<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 2000
REGISTRATION NO. 333-79285
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
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 PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE PRICE(1) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share....... 3,852,500 $13.00 $50,082,500 $13,922.94
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</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.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 19, 2000
PROSPECTUS
3,350,000 SHARES
[ROCKFORD CORPORATION LOGO]
COMMON STOCK
------------------------------
Of the 3,350,000 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 850,000 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 $11.00 and $13.00 per share.
-----------------------------
PRICE $ PER SHARE
-----------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Initial public offering price......................... $ $
Underwriting discounts and commissions................ $ $
Proceeds, before expenses, to Rockford................ $ $
Proceeds, before expenses, to selling shareholders.... $ $
</TABLE>
The underwriters have a 30-day option to purchase up to 502,500 additional
shares of common stock from us to cover over-allotments, if any.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. It is illegal for any person to tell
you otherwise.
------------------------------
DAIN RAUSCHER WESSELS
MCDONALD INVESTMENTS INC.
NEEDHAM & COMPANY, INC.
------------------------------
, 2000
<PAGE> 3
Inside front cover
[Diamond R and Rockford Corporation Logo]
Down right side of page:
At top: Rockford Fosgate car audio logo and picture of Rockford Fosgate
amplifier, speaker and source unit;
In middle: Lightning Audio car audio logo and picture of Lightning Audio
amplifier, speaker and capacitor;
At bottom: Hafler professional & home audio logo and picture of Hafler
amplifier, home theater speaker and powered monitor.
Bottom left side of page:
[The Standard for audio performance]
Inside gatefold of page 2:
Top of page: Car Audio Worldwide
Top center:
[Map showing countries where Rockford Fosgate products are distributed]
Running up left side of page: [Diamond R, Rockford Fosgate logo, and picture of
mechanical wolf]
Upper left of page: Independent Specialty Retailers 5000 stores worldwide
[Photo of specialty retailer storefront and Rockford product display]
Middle left of page: Independent National Chains 350+ Stores in the USA
[Photo of Best Buy store and Rockford product display]
Bottom left side of page:
Advanced digital technology
[photo of Rockford Fosgate source unit, MP3 changer, digital amplifier,
signal processor and subwoofer]
Running down right side of page:
[Lightning Audio logo and picture of Lightning Audio male model with arms
folded across his chest]
Lower right side of page:
[Photo of Lightning Audio amplifier, subwoofer and capacitor]
Our Rockford Fosgate and Lightning Audio brands stand for products that
are designed to set the standard for high-performance car audio. If you haven't
heard OF us, you've HEARD us. If you haven't seen us, you've HEARD us. Our
Rockford Fosgate and Lightning Audio core consumers are young adults who are
passionate about their music and their brands. We are at the forefront of
digital technology for car audio, with innovative products like MP3 changers,
digital amplifiers, surround sound processors and, coming soon, in-car video. We
intend to continue building products deserving of the premier high-performance
car audio brands.
<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.................................................... 29
Management.................................................. 43
Related-Party Transactions.................................. 50
Principal and Selling Shareholders.......................... 52
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 58
Underwriting................................................ 60
Legal Matters............................................... 61
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.
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 design, manufacture and distribute high-performance audio systems for
the car and professional audio markets. Our car audio products are sold
primarily in the $6.3 billion worldwide car audio aftermarket to consumers who
want to improve their existing car audio systems. We market our car audio
products under our Rockford Fosgate and Lightning Audio brand names, selling
products that include digital and analog amplifiers, speakers, source units, CD
and MP3 changers and accessories. Based on 1999 dollar sales, we rank first in
U.S. market share for car audio amplifiers and third for car speakers. Under our
Hafler brand, we market amplifiers and speakers in the professional audio market
and plan to introduce Hafler home theater products later this year.
We believe our ability to deliver innovative and technologically advanced
products appeals to our consumers' desires for distinctive, leading-edge
products and powerful, high-quality sound. We continue to develop new products
to capitalize on improvements in digital technology that have increased demand
for high-performance audio products. Our Rockford Fosgate, Lightning Audio and
Hafler products have won numerous consumer and industry awards.
Car Audio
For over 20 years, Rockford Fosgate has been the brand of choice among our
core consumers, 16-24 year old males. Many of these consumers devote a
significant portion of their time and disposable income to their car audio
systems. We believe our core consumers perceive Rockford Fosgate as the
"coolest" car audio brand and we target our message to them using aggressive
grass-roots marketing. As a result of our consumers' loyalty, we believe
Rockford Fosgate has generated loyalty among the retailers who use our brand,
products and distinctive marketing programs as a "pull" brand to attract these
consumers.
In June 1999, as part of our growth strategy to develop additional brands,
we acquired Lightning Audio, a manufacturer and distributor of car audio
accessories. In January 2000, at the Consumer Electronics Show, we introduced a
line of high-performance amplifiers and subwoofers under the Lightning Audio
brand name that are more moderately priced than our Rockford Fosgate products.
Our newly introduced Lightning Audio amplifier won an EIA/CES Innovation Award
at the Consumer Electronics Show.
We currently sell our car audio products in the U.S. through approximately
2300 independent retail stores, including specialty dealers, audio/video
retailers, national consumer electronics retailers and catalog merchants.
Internationally, we sell our car audio products in over 60 countries through
independent distributors and sales representatives. We believe the Rockford
Fosgate brand is as widely-recognized internationally as it is in the U.S.
Historically, specialty dealers dominated the retail distribution of car
audio aftermarket products. However, over the last several years, as a result of
changing consumer buying patterns, audio/video and national consumer electronics
retailers have become the fastest growing distribution channels for car audio
aftermarket products, increasing their combined market share from 35% in 1987 to
48% in 1999. To capitalize on these changing industry dynamics, in early 1999 we
began distributing our products through Best Buy, a national consumer
electronics retailer, in all of its more than 350 stores.
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<PAGE> 6
Professional Audio and Home Theater
Our Hafler professional audio products are used in recording studios, movie
theaters, concert facilities, stadiums, traveling bands and broadcast studios.
Our amplifiers are designed for use in recording studios. We believe our ability
to meet the needs of this demanding niche positions us well for expansion into
other segments of the professional audio market. Additionally, we are developing
a full line of home theater products, including a preamp/surround processor,
multi-channel amplifiers and speakers for introduction in 2000. We believe our
home theater products will benefit from the reputation of our Hafler brand in
the professional audio market.
Our Growth Strategy
Our goal is to design, produce and distribute the best engineered and most
recognized and respected brands of high-performance 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:
- Continue to introduce new and technologically innovative products;
- Acquire and develop additional audio brands, taking advantage of our
technology and distribution strengths;
- Broaden our distribution by entering new distribution channels and
increasing our penetration of our existing distribution channels;
- Capitalize on our worldwide brand recognition to increase sales in
international markets; and
- Expand our professional audio business and enter the home theater market.
As a result of our strong brands and growth strategy, we believe we can grow our
business significantly and become a much larger participant in the worldwide car
and professional audio markets.
------------------------
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
SITES DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS.
5
<PAGE> 7
THE OFFERING
Except as otherwise indicated, all information in this prospectus reflects
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.............................. 850,000 shares
Common stock to be outstanding after the
offering and common stock underlying
outstanding options, warrants and
convertible securities.................. 9,793,627 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
The following table shows ownership of our outstanding shares, and shares
underlying our outstanding options, warrants and convertible securities even if
they are not exercisable immediately after the offering:
<TABLE>
<CAPTION>
OPTIONS, WARRANTS
OUTSTANDING AND CONVERTIBLE
SHARES SECURITIES TOTAL
----------- ----------------- ---------
<S> <C> <C> <C>
Officers, directors and employees............. 3,470,883 2,199,043 5,669,926
Other existing shareholders................... 624,110 149,591 773,701
New shareholders.............................. 3,350,000 0 3,350,000
--------- --------- ---------
Total....................................... 7,444,993 2,348,634 9,793,627
========= ========= =========
</TABLE>
After this offering, we will have 7,444,993 shares outstanding, including:
- 4,753,146 shares outstanding on December 31, 1999;
- 67,488 shares issued after December 31, 1999, upon exercise of
outstanding warrants;
- 2,500,000 shares issued in this offering; and
- 124,359 shares we will issue to shareholders who currently own $277,417
of our 8.5% convertible subordinated debentures or warrants and who will
convert them into shares in order to sell the shares in this offering.
In addition, after this offering we will have 2,348,634 shares reserved for
issuance to holders of outstanding options, warrants and convertible securities,
including:
- 1,998,131 shares of common stock that we will issue if the holders choose
to exercise outstanding options and warrants, with a weighted average
exercise price of $3.34 per share;
- 286,003 shares of common stock that we will issue if the holders of our
8.5% convertible subordinated debentures exercise their conversion
rights, with a conversion price of $2.44 per share; and
- 64,500 shares of common stock that we will issue if the holders choose to
exercise outstanding options, with an exercise price of the price per
share of this offering.
We also will have reserved 272,485 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.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following summary consolidated financial data together
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, 1997, 1998 and
1999. Also set forth below is summary consolidated balance sheet data as at
December 31, 1999, on an actual, pro forma and pro forma as adjusted basis. The
pro forma data gives effect to (1) the conversion of $277,417 of our 8.5%
convertible subordinated debentures into 113,609 shares of common stock to occur
concurrently with this offering, (2) the issuance of 10,750 shares upon exercise
of warrants to occur concurrently with this offering and (3) the issuance of
67,488 shares after December 31, 1999 upon exercise of outstanding warrants. The
pro forma as adjusted data gives effect to the sale by us of 2,500,000 shares in
this offering at an assumed initial public offering price of $12.00 per share,
our receipt of the estimated proceeds of that sale after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, and the
application of the net proceeds. See "Capitalization."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 87,423 $ 87,577 $123,889
Gross profit......................................... 30,102 32,431 48,875
Operating income..................................... 4,646 5,523 12,531
Net income........................................... 1,632 2,305 6,497
Net income per share:
Basic.............................................. $ 0.37 $ 0.52 $ 1.40
Diluted............................................ $ 0.31 $ 0.41 $ 1.04
Shares used to calculate net income per share:
Basic.............................................. 4,401 4,412 4,641
Diluted............................................ 5,688 5,951 6,289
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................................... $ 21,219 $ 21,319 $ 32,149
Total assets......................................... 51,222 51,322 61,752
Long-term debt and capital lease obligations......... 17,342 17,065 1,495
Total liabilities.................................... 38,465 38,188 22,218
Shareholders' equity................................. 12,757 13,134 39,534
</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 not gaining market share. We
historically distributed our products primarily through specialty dealers who
sold only car audio products. We believe other product distribution channels,
including audio/video retailers and large consumer electronics retailers, have
captured significant market share in recent years and we now are increasing
distribution of our products through these growing 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 sales and 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 79% of our sales in 1997, 82% in 1998 and 79% in 1999. If
sales of either of these two product lines decline, our results of operations
would 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. Best Buy
accounted for 19.9% of our sales for 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 shipped our
first products to Best
8
<PAGE> 10
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 UNABLE 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, Kenwood, Kicker, MTX, Orion, Phoenix Gold,
Pioneer, Precision Power 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.
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 be unable 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.
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
9
<PAGE> 11
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 our marketing programs and those of our competitors.
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.
A DECLINE IN DISCRETIONARY SPENDING LIKELY WOULD REDUCE OUR SALES.
Because car audio sales are highly discretionary, a recession in the
general economy or a general decline in consumer spending likely would 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 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
10
<PAGE> 12
the risk of inventory obsolescence. Because competition has required us to
shorten our product life cycles and more rapidly introduce new and enhanced
products, there is a growing and significant risk that our inventory could
become obsolete.
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 our business and 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 experienced unstable local economies and significant
devaluations of local currencies. These or similar instabilities could have a
material adverse effect on our business, financial condition and results of
operations. Our sales in Asia and Latin America, collectively, constituted 5.9%
of our sales for 1999.
LOSS OF AN INTERNATIONAL DISTRIBUTOR MAY DISRUPT OUR SALES.
International customers accounted for 14.9% of our sales in 1999. 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 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 international 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 also
would 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.
11
<PAGE> 13
CURRENCY FLUCTUATIONS MAY REDUCE THE PROFITABILITY OF OUR FOREIGN SALES.
In early 1999, we began making sales to Canadian and German dealers in
their respective currencies. In 2000, we plan to begin making sales to
additional countries in Europe denominated in local currencies. Previously,
except for sales in Japan, all our international sales were denominated solely
in U.S. dollars and, accordingly, we were not directly exposed to fluctuations
in foreign currency exchange rates. An increasing portion of our international
sales likely will 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 be unable 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 approximately 16% of our inventory purchases. 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.
12
<PAGE> 14
IF WE ARE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF OUR INTELLECTUAL
PROPERTY, OUR BUSINESS MAY DECLINE.
Our future success will depend, in substantial part, on our intellectual
property. We seek to protect our intellectual property rights, but our actions
may not adequately protect the rights covered by our patents, patent
applications, trademarks and other proprietary rights, and prosecution of our
claims could be time consuming and costly. In addition, the intellectual
property laws of some foreign countries do not protect our proprietary rights as
do the laws of the U.S. Despite our efforts to protect our proprietary
information, third parties may obtain, disclose or use our proprietary
information without our authorization which could adversely affect our business.
From time to time, third parties have alleged that we infringe their
proprietary rights. For example, 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.
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,
collectively will hold 45.6% of our outstanding shares. These shareholders, if
they act together, will be able to control the outcome of all matters submitted
for shareholder action, including the election of our board of directors and the
approval of significant corporate transactions. Consequently, these shareholders
will effectively control our management and affairs, which may limit the
liquidity of our shares, discourage acquisition bids for Rockford and limit the
price some investors might be willing to pay for our shares.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY NOT USE THE PROCEEDS EFFECTIVELY.
We plan to use approximately $10.4 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
$6.97. You will pay a price per share which substantially exceeds the value of
our assets after subtracting our liabilities. You and the other investors in
this offering will contribute 89.1% of the total amount paid to us for our
common stock,
13
<PAGE> 15
but will own only 33.6% of our outstanding shares. To the extent outstanding
options or warrants to purchase our shares are exercised or convertible
debentures are converted, you will suffer further dilution.
AFTER THIS OFFERING, MANY OF OUR UNREGISTERED SHARES WILL BE AVAILABLE FOR
RESALE 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), Urban Industrial Gear(TM), Hafler(R) and our
"Diamond R" logo are 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 us are estimated to be $26.4 million, or $32.0 million if the
underwriters' over-allotment option is exercised in full, in each case assuming
an initial public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. We will not receive any proceeds from the sale of shares of common stock
by the selling shareholders.
We plan to use the net proceeds from this offering as follows:
- $16.0 million to fully repay the outstanding balance of our bank credit
facility; and
- $10.4 million for working capital and other general corporate purposes,
including new product development and marketing expansion. We also may
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 bank 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 or 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 December 31, 1999, the bank credit
facility had a weighted average interest rate of 9.34% per annum. The bank
credit facility matures on June 19, 2001.
16
<PAGE> 18
CAPITALIZATION
The following table shows our capitalization as at December 31, 1999, on an
actual, pro forma and pro forma as adjusted basis. The pro forma data gives
effect to (1) the conversion of $277,417 of our 8.5% convertible subordinated
debentures into 113,609 shares of common stock to occur concurrently with this
offering, (2) the issuance of 10,750 shares upon exercise of warrants to occur
concurrently with this offering and (3) 67,488 shares issued after December 31,
1999 upon exercise of warrants. The pro forma as adjusted data gives effect to:
- the sale by us of 2,500,000 shares in this offering at an assumed initial
public offering price of $12.00 per share;
- our receipt of the estimated proceeds of that sale after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by us; and
- the application of the net proceeds.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long term debt and capital
lease obligations............................. $ 1,420 $ 1,420 $ 1,020
======= ======= =======
Credit facility debt, less current portion...... 15,570 15,570 0
8.5% convertible subordinated debentures........ 995 718 718
Capital lease obligations, less current
portion....................................... 777 777 777
Shareholders' equity:
Common stock, $0.01 par value; 40,000,000
shares authorized, 4,753,146 shares issued
and outstanding actual; 4,944,993 shares
issued and outstanding pro forma; and
7,444,993 shares issued and outstanding pro
forma as adjusted.......................... 48 49 74
Additional paid-in capital.................... 3,686 4,062 30,437
Retained earnings............................. 8,685 8,685 8,685
Accumulated other comprehensive income........ 338 338 338
------- ------- -------
Total shareholders' equity................. 12,757 13,134 39,534
------- ------- -------
Total capitalization.................. $30,099 $30,199 $41,029
======= ======= =======
</TABLE>
17
<PAGE> 19
DILUTION
The following discussions assume no conversion or exercise of outstanding
debentures, options and warrants to purchase our common stock other than (1) the
conversion of $277,417 of our 8.5% convertible subordinated debentures into
113,609 shares of common stock to occur concurrently with this offering, (2) the
issuance of 10,750 shares upon exercise of warrants to occur concurrently with
this offering and (3) the issuance of 67,488 shares at $0.93 per share after
December 31, 1999 upon exercise of outstanding warrants. Our pro forma net
tangible book value as at December 31, 1999 was $11.0 million, or $2.23 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 December 31, 1999 would have been $37.4 million, or $5.03 per
share, after giving effect to:
- the sale by us of 2,500,000 shares in this offering at an assumed initial
public offering price of $12.00 per share;
- our receipt of the estimated proceeds of that sale after deducting
estimated 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 $2.80
per share to existing shareholders and an immediate dilution of $6.97 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $12.00
Pro forma net tangible book value as at December 31,
1999................................................ $2.23
Increase in pro forma net tangible book value
attributable to new investors....................... 2.80
-----
Pro forma net tangible book value after this offering....... 5.03
------
Pro forma dilution per share to new investors............... $ 6.97
======
</TABLE>
The following table summarizes, on a pro forma basis as at December 31,
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............ 4,944,993 66.4% $ 3,686,000 10.9% $ 0.75
New investors.................... 2,500,000 33.6 30,000,000 89.1 $12.00
--------- ----- ----------- -----
Total.................. 7,444,993 100.0% $33,686,000 100.0%
========= ===== =========== =====
</TABLE>
As at December 31, 1999, there were outstanding:
- 1,998,131 shares of common stock that we will issue if the holders choose
to exercise outstanding options and warrants, with a weighted average
exercise price of $3.34 per share; and
- 287,444 shares of common stock that we will issue if the holders of our
8.5% convertible subordinated debentures exercise their conversion
rights, assuming conversion of 113,609 shares in this offering.
We had also reserved 336,985 shares of common stock for future issuance of
options under our 1994 and 1997 stock option plans, of which we plan to issue
64,500 shares concurrently with this
18
<PAGE> 20
offering at the price of this offering, and 361,200 shares of common stock for
future issuance under our 1999 employee stock purchase plan. To the extent these
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
bank 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.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data together
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 selected
consolidated financial data for the years ended September 30, 1995 and 1996, and
the three months ended December 31, 1996, when we changed our fiscal year end to
December 31, derived from audited consolidated financial statements, which are
not included in this prospectus. The selected consolidated financial data for
the years ended December 31, 1997, 1998 and 1999 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.
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS
SEPTEMBER 30, ENDED YEAR ENDED DECEMBER 31,
------------------ DEC. 31, -----------------------------------------
1995 1996 1996 1996 1997 1998 1999
------- ------- -------- ------- ------- ------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................................... $73,915 $81,144 $16,448 $82,937 $87,423 $87,577 $123,889
Cost of goods sold.................................. 49,803 56,761 11,020 57,057 57,321 55,146 75,014
------- ------- ------- ------- ------- ------- --------
Gross profit........................................ 24,112 24,383 5,428 25,880 30,102 32,431 48,875
Operating expenses:
Sales and marketing................................ 11,251 15,218 2,814 15,627 14,530 14,821 20,602
General and administrative......................... 8,303 8,552 1,983 8,156 9,350 10,211 13,465
Research and development........................... 1,404 1,448 292 1,372 1,576 1,876 2,277
------- ------- ------- ------- ------- ------- --------
Total operating expenses......................... 20,958 25,218 5,089 25,155 25,456 26,908 36,344
------- ------- ------- ------- ------- ------- --------
Operating income (loss)............................. 3,154 (835) 339 725 4,646 5,523 12,531
Interest and other expense, net..................... 1,660 2,193 377 2,064 2,055 1,501 1,946
------- ------- ------- ------- ------- ------- --------
Income (loss) before tax............................ 1,494 (3,028) (38) (1,339) 2,591 4,022 10,585
Income tax expense (benefit)........................ 379 (1,025) (19) (407) 959 1,717 4,088
------- ------- ------- ------- ------- ------- --------
Net income (loss)................................... $ 1,115 $(2,003) $ (19) $ (932) $ 1,632 $ 2,305 $ 6,497
======= ======= ======= ======= ======= ======= ========
Net income (loss) per share:
Basic.............................................. $ 0.35 $ (0.50) $ (0.01) $ (0.23) $ 0.37 $ 0.52 $ 1.40
======= ======= ======= ======= ======= ======= ========
Diluted............................................ $ 0.33 $ (0.50) $ (0.01) $ (0.23) $ 0.31 $ 0.41 $ 1.04
======= ======= ======= ======= ======= ======= ========
Shares used to calculate net income (loss) per
share:
Basic.............................................. 3,226 4,040 4,394 4,114 4,401 4,412 4,641
======= ======= ======= ======= ======= ======= ========
Diluted............................................ 3,392 4,040 4,394 4,114 5,688 5,951 6,289
======= ======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- -------------------------------------
1995 1996 1996 1997 1998 1999
------- ------- ------- ------- ------- -------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital............................................ $12,560 $11,063 $12,369 $ 9,592 $13,488 $21,219
Total assets............................................... 29,848 34,423 31,420 29,234 37,307 51,222
Long-term debt and capital lease obligations............... 15,352 16,033 16,720 12,230 14,292 17,342
Total liabilities.......................................... 28,054 33,644 30,629 26,766 32,369 38,465
Shareholders' equity....................................... 1,794 779 791 2,463 4,907 12,757
</TABLE>
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<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together 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.
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
104 in 1999 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.
Beginning in 1997, we began to realize the benefits of these management and
operational changes and other investments in our infrastructure, resulting in
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 98% of our sales in 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 other significant obligations
subsequent to shipment, as we do not install our products.
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 in over 60 countries. In Japan we sell through
a wholly owned subsidiary. In Canada and Germany (since 1999), and Austria
(beginning in early 2000) we sell through commissioned independent sales
representatives. In other countries, we have established relationships with
independent distributors who purchase our products and resell them to retailers.
In March 1999, we began selling through Best Buy. Including its $4.4
million initial purchase of our products to stock its distribution channel, Best
Buy accounted for 19.9% of our sales for 1999.
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<PAGE> 23
Our growth plan contemplates that Best Buy will continue to account for a
significant portion of our sales for the foreseeable future.
In June 1999, we acquired Lightning Audio, a manufacturer and distributor
of car audio accessories. In January 2000, at the Consumer Electronics Show, we
introduced a line of amplifiers and subwoofers under the Lightning Audio brand.
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, selected consolidated
statements of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 65.6 63.0 60.5
----- ----- -----
Gross profit................................................ 34.4 37.0 39.5
Operating expenses:
Sales and marketing....................................... 16.6 16.9 16.6
General and administrative................................ 10.7 11.7 10.9
Research and development.................................. 1.8 2.1 1.9
----- ----- -----
Total operating expenses............................... 29.1 30.7 29.4
----- ----- -----
Operating income............................................ 5.3 6.3 10.1
Interest and other expense, net............................. 2.3 1.7 1.5
----- ----- -----
Income before tax........................................... 3.0 4.6 8.6
Income tax expense.......................................... 1.1 2.0 3.4
----- ----- -----
Net income.................................................. 1.9% 2.6% 5.2%
===== ===== =====
</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 our business. Research
and development expenses primarily consist of salaries associated with our
research and development personnel.
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<PAGE> 24
Geographic Distribution of Sales
Since 1997, our sales by geographic region were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REGION:
United States............................................... $64,165 $70,016 $105,482
Other Americas.............................................. 7,005 4,905 5,294
Europe...................................................... 7,819 6,599 7,337
Asia........................................................ 8,434 6,057 5,776
------- ------- --------
Total sales(1)......................................... $87,423 $87,577 $123,889
======= ======= ========
</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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales. Sales increased by $36.3 million, or 41.5%, to $123.9 million
for 1999 from $87.6 million for 1998. The increase in sales primarily was
attributable to our 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 $24.7 million, or 19.9%, of our sales for 1999. In addition, sales to car
audio specialty dealers in the U.S. increased by $7.1 million, or 12.7%, to
$63.2 million for 1999 from $56.1 million for 1998. This increase primarily was
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 $35.5 million, or 50.7%, to $105.5 million for 1999
from $70.0 million for 1998. International sales increased by $0.8 million, or
4.8%, to $18.4 million for 1999 from $17.6 million for 1998. A decrease in sales
in Asia and in Latin America as a result of these regions' deteriorating
economic conditions was offset by increased sales in Europe and Canada.
Cost of Goods Sold. Cost of goods sold increased by $19.9 million, or
36.0%, to $75.0 million for 1999 from $55.1 million for 1998. Substantially all
of the increase was due to increased sales. As a percent of sales, cost of goods
sold decreased to 60.5% for 1999 from 63.0% for 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
$5.8 million, or 39.0%, to $20.6 million for 1999 from $14.8 million for 1998.
The increase primarily was 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 through independent distributors and, while
those sales generally have a lower gross margin, they do not require commission
payments. As a percent of sales, sales and marketing expenses decreased to 16.6%
for 1999 from 16.9% for 1998. The decrease as a percent of sales primarily was
because some expenses in this category are fixed and do not fluctuate with
sales.
General and Administrative Expenses. General and administrative expenses
increased by $3.3 million, or 31.9%, to $13.5 million for 1999 from $10.2
million for 1998. The primary reasons for the increase were an increase in our
financial performance-based employee incentive program, additional expenses from
Lightning Audio operations and increased personnel expenses. As a percent of
sales, these expenses decreased to 10.9% for 1999 from 11.7% for 1998. The
decrease as a percent of sales primarily was because some expenses in this
category are fixed and do not fluctuate with sales.
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<PAGE> 25
Research and Development Expenses. Research and development expenses
increased by $0.4 million, or 21.4%, to $2.3 million for 1999 from $1.9 million
for 1998. As a percent of sales, these expenses decreased to 1.9% for 1999 from
2.1% for 1998.
Operating Income. Operating income increased by $7.0 million, or 126.9%,
to $12.5 million for 1999 from $5.5 million for 1998. This increase primarily
was attributable to our sales to Best Buy. As a percent of sales, operating
income increased to 10.1% for 1999 from 6.3% for 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. Interest and other expense, net increased by $0.4
million, or 29.7%, to $1.9 million for 1999 from $1.5 million for 1998. Interest
expense increased in 1999 due to slightly higher levels of debt and interest
rates.
Income Tax Expense. Income tax expense increased by $2.4 million to $4.1
million for 1999 from $1.7 million for 1998. The effective income tax rates were
38.6% for 1999 and 42.7% for 1998. The lower effective tax rate for 1999
primarily was attributable to the lower effective tax rate in Michigan, where we
experienced significant increased operating income without a corresponding
increase in tax expense.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net 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 $5.9 million, or 9.2%,
to $70.0 million for 1998 from $64.2 million for 1997 due to market acceptance
by our dealers of our newly redesigned speakers. International sales decreased
by $5.7 million, or 24.5%, to $17.6 million for 1998 from $23.3 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 primarily was related to increased sales commissions as a direct
result of higher U.S. sales. As a percent of sales, these expenses increased to
16.9% for 1998 from 16.6% for 1997.
General and Administrative Expenses. General and administrative expenses
increased by $0.9 million, or 9.2%, to $10.2 million for 1998 from $9.4 million
for 1997. This increase primarily was 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 was 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.
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<PAGE> 26
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. 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.
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
fourth quarter of 1998, our cost of goods sold was unusually high as a percent
of sales due to end-of-life discounting on lower margin products. 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 26.6% of our sales in the three
months ended March 31, 1999, 19.3% in the three months ended June 30, 1999,
12.3% in the three months ended September 30, 1999 and 21.8% in the three months
ended December 31, 1999.
The following tables show selected consolidated quarterly statements of
operations data that were derived from unaudited financial statements for each
of the eight quarters ended December 31, 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 a 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.
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<PAGE> 27
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ $20,504 $25,419 $22,564 $19,090 $31,798 $34,113 $31,205 $26,773
Cost of goods sold............... 13,148 15,635 13,693 12,670 19,567 20,654 19,030 15,763
------- ------- ------- ------- ------- ------- ------- -------
Gross profit..................... 7,356 9,784 8,871 6,420 12,231 13,459 12,175 11,010
Operating expenses:
Sales and marketing............ 3,873 4,224 3,976 2,748 5,388 5,583 5,312 4,319
General and administrative..... 2,290 2,769 2,495 2,657 3,018 3,657 3,242 3,548
Research and development....... 404 466 498 508 501 472 580 724
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 6,567 7,459 6,969 5,913 8,907 9,712 9,134 8,591
------- ------- ------- ------- ------- ------- ------- -------
Operating income................. 789 2,325 1,902 507 3,324 3,747 3,041 2,419
Interest and other expense,
net............................ 357 400 619 125 431 414 485 616
------- ------- ------- ------- ------- ------- ------- -------
Income before tax................ 432 1,925 1,283 382 2,893 3,333 2,556 1,803
Income tax expense............... 174 832 548 163 1,091 1,315 1,000 682
------- ------- ------- ------- ------- ------- ------- -------
Net income....................... $ 258 $ 1,093 $ 735 $ 219 $ 1,802 $ 2,018 $ 1,556 $ 1,121
======= ======= ======= ======= ======= ======= ======= =======
Net income per share:
Basic.......................... $ 0.06 $ 0.25 $ 0.17 $ 0.05 $ 0.41 $ 0.44 $ 0.33 $ 0.24
======= ======= ======= ======= ======= ======= ======= =======
Diluted........................ $ 0.05 $ 0.19 $ 0.13 $ 0.04 $ 0.29 $ 0.32 $ 0.25 $ 0.18
======= ======= ======= ======= ======= ======= ======= =======
Shares used to calculate net
income per share:
Basic.......................... 4,412 4,412 4,412 4,412 4,412 4,602 4,749 4,753
======= ======= ======= ======= ======= ======= ======= =======
Diluted........................ 5,725 5,957 6,051 6,051 6,275 6,270 6,280 6,287
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF SALES FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............... 64.1 61.5 60.7 66.4 61.5 60.5 61.0 58.9
------- ------- ------- ------- ------- ------- ------- -------
Gross profit..................... 35.9 38.5 39.3 33.6 38.5 39.5 39.0 41.1
Operating expenses:
Sales and marketing............ 18.9 16.6 17.6 14.4 16.9 16.4 17.0 16.1
General and administrative..... 11.2 10.9 11.1 13.9 9.5 10.7 10.4 13.3
Research and development....... 2.0 1.8 2.2 2.7 1.6 1.4 1.9 2.7
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 32.1 29.3 30.9 31.0 28.0 28.5 29.3 32.1
------- ------- ------- ------- ------- ------- ------- -------
Operating income................. 3.8 9.2 8.4 2.6 10.5 11.0 9.7 9.0
Interest and other expense,
net............................ 1.7 1.6 2.7 0.6 1.4 1.2 1.5 2.3
------- ------- ------- ------- ------- ------- ------- -------
Income before tax................ 2.1 7.6 5.7 2.0 9.1 9.8 8.2 6.7
Income tax expense............... 0.8 3.3 2.4 0.9 3.4 3.9 3.2 2.5
------- ------- ------- ------- ------- ------- ------- -------
Net income....................... 1.3% 4.3% 3.3% 1.1% 5.7% 5.9% 5.0% 4.2%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
26
<PAGE> 28
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 $21.2 million at December 31, 1999, compared with $13.5 million at
December 31, 1998. At December 31, 1999, we maintained $0.9 million of cash and
cash equivalent balances.
We currently have a $20.0 million bank credit facility that 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 December
31, 1999, the amounts outstanding under the bank credit facility consisted of
approximately $15.0 million on the revolving line-of-credit and approximately
$1.0 million on the term loan. The revolving line-of-credit has a blended
variable interest rate per annum of LIBOR plus 300 basis points or 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 December 31, 1999, the bank credit facility had a
weighted average interest rate of 9.34% per annum. The bank credit facility
matures on June 19, 2001. The bank credit facility requires that we:
- have $8.0 million in earnings before interest, taxes, depreciation and
amortization, computed monthly on a rolling 12 month basis;
- maintain debt service coverage of 1.0 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, except
that we may also make an aggregate $2.0 million of capital expenditures
in excess of this limit using off-balance sheet financing.
We intend to pay off this bank credit facility using the proceeds from this
offering.
We also have a $3.3 million capital lease credit facility under which
leases can be funded until September 10, 2000, 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 December 31, 1999, the capital lease credit
facility had an outstanding balance of $1.4 million with a weighted average
interest rate of 8.1% per annum.
We also have $995,000 of 8.5% convertible subordinated debentures
outstanding, of which $277,417 will be converted into 113,609 shares of common
stock upon completion of this 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.
Net cash provided by operating activities was $2.8 million for 1999, $0.2
million for 1998 and $6.5 million for 1997. The primary contributing factor to
the growth in our working capital requirements in 1999 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 $4.4 million for 1999, $1.5
million for 1998 and $1.6 million for 1997. Net cash used in investing
activities primarily was related to purchases of property and equipment and,
during 1999, to 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 $2.0 million for
1999, $1.3 million for 1998 and ($4.9) million for 1997. Net cash provided by
(used in) financing activities primarily was
27
<PAGE> 29
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 bank 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 12 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.
TRANSITION TO THE YEAR 2000
We did not experience any interruption to our business as a result of the
transition to January 1, 2000, and we are not aware of any Year 2000 related
problems associated with our internal systems or software, or with the software
and systems of our vendors or distributors. Computer experts have warned that
there may still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems. We intend to maintain efforts relating to internal Year
2000 compliance; however, we do not anticipate any significant future costs with
respect to this issue.
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<PAGE> 30
BUSINESS
OUR BUSINESS
We design, manufacture and distribute high-performance car audio and
professional audio systems. Our car audio products include technologically
advanced digital and analog amplifiers, speakers, source units, CD and MP3
changers and accessories marketed under our Rockford Fosgate and Lightning Audio
brand names. 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.
We believe our ability to deliver innovative and technologically advanced
products appeals to our consumers' desires for distinctive, leading-edge
products and powerful, high-quality sound. We continue to develop new products
to capitalize on improvements in digital technology that have increased demand
for high-performance audio products. Our Rockford Fosgate, Lightning Audio and
Hafler products have won numerous consumer and industry awards for technical
innovation, quality and audio performance.
OUR BRANDS
Our marketing and product development efforts are designed to enhance our
brand images and generate increased loyalty among our consumers in each segment
and among the retailers who sell our products. We market our products under the
following brands:
- Rockford Fosgate. Rockford Fosgate is one of the most preferred
high-performance car audio brands. According to NPD Intelect Market
Tracking, based on dollar sales in 1999, our Rockford Fosgate brand ranks
first in U.S. market share for car audio amplifiers and third for
speakers. We believe our core consumers, 16-24 year old males, view
Rockford Fosgate as the "coolest" car audio brand. Many of these
consumers devote a significant portion of their time and disposable
income to their car audio systems. We target these consumers by offering
distinctive, leading-edge products and powerful, high-quality sound
supported by aggressive grass-roots marketing. Many of our core consumers
are extremely loyal to our Rockford Fosgate brand and proudly display our
logos on their cars and clothing. Our Rockford Fosgate products are
marketed under four brand names: (1) Punch -- the brand for the majority
of our amplifiers, subwoofers, speakers and source units; (2) Punch
Power -- the brand for the highest performing car audio products we
offer; (3) Connecting Punch -- a full line of car audio installation
accessories; and (4) Punch Sport -- promotional items and clothing.
- Lightning Audio. In June 1999, as part of our growth strategy to develop
additional brands, we acquired Lightning Audio, a manufacturer and
distributor of car audio accessories. In addition to continuing to market
accessories under this brand, we acquired Lightning Audio with a view
toward marketing a complementary line of car audio products under the
Lightning Audio brand. In January 2000, at the Consumer Electronics Show,
we introduced a line of high-performance amplifiers and subwoofers under
the Lightning Audio brand name that are more moderately priced than our
Rockford Fosgate products. Our newly introduced Lightning Audio amplifier
design won an EIA/CES Innovation Award at the Consumer Electronics Show.
- Hafler. We sell high-performance amplifiers and speakers to the
professional audio market under the Hafler brand. Our Hafler professional
audio products are used in recording studios, movie theaters, concert
facilities, stadiums, traveling bands and broadcast studios.
Additionally, later this year we intend to introduce a full line of home
theater systems, including a preamp/surround sound processor,
multi-channel amplifiers and speakers. We plan to sell our Hafler home
theater products on our Web site at www.hafler.com, through established
Internet retailers and through traditional retail stores.
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<PAGE> 31
OUR INDUSTRY
Car Audio
According to the Consumer Electronics 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 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.
According to NPD Intelect Market Tracking, U.S. retail sales of car audio
aftermarket products grew 10.4% in 1999. We believe this growth primarily was
attributable to new digital technologies that increased demand for
high-performance consumer electronics products.
The U.S. car audio aftermarket industry is 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 from 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, such as Tweeter and Ultimate Electronics;
- Consumer electronics retailers: National consumer electronics chains,
such as Best Buy and Circuit City;
- Catalog and Internet retailers: Mail order retailers, such as
Crutchfield, and Internet retailers, such as Amazon.com;
- 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 dominated the retail distribution of car audio
aftermarket products. However, over the last several years, as a result of
changing consumer buying patterns, the audio/ video and consumer electronics
retailers have become the fastest growing distribution channels for car audio
products, increasing their combined market share from 35% in 1987 to 48% in
1999.
Professional Audio and Home Theater
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 home theater market grew rapidly during the late 1990s as manufacturers
introduced products that dramatically improved the home theater experience.
These products, including improved large screen televisions, analog and digital
surround sound processors, multichannel amplifiers, and DVD players, have
increased consumer demand for home audio products with aggregate U.S. dollar
sales of home audio products growing 9.0% in 1999. We believe that further
30
<PAGE> 32
improvements in technology, such as high definition television, and increasing
consumer awareness are likely to result in further growth in the home theater
market.
OUR CONSUMERS
Car Audio
Our primary consumers are 16-24 year old males. They are part of the
demographic group known as Generation Y. These consumers possess substantial
disposable income and devote much of their time and money to their music and
cars. These consumers have a strong preference for brand names and
technologically advanced products. Consumer electronics retailers, such as Best
Buy, devote significant floor space to car audio products because they have
found the category to be a very important traffic driver for these desirable
consumers.
In 1999, to broaden our consumer base we expanded our distribution channels
to include Best Buy, a national consumer electronics retailer. This new
distribution channel provides us the opportunity to attract consumers that are
familiar with our Rockford Fosgate brand's strong reputation, but who were
previously unreachable through our existing distribution channels. We believe we
will appeal to these consumers' desires for technologically advanced products
such as multi-channel amplifiers, source units, in-car video, MP3 changers and
plug-and-play component speaker systems.
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 broader group of consumers.
Professional Audio and Home Theater
Our professional audio consumers are technically oriented and drawn from a
broad range of age groups. These consumers include recording engineers, live
sound mixers, studio professionals and professional musicians who use our
products primarily for commercial applications and in their professional
activities. We plan to market our Hafler home theater products to consumers who
appreciate high-performance home theater systems. We believe these consumers are
comfortable with technology and are frequent Internet users. We plan to sell our
Hafler home theater products over the Internet as well as through traditional
channels.
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, Lighting Audio and Hafler
among consumers and retailers. Key elements of our growth strategy are to:
Introduce New and Innovative Products. We must remain on the forefront of
technological development because our consumers demand high-performance and
technologically advanced features in their audio products. We intend to take
advantage of the strength of our Rockford Fosgate, Lightning Audio and Hafler
brands by continuing to introduce new and innovative products. We believe our
ability to deliver innovative products to market, with a product design process
that allows us to begin selling new products within 9 months after initial
design work begins, appeals to consumers' desires 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
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<PAGE> 33
sales of our core products. For example, in January 2000, at the Consumer
Electronics Show, we introduced:
- One of the first MP3 changers for the car available in the United States,
offering our consumers the ability to play MP3 music downloaded from the
Internet over their car audio systems;
- The first car amplifier specifically designed to be cosmetically and
functionally customized by the consumer;
- A new digital amplifier, incorporating a proprietary circuit design to
offer higher efficiency and power without the need for a large heatsink;
and
- A new surround sound processor for the car.
We are developing products to add video capabilities to our Rockford
Fosgate car audio systems, with the goal of allowing our consumers to watch DVD
movies in their cars. For Hafler, we have recently introduced a new C-Series
amplifier line designed for touring and cinema use and are developing a line of
home theater products including a preamp/surround processor, multi-channel
amplifiers, satellite speakers and subwoofer systems.
Acquire and Develop Additional Audio Brands. We intend to continue to look
for opportunities to add new brands through acquisition or internal development.
We believe that the introduction of additional brands will enable us to take
advantage of our distribution capabilities and our strengths in advanced
technology design and development. We also believe that offering additional
brands with different price points and target market segments will enable us to
extend our product range, complement our existing distribution channels and
broaden our customer base.
As part of this strategy, we acquired Lightning Audio in June 1999 and have
developed new car audio products to be marketed under this brand at more
moderate price points than our Rockford Fosgate products. We also believe that
we have substantial opportunities to acquire professional audio brands that will
complement our Hafler brand, although we do not have any currently identified
acquisition targets.
Broaden Our Distribution. We intend to broaden the distribution of our
products by entering new distribution channels and increasing our penetration of
our existing distribution channels. We have recently increased our channels of
distribution, focusing on some of the fastest growing retailers in the U.S. In
August 1998, we entered the catalog retailing channel through Crutchfield, a
catalog retailer of consumer electronics in the U.S. In early 1999, we entered
the national consumer electronics retailing channel through Best Buy. We intend
to increase our penetration of these channels as well as our specialty dealer
and audio/video retailer channels by expanding the breadth of our products that
these retailers sell and by selectively adding new dealers within these
channels. As we broaden the distribution of our products, we will adhere to our
strategy of selective distribution. We believe selective distribution fosters
retailers' loyalty to our brands, enhances retailers' profit margins and
encourages retailers to carry a broad range of our products.
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 Austria, and through independent
distributors in over 60 other countries. Recently, we initiated a strategy of
moving to a one-step distribution system in larger international markets by
converting selected distributors into independent sales representatives,
allowing us to sell directly to retailers. We expect these measures to increase
our sales in these markets by allowing us to better compete through lower
distribution costs and reduced prices to the consumer.
Expand Our Professional Audio Business and Enter the Home Theater
Market. Our Hafler professional audio products are designed for use in
recording studios, a small but demanding
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<PAGE> 34
segment of the professional audio market. We believe our strength in this niche
market positions us well for expansion into other professional audio segments if
we introduce new products that address the needs of those segments. For example,
our new C-Series amplifiers are designed for touring and cinema users who need
higher powered amplifiers with lower weight. We believe that sales of Hafler
professional products will increase substantially if we devote additional
resources to the development and distribution of new products.
We intend to capitalize on Hafler's brand name and reputation in the
professional audio market to enter the home theater market. We intend to
introduce preamp/surround sound processors, multi-channel amplifiers and
speakers for the home theater under the Hafler brand.
OUR PRODUCTS
Percent of Sales by Product Class
Our sales since 1997 were divided among our principal product classes as
shown in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
PRODUCT CLASS: ----- ----- -----
<S> <C> <C> <C>
Amplifiers.................................................. 49.1% 49.7% 45.5%
Speakers.................................................... 29.8 32.2 33.1
Accessories................................................. 7.0 7.6 11.8
Others(1)................................................... 14.1 10.5 9.6
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- ---------------
(1) Includes source units and other products of which no 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 consisting of
the following:
- Amplifiers. Power amplifiers increase the voltage and current coming
from the source unit, providing more power than possible from a source
unit alone. Power amplifiers are essential for a high-performance car
audio system and are typically not part of a standard factory installed
system. Also included as part of the amplifier category are signal
processors that accept input from a source unit, modify the signal to
enhance performance and deliver the modified signal to one or more
amplifiers. For specialized applications, we also sell stand-alone signal
processors that are not integrated into an amplifier.
- 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 systems.
- 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 source units also have the ability to control a separate CD or MP3
changer.
- Accessories. Accessories include amplifier installation kits, RCA and
speaker cables, carpet/ fabric/surface applications, stiffening
capacitors and battery clamps.
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<PAGE> 35
Under our Rockford Fosgate brand we currently offer the following products:
Amplifiers: - 28 models of power amplifiers under our Punch brand,
with rated power from 100 to 1,000 watts, and minimum
advertised prices from $149.95 to $1,329.95. Our
amplifiers include 1, 2, 4, and 5 channel
alternatives, giving consumers the ability to select
an optimum configuration for their system;
- Six models of stand alone signal processors, with
minimum advertised prices from $99.95 to $719.95. The
newest of these processors is a surround sound
processor, designed by Jim Fosgate and able to produce
surround sound in the car from any 2 channel source;
Speakers: - 88 models of speakers under our Punch brand, with
minimum advertised prices from $59.95 to $699.95;
Source Units: - Five models of source units, with minimum advertised
prices from $229.95 to $499.95. Our top of the line
source unit offers on-board audio and video switching,
allowing the consumer to play a video player, DVD
player, video game system, or other component through
the unit without need for an accessory switch;
- One 8-disc CD changer, with a minimum advertised
price of $299.95;
- One MP3 changer, with a minimum advertised price of
$249.95, controlled by our source units and able to
play MP3 format music downloaded from the Internet
and stored on eight MMC (Multi Media Card) storage
cards;
Accessories: - Over 400 different accessories, including amplifier
installation kits, RCA and speaker cables,
carpet/fabric/surface applications and stiffening
capacitors;
- Various promotional materials and clothing under our
Punch Sport brand name.
Under our Lightning Audio brand we currently offer the following products:
Amplifiers: - Six power amplifier models, with rated power from 60
to 1,300 watts and minimum advertised prices from
$149.95 to $699.99;
Speakers: - Six subwoofer speakers, in 10", 12" and 15" sizes, with
minimum advertised prices from $89.99 to $199.99;
Accessories: - Over 1,000 different accessories, including RCA and
speaker cables, stiffening capacitors, battery clamps
and installation kits;
- Various promotional materials and clothing under our
Urban Industrial Gear brand name.
Our products have won numerous consumer and industry awards, including
Autosound Grand Prix awards in every year from 1987 through 1999, EIA/CES
Innovation Awards at the Consumer Electronics Shows in 1997, 1998, 1999 and 2000
and European Car Audio Press awards in 1997 and 1998. Our Punch Power 1100a2
power amplifier was awarded the Car Sound 1999 Voice of the People award by vote
of the readers of Car Sound magazine.
Professional Audio and Home Theater
We sell professional audio amplifiers and speakers under the Hafler brand
name. 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 our car audio products,
many processes and technologies are shared and developed across our brands.
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<PAGE> 36
Under our Hafler brand we currently offer the following products:
Amplifiers: - Six power amplifier models, with rated power
from 110 to 1,000 watts and suggested retail
prices from $569 to $2,200; and
Powered Speakers: - Two powered monitors and two powered subwoofers,
which are speakers with integrated amplifiers, with
suggested retail prices from $625 to $795.
Our Hafler products won awards from Pro Audio Review in 1996 and 1997, and
Mix Magazine in 1996 and 1998, as well as receiving the EQ Award in 1997 and
Electronic Musician Editor's Choice Award in 1999. Later this year, we plan to
offer a preamp/surround sound processor, multi-channel amplifiers and speakers
for the home theater market.
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.
As at December 31, 1999, our research and development staff consisted of 11
design engineers, as well as other support staff, dedicated to product
development and who coordinate their efforts with:
- our sales group to identify features consistent with market requirements
and our brand image;
- our manufacturing staff to develop and build products more efficiently;
- our product support staff to identify weaknesses in our existing products
and to help re-design them; and
- our customers -- both at the retailer and consumer level -- to help us
better understand their needs and preferences and incorporate them into
our products.
As a result of these efforts, we have reduced product development
time-to-market from up to 24 months to an average of six to nine months. By
contrast, we believe that most of our competitors average over 12 months. Our
objective is to introduce new products or re-engineer at least one-third of our
existing product line annually. In 1999, 69% 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;
- digital amplifiers that incorporate a more efficient circuit design;
- surround sound processors for the car and home;
- MP3 changer, which will be the one of the first MP3 changers for the car
available in the United States;
- materials improvements that increase the durability and performance of
our products; and
- digital signal processing technology.
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<PAGE> 37
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. Our products are promoted with
advertisements in car audio magazines, newspapers and other publications as well
as on television and the Internet. We participate in six annual trade and
consumer shows and contests, and supply promotional prizes and giveaways. 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;
- participating in related professional and consumer trade shows; and
- maintaining product and brand information for consumers and retailers on
our Web sites.
We consider our advertising to be hard-hitting because our advertisements
are intense, frequent and intended to excite our core consumer. We use 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, and our brand
sites www.rockfordfosgate.com, www.lightningaudio.com and www.hafler.com, offer
consumers and retailers reliable and comprehensive information about our product
offerings and consumer services. Because our core car audio 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. 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 both at our www.hafler.com Web site and through authorized Internet
retailers.
Car Audio Distribution
We currently sell our car audio products in the U.S. to approximately 2,300
independent retail stores through 28 independent sales representative firms who
identify, recruit and sell to dealers in their regions. Our representative
firms, supported by our five in-house regional managers, employ a total of
approximately 114 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 2% 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
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<PAGE> 38
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 350 stores nationwide. Our
expansion into Best Buy is part of 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;
- 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 review sales goals and orders
with Best Buy monthly to determine whether goals are being met. The agreement is
terminable at will and does not include any term or renewal provisions.
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.
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 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 continuing to
distribute through distributors in smaller territories. To date, we have
successfully completed the conversion to the one-step distribution system in
Canada, Germany and Austria.
Professional Audio and Home Theater Distribution
In the U.S., we sell professional audio products primarily through sales
representatives, who sell to small specialty musical instrument and recording
dealers and to larger retail chains, such as Guitar Center and Sam Ash. Larger
recording studios, sports arenas and large commercial installations tend to
bypass traditional retail channels and purchase from contractors or audio
engineers responsible for the design of systems for these large projects.
Similarly, retail stores and home contractors often sell professional audio
equipment for installation in larger home-theater applications and our
professional products are used in these applications. We are attempting to
increase Hafler's penetration in these markets. We also sell Hafler professional
audio products internationally, through approximately 28 independent
distributors in over 30 countries.
We plan to distribute Hafler home theater products via the Internet, both
at www.hafler.com and through authorized Internet retailers, as well as through
traditional retail channels. Consumers have become more comfortable with buying
large ticket items over the Internet, and we believe that these products can be
sold in reasonable volume through this channel. We plan to address consumers'
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<PAGE> 39
concerns with purchasing a home theater system without hearing it, by
establishing a strong reputation for reliability and sound quality. We plan to
begin building this reputation through reviews and advertisements in respected
magazines.
PRODUCT SUPPORT
To maintain and enhance our relationships with retailers, we provide
numerous support services, including product and installation training, sales
training and technical and customer service support. 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 approximately 2,000 retail sales and installation personnel per year on
installation, sales and marketing techniques that help them sell car audio
products. In addition, our instructors and demonstration vehicles travel
worldwide hosting dealer instruction seminars.
Our products carry standard warranties against defects in material and
workmanship, and we will either repair or replace any product that fails to meet
this warranty. Repair services are available for products which are no longer
covered under the original warranty. For our U.S. customers, we have in-house
customer service, repair and technical support personnel who provide general
company information, installation support, troubleshooting, and system design
assistance. We provide a unique rapid factory direct repair program that repairs
and ships products within 24 hours of receipt, reducing retailer and consumer
inconvenience if our products fail to perform properly. For our international
customers, our distributors provide customer service and warranty support.
MANUFACTURING
We believe our efficient production, sourcing and distribution capabilities
make us one of the preferred suppliers in the car audio aftermarket.
We manufacture amplifiers, signal processors and various accessories at our
facilities in Tempe, Arizona and mid-range speakers, woofers and subwoofers at
our facility in Grand Rapids, Michigan. In 1999, Hyundai Electronics signed a
four-year joint development agreement with us to supply all of the source units
we resell under the Rockford Fosgate brand name in accordance with our
specifications. 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 December 31, 1999, we had paid to Hyundai approximately $6.1 million
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.
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Since 1998, we have 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. Our new Lightning Audio amplifiers and
speakers are built to our specifications by suppliers in Korea and China.
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 regularly introduce new products, add
performance features to existing products and limit increases in prices or even
reduce prices. Our principal competitors within our product lines are listed
below:
- Car Audio Amplifiers: Alpine, Kenwood, Kicker, MTX, Orion, Phoenix Gold
and Precision Power;
- Car Audio Speakers: Blaupunkt, Boston Acoustics, Infinity, JBL, JL
Audio, Kenwood, Kicker, MTX, 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: Crest, Crown, Eastern
Acoustic Works, Mackie Designs, Peavy, QSC and Tannoy.
According to NPD Intelect Market Tracking, based on U.S. dollar sales in
1999, we rank:
- first among our competitors in car audio amplifiers; and
- third among our competitors in car audio speakers.
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We believe we have a significant share of the market for professional
amplifiers in recording studios and a small share in the remainder of the
professional audio market, but do not have information allowing us to rank
ourselves in those markets.
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.
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);
- Urban Industrial Gear(TM);
- Hafler(R); and
- Our "Diamond R" logo.
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EMPLOYEES
As at December 31, 1999, we had 454 total employees. At that date, in the
U.S., 293 were engaged in manufacturing, 37 in research and development, 49 in
sales and marketing and 55 in administration. We also had 20 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.
CORPORATE STRUCTURE
The chart below shows our corporate structure and the division of our
operations among us and our subsidiaries:
[SUBSIDIARY FLOW CHART]
FACILITIES
Our corporate headquarters and electronics manufacturing facilities are
located in Tempe, Arizona. We manufacture speakers at our facility in Grand
Rapids, Michigan. We use warehouses strategically located in the U.S., Japan,
Singapore and Germany that enhance our ability to serve our markets faster and
more cost effectively than many of our competitors. The following table contains
information about our facilities, all of which are leased:
<TABLE>
<CAPTION>
APPROXIMATE
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, 2001
Manufacturing, research and
development, and
purchasing................... Tempe, Arizona 22,000 143,000 December 31, 2001(1)
Warehousing, sales and customer
service...................... Tempe, Arizona 25,000 163,000 December 31, 2001(1)
Warehousing and sales.......... Gilbert, Arizona 29,000 127,000 August 31, 2001
Manufacturing, research and
development, purchasing and
administration............... Grand Rapids, 81,000 246,000 March 31, 2001
Michigan
Warehousing and sales.......... Japan 7,500 135,000 April 30, 2011
Warehousing.................... Singapore 9,000 145,000 November 15, 2000
Warehousing.................... Germany 17,000 137,000 December 30, 2006
------- ----------
Total................ 205,400 $1,246,000
======= ==========
</TABLE>
- ---------------
(1) We have the right to extend these leases for one additional one-year term.
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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. IET has not initiated any legal proceedings
relating to this claim, but recently communicated with us through new counsel
and requested a meeting to review their claims. We anticipate such a meeting in
the near future. We believe that IET's allegations are without merit.
On December 28, 1999, Monster Cable filed a patent infringement action in
the United States District Court for the Northern District of California against
Lightning Audio. The complaint arises out of the display packaging for our
Lightning Audio connector cables and alleges trade dress infringement and
infringement of four design patents and one utility patent. We intend to
vigorously defend against the asserted claims, have filed an answer denying any
liability to Monster Cable, and do not believe the claims will have a material
effect on our business.
In addition to the above, we are and may continue to be a party to various
lawsuits and arbitrations from time to time. As at March 31, 2000, we were not a
party to any legal proceedings that we believe are material.
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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.......................... 46 Vice President of Sales
David L. Richards......................... 53 Vice President of Information Technology
James C. Strickland....................... 62 Vice President of Engineering
James M. Thomson.......................... 53 Vice President of Finance, Chief Financial
Officer and Secretary
Alan R. Zimmerman......................... 43 Vice President of Product Design and Development
Jerry E. Goldress(1)(2)(3)................ 69 Chairman of the Board
Nicholas G. Bartol........................ 45 Director
Timothy C. Bartol(1)(2)(3)................ 44 Director
Ralph B. Godfrey(2)....................... 60 Director
John P. Lloyd(3).......................... 48 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.
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
43
<PAGE> 45
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.
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 is currently Director of Information Technology for its Western
Division. From 1997 until February 2000, he served as Director of Applications
Development for Phillips Publishing. 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.
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.
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<PAGE> 46
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 1999, executive compensation decisions were made by our board's
nominating and compensation committee which consisted of Messrs. T. Bartol,
Goldress and Suttle. Prior to January 1, 1999, 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 "Related-Party 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. We have applied for
additional key person life insurance of $7.0 million for Mr. Suttle and $2.0
million each for five other executive officers.
EXECUTIVE COMPENSATION
The following table shows all compensation earned during 1999 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
1999.
45
<PAGE> 47
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.................................... $386,154 $120,000(2) 86,000
President and Chief Executive Officer
David A. Boshes................................... 148,551 26,000 --
Vice President of Operations
Daniel C. McLeod.................................. 198,407 25,000 --
Vice President of Sales
David L. Richards................................. 150,891 30,000 --
Vice President of Information Technology
James M. Thomson.................................. 151,050 30,000 --
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.
(2) This bonus 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.
1999 STOCK OPTION GRANTS
The following table summarizes the stock options we granted to our officers
listed on the Summary Compensation Table for 1999. 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.
INDIVIDUAL GRANT(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
GRANTED TO EXERCISE OPTION TERM(2)
NUMBER OF EMPLOYEES IN PRICE PER ---------------------
NAME SHARES 1999 SHARE EXPIRATION DATE 5% 10%
- ---- --------- ------------- --------- --------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
W. Gary Suttle........... 86,000 100% $7.67 January 1, 2009 $415,070 $1,051,870
David A. Boshes.......... -- -- -- -- -- --
Daniel C. McLeod......... -- -- -- -- -- --
David L. Richards........ -- -- -- -- -- --
James M. Thomson......... -- -- -- -- -- --
</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.
46
<PAGE> 48
1999 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, 1999 by our officers listed on
the Summary Compensation Table:
- the shares that our executive officers purchased during 1999 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, 1999. Value is determined
by subtracting the exercise price from our board's deemed fair market
value at that date.
<TABLE>
<CAPTION>
VALUE OF
1999 OPTION UNEXERCISED IN-THE-MONEY
EXERCISES UNEXERCISED OPTIONS AT OPTIONS AT
------------------- DECEMBER 31, 1999 DECEMBER 31, 1999
SHARES VALUE ----------------------------- -----------------------------
ACQUIRED REALIZED EXERCISABLE NOT EXERCISABLE EXERCISABLE NOT EXERCISABLE
-------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
W. Gary Suttle........... -- -- 60,200 64,500 $202,500 $ --
David A. Boshes.......... -- -- 73,100 12,900 372,788 31,574
Daniel C. McLeod......... -- -- 71,221 14,779 360,945 34,055
David L. Richards........ -- -- 70,950 15,050 338,288 39,074
James M. Thomson......... -- -- 72,025 13,975 365,538 31,824
</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
- 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 December 31, 1999, we had:
- issued 40,634 shares under the plans;
- outstanding options to purchase 1,772,381 shares under the plans at a
weighted average exercise price of $3.56 per share; and
- 336,985 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.
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<PAGE> 49
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.
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 became 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.
48
<PAGE> 50
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 an offering period, and we will repay their
payroll deductions as of the date they stop participating. Participation ends
automatically upon termination of employment with us.
Rights granted under the plan are generally not transferable by an employee
other than by will or the laws of descent and distribution. In the event that we
merge with or into another corporation and we are not the surviving corporation
or sell substantially all of our assets, each outstanding right under the plan
will be automatically exercised to the extent of existing payroll deductions as
of the effective date of the merger or asset sale.
The board of directors has the authority to terminate or amend the plan,
however, the shareholders must approve any amendment that will increase the
total number of shares for which rights may be granted. The shareholders must
also approve any amendment that is required by reason of section 423 of the
Internal Revenue Code. The plan will terminate automatically ten years from its
effective date unless it is terminated sooner by the board.
49
<PAGE> 51
RELATED-PARTY 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 for each of 1997 and 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.
50
<PAGE> 52
SUTTLE EMPLOYMENT AGREEMENT
The principal terms of our agreement with Mr. Suttle are as follows:
- five-year term ending January 1, 2004;
- initial base salary of $400,000 per year, subject to increases at the
discretion of our nominating and compensation committee;
- bonus potential of up to 50% of salary at the discretion of the board of
directors and the compensation committee based upon our performance;
- participation in our stock option plan, with an initial grant of 86,000
shares at $7.67 per share as of January 1, 1999;
- payment by us of up to $36,000 per year in premiums on a "split dollar"
life insurance policy for Mr. Suttle's benefit; and
- we may terminate the agreement at any time after the first year.
If we terminate without good cause, or if Mr. Suttle terminates for good reason,
we must continue to pay Mr. Suttle's base salary for 18 months after the
termination. Mr. Suttle shall not compete with us, call on any of our customers
or induce any of our employees to work for another business during the term of
the agreement and for 12 months after the later of (1) the termination date or
(2) the day we stop paying severance payments under the employment agreement.
51
<PAGE> 53
PRINCIPAL AND SELLING SHAREHOLDERS
This table contains information with respect to the beneficial ownership of
our outstanding common stock as at December 31, 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
4,753,146 shares of common stock outstanding as at December 31, 1999, adjusted
for the issuance of 67,488 shares issued after December 31, 1999, upon exercise
of warrants that would otherwise have expired on February 3, 2000. For
beneficial ownership after the offering, the following calculation assumes
conversion of $277,417 of our 8.5% convertible subordinated debentures into
113,609 shares to occur upon completion of the offering, conversion of 10,750 of
the warrants into 10,750 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 December 31, 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 78.9% 399,007 3,421,024 45.8%
Timothy C. Bartol(2).................... 3,816,755 78.7 399,007 3,417,748 45.8
Monument Investors Limited
Partnership(3)........................ 3,154,016 65.4 399,007 2,755,009 37.0
W. Gary Suttle(4)....................... 898,700 18.2 898,700 11.9
Boulder Investors Limited
Partnership(5)........................ 602,493 12.6 602,493 8.1
Jerry E. Goldress(6).................... 246,840 4.9 246,840 3.2
James M. Thomson(7)..................... 93,629 1.9 93,629 1.2
David A. Boshes(8)...................... 81,306 1.7 81,306 1.1
Daniel C. McLeod(9)..................... 72,025 1.5 72,025 1.0
David L. Richards(10)................... 72,690 1.5 72,690 1.0
John P. Lloyd(11)....................... 46,992 * 46,992 *
Ralph B. Godfrey(12).................... 0 * 16,125 *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS
A GROUP (13 PERSONS)(13).............. 4,658,704 82.0% 399,007 4,275,822 51.4%
</TABLE>
52
<PAGE> 54
<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.......................... 64,497 1.4 64,497 0 *
Otto Shill............................ 54,966 1.2 54,966 0 *
Kevin Campbell........................ 28,380 * 25,800 2,580 *
Darrell Chapman....................... 22,678 * 22,678 0 *
Vrolyk & Company...................... 21,500 * 10,750 10,750 *
Scott and Kathy Carter................ 20,329 * 20,329 0 *
The Church of Jesus Christ of
Latter-Day Saints.................. 16,608 * 16,608 0 *
Dennis Blackhurst..................... 13,953 * 13,953 0 *
David Nettleton....................... 10,279 * 10,279 0 *
Gordon MacInnes....................... 9,974 * 4,300 5,674 *
Robert S. Pothier..................... 8,995 * 8,995 0 *
Don Hammerle.......................... 8,062 * 8,062 0 *
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 Paul.......................... 3,074 * 1,505 1,569 *
Brigham P. Herzfeld................... 3,074 * 1,530 1,544 *
Andy Szabo............................ 1,720 * 1,720 0 *
Mark Quale............................ 1,689 * 1,689 0 *
John Seaver........................... 860 * 860 0 *
National Ability Center............... 833 * 833 0 *
Enterprise Mentors International...... 833 * 833 0 *
Franklin D. Richards Jr. University of
Utah Athletic Trust Fund........... 833 * 833 0 *
Marion Szabo.......................... 430 * 430 0 *
Deseret International................. 417 * 417 0 *
Utah Boys Ranch....................... 417 * 417 0 *
Choice Humanitarian................... 417 * 417 0 *
Arizona Strip Interpretive Center..... 208 * 208 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;
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<PAGE> 55
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.
(4) Includes 21,500 shares underlying convertible debentures; 795,500 shares
underlying options granted by Monument Investors Limited Partnership; and
81,700 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) 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.
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<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
As at June 28, 1999, we increased our authorized capital stock to
40,000,000 shares of common stock, $.01 par value per share. The following
summary is qualified in its entirety by reference to our articles of
incorporation and bylaws, copies of which are filed as exhibits to the
registration statement of which this prospectus is a part.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders, except for the election of
directors. The holders of common stock have cumulative voting rights with
respect to the election of directors and, as a result, minority shareholders may
be able to elect directors on the basis of their votes alone. Holders of common
stock are entitled to receive pro rata dividends as may be declared by the board
of directors out of funds legally available as dividends. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share pro rata in all assets remaining after payment of liabilities. Holders of
our common stock have no preemptive, conversion or other rights to subscribe for
additional securities. There are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of the offering
will be, validly issued, fully paid and nonassessable.
On the date of this prospectus and assuming the conversion of $277,417 of
our 8.5% convertible subordinated debentures into 113,609 shares and the
issuance of 10,750 shares upon exercise of warrants, both to occur upon
completion of this offering, there were outstanding (1) 4,944,993 shares of
common stock, (2) options to purchase 1,987,381 shares of common stock, (3)
warrants to purchase 10,750 shares of common stock and (4) debentures
convertible into 286,003 shares of common stock. Upon completion of this
offering, 7,444,993 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 December 31,
1999 other than those described in the preceding sentence.
WARRANTS
As of the date of this prospectus, warrants to purchase 21,500 shares of
common stock at an exercise price of $3.45 per share were outstanding. The
warrantholder will exercise 10,750 of these warrants concurrently with this
offering in order to sell the shares in this offering.
DEBENTURES
As of the date of this prospectus, holders of our 8.5% convertible
subordinated debentures had the right to convert their debentures into 399,612
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 67,488 shares of common stock that we issued
upon exercise of 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> 57
The holders of approximately 399,612 shares of common stock, that we will
issue if the holders of our 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 11 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> 58
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> 59
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 7,444,993 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 December 31, 1999 other than the exercise of 67,488 warrants
before their expiration on February 3, 2000, conversion of $277,417 of the 8.5%
convertible subordinated debentures into 113,609 shares and the issuance of
10,750 shares upon exercise of warrants, both to occur upon completion of this
offering. Of these shares, the 3,350,000 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 4,094,993 outstanding shares of common stock will be "restricted
securities" under Rule 144.
LOCK-UP AGREEMENTS
Our directors, executive officers and other shareholders, holding 3,727,466
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>
3,717,527 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; and
- Shares eligible for sale under Rule
701
6,076,100 180 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> 60
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 74,450 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 with 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> 61
UNDERWRITING
The underwriters named below, acting through their representatives, Dain
Rauscher Incorporated, McDonald Investments Inc., a KeyCorp Company, 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 Incorporated..................................
McDonald Investments Inc., a KeyCorp Company................
Needham & Company, Inc. ....................................
---------
Total............................................. 3,350,000
=========
</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 502,500
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 3,350,000 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 3,350,000 shares are being sold.
The price of the shares of common stock purchased by the underwriters will
be the public offering price set forth on the cover page of the prospectus less
the following underwriting discounts and commissions to be paid by us and the
selling shareholders.
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
By Rockford Corporation........................... $0.84 $2,100,000 $2,522,100
By the selling shareholders....................... $0.84 $ 714,000 $ 714,000
</TABLE>
We will also pay the total expenses of this offering.
Our officers, directors and other shareholders, holding 3,726,025 shares in
the aggregate, 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
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<PAGE> 62
without the prior written consent of the underwriters. This 180-day period is
known as the lock-up period. The representatives may, without notice and in
their sole discretion, allow any officer or director to dispose of common stock
or other securities prior to the expiration of the lock-up period. There are,
however, currently no agreements between the underwriters and any of our
officers or directors allowing any sale.
In addition, we have agreed that we will not issue, sell, offer to sell, or
otherwise dispose of any shares of our common stock or other securities during
the lock-up period without the prior consent of the underwriters. This agreement
does not include shares of common stock or other securities issued pursuant to
employee stock option plans, employee stock purchase plans, or common stock or
other securities outstanding on the date of this prospectus. However, we have
agreed that employee stock options issued during the lock-up period to our
officers and directors may not be exercised prior to the expiration of the
lock-up period. Any shares of common stock issued to our officers and directors
during the lock-up period pursuant to the exercise of stock options or other
securities outstanding on the date of this prospectus shall bear a restrictive
legend restricting the transfer of those shares during the lock-up period.
The underwriters have advised us that in connection with this offering,
some persons participating in this offering may engage in transactions that may
have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market.
These transactions may include stabilizing bids, syndicate covering transactions
and the imposition of penalty bids.
- A "stabilizing bid" is a bid for or the purchase of common stock on
behalf of the underwriters for the purpose of preventing or retarding
a decline in the market price of the common stock.
- A "syndicate covering transaction" is the bid for or the purchase of
the common stock in the open market on behalf of the underwriters to
reduce a short position incurred by the underwriters in connection
with this offering. A syndicate short position may result if the
underwriters decide to exercise the overallotment option or if they
sell shares beyond the overallotment option. The potential maximum
size of this share position cannot be determined at this time.
Customers who receive shares of common stock that are purchased by the
underwriters in the open market in a syndicate covering transaction
will receive a final prospectus that will be the same as that received
by customers in the primary offering. Purchasers in this offering of
shares sold short by the underwriters are entitled to the same
remedies under the federal securities laws as any other purchaser in
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.
At our request the underwriters have reserved up to 5% of the shares
offered in this offering. These shares are reserved for our employees, their
affiliates, and selected sales representatives, dealers, distributors and
vendors. All participants have pre-existing relationships with us and will
purchase the shares at the price offered to the public in this offering.
Participants may purchase between 100 and 1,000 shares. To the extent
participants purchase reserved shares, they will reduce the number of shares
available to the general public. If the participants do not purchase the
reserved shares, the underwriters will offer them to the public in this
offering.
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<PAGE> 63
Needham & Company, Inc. rendered financial advisory services to us during
January 2000 in connection with a proposed acquisition and received a retainer
of $50,000 for those services. We ultimately decided not to pursue the
acquisition.
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 1997, 1998, 1999 and for the years ended
December 31, 1997, 1998 and 1999. 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 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.
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<PAGE> 64
ROCKFORD CORPORATION AND SUBSIDIARIES
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, 1998 and
1999...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 65
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, 1998 and 1999, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the years ended December 31, 1997, 1998 and 1999. These financial
statements are the responsibility of Rockford's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall 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, 1998 and 1999, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997, 1998 and 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 2, 2000
F-2
<PAGE> 66
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 470 $ 917
Accounts receivable, less allowances of $1,043,000 and
$3,700,000 at December 31, 1998 and 1999,
respectively........................................... 15,097 19,211
Inventories, net.......................................... 12,226 15,871
Deferred income taxes..................................... 3,084 3,661
Prepaid expenses and other................................ 688 2,682
------- -------
Total current assets........................................ 31,565 42,342
Property and equipment, net................................. 5,007 5,541
Deferred income taxes....................................... -- 289
Goodwill, net............................................... -- 2,108
Other assets................................................ 735 942
------- -------
Total assets................................................ $37,307 $51,222
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,492 $ 7,442
Accrued salaries and incentives........................... 3,045 5,068
Accrued warranty.......................................... 3,625 3,512
Income taxes payable...................................... 30 319
Other accrued expenses.................................... 2,492 3,362
Current portion of notes payable, long-term debt and
capital lease obligations.............................. 2,393 1,420
------- -------
Total current liabilities................................... 18,077 21,123
Notes payable and long-term debt, less current portion...... 13,596 16,565
Capital lease obligations, less current portion............. 696 777
Minority interest........................................... 31 --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value Authorized
shares -- 40,000,000
Issued shares -- 4,432,775 shares at December 31, 1998
and 4,753,146 at December 31, 1999.................... 44 48
Additional paid-in capital................................ 2,489 3,686
Retained earnings......................................... 2,188 8,685
Accumulated other comprehensive income.................... 238 338
------- -------
4,959 12,757
Less treasury stock, 21,500 shares at cost at December 31,
1998 and -0- at December 31, 1999...................... 52 --
------- -------
Total shareholders' equity.................................. 4,907 12,757
------- -------
Total liabilities and shareholders' equity.................. $37,307 $51,222
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 67
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1998 1999
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................ $87,423 $87,577 $123,889
Cost of goods sold....................................... 57,321 55,146 75,014
------- ------- --------
Gross profit............................................. 30,102 32,431 48,875
Operating expenses:
Sales and marketing.................................... 14,530 14,821 20,602
General and administrative............................. 9,350 10,211 13,465
Research and development............................... 1,576 1,876 2,277
------- ------- --------
Total operating expenses................................. 25,456 26,908 36,344
------- ------- --------
Operating income......................................... 4,646 5,523 12,531
Other expense:
Interest............................................... (1,757) (1,434) (1,671)
Other.................................................. (294) (49) (282)
------- ------- --------
Income before income taxes............................... 2,595 4,040 10,578
Income tax expense....................................... 959 1,717 4,088
------- ------- --------
Income before minority interest.......................... 1,636 2,323 6,490
Minority interest........................................ (4) (18) 7
------- ------- --------
Net income............................................... $ 1,632 $ 2,305 $ 6,497
======= ======= ========
Net income per common share:
Basic.................................................. $ 0.37 $ 0.52 $ 1.40
======= ======= ========
Diluted................................................ $ 0.31 $ 0.41 $ 1.04
======= ======= ========
Weighted average shares:
Basic.................................................. 4,401 4,412 4,641
======= ======= ========
Diluted................................................ 5,688 5,951 6,289
======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 68
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 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................ -- -- -- -- 100 -- 100
Net income.......................... -- -- -- 6,497 -- -- 6,497
-------
Comprehensive income................ 6,597
Conversion of subordinated
promissory note to common stock... 289 3 997 -- -- -- 1,000
Exercise of stock options........... 21 1 78 -- -- -- 79
Issuance of treasury stock to
acquire minority interest......... -- -- 113 -- -- 52 165
Exercise of warrants................ 10 -- 9 -- -- -- 9
----- --- ------ ------- ---- ---- -------
Balance at December 31, 1999.......... 4,753 $48 $3,686 $ 8,685 $338 $ -- $12,757
===== === ====== ======= ==== ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 69
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1998 1999
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $1,632 $2,305 $6,497
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,176 2,274 2,386
Loss (gain) on sale of fixed assets....................... -- (12) 92
Deferred income tax expense (benefit)..................... 28 (686) (866)
Provision for doubtful accounts........................... 540 561 991
Provision for inventory allowances........................ 638 787 2,269
Minority interest......................................... 4 18 (7)
Changes in operating assets and liabilities:
Accounts receivable.................................... 14 (4,569) (4,104)
Inventories............................................ 487 (3,410) (5,082)
Prepaid expenses and other............................. 121 5 (1,967)
Income taxes receivable................................ 242 85 --
Accounts payable....................................... (2,454) 1,083 98
Accrued salaries and incentives........................ 1,939 279 1,555
Accrued warranty....................................... 823 714 (113)
Income taxes payable................................... -- 30 289
Other accrued expenses................................. 277 775 782
------ ------ ------
Net cash provided by operating activities................... 6,467 239 2,820
INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,318) (1,728) (2,781)
Proceeds from sale of property and equipment................ 118 38 46
Acquisitions of business, net of cash acquired.............. -- -- (1,508)
Decrease (increase) in other assets......................... (425) 194 (186)
------ ------ ------
Net cash used in investing activities....................... (1,625) (1,496) (4,429)
FINANCING ACTIVITIES
Net proceeds from notes payable, long-term debt............. 160 1,791 3,064
Payments on notes payable and long-term debt................ (3,550) (142) (665)
Debt issuance costs......................................... (514) -- --
Payments on capital lease obligations....................... (1,058) (321) (531)
Proceeds from exercise of stock options and warrants........ 33 -- 88
------ ------ ------
Net cash provided by (used in) used in financing
activities................................................ (4,929) 1,328 1,956
Effect of exchange rate changes on cash..................... 7 139 100
------ ------ ------
Net increase (decrease) in cash............................. (80) 210 447
Cash at beginning of year................................... 340 260 470
------ ------ ------
Cash at end of year......................................... $ 260 $ 470 $ 917
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Conversion of subordinated debt to common stock............. $ -- $ -- $1,000
====== ====== ======
Exchange of stock for minority interest..................... $ -- $ -- $ 165
====== ====== ======
</TABLE>
See accompanying notes.
F-6
<PAGE> 70
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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" and "Lightning Audio" brand names 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. 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.
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, 1999, 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.
Net Sales
Sales are recorded at the time of shipment net of related discounts.
Accounts Receivable
Rockford sells its products principally to automotive stereo and
professional sound reinforcement dealers primarily in North America, South
America, Europe and Asia. Rockford also sells certain portions of its product
line to a large retail reseller of consumer electronics in the United States. At
December 31, 1998 and 1999, net accounts receivable includes approximately
$2,958,000 and $3,582,000, respectively, due from overseas businesses.
F-7
<PAGE> 71
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1999 approximately $262,000 and $415,000,
respectively, with respect to accounts expected to utilize such discounts after
year-end.
Inventories
Inventories consist principally of raw materials of electronic and
mechanical components used in the manufacturing of amplifier and speaker systems
and finished goods. Inventories are carried at the lower of cost or market using
the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are
computed principally on the straight-line method for financial reporting
purposes over a three to five year life. 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.
Impairment of Long-Lived Assets
In accordance with the Financial Accounting Standards Board Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," Rockford records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. This methodology includes intangible assets acquired.
Goodwill relating to specific intangible assets is included in the related
impairment measurements to the extent it is identified with such assets.
Intangible Assets
Rockford amortizes goodwill over the useful life of the underlying asset,
not to exceed 15 years. As of December 31, 1999, Rockford had gross goodwill of
$2,182,000 and accumulated amortization of $74,000. For the year ended December
31, 1999, Rockford recognized $74,000 of amortization expense.
Prepaid Offering Costs
As of December 31, 1999, Rockford has capitalized $1,240,000 related to
printing and professional fees incurred for Rockford's initial public offering.
Advertising
Rockford expenses advertising as incurred. Advertising expense for the
years ended December 31, 1997, 1998 and 1999 was approximately $1,008,000,
$1,201,000 and $1,245,000, 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.
F-8
<PAGE> 72
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Fair value of the underlying shares is determined by
Rockford utilizing independent valuations and third party transactions in
Rockford's stock.
Significant Customer
Rockford has sales to one customer representing 19.9 percent of net sales
for the year ended December 31, 1999.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with FASB Statement No. 52. All balance sheet
accounts have been translated using the current exchange rates at the balance
sheet date. Income statement amounts have been translated using the average
exchange rate for the year. The gains and losses resulting from the change in
exchange rates from year-to-year have been reported separately as a component of
stockholders' equity. 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.
Fair value of the underlying shares is determined by Rockford utilizing
independent valuations and third party transactions in Rockford's stock.
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 nonemployees 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 the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS No. 130). In adopting the new requirements for
calculating income, items of other comprehensive income have been presented in
the statement of shareholder's equity.
Segments of an Enterprise and Related Information
Effective January 1, 1998, Rockford adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131). 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
F-9
<PAGE> 73
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1997 and 1998 consolidated
financial statements to conform them to the 1999 presentation.
2. ACQUISITIONS
On June 30, 1999, Rockford completed its acquisition of all of the common
stock of Lightning Audio. Under the terms of the acquisition, Rockford paid
$1,550,000 in cash and recorded an additional $50,000 of purchase consideration
obligations for a total purchase price of $1.6 million. Under the terms of the
acquisition, Rockford could pay up to $600,000 more over the next two years
based upon the subsequent performance of Lightning Audio. Through December 31,
1999, the former owners of Lightning Audio have earned $274,000 in additional
consideration. Rockford recorded approximately $2,027,000 of goodwill with
respect to the initial purchase and the additional consideration paid during
1999, 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 have been 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 percent interest in its Japanese subsidiaries not held by
Rockford. Rockford 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,
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 4,864 $ 5,578
Work in progress............................................ 754 647
Finished goods.............................................. 8,512 11,295
------- -------
14,130 17,520
Less allowances............................................. (1,904) (1,649)
------- -------
$12,226 $15,871
======= =======
</TABLE>
F-10
<PAGE> 74
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $ 10,708 $ 12,228
Tooling equipment........................................... 3,718 4,449
Leasehold improvements...................................... 1,368 1,801
Furniture and fixtures...................................... 905 1,185
Construction in process..................................... 849 574
-------- --------
17,548 20,237
Less accumulated depreciation and amortization.............. (12,541) (14,696)
-------- --------
$ 5,007 $ 5,541
======== ========
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
$17,000,000 revolving line of credit with a lender
collateralized by substantially all assets, interest
payments at prime plus .75 percent (approximately 9.25
percent at December 31, 1999) until June 2001 when all
remaining principal and interest is due and payable.
Borrowings under this line of credit are limited to a
borrowing base defined substantially as a percentage of
inventory and accounts receivable, as defined and adjusted
in the agreement. ........................................ $11,631 $15,000
$2,000,000 term note payable to a lender collateralized by
substantially all assets, monthly principal payments of
$33,333 plus interest fixed at 10.67 percent until June
2001 when all principal and interest is due and
payable. ................................................. 1,370 970
9.0 percent subordinated, promissory note to related party,
unsecured, converted into 289,562 common shares on May 1,
1999. .................................................... 1,000 --
10.5 percent subordinated, senior notes payable to related
parties, 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 up to 76,835
shares of Rockford's common stock at $3.45 per share,
expiring February 2000 of which 67,488 were outstanding at
December 31, 1999. ....................................... 415 --
8.5 percent subordinated, convertible 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
</TABLE>
F-11
<PAGE> 75
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Other....................................................... $ 26 $ 243
------- -------
15,437 17,208
Less current portion........................................ (1,841) (643)
------- -------
$13,596 $16,565
======= =======
</TABLE>
Annual maturities of notes payable and long-term debt for the five years
succeeding December 31, 1999 are $643,000 in 2000, $15,570,000 in 2001 and
$995,000 in 2002. Interest payments were approximately $1,705,000, $1,520,000
and $1,671,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
At December 31, 1999, Rockford has $3,030,000 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 subordinated,
convertible debentures contain covenants which place various restrictions on
financial ratios, levels of indebtedness, and capital expenditures, among other
things. Rockford was in compliance with all debt covenants at December 31, 1999.
6. LEASES
Rockford leases equipment under capital leases. 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
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Equipment................................................... $3,064 $3,244
Less accumulated amortization............................... (955) (1,631)
------ ------
$2,109 $1,613
====== ======
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
During the years ended December 31, 1998 and 1999, Rockford acquired
approximately $1,394,000 and $180,000 of equipment under capital leases,
respectively.
F-12
<PAGE> 76
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
2000................................................. $ 777 $1,200
2001................................................. 675 980
2002................................................. 265 391
2003................................................. -- 267
2004................................................. -- 267
Thereafter........................................... -- 1,118
------ ------
Total minimum lease payments......................... 1,717 $4,223
======
Less amounts representing interest................... (163)
------
Present value of net minimum lease................... 1,554
Less current portion................................. (777)
------
$ 777
======
</TABLE>
Total rental expense for all operating leases was approximately $2,309,000,
$1,957,000 and $1,719,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
7. INCOME TAXES
Significant components of Rockford's deferred tax assets are:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory basis.......................................... $ 837 $ 756
Basis in receivables..................................... 251 987
Book over tax depreciation............................... -- 289
Accrued warranty......................................... 1,342 1,295
Accrued liabilities and other............................ 654 623
------ ------
Total deferred tax assets.................................. $3,084 $3,950
====== ======
</TABLE>
F-13
<PAGE> 77
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the federal and state income tax expense
(benefit) are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1998 1999
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal expense.................................. $779 $1,883 $3,994
State expense.................................... 116 384 942
Foreign expense.................................. 36 136 18
---- ------ ------
Total current expense.............................. 931 2,403 4,954
Deferred:
Federal expense (benefit)........................ 25 (719) (796)
State expense (benefit).......................... 3 33 (70)
---- ------ ------
Total deferred expense (benefit)................... 28 (686) (866)
---- ------ ------
$959 $1,717 $4,088
==== ====== ======
</TABLE>
A reconciliation of Rockford's effective income tax rate to the federal
statutory rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1998 1999
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal statutory rate............................. $881 $1,374 $3,597
State tax net of federal benefit................... 79 275 575
Nondeductible items................................ 36 45 98
Higher (lower) foreign tax rates................... (43) 17 (34)
Foreign sales corporation benefit.................. (98) (65) (145)
Other, net......................................... 104 71 (3)
---- ------ ------
$959 $1,717 $4,088
==== ====== ======
</TABLE>
Rockford's income attributable to foreign operations amounted to
approximately $237,000, $350,000 and $150,000 for the years ended December 31,
1997, 1998 and 1999.
For the years ended December 31, 1997, 1998 and 1999, Rockford made tax
payments of $694,000 (net of $460,000 in refunds), $2,082,000 and $4,631,000
(net of $29,000 in refunds), respectively.
8. COMMON STOCK GRANTS AND OPTIONS
The Board of Directors of Rockford prior to 1995 granted a certain
consulting firm, which is providing executive and other consulting services to
Rockford, options to purchase 215,000 shares of its authorized but unissued
common stock at a price of $1.51 per share, protected against dilution, as
defined, and expiring in August 2002. The price per share exceeded the fair
value at the date of the grant. The stock options were fully vested at December
31, 1999.
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 FASB Statement No. 123,
Accounting for Stock-Based Compensation, (Statement 123) 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.
F-14
<PAGE> 78
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rockford has provided a stock option plan for certain employees and
directors. Under the plan, options to purchase common stock of Rockford will be
granted to certain employees and directors at the fair value of the underlying
common stock. The options generally have a term of ten years and are 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 this plan. Under certain circumstances, Rockford has the right
to repurchase common stock acquired under the options at the fair value price.
Pro forma information regarding net income and earnings per share is
required by Statement 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:
<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>
YEAR ENDED DECEMBER 31
--------------------------
1997 1998 1999
------ ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income as reported........................... $1,632 $2,305 $6,497
Pro forma Statement 123 expense.................. (76) (110) (262)
------ ------ ------
Pro forma net income............................. $1,556 $2,195 $6,235
====== ====== ======
Pro forma income per common share
Basic.......................................... $ 0.35 $ 0.50 $ 1.35
====== ====== ======
Diluted........................................ $ 0.29 $ 0.39 $ 1.00
====== ====== ======
</TABLE>
F-15
<PAGE> 79
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the stock option plan during the years ended December
31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
SHARES AVAILABLE WEIGHTED-AVERAGE
UNDER OPTION SHARES EXERCISE PRICE
---------------- --------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1996......... 161,448 910,327 $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......... 627,233 1,502,880 2.89
Granted.................................. (158,025) 158,025 5.38
--------- --------- -----
Outstanding at December 31, 1998......... 469,208 1,660,905 3.12
Granted.................................. (172,000) 172,000 7.67
Exercised................................ -- (20,747) 3.76
Expired or cancelled..................... 39,777 (39,777) 3.05
--------- --------- -----
Outstanding at December 31, 1999......... 336,985 1,772,381 $3.56
========= ========= =====
</TABLE>
The weighted-average fair value of options granted during the years ended
December 31, 1997, 1998 and 1999 was $0.90, $1.08 and $1.99, respectively.
The following table summarizes information about stock options under the
plan outstanding at December 31, 1999:
<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, 1999 LIFE PRICE DECEMBER 31, 1999 PRICE
- ------------- ----------------- ----------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
$1.51 454,527 5.0 years $1.51 454,527 $1.51
$2.44 - $3.45 516,750 6.6 years 2.87 490,825 2.84
$4.19 513,004 8.0 years 4.19 339,224 4.19
$5.81 116,100 8.8 years 5.81 48,375 5.81
$7.67 172,000 9.0 years 7.67 57,333 7.67
</TABLE>
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-16
<PAGE> 80
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income................................................ $1,632 $2,305 $6,497
Effect of dilutive securities interest impact of
convertible debentures................................. 110 110 72
------ ------ ------
Numerator for diluted net income per share, income available
to common stockholders after assumed conversions.......... $1,742 $2,415 $6,569
====== ====== ======
Denominator:
Denominator for basic net income per share, weighted,
average shares......................................... 4,401 4,412 4,641
Effect of dilutive securities:
Employee stock options................................. 529 772 1,075
Warrants............................................... 61 70 71
Convertible debentures................................. 697 697 503
------ ------ ------
Dilutive potential common shares.......................... 1,287 1,539 1,648
------ ------ ------
Denominator for diluted net income per share, adjusted
weighted average shares and assumed conversions........... 5,688 5,951 6,289
Basic net income per share.................................. $ 0.37 $ 0.52 $ 1.40
====== ====== ======
Diluted net income per share................................ $ 0.31 $ 0.41 $ 1.04
====== ====== ======
</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 funds.
11. BENEFIT PLAN
Rockford has a 401(k) Retirement Savings Plan (Plan) covering substantially
all employees who have completed six consecutive months of service without
regard to hours of service. Under the terms of the Plan, employees may make
voluntary contributions, subject to Internal Revenue Service limitations.
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 December 31, 1997, 1998 and 1999 were approximately $237,000, $296,000 and
$369,000, respectively.
12. STOCK PURCHASE PLAN
On May 17, 1999 the shareholders of Rockford approved the Employee Stock
Purchase Plan. A total of 361,200 shares of its common stock are reserved for
issuance under the plan, which became effective September 1, 1999. Employees
will be eligible to participate if they are employed by Rockford or a
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. Each employee will be able to purchase up to
$25,000 worth of shares up to a
F-17
<PAGE> 81
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maximum of 1,000 shares in each calendar year. The price per share purchased
under the plan will generally be 85 percent of the fair market value of the
shares.
13. SEGMENT INFORMATION
Rockford operates its business under the car audio and professional audio
product lines. For each of the periods ended December 31, 1997, 1998 and 1999,
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>
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales from external customers(a)
United States...................................... $64,165 $70,016 $105,482
Export:
Other Americas.................................. 7,005 4,905 5,294
Europe.......................................... 7,819 6,599 7,337
Asia............................................ 8,434 6,057 5,776
------- ------- --------
Total sales from external customers.................. $87,423 $87,577 $123,889
======= ======= ========
</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 year ended December 31, 1999 in
which sales to one customer accounted for 19.9 percent of that period's net
sales. Rockford's long-lived assets outside of the United States are not
significant.
F-18
<PAGE> 82
Inside back cover
Page highlights Hafler:
Upper left: [Hafler logo]
Middle left: [Photo of Hafler amplifier, of Hafler powered monitor and of Hafler
home theater speaker]
Bottom left: Web site address www.hafler.com
Upper right: [Photo of Hafler studio monitor]
Middle right: [Photo of Hafler power amplifier]
Bottom: [Photo of professional sound engineers using Hafler professional
monitors in recording studio]
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 who 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 recording professionals.
Hafler has spent more than 50 years developing a brand that embraces the
emotions of recording and listening to music. In 2000, we intend to take
advantage of this passion by delivering the message of music and Hafler's
heritage directly to home theater consumers.
<PAGE> 83
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,350,000 SHARES
[ROCKFORD CORPORATION LOGO]
COMMON STOCK
-----------------------------
PRICE $ PER SHARE
-----------------------------
DAIN RAUSCHER WESSELS
MCDONALD INVESTMENTS INC.
NEEDHAM & COMPANY, INC.
------------------------------
, 2000
------------------------------
Until , 2000 (25 days after the date of this Prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We expect to incur the following estimated expenses (other than
underwriting discounts and commissions) in connection with the issuance and
distribution of the securities which we are registering under this statement:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,131
NASD filing fee............................................. 5,565
Nasdaq National Market listing fee.......................... 48,750
Printing and engraving...................................... 400,000
Legal fees and expenses..................................... 550,000
Accounting fees and expenses................................ 350,000
Transfer agent fees......................................... 25,000
Miscellaneous............................................... 106,554
----------
Total............................................. $1,500,000
==========
</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.
Reference is made to Section 8 of the underwriting agreement to be filed as
an exhibit to the registration statement, indemnifying our officers and
directors against certain liabilities.
II-1
<PAGE> 85
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. During July 1999 we issued 9,348 shares to a warrantholder who
exercised his warrant conversion rights.
9. During August 1999 we issued 8,600 shares to a director who
exercised stock options pursuant to our 1994 and 1997 stock option plan.
10. During January and February 2000 we issued 67,488 shares to
warrant holders who exercised their warrant conversion rights.
11. 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 December 31, 1999................... 172,000 $7.67
January 1, 2000 through the date of this prospectus......... 0 $0
</TABLE>
II-2
<PAGE> 86
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+
10.9.1 Amendment to Standard Industrial Commercial Multi-Tenant
Lease -- Gross American Industrial Real Estate Association
Lease, 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+
10.10.1 Amendment to Standard Industrial Lease -- Gross by and
between Cloyce Clark and Rockford Corporation+
10.11 Lease Agreement, and addenda thereto, by and between
Carbonneau Industries, Inc. and Rockford Corporation+
10.11.1 Amendment to Lease Agreement 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+
10.13.1 Amendment No. 1 to Loan and Security Agreement by and
between FINOVA Capital Corporation and Rockford Corporation+
10.13.2 Amendment No. 2 to Loan and Security Agreement by and
between FINOVA Capital Corporation and Rockford Corporation+
10.14 Employee 401(k) Deferred Compensation Plan and amendments
thereto,+
10.15 Manufacturing and Distribution Agreement by and between Path
Group, Inc. and Rockford Corporation**+
</TABLE>
II-3
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.15.1 Addendum to the Manufacturing and Distribution Agreement by
and between Path Group, Inc. and Rockford Corporation.**+
10.15.2 Addendum to the Manufacturing and Distribution Agreement by
and between Path Group, Inc. and Rockford Corporation**+
10.16 Product Sales Agreement by and between Rockford Corporation
and Avnet Electronics Marketing**+
10.17 Convertible Subordinated Debenture Amendment Agreement and
Agreement to Rename as Senior Notes+
10.18 Form of Senior Note due February 3, 1999 and Warrant+
10.19 Schedule for Senior Notes and Warrants+
10.20 Convertible Subordinated Debenture Purchase Agreement+
10.21 Form of 8.5% Convertible Subordinated Debenture due May 1,
2002+
10.22 Schedule for 8.5% Convertible Subordinated Debentures+
10.23 Warrant issued to the Vrolyk Partnership 97-A to expire June
1, 2007+
10.24 Services and Option Agreement by and between W. Gary Suttle,
Caroline S. Bartol, individually and as representative of
the estate of John G. Bartol and Rockford Corporation+
10.25 Amendment of Services and Option Agreement by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.26 Amendment of Services and Option Contract by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.27 Consulting and Option Contract by and between Rockford
Corporation and Grisanti, Galef & Goldress, Inc.+
10.28 Amendment and Renewal of Consulting and Option Contract by
and between Rockford Corporation and Grisanti, Galef &
Goldress, Inc.+
10.29 Amendment of Consulting and Option Contract by and between
Rockford Corporation and Grisanti, Galef & Goldress, Inc.+
10.30 Letter from Timothy Bartol, General Partner for the Boulder
Investors Partnership exercising rights under Bridge Loan
Conversion and Extension Agreement by and between Rockford
Corporation and Boulder Investors Ltd. Partnership, as
successor to Caroline S. Bartol+
10.31 Fifth Amendment to Bridge Loan Conversion and Extension
Agreement by and between Rockford Corporation and Boulder
Investors Ltd. Partnership, as successor to Caroline S.
Bartol+
10.32 Bridge Loan Conversion and Extension Agreement by and
between Rockford Corporation and Caroline S. Bartol+
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+
10.39 Financing Lease Schedule No. 1000100950 by and between Banc
One Leasing Corporation and Rockford Corporation+
21 List of Subsidiaries of Rockford Corporation+
23.1 Consent of Ernst & Young LLP, Independent Auditors*
23.2 Consent of Consumer Electronics Manufacturers Association
(now known as Consumer Electronics Association)+
23.3 Consent of NPD Intelect Market Tracking+
</TABLE>
II-4
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
23.4 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 Financial Data Schedule for year ended December 31, 1999+
</TABLE>
- ---------------
* Revised versions of these exhibits, reflecting current information, are being
filed herewith.
** Portions of the document have been omitted and filed separately with the
Commission under a request for confidential treatment.
+ Previously filed
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, 1999
Receivable allowances........ $1,043 $ 991 $8,097(3) $6,431(1) $3,700
Inventory reserve............ 1,904 2,269 2,524(2) 1,649
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
</TABLE>
- ---------------
(1) Accounts written off net of recoveries and returns.
(2) Reserved inventory sold or scrapped.
(3) Amounts netted against sales.
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.
II-5
<PAGE> 89
We hereby undertake that for purposes of determining any liability under
the Securities Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by us pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
be deemed to be part of this registration statement as of the time it was
declared effective. We further undertake that for the purpose of determining any
liability under the Securities Act of 1933, as amended, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
II-6
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this Amendment No. 7 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 April 19, 2000.
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 April 19, 2000
- --------------------------------------------------- Officer, and Director
W. Gary Suttle (Principal Executive
Officer)
/s/ JAMES M. THOMSON* Vice President of Finance and April 19, 2000
- --------------------------------------------------- Chief Financial Officer,
James M. Thomson Secretary (Principal
Financial Officer)
/s/ D. LYNN THROWER* Corporate Controller April 19, 2000
- --------------------------------------------------- (Principal Accounting
D. Lynn Thrower Officer)
/s/ JERRY E. GOLDRESS* Director April 19, 2000
- ---------------------------------------------------
Jerry E. Goldress
/s/ TIMOTHY C. BARTOL* Director April 19, 2000
- ---------------------------------------------------
Timothy C. Bartol
/s/ NICHOLAS G. BARTOL* Director April 19, 2000
- ---------------------------------------------------
Nicholas G. Bartol
/s/ RALPH B. GODFREY* Director April 19, 2000
- ---------------------------------------------------
Ralph B. Godfrey
/s/ JOHN P. LLOYD* Director April 19, 2000
- ---------------------------------------------------
John P. Lloyd
*By: /s/ W. GARY SUTTLE
---------------------------------------------
W. Gary Suttle
Attorney-in-fact
</TABLE>
II-7
<PAGE> 91
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+
10.9.1 Amendment to Standard Industrial Commercial Multi-Tenant
Lease -- Gross American Industrial Real Estate Association
Lease, 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+
10.10.1 Amendment to Standard Industrial Lease -- Gross by and
between Cloyce Clark and Rockford Corporation+
10.11 Lease Agreement, and addenda thereto, by and between
Carbonneau Industries, Inc. and Rockford Corporation+
10.11.1 Amendment to Lease Agreement 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+
10.13.1 Amendment No. 1 to Loan and Security Agreement by and
between FINOVA Capital Corporation and Rockford Corporation+
10.13.2 Amendment No. 2 to Loan and Security Agreement by and
between FINOVA Capital Corporation and Rockford Corporation+
10.14 Employee 401(k) Deferred Compensation Plan and amendments
thereto,+
10.15 Manufacturing and Distribution Agreement by and between Path
Group, Inc. and Rockford Corporation**+
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.15.1 Addendum to the Manufacturing and Distribution Agreement by
and between Path Group, Inc. and Rockford Corporation.**+
10.15.2 Addendum to the Manufacturing and Distribution Agreement by
and between Path Group, Inc. and Rockford Corporation**+
10.16 Product Sales Agreement by and between Rockford Corporation
and Avnet Electronics Marketing**+
10.17 Convertible Subordinated Debenture Amendment Agreement and
Agreement to Rename as Senior Notes+
10.18 Form of Senior Note due February 3, 1999 and Warrant+
10.19 Schedule for Senior Notes and Warrants+
10.20 Convertible Subordinated Debenture Purchase Agreement+
10.21 Form of 8.5% Convertible Subordinated Debenture due May 1,
2002+
10.22 Schedule for 8.5% Convertible Subordinated Debentures+
10.23 Warrant issued to the Vrolyk Partnership 97-A to expire June
1, 2007+
10.24 Services and Option Agreement by and between W. Gary Suttle,
Caroline S. Bartol, individually and as representative of
the estate of John G. Bartol and Rockford Corporation+
10.25 Amendment of Services and Option Agreement by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.26 Amendment of Services and Option Contract by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.27 Consulting and Option Contract by and between Rockford
Corporation and Grisanti, Galef & Goldress, Inc.+
10.28 Amendment and Renewal of Consulting and Option Contract by
and between Rockford Corporation and Grisanti, Galef &
Goldress, Inc.+
10.29 Amendment of Consulting and Option Contract by and between
Rockford Corporation and Grisanti, Galef & Goldress, Inc.+
10.30 Letter from Timothy Bartol, General Partner for the Boulder
Investors Partnership exercising rights under Bridge Loan
Conversion and Extension Agreement by and between Rockford
Corporation and Boulder Investors Ltd. Partnership, as
successor to Caroline S. Bartol+
10.31 Fifth Amendment to Bridge Loan Conversion and Extension
Agreement by and between Rockford Corporation and Boulder
Investors Ltd. Partnership, as successor to Caroline S.
Bartol+
10.32 Bridge Loan Conversion and Extension Agreement by and
between Rockford Corporation and Caroline S. Bartol+
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+
10.39 Financing Lease Schedule No. 1000100950 by and between Banc
One Leasing Corporation and Rockford Corporation+
21 List of Subsidiaries of Rockford Corporation+
23.1 Consent of Ernst & Young LLP, Independent Auditors*
23.2 Consent of Consumer Electronics Manufacturers Association
(now known as Consumer Electronics Association)+
23.3 Consent of NPD Intelect Market Tracking+
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
23.4 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 Financial Data Schedule for year ended December 31, 1999+
</TABLE>
- ---------------
* Revised versions of these exhibits, reflecting current information, are being
filed herewith.
** 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
3,350,000 Shares
Common Stock
Par Value $.01 Per Share
UNDERWRITING AGREEMENT
April 19, 2000
Dain Rauscher Incorporated
McDonald Investments Inc.
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 3,350,000 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
850,000 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 502,500
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
Dain Rauscher Incorporated has agreed to reserve up to __________ of
the Shares to be purchased by it under this Agreement for sale to the Company's
directors, officers, employees and business associates and other parties related
to the Company (collectively, "Participants"), as set forth in the Prospectus
under the heading "Underwriting" (the "Directed Share Program"). The Shares to
be sold by Dain Rauscher Incorporated and its affiliates pursuant to the
Directed Share Program are referred to hereinafter as the "Directed Shares." Any
Directed Shares not orally confirmed for purchase by any Participants by the end
of the business day on which this Agreement is executed will be offered to the
public by the Underwriters as set forth in the Prospectus.
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
2
<PAGE> 3
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, 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
3
<PAGE> 4
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,
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
4
<PAGE> 5
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 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
5
<PAGE> 6
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 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,
6
<PAGE> 7
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 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
7
<PAGE> 8
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.
(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
8
<PAGE> 9
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.
(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
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<PAGE> 10
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.
(xxxii) No consent, approval, authorization or order
of, or qualification with, any governmental body or agency, other than those
obtained, is required in connection with the offering of Directed Shares in any
jurisdiction where the Directed Shares are being offered. The Company has not
offered, or caused Dain Rauscher Incorporated or its affiliates to offer, Shares
to any person pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company in order to alter
the customer's or supplier's level or type of business with the Company, or (ii)
a trade journalist or publication to write or publish favorable information
about the Company or its products.
(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
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<PAGE> 11
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 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.
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<PAGE> 12
(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.
(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
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<PAGE> 13
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 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 502,500 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
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<PAGE> 14
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 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
_________, 2000, 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
14
<PAGE> 15
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 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.
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<PAGE> 16
(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
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.
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<PAGE> 17
(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.
(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.
(n) The Company will comply with all applicable laws and
regulations in each jurisdiction in which the Directed Shares are offered in
connection with the Directed Share Program.
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
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<PAGE> 18
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 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
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<PAGE> 19
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 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).
(v) The statements (A) in the Prospectus under the
captions "Business - Legal Proceedings," "Related-Party 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 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
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<PAGE> 20
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.
(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
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<PAGE> 21
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 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
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<PAGE> 22
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.
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,
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<PAGE> 23
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 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).
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<PAGE> 24
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 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
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<PAGE> 25
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 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 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
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<PAGE> 26
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) The Company 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, from and against any and
all losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of material fact contained in any material prepared by
or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program, (ii) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the
Participant has agreed to purchase, or (iii) related to, arising out of, or in
connection with the Directed Share Program, other than losses, claims, damages
or liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith, willful misconduct or gross
negligence of any Underwriter.
(e) 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), (c) or (d) or contribution
provided for in Section 8(f) 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(e) 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), (d) or (f). 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
26
<PAGE> 27
the Representatives and shall be reasonably satisfactory to the Company in the
case of parties indemnified pursuant to Section 8(a), (b) and (d) 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.
(f) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under Section
8(a), (b), (c) or (d) 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(f) 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(f). 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(f) 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(f), 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
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<PAGE> 28
such fraudulent misrepresentation. The Underwriters' obligations in this Section
8(f) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) 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.
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.
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<PAGE> 29
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 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
29
<PAGE> 30
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.
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
McDonald Investments Inc.
Needham & Company, Inc.
As Representatives of the several Underwriters
By Dain Rauscher Incorporated
By: _________________________________
Name: _______________________________
Its: ________________________________
[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................................ _________ _______
McDonald Investments Inc............................. _________ _______
Needham & Company, Inc............................... _________ _______
Total................................................ 3,350,000 502,500
========= =======
</TABLE>
<PAGE> 33
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF MAXIMUM NUMBER
SELLER FIRM SHARES OF OPTION SHARES
------ ----------- ----------------
<S> <C> <C>
Rockford Corporation................................. 2,500,000 502,500
Selling Shareholders: 850,000
Part A
Monument Investors Limited Partnership............... 399,007
Part B
Glenn and Pamela Carrio.............................. 119,174
Kathryn A. Coffey, Trustee and Individually.......... 48,160
Will Hegarty......................................... 64,497
Otto Shill........................................... 54,966
Kevin Campbell....................................... 25,800
Darrell Chapman...................................... 22,678
Vrolyk & Company..................................... 10,750
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.......................................... 3,225
John P. Frank........................................ 6,450
Larry Ulrich......................................... 1,075
Rebecca Paul......................................... 1,505
Brigham P. Herzfeld.................................. 1,530
Andy Szabo........................................... 1,720
Mark Quale........................................... 1,689
John Seaver.......................................... 860
Marion Szabo......................................... 430
The Church of Jesus Christ of Latter-Day Saints...... 16,608
National Ability Center.............................. 833
Enterprise Mentors Int'l.............................. 833
Franklin D. Richards Jr. U. of Utah Athletic
Trust Fund......................................... 833
Deseret International................................ 417
Utah Boys Ranch...................................... 417
Arizona Strip Interpretive Center.................... 208
Choice Humanitarian.................................. 417
--------- -------
Total................................................ 3,350,000 502,500
========= =======
</TABLE>
<PAGE> 35
SCHEDULE C
TO UNDERWRITING AGREEMENT
<TABLE>
<CAPTION>
NUMBER
SHAREHOLDER OF SHARES
- ----------- ---------
<S> <C>
Albers, Mark 27,961
Barnes, Christopher 35,553
Bartol, Nadya 8,600
Bartol, Nick 27,645
Bartol, Renee 4,095
Bartol, Tim 19,864
Batt, Martin 575
Beck, Jean Michel 17,200
Bollinger, Mike 12,900
Boshes, Dave 94,206
Boulder Investors Limited Partnership 602,493
Butterfield, Anne 3,074
Campbell, Kevin 28,380
Carlsness, Brian 34,400
Carter, Jeff 12,900
Carrio Cabling 204,761
Carrio, Glen 8,600
Castrejon, Carlos 25,800
Cave, Jerry 34,400
Church, Gary 34,400
Clifford, Scott 2,580
Collard, Rebecca 8,600
Cooper, Rod 26,250
Crisman, Craig 575
Crouch, Darlene 10,750
Davis, Marvin 575
Dedrick, Sharon 934
Driggs, Gary 19,954
Duffy, Chris 25,800
Earl, Steve 8,600
Fairbourn, Wade 30,100
Ferris, Leslie 45,047
France Trust (by Kathryn Coffey) 95,459
Frank, John P 6,450
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
NUMBER
SHAREHOLDER OF SHARES
- ----------- ---------
<S> <C>
Gitch, Angie 7,752
Goldress Revocable Trust 12,490
Goldress, Jerry 30,100
Grisanti, Galef & Goldress 215,000
GST Trust 31,782
Hammerle, Don 8,062
Harris, Celise 8,600
Harris, Rebecca Paul 3,074
Harris, Wayne 103,301
Hegarty, Jr., William and Patricia 64,497
Henry, Jim 30,100
Herzfeld, Brigham Paul 3,074
Hodson, Victoria 17,246
Hughes, Edward 25,800
Humes, Graham 7,979
Jackson, William 34,650
Janesk, Arthur 8,600
Johnson, Pete 8,600
Kane, Herb 34,400
Katz, Lee 575
Lezman, Randy 21,499
Lieber, Mark 4,300
Lloyd, John 73,100
Lloyd, John & Beverly 2,047
Lloyd, John P & John M 4,095
Lowe, Mark 21,500
MacInnes, Gordon 9,974
May, Rich 21,500
McDonald, Kathy 4,300
McLeod, Dan 86,000
Meyers, Bill 8,600
Monument Investors Limited Partnership 3,154,016
Moore, John 12,900
Moore, Russell 12,900
Moore, Steven 6,450
Moreland, Sylvia 8,600
Mott, Jacque 34,400
Nace, Art 12,900
Nedved, Todd 17,200
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
NUMBER
SHAREHOLDER OF SHARES
- ----------- ---------
<S> <C>
Newton, Dianne 4,300
O'Connor, Carole 575
Olson, Kevin 2,150
Omae, Harry 43,000
Orchard, Debra 8,600
Parvin, Chris 36,447
Pavone, Glenna 537
Puricelli, Rich 575
Quale, Mark 1,689
Reynolds, Don 26,875
Richards, Dave 87,740
Sando, Jim 4,300
Saunders, Dick 575
Seaver, John 860
Shill, Jr., Otto 54,966
Shutters, Shade 2,150
Shutters, Shade & Callie 38,700
Small, Jay 8,600
Springgay, Garry 8,600
Stanley, Larry 8,600
Strickland, Jim 40,850
Suttle Brothers Investments LLC 21,500
Suttle, Gary 124,700
Szabo, Andy 1,720
Thompson, Bob 25,800
Thomson, James 107,604
Thomson, Ruth 4,300
Thrower, Lynn 39,237
Thrower, Lynn & John Pettas 2,150
Thrower, Steven 537
Trapp, Christine 17,988
Trout, Ron 45,130
Trout, Ron & Joni 2,015
Ulrich, Larry 4,515
VAR & Company 153,815
Vrolyk & Co. 21,500
Welch, John 17,200
Wesche, Rob 8,600
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
NUMBER
SHAREHOLDER OF SHARES
- ----------- ---------
<S> <C>
Wilson, James 21,500
Zimmerman, Alan 62,352
</TABLE>
<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 2, 2000, with respect to the financial
statements of Rockford Corporation included in Amendment Number 7 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
April 19, 2000
