<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1999
REGISTRATION NO. 333-79285
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4, 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>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
REGISTERED AMOUNT TO BE REGISTERED OFFERING PRICE PER SHARE PRICE(1) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share....... 3,895,998 $10.50 $40,907,979 $11,372.42
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</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) All of which 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 AUGUST 5, 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. Our common stock
has been approved for quotation on The Nasdaq National Market under the symbol
"ROFO." We anticipate that the initial public offering price will be between
$9.50 and $10.50 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 8.
------------------------
<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.
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.
DAIN RAUSCHER WESSELS NEEDHAM & COMPANY, INC.
a division of Dain Rauscher Incorporated
The date of this prospectus is , 1999
<PAGE> 3
Inside front cover
[Close up picture of Rockford wolf]
[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
[Vicious car audio trademark]
Inside gatefold of page 2:
[Diamond R, Rockford Fosgate, and Car audio for fanatics Logo]
Specialty Retailers 5000 stores worldwide
[Photo of specialty retailer storefront and Rockford product display]
National Chains 300+ Stores in the USA
[Photo of Best Buy store and Rockford product display]
Global Fanatics
Israel [Photo of car audio contestants]
Germany [Photo of vehicle with Rockford logos and wolf]
United States [Photo of boys with car audio trophy]
Japan [Photo of vehicle with Rockford wolf]
Rockford Worldwide Distribution
[Map showing countries where Rockford Fosgate products are distributed]
[Photo of Rockford Fosgate demo truck]
[System diagram showing system installed in truck]
Six 12" Woofers, Thousands of watts, and 5.1 surround sound
[Photos and description of specific products, including source units,
crossovers, amplifiers, full-range speakers, and woofers]
Over 6000 watts
WWW.rockfordfosgate.com
[images of wolf logo and product information from our web-site]
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're young adults who are passionate about their
lifestyle. Typically customers begin as hobbyists who become enthusiasts :
possessed by the dream of evolving in the fanatic fringe. They are loud, they
are proud, and most importantly, 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.................................................... 32
Management.................................................. 44
Certain Relationships and Related Transactions.............. 51
Principal and Selling Shareholders.......................... 53
Description of Capital Stock................................ 56
Shares Eligible for Future Sale............................. 59
Underwriting................................................ 61
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find More Information......................... 62
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 American 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 quickly deliver innovative products to market
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 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, Lightning Audio 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 while maintaining our
strategy of selective distribution.
- Develop a Second Brand. We intend to introduce a line of moderately
priced, high-performance amplifiers and subwoofers under our recently
acquired Lightning Audio brand name in 2000.
- Capitalize on International Opportunities. 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. In order to appeal to our
consumers' desire for "leading edge" products we intend to continue
introducing new products and re-engineering our existing product line.
- Promote Our Unique Brand Image. We intend to continue to enhance the
Rockford Fosgate, Lightning Audio and Hafler brands by emphasizing our
products' performance, value and authentic image.
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 effected on August 2, 1999, 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 at a
conversion price of $2.44, which will convert into 114,236 shares, and
warrants for 14,424 shares at a weighted average exercise price of $2.81
per share.
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 if the holders of the
8.5% convertible subordinated debentures exercise their conversion
rights, assuming conversion of $278,953 of debentures into 114,236 shares
in this offering. The conversion price for the debentures is $2.44 per
share;
- 1,995,981 shares of common stock that we will issue if the holders choose
to exercise outstanding options, with a weighted average exercise price
of $3.33 per share;
- 64,500 shares of common stock that we will issue if the holders choose to
exercise 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 if the holders choose to
exercise 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................. 3,395,493 2,287,774 5,683,267
Other existing shareholders....................... 580,544 149,741 730,285
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
$10 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 $ 0.62
======= ======= ======= ======= =======
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 6,274
======= ======= ======= ======= =======
</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 $26,179
Total assets............................................. 52,859 52,900 59,458
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 32,392
</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 considerable
discretion to reduce, change or terminate its purchases of our products.
Further, our relationship with Best Buy is recent, as we
8
<PAGE> 10
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 to be negatively and disproportionately
affected. In this event, our stock price may fall dramatically.
9
<PAGE> 11
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.
In order to increase sales in current markets and gain footholds in new
markets we must maintain and improve existing products, while successfully
developing and introducing new products. 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 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.
10
<PAGE> 12
OUR INTERNATIONAL OPERATIONS COULD BE HARMED BY FACTORS INCLUDING POLITICAL
INSTABILITY, CURRENCY EXCHANGE RATES AND CHANGES IN REGULATIONS THAT GOVERN
INTERNATIONAL TRANSACTIONS.
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 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
11
<PAGE> 13
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 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
12
<PAGE> 14
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 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 45.2% 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
13
<PAGE> 15
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 $6.9 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
$5.84. 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 87.5% 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.
AFTER THIS OFFERING, MANY OF OUR UNREGISTERED SHARES WILL BE AVAILABLE FOR
RE-SALE WITHOUT SIGNIFICANT RESTRICTIONS OTHER THAN A 180 DAY LOCK-UP AGREEMENT
WITH OUR UNDERWRITERS. THEIR SALE MAY NEGATIVELY AFFECT OUR STOCK PRICE.
We have been operating as a privately held company for a relatively long
period and have issued a large number of shares of our common stock to
individuals who are not affiliated with us. As a result, following this
offering, we will have a large number of shares of common stock outstanding and
available for resale immediately or upon the expiration of the 180 day lock-up
period imposed by 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.
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 shareholders of opportunities to sell our
stock at above-market prices typical in many acquisitions.
14
<PAGE> 16
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 $22.5 million, or $27.2
million if the underwriters' over-allotment option is exercised in full, in each
case assuming an initial public offering price of $10 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
- $6.9 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 $10.00 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............................... 3,642 3,960 26,385
Retained earnings(1)..................................... 6,008 6,008 5,748
Accumulated other comprehensive income................... 185 185 185
------- ------- -------
Total shareholders' equity............................ 9,882 10,202 32,392
------- ------- -------
Total capitalization............................. $26,014 $26,055 $33,783
======= ======= =======
</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 $30.6
million, or $4.16 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 $10 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 $2.43
per share to existing shareholders and an immediate dilution of $5.84 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $10.00
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....................... 2.43
-----
Pro forma net tangible book value after this offering....... 4.16
------
Pro forma dilution per share to new investors............... $ 5.84
======
</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 12.5% $ 0.74
New investors.................... 2,500,000 33.9 $25,000,000 87.5 $10.00
--------- ----- ----------- -----
Total.................. 7,363,861 100.0% $28,584,000 100.0%
========= ===== =========== =====
</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 if the holders of the
8.5% convertible subordinated debentures exercise their conversion
rights, assuming conversion of 114,236 shares in this offering;
- 1,995,981 shares of common stock that we will issue if the holders choose
to exercise outstanding options, with a weighted average exercise price
of $3.33 per share;
- 64,500 shares of common stock that we will issue if the holders choose to
exercise outstanding options, with an exercise price of the per share
price of this offering; and
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<PAGE> 20
- 83,911 shares of common stock that we will issue if the holders choose to
exercise 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
YEAR ENDED SEPTEMBER MONTHS ENDED
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
CEO option(1)......................... -- 644 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 18,535 20,958 25,218 5,089 25,155 25,456 26,908 14,026 18,619
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)................ 4,951 3,154 (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 1,494 (3,028) (38) (1,339) 2,591 4,022 2,357 6,226
Income tax expense (benefit)........... (1,594) 379 (1,025) (19) (407) 959 1,717 1,006 2,406
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...................... $ 4,856 $ 1,115 $(2,003) $ (19) $ (932) $ 1,632 $ 2,305 $ 1,351 $ 3,820
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic................................. $ 1.85 $ 0.35 $ (0.50) $ (0.01) $ (0.23) $ 0.37 $ 0.52 $ 0.31 $ 0.85
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted............................... $ 1.83 $ 0.33 $ (0.50) $ (0.01) $ (0.23) $ 0.31 $ 0.41 $ 0.25 $ 0.62
======= ======= ======= ======= ======= ======= ======= ======= =======
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 6,274
======= ======= ======= ======= ======= ======= ======= ======= =======
</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>
(1) During 1995 our majority shareholder amended a stock option to our CEO,
extending its exercise period and creating a new date for measurement of
compensation expense. CEO option expense represents the difference between
the fair value of our common stock on the date of the amendment and the
exercise price for the extended option period.
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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 generated over 95% of our sales in the first six months of 1999 from our
car audio products. We recognize revenues from sales when we ship products to
the distributor or dealer. Sales are reported 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
21
<PAGE> 23
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 wholly 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
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
23
<PAGE> 25
June 30, 1999 from 17.6% 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.
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 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
24
<PAGE> 26
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.
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
25
<PAGE> 27
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 $ 0.32
======= ======= ======= ======= ======= ======= ======= ======= =======
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 4,602
======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted...................... 5,575 5,659 4,412 5,725 5,957 6,051 6,051 6,275 6,270
======= ======= ======= ======= ======= ======= ======= ======= =======
</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 requires that we:
- have $7.0 million in earnings before interest, taxes, depreciation and
amortization, computed monthly on a rolling 12 month basis. This will
increase to $8.0 million on December 31, 1999;
- maintain debt service coverage of 1 to 1 for total debt and 1.3 to 1 for
senior debt;
- incur no more than $2.0 million of indebtedness per year outside our
existing credit arrangements; and
- make capital expenditures of no more than $3.0 million per year. We may
also make an aggregate of $2.0 million capital expenditures in excess of
this limit using off-balance sheet financing.
We intend to pay off this credit facility using the proceeds from this offering.
These covenants will then no longer apply to us after this pay-off.
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. These debentures are unsecured. 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 $0.2 million for
1998, $6.5 million for 1997 and ($0.2) million for 1996. Net cash provided by
(used in) operating activities was $1.6 million for the six months ended June
30, 1999 and negligible 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 $1.5 million for 1998, $1.6
million for 1997 and $1.8 million for 1996. Net cash used in investing
activities was $3.0 million for the six months ended
28
<PAGE> 30
June 30, 1999 and $0.6 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, ($4.9) 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 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.
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 Oracle 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.
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Additionally, we sponsored an 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.
We have completed our analysis and testing of our information systems hardware
and software. We believe all of our existing systems are Year 2000 compliant in
all material respects.
Process Equipment and Embedded Chips. After our 1997 physical inventory,
we contacted each supplier of process equipment and embedded chips to confirm
whether the equipment was Year 2000 compliant. Most of our process equipment was
acquired after 1993 and was certified to be Year 2000 compliant. We have
completed our testing and remediation of our equipment and believe all of our
equipment is Year 2000 compliant. We have also confirmed that, if any of this
equipment has unforeseen Year 2000 compliance issues, we will be able to turn
back the date on this equipment without affecting product assembly processes. We
did not replace any of our equipment specifically because of Year 2000
compliance issues.
Ongoing Internal Year 2000 Compliance. Our continuing efforts relating to
internal Year 2000 compliance are focused on new acquisitions of, and
enhancements to, our existing hardware, software, and equipment. We require our
suppliers to certify that all new acquisitions and enhancements are Year 2000
compliant and we also test them for Year 2000 compliance before loading and
using them with our existing 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.
The following table summarizes the responses we have received to date:
<TABLE>
<CAPTION>
NO. RESPONSE
--- --------
<S> <C>
36 Fully Year 2000 compliant, no anticipated issues in supply
to Rockford
2 Still testing systems, but do not anticipate problems in
supply to Rockford
1 Not computerized and has not assessed Year 2000 readiness
12 No response
</TABLE>
We are contacting the 12 suppliers who have not responded to request a response.
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
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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, during the 3rd Quarter of 1999, a contingency plan that
will:
- increase inventory of finished goods and of parts and raw materials, to
the extent we believe Year 2000 issues may jeopardize required supplies;
- secure secondary sources for critical inventory supplies, communications
and manufacturing equipment to the extent our review suggests a risk that
our primary suppliers have significant Year 2000 risks; and
- provide back-up computer and communication systems.
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 most preferred 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
According to the Consumer Electronics Manufacturers Association, 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.
OUR CONSUMERS
Car Audio
Historically, 16-24 year old males have been the primary consumers of
high-end car audio aftermarket products. 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. Generation Y consumers possess substantial disposable income and
devote much of their time and money to their music and cars. According to
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<PAGE> 35
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.
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 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
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<PAGE> 36
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 brand 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.
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
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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.
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;
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- 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.
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
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.
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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 over 1,500 independent 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. We pay our independent
sales representatives in the United States commissions based on sales of our
products to independent retailers in their territory. Commission amounts range
from 3% to 9% of sales depending upon product category, retailer involved in the
purchase and achievement of quarterly sales targets.
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.
Under our agreement, Best Buy provides to us (1) six-month rolling
forecasts, updated monthly, (2) commitments to purchase products within 60 days
and (3) purchase orders 30 days in advance of shipment. The payment terms
generally require payment of invoices within 60 days. We are obligated to
provide discounts varying by product. The agreement is terminable at will and
does not include any term or renewal provisions.
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We currently sell our car audio products in over 60 other countries through
independent distributors and sales representatives. Independent distributors
purchase products from us and re-sell them to retailers in their designated
territories. They assume inventory risks and take responsibility for warranty
service in their territory. 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 wholly 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. Independent sales representatives do not purchase products from
us, but instead sell products on our behalf. We remain responsible for inventory
until an independent retailer purchases it and we retain responsibility for
warranty service. 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 because commissions to independent sales representatives are less than
the distributor mark-up, allowing us to reduce 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 25 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 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.
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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. Under the agreement, we agreed to develop jointly and then
purchase source units from Hyundai on an exclusive basis, provided that Hyundai
could demonstrate to us successful commercial production of the units. We set
development and production milestones which Hyundai successfully met. We paid to
Hyundai a development fee and agreed to provide, at Hyundai's expense, personnel
and equipment to assist Hyundai's development of the source units according to
our specifications. The agreement obligates us to place monthly purchase orders
with Hyundai and is subject to cancellation charges for partially or totally
cancelled orders. The agreement commenced April 8, 1999 and expires July 31,
2003. As at June 30, 1999, we had paid to Hyundai $3,903,206 under the agreement
which includes pre-contract development costs. 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 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
40
<PAGE> 42
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.
Based on United States consumer brand preferences and market share (based
on dollar sales volume), we believe:
- we rank first or second among our competitors in car audio amplifiers;
- we are in the top six among our competitors in car audio speakers and
accessories;
- we are a relatively minor competitor in car audio source units.
We believe we have a significant share of the market for professional
amplifiers in recording studios and a very small share in the remainder of the
professional audio market, but do not have information allowing us to rank
ourselves in those markets. We are new to the professional audio speaker 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. 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.
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<PAGE> 43
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.
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
42
<PAGE> 44
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
APPROXIMATE 1999 ANNUAL
FUNCTION LOCATION SQUARE FOOTAGE RENTAL EXPENSE LEASE EXPIRATION
- ------------------------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Corporate headquarters......... Tempe, Arizona 15,000 $ 150,000 December 31, 2000(1)
Manufacturing, research and
development, and
purchasing................... Tempe, Arizona 22,000 306,000(2) December 31, 2000(1)
Warehousing, sales and customer
service...................... Tempe, Arizona 25,000 -- December 31, 2000(1)
Warehousing and sales.......... Tempe, Arizona 6,600 52,000 December 31, 1999
Warehousing and sales.......... Tempe, Arizona 29,000 127,000 July 15, 2001
Manufacturing, research and
development, purchasing and
administration............... Grand Rapids, 81,000 246,000 March 31, 2001
Michigan
Warehousing and sales.......... Japan 6,400 106,000 March 29, 2004
Warehousing.................... Singapore 10,000 145,000 November 15, 2000
Warehousing.................... Germany 17,000 137,000 December 30, 2006
------- ----------
Total................ 212,000 $1,269,000
</TABLE>
- ---------------
(1) We have the right to extend these leases for two additional one-year terms.
(2) Rent for this facility includes rent for our warehousing, sales and customer
service facility in Tempe, Arizona.
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.
43
<PAGE> 45
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 responsibility for systems and programming
implementation. Mr. Richards also served in the U.S. Army.
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<PAGE> 46
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 Senior Vice President of E-Business. Mr. Godfrey holds a B.S.E.E.
and an M.S. in Electrical Engineering from Auburn University.
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.
45
<PAGE> 47
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.
EMPLOYMENT AGREEMENTS
Except for Mr. Suttle, none of our executive officers has a written
employment agreement. See "Certain Relationships and Related
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.
46
<PAGE> 48
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.
47
<PAGE> 49
INDIVIDUAL GRANT(1)
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
PERCENT OF RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR 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;
- motivate them to achieve our long-range goals; and
48
<PAGE> 50
- 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.
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.
49
<PAGE> 51
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 1,000 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.
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<PAGE> 52
CERTAIN RELATIONSHIPS AND RELATED 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 term of the option from
August 1, 1999 to August 1, 2002 and to increase the exercise price of the
options during the extended period. 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
</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 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:
51
<PAGE> 53
- 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.
52
<PAGE> 54
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
OWNED BEFORE SHARES BENEFICIALLY
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% 413,682 3,420,592 45.7%
Timothy C. Bartol(2).................... 3,812,555 79.2 413,682 3,413,016 45.7
Monument Investors Limited
Partnership(3)........................ 3,154,016 66.6 413,682 2,740,334 37.2
W. Gary Suttle(4)....................... 877,200 18.2 877,200 11.8
Boulder Investors Limited
Partnership(5)........................ 579,124 12.7 579,124 8.2
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% 413,682 4,254,375 51.2%
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED BEFORE SHARES BENEFICIALLY
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. Coffey, Trustee and
Individually....................... 95,459 2.0 48,160 47,299 *
Will Hegarty.......................... 64,500 1.4 64,500 0 *
Otto Shill............................ 54,966 1.2 54,966 0 *
Kevin Campbell........................ 28,380 * 25,800 2,580 *
Sidney Smith.......................... 23,146 * 23,146 0 *
Darrell Chapman....................... 22,678 * 22,678 0 *
Vrolyk & Company...................... 21,500 * 10,750 10,750 *
Franklin Richards..................... 20,566 * 20,566 0 *
Scott and Kathy Carter................ 20,329 * 20,329 0 *
Dennis Blackhurst..................... 13,953 * 13,953 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 *
Angie Gitch........................... 7,752 * 3,225 4,527 *
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 353 Pampa Drive, Pagosa Springs, Colorado 81147.
(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.
54
<PAGE> 56
(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.
55
<PAGE> 57
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. The conditions imposed on these registration rights 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 the warrants must request registration and the
proposed offering must be expected to raise proceeds of at least $7.5 million.
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<PAGE> 58
The holders of approximately 407,359 shares of common stock, that we will
issue if the holders of the 8.5% convertible subordinated debentures exercise
their conversion rights, 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 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.
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<PAGE> 59
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.
LISTING
Our common stock has been approved for quotation 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 June 30, 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 3,620,887
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>
3,742,974 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
6,058,402 180 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 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, as described 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 underwriting agreement describes
the conditions on which the underwriters are committed to purchase and pay for
all such shares if any are purchased.
<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........................... $0.70 $1,750,000 $2,105,722
By the selling shareholders....................... $0.70 $ 621,498 $ 621,498
</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 the prior written consent
of the
61
<PAGE> 63
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. 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.
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
62
<PAGE> 64
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.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 5, 1999, except for Note 13
as to which the date is August 2, 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............................... 2,489 2,489 3,642
Retained earnings (deficit).............................. (117) 2,188 6,008
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 $ 0.62
======= ======= ======= ======= ======= =======
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 6,274
======= ======= ======= ======= ======= =======
</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 $1,311 $ 273 $ 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 2,452 (1,730) 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 2,456 (1,749) 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 2,489 (117) 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 2,489 2,188 238 (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 $3,642 $ 6,008 $ 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 2,274 980 1,185
Loss (gain) on sale of fixed assets........... 127 -- -- (12) 9 (9)
Deferred income tax expense (benefit)......... (691) 145 28 (686) -- --
Provision for doubtful accounts............... 653 247 540 561 243 721
Provision for inventory allowances............ 251 79 638 787 482 833
Minority interest............................. -- -- 4 18 4 (21)
Changes in operating assets and liabilities:
Accounts receivable......................... (1,969) 3,304 14 (4,569) (6,439) (8,789)
Inventories................................. (1,553) (1,174) 487 (3,410) (1,131) (2,400)
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) 832
Accrued warranty............................ 370 (7) 823 714 424 187
Income taxes payable........................ (158) (4) -- 30 412 671
Other accrued expenses...................... 1,219 (1,296) 1,220 879 1,717 3,430
-------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities.................................... 269 (156) 6,467 239 34 1,566
INVESTING ACTIVITIES
Purchases of property and equipment............. (2,191) (36) (1,318) (1,728) (717) (1,131)
Proceeds from sale of property and equipment.... 362 -- 118 38 57 10
Acquisitions of business net of cash acquired... -- -- -- -- -- (1,555)
Decrease (increase) in deposits................. 30 20 (425) 194 70 (330)
-------- ------- ------- ------- ------- -------
Net cash used in investing activities........... (1,799) (16) (1,625) (1,496) (590) (3,006)
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)
Debt issuance costs............................. -- -- (514) -- -- --
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) (4,929) 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, Singapore and 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.
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
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 includes approximately $3,213,000, $2,958,000 and
$4,384,000, respectively, due from overseas businesses.
In most cases, Rockford also offers a prompt pay discount for 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.
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.
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)
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.
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
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)
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>
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-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)
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-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)
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-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)
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-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)
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.
8. COMMON STOCK GRANTS AND OPTIONS
The Board of Directors of Rockford prior to 1995 granted the consulting
firm of Grisanti, Galef & Goldress, 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
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)
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 eligible 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. The stock option plans describe the circumstances under which 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>
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>
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)
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>
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>
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)
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............... -- -- 697 697 697 600
------- ------ ------ ------ ------ ------
Dilutive potential common shares........ 4,040 4,394 1,287 1,539 1,314 1,766
------- ------ ------ ------ ------ ------
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 6,274
======= ====== ====== ====== ====== ======
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 $ 0.62
======= ====== ====== ====== ====== ======
</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.
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)
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 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 August 2, 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-18
<PAGE> 83
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. It is
Hafler's goal to be 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> 84
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,387,824 SHARES
[ROCKFORD CORPORATION LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DAIN RAUSCHER WESSELS NEEDHAM & COMPANY, INC.
a division of Dain Rauscher Incorporated
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 85
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........................................ $ 11,372
NASD filing fee............................................. 5,565
Nasdaq National Market listing fee.......................... 48,750
Printing and engraving...................................... 153,000
Legal fees and expenses..................................... 325,000
Accounting fees and expenses................................ 200,000
Transfer agent fees......................................... 25,000
Miscellaneous............................................... 31,313
--------
Total............................................. $800,000
========
</TABLE>
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.
II-1
<PAGE> 86
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.
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 Regulation D or
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. To the extent we relied on Section 4(2) of the Act, each of these
investors was sophisticated within the meaning of Section 4(2).
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>
II-2
<PAGE> 87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1 Form of 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 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+
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+
</TABLE>
II-3
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
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 Indemnification Agreement+
10.35.1 Schedule for Indemnification Agreement+
10.36 FINOVA -- Schedule of Loan and Security Agreement+
10.37 Consent of Consumer Electronics Manufacturing Association+
21 List of Subsidiaries of Rockford Corporation+
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Steptoe & Johnson LLP (included as part of
Exhibit 5)+
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>
- ---------------
** Portions of the document have been omitted and filed separately with the
Commission under a request for confidential treatment.
+ Previously filed
Financial Statement Schedule: Schedule II -- Valuation and Qualifying
Accounts.
II-4
<PAGE> 89
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.
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
II-5
<PAGE> 90
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-6
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this Amendment No. 4 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 August 5, 1999.
ROCKFORD CORPORATION
By: /s/ W. GARY SUTTLE
------------------------------------
W. Gary Suttle
President and Chief Executive
Officer
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 August 5, 1999
- --------------------------------------------------- Officer, and Director
W. Gary Suttle (Principal Executive Officer)
/s/ JAMES M. THOMSON* Vice President of Finance and August 5, 1999
- --------------------------------------------------- Chief Financial Officer,
James M. Thomson Secretary (Principal Financial
Officer)
/s/ D. LYNN THROWER* Corporate Controller (Principal August 5, 1999
- --------------------------------------------------- Accounting Officer)
D. Lynn Thrower
/s/ JERRY E. GOLDRESS* Director August 5, 1999
- ---------------------------------------------------
Jerry E. Goldress
/s/ TIMOTHY C. BARTOL* Director August 5, 1999
- ---------------------------------------------------
Timothy C. Bartol
/s/ NICHOLAS G. BARTOL* Director August 5, 1999
- ---------------------------------------------------
Nicholas G. Bartol
/s/ RALPH B. GODFREY* Director August 5, 1999
- ---------------------------------------------------
Ralph B. Godfrey
/s/ JOHN P. LLOYD* Director August 5, 1999
- ---------------------------------------------------
John P. Lloyd
*By: /s/ W. GARY SUTTLE
---------------------------------------------
W. Gary Suttle
Attorney-in-fact
</TABLE>
II-7
<PAGE> 92
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1 Form of 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 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> 93
<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 Indemnification Agreement+
10.35.1 Schedule for Indemnification Agreement+
10.36 FINOVA -- Schedule of Loan and Security Agreement+
10.37 Consent of Consumer Electronics Manufacturers Association+
21 List of Subsidiaries of Rockford Corporation+
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Steptoe & Johnson LLP (included as part of
Exhibit 5)+
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>
- ---------------
** Portions of the document have been omitted and filed separately with the
Commission under a request for confidential treatment.
+ Previously filed
<PAGE> 1
EXHIBIT 1
ROCKFORD CORPORATION
3,387,824 Shares
Common Stock
Par Value $.01 Per Share
FORM OF UNDERWRITING AGREEMENT
August 5, 1999
Dain Rauscher Incorporated
Needham & Company, Inc.
As Representatives of the several Underwriters
c/o Dain Rauscher Wessels
Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Rockford Corporation, an Arizona corporation (the "Company"), and the
shareholders of the Company named in Schedule B hereto (the "Selling
Shareholders") propose, subject to the terms and conditions stated herein, to
issue and sell, or to sell, as the case may be, to the several underwriters
named in Schedule A hereto (the "Underwriters"), for which you are acting as
representatives (the "Representatives"), an aggregate of 3,387,824 shares (the
"Firm Shares") of common stock, par value $.01 per share, of the Company (the
"Common Stock"), including 2,500,000 shares to be sold by the Company and
887,824 shares to be sold by the Selling Shareholders. The Company also
proposes, subject to the terms and conditions stated herein, to sell to the
Underwriters, at the Underwriters' election, up to an aggregate of 508,174
additional shares of Common Stock (the "Option Shares"). The Firm Shares and the
Option Shares are herein collectively called the "Shares."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-79285) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). The registration statement, as
amended at the time it was declared effective, including the information (if
any) deemed to be part thereof pursuant to Rule 430A under the Act is herein
referred to as the "Registration Statement." The form of prospectus first filed
by the Company with the Commission pursuant to Rules 424(b) and 430A under the
Act is referred to herein as the "Prospectus." Each preliminary prospectus
included in the Registration Statement prior to the time it became effective or
filed with the Commission pursuant to Rule 424(a) under the Act is referred to
herein as a "Preliminary Prospectus." Copies of the Registration Statement,
including all exhibits and schedules thereto, any amendments thereto and all
Preliminary Prospectuses have been delivered to you.
<PAGE> 2
The Company and the Selling Shareholders hereby confirm their
respective agreements with respect to the purchase of the Shares by the
Underwriters as follows:
1. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) The Registration Statement has been declared
effective under the Act, and no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. No stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose has been instituted or threatened by the
Commission.
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, nor, to the best of
the Company's knowledge have proceedings for such purpose been instituted, and
each Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and regulations
of the Commission promulgated thereunder (collectively, the "Regulations"), and
did not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, the Company makes no representation or warranty
as to information contained in or omitted in reliance upon, and in conformity
with, written information furnished to the Company by or on behalf of any
Underwriter through the Representatives expressly for use in the preparation
thereof.
(iii) The Registration Statement conforms, and the
Prospectus and any amendments or supplements thereto will conform, in all
material respects to the requirements of the Act and Regulations. Neither the
Registration Statement nor any amendment thereto, and neither the Prospectus nor
any supplement thereto, contains or will contain, as the case may be, any untrue
statement of a material fact or omits or will omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representation or warranty as to information
contained in or omitted from the Registration Statement or the Prospectus, or
any such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any Underwriter
through the Representatives, expressly for use in the preparation thereof.
(iv) The Company has been duly organized, is validly
existing as a corporation under the laws of the state of Arizona, has the
corporate power and authority to own, lease, license and use its properties and
conduct its business as described in the Prospectus, and is duly qualified to
transact business and is in good standing in all jurisdictions in which the
conduct of its business or its ownership, leasing, licensing or using of
property requires such qualification and the failure so to qualify would have a
material adverse effect on the business, properties, condition,
2
<PAGE> 3
financial or otherwise, or results of operations of the Company and its
subsidiaries, taken as a whole (a "Material Adverse Effect").
(v) The Company has no subsidiaries other than those
disclosed in Exhibit 21 of the Registration Statement (hereinafter referred to
as its "subsidiaries"). Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own, lease, license and use its properties and conduct its business
as described in the Prospectus, and is duly qualified to transact business in
all jurisdictions in which the conduct of its business or its ownership, lease,
license or use of property requires such qualification and the failure so to
qualify would have a Material Adverse Effect. Other than the Company's
subsidiaries, the Company does not own, directly or indirectly, any shares of
stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture, association or
other entity. All outstanding shares of capital stock of each of the
subsidiaries of the Company have been duly authorized and validly issued, are
fully paid and non-assessable, and are owned, directly or indirectly, by the
Company free and clear of all liens, encumbrances and security interests, except
for the security interest created pursuant to the Company's credit agreement
with FINOVA Capital Corporation. No options, warrants or other rights to
purchase, agreements or other obligations to issue, or other rights to convert
any obligations into, shares of capital stock or ownership interests in any of
the subsidiaries of the Company are outstanding.
(vi) The outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. All offers and sales by the Company of outstanding shares of
capital stock and other securities of the Company, prior to the date hereof,
were made in compliance with the Act and all applicable state securities or blue
sky laws and were not issued in violation of any preemptive right, resale right,
right of first refusal or similar right. The Shares to be issued and sold by the
Company to the Underwriters pursuant to this Agreement have been duly authorized
and, when issued and paid for as contemplated herein, will be validly issued,
fully paid and nonassessable. Each of the Underwriters will receive good and
marketable title to the Shares purchased by it, free and clear of any and all
liens, encumbrances, pledges, security interests, charges, claims, equitable
interests, restrictions and defects. Except as otherwise stated in the
Prospectus, there are no preemptive rights or other rights to subscribe for or
to purchase, or any restriction upon the voting or transfer of, any shares of
capital stock of the Company pursuant to the Company's Articles of
Incorporation, Bylaws or any agreement or other instrument to which the Company
is a party or by which the Company is bound. Neither the filing of the
Registration Statement nor the offering or the sale of the Shares as
contemplated by this Agreement gives rise to any rights for, or relating to, the
registration of any shares of capital stock or other securities of the Company,
except such rights which have been validly waived or satisfied. Except as
described in the Prospectus, there are no outstanding options, warrants,
agreements or contracts to purchase or preemptive or other rights to purchase,
subscribe for or acquire from the Company any shares of its capital stock or any
securities or obligations convertible into or exercisable for shares of the
Company's capital stock. The Company has the authorized and outstanding capital
stock as set forth under the heading "Capitalization" in the Prospectus as of
the date set forth therein. The outstanding capital stock of the Company,
including the Shares,
3
<PAGE> 4
conforms, and the Shares to be issued by the Company to the Underwriters will
conform, to the description thereof contained in the Prospectus.
(vii) The financial statements, together with the
related notes and schedules as set forth in the Registration Statement and
Prospectus, present fairly the consolidated financial position, results of
operations and changes in financial position of the Company and its subsidiaries
on the basis stated in the Registration Statement at the indicated dates and for
the indicated periods. Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, and all adjustments necessary for a fair
presentation of results for such periods have been made, except as otherwise
stated therein and are in accordance with the books and records of the Company.
The summary and selected financial and statistical data included in the
Registration Statement present fairly the information shown therein on the basis
stated in the Registration Statement and have been compiled on a basis
consistent with the financial statements presented therein. The books, records
and accounts of the Company and its subsidiaries accurately and fairly reflect
in all material respects, in reasonable detail, the transactions in and
dispositions of the assets of, and the results of operations of, the Company and
its subsidiaries.
(viii) There is no action, suit, claim, proceeding or
investigation pending or, to the knowledge of the Company, threatened or
contemplated against the Company or any of its subsidiaries or any of their
respective officers, directors, properties, assets or rights before any court or
administrative or regulatory agency which, if determined adversely to the
Company or any of its subsidiaries, would, individually or in the aggregate,
result in a Material Adverse Effect except as set forth in the Registration
Statement.
(ix) The Company has good and marketable title to all
properties and assets reflected in the financial statements hereinabove
described as owned by the Company (or as described in the Prospectus as owned by
the Company), in each case free and clear of all liens, encumbrances, pledges,
security interests, charges, claims, equitable interests, restrictions and
defects, except such as have been granted pursuant to the Company's credit
agreement with FINOVA Capital Corporation or the Company's master lease
agreement with Banc One Leasing Corporation or are described in the Prospectus
or do not materially affect the value of such properties and assets and do not
materially interfere with the use made and proposed to be made of such
properties and assets by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are held by
them under valid and enforceable leases with such exceptions set forth in the
Prospectus or as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries.
(x) Since the respective dates as of which
information is given in the Registration Statement and Prospectus, as they may
be amended or supplemented, (A) there has not been any material adverse change,
or any development that could reasonably be expected to result in a material
adverse change, in or affecting the condition, financial or otherwise, of the
Company and its subsidiaries, taken as a whole, or the business affairs,
management, financial position, shareholders' equity or results of operations of
the Company and its subsidiaries, taken as a whole, whether or not occurring in
the ordinary course of business, (B) there has not been any transaction
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<PAGE> 5
not in the ordinary course of business entered into by the Company or any of its
subsidiaries which is material to the Company and its subsidiaries, taken as a
whole, other than transactions described or contemplated in the Registration
Statement, (C) the Company and its subsidiaries have not incurred any material
liabilities or obligations, direct or indirect or contingent or non-contingent,
which are not in the ordinary course of business or which could result in a
material reduction in the future earnings of the Company and its subsidiaries,
(D) the Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance, (E)
there has not been any change in the capital stock of the Company (other than
upon the exercise of options and warrants and the conversion of debentures
described in the Registration Statement), or any material increase in the
short-term or long-term debt (including capitalized lease obligations) of the
Company and its subsidiaries, taken as a whole, (F) there has not been any
declaration or payment of any dividends or any distributions of any kind with
respect to the capital stock of the Company, other than any dividends or
distributions described or contemplated in the Registration Statement, or (G)
there has not been any issuance of warrants, options, convertible securities or
other rights to purchase or acquire capital stock of the Company (other than
options granted under the Company's 1994 and 1997 Stock Option Plans and under
this Agreement).
(xi) Neither the Company nor any of its subsidiaries
is in violation of, or in default under, its Articles of Incorporation or
Bylaws, or any statute, or any law, rule, regulation, order, judgment,
injunction, decree or authorization of any court or governmental or
administrative agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties, or any indenture, mortgage, deed of
trust, loan agreement, lease, franchise, license or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them are bound or to which any property or assets of the
Company or any of its subsidiaries is subject, which violation or default would
have a Material Adverse Effect.
(xii) The issuance and sale of the Shares by the
Company and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions contemplated herein will not
violate any provision of the Articles of Incorporation or Bylaws of the Company
or any of its subsidiaries or any statute or any order, judgment, decree, rule,
regulation or authorization of any court or governmental or administrative
agency or body having jurisdiction over the Company or any of its subsidiaries
or any of their properties, and will not conflict with, result in a breach or
violation of, or constitute, either by itself or upon notice or passage of time
or both, a default under any indenture, mortgage, deed of trust, loan agreement,
lease, franchise, license or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any property or assets of the Company or any
of its subsidiaries is subject. No approval, consent, order, authorization,
designation, declaration or filing by or with any court or governmental agency
or body is required for the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein contemplated, except
as may be required under the Act or any state securities or blue sky laws or
under the rules and regulations of the National Association of Securities
Dealers, Inc. (the "NASD"). No further approval or authorization of any
securityholder, the Company's Board of Directors or any duly appointed committee
thereof or others is required for
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<PAGE> 6
the issuance and sale or transfer of the Shares, except as may be required under
the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
by the NASD or under state securities or blue sky laws.
(xiii) The Company and each of its subsidiaries holds
and is operating in compliance with all licenses, approvals, certificates and
permits from governmental and regulatory authorities, foreign and domestic,
which are necessary or material to the conduct of its business as described in
the Prospectus (except where the failure to so hold or operate in compliance
with such a license, approval, certificate or permit would not have a Material
Adverse Effect) and there are no proceedings pending or, to the knowledge of the
Company, threatened, which may cause any such license, approval, certificate or
permit to be withdrawn, cancelled, suspended or not renewed.
(xiv) The Company has the power and authority to
enter into this Agreement and to authorize, issue and sell the Shares it will
sell hereunder as contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by the Company.
(xv) Ernst & Young LLP, which has certified certain
of the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Act and Regulations.
(xvi) The Company has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted, or
which might reasonably be expected to cause or result in, stabilization or
manipulation of the price of the Common Stock.
(xvii) The Company's registration statement pursuant
to Section 12(g) of the Exchange Act of 1934, has been declared effective by the
Commission; and the Shares have been approved for designation upon notice of
issuance on The Nasdaq National Market under the symbol "ROFO."
(xviii) The Company has obtained and delivered to
the Representatives written agreements (the "Lock-Up Agreements"), in form and
substance satisfactory to the Representatives, of each of its shareholders
listed on Schedule C that such shareholders shall not (A) offer, pledge, sell,
offer to sell, contract to sell, sell any option or contract to purchase,
purchase any option to sell, grant any option right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any of the shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for, Common Stock, or (B) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences of ownership of the shares
of Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock (whether any such transaction described
in clause (A) or (B) above is to be settled by delivery of the shares of Common
Stock or such other securities, in cash or otherwise), in each case,
beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) or
otherwise controlled by such shareholder on the date hereof or hereafter
acquired, for a period beginning from the date of execution of this Agreement
and continuing to and including the date 180 days after the date of the
Prospectus (the "Lock-Up Period"); provided, however, that, if such shareholder
is an individual, such shareholder may, without the prior written
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<PAGE> 7
consent of Dain Rauscher Wessels on behalf of the Underwriters, transfer shares
of Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock either during his or her lifetime or, on death,
by will or intestacy to members of such shareholder's immediate family or to
trusts exclusively for the benefit of members of such shareholder's immediate
family or in connection with bona fide gifts, provided that, prior to any such
transfer, such transferee executes an agreement, satisfactory to Dain Rauscher
Wessels, pursuant to which such transferee agrees to receive and hold such
shares subject to the provisions of the Lock-Up Agreement and that there shall
be no further transfer except in accordance with the provisions of the Lock-Up
Agreement. For purposes of this paragraph, "immediate family" shall mean such
shareholder's spouse, lineal descendant, father, mother, brother or sister. The
restrictions on transfers described in the Lock-Up Agreements shall not apply to
(1) the sale of any shares of Common Stock to the Underwriters pursuant to this
Agreement or (2) transactions in shares of Common Stock acquired in open-market
transactions after completion of the Offering. In addition, each such
shareholder agrees that, without the prior written consent of Dain Rauscher
Wessels on behalf of the Underwriters, he, she or it will not, during the period
ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
(xix) The Company has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by the
Company.
(xx) The Company is in compliance with all provisions
of Florida Statutes Section 517.075 (Chapter
92-198, laws of Florida). The Company does not do any business, directly or
indirectly, with the government of Cuba or with any person or entity located in
Cuba.
(xxi) The Company and its subsidiaries have timely
filed all federal, state, local and foreign tax returns or reports required to
be filed, and have paid in full all taxes indicated by said returns or reports
and all assessments received by it or any of them to the extent that such taxes
have become due and payable, except where the Company and its subsidiaries are
contesting in good faith such taxes and assessments and there is no tax
deficiency that has been or, to the Company's knowledge, might be asserted
against the Company or any of its subsidiaries which might have a Material
Adverse Effect and all material tax liabilities, whether or not disputed, are
adequately provided for on the books of the Company and its subsidiaries. Except
as set forth in the Registration Statement and the Prospectus, neither the
Company nor any subsidiary has executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment or
collection of any income taxes or is a party to any pending action or proceeding
by any foreign or domestic governmental agency for assessment or collection of
taxes, and no claims for assessment or collection of taxes have been asserted
against the Company or any of its subsidiaries.
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<PAGE> 8
(xxii) The Company and each of its subsidiaries owns
or possesses adequate licenses or other rights to use all patents, patent
applications, trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade secrets
know-how, technology and other similar rights necessary for or material to the
conduct of its business as described in the Prospectus (except for failures to
own or possess such rights that would not have a Material Adverse Effect). The
Company has no knowledge of any facts which would preclude it from having rights
to its patent applications described in the Prospectus. Other than as disclosed
in the Prospectus, (A) the Company has no knowledge of any infringement by it or
its subsidiaries of, or conflicts with, any patents, patent applications,
trademarks, service marks, tradenames, trademark registrations, service mark
registrations, copyrights, licenses, inventions, trade secrets, know-how,
technology or other similar rights of others, and (B) neither the Company nor
any of its subsidiaries has any knowledge of or has received any notice or claim
of conflict with the asserted rights of others with respect to any of the
foregoing.
(xxiii) The Company is not, and upon completion of
the sale of Shares contemplated hereby will not be, required to register as an
"investment company" under the Investment Company Act of 1940, as amended.
(xxiv) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (C) access to records is
permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxv) Other than as contemplated by this Agreement,
neither the Company nor any of its subsidiaries has incurred any liability for
any finder's or broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(xxvi) The Company and its subsidiaries maintain
insurance with insurers of recognized financial responsibility of the types and
in the amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and personal
property owned or leased by the Company or its subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect; neither the Company
nor any such subsidiary has been refused any insurance coverage sought or
applied for; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.
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<PAGE> 9
(xxvii) To the Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, subassemblers,
subcontractors or international distributors that might be expected to result in
a material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise. No collective bargaining agreement exists with any
of the Company's employees and, to the Company's knowledge, no such agreement is
imminent.
(xxviii) The Company has not distributed and will not
distribute prior to the later of (A) the Closing Date, or any date on which
Option Shares are to be purchased, as the case may be, and (B) completion of the
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted by
the Act.
(xxix) Neither the Company nor any of its
subsidiaries has at any time during the last five years (A) made any unlawful
contribution to any candidate for foreign office or failed to disclose fully any
contribution in violation of law, or (B) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof.
(xxx) Except as set forth in the Registration
Statement and Prospectus, (i) the Company and each of its subsidiaries is in
compliance with all rules, laws and regulations relating to the use, treatment,
storage and disposal of toxic substances and protection of health or the
environment ("Environmental Laws") which are applicable to its business, except
for such instances of non-compliance as would not individually or in the
aggregate have a Material Adverse Effect (ii) neither the Company nor any of its
subsidiaries has received notice from any governmental authority or third party
of an asserted claim under Environmental Laws, which claim is required to be
disclosed in the Registration Statement and the Prospectus and is not so
disclosed, (iii) to the knowledge of the Company, neither the Company nor any of
its subsidiaries will be required to make future material capital expenditures
to comply with Environmental Laws and (iv) to the knowledge of the Company, no
property which is owned, leased or occupied by the Company or any of its
subsidiaries has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.
(xxxi) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the benefit of
any of the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
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<PAGE> 10
(b) Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel to the Underwriters shall be deemed
to be a representation and warranty of the Company to each Underwriter as to the
matters covered thereby.
2. Representations, Warranties and Covenants of the Selling
Shareholders.
(a) Each Selling Shareholder severally represents and warrants
to, and covenants and agrees with, each of the Underwriters and the Company
that:
(i) Such Selling Shareholder has duly executed and
delivered a Power of Attorney (the "Power of Attorney"), appointing W. Gary
Suttle and James M. Thomson and each of them, as attorney-in-fact (the
"Attorneys-In-Fact") with full power and authority to execute and deliver this
Agreement on behalf of such Selling Shareholder, to authorize the delivery of
the Shares to be sold by the Selling Shareholder hereunder, and otherwise to act
on behalf of such Selling Shareholder in connection with the transactions
contemplated by this Agreement.
(ii) Such Selling Shareholder has duly executed and
delivered a Custody Agreement (the "Custody Agreement") with the Company, as
Custodian, pursuant to which certificates in negotiable form for the Shares to
be sold by such Selling Shareholder hereunder have been placed in custody for
delivery under this Agreement.
(iii) Such Selling Shareholder has full right, power
and authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement, and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder hereunder; and all consents, approvals,
authorizations and orders necessary for the execution and delivery by such
Selling Shareholder of this Agreement, the Power of Attorney and the Custody
Agreement, and for the sale and delivery of the Shares to be sold by such
Selling Shareholder hereunder, have been obtained, except such as may be
required by any state securities or blue sky laws.
(iv) Such Selling Shareholder has, and at the Closing
Date (as such date is hereinafter defined) will have, good and valid title to
the Firm Shares to be sold by such Selling Shareholder hereunder, free of any
liens, encumbrances, security interests, equities or claims whatsoever; and upon
delivery of and payment for such Firm Shares pursuant to this Agreement, good
and valid title thereto, free of any liens, encumbrances, security interests,
equities or claims whatsoever, will be transferred to the several Underwriters.
(v) The execution and delivery by each Selling
Shareholder of this Agreement, the Power of Attorney and the Custody Agreement
and the consummation by such Selling Shareholder of the transactions herein and
therein contemplated and the fulfillment by such Selling Shareholder of the
terms hereof and thereof will not conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any will, mortgage, deed of trust, loan agreement or other agreement, instrument
or obligation to which such Selling Shareholder is a party or to which any of
the property or assets of such Selling Shareholder is subject, except for such
agreements, instruments or obligations for which consents have been
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<PAGE> 11
obtained, nor will such actions result in any violations of the provisions of
the charter or by-laws if such Selling Shareholder is a corporation, the
partnership agreement, certificate or articles if the Selling Shareholder is a
partnership, or any statute, rule, regulation or order applicable to such
Selling Shareholder of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction over such Selling
Shareholder.
(vi) Such Selling Shareholder has not taken and will
not take, directly or indirectly, any action designed to, or which has
constituted, or which might reasonably be expected to cause or result in,
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(vii) To the extent that any statements or omissions
made in the Registration Statement, any Preliminary Prospectus thereof, the
Prospectus or any amendment or supplement thereto are made in reliance upon and
in conformity with written information with respect to such Selling Shareholder
furnished to the Company by such Selling Shareholder expressly for use therein,
such Preliminary Prospectus and the Registration Statement did not, and the
Prospectus and any further amendments or supplements to the Registration
Statement and the Prospectus will not, when they become effective or are filed
with the Commission, as the case may be, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(viii) Such Selling Shareholder will not offer to
sell, sell, transfer, assign or otherwise dispose of any Common Stock or other
capital stock of the Company, directly or indirectly, for a period of 180 days
after the date of the Prospectus, otherwise than as expressly permitted
hereunder, under the Lock-Up Agreement between such Selling Shareholder and the
Representatives, or with the written consent of the Representatives.
(ix) Such Selling Shareholder has reviewed the
information contained in the Registration Statement and, based on such review
and such Selling Shareholder's knowledge of the industry, the Company and its
business (but without further investigation), such Selling Shareholder does not
have knowledge that, and nothing has come to such Selling Shareholder's
attention that would give such Selling Shareholder reason to believe that, at
the time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing Date and
on any Option Closing Date, (i) the Registration Statement and the Prospectus,
and any amendments or supplements thereto, contained or will contain any untrue
statement of a material fact or omitted or will omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and (ii) the Prospectus, and any amendments or supplements thereto
effective on or prior to the Closing Date or any Option Closing Date, contained
or will contain any untrue statement of a material fact or omitted or omits to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
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(x) This Agreement, the Custody Agreement and the
Power of Attorney have been duly authorized, executed and delivered by such
Selling Shareholder and are valid and binding agreements of such Selling
Shareholder.
(xi) Assuming the Underwriters purchase the Shares to
be sold by each Selling Shareholder for value, in good faith and without notice
of any adverse claim within the meaning of Article VIII of the Arizona Uniform
Commercial Code, delivery of the Shares to be sold by such Selling Shareholder
pursuant to this Agreement will be free and clear of any security interests,
claims, liens, equities and other encumbrances.
(b) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986, as
amended, with respect to the transactions herein contemplated, each of the
Selling Shareholders agrees to deliver to you prior to or at the Closing Date a
properly completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
(c) Each of the Selling Shareholders specifically agrees that
the Shares represented by the certificates held in custody for such Selling
Shareholder under the Custody Agreement are subject to the interests of the
Underwriters hereunder, and that the arrangements made by such Selling
Shareholder for such custody and the appointment by such Selling Shareholder of
the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable.
Each of the Selling Shareholders specifically agrees that the obligations of the
Selling Shareholders hereunder shall not be terminated by operation of law,
whether by the death or incapacity of any individual Selling Shareholder or, in
the case of an estate or trust, by the death or incapacity of any executor or
trustee or the termination of such estate or trust, or in the case of a
corporation or partnership, by the dissolution of such corporation or
partnership, or by the occurrence of any other event. If any individual Selling
Shareholder or any such executor or trustee should die or become incapacitated,
or if any such estate or trust should be terminated, or if any such corporation
or partnership should be dissolved, or if any other such event should occur
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Shareholders in
accordance with the terms and conditions of this Agreement and of the Custody
Agreement, and actions taken by the Attorneys-in-Fact pursuant to the Powers of
Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or not the
Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of
such death, incapacity, termination, dissolution or other event.
(d) Any certificate signed by or on behalf of any Selling
Shareholder and delivered to the Representatives or to counsel to the
Underwriters shall be deemed to be a
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<PAGE> 13
representation and warranty of such Selling Shareholder to each Underwriter as
to the matters covered thereby.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and covenants contained herein, and subject to the
terms and conditions herein set forth, the Company and each Selling Shareholder
agrees, severally and not jointly, to sell to each Underwriter and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
each Selling Shareholder, at a price of $___________ per share, the number of
Firm Shares (to be adjusted by you to eliminate fractional shares) determined by
multiplying the aggregate number of Firm Shares to be sold by the Company and
each of the Selling Shareholders, as set forth opposite their respective names
in Schedule B hereto, by a fraction, the numerator of which is the aggregate
number of Firm Shares to be purchased by such Underwriter as set forth opposite
the name of such Underwriter in Schedule A hereto and the denominator of which
is the aggregate number of Firm Shares to be purchased by all the Underwriters
from the Company and the Selling Shareholders hereunder.
In addition, on the basis of the representations, warranties and
covenants contained herein and subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters an option to
purchase at the Underwriters' election up to 508,174 Option Shares at the same
price per share as set forth for the Firm Shares in the paragraph above, for the
sole purpose of covering over-allotments in the sale of the Firm Shares. The
option granted hereby may be exercised in whole or in part, but only once, and
at any time upon written notice given within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters, to the
Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option and the time and date at which
certificates are to be delivered. If any Option Shares are purchased, each
Underwriter agrees, severally and not jointly, to purchase that portion of the
number of Option Shares as to which such election shall have been exercised
(subject to adjustment to eliminate fractional shares) determined by multiplying
such number of Option Shares by a fraction the numerator of which is the maximum
number of Option Shares which such Underwriter is entitled to purchase as set
forth opposite the name of such Underwriter in Schedule A hereto and the
denominator of which is the maximum number of Option Shares which all of the
Underwriters are entitled to purchase hereunder. The time and date at which
certificates for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than two or later than ten full
business days after the exercise of such option, and shall not in any event be
prior to the Closing Date. If the date of exercise of the option is three or
more full days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date.
Certificates in definitive form for the Shares to be purchased by each
Underwriter hereunder, and in such denominations and registered in such names as
Dain Rauscher Wessels may request upon at least 48 hours' prior notice to the
Company, shall be delivered by or on behalf of the Company or the Selling
Shareholders, as applicable, to you for the account of such Underwriter at such
time and place as shall hereafter be designated by the Representatives, against
payment by such Underwriter or on its behalf of the purchase price therefor by
wire transfer of Federal or other funds immediately available in Minneapolis,
Minnesota. The time and date of such delivery and payment shall be, with respect
to
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the Firm Shares, 8:30 a.m. Minneapolis, Minnesota time, at the offices of
Steptoe & Johnson LLP, 40 N. Central Avenue, Suite 2400, Phoenix, Arizona, on
_________________, 1999, or such other time and date as you and the Company may
agree upon in writing, such time and date being herein referred to as the
"Closing Date," and, with respect to the Option Shares, at the time and on the
date specified by you in the written notice given by you of the Underwriters'
election to purchase the Option Shares, or such other time and date as you and
the Company may agree upon in writing, such time and date being referred to
herein as the "Option Closing Date." Such certificates will be made available
for checking and packaging at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be, at a location as may be designated by
you.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to make a public offering of the Firm Shares as soon as the
Representatives deem it advisable to do so. The Firm Shares are to be initially
offered to the public at the initial public offering price and terms set forth
in the Prospectus. The Representatives may from time to time thereafter change
the public offering price and other selling terms. To the extent, if at all,
that any Option Shares are purchased pursuant to Section 3 hereof, the
Underwriters will offer such Option Shares to the public on the foregoing terms.
5. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will prepare and timely file with the
Commission under Rule 424(b) under the Act a Prospectus containing information
previously omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A under the Act, and will not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
and as to which the Representatives shall have reasonably objected in writing
promptly after reasonable notice thereof or which is not in compliance with the
Act or the Regulations.
(b) The Company will advise the Representatives promptly of
any request of the Commission for amendment of the Registration Statement or for
any supplement to the Prospectus or for any additional information, or of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
institution or threatening of any proceedings for that purpose, and the Company
will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus or suspending such
qualification and to obtain as soon as possible the lifting thereof, if issued.
(c) To the extent required of issuers listed on The Nasdaq
National Market, the Company will endeavor to qualify the Shares for sale under
the securities laws of such jurisdictions as the Representatives may reasonably
have designated in writing and will, or will cause counsel to, make such
applications, file such documents, and furnish such information as may be
reasonably requested by the Representatives, provided that the Company shall not
be required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not
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<PAGE> 15
now so qualified or required to file such a consent. The Company will, from time
to time, prepare and file such statements, reports and other documents as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) The Company will furnish the Underwriters with as many
copies of any Preliminary Prospectus as the Representatives may reasonably
request and, during the period when delivery of a prospectus is required under
the Act, the Company will furnish the Underwriters with as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may, from time to time, reasonably request. The Company will
deliver to the Representatives, at or before the Closing Date, three signed
copies of the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement, without exhibits, and of all amendments
thereto, as the Representatives may reasonably request.
(e) If, during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or if
for any other reason it shall be necessary at any time to amend or supplement
the Prospectus to comply with any law, the Company promptly will prepare and
file with the Commission an appropriate amendment to the Registration Statement
or supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not include an untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein in
light of the circumstances existing when it is so delivered, not misleading, or
so that the Prospectus will comply with law. In case any Underwriter is required
to deliver a prospectus in connection with sales of any Shares at any time nine
months or more after the effective date of the Registration Statement, upon the
request of the Representatives but at the expense of such Underwriter, the
Company will prepare and deliver to such Underwriter as many copies as the
Representatives may request of an amended or supplemented Prospectus complying
with Section 10(a)(3) of the Act.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
18 months after the effective date of the Registration Statement, an earnings
Statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earnings statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 thereunder and will advise you in
writing when such statement has been so made available.
(g) During a period of five years after the date hereof, or
such shorter period that the Company remains subject to the periodic reporting
requirements of the Exchange Act, the Company, as soon as practicable after the
end of each respective financial quarter or year, as applicable, will furnish to
its shareholders annual reports (including financial statements audited by
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<PAGE> 16
independent certified public accountants) and will furnish to its shareholders
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will, upon request, furnish to you and the other several
Underwriters hereunder (i) concurrently with making such reports available to
its shareholders, statements of operations of the Company for each of the first
three quarters in the form made available to the Company's shareholders; (ii)
concurrently with the furnishing thereof to its shareholders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of shareholders' equity and of cash flow of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
nationally recognized independent certified public accountants; and (iii)
concurrently with the furnishing of such reports to its shareholders, copies of
all reports (financial or other) mailed to shareholders; and (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or The Nasdaq National
Market by the Company (except for documents for which confidential treatment is
requested).
(h) No offering, sale or other disposition of any Common Stock
or other capital stock of the Company, or warrants, options, convertible
securities or other rights to acquire such Common Stock or other capital stock
(other than pursuant to employee stock option plans, employee stock purchase
plans, outstanding options or on the conversion of convertible securities
outstanding on the date of this Agreement; provided, that any employee stock
options issued pursuant to employee stock option plans during the Lock-Up Period
shall not vest and become exercisable to any extent prior to the expiration of
the Lock-Up Period; and, provided further, that any shares of Common Stock
issued during the Lock-Up Period pursuant to the exercise of stock options shall
bear a restrictive legend restricting the transfer of such shares during the
Lock-Up Period) will be made from the date of this Agreement until the end of
the Lock-Up Period, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of the Representatives.
(i) The Company will apply the net proceeds from the sale of
the Shares to be sold by it hereunder substantially in accordance with the
purposes set forth under "Use of Proceeds" in the Prospectus. The Company will
invest such proceeds pending their use in such a manner that, upon completion of
such investment, the Company will not be an 'investment company' as defined in
the Investment Company Act of 1940, as amended.
(j) The Company will use its best efforts to maintain the
designation of the Common Stock on The Nasdaq National Market.
(k) The Company will file with the Commission such information
with respect to the use of proceeds from the sale of the Shares as may be
required pursuant to Rule 463 under the Act.
(l) From the date of this Agreement until the termination of
the Lock-Up Period, the Company will not, without the prior written consent of
Dain Rauscher Wessels on behalf of the Underwriters, alter or amend in any
manner the vesting schedule of any option, warrant or other security of the
Company or its subsidiaries.
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<PAGE> 17
(m) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer Agent) for its Common Stock.
6. Costs and Expenses. Whether or not the transactions contemplated by
this Agreement are consummated, the Company will pay (directly or by
reimbursement) all costs, expenses and fees incident to the performance of the
obligations of the Company and the Selling Shareholders under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for the
Company; the cost of preparing, printing and filing of the Registration
Statement, Preliminary Prospectuses and the Prospectus and any amendments and
supplements thereto and the printing, mailing and delivery to the Underwriters
and dealers of copies thereof and of this Agreement, the Agreement Among
Underwriters, any Selected Dealers Agreement, the Underwriters' Selling
Memorandum, the Invitation Letter, the Power of Attorney, the Blue Sky
Memorandum and any supplements or amendments thereto (excluding, except as
provided below, fees and expenses of counsel to the Underwriters); the filing
fees of the Commission; the filing fees and expenses (including reasonable legal
fees and disbursements of counsel for the Underwriters) incident to securing any
required review by the NASD of the terms of the sale of the Shares; listing
fees, if any, transfer taxes and the expenses, including the reasonable fees and
disbursements of counsel for the Underwriters incurred in connection with the
qualification of the Shares under state securities or Blue Sky laws; the fees
and expenses incurred in connection with the designation of the Shares on The
Nasdaq National Market; the costs of preparing stock certificates; the costs and
fees of any registrar or transfer agent and all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section 6. In addition, the Company will pay
all travel and lodging expenses incurred by management of the Company in
connection with any informational "road show" meetings held in connection with
the offering and will also pay for the preparation of all materials used in
connection with such meetings. The Selling Shareholders will pay the fees and
expenses of any separate counsel retained by them in connection with the
transactions contemplated hereby. The Company and the Selling Shareholders shall
not, however, be required to pay for any of the Underwriters' expenses (other
than those related to qualification of the Shares under state securities or Blue
Sky laws and those incident to securing any required review by the NASD of the
terms of the sale of the shares but including, without limitation, the
Underwriter expenses specified in Section 5(e) of this Agreement) except that,
if this Agreement shall not be consummated because the conditions in Section 7
hereof (other than the condition in Section 7(d)) are not satisfied or because
this Agreement is terminated by the Representatives pursuant to clause (i) of
Section 11(a) hereof, or by reason of any failure, refusal or inability on the
part of the Company or the Selling Shareholders to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the terms
hereof on their respective parts to be performed, unless such failure to satisfy
said condition or to comply with said terms shall be due to the default or
omission of any Underwriter, then the Company shall promptly upon request by the
Representatives reimburse the several Underwriters for
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<PAGE> 18
all appropriately itemized out-of-pocket accountable expenses, including fees
and disbursements of counsel, reasonably incurred in connection with
investigating, marketing and proposing to market the Shares or in contemplation
of performing their obligations hereunder; but the Company and the Selling
Shareholders shall not in any event be liable to any of the several Underwriters
for damages on account of loss of anticipated profits from the sale by them of
the Shares.
7. Conditions of Obligations of the Underwriters. The several
obligations of the Underwriters to purchase the Firm Shares on the Closing Date
and the Option Shares, if any, on the Option Closing Date, are subject to the
condition that all representations and warranties of the Company and the Selling
Shareholders contained herein are true and correct, at and as of the Closing
Date or the Option Closing Date, as the case may be, the condition that the
Company and the Selling Shareholders shall have performed all of their
respective covenants and obligations hereunder (to the extent performance of
such covenants and obligations are due at such times) and to the following
additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the Regulations and in accordance with Section 4(a) hereof; no stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, or any part thereof shall have been issued and no proceedings
for that purpose shall have been initiated or threatened by the Commission; and
all requests for additional information on the part of the Commission shall have
been complied with to the reasonable satisfaction of the Representatives.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of Steptoe &
Johnson LLP, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters, to the effect
that:
(i) The Company has been duly organized and is
validly existing as a corporation under the laws of the state of Arizona, with
corporate power and authority to own, lease, license and use its properties and
conduct its business as described in the Prospectus, and is duly qualified to
transact business and is in good standing in all jurisdictions in which the
conduct of its business or its ownership, lease, license or use of property
requires such qualification and the failure so to qualify would have a Material
Adverse Effect.
(ii) The Company has authorized and outstanding
capital stock as described in the Prospectus as of the date set forth therein.
The outstanding shares of the Company's capital stock have been duly authorized
and validly issued and are fully paid and nonassessable. The form of certificate
for the Shares is in due and proper form and complies with the requirements of
the Arizona Business Corporations Act. The Shares to be issued and sold by the
Company pursuant to this Agreement have been duly authorized and, when issued
and paid for as contemplated herein, will be validly issued, delivered, fully
paid and nonassessable. No preemptive right, co-sale right, registration right,
right of first refusal or other similar right of shareholders of the Company, or
of holders of warrants, options, convertible securities or other rights to
acquire shares of capital stock of
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<PAGE> 19
the Company, exist with respect to any of the Shares or the issue and sale
thereof (except for registration rights that have been waived) (i) pursuant to
the terms of the Company's Articles of Incorporation or Bylaws or (ii) to the
knowledge of such counsel, pursuant to the terms of any agreement or instrument
to which the Company is a party or by which the Company is bound. To the
knowledge of such counsel, no rights to register outstanding shares of the
Company's capital stock, or shares issuable upon the exercise of outstanding
warrants, options, convertible securities or other rights to acquire shares of
such capital stock, exist which have not been exercised or waived with respect
to the offering contemplated by the Registration Statement. The capital stock of
the Company, including the Shares, conforms in all material respects as to legal
matters to the description thereof contained in the Prospectus.
(iii) The Registration Statement has become effective
under the Act and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued under the Act
and no proceedings for that purpose have been instituted or are pending or
threatened by the Commission.
(iv) The Registration Statement, the Prospectus and
each amendment or supplement thereto comply as to form in all material respects
with the requirements of the Act and the rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
and the notes thereto and related schedules and other financial and statistical
data included therein or omitted therefrom).
(v) The statements (A) in the Prospectus under the
captions "Business -- Legal Proceedings," "Certain Relationships and Related
Transactions," "Description of Capital Stock," and "Shares Eligible for Future
Sale" and (B) in the Registration Statement in Items 14 and 15 insofar as such
statements constitute a summary of documents, proceedings or matters of law, are
in all material respects, accurate summaries and fairly present the information
called for with respect to such matters.
(vi) Such counsel does not know of any contracts,
agreements, documents or instruments required to be filed as exhibits to the
Registration Statement, or described in the Registration Statement or the
Prospectus which are not so filed, or described as required; and insofar as any
statements in the Registration Statement or the Prospectus constitute summaries
of any contract, agreement, document or instrument to which the Company is a
party, such statements are, in all material respects, accurate summaries and
fairly present the information called for with respect to such matters to the
extent required under the Act.
(vii) Such counsel knows of no legal or governmental
proceeding, pending or threatened, before any court or administrative body or
regulatory agency, to which the Company or any of its subsidiaries is a party or
to which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
Prospectus and are not so described, or statutes or regulations that are
required to be described in the Registration Statement or the Prospectus that
are not so described.
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<PAGE> 20
(viii) The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated do not and will not
conflict with or result in a violation of or default under the charter or bylaws
of the Company, or under any statute, permit, judgment, decree, order, rule or
regulation known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its properties (other than the
state securities and blue sky laws, as to which such counsel need express no
opinion) and do not and will not conflict with or result in a violation of or
default under (except for such conflicts, violations or defaults as would not
have a Material Adverse Effect) under any lease, license, contract, indenture,
mortgage, loan agreement or other agreement or other instrument or obligation
known to such counsel to which the Company is a party or by which the Company is
bound or to which any property or assets of the Company is subject, except such
agreements, instruments or obligations with respect to which valid consents or
waivers have been obtained by the Company.
(ix) The Company has the corporate power and
authority to enter into this Agreement and to authorize, issue, sell and deliver
the Shares as contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by the Company.
(x) No approval, consent, order, authorization,
designation, declaration, qualification or filing by or with any judicial,
regulatory, administrative or other governmental body is necessary in connection
with the execution and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by state
securities and blue sky laws, as to which such counsel need express no opinion)
except such as have been obtained or made.
(xi) The Company is not, and immediately upon
completion of the sale of Shares contemplated hereby will not be, required to
register as an "investment company" under the Investment Company Act of 1940, as
amended.
(xii) Although such counsel assumes no responsibility
for the factual accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to in the
opinion in subsections (ii) and (v) of this Section 7(b) and on the basis of the
procedures undertaken by such counsel (and relying as to materiality to the
extent such counsel deems appropriate upon opinions of officers and other
representatives of the Company), no facts have come to the attention of such
counsel that cause it to believe that the Registration Statement and any
amendments and supplements thereto, at the time they became effective and as of
the Closing Date or the Option Closing Date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or that the Prospectus or any further
amendment or supplement thereto, at the time it was mailed or otherwise
delivered to the Commission for filing pursuant to Rule 424(b) and as of the
Closing Date and the Option Closing Date, included an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that such counsel need not express any opinion with
respect to the financial statements and supporting schedules and other financial
and statistical data included in the
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<PAGE> 21
Registration Statement and the Prospectus. Such counsel may indicate that it has
not undertaken any independent investigation to verify the completeness or
accuracy of the statements in the Registration Statement or the Prospectus.
Counsel rendering the foregoing opinions may rely as to
questions of fact upon representations or certificates of officers of the
Company and of government officials. Copies of any representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(c) The Representatives shall have received on the Closing
Date the opinion of counsel for each of the Selling Shareholders, which counsel
shall be reasonably acceptable to the Representative, dated the Closing Date,
addressed to the Underwriters, to the effect that:
(i) A Power of Attorney and a Custody Agreement have
been duly executed and delivered by such Selling Shareholder and are the valid
and binding agreements of such Selling Shareholder.
(ii) This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Shareholder.
(iii) The sale of the Shares to be sold by such
Selling Shareholder hereunder and the compliance by such Selling Shareholder
with all of the provisions of this Agreement, the Power of Attorney and the
Custody Agreement, and the consummation of the transactions herein and therein
contemplated, will not conflict with or result in a breach or violation of any
terms or provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which such Selling Shareholder is a party or
by which such Selling Shareholder is bound or to which any of the property or
assets of such Selling Shareholder is subject, nor will such action result in
any violation of any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over such Selling
Shareholder or the property of such Selling Shareholder.
(iv) No consent, approval, authorization or order of
any court or governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the Shares to be
sold by such Selling Shareholder hereunder, except such consents, approvals,
authorizations or orders as have been validly obtained and are in full force and
effect, such as have been obtained under the Act, and such as may be required
under the state securities or blue sky laws in connection with the purchase and
distribution of such Shares by the Underwriters, as to which such counsel need
express no opinion.
(v) Such Selling Shareholder has full right, power
and authority to sell, assign, transfer and deliver the Shares to be sold by
such Selling Shareholder hereunder.
(vi) Upon delivery of the Shares being sold by such
Selling Shareholder and payment therefor, good and valid title to the Shares
being sold by such Selling Shareholder, free and clear of any claims, liens,
encumbrances, security interests or other adverse claims, will be transferred to
each of the several Underwriters who have purchased such Shares in good faith
and without notice of any such claim, lien, encumbrance, security interest or
other adverse claim within the meaning of the Arizona Uniform Commercial Code.
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<PAGE> 22
In rendering the opinions described above, counsel for each of the
Selling Shareholders may rely, as to matters of fact with respect to such
Selling Shareholder, upon the representations of such Selling Shareholder
contained in this Agreement, the Power of Attorney and the Custody Agreement or
any certificates required or permitted to be delivered by such Selling
Shareholder pursuant to this Agreement.
(d) The Representatives shall have received from Brobeck,
Phleger & Harrison LLP, counsel for the Underwriters, an opinion dated the
Closing Date or the Option Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the Shares, the Registration
Statement, the Prospectus, and other related matters as the Representatives may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters.
(e) The Representatives shall have received on each of the
date hereof, the Closing Date and the Option Closing Date, as the case may be, a
signed letter, dated as of the date hereof, the Closing Date or the Option
Closing Date, as the case may be, in form and substance reasonably satisfactory
to the Representatives, from Ernst & Young LLP, to the effect that they are
independent public accountants with respect to the Company and its subsidiaries
within the meaning of the Act and the related rules and regulations and
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
(f) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date or the Option Closing Date, as the case may be,
there shall not have been any change or any development involving a prospective
change, in or affecting the general affairs, management, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in your judgment, is material and adverse to the Company and
makes it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at the Closing Date or the Option Closing
Date, as the case may be, on the terms and in the manner contemplated in the
Prospectus.
(g) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the Company, signed by the chief executive officer and the chief
financial officer of the Company to the effect that, as of the Closing Date or
the Option Closing Date, as the case may be:
(i) The Prospectus was filed with the Commission pursuant to
Rule 424(b) within the applicable period prescribed for such filing by the
Regulations and in accordance with Section 4 of this Agreement; no stop order
suspending the effectiveness of the Registration Statement has been issued, and
no proceedings for such purpose have been initiated or are, to his knowledge,
threatened by the Commission.
(ii) The representations and warranties of the
Company set forth in Section 1 of this Agreement are true and correct at and as
of the Closing Date or the Option Closing
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<PAGE> 23
Date, as the case may be, and the Company has performed all of its obligations
under this Agreement to be performed at or prior to the Closing Date or the
Option Closing Date, as the case may be.
(h) The Representatives shall have received on the Closing
Date a certificate of the Selling Shareholders pursuant to which the Selling
Shareholders certify that their representations and warranties set forth in this
Agreement are true and correct at and as of the Closing Date and that they have
performed all of their obligations under this Agreement to be performed at or
prior to the Closing Date.
(i) The Company and the Selling Shareholders shall have
furnished to the Representatives such further certificates and documents as the
Representatives may reasonably have requested.
(j) The Lock-Up Agreements shall have been delivered to the
Representatives prior to the date hereof and are, as of the Closing Date or the
Option Closing Date, as the case may be, in full force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects reasonably satisfactory to the Representatives and to Brobeck,
Phleger & Harrison LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 7
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company of such termination in writing or
by telegram at or prior to the Closing Date or the Option Closing Date, as the
case may be. In such event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 6 and 8
hereof).
8. Indemnification.
(a) The Company and the Selling Shareholder listed in Part A
of Schedule B jointly and severally agree to indemnify and hold harmless each
Underwriter, each officer and director thereof, and each person, if any, who
controls any Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) to which such Underwriter or such persons may became
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus, including any amendments or supplements thereto, or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, or (iii) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Common Stock or the offering
contemplated hereby, and which is included as part of or referred to
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<PAGE> 24
in any losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arising out of or based upon matters covered by clause (i) or
(ii) above, and will reimburse each Underwriter and each such controlling person
for any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such action
or claim as such expenses are incurred; provided however, that the Company and
the Selling Shareholder listed in Part A of Schedule B shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement,
or omission or alleged omission, made in the Registration Statement, any
Preliminary Prospectus or the Prospectus, including any amendments or
supplements thereto, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein; provided further, that the Company and the Selling
Shareholder listed in Part A of Schedule B shall not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission, made in a Preliminary Prospectus, if a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of the
Underwriters to the person asserting such loss, claim, damage or liability, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of Shares to such person, and if the Prospectus (as
amended or supplemented) would have cured the defect giving rise to such loss,
claim, damage or liability, unless the failure to so deliver the Prospectus (as
amended or supplemented) is the result of noncompliance by the Company with the
first sentence of paragraph 5(d) of this Agreement; provided further that the
Company and the Selling Shareholder listed in Part A of Schedule B shall not be
liable in the case of any matter covered by clause (iii) above to the extent
that it is determined in a final judgment by a court of competent jurisdiction
that such losses, claims, damages or liabilities resulted directly from any such
acts or failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct; and, provided further, that
in no event shall any Selling Shareholder be liable for an amount in excess of
the net proceeds received by such Selling Shareholder from the sale of the
Shares.
(b) Each Selling Shareholder listed in Part B of Schedule B
severally agrees to indemnify and hold harmless each Underwriter, each officer
and director thereof, and each person, if any, who controls any Underwriter
within the meaning of the Act, against any losses, claims, damages or
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) to which such Underwriter or such persons may became subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus, including any amendments or supplements thereto, or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, in each case to the
extent, but only to the
24
<PAGE> 25
extent, that such untrue statement or alleged untrue statement in clause (i)
above or such omission or alleged omission in clause (ii) above was made in the
Registration Statement, any Preliminary Prospectus or the Prospectus, including
any amendments or supplements thereto, in reliance upon and in conformity with
written information furnished to the Company by such Selling Shareholder
expressly for use therein, and will reimburse each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such action or claim as such expenses are incurred; provided
however, that in no event shall any Selling Shareholder listed in Part B of
Schedule B be liable for an amount in excess of the net proceeds received by
such Selling Shareholder from the sale of the Shares offered by such Selling
Shareholder.
(c) Each Underwriter agrees severally and not jointly to
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement, each Selling Shareholder
and each person, if any, who controls the Company or any Selling Shareholder
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, Selling
Shareholder or controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director, officer,
Selling Shareholder or controlling
25
<PAGE> 26
person in connection with investigating or defending any such action or claim as
such expenses are incurred; provided, however, that each Underwriter will be
liable in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission has been
made in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity or contribution may be sought pursuant to this Section 8, such person
(the "indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a), (b) or (c) or contribution
provided for in Section 8(e) shall be available with respect to a proceeding to
any party who shall fail to give notice of such proceeding as provided in this
Section 8(d) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the failure to give such notice shall not
relieve the indemnifying party or parties from any liability which it or they
may have to the indemnified party otherwise than on account of the provisions of
Section 8(a), (b), (c) or (e). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel at its own expense. Notwithstanding the foregoing, the indemnifying
party shall pay promptly as incurred the reasonable fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and the indemnified party shall have reasonably concluded that there may be a
conflict between the positions of the indemnifying party and the indemnified
party in conducting the defense of any such action or that there may be legal
defenses available to it or other indemnified parties which are different from
or additional to those available to the indemnifying party. It is understood
that the indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate counsel at any time for all such indemnified
parties. Such counsel shall be designated in writing by the Representatives and
shall be reasonably satisfactory to the Company in the case of parties
indemnified pursuant to Section 8(a) or (b) and shall be designated in writing
by the Company and shall be reasonably satisfactory to the Representatives in
the case of parties indemnified pursuant to Section 8(c). The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
26
<PAGE> 27
(e) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under Section
8(a), (b) or (c) above in respect of any losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other from the offering
of the Shares. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholders bears
to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company and the Selling Shareholders on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section 8(e) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(e). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereto) referred to above in this Section 8(e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(e), no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, no Selling
Shareholder shall be required to contribute any amount in excess of the proceeds
received by such Selling Shareholder, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling
Shareholders under this Section 8 shall be in addition to any liability which
the Company and the Selling Shareholders may otherwise have, and the obligations
of the Underwriters under this Section 8 shall be in addition to any liability
which the Underwriters may otherwise have.
27
<PAGE> 28
9. Default by Underwriters. If on the Closing Date or the Option
Closing Date, as the case may be, any Underwriter shall fail to purchase and pay
for the portion of the Shares which such Underwriter has agreed to purchase and
pay for on such date (otherwise than by reason of any default on the part of the
Company or a Selling Shareholder), you, as Representatives of the Underwriters,
shall use your best efforts to procure within 36 hours thereafter one or more of
the other Underwriters, or any others, to purchase from the Company and the
Selling Shareholders such amounts as may be agreed upon, and upon the terms set
forth herein, of the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If the aggregate
number of Shares that the defaulting Underwriter or Underwriters agreed to
purchase shall not be purchased in accordance with the preceding sentence, the
Company shall have the right, within 36 hours next succeeding the 36-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such remaining Shares on the terms herein
set forth. If during such two 36-hour periods you, as Representatives, and the
Company shall not have procured such other Underwriters, or any others, to
purchase the Firm Shares or Option Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of Shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of shares of
Firm Shares or Option Shares, as the case may be, with respect to which such
default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case
may be, covered hereby, the Company and the Selling Shareholders or you as the
Representatives of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company and the Selling Shareholders except for expenses to be borne
by the Company, the Selling Shareholders and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9 (and assuming that this Agreement is not terminated
pursuant to the immediately preceding sentences), the Closing Date or Option
Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Representatives, may determine in order that
the required changes in the Registration Statement or in the Prospectus or in
any other documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any action taken
under this Section 9 shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
10. Notices. All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered or telegraphed
and confirmed as follows: if to the Underwriters, to Dain Rauscher Incorporated,
2711 North Haskell Avenue, Suite 2400, Dallas, Texas 75204, fax: (214) 989-1490,
Attention: James R. Kipp, with copies to Brobeck, Phleger & Harrison LLP, 301
Congress Avenue, Suite 1200, Austin, Texas 78701, fax: (512) 477-5813,
Attention: Ronald G. Skloss; if to the Company or Selling Shareholders, to
Rockford Corporation, 546 South
28
<PAGE> 29
Rockford Drive, Tempe, Arizona 85281, fax: (480) 966-3639, Attention: W. Gary
Suttle, with copies to Steptoe & Johnson LLP, 40 N. Central Avenue, Suite 2400,
Phoenix, Arizona 85004, fax: (602) 257-5299, Attention: Kevin L. Olson.
11. Termination. This Agreement may be terminated by you by notice to
the Company and the Selling Shareholders as follows:
(a) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any material adverse
change in or affecting the condition, financial or otherwise, of the Company and
its subsidiaries taken as a whole or the business affairs, management, financial
position, shareholders' equity or results of operations of the Company and its
subsidiaries taken as a whole, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration of war
or national emergency after the date hereof or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in your judgment, make the
offering or delivery of the Shares impracticable or inadvisable, (iii)
suspension of trading in securities on the New York Stock Exchange or the
American Stock Exchange or limitation on prices (other than limitations on hours
or numbers of days of trading) for securities on either such Exchange, or a halt
or suspension of trading in securities generally which are quoted on The Nasdaq
National Market System, or (iv) declaration of a banking moratorium by either
federal or New York State authorities; or
(b) as provided in Sections 7 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company,
as to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (a) above or as provided in Sections 7 and 9 of this
Agreement.
12. Written Information. For all purposes under this Agreement
(including, without limitation, Section 1, Section 2, Section 3 and Section 8
hereof), the Company and the Selling Shareholders understand and agree with each
of the Underwriters that the following constitutes the only written information
furnished to the Company by or through the Representatives specifically for use
in preparation of the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto: (i) the per share "Price to
Public" and per share "Underwriting Discounts and Commissions" set forth on the
cover page of the Prospectus, and (ii) the information set forth under the
caption "Underwriting" in the Preliminary Prospectus and the Prospectus.
13. Successors. This Agreement has been and is made solely for the
benefit of and shall be binding upon the Underwriters, the Company, the Selling
Shareholders and their respective successors, executors, administrators, heirs
and assigns, and the officers, directors and controlling persons referred to
herein, and no other person will have any right or obligation hereunder. The
term "successors" shall not include any purchaser of the Shares merely because
of such purchase.
29
<PAGE> 30
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors or officers or the Selling Shareholders and (c)
delivery of and payment for the Shares under this Agreement.
Each provision of this Agreement shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of this
Agreement is held to be invalid, illegal or unenforceable under any applicable
law or rule in any jurisdiction, such provision will be ineffective only to the
extent of such invalidity, illegality or unenforceability in such jurisdiction
or any provision hereof in any other jurisdiction.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Minnesota.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholders and the several Underwriters in accordance with its terms.
30
<PAGE> 31
Very truly yours,
ROCKFORD CORPORATION
By:
___________________________________________
W. Gary Suttle
President and Chief Executive Officer
SELLING SHAREHOLDERS LISTED ON
SCHEDULE B
By:
___________________________________________
W. Gary Suttle
Attorney-in-Fact
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
Dain Rauscher Incorporated
Needham & Company, Inc.
As Representatives of the several Underwriters
By Dain Rauscher Incorporated
By:
_____________________________________
Name: James R. Kipp
___________________________________
Its: Managing Director
____________________________________
[SIGNATURE PAGE TO UNDERWRITING AGREEMENT]
<PAGE> 32
SCHEDULE A
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM MAXIMUM NUMBER
UNDERWRITER SHARES TO BE PURCHASED OF OPTION SHARES
<S> <C> <C>
Dain Rauscher Wessels................................ _________ _______
Needham & Company, Inc............................... _________ _______
Total................................................ 3,387,824 508,174
========= =======
</TABLE>
<PAGE> 33
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF MAXIMUM NUMBER
SELLER FIRM SHARES OF OPTION SHARES
------ ----------- ----------------
<S> <C> <C>
Rockford Corporation................................. 2,500,000 508,174
Selling Shareholders: 887,824
Part A
Monument Investors Limited Partnership............... 413,682
Part B
Glenn and Pamela Carrio.............................. 119,174
Kathryn A. Coffey, Trustee and Individually.......... 48,160
Will Hegarty......................................... 64,500
Otto Shill........................................... 54,966
Kevin Campbell....................................... 25,800
Sidney Smith......................................... 23,146
Darrell Chapman...................................... 22,678
Vrolyk & Company..................................... 10,750
Franklin Richards.................................... 20,566
Scott and Kathy Carter............................... 20,329
Dennis Blackhurst.................................... 13,953
David Nettleton...................................... 10,279
Gordon MacInnes...................................... 4,300
Robert S. Pothier.................................... 8,995
Don Hammerle......................................... 8,062
</TABLE>
<PAGE> 34
<TABLE>
<S> <C> <C>
Angie Gitch.......................................... 7,752
John P. Frank........................................ 6,450
Larry Ulrich......................................... 1,075
Rebecca P. Harris.................................... 1,505
Brigham P. Herzfeld.................................. 1,531
Andy Szabo........................................... 1,720
Mark Quale........................................... 1,689
John Seaver.......................................... 860
Marion Szabo......................................... 430
--------- -------
Total................................................ 3,387,824 508,174
========= =======
</TABLE>
<PAGE> 1
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. CONFIDENTIAL MATERIAL HAS BEEN REDACTED
AND FILED SEPARATELY WITH THE COMMISSION.
<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
- 2 -
<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
- 3 -
<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. (*)
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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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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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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(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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<PAGE> 10
(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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<PAGE> 11
(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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<PAGE> 12
(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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<PAGE> 13
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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<PAGE> 15
EXHIBIT A
PRODUCTS
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<PAGE> 16
EXHIBIT B
LICENSED ROCKFORD NAMES
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<PAGE> 17
EXHIBIT C
SCHEDULE OF INVOICES AND PAYMENTS
Amount Due. Rockford will pay Path, and Path may invoice Rockford for, the
Dealer Price less:
(1) a discount from the Dealer Price of (*) for sales to all
Dealers other than those who order from Rockford's European
price sheet;
(2) a discount from the Dealer Price of (*) for sales to all
Dealers who order from Rockford's European price sheet;
(3) an additional discount from the Dealer Price of (*) of the
Dealer Price for sales above (*) of the worldwide sales
target. The additional discount will commence when aggregate
gross shipments of the Products as established by Rockford's
shipping records for the year reach (*) of the plan target
gross shipments worldwide. Rockford will establish plan target
gross shipments in consultation with Path. Rockford will
notify Path promptly when aggregate gross shipments reach this
target.
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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AND FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 18
EXHIBIT D
PRIOR AGREEMENTS
[List prior agreements superseded by this agreement]
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<PAGE> 1
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 August 2, 1999, with respect to the financial statements of Rockford
Corporation included in Amendment Number 4 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.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
August 5, 1999
