's common stock at $36.00 per share, expiring
June 1995; the exercisable warrants are being reduced pro rata based on
payments on the outstanding loan balance 1,322 1,622
10 percent subordinated, convertible debentures, unsecured, interest payable
semiannually until January 1998 when all remaining principal and interest is
due and payable, convertible into common shares at $11.95 per share
Subsequent to year-end, the subordinated convertible debentures were amended
to senior notes, unsecured, subordinated, no conversion rights, with interest
payable quarterly. In connection with the amendment, detachable warrants were
issued to purchase up to 167,400 shares of the Company's commons stock at
$6.50 per share, expiring February 2000 2,000 2,000
</TABLE>
-9-
<PAGE> 38
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
(In thousands)
<S> <C> <C>
10.5 percent subordinated, convertible debentures, unsecured, interest payable
quarterly until February 1999 when all remaining principal and interest is
due and payable, convertible into common shares at $23.00 per share
Subsequent to year-end, the subordinated convertible debentures were amended
to senior notes, unsecured, subordinated, with no conversion rights. In
connection with the amendment, detachable warrants were issued to purchase up
to 54,696 shares of the Company's common stock at $6.50 per share, expiring
February 2000 $1,258 $1,258
7.5 percent subordinated, convertible debentures to a related parties,
unsecured, interest payable quarterly until January 1995, when all remaining
principal and interest is due and payable, convertible into common shares at
$.75 per share 150 150
7 percent subordinated, convertible debentures to a related parties, unsecured,
interest payable quarterly until March 1996 when all remaining principal and
interest is due and payable, convertible into common shares at rates ranging
from $.01 share to $1 per share 150 150
10.5 percent subordinated, convertible debentures to a related parties,
unsecured, interest payable quarterly until February 1999 when all remaining
principal and interest is due and payable, convertible into common shares at
$23.00 per share. Subsequent to year-end, the subordinated convertible
debentures were amended to senior notes, unsecured, subordinated, with no
conversion rights. In connection with the amendment, detachable warrants were
issued to purchase up to 16,609 shares of the Company's common stock at $6.50
per share, expiring February 2000 382 382
</TABLE>
-10-
<PAGE> 39
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
(In thousands)
<S> <C> <C>
7 percent promissory note to a vendor, paid in full during 1994 $ -- $ 296
8.75 percent note payable to a financing company collateralized by equipment,
payable in monthly installments of $5,576, including interest, until February
1998 when all remaining principal and interest is due and payable 193 241
Other 4 6
------- -------
12,307 15,033
Less current portion 1,529 12,900
------- -------
$10,778 $ 2,133
======= =======
</TABLE>
Maturities of notes payable and long-term debt for the five years succeeding
September 30, 1994 are $1,529,000 in 1995, $200,000 in 1996, $6,896,000 in 1997,
$2,048,000 in 1998, and $1,634,000 in 1999. Interest payments were approximately
$1,490,000 and $1,597,000 for the years ended September 30, 1994 and 1993,
respectively.
During 1994, the Company converted $1,407,000 of vendor payables to short-term
promissory notes in noncash transactions. The promissory notes were paid in full
during the fiscal year ended September 30, 1994.
The Company's $9,500,000 line of credit, its 10.5 percent senior note payable
with an outstanding balance at September 30, 1994 of $1,322,000, and its 10
percent subordinated, convertible debentures contain convenants which place
various restrictions on financial ratios, levels of indebtedness and capital
expenditures, among other things.
5. LEASES
The Company leases equipment under capital leases. The Company also leases
certain manufacturing, warehouse and office facilities and computer hardware and
software under noncancelable operating leases that expire in various years
through April 1999.
-11-
<PAGE> 40
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
5. LEASES (CONTINUED)
Property and equipment includes the following amounts for leases that have been
capitalized at September 30:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Equipment $ 625 $ 2,249
Less accumulated amortization (478) (1,818)
------- -------
$ 147 $ 431
======= =======
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital leases and noncancelable operating leases
with initial terms of one year or more consisted of the following at September
30, 1994:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
(In thousands)
<S> <C> <C>
1995 $ 74 $1,319
1996 25 1,230
1997 24 1,238
1998 -- 601
1999 -- 157
Thereafter -- 111
------ ------
Total minimum lease payments 123 $4,656
======
Amounts representing interest 14
------
Present value of net minimum lease payments (including
current portion of $58,000) $ 109
======
</TABLE>
Total rental expense for all operating leases was approximately $995,000 and
$740,000 for the years ended September 30, 1994 and 1993, respectively.
-12-
<PAGE> 41
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Effective October 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method too the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes" (FAS 109). As permitted under
the new rules, prior years' financial statements have not been restated. The
cumulative effect of adopting FAS 109 as of October 1, 1992 was to increase the
net loss by $827,000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of September 30, 1994 are as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Inventory allowances $ 556 $ 736
Receivables allowances 258 214
Book over tax depreciation 170 124
Accrued liabilities and other 636 485
Research and development 208 219
Alternative minimum tax credit carryforward 244 315
Net operating loss carryforwards - state 198 300
------- -------
Total deferred tax assets 2,270 2,393
Less valuation allowance for deferred tax assets -- (2,393)
Less current portion of deferred tax assets (2,100) --
------- -------
Deferred tax assets long-term $ 170 $ --
======= =======
</TABLE>
The valuation allowance decreased by $2,393,000 during 1994 based upon
management's assessment that a valuation allowance was no longer required with
the recent improvements in the Company's financial results. During 1993, the
valuation allowance was increased by $1,330,000 from the amount existing at
adoption based on that year's losses.
-13-
<PAGE> 42
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the federal and state income tax expense (benefit)
are:
<TABLE>
<CAPTION>
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Current:
Federal expense $ 590 $ 50
State expense 110 40
------- -------
Total current 700 90
Deferred:
Federal (benefit) (2,135) --
State (benefit) (135) --
------- -------
Total deferred (benefit) (2,270) --
------- -------
Deferred tax assets long-term $(1,570) $ 90
======= =======
</TABLE>
The Company's effective tax rate differs from the statutory rates primarily due
to the noninclusion of foreign income and (losses) of approximately $223,000,
net, in 1994 and $(159,000), net, in 1993, utilization of net operating loss
carryforwards, as well as the deferred tax asset valuation allowance changes
during 1994 and 1993.
At September 30, 1994, the Company had a net operating loss carryforward of
approximately $3,950,000 for state income tax purposes which expires during 1996
through 1998.
7. COMMON STOCK GRANTS AND OPTIONS
In May 1990, the Board of Directors granted certain officers and employees
common stock grants as compensation and additional incentive to provide
continued services to the Company. The stock was granted at its fair market
value as determined by management at the date of the grant. If the officers' or
employees' employment with the Company is terminated during the four year
incentive period for any reason, the officer or employee shall be required to
forfeit all unvested stock issued under the stock grant program. The Company
charged to expense, under the stock grant program, $24,000 and $29,000 as
compensation in 1994 and 1993, respectively.
The Board of Directors of the Company granted a certain consulting firm, which
is providing executive and other consulting services to the Company, options to
purchase 50,000 shares of its authorized but unissued common stock at a price of
$23 per share (amended to $6.50 per share subsequent to year-end), protected
against dilution, as defined, and expiring in August 1999. The price per share
exceeded the fair market value at the date of the grant. These stock options
shall be contingent upon the Company's stock being publicly traded, or the
Company being
-14-
<PAGE> 43
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK GRANTS AND OPTIONS (CONTINUED)
merged into or acquired by a private or publicly owned concern, and if such
event occurs, the stock options will vest 100 percent and shall be exercisable
only within 90 days after such event. The stock options shall vest 25 percent on
August 1, 1992, and 25 percent each year thereafter provided that the consulting
firm shall be, each vesting date, still performing the services required of
them.
Subsequent to year-end, the Board authorized the implementation of an incentive
stock option plan for certain employees. Under the plan, options to purchase
common stock of the Company will be granted to certain employees at the fair
market value of the underlying common stock. Up to 250,000 shares may be offered
under this plan.
8. LIFE INSURANCE PROCEEDS
During 1993, the Company received proceeds of approximately $1,000,000 from a
claim filed under a key man life insurance policy due to the death of a member
of the Board of Directors. The proceeds are recorded in other income in the 1993
financial statements.
9. CONTINGENCIES
The Company is a party to legal proceedings which arise out of the ordinary
course of business. Based upon advice from outside legal counsel, management is
of the opinion that these matters will have no material effect on the Company's
consolidated financial position.
10. BENEFIT PLAN
During 1990, the Company's Board of Directors elected to establish the Rockford
Corporation 401(k) Retirement Savings Plan (Plan) covering substantially all
employees who have completed six consecutive months of service without regard to
hours of service. Under the terms of the Plan, employees may make voluntary
contributions, subject to Internal Revenue Service limitations. The company will
match employee contributions up to three percent of the employee's annual
compensation. Additional contributions to the Plan can be made at the discretion
of the Board of Directors. Contributions to the Plan during the years ended
September 30, 1994 and 1993 were approximately $140,000 and $71,000,
respectively.
-15-
<PAGE> 44
OTHER FINANCIAL INFORMATION
<PAGE> 45
[ERNST & YOUNG LLP letterhead]
Report of Independent Auditors on
Other Financial Information
The Board of Directors and Stockholders
Rockford Corporation
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The following financial information,
included on pages 17 through 19, is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Ernst & Young LLP
November 23, 1994
-16-
<PAGE> 46
Rockford Corporation
Consolidating Balance Sheet
September 30, 1994
(In thousands)
<TABLE>
<CAPTION>
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 120 $ -- $ 60 $ 34 $ 26
Accounts receivable 11,254 (1,844) 12,604 121 373
Less allowance for doubtful accounts (715) -- (696) (19) --
-------- -------- -------- -------- --------
Net accounts receivable 10,539 (1,844) 11,908 102 373
Inventories 7,287 (109) 7,105 -- 291
Less allowances (1,402) -- (1,402) -- --
-------- -------- -------- -------- --------
Net inventories 5,885 (109) 5,703 -- 291
Prepaid expenses and other 634 -- 522 32 80
Notes receivable -- (564) 564 -- --
Deferred income taxes 2,100 -- 2,100 -- --
-------- -------- -------- -------- --------
Total current assets 19,278 (2,517) 20,857 168 770
Property and equipment, net 3,015 -- 2,895 38 82
Deferred income taxes 170 -- 170 -- --
Other assets, net 282 (175) 377 50 30
-------- -------- -------- -------- --------
Total assets $ 22,745 $ (2,692) $ 24,299 $ 256 $ 882
======== ======== ======== ======== ========
</TABLE>
-17-
<PAGE> 47
Rockford Corporation
Consolidating Balance Sheet -- Continued
September 30, 1994
(In thousands)
<TABLE>
<CAPTION>
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 300 $ -- $ 300 $ -- $ --
Accounts payable 5,264 (1,844) 5,185 1,060 863
Current portion of notes payable, long-term debt, and --
capital lease obligations 1,587 -- 1,587 --
Accrued payroll, bonus, commissions, and other 2,750 -- 2,749 (24) 25
Accrued warranty 1,570 -- 1,570 -- --
Income taxes payable 400 -- 400 -- --
-------- -------- -------- -------- --------
Total current liabilities 11,871 (1,844) 11,791 1,036 888
Notes payable and long-term debt, less current portion 10,778 (564) 10,778 454 110
Capital lease obligations, less current portion 51 -- 51 -- --
-------- -------- -------- -------- --------
10,829 (564) 10,829 454 110
Stockholders' equity (deficit):
Common stock 6 (216) 6 117 99
Additional paid-in capital 765 -- 765 -- --
Deferred stock grants -- -- -- -- --
Retained earnings (accumulated deficit) (531) (68) 980 (1,047) (324)
Currency translation adjustments (195) -- -- (304) 109
-------- -------- -------- -------- --------
Total stockholders' equity (deficit) 45 (284) 1,679 (1,234) (116)
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity (deficit) $ 22,745 $ (2,692) $ 24,299 $ 256 $ 882
======== ======== ======== ======== ========
</TABLE>
-18-
<PAGE> 1
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Group Debenture Holder Amount On Conversion
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.5% Debentures:
Bartol Family Carrio Cabling Corporation $500,000 204,762
Nicholas G. Bartol $7,507.50 3,075
Timothy C. Bartol $7,507.50 3,075
Ann Farr Bartol $7,507.50 3,075
Pamela B. Carrio $7,507.50 3,075
Mary Brigham Paul $7,507.50 3,075
Rebecca Paul Harris $7,507.50 3,075
Timothy C. Bartol $20,000.00 8,192
Nick G. Bartol $39,000.00 15,970
Renee F. Bartol $10,000.00 4,094
Gary Suttle and 3G The J. Goldress Trust, $20,000.00 8,192
Jerry E. Goldress, Trustee
Suttle Brothers Investments LLC $21,000.00 8,600
Suttle Brothers Investments LLC $31,500.00 12,900
</TABLE>
<PAGE> 2
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Group Debenture Holder Amount On Conversion
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lee Katz $1,406.25 576
Richard J. Puricelli $1,406.25 576
Carole O'Connor $1,406.25 576
Richard D. Saunders $1,406.25 576
Craig D. Crisman $1,406.25 576
Marvin A. Davis $1,406.25 576
Brian R. Stone $1,406.25 576
Martin M. Batt $1,406.25 576
Rockford Employees Ronald N. Trout & $4,922.00 2,017
Jonie Schuster Trout, Community Property
The Principal Financial Group $10,000.00 4,094
(401K) Ronald N. Trout, Owner
The Principal Financial Group $15,755.00 6,450
(401K) Alan R. Zimmerman, Owner
Christopher D. Barnes $2,817.00 1,152
The Principal Financial Group $3,521.00 1,441
(401K) Gary E. Church, Owner
The Principal Financial Group $704.00 288
(401K) Thomas D Coulson, Owner
</TABLE>
<PAGE> 3
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Group Debenture Holder Amount On Conversion
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Principal Financial Group $3,521.00 1,441
(401K) Herb Kane, Owner
The Principal Financial Group $3,521.00 1,441
(401K) William E. Turner, Jr., Owner
The Principal Financial Group $11,056.00 4,528
(401K) Angie Gitch, Owner
The Principal Financial Group $5,000.00 2,047
(401K) H. Christopher Parvin, Owner
Wayne Harris $60,500.00 24,777
The Principal Financial Group $39,500.00 16,177
(401K) Wayne Harris, Owner
The Principal Financial Group $1,789.15 731
(401K) Donald D. Hammerle, Owner
Christine Trapp $704.00 288
The Principal Financial Group $704.00 288
(401K) Margie Williams, Owner
The Principal Financial Group $1,760.00 722
(401K) Richard H. Gentry, Owner
The Principal Financial Group $2,112.00 864
(401K) Mark Lowe, Owner
The Principal Financial Group $1,300.00 533
(401K) Mark F. Rudolph, Owner
</TABLE>
<PAGE> 4
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Group Debenture Holder Amount On Conversion
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Matthew Clonts $1,760.00 722
The Principal Financial Group $5,000.00 2,047
(401K) Leslie K. Ferris, Owner
Mark Albers $1,760.00 722
The Principal Financial Group $3,520.00 1,441
(401K) Mark Albers, Owner
The Principal Financial Group $50,000.00 20,477
IRA - James M. Thomson
The Principal Financial Group $7,042.00 2,885
(401K) - David Boshes, Owner
The Principal Financial Group $13,000.00 5,323
IRA - David Boshes, Owner
The Principal Financial Group $114.00 47
(401K) Victoria L. Hodson, Owner
The Principal Financial Group $4,250.39 1,742
(401K) David Richards, Owner
Others Var & Co., $23,606.00 9,666
First Trust National Association
Graham Humes $1,225.00 503
Gordon A. Jr. & Blair B. MacInnes $1,531.00 628
John P. Lloyd & $5,000.00 2,047
Beverly A Lloyd, Joint Tenants
</TABLE>
<PAGE> 5
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Group Debenture Holder Amount On Conversion
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John P. Lloyd & $10,000.00 4,094
John M. Lloyd, Joint Tenants
</TABLE>
<PAGE> 1
EXHIBIT 10.32
BRIDGE LOAN CONVERSION AND EXTENSION AGREEMENT
This Agreement is between Rockford Corporation, an Arizona corporation
("Borrower") and Caroline S. Bartol ("Lender"). Borrower and Lender agree as
follows:
1. RECITALS.
1.1 Borrower Business. Borrower manufacturers high quality auto
and professional audio equipment, including amplifiers,
speakers, source units, and accessories.
1.2 Loan. Lender provided a $2,000,000 loan (the "Bridge Loan") to
Borrower to help finance working capital and general corporate
needs of Borrower pursuant to a Bridge Loan Agreement (the
"Original Agreement") attached as Exhibit A.
1.3 Conversion and Extension. Lender and Borrower have agreed to
(a) convert $999,999 of the Bridge Loan principal into 67,340
shares of Borrower's common stock (a price of $14.85 per
share) and (b) extend the balance of the Bridge Loan, or
$1,000,001 of principal, so that its due date is December 31,
1996.
1.4 Purpose. The purpose of this Agreement is to set forth the
terms of the agreement to convert and extend the terms of the
Bridge Loan.
2. CONVERSION AGREEMENT. Lender subscribes to purchase, and Borrower
promises to issue, 67,340 shares of Borrower's common stock, par value
$0.01 per share (the "Shares"), for a purchase price of $14.85 per
share or $999,999 in the aggregate. The purchase price is payable by
conversion of $999,999 of the Bridge Loan principal into capital of
Borrower and Lender instructs Borrower to convert such principal into
capital upon issuance and delivery of the Shares to Lender.
In connection with the purchase of the Shares, Lender represents and
acknowledges as follows:
2.1 Investment Intent. Lender is acquiring the Shares for
investment and not with a view to their resale or
distribution. Lender has no contract, undertaking, agreement,
or arrangement with any person to sell, transfer or pledge the
Shares and has no present plans to enter into any such
contract, undertaking, agreement, or arrangement.
2.2 Securities Registration. The Shares are offered and sold
without registration under the Securities Act of 1933 (the
"Act") or the Arizona Securities Act, in reliance upon one or
more exemptions available under the Act and under Arizona Law
for non-public offerings.
2.3 Legend on Shares. The certificates evidencing the Shares will
bear a legend giving notice of the restrictions on transfer of
the Shares resulting from their sale in reliance on exemptions
from registration under applicable state securities laws.
<PAGE> 2
2.4 Accredited Investor. Lender is an Accredited Investor as that
term is defined in the rules of the Securities and Exchange
Commission.
2.5 Risk. Lender has the financial ability to bear the economic
risk of Lender's investment in the Shares (including its
possible loss). Lender has adequate means for providing for
Lender's current needs and personal contingencies and has no
need for liquidity with respect to Lender's investment in the
Shares. Lender has (alone or together with Lender's advisers
and family) such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and
risks of an investment in the Shares and has obtained, in
Lender's judgment, sufficient information to evaluate the
merits and risks of an investment in the Shares.
2.6 Information Supplied. Lender (alone or with representatives)
has had opportunity to ask questions of and receive
satisfactory answers from the Borrower and its officers and
directors concerning the business and prospects of the
Borrower and has had the opportunity to review such documents,
records, books, and other information as Lender has deemed
necessary in order to make an investment decision with respect
to the purchase of the Shares. In making the decision to
purchase the Shares subscribed for, Lender has relied solely
on independent investigations and on documents supplied by
Company.
3. EXTENSION AGREEMENT. Lender extends the balance of the Bridge Loan
after conversion, $1,000,001 (the "Loan") on the terms set forth in
this agreement. Borrower will execute and deliver to Lender a
promissory note (the "Note") in the form of Exhibit A, in exchange for
Lender's delivery to Borrower of the original promissory note
evidencing the Bridge Loan. Borrower will (a) maintain accurate records
of the original principal amount, payments made, and interest and other
charges in connection with the Loan and (b) render to Lender on
request, and at least monthly, an account statement showing such
amounts.
4. INTEREST. The outstanding principal and unpaid interest under this
Agreement will bear interest at the rate of 9% per annum. Interest is
payable monthly on the first day of each month.
5. REPAYMENT OF PRINCIPAL AND OPTION. Borrower will pay the principal on
the Note on December 31, 1996. Borrower grants Lender an option to
purchase additional shares of Borrower's Common Stock (the "Option
Shares") by conversion of the Loan at any time before its repayment by
Borrower. The price for the Option Shares will be (a) the most recent
price at which Borrower has sold its shares to an unaffiliated third
party in a transaction concluded after the date of this Agreement of
(b) $14.85 per share, if Borrower has not sold its shares in such a
transaction. Lender may purchase up to the number of Option Shares
computed by dividing the outstanding principal of the Loan by the price
per share established in the immediately preceding sentence. In
connection with any purchase of Option Shares, Lender will provide
Borrower with representations comparable to those set forth in Section
2 above.
- 2 -
<PAGE> 3
6. SUBORDINATION TO BANK LOAN. The Loan is subordinate to Borrower's
obligations under its loan (the "Bank Loan") with its principal lender,
Wells Fargo Bank, formerly First Interstate Bank of Arizona (the
"Bank"). All Borrower's obligations to Bank must be first paid to Bank
in full before any payments may be made under this Loan, except for:
6.1 payments of interest when due;
6.2 payments of principal paid from proceeds of a capital
investment by Lender or its affiliates in Borrower; and
6.3 payments of principal when due on December 31, 1996, but only
if (a) Bank has not given Borrower notice that it is in
default or non-compliance under the Bank Loan and (b) the
payment of principal would not cause Borrower to be out of
compliance under the Bank Loan either (i) as of the date made,
(ii) as of the most recent quarterly compliance date under the
Bank Loan (assuming the payment had been made on the last day
of such quarter), or (iii) as of the next quarterly compliance
date under the Bank Loan (based on Borrower's current
projected financial statements). If Borrower makes a payment
of principal, Borrower will deliver to Lender and Bank a
certificate confirming that these conditions are satisfied.
6.4 If there is an Event of Default under Section 9.4 below, then
Borrower and its officers, assigns, trustee, receiver, and
other representative are directed to pay Bank the full amount
of the Bank Loan before making any payments to Lender other
than payments of principal out of proceeds of the investment
by Lender or its affiliates in Borrower.
7. NO SECURITY. The Loan is unsecured but constitutes a general obligation
of Borrower.
8. MANAGEMENT BONUS PLAN. If Borrower establishes a management bonus plan
for its fiscal years 1997, 1998, or 1999 Borrower's compensation
committee and management will provide Lender with a written explanation
of any differences between (a) the income projections used to establish
fiscal 1997, 1998, and 1999 bonus levels in the plan and (b) the income
projections used by Vrolyk and Company in its evaluation of the value
of Borrower's common stock.
9. ADDITIONAL DOCUMENTS. Borrower will execute and deliver to lender
additional documents as necessary to carry out the purposes of this
Agreement.
10. EVENTS OF DEFAULT. The following events are "Events of Default":
10.1 Borrower fails to pay any amount under this Agreement when due
and payable;
10.2 Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, representation, or
warranty contained in this Agreement;
10.3 Borrower becomes insolvent; or
- 3 -
<PAGE> 4
10.4 A complaint or case is filed by or against borrower under
federal bankruptcy laws and is not dismissed within 60 days of
filing; Borrower admits to inability to pay or fails to pay
Borrower's debts generally as they mature; Borrower makes an
assignment for the benefit of creditors; a receiver is
appointed for Borrower; or any other insolvency proceedings
are instituted by or against Borrower and are not dismissed
within 60 days of filing.
11. ACCELERATION OF OBLIGATIONS AND REMEDIES. If there is an event of
default, the outstanding Loan balance and all other amounts owed by
Borrower to Lender will, if Lender elects, become immediately due and
payable without notice to or demand upon Borrower of any kind. Any
acceleration, if elected by Lender, is subject to all applicable laws.
12. USURY SAVINGS CLAUSE. Borrower will not, upon acceleration of maturity
by Lender or otherwise, be required to pay any interest in excess of
the maximum amount permitted by law.
13. MISCELLANEOUS.
13.1 Waiver of Defaults. Lender may, in its sole discretion, waive
a default or cure at Borrower's expense a default. Any waiver
in a particular instance or of a particular default is not a
waiver of other defaults or of the same kind or default at
another time.
13.2 Entire Agreement; Amendments. This Agreement is the entire
Agreement of the parties with respect to its subject matter
and may not be changed or amended without the written consent
of each party.
13.3 Severability. If any part (or parts) of this Agreement is
invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability will not effect any
provisions of this Agreement, and this Agreement will be
construed as if the invalid, illegal, or unenforceable
provision were omitted, provided that such construction and
omission is consistent with the general intent of the parties
as evidenced by this Agreement considered as an entirety.
13.4 Notices. Notices required under this Agreement are effective
upon delivery or three days after mailing by registered or
certified mail, return receipt requested, to the address of
the parties shown on the signature page of this Agreement
(which may be changed by notice).
13.5 Governing Law. This Agreement is governed by the laws of
Arizona.
13.6 Assignability. This Agreement may not be assigned without the
prior written consent of each party.
13.7 Counterparts. This Agreement may be executed in counterparts
and all counterparts so executed constitute one Agreement.
- 4 -
<PAGE> 5
13.8 Attorneys' Fees. In any proceeding arising under this
Agreement, the prevailing party is entitled to recover the
attorneys' fees, costs, and expenses in connection with such
proceeding.
14. EXECUTION AND EFFECTIVE DATE. This Agreement is executed
________________, 1996 and effective as of July 1, 1996.
"BORROWER"
Rockford Corporation
By: / s /
-------------------------------------
Chief Financial Officer
Address: 648 S. River Drive
Tempe, Arizona 85281
"LENDER"
/ s /
-------------------------------------
Caroline S. Bartol
Address: 38415 Sombrero Road
Carefree, Arizona 85377
P.O. Box 1209
- 5 -
<PAGE> 6
EXHIBIT A
PROMISSORY NOTE
Principal Amount: $2,000,000 Tempe, Arizona
March 18, 1996
For value received, Rockford Corporation ("Maker") promises to pay
to the order of Caroline S. Bartol ("Lender"), the principal amount stated above
plus interest on the unpaid balance of the principal as hereinafter provided.
This Promissory Note ("Note") is given by Maker to evidence Maker's obligation
to make payments under the Loan Agreement between Lender and Maker of even date
with this Note (the "Agreement").
INTEREST AND INTEREST PAYMENTS. The outstanding principal under
this Note will bear interest at the rate of 9% per annum. Interest is payable in
monthly installments equal to accrued interest, with the first installment due
on or before May 1, 1996, and each subsequent installment due on or before the
first day of each month thereafter.
PRINCIPAL PAYMENTS. Maker will pay the principal on the Note on the
earlier of (a) receipt of the proceeds of the capital investment in Maker
committed by Lender or its affiliates or (b) September 30, 1996.
DEFAULT. A default will occur upon an "Event of Default" as defined
in the Agreement.
REMEDIES. Upon any Event of Default, the entire principal and any
accrued but unpaid interest will, at Lender's option, become due and payable on
demand and Lender will have any other remedies granted to it under the
Agreement.
CREDITING OF PAYMENTS. Lender may credit all payments received
first against the accrued but unpaid interest, then against any costs of
collection, then against the unpaid principal then due or delinquent.
<PAGE> 7
PREPAYMENT. Maker reserves the right to prepay all or any portion
of the principal sum without penalty of any kind, but will pay all accrued but
unpaid interest on the date of such a prepayment.
FORM OF PAYMENTS. Principal and interest are payable only in lawful
money of the United States of America in immediately available funds.
ATTORNEYS FEES. If this Note is placed in the hands of an attorney
for collection, Maker promises to pay, in addition to the unpaid principal and
accrued but unpaid interest, the costs of collection including reasonable
attorneys fees.
WAIVERS. Maker and any endorsers hereof waive demand, notice of
presentment, protest, notice of dishonor and protest, rights of exemption, and
any defense by reason of extension of time or other indulgences granted by
Lender. The obligations under this Note are binding and enforceable upon and
against the successors and assigns of Maker.
"MAKER"
Rockford Corporation
By: /s/ James M. Thomson
-------------------------
Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.33
BRIDGE LOAN AGREEMENT
This Agreement is between Rockford Corporation, an Arizona corporation
("Borrower") and Caroline S. Bartol ("Lender"). Borrower and Lender agree as
follows:
1. RECITALS.
1.1. Borrower Business. Borrower manufactures high quality auto and
professional audio equipment, including amplifiers, speakers,
"head units," and accessories.
1.2. Loan. Borrower has sought and, subject to the conditions in
this agreement, Lender has agreed to provide a $2,000,000 loan
to Borrower to help finance working capital and general
corporate needs of Borrower.
1.3. Purpose. The purpose of this Agreement is to set forth the
terms of Lender's agreement to lend to Borrower $2,000,000.
2. LOAN AGREEMENT. Lender will loan Borrower $2,000,000 (the "Loan") on
the terms set forth in this agreement. Borrower will execute and
deliver to Lender a promissory note (the "Note") in the form of Exhibit
A. Lender will advance the amount of the Loan as of the date of this
Agreement. Borrower will (a) maintain accurate records of the amount
advanced, payments made, and interest and other charges in connection
with the Loan and (b) render to Lender on request, and at least
monthly, an account statement showing such amounts.
3. USE OF MONIES LOANED. Borrower will use the amount loaned to for
working capital, to reduce other debt, and to pay trade accounts
payable.
4. INTEREST. The outstanding principal and unpaid interest under this
Agreement will bear interest at the rate of 9% per annum. Interest is
payable monthly on the first day of each month.
5. REPAYMENT OF PRINCIPAL. It is intended that this Loan is a "bridge"
loan in advance of an investment by Lender or its affiliates in
Borrower of not less than the principal amount of the Loan. The Loan
will be repaid out of the investment by Lender or its affiliates.
Borrower will pay the principal on the Note on the earlier of (a)
receipt of the proceeds of the capital investment in Borrower committed
by Lender or its affiliates or (b) September 30, 1996.
6. SUBORDINATION TO BANK LOAN. The Loan is subordinate to Borrower's
obligations under its loan (the "Bank Loan") with its principal lender,
First Interstate Bank of Arizona (the "Bank"). All Borrower's
obligations to Bank must be first paid to Bank in full before any
payments may be made under this Loan, except for:
<PAGE> 2
6.1. payments of interest when due;
6.2. payments of principal paid from proceeds of the capital
investment by Lender or its affiliates in Borrower; and
6.3. payments of principal when due on September 30, 1996, but only
if (a) Bank has not given Borrower notice that it is in
default or non-compliance under the Bank Loan and (b) the
payment of principal would not cause Borrower to be out of
compliance under the Bank Loan either (i) as of the date made,
(ii) as of the most recent quarterly compliance date under the
Bank Loan (assuming the payment had been made on the last day
of such quarter), or (iii) as of the next quarterly compliance
date under the Bank Loan (based on Borrower's current
projected financial statements). If Borrower makes a payment
of principal, Borrower will deliver to Lender and Bank a
certificate confirming that these conditions are satisfied.
6.4. If there is an Event of Default under Section 9.4 below, then
Borrower and its officers, assigns, trustee, receiver, and
other representative are directed to pay Bank the full amount
of the Bank Loan before making any payments to Lender other
than payments of principal out of proceeds of the investment
by Lender or its affiliates in Borrower.
7. NO SECURITY. The Loan is unsecured but constitutes a general obligation
of Borrower.
8. ADDITIONAL DOCUMENTS. Borrower will execute and deliver to Lender
additional documents as necessary to carry out the purposes of this
Agreement.
9. EVENTS OF DEFAULT. The following events are "Events of Default":
9.1. Borrower fails to pay any amount under this Agreement when due
and payable;
9.2. Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, representation, or
warranty contained in this Agreement;
9.3. Borrower becomes insolvent; or
9.4. A complaint or case is filed by or against borrower under
federal bankruptcy laws and is not dismissed within 60 days of
filing; Borrower admits to inability to pay or fails to pay
Borrower's debts generally as they mature; Borrower makes an
assignment for the benefit of creditors; a receiver is
appointed for Borrower; or any other insolvency proceedings
are instituted by or against Borrower and are not dismissed
within 60 days of filing.
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<PAGE> 3
10. ACCELERATION OF OBLIGATIONS AND REMEDIES. If there is an event of
default, the outstanding Loan balance and all other amounts owed by
Borrower to Lender will, if Lender elects, become immediately due and
payable without notice to or demand upon Borrower of any kind. Any
acceleration, if elected by Lender, is subject to all applicable laws.
11. USURY SAVINGS CLAUSE. Borrower will not, upon acceleration of maturity
by Lender or otherwise, be required to pay any interest in excess of
the maximum amount permitted by law.
12. MISCELLANEOUS.
12.1. Waiver of Defaults. Lender may, in its sole discretion, waive
a default or cure at Borrower's expense a default. Any waiver
in a particular instance or of a particular default is not a
waiver of other defaults or of the same kind of default at
another time.
12.2. Entire Agreement; Amendments. This Agreement is the entire
Agreement of the parties with respect to its subject matter
and may not be changed or amended without the written consent
of each party.
12.3. Severability. If any part (or parts) of this Agreement is
invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability will not effect any
other provisions of this Agreement, and this Agreement will be
construed as if the invalid, illegal, or unenforceable
provision were omitted, provided that such construction and
omission is consistent with the general intent of the parties
as evidenced by this Agreement considered as an entirety.
12.4. Notices. Notices required under this Agreement are effective
upon delivery or three days after mailing by registered or
certified mail, return receipt requested, to the address of
the parties shown on the signature page of this Agreement
(which may be changed by notice).
12.5. Governing Law. This Agreement is governed by the laws of
Arizona.
12.6. Assignability. This Agreement may not be assigned without the
prior written consent of each party.
12.7. Counterparts. This Agreement may be executed in counterparts
and all counterparts so executed constitute one Agreement.
12.8. Attorneys' Fees. In any proceeding arising under this
Agreement, the prevailing party is entitled to recover the
attorneys' fees, costs, and expenses in connection with such
proceeding.
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<PAGE> 4
13. EXECUTION AND EFFECTIVE DATE. This Agreement is executed and effective
March 18, 1996.
"BORROWER"
Rockford Corporation
By: /s/
----------------------------
Chief Financial Officer
Address: 648 S. River Drive
Tempe, Arizona 85281
"LENDER"
/s/
----------------------------
Caroline S. Bartol
Address: 38415 Sombrero Road
Carefree, Arizona 85377
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<PAGE> 5
EXHIBIT A
PROMISSORY NOTE
Principal Amount: $2,000,000 Tempe, Arizona
March 18, 1996
For value received, Rockford Corporation ("Maker") promises to pay
to the order of Caroline S. Bartol ("Lender"), the principal amount stated above
plus interest on the unpaid balance of the principal as hereinafter provided.
This Promissory Note ("Note") is given by Maker to evidence Maker's obligation
to make payments under the Loan Agreement between Lender and Maker of even date
with this Note (the "Agreement").
INTEREST AND INTEREST PAYMENTS. The outstanding principal under
this Note will bear interest at the rate of 9% per annum. Interest is payable in
monthly installments equal to accrued interest, with the first installment due
on or before May 1, 1996, and each subsequent installment due on or before the
first day of each month thereafter.
PRINCIPAL PAYMENTS. Maker will pay the principal on the Note on the
earlier of (a) receipt of the proceeds of the capital investment in Maker
committed by Lender or its affiliates or (b) September 30, 1996.
DEFAULT. A default will occur upon an "Event of Default" as defined
in the Agreement.
REMEDIES. Upon any Event of Default, the entire principal and any
accrued but unpaid interest will, at Lender's option, become due and payable on
demand and Lender will have any other remedies granted to it under the
Agreement.
CREDITING OF PAYMENTS. Lender may credit all payments received
first against the accrued but unpaid interest, then against any costs of
collection, then against the unpaid principal then due or delinquent.
<PAGE> 6
PREPAYMENT. Maker reserves the right to prepay all or any portion
of the principal sum without penalty of any kind, but will pay all accrued but
unpaid interest on the date of such a prepayment.
FORM OF PAYMENTS. Principal and interest are payable only in lawful
money of the United States of America in immediately available funds.
ATTORNEYS FEES. If this Note is placed in the hands of an attorney
for collection, Maker promises to pay, in addition to the unpaid principal and
accrued but unpaid interest, the costs of collection including reasonable
attorneys fees.
WAIVERS. Maker and any endorsers hereof waive demand, notice of
presentment, protest, notice of dishonor and protest, rights of exemption, and
any defense by reason of extension of time or other indulgences granted by
Lender. The obligations under this Note are binding and enforceable upon and
against the successors and assigns of Maker.
"MAKER"
Rockford Corporation
By: /s/ James M. Thomson
--------------------------------
Chief Financial Officer
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<PAGE> 1
FIN0VA
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: ROCKFORD CORPORATION
ADDRESS: 648 SOUTH RIVER DRIVE
TEMPE, ARIZONA 85281
DATE: JUNE 20, 1997
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
================================================================================
TOTAL FACILITY (SECTION 1.1):
The Total Facility is the amount of Twenty Million and No/100
Dollars ($20,000,000.00).
================================================================================
LOANS (SECTION 1.2):
RECEIVABLES LOANS: A revolving line of credit consisting of
loans against Borrower's Eligible Receivables ("Receivable
Loans") in an aggregate outstanding principal amount not to
exceed the lesser of:
(a) the total of:
(i) the Total Facility minus
(ii) the aggregate outstanding and unpaid
principal balance of all Inventory Loans; minus
(iii)the outstanding and unpaid principal balance
of Term Loan A; minus
(iv) the aggregate outstanding and unpaid balance
of all Capex Loans; minus
(v) the aggregate sum of the outstanding and
unpaid principal balance of all Senior Notes on and
after October 10, 1997;
or
(b) the total of:
(i) an amount equal to eighty percent (80.0%) of
the net amount of the Eligible Receivables (after first
deducting from such Eligible Receivables a dilution
reserve to account for dilution in excess of ten percent
(10.0%) to be established at Lender's sole
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<PAGE> 2
discretion and to be adjusted quarterly at Lender's sole
discretion on a trailing twelve-month basis); minus
(ii) the aggregate sum of the outstanding and
unpaid principal balance of all Senior Notes on and
after October 10, 1997.
Lender may change the applicable advance rate set forth above
from time to time in its sole discretion.
INVENTORY LOANS AND SEASONAL LOANS: A revolving line of credit
consisting of loans against Borrower's Eligible Inventory in
an aggregate outstanding principal amount not to exceed the
lesser of:
(a) the amount of Six Million and No/100 Dollars
($6,000,000.00); or
(b) (i) the sum of:
(A) fifty percent (50.0%) of the value of
Borrower's Eligible Raw Materials Inventory; plus
(B) sixty-five percent (65.0%) of the value of
Borrower's Eligible U.S. Finished Goods Inventory; plus
(C) the lesser of (1) sixty-five percent (65.0%)
of the value of Borrower's Eligible Foreign Finished
Goods Inventory, or (2) the amount of One Million Five
Hundred Thousand and No/100 Dollars ($1,500,000.00); or
(ii) during the four consecutive calendar months of
November through February, the sum of:
(A) an additional ten percent (10.0%), over and
above the provisions of paragraph (b)(i)(A) and
paragraph (b)(i)(B) above, of the value of each of
Borrower's Eligible Raw Materials Inventory and
Borrower's Eligible U.S. Finished Goods Inventory,
respectively; plus
(B) the lesser of (i) an additional ten percent
(10.0%), over and above the provisions of paragraph
(b)(i)(C)(1) above, of the value of Borrower's Eligible
Foreign Finished Goods Inventory, or (ii) the positive
amount by which the amount of One Million Five Hundred
Thousand and No/100 Dollars ($1,500,000.00) exceeds
sixty-five percent (65.0%) of the value of Borrower's
Eligible Foreign Finished Goods Inventory.
The value of Borrower's Eligible Inventory shall in all
instances be calculated at the lower of cost or market value
and determined on a first-in, first-out basis. Lender may
change the applicable advance rate set forth above from time
to time in its sole discretion.
Loans advanced pursuant to paragraph (b)(i) above are herein
called the "Inventory Loans." Loans advanced pursuant to
paragraph (b)(ii) above are herein called the "Seasonal
Loans." The Inventory Loans, Seasonal Loans and Receivables
Loans are herein called the "Revolving Loans."
TERM LOAN A: A single-advance term loan against the value of
Borrower's existing machinery and equipment ("Term Loan A") in
the original principal amount of Two Million and No/100
Dollars $2,000,000.00). Term Loan A shall be repayable upon
such terms and subject to such conditions as are set forth on
the promissory note of Borrower evidencing such Term Loan A
("Term Note A"), in form and substance satisfactory to Lender
in its sole discretion. The outstanding and unpaid principal
balance of and all accrued and unpaid interest on Term Loan A
shall in all events be due and payable on the earlier to occur
of (a) the Maturity Date or (b) the date on which this
Agreement is terminated and all Obligations become due and
payable as provided in Section 16 or Section 17 above or
otherwise pursuant to this Agreement.
- 2 -
<PAGE> 3
CAPEX LOANS: One or more term loans (each a "Capex Loan" and
collectively the "Capex Loans") to finance in part the
acquisition costs of Borrower's post-Closing Equipment
purchases. Each Capex Loan shall bear interest only (payable
monthly in arrears) to the nearest anniversary date of this
Agreement, and thereafter shall be repayable in monthly
installments of principal to be calculated based upon a
five-year straight-line amortization period plus interest
outstanding from time to time at the Capex Loans Interest
Rate, but in any event upon such terms and subject to such
conditions as are set forth on the promissory note of Borrower
evidencing the aggregate amount of all Capex Loans (the "Capex
Note"), in form and substance satisfactory to Lender in its
sole discretion, upon the following terms and subject to the
following conditions: (a) Lender shall have no obligation to
make a Capex Loan which, without giving effect to any
amortization or repayment of the Capex Loans, would cause the
aggregate amount of all Capex Loans advanced hereunder to
exceed the amount of One Million and No/100 Dollars
($1,000,000.00); (b) the Capex Loans, if any, shall be
evidenced by the Capex Note, and otherwise shall be made on
such terms and subject to such conditions as are set forth
herein, (c) Borrower shall have notified Lender in writing not
less than one (1) Business Day prior to the date upon which
the Capex Loan is to be made, specifying the amount of such
Capex Loan and the Capital Expenditure acquisition to be
financed thereby; (d) each Capex Loan (other than a Capex Loan
which makes the aggregate of all Capex Loans equal to
$1,000,000) shall be in the amount of at least Fifty Thousand
and No/100 Dollars (S50,000.00); (e) Lender shall be satisfied
that it will receive a purchase money security interest in the
Equipment to be financed by and acquired with the proceeds of
the Capex Loan; (f) no Capex Loan shall exceed the amount of
eighty percent (80.0%) of the "hard" acquisition costs
(excluding without limitation installation, training,
supplies, ancillary or accessory items or similar "soft"
costs) of the Equipment to be acquired with the proceeds of
such Capex Loan; (g) Borrower may not request more than two
(2) Capex Loans during any calendar month; (h) Lender may, in
its sole discretion, make any Capex Loan by funding directly
to the seller of the Equipment to be financed by such Capex
Loan and to require Borrower to execute and to deliver to
Lender prior to funding of such Capex Loan a UCC-I Financing
Statement concerning such Equipment to be acquired; (i) Lender
shall have no obligation to make any Capex Loan if, either
before or after giving effect to such requested Capex Loan,
Borrower would not be in compliance with the financial
covenants set forth in Section 13.14 of this Agreement or any
other term or condition of this Agreement; and (j) to the
extent not contrary to this paragraph, the terms and
conditions applicable to all advances of any Loans shall apply
to any Capex Loan. The outstanding and unpaid principal
balance of and all accrued and unpaid interest on all Capex
Loans shall in all events be due and payable on the earlier to
occur of (a) the Maturity Date or (b) the date on which this
Agreement is terminated and all Obligations become due and
payable as provided in Section 16 or Section 17 above or
otherwise pursuant to this Agreement.
The Revolving Loans and the Term Loans are collectively herein
called the "Loans."
================================================================================
CONDITIONS PRECEDENT (SECTION 2.1):
The obligation of Lender to make the initial advance hereunder
is subject to the fulfillment, to the satisfaction of Lender
and its counsel, of each of the following conditions, in
addition to the conditions set forth in Sections 2.1 and 2.2
above: (a) Excess Availability. Borrower shall have excess
borrowing availability under the Receivables Loans facility of
not less than Five Hundred Thousand and No/100 Dollars
($500,000.00), after giving effect to the initial advance
hereunder and after giving effect to payment in full of all of
Borrower's suppliers to within sixty (60) days of such
suppliers' respective written or agreed-upon terms of payment.
(b) Opinions. To the extent any persons other than Borrower
and Lender shall be parties to the Loan Documents, Lender
reserves the right to require satisfactory opinions of counsel
for each such person concerning the proper organization of
such person and the due authorization, execution, delivery,
enforceability, validity and binding effect of the Loan
Documents to which such person is a party. Each such opinion
of counsel shall confirm, to the satisfaction of Lender, that
the opinion is being
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<PAGE> 4
delivered to Lender at the instruction of the party
represented by such counsel, that Lender is entitled to rely
on such opinion, and that for purposes of such reliance Lender
is deemed to be in privity with the opining counsel. (c)
Review of Material Agreements. Prior to Closing, Lender shall
have reviewed and approved all material agreements to which
Borrower is a party, including, without limitation, all
documents in respect of the borrowing of money, all joint
venture agreements, royalty agreements, license agreements,
employment/management incentive agreements, all non-compete
agreements to which Borrower is a party, and such other
agreements as are requested by Lender for review. (d) Approval
of Employment and Other Agreements. Lender shall have reviewed
and approved all employment or sales agreements to be in
effect as of the Closing between Borrower and 3G. In addition,
Lender may require in its sole discretion that Borrower, enter
into one or more employment agreements with certain of
Borrower's employees. (e) Approval of Projections. Lender
shall have received and approved cash flow projections and a
pro forma balance sheet with adjusting entry showing (i) that
the proposed Loans, together with any equity investment
required of Borrower by Lender under this Agreement, will
satisfy Borrower's projected working capital needs; and (ii)
that following the Closing of the Loans, (A) the then present
fair market value of the assets of Borrower will be greater
than the total amount of liabilities, including contingent,
subordinated, absolute, fixed, matured or unmatured and
liquidated or unliquidated liabilities, of Borrower, (B) the
present fair market value of the assets of Borrower will be
sufficient to pay the probable liability of Borrower on its
existing debts as such debts become absolute and matured, (C)
Borrower will not be left with property which would constitute
an unreasonably small capital, (D) Borrower will not incur
debts beyond its ability to pay as they mature, (E) Borrower
will have a tangible net worth in a minimum amount to be
considered solvent immediately following the proposed initial
advance hereunder, or in the alternative Borrower may provide
a "solvency opinion" acceptable in all respects to Lender in
its sole discretion, and (F) Borrower will have reasonably
sufficient capital for the conduct of its business following
the initial advance hereunder. (f) UCC, Lien Searches. Lender
shall have received and approved the results of UCC, tax lien,
litigation, judgment, and bankruptcy searches regarding
Borrower, and shall have received satisfactory customer,
vendor and credit reference checks on Borrower and Guarantors.
In addition, Lender shall have received satisfactory personal
investigatory reports on each member of the senior management
of Borrower, including without limitation W. Gary Suttle and
James M. Thomson, as well as so-called "Bishop" reports on
certain Persons associated with Borrower. (g) Cash
Collections. Lender shall have approved Borrower's proposed
methods for, and arrangements shall have been made for,
submission of Borrower's cash collections to Lender. (h) First
Priority Perfected Security Interest. Lender shall have
received and perfected a first priority security interest in
the Collateral. (i) Appraisal. Lender shall have received and
approved in its sole discretion an appraisal of (1) Borrower's
unencumbered Equipment located at Borrower's plants in Tempe,
Arizona and Grand Rapids, Michigan demonstrating a minimum
orderly liquidation value of not less than One Million and
No/100 Dollars ($1,000,000.00) and (2) Borrower's Inventory,
other Equipment and fixed assets which are to become
Collateral. ( j) Foreign Credit A/R Insurance. Lender shall
have received and approved a new policy of foreign credit
accounts receivable insurance, having a term and coverages
acceptable to Lender in its sole discretion.
Borrower shall cause the conditions precedent set forth in
Section 2.1 of this Agreement and set forth above in this
Schedule to be satisfied on or before June 30, 1997.
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<PAGE> 5
================================================================================
INTEREST AND FEES (SECTION 3.1):
I. REVOLVING LOANS.
A. Interest.
(i) Rates of Interest. The Revolving Loans shall bear interest
on the unpaid principal amount thereof from the date such Revolving Loans
are made and until paid in full at one of the following rates, as selected
by Borrower from time to time as provided in this Section:
(a) Base Rate Option (Receivables Loans and Inventory
Loans only). That portion of the outstanding principal balance of
the Receivables Loans and the Inventory Loans subject to this option
shall bear interest at a fluctuating rate per annum equal at all
times to one percent (1.0%) in excess of the Base Rate;
(b) LIBO Rate Option (Receivables Loans and Inventory
Loans only). That portion of the outstanding principal balance of
the Receivables Loans and the Inventory Loans subject to this option
shall bear interest at a fixed rate per annum equal to three and
one-quarter percent (3.250%) in excess of the LIBO Rate applicable
to such LIBO Rate Portion;
(c) Base Rate Option (Seasonal Loans only). That portion
of the outstanding principal balance of the Seasonal Loans subject
to this option shall bear interest at a fluctuating rate per annum
equal at all times to three percent (3.0%) in excess of the Base
Rate; and
(d) LIBO Rate Option (Seasonal Loans only). That portion
of the outstanding principal balance of the Seasonal Loans subject
to this option shall bear interest at a fixed rate per annum equal
to five and one-quarter percent (5.250%) in excess of the LIBO Rate
applicable to such LIBO Rate Portion.
Notwithstanding the foregoing, if for Borrower's fiscal year ending
December 31, 1997 Borrower's EBITDA exceeds the amount of $5,500,000
and Borrower's Senior Debt Coverage exceeds 1.40 to 1.0, as
determined by the audited financial statements to be provided
pursuant to Section 5.2 of this Agreement, then (effective on the
first day of the calendar month first following Lender's review and
approval of such audited financial statements and the calculations
of EBITDA and Senior Debt Coverage Ratio) the applicable Margin
otherwise added to the Base Rate or the LIBO Rate, as applicable,
shall be reduced by subtracting therefrom one-quarter of one percent
(0.250%); provided, however, that if for any consecutive
twelve-calendar-month period ending after December 31, 1997
Borrower's EBITDA does not exceed the amount of $5,500,000 or
Borrower's Senior Debt Coverage Ratio does not exceed 1.40 to 1.0,
as determined by Lender, then (effective on the first day of the
calendar month first following such determination and at all times
thereafter) the applicable Margin shall revert to that provided in
subparagraphs (a) through (d) above.
The interest rate chargeable hereunder shall be
increased or decreased, as the case may be, without notice or demand
of any kind, upon the announcement of any change in the Base Rate.
Each change in the Base Rate shall be effective hereunder on the
first day following the announcement of such change, provided, that
a cumulative change of less than one-fourth of one percent (0.25%)
shall not be considered. Interest charges and all other fees and
charges herein shall be computed on the basis of a year of 360 days
and actual days elapsed and shall be payable to Lender in arrears on
the first day of each month.
If on any day notice has not been timely delivered by
Borrower to Lender in accordance with the terms of this Agreement
specifying the basis for determining the rate of interest on that
day, then for that day Borrower shall be deemed to have selected the
Base Rate Option. The outstanding principal
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<PAGE> 6
balance of Obligations other than the Loans shall bear interest from
the date such Obligations are incurred until paid in full based upon
the Base Rate Option. Notwithstanding anything contained herein to
the contrary, Borrower may not select the LIBO Rate Option if an
Event of Default exists.
(ii) Interest Payments. With respect to any Base Rate
Portion, accrued interest shall be payable, in arrears, (A) on the first
day of each calendar month, and (B) at maturity (whether by acceleration
or otherwise) of the Revolving Loans. With respect to any LIBO Rate
Portion (and if the Interest Period applicable thereto is longer than
three (3) months, also ninety (90) days after the be-inning of such
Interest Period), accrued interest shall be payable (A) on the last day of
the applicable Interest Period for such LIBO Rate Portion, and (B) at
maturity (whether by acceleration or otherwise) of the Revolving Loans.
(iii) Conversion or Continuation.
(a) Subject to the provisions of this Agreement,
Borrower shall have the option (A) as of any date to convert all or
any part of its outstanding Base Rate Portion, if any, into one or
more LIBO Rate Portions; (B) as of the last day of its applicable
Interest Period, to convert all or any part of a LIBO Rate Portion
to a Base Rate Portion on such expiration date; or (C) as of the
last day of any Interest Period, to continue all or any part of a
LIBO Rate Portion, and, in the case of clauses (B) and (C) of this
paragraph, the succeeding Interest Period of such continued LIBO
Rate Portion shall commence on such expiration date; provided,
however, no outstanding portion of the Revolving Loans may be
continued as, or be converted into, a LIBO Rate Portion (i) if the
continuation of, or the conversion into such LIBO Rate Portion,
would violate any of the provisions of Section 3.1(1)(A)(v) of this
Schedule or (ii) if as of such date a Default or an Event of Default
would occur or has occurred and is continuing.
(b) To convert or continue a LIBO Rate Portion under
this Section 3.1(I)(A)(iii). Borrower shall deliver a Notice of
Conversion/Continuation, in the form of Exhibit A attached hereto
and incorporated herein by this reference, to Lender no later than
10:00 a.m. (Los Angeles time) at least three (3) Business Days in
advance of the proposed conversion/continuation date. A Notice of
Conversion/Continuation shall specify (A) the proposed
conversion/continuation date (which shall be a Business Day), (B)
the amount of the principal portion of the Revolving Loans to be
converted/continued, and (C) whether such portion shall be converted
and/or continued. In lieu of delivering a Notice of
Conversion/Continuation, Borrower may give Lender telephonic notice
of any proposed conversion/continuation by the time required under
this Section 3.l(I)(A)(iii), and such notice shall be confirmed in
writing delivered to Lender promptly (but in no event later than
3:00 p.m. (Los Angeles time) on the same Business Day). Any Notice
of Conversion/Continuation delivered by Borrower (or telephonic
notice in lieu thereof) shall be irrevocable when given pursuant to
this clause (b) (whether given in writing or by telephone), and
Borrower shall be bound to convert or continue in accordance
therewith.
(iv) Computation of Interest. In computing interest, the date
of the making of the Revolving Loans, the first day of an Interest Period
or the date of any conversion into the Base Rate Portion, as the case may
be, shall be included and the date of payment, the expiration date of the
Interest Period or the date of any conversion from the Base Rate Portion,
as the case may be, shall be excluded so long as payment is timely
received in accordance with this Agreement.
(v) Special Provisions Governing Borrower's Selection of the
LIBO Rate-Option. With respect to the LIBO Rate Portion:
(a) Amount of LIBO Rate Portion. Each LIBO Rate Portion
shall be for a minimum amount of One Million Dollars ($1,000,000)
and in integral multiples of One Hundred Thousand Dollars ($100,000)
in excess of that amount. Further, the aggregate outstanding
principal amount of all LIBO Rate Portions shall not exceed the
amount of Eleven Million Five Hundred Thousand and No/100 Dollars
($11,500,000).
(b) Determination of Interest Period. By giving notice
as set fourth in Section 3.1(I)(A)(iii) of the Schedule, Borrower
shall have the option, subject to the other provisions of this
- 6 -
<PAGE> 7
Section 3.1(I)(A)(v), to select an interest period (each, an
"Interest Period") to apply to each LIBO Rate Portion described in
such notice, subject to the following provisions:
(1) Borrower may only select an Interest Period of
one (1), two (2), three (3) or six (6) months in duration;
(2) In the case of immediately successive Interest
Periods applicable to the LIBO Rate Portion, each successive
Interest Period shall commence on the day on which the next
preceding Interest Period expires;
(3) If any Interest Period would otherwise expire
on a day which is not a Business Day, such Interest Period
shall be extended to expire on the next succeeding Business
Day if the next succeeding Business Day occurs in the same
calendar month, and if there will be no succeeding Business
Day in such calendar month, the Interest Period shall expire
on the immediately preceding Business Day;
(4) Borrower may not select an Interest Period as
to any LIBO Rate Portion if such Interest Period expires after
a scheduled date of termination of this Agreement; and
(5) There shall be no more than three (3) Interest
Periods in effect at any one time.
(c) Determination of LIBO Rate. As soon as practicable
on the second Business Day prior to the first day of each Interest
Period (the "Interest Rate Determination Date"), Lender shall
determine (pursuant to the definition of "LIBO Rate") the interest
rate which shall apply to the LIBO Rate Portion for which an
interest rate is then being determined and shall promptly give
notice thereof (in writing or by telephone confirmed in writing) to
Borrower. Lender's determination shall be presumed to be correct,
absent manifest error, and shall be binding upon Borrower, absent
manifest error.
(vi) Special Provisions Governing LIBO Rate Portions.
Notwithstanding any other provision of this Agreement, the following
provisions shall govern with respect to LIBO Rate Portions as to the
matters covered:
(a) In the event Lender shall have determined (which
determination shall be final and conclusive and binding upon all
parties hereto), on any Interest Rate Determination Date with
respect to any LIBO Rate Portions, that by reason of circumstances
affecting the interbank Eurodollar market, adequate and fair means
do not exist for determining the interest rate applicable to such
LIBO Rate Portions on the basis provided for in the definition of
LIBO Rate, Lender shall on such date give notice (by telecopy or by
telephone confirmed in writing) to Borrower of such determination,
whereupon (1) no Revolving Loans may be made as, or converted into,
LIBO Rate Portions until such time as Lender notifies Borrower that
the circumstances giving rise to such notice no longer exist and (2)
any Notice of Conversion/Continuation given by Borrower with respect
to the Revolving Loans in respect of which such determination was
made shall be deemed to be modified by Borrower and the LIBO Rate
Portions then being requested shall be made or continued by Lender
as Base Rate Portions.
(b) If Lender shall have determined (which determination
shall be final and conclusive and binding upon all parties), with
respect to any LIBO Rate Portion and any pending Interest Period
that by reason of (a) any change after the date hereof in any
applicable law or governmental rule, regulation or order (or any
interpretation thereof and including the introduction of any new law
or governmental rule, regulation or order) or (b) other
circumstances affecting Lender or the LIBO market or the position of
Lender or its affiliates in such market (such as for example, but
not limited to, official reserve requirements required by Regulation
D to the extent not given effect in the LIBO Rate), the LIBO Rate
shall no longer represent the effective pricing to Lender for U.S.
Dollar deposits of comparable amounts for the relevant period, then,
and in any such event, Lender shall promptly (and in any event as
soon as possible after being notified of a borrowing, conversion or
continuation) give notice (by telephone
- 7 -
<PAGE> 8
confirmed in writing) to Borrower of such determination. Thereafter,
Borrower shall pay to Lender, upon written demand therefor, such
additional amounts in the form of an increased interest rate of, or
a different method of calculating, interest or otherwise as Lender
shall reasonably determine. A certificate as to additional amounts
owed Lender, showing in reasonable detail the basis for the
calculation thereof, submitted in good faith and on a reasonable
basis to Borrower by Lender shall, absent manifest error, be final
and conclusive and binding upon all of the parties hereto.
(c) If on any date Lender shall have reasonably
determined (which determination shall be final and conclusive and
binding upon all parties) that the making or continuation of its
LIBO Rate Portions has become unlawful or impossible under any law,
governmental rule, regulation or order with which Lender believes,
in good faith, it must comply (whether or not having the force of
law and whether or not failure to comply therewith would be
unlawful), then, and in any such event, Lender shall promptly give
notice (by telephone confirmed in writing) to Borrower of that
determination. Subject to the prior withdrawal of a Notice of
Conversion/Continuation or prepayment of the LIBO Rate Portions as
contemplated by the following subsection, the obligation of Lender
to make or maintain the LIBO Rate Portions during any such period
shall be terminated at the earlier of the termination of the
Interest Period then in effect or when required by law and Borrower
shall no later than the termination of the Interest Period in effect
at the time any such determination pursuant to this subsection is
made or, earlier, when required by law, repay or prepay the LIBO
Rate Portions, together with all interest accrued thereon.
(d) In lieu of paying Lender such additional moneys as
are required by Section 3.1(I)(A)(vi)(b) or the prepayment of Lender
required by Section 3.1(I)(A)(vi)(c), Borrower may exercise any one
of the following options:
(1) If the determination by Lender relates only to
LIBO Rate Portions then being requested by Borrower pursuant
to a Notice of Conversion/Continuation, Borrower may by giving
notice (by telephone confirmed in writing) to Lender no later
than the date immediately prior to the date on which such LIBO
Rate Portions are to be made, withdraw that Notice of
Conversion/Continuation and the LIBO Rate Portions then being
requested shall be made by Lender as Base Rate Portions; or
(2) Upon written notice to Lender, Borrower may
terminate the obligations of Lender to make or maintain the
Revolving Loans as, and to convert the Revolving Loans into,
LIBO Rate Portions and in such event, Borrower shall, prior to
the time any payment pursuant to Section 3.1(I)(A)(vi)(c) is
required to be made or if the provisions of Section
3.1(I)(A)(vi)(b) are applicable, at the end of the then
current Interest Period, convert all of the LIBO Rate Portions
into Base Rate Portions but without satisfying the advance
notice requirements therein.
(e) Borrower shall compensate Lender, upon written
request by Lender (which request shall set forth in reasonable
detail the basis for requesting such amounts and which shall, absent
manifest error, be conclusive and binding upon all parties hereto),
for all reasonable losses, expenses and liabilities (including,
without limitation, any loss (including interest paid) sustained by
Lender in connection with the re-employment of such funds) Lender
may sustain: (1) if for any reason (other than a default by Lender)
a borrowing of any LIBO Rate Portions does not occur on a date
specified therefor in a Notice of Conversion/Continuation or a
telephonic request for borrowing or conversion/continuation therefor
is given pursuant to Section 3.1(I); (2) if any prepayment of any
LIBO Rate Portion occurs on a date that is not the last day of an
Interest Period applicable to that LIBO Rate; (3) if any prepayment
of any LIBO Rate Portion is not made on any date specified in a
notice of prepayment given by Borrower; or (4) as a consequence of
any other default by Borrower to repay any LIBO Rate Portions when
required by the terms of this Agreement.
(f) Except as provided in Section 3.1(I)(A)(vi)(b) with
respect to certain determinations on Interest Rate Determination
Dates, if, after the date hereof by reason of, (1) the introduction
of or any change (including, without limitation, any change by way
of imposition or increase of reserve requirements) in or in the
interpretation of any treaty, law, rule, or regulation, or (2) the
- 8 -
<PAGE> 9
compliance with any guideline or request from any central bank or
other governmental authority or quasi-governmental authority
exercising control over banks or financial institutions generally
(whether or not having the force of law):
(1) Lender (or its applicable lending office)
shall be subject to any tax, duty, levy, cost or other charge
(except for (i) taxes on the overall net income or alternative
minimum taxable income of Lender or its applicable lending
office imposed by the jurisdiction in which Lender's principal
executive office or applicable lending office is organized,
located or is doing business and (ii) any branch profits taxes
imposed by the United States of America or any similar tax
imposed by any other jurisdiction and (iii) in the case of a
foreign lender, any withholding tax that is imposed on amounts
payable to such foreign lender) with respect to any LIBO Rate
Portions or its obligations to make LIBO Rate Portions, or the
recording, registration, notarization or other formalization
of the LIBO Rate Portions or the basis of taxation of payments
to Lender of the principal of or interest or commitment fees
or any amount payable on any LIBO Rate Portions or its
obligation to make LIBO Rate Portions shall change; or
(2) any reserve (including, without limitation,
any imposed by the Board of Governors of the Federal Reserve
System), special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended
by, Lender's applicable lending office shall be imposed on
Lender or its applicable lending office or the interbank LIBO
market,
and as a result thereof there shall be any increase in the cost to
Lender of agreeing to make or making, funding or maintaining LIBO
Rate Portions, or there shall be a reduction in the amount received
or receivable by Lender or its lending office in respect of such
LIBO Rate Portions, then Borrower shall from time to time, upon
written notice from and demand by Lender, pay to Lender, within five
(5) Business Days after receipt of such notice, demand and
appropriate proof of such cost, additional amounts sufficient to
indemnify Lender against such increased cost or reduced amount. A
certificate as to the amount of such increased cost or reduced
amount, submitted to Borrower by Lender, shall except for manifest
error, be final, conclusive and binding for all purposes. Any
payments to be made by Borrower under Section 3.1(I)(A)(vi)(b),
3.1(I)(A)(vi)(e) or 3.1(I)(A)(vi)(f) in respect of LIBO Rate
Portions are to be without duplication.
(g) Calculation of all amounts payable to Lender under
this Section 3.1(I)(A) shall be made as though Lender had actually
funded its LIBO Rate Portion through the purchase of a LIBO deposit
bearing interest at the LIBO Rate in an amount equal to the amount
of that LIBO Rate Portion and having a maturity comparable to the
relevant Interest Period and through the transfer of such LIBO
deposit from an offshore office to a domestic office in the United
States of America; provided, however, that Lender may --------
------- fund each of its LIBO Rate Portion in any manner it sees fit
and the foregoing assumption shall be utilized only for the
calculation of amounts payable under this Section 3.1(1)(A).
B. [RESERVED].
II. TERM A LOAN.
Term Loan A shall bear interest (the "Term Loan A Interest Rate") at
either a fixed rate per annum or a variable rate per annum, to be
selected by Borrower no later than three (3) Business Days prior to
the Closing. In the event Borrower elects that the Term Loan A
Interest Rate throughout the term of the Loans shall be a fixed rate
of interest, the Term Loan A Interest Rate shall be equal to the per
annum rate offered on a five-year U.S. Treasury Note in effect as of
three (3) Business Days prior to the Closing plus four and
one-quarter percent (4.250%). The rate offered on a five-year U.S.
Treasury Note shall be defined as the rate shown under the column
heading "Ask Yld." for "Govt. Bonds & Notes" in the "Treasury Bonds,
Notes & Bills" Section of The Wall Street Journal - Western Edition
published on the third (3rd) Business Day prior to the Closing for
the government bond or note with a maturity date in the same month
and year as the Maturity Date, or, if there are more than one
government bonds or notes with a maturity date in the
- 9 -
<PAGE> 10
same month and year as the Maturity Date, the highest of the rates
shown in the "Ask Yld." column for any such bond or note, or, if
there is no government bond or note with a maturity date in the same
month and year as the Maturity Date, the average (rounded to the
next highest basis point) of the rates shown in the "Ask Yld."
column for the bonds or notes in the months preceding and following,
the month in which the Maturity Date falls. In the event the
Borrower elects that the Term Loan A Interest Rate throughout the
term of the Loans shall be a variable rate of interest, (i) the Term
Loan A Interest Rate shall be equal to the Base Rate plus one and
one-quarter percent (1.250%), (ii) the interest rate chargeable
shall be increased or decreased, as the case may be, without notice
or demand of any kind, upon the announcement of any change in the
Base Rate and (iii) each change in the Base Rate shall be effective
hereunder on the first day following the announcement of such
change, provided that, a cumulative change of less than one fourth
of one percent (0.25%) shall not be considered. Regardless of
whether a fixed or variable rate is chosen, interest on Term Loan A
shall be calculated on the basis of a 360-day year and charged for
the actual number of days elapsed.
III. CAPEX LOANS.
The Capex Loans shall bear interest (the "Capex Loans Interest
Rate") at either a fixed rate per annum or a variable rate per
annum, to be selected by Borrower no later than three (3) Business
Days prior to the Closing. In the event Borrower elects that the
Capex Loans Interest Rate throughout the term of the Loans shall be
a fixed rate of interest, the Capex Loans Interest Rate shall be
equal to the per annum rate offered on a five-year U.S. Treasury
Note in effect as of three (3) Business Days prior to the Closing
plus four and one-quarter percent (4.250%). The rate offered on a
five-year U.S. Treasury Note shall be defined as the rate shown
under the column heading "Ask Yld." for "Govt. Bonds & Notes" in the
"Treasury Bonds, Notes & Bills" Section of The Wall Street Journal -
Western Edition published on the third (3rd) Business Day prior to
the Closing for the government bond or note with a maturity date in
the same month and year as the Maturity Date, or, if there are more
than one government bonds or notes with a maturity date in the same
month and year as the Maturity Date, the highest of the rates shown
in the "Ask Yld." column for any such bond or note, or, if there is
no government bond or note with a maturity date in the same month
and year as the Maturity Date, the average (rounded to the next
highest basis point) of the rates shown in the "Ask Yld." column for
the bonds or notes in the months preceding and following the month
in which the Maturity Date falls. In the event the Borrower elects
that the Capex Loans Interest Rate throughout the term of the Loans
shall be a variable rate of interest, (i) the Capex Loans Interest
Rate shall be equal to the Base Rate plus one and one-quarter
percent (1.250%), (ii) the interest rate chargeable shall be
increased or decreased, as the case may be, without notice or demand
of any kind, upon the announcement of any change in the Base Rate
and (iii) each change in the Base Rate shall be effective hereunder
on the first day following the announcement of such change, provided
that, a cumulative change of less than one fourth of one percent
(0.25%) shall not be considered. Regardless of whether a fixed or
variable rate is chosen, interest on the Capex Loans shall be
calculated on the basis of a 360-day year and charged for the actual
number of days elapsed.
IV. OTHER FEES.
A. Unused Line Fee. With respect to each calendar month or portion
thereof during the term of this Agreement (excluding the calendar month in
which this Agreement is executed), Borrower shall also pay Lender, on the
first day of the next month, one-half percent (0.50%) per annum of the
positive amount, if any, by which the Total Facility exceeded sum of the
average aggregate daily balances of outstanding and unpaid Revolving
Loans, Capex Loans and Term Loan A, which shall be deemed fully earned at
the time of each payment.
B. Collateral Monitoring, Fee. At the closing of this transaction
and on the first day of each calendar quarter thereafter, Borrower shall
pay Lender a collateral monitoring fee in an amount equal to one-quarter
percent (0.250%) per annum of the amount of the Total Facility, which
shall be deemed fully earned at the time of each payment.
- 10 -
<PAGE> 11
C. Closing Fee. At the Closing of this transaction, Borrower shall
pay to Lender a closing fee in an amount equal to three-quarters percent
(0.750%) of the amount of the Total Facility, which shall be deemed fully
earned at the time of payment.
D. Examination Fees. Borrower agrees to pay to Lender an examination
fee in the amount of Six Hundred and No/100 Dollars ($600.00) per day per
auditor in connection with each audit or examination of Borrower performed
by Lender prior to or after the date hereof, plus all costs and expenses
incurred in connection therewith (the "Examination Fee"). Without limiting
the generality of the foregoing, Borrower shall pay to Lender an initial
Examination Fee in an amount equal to Six Hundred and No/100 Dollars
($600.00) per day per auditor, plus all costs and expenses incurred in
connection therewith. Such initial Examination Fee shall be deemed fully
earned at the time of payment and due and payable upon the closing of this
transaction, and shall be deducted from any good faith deposit paid by
Borrower to Lender prior to the date of this Agreement.
================================================================================
REPORTING REQUIREMENTS (SECTION 5.2):
Borrower shall provide Lender with (i) monthly agings and
reconciliations of Receivables within ten (10) days after the end of
each month; (ii) payables reports and inventory reports (including a
perpetual inventory listing) within fifteen (15) days after the end
of each month; and (iii) internally prepared, unaudited financial
statements within thirty (30) days after the end of each month.
================================================================================
BORROWER INFORMATION:
Borrower State of Incorporation (Section 12. 1): Arizona.
Fictitious Names/Prior Corporate Names/Surviving Corporation (Section
12.2):
Prior Corporate Names: Perfect Interface (a division of Rockford
Corporation).
Fictitious Names: Rockford Acoustic Design (a division of Rockford
Corporation); Rockford Corporation (a division of Rockford
Corporation), Hafler Professional (a division of Rockford
Corporation), Connecting Punch (a division of Rockford Corporation);
and Rockford Fosgate (a division of Rockford Corporation).
Company Merged, Consolidated, or whose Assets All Acquired:
Carbonneau; David Hafler Company.
Borrower Locations (Section 12.16): (1) Chief Executive Office and Principal
Place of Business: 648 South River Drive,
Tempe, Arizona 85281.
(2) 546 South Rockford Drive, Tempe,
Arizona 85281.
(3) 2075/2055 E. Fifth Street, Tempe,
Maricopa County, Arizona 85281.
(4) 609 Myrtle NW, Grand Rapids, Kent
County, Michigan 49504.
(5) 600 Webster NW, Grand Rapids, Kent
County, Michigan 49504.
(6) Im Finigen 5, 28832 Achim, Bremen,
Germany.
(7) Citilink Warehouse Complex, 102E
Pasar Panjang Road, #07-06, Singapore
118529.
(8) 514-1, Hiata, Kannami-cho,
Tagata-gun, Shizuoki-Ken, 419-01, Japan.
- 11 -
<PAGE> 12
================================================================================
PERMITTED ENCUMBRANCES (SECTION 11.1):
"Permitted Encumbrances" includes only (a) the Senior Notes, (b) purchase
money security interests in specific items of Equipment identified in the
following UCC Financing Statements:
<TABLE>
<CAPTION>
ORIGINAL SECURED
JURISDICTION FILE NO. FILING PARTY COLLATERAL
DATE
------------ -------- -------- ---------------- --------------------------
<S> <C> <C> <C> <C>
Michigan Sec'y of State D224300 04/23/97 Breton Financial Copier
Company
Michigan Sec'y of State D164060 11/21/96 Crown Credit Forklift (filed against
Company Company Rockford Acoustic)
</TABLE>
, and (c) leases of specific items of Equipment identified in the following UCC
Financing Statements:
<TABLE>
<CAPTION>
ORIGINAL
JURISDICTION FILE NO. FILING SECURED PARTY
DATE
------------ -------- ------ -------------
<S> <C> <C> <C>
Arizona Sec'y of State 665657 05/28/91 Eaton Financial Corporation
Arizona Sec'y of State 688004 12/09/91 Pitney Bowes Credit Corp.
Arizona Sec'y of State 768139 12/10/93 Toyota Motor Credit Corporation
Arizona Sec'y of State 777356 03/01/94 Center Capital Corporation
Arizona Sec'y of State 780892 03/29/94 Center Capital Corporation
Arizona Sec'y of State 784236 04/26/94 Center Capital Corporation/
New England Capital Corporation
Arizona Sec'y of State 795505 07/26/94 New England Capital Corporation
Arizona Sec'y of State 808969 11/15/94 Heller Financial Leasing, Inc.
Arizona Sec'y of State 813814 12/27/94 Norstan Financial Services, Inc.
Arizona Sec'y of State 827692 04/17/95 Norwest Equipment Finance, Inc.
Arizona Sec'y of State 834768 06/13/95 Newcourt Receivables Corporation
Arizona Sec'y of State 835245 06/16/95 Norwest Equipment Finance, Inc.
Arizona Sec'y of State 851741 10/24/95 Newcourt Receivables Corporation
Arizona Sec'y of State 861154 01/03/96 Newcourt Receivables Corporation
Arizona Sec'y of State 892561 04/08/96 Leasetec Systems Credit
Arizona Sec'y of State 892738 04/09/96 Pitney Bowes Credit Corporation
Arizona Sec'y of State 928332 07/30/96 Pitney Bowes Credit Corporation
Arizona Sec'y of State 938674 10/08/96 MetLife Capital Corporation
Arizona Sec'y of State 940168 10/21/96 M&I First National Leasing Corp.
Arizona Sec'y of State 940617 10/23/96 MetLife Capital Corporation
Arizona Sec'y of State 948997 12/24/96 First Sierra Financial
Arizona Sec'y of State 949848 12/31/96 Data General Corporation
Arizona Sec'y of State 962076 04/01/97 Data General Corporation
Arizona Sec'y of State 962077 04/01/97 Data General Corporation
Maricopa County, Arizona 88-484378 09/30/88 BancWest Equipment Leasing Services
Recorder's Office (re 613 S. Rockford)
Michigan Sec'y of State 54858B 04/17/95 Norwest Equipment Finance, Inc.
Michigan Sec'y of State 78935B 10/09/96 MetLife Capital Corporation
Michigan Sec'y of State 62517B 11/02/95 Data General Corporation
Michigan Sec'y of State 84166B 04/04/97 Data General Corporation
Michigan Sec'y of State C902716 11/04/94 Ervin Leasing Company
(filed against Rockford Acoustic Design)
</TABLE>
- 12 -
<PAGE> 13
================================================================================
FINANCIAL COVENANTS (SECTION 13.14):
Borrower shall comply with all of the
following covenants. Compliance shall be
determined as of the end of each month,
except as otherwise specifically provided
below:
Debt Service Coverage Ratio. Maintain a Senior Debt Coverage Ratio of no
less than 1.30 to 1.0 and maintain a Total
Contractual Debt Coverage Ratio of no less
than 1.0 to 1.0. For Borrower's fiscal year
ending December 31, 1997, the foregoing
covenants shall be tested using Borrower's
fiscal year-to-date financial information
but on annualized basis; for Borrower'
fiscal years ending after such date, the
foregoing covenants shall be tested monthly
on a rolling and trailing twelve (12) month
basis.
EBITDA. Maintain, on a consolidated basis, EBITDA of
no less than Three Million Dollars
($3,000,000). The foregoing covenant shall
be tested monthly, beginning with the period
ending on December 31, 1997, on a rolling
and trailing twelve (12) month basis.
================================================================================
ADDITIONAL COVENANTS (SECTION 13.15):
Should any Person who has executed and
delivered to Lender a Support Agreement
cease employment with Borrower, Borrower
shall within 30 days following such
cessation obtain an executed Support
Agreement, in form and substance acceptable
to Lender in its sole discretion, from such
Person's replacement or another officer of
Borrower of similar responsibilities.
================================================================================
NEGATIVE COVENANTS (SECTION 14):
Capital Expenditures: Borrower shall not make or incur any Capital
Expenditure (exclusive of (i) Capital
Expenditures financed solely by one or more
Capex Loans and (ii) the Equipment Lease
Termination Advance) if, after giving effect
thereto, the aggregate amount of all such
Capital Expenditures by Borrower in any
fiscal year would exceed the sum of (a) One
Million Five Hundred Thousand and No/100
Dollars ($1,500,000.00) plus (b) from and
after the first (1st) anniversary of the
date hereof but before the third anniversary
of the date hereof, purchase money
Indebtedness, Capital Lease expenditures and
so-called "off-balance sheet" obligations
with respect to Equipment financing
(collectively, "Financed Capex") in the
aggregate amount of One Million and No/100
Dollars ($1,000,000.00). The "Equipment
Lease Termination Advance" means the advance
to be made at the Closing in full and
complete satisfaction of Borrower's
Equipment leases with First Interstate Bank
of Arizona, N.A. and its
successors-in-interest in the approximate
aggregate amount of $562,904 covering
Equipment identified in UCC File Nos. 861145
& 890606, filed with the Arizona Secretary
of State on January 3, 1996 and March 26,
1996, respectively, and UCC File No.
D079670, filed with the Michigan Secretary
of State on April 1, 1996. Borrower shall
give Lender not less than thirty (30) days
written notice of any proposed Financed
Capex expenditure.
Compensation: Borrower shall not pay total compensation,
including salaries, withdrawals, fees,
bonuses, commissions, drawing accounts and
other payments, whether directly or
indirectly, in money or otherwise, during
any fiscal year in an amount in excess of
One Million One Hundred Thousand and No/100
Dollars ($1,100,000.00) to the following
executives, officers and directors of
Borrower (and any relative and/or
- 13 -
<PAGE> 14
replacement in title thereof): Dan McLeod,
James M. Thomson, David Boshes, David
Richards, Ron Trout and Jim Strickland.
Subsidiaries: Borrower will not create or permit to exist
any Subsidiary, other than any Subsidiary in
existence on the date hereof and disclosed
to Lender in writing.
Management Fees: Borrower shall not pay to any Person any
fee, commission or other compensation
related to the management of Borrower's
business; provided, however, that Borrower
may pay a management fee to 3G, pursuant to
Borrower's agreement with 3G, in an amount
not to exceed Three Hundred Sixty Thousand
and No/100 Dollars ($360,000.00) per fiscal
year of Borrower (the "Base Management
Fee"), provided that such payments are made
solely in compensation for services rendered
to Borrower by W. Gary Suttle; provided
further, however, that as long as no Default
or Event of Default exists (or would exist
as a result of such payment), Borrower may
pay an additional management fee to 3G (over
and about the amount of the Base Management
Fee), pursuant to Borrower's agreement with
3G, in an amount not to exceed One Hundred
Twenty Thousand and No/100 Dollars
($120,000.00) per fiscal year of Borrower,
provided that such payments are made solely
in compensation for services rendered to
Borrower by W. Gary Suttle.
Change in Ownership: Without Lender's consent, which may be
withheld at Lender's sole discretion,
Borrower will not issue or sell any stock of
Borrower so as to cause the Control Group,
on a fully-diluted basis, to own less than
sixty-five percent (65.0%) of Borrower's
voting and non-voting stock, and Borrower
will not permit or suffer to occur the sale,
transfer, assignment, pledge or other
disposition of any or all of the issued and
outstanding shares of stock or other
evidence of ownership of Borrower so as to
cause the Control Group, on a fully-diluted
basis, to own less than sixty-five percent
(65.0%) of the issued and outstanding shares
of common stock or other evidence of
ownership of Borrower.
Indebtedness: Borrower shall not create, incur, assume or
permit to exist any Indebtedness (including
Indebtedness in connection with Capital
Leases), other than (i) from and after the
first (1st) anniversary of the date hereof
but before the third anniversary of the date
hereof, no more than the amount of One
Million and No/100 ($1,000,000) per fiscal
year of Borrower solely in connection with
permitted Financed Capex expenditures as
more fully described in the paragraph
labeled "Capital Expenditures" in this
Section 14, (ii) the Obligations, (iii)
trade payables and other contractual
obligations to suppliers and customers
incurred in the ordinary course of business
and (iv) other Indebtedness existing on the
date of this Agreement and reflected in the
Prepared Financials (other than Indebtedness
paid on the date of this Agreement from
proceeds of the initial advances hereunder).
================================================================================
TERM (SECTION 16.1):
The initial term of this Agreement shall be
three (3) years from the date hereof (the
"Initial Term") and shall be automatically
renewed at the discretion of Lender for
successive periods of one (1) year each
(each, a "Renewal Term"), unless earlier
terminated as provided in Section 16 or 17
above or elsewhere in this Agreement.
Upon the expiration of the Initial Term (if
not renewed) or any Renewal Term (if not
renewed), or the earlier termination of this
Agreement as provided in Section 16 or 17
above or elsewhere in this Agreement, all
Obligations shall be immediately due and
payable.
- 14 -
<PAGE> 15
TERMINATION FEE (SECTION 16.4):
(a) Termination Fee. The Termination Fee
provided in Section 16.4 shall be, with
respect to the Revolving Loans, an amount
equal to the following percentage of the
average daily outstanding balance of the
Obligations for the 180-day period (or
lesser period if applicable) preceding the
date of termination, and with respect to the
Term Loans, an amount equal to the following
percentage of the principal amount of such
Term Loans prepaid:
(i) three percent (3.0%), if such early
termination occurs on or prior to the
first anniversary of this Agreement;
(ii) two percent (2.0%), if such early
termination occurs after the first
anniversary of this Agreement but on or
prior to the second anniversary of this
Agreement; and
(iii) one percent (1.0%), if such early
termination occurs alter the second
anniversary of this Agreement.
Notwithstanding the foregoing, in the event
that such termination and prepayment is
financed by Borrower's concluding a
successful initial public offering, then the
Termination Fee under paragraph (a)(i) above
shall be one percent (1.0%), and under
paragraphs (a)(ii) and (a)(iii) shall be
zero percent (0%).
(b) Loans Coterminous. Any termination of
any of the Revolving Loans facilities shall
be accompanied by (i) repayment in full of
such Loan facility, (ii) termination and
repayment in full of all other Loans and
(iii) payment of the applicable Termination
Fee.
(c) Prepayment. Term Loan A and all Capex
Loans then outstanding may be prepaid in
full (but not in part) upon the payment of
the applicable Termination Fee. Upon such
prepayment, the Capex Loans facility shall
be automatically terminated.
(d) Excess Cash Flow Prepayment. No
Termination Fee shall be payable with
respect to any prepayments required by
Lender to be made out of Borrower's Excess
Cash Flow pursuant to Section 7.7 hereof.
(e) Make Whole Premium; Other Premiums. In
the event Borrower elects that the Term Loan
A Interest Rate shall be a fixed rate of
interest, any prepayment of Term Loan A
otherwise permitted hereunder (other than a
prepayment made pursuant to Section 7.7 of
this Agreement) shall also be accompanied by
a payment equal to the Make Whole Premium
with respect to Term Loan A. In the event
Borrower elects that the Capex Loans
Interest Rate shall be a fixed rate of
interest, any prepayment of the Capex Loans
otherwise permitted hereunder (other than a
prepayment made pursuant to Section 7.7 of
this Agreement) shall also be accompanied by
a payment equal to the Make Whole Premium
with respect to the Capex Loans. In any
case, such Make Whole Premium shall be
payable even if there is no Termination Fee
due with respect to such prepayment. Any
prepayment made with respect to a LIBO Rate
Portion shall, among other things, be
accompanied by the applicable premiums
described in Section 3.1(I)(A)(vi)(e) of
this Schedule.
================================================================================
ADDITIONAL DEFINITIONS (SECTION 18.1):
"3G" means Grisanti, Galef & Goldress, Inc., a Nevada corporation.
"Bartol" means those Persons who are descendants of or, in the case
of non-individual Persons, entities which are controlled by descendants
of, John G. and Carolyn S. Bartol.
- 15 -
<PAGE> 16
"Bartol Notel" means that certain $1,000,001 promissory note of
Borrower, payable to Boulder Investors Limited Partnership, which note was
issued pursuant to that certain Bridge Loan Conversion and Extension
Agreement dated as of July 1, 1996 by and between Borrower and Boulder
Investors Limited Partnership.
"Base Rate" means the per annum rate of interest announced publicly
by Citibank, N.A., from time to time as its "base rate" (or any successor
thereto), which may not be such institution's lowest rate. Each change in
the shall be effective hereunder on the first day following the
announcement of such change, without notice of any kind.
"Base Rate Option" means the interest rate option described in
Section 3.1(I)(A)(i)(a) of the Schedule.
"Base Rate Portion" means the portion of the Revolving Loans, if
any, which bears interest at the rate described in Section 3.1(I)(A)(i)(a)
of the Schedule.
"Business Day" means any day on which commercial banks in both Los
Angels, California and Phoenix, Arizona are open for business; provided
that with respect to all notices, determinations, fundings and payments in
connection with any LIBO Rate Portion of the Revolving Loans, a Business
Day means any day that is also a day for trading by and between banks in
U.S. Dollar deposits in the London interbank eurodollar market.
"Capex Loans" has the meaning given to it in Section 1.2 of the
Schedule.
"Capex Loans Interest Rate" has the meaning given to it in Section
3.1(III) of the Schedule.
"Capex Note" has the meaning given to it in Section 1.2 of the
Schedule.
"Eligible Foreign Finished Goods Inventory" means that portion of
Eligible Inventory consisting of finished goods stored in warehouses
acceptable to Lender in its sole discretion and located in the cities of
Bremen, Germany or Singapore.
"Eligible Raw Materials Inventory" means that portion of Eligible
Inventory consisting of raw materials stored in warehouses acceptable to
Lender in its sole discretion and located in the cities of Tempe, Arizona
and Grand Rapids, Michigan.
"Eligible U.S. Finished Goods Inventory" means that portion of
Eligible Inventory consisting of' finished goods stored in warehouses
acceptable to Lender in its sole discretion and located in the cities of
Tempe, Arizona and Grand Rapids, Michigan.
"Excess Cash Flow" means Operating Cash Flow - Permitted less Total
Contractual Debt Service.
"Financed Capex" has the meaning given to it under the paragraph
captioned "Capital Expenditures" under Section 14 of this Schedule.
"Guarantor" means, jointly and severally, each Subsidiary.
"Interest Period" has the meaning set forth in Section
3.1(I)(A)(v)(b) of the Schedule.
"Interest Rate Determination Date" has the meaning set forth in
Section 3.1(I)(A)(v)(c) the Schedule.
"Inventory Loans" has the meaning given to it in Section 1.2 of the
Schedule.
"LIBO Rate" shall mean, for any LIBO Rate Portion the per annum rate
of interest which is ordinarily reported on page 3750 of the Telerate
Matrix (in U.S. Dollars) for a principal amount substantially equal to the
amount of such LIBO Rate Portion and having a maturity comparable to the
Interest Period proposed to be applicable to such LIBO Rate Portion, as
quoted to Borrower by Lender, provided, however, if, for whatever reason,
Lender shall be unable to ascertain the LIBO Rate pursuant to the
preceding provisions, the LIBO Rate in such circumstances shall be the
rate per annum determined by Lender by dividing (the resulting quotient to
be rounded upward to the nearest 1/100 of one percent) (i) the per annum
rate of interest at which deposits in U.S. Dollars in an amount
substantially equal to such LIBO Rate Portion and having a maturity
comparable to the Interest Period proposed for such LIBO Rate Portion are
offered Citibank, N.A. or its affiliates in the London interbank market at
approximately 11:00 a.m. (London time) on the
- 16 -
<PAGE> 17
applicable Interest Rate Determination Date, by (ii) a number equal to 1.0
minus the aggregate (but without duplication) of the rates (expressed as a
decimal fraction) of reserve requirements in effect on the applicable
Interest Rate Determination Date (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the
Board of Governors of the Federal Reserve System or other governmental
authority having jurisdiction with respect thereto, as now and from time
to time in effect) for eurocurrency funding (currently referred to as
"Eurocurrency liabilities" in Regulation D of such Board) which are
required to be maintained by Lender.
"LIBO Rate Option" shall mean the interest rate option described in
Section 3.1(I)(A)(i)(b) of the Schedule.
"LIBO Rate Portion" shall mean the portion of the Revolving Loans,
if any, which bears interest at the rate described in subsection
3.1(I)(A)(i)(b) of the Schedule.
"Loans" has the meaning given to it in Section 1.2 of the Schedule.
"Margin" means, with respect to an advance of the Revolving Loans
only, the per annum rate of interest by which the per annum rate of
interest payable by Borrower to Lender exceeds the Base Rate or LIBO Rate,
as applicable.
"Maturity Date" means the third anniversary of the date of this
Agreement.
"Prepared Financials" means the balance sheets of Borrower as of May
31, 1997, and as of each subsequent date on which audited balance sheets
are delivered to Lender from time to time hereunder, and the related
statements of operations, changes in stockholder's equity and changes in
cash flow for the periods ended on such dates.
"Receivables Loans" has the meaning given to it in Section 1.2 of
the Schedule.
"Required Excess Cash Flow Payments" has the meaning set forth in
Section 7.7 of this Agreement.
"Revolving Loans" has the meaning given to it in Section 1.2 of the
Schedule.
"Seasonal Loans" has the meaning given to it in Section 1.2 of the
Schedule.
"Senior Debt Coverage Ratio" means, for the applicable period, the
ratio of Borrower's Operating, Cash Flow - Actual to Borrower's Senior
Contractual Debt Service, determined on a consolidated basis.
"Senior Note" means a Rockford Corporation Senior Note Due February
3, 1999 (Renaming, Amending, And Replacing A 10.5% Convertible Debenture
Due February 3, 1999) issued by Borrower to each of those holders of
record, and in the original principal amount, shown on Exhibit E attached
hereto and incorporated herein by this reference.
"Subordinating Creditor" means each of 3G, the holder(s) of the
Bartol Note, each Guarantor and each holder of a Senior Note.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of
such corporation, irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of
the happening of any contingency, is at the time directly or indirectly
owned by Borrower, by Borrower and one or more other Subsidiaries, or by
one or more other Subsidiaries. Without in any way limiting the foregoing,
"Subsidiary" shall include each of Rockford Europe Elektronik Vertriebs
GmBH, Rockford Japan Corporation and Rockford Singapore Corporation.
"Term Loan" means, as the context requires, either Term Loan A or
the Capex Loans; and "Term Loans" means Term Loan A and the Capex Loans,
collectively.
"Term Loan A" has the meaning given to it in Section 1.2 of the
Schedule.
"Term Loan A Interest Rate" has the meaning given to it in Section
3.1(II) of the Schedule.
- 17 -
<PAGE> 18
"Term Note A" has the meaning given to it in Section 1.2 of the
Schedule.
"Total Contractual Debt Coverage Ratio" means, for the applicable
period, the ratio of Borrower's Operating Cash Flow - Actual to Borrower's
Total Contractual Debt Service, determined on a consolidated basis.
"U.S. Dollars" means the currency of the United States of America.
================================================================================
TRADEMARKS, LICENSES AND PATENTS (SECTION 18.1):
See Exhibit B, Exhibit C and Exhibit D attached
hereto and incorporated herein by this
reference for all purposes.
================================================================================
DISBURSEMENT (SECTION 19.12):
Unless and until Borrower otherwise directs
Lender in writing, all loans shall be wired to
Borrower's operating account described in
Exhibit G attached hereto and incorporated
herein by this reference.
================================================================================
ADDITIONAL PROVISIONS:
1. The proceeds of the Loans shall be used to pay
Borrower's senior Indebtedness to Wells Fargo Bank, to pay
subordinated Indebtedness to Provident Mutual, to pay
miscellaneous subordinated Indebtedness to certain noteholders
and to provide additional working capital for Borrower's ongoing
operational needs.
2. [RESERVED].
3. Notwithstanding anything to the contrary herein
contained, Borrower shall have until the thirtieth (30th) day
after the date hereof to complete the perfection of Lender's
security interest in the domestic Trademarks, Licenses and
Patents and those foreign Trademarks, Licenses and Patents
selected by Lender in its sole discretion, and to cure any
defects in title (if any) with respect to such Trademarks,
Licenses and Patents. Without limiting any other provision of
this Agreement, Borrower hereby agrees to execute such further
instruments as may be necessary to effect the perfection of
Lender's security interest pursuant to the Collateral
Assignments.
4. Notwithstanding anything to the contrary herein
contained, (a) Borrower shall have until October 1, 1997 to
retire in full the Indebtedness owed to each holder of a Senior
Note and evidenced by such Senior Note, (b) should Borrower fail
to retire all such Indebtedness by such date, Lender shall have
no further obligation to make any advances of the Loans until
Borrower has excess borrowing availability under the Receivables
Loans facility of not less than the aggregate sum of the
outstanding and unpaid principal balance of all Senior Notes ,
after giving effect to payment in full of all of Borrower's
suppliers to within sixty (60) days of such suppliers' respective
written or agreed-upon terms of payment, and (c) should Borrower
fail by the close of business on October 10, 1997 to either
establish such excess borrowing availability or to retire in full
all such Indebtedness, then Lender may, without limiting any
other remedy available to it under this Agreement, declare an
Event of Default.
5. Notwithstanding anything to the contrary herein
contained, Borrower may make payments with respect to the Bartol
Note, but only upon the terms and subject to the conditions
herein contained: (a) provided no Default or Event of Default
exists or would exist after giving effect to the proposed
payment, Borrower may make regularly-scheduled monthly
installments of interest with respect to the Bartol Note at a
rate of interest not exceeding 11.0% per annum; (b) Borrower may
make principal installments with respect to the Bartol Note not
to exceed the amount of Two Hundred Thousand and No/100 Dollars
($200,000) in any one calendar month, but only upon the
satisfaction of the following
- 18 -
<PAGE> 19
conditions precedent: (I) no Default or Event of Default exists
or would exist after giving effect to the proposed payment; (ii)
Borrower shall have excess borrowing ability (in addition to that
set forth in Section 2.1 of this Schedule) under the Receivables
Loans facility of not less of not less than Five Hundred Thousand
and No/100 Dollars ($500,000) after giving effect to the proposed
payment and after giving effect to payment in full of all of
Borrower's suppliers to within sixty (60) days of such suppliers'
respective written or agreed-upon terms of payment; (iii)
Borrower's Total Contractual Debt Coverage Ratio, on a rolling
and trailing twelve (12) month basis (and after annualizing the
then Total Contractual Debt Service amount from the date of this
Agreement to the then current date) shall be no less than 1.0 to
1.0 both before and after giving effect to the proposed payment;
and (iv) in no event may Borrower make any payment with respect
to the outstanding principal balance of the Bartol Note before
September 1, 1997.
6. Within five (5) business days after Closing, Borrower
shall pay in full those Persons formerly holders of Senior Notes
and identified in Exhibit F attached hereto and incorporated
herein by this reference.
Borrower: Lender:
ROCKFORD CORPORATION FINOVA CAPITAL CORPORATION
By /ss/ By /ss/
---------------------------------- ----------------------------------
Name James M. Thomson Name Carleton S. Breed
-------------------------------- --------------------------------
Title Vice President Finance & CFO Title Vice President
------------------------------- -------------------------------
- 19 -
<PAGE> 20
EXHIBIT A
NOTICE OF CONVERSION/CONTINUATION1
[TO BE RE-TYPED ON BORROWER'S LETTERHEAD]
____________________ , 199
FINOVA Capital Corporation
355 South Grand Avenue
Suite 2400
Los Angeles, California 90071
Ladies and Gentlemen:
We refer to the Loan and Security Agreement dated as of
June , 1997 (as the same may hereafter be amended, modified or supplemented, the
"Loan Agreement") between FINOVA Capital Corporation and corporation (the
"Borrower"). Capitalized terms used but not defined herein have the meanings
given to them in the Loan Agreement.
This letter represents the Borrower's request to [A: convert $
[must be a minimum of $1,000,000 and integral multiples of $100,000 in excess
thereof] in principal amount of presently outstanding Revolving Loans bearing
interest at the [Base Rate Option/LIBO Rate Option] [with an Interest Period
expiration date of , 199 ] to Revolving Loans bearing interest at the [Base Rate
Option/LIBO Rate Option] on , 199 .] [The Interest Period for such loans is
requested to be a [one/two/three/six] month period. [B: continue as Revolving
Loans bearing interest at the LIBO Rate Option $ [must be a minimum of
$1,000,000 and integral multiples of $100,000 in excess thereof] with an
Interest Period expiration date of , 199 . The interest Period for such loans is
requested to be a [one/two/three/six] month period.] The Borrower hereby
certifies that no Default or Event of Default has occurred and is continuing or
will result from the proposed [conversion/continuation].
Very truly yours,
[Borrower]
By______________________________________
Its_____________________________________
- ----------
(1) To be delivered no later than 10:00 a.m. (Los Angeles time) at least three
(3) Business Days in advance of the proposed conversion/continuation date.
<PAGE> 21
EXHIBIT B
PATENTS AND PATENT APPLICATION REGISTERED OR PENDING
<TABLE>
<CAPTION>
USA NUMBER NAME/DESCRIPTION
<S> <C>
5,339,362 Symmetry Amplifier Housing
(Control/Configuration/Circuitry)
D315,832 Punch Heat Sink
4,467,288 TransNova Audiopile Circuitry
D368,253 Punch DSM
4,323,736 MK1 Interface
4,496,910 Pre-Amplifier Having Improved Sonic Performance
</TABLE>
<PAGE> 22
EXHIBIT C
TRADEMARKS, TRADEMARK REGISTRATION, TRADE NAMES,
TRADE NAME REGISTRATIONS, AND TRADEMARK
OR TRADE NAME APPLICATIONS
ROCKFORD CORPORATION
TRADEMARKS
<TABLE>
<CAPTION>
JURISDICTION NUMBER NAME/DESCRIPTION
<S> <C> <C>
Argentina 1,563,069 ROCKFORD FOSGATE (Label)
Argentina 1,538,432 R (Label)
Argentina 1,532,622 ROCKFORD FOSGATE
Arizona 085784 ACOUSTAT
Arizona 085786 PERFECT INTERFACE
Arizona 085787 ROCKFORD FOSGATE
Arizona 085785 THE DAVID HAFLER COMPANY
Australia 633,189 DIAMOND R DESIGN
Australia 633187 ROCKFORD FOSGATE
Canada 446,636 DIAMOND R DESIGN
Canada 447,053 PUNCH
Canada 453,809 ROCKFORD FOSGATE
Chile 468,372 R (Label)
Columbia 188,834 DIAMOND R DESIGN
Columbia 188203 ROCKFORD FOSGATE
Finland 140187 R (Diamond Design)
Finland 140186 ROCKFORD FOSGATE
Germany 1,143,651 PUNCH
Hong Kong 10769/96 DIAMOND R DESIGN
Indonesia 314.889 ROCKFORD FOSGATE & Device
Japan 04-120823 ROCKFORD FOSGATE (Stylized)
Korea 210057 HAFLER
Korea South 210056 ROCKFORD FOSGATE
Korea South 210061 THE PUNCH WITH R
Malaysia 2341/90 THE PUNCH
Mexico 494651 PUNCH
Mexico 484449 R LOGO
Mexico 511146 ROCKFORD FOSGATE
Mexico 494650 THE PUNCH
New Zealand 238,328 DIAMOND R DESIGN
New Zealand 238,327 PUNCH
New Zealand 238,326 ROCKFORD FOSGATE
Norway 173274 DIAMOND R DESIGN
Norway 172799 PUNCH
Norway 172971 ROCKFORD FOSGATE
Paraguay 174854 PUNCH
Singapore S/113/90 DIAMOND R DESIGN
Singapore 675/90 ROCKFORD FOSGATE
Singapore S/114/90 THE PUNCH
Sweden 264191 DIAMOND R DESIGN
Sweden 9,404,723 ROCKFORD FOSGATE
Taiwan 527899 ACOUSTAT
</TABLE>
<PAGE> 23
<TABLE>
<S> <C> <C>
Taiwan 526760 DIAMOND R DESIGN
Taiwan 526761 HAFLER
Taiwan 537325 PUNCH
Taiwan 660427 PUNCH POWER
Taiwan 512327 ROCKFORD
Taiwan 381791 ROCKFORD FOSGATE (Stylized)
Taiwan 381800 THE PUNCH
Thailand 129413 HAFLER
Thailand 137875 R ACOUSTAT
Thailand 137874 R PERFECT INTERFACE
Thailand 147398 R ROCKFORD
Thailand 97326 ROCKFORD FOSGATE THE PUNCH
Turkey 160397 DIAMOND R DESIGN
Turkey 160294 PUNCH
Turkey 160238 ROCKFORD FOSGATE
United Kingdom 1,561,888 DIAMOND R DESIGN
United Kingdom 1,561,887 FOSGATE (Stylized)
United Kingdom 1,561,902 ROCKFORD (Stylized)
United Kingdom 1,561,782 ROCKFORD FOSGATE (Stylized)
United Kingdom 1,561,819 THE PUNCH (Stylized)
USA 1,364,265 ACOUSTAT
USA 1,695,594 BOOMER
USA 1,956,529 EPX
USA 1,573,000 HAFLER
USA 1,592,841 PERFECT INTERFACE
USA 1,514,462 PUNCH
USA 2,013,318 PUNCH DSM
USA 1,524,277 R (And Design)
USA 2,005,905 RF PUNCH AND DESIGN
USA 1,216,478 ROCKFORD FOSGATE
USA 1,526,601 ROCKFORD FOSGATE (Stylized)
USA 1,715,158 SERIES 1
USA 1,801,415 SERIES 1
USA 1,712,627 SYMMETRY
USA 1,515,245 THE PUNCH
USA 2,021,730 TOPAZ
USA 1,961,961 TRANS-NOVA
</TABLE>
ROCKFORD EUROPE ELEKTRONIK VERTRIEBS GMBH
TRADEMARKS
<TABLE>
<CAPTION>
JURISDICTION NUMBER NAME/DESCRIPTION
<S> <C> <C>
Germany 2,082,761 DIAMOND R DESIGN
Germany 2,076,321 PUNCH
Germany 2,076,872 ROCKFORD FOSGATE
Germany 2,076,871 THE PUNCH
International IR 646 247 DIAMOND R DESIGN
International IR 647 284 PUNCH
International IR 646 695 ROCKFORD FOSGATE
International IR 646 246 THE PUNCH
</TABLE>
- 2 -
<PAGE> 24
EXHIBIT D
LICENSE AGREEMENTS
None.
<PAGE> 25
EXHIBIT E
SENIOR NOTE HOLDERS
<TABLE>
<CAPTION>
Holder of Record Original Note Amount
---------------- --------------------
<S> <C>
GST Exempt Trust $170,000
Boulder Investors Limited Partnership $125,000
Ron Trout $ 1,000
Darrell W. Chapman $ 4,000
Graham Humes $ 40,000
Francis E. & Suzette E. Baird $ 20,000
Gordon A. Jr. & Blair B. MacInnes $ 50,000
Sharon Dedrick $ 5,000
--------
TOTAL: $415,000
</TABLE>
<PAGE> 26
EXHIBIT F
FORMER HOLDERS OF SENIOR NOTES
<TABLE>
<CAPTION>
Holder of Record Original Note Amount
---------------- --------------------
<S> <C>
Robert F. & Marva S. Pothier $20,000
Scott M. & Kathy K. Carter $30,000
Robert A. & Jan F. Langford $ 7,000
Mark C. Quale $14,000
Patricia M. Keeling $ 4,000
Douglas C. & Carola A. Morby $ 2,000
-------
TOTAL: $77,000
</TABLE>
<PAGE> 27
EXHIBIT G
BORROWER'S WIRING INSTRUCTIONS
Rockford Corporation
Account Name: Rockford Corporation
Account Number: 415 954 1820
Bank Name: Wells Fargo Bank Arizona -- Phoenix, Arizona
Bank Routing Number: 121 000 248
Swift Code: USFIAZ 55 (Arizona Swift ID)
<PAGE> 1
EXHIBIT 21
ROCKFORD SINGAPORE CORPORATION
RUSS MOORE
SINGAPORE OPERATIONS MANAGER
102 East Pasir Panjang Road
Citilink Warehouse complex #07-06
Singapore 118529
Tele 011-65-278-8996
Fax 011-65-278-3116
ROCKFORD (EUROPE) ELEKTRONIK VERTRIEBS GmbH
JEAN-MICHEL BECK
EUROPEAN OPERATIONS MANAGER
Im Finigen 5
28832 Achim
Germany
Tele 011-49-4202-9450-0
Fax 011-49-4202-9750-50
ROCKFORD JAPAN CORPORATION
HARRY OMAE
PRESIDENT
514-1 Hita, Kannami-Cho
Tagata-Gun
Shizuoka-Ken, 419-01
Japan
Tele 011-81-559-791260
Fax 011-81-559-791265
ROCKFORD FOREIGN SALES CORPORATION
JEANNINE GIRAUDY-MCINTYRE
SENIOR ADMINISTRATOR, CORPORATE SERVICES
Ernst & Young Building
Bay Street
P.O. Box 261
Bridgetown,
Barbados
Tele 1-246-427-5260
Fax 1-246-426-9551
<PAGE> 2
LIGHTNING AUDIO
SCOTT DELEY, PRESIDENT
LARRY VANSIKEL, SECRETARY
1835 East 6th Street
Tempe, Arizona 85281
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 5, 1999, except for Note 13 as to which the
date is July 7, 1999, with respect to the financial statements of Rockford
Corporation included in Amendment Number 1 to the Registration Statement (Form
S-1) and in the related Prospectus of Rockford Corporation for the registration
of shares of its common stock.
Our audit also included the financial statement schedule of Rockford
Corporation listed in Item 16. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Phoenix, Arizona
July , 1999
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The foregoing consent is in the form that will be signed upon the
completion of the restatement of the capital accounts described in Note 13 to
the financial statements.
/s/ERNST & YOUNG LLP
Phoenix, Arizona
July 7, 1999
