<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000
REGISTRATION NO. 333-79285
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
ROCKFORD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
ARIZONA 3651 86-0394353
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
546 SOUTH ROCKFORD DRIVE
TEMPE, ARIZONA 85281
(480) 967-3565 (800) 366-2349
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
W. GARY SUTTLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROCKFORD CORPORATION
546 SOUTH ROCKFORD DRIVE
TEMPE, ARIZONA 85281
(480) 967-3565 (800) 366-2349
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
KEVIN L. OLSON RONALD G. SKLOSS
STEPTOE & JOHNSON LLP BROBECK, PHLEGER & HARRISON LLP
40 N. CENTRAL AVENUE, SUITE 2400 301 CONGRESS AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004 AUSTIN, TEXAS 78701
(602) 257-5275 (512) 477-5495
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for this same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for this same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE PRICE(1) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share....... 3,852,500 $13.00 $50,082,500 $13,922.94
- -------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) 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 FEBRUARY 11, 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 $ and $ 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 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
Certain Relationships and Related Transactions.............. 50
Principal and Selling Shareholders.......................... 52
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 58
Underwriting................................................ 60
Legal Matters............................................... 61
Experts..................................................... 61
Where You Can Find More Information......................... 61
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 quickly 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 over 2000
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.
We believe we have a significant market share in professional amplifiers for
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.................. 9,795,068 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................... 624,110 151,032 775,142
New shareholders.............................. 3,350,000 0 3,350,000
--------- --------- ---------
Total....................................... 7,444,993 2,350,075 9,795,068
========= ========= =========
</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 2,350,075 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;
- 287,444 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 $ per share, our
receipt of the estimated proceeds of that sale after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, and the
application of the net proceeds therefrom. See "Capitalization."
<TABLE>
<CAPTION>
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 $
Total assets......................................... 51,222 51,322
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
</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 81% 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 21.5% 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 10% of our purchases of electronic
components and parts. If Avnet refuses or is unable to continue to supply us, we
would require substantial time to identify an alternative supplier and could
face a shortage of electronic components and parts.
WE MAY BE UNABLE TO RETAIN AND ATTRACT KEY EMPLOYEES, WHICH COULD IMPAIR OUR
BUSINESS.
We operate in highly competitive employment markets and cannot guarantee
our continued success in retaining and attracting the employees we need to
develop, manufacture and market our products and manage our operations. Our
business strategy and operations depend, to a large extent, on our senior
management team, particularly Gary Suttle, our President and Chief Executive
Officer. We do not have key-person life insurance on or employment contracts
with any of our key employees, other than Mr. Suttle. The terms of Mr. Suttle's
employment contract are limited and if Mr. Suttle or other key members of our
management team are unable or unwilling to continue in their present positions,
our ability to develop, introduce and sell our products could be negatively
impacted.
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<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 $ 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
$ . 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 % of the total amount paid to us for our
common
13
<PAGE> 15
stock, 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 $ million, or $ million if the
underwriters' over-allotment option is exercised in full, in each case assuming
an initial public offering price of $ 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
- $ 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.
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<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 $ 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
Retained earnings............................. 8,685 8,685 8,685
Accumulated other comprehensive income........ 338 338 338
------- ------- -------
Total shareholders' equity................. 12,757 13,134
------- ------- -------
Total capitalization.................. $30,099 $30,199 $
======= ======= =======
</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 $ million, or $ 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 $ 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 $
per share to existing shareholders and an immediate dilution of $ per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
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.......................
-----
Pro forma net tangible book value after this offering.......
-------
Pro forma dilution per share to new investors............... $
=======
</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 % $0.75
New investors..................... 2,500,000 33.6 $
--------- ----- ---------- -----
Total................... 7,444,993 100.0% $ 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>
20
<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 21.5% 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............................................... $64,252 $70,016 $105,482
Other Americas.............................................. 7,005 4,905 5,294
Europe...................................................... 7,819 6,599 7,337
Asia........................................................ 8,347 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 $26.6 million, or 21.5%, of our sales for 1999. In addition, sales to car
audio specialty dealers increased by $4.7 million, or 8.3%, to $61.4 million for
1999 from $56.7 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 $5.8 million, or 9.0%,
to $70.0 million for 1998 from $64.3 million for 1997 due to market acceptance
by our dealers of our newly redesigned speakers. International sales decreased
by $5.6 million, or 24.2%, to $17.6 million for 1998 from $23.2 million for
1997, primarily due to economic instability in Latin America and Asia and
weakness in business conditions in Europe.
Cost of Goods Sold. Cost of goods sold decreased by $2.2 million, or 3.8%,
to $55.1 million for 1998 from $57.3 million for 1997. Cost of goods sold as a
percent of sales decreased to 63.0% for 1998 from 65.6% for 1997. The primary
reasons for the decrease as a percent of sales included the launch of our raw
material global sourcing strategy, leveraging of fixed overhead due to increased
production volume as we prepared for initial shipments to Best Buy and shifting
of sales away from lower margin source units.
Sales and Marketing Expenses. Sales and marketing expenses increased by
$0.3 million, or 2.0%, to $14.8 million for 1998 from $14.5 million for 1997.
The increase 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 26.5% of our sales in the three
months ended March 31, 1999, 19.1% in the three months ended June 30, 1999,
15.1% in the three months ended September 30, 1999 and 25.9% 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.
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<PAGE> 29
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 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.
28
<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 quickly 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.
29
<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
significantly increased consumer demand. We believe that further improvements in
technology, such as high definition television, and increasing consumer
awareness are likely to result in further growth in the home theater market.
30
<PAGE> 32
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 quickly deliver innovative products to market 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 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;
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<PAGE> 33
- 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 adding 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
leading 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 currently have a significant
market share in the market for professional amplifiers in recording studios, a
small but demanding 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.
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<PAGE> 34
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.................................................. 49.3% 49.9% 45.2%
Speakers.................................................... 30.1 32.5 35.5
Accessories................................................. 7.1 7.7 12.3
Others(1)................................................... 13.5 9.9 7.0
----- ----- -----
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.
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;
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<PAGE> 35
- 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 eliminate the need for an
accessory switch and play a video player, DVD player or
video game system through the unit;
- 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.
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
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<PAGE> 36
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 project
development and who coordinate their efforts with:
- our sales group to identify features consistent with market requirements
and our brand image;
- our manufacturing staff to develop and build products more efficiently;
- our product support staff to identify weaknesses in our existing products
and to help re-design them; and
- our customers -- both at the retailer and consumer level -- to help us
better understand their needs and preferences and incorporate them into
our products.
As a result of these efforts, we have reduced product development
time-to-market from up to 24 months to an average of six to nine months. 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 over 2,000
independent retail stores through 27 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. 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'
concerns with purchasing a home theater system without hearing it, by
establishing a strong
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<PAGE> 39
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, 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.
Since 1998, we 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
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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.
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
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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 July 15, 2001
Manufacturing, research and
development, purchasing and
administration............... Grand Rapids, 81,000 246,000 March 31, 2001
Michigan
Warehousing and sales.......... Japan 6,400 135,000 April 30, 2011
Warehousing.................... Singapore 10,000 145,000 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. We believe that IET's allegations are
without merit. IET has not initiated any legal proceedings relating to this
claim and has not communicated with us about it since September 1998.
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 has not yet been served, although a courtesy copy
was provided to us. 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 and we 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 December 31, 1999, 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)....................... 59 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, since 1997, has served as Director of Applications Development.
Mr. Bartol holds a B.A. from Stanford University, and an M.B.A. and M.S./M.I.S.
from Boston University. Mr. Bartol is the brother of Nicholas G. Bartol.
Ralph B. Godfrey has served as a director since April 1999. Mr. Godfrey has
been employed since 1990 by 3Com, a publicly held manufacturer of computer
networking products. He has held various sales positions including Senior Vice
President of Americas Sales. He is currently managing 3Com's electronic business
operations as Senior Vice President of E-Business. Mr. Godfrey holds a B.S.E.E.
and an M.S. in Electrical Engineering from Auburn University.
John P. Lloyd has served as a director since 1988. Mr. Lloyd has worked
since 1994 as a Managing Director in the Investment Management Group of Aetna.
Mr. Lloyd is a Chartered Financial Analyst and has a B.S. in Finance from
Villanova University and an M.B.A. in Investments from Drexel University.
COMMITTEES OF THE BOARD OF DIRECTORS
The executive committee of the board of directors meets periodically to
advise upon and approve Rockford's business and affairs that may arise between
the regularly scheduled board meetings. The current members of the executive
committee are Messrs. Goldress (Chair), T. Bartol and Suttle.
The nominating and compensation committee of the board of directors
recommends officers and directors to the board of directors and reviews and
approves the amount and type of compensation
44
<PAGE> 46
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 "Certain Relationships and Related
Transactions -- Suttle Employment Agreement" for a description of Mr. Suttle's
employment agreement. We maintain a $1.0 million key-person life insurance
policy on Mr. Suttle. 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 a offering period, and we will repay their
payroll deductions as of the date they stop participating. Participation ends
automatically upon termination of employment with us.
Rights granted under the plan are generally not transferable by an employee
other than by will or the laws of descent and distribution. In the event that we
merge with or into another corporation and we are not the surviving corporation
or sell substantially all of our assets, each outstanding right under the plan
will be automatically exercised to the extent of existing payroll deductions as
of the effective date of the merger or asset sale.
The board of directors has the authority to terminate or amend the plan,
however, the shareholders must approve any amendment that will increase the
total number of shares for which rights may be granted. The shareholders must
also approve any amendment that is required by reason of section 423 of the
Internal Revenue Code. The plan will terminate automatically ten years from its
effective date unless it is terminated sooner by the board.
49
<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GRISANTI, GALEF & GOLDRESS CONSULTING AGREEMENT
We initially retained Grisanti, Galef & Goldress to provide Mr. Suttle's
consulting services to us under a February 1992 letter agreement. Effective on
August 1, 1992, we named Mr. Suttle our President and Chief Executive Officer
and entered into a consulting agreement with Grisanti, Galef & Goldress. Under
the consulting agreement, we retained Grisanti, Galef & Goldress to provide
services for three years beginning on August 1, 1992. We agreed to pay
consulting fees of $360,000 per year and bonus fees of up to $120,000 per year.
In addition, we granted Grisanti, Galef & Goldress an option to purchase up to
215,000 shares of our common stock at an exercise price of $5.35 per share. In
October 1994, we agreed to reduce the exercise price of the option to $1.51 per
share.
We renewed our agreement with Grisanti, Galef & Goldress effective as of
August 1, 1995, extending the term for five more years. We agreed to continue
paying consulting fees of $360,000 per year and bonus fees up to $120,000 per
year. We paid bonus fees of $120,000 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 twelve 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 *
Franklin Richards..................... 20,566 * 20,566 0 *
Scott and Kathy Carter................ 20,329 * 20,329 0 *
Dennis Blackhurst..................... 13,953 * 13,953 0 *
David Nettleton....................... 10,279 * 10,279 0 *
Gordon MacInnes....................... 9,974 * 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 P. Harris..................... 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 *
Marion Szabo.......................... 430 * 430 0 *
</TABLE>
- ---------------
* Represents less than 1%.
(1) Includes 3,154,016 shares held by Monument Investors Limited Partnership,
for which Mr. Bartol serves as general partner; 602,493 shares held by
Boulder Investors Limited Partnership, for which Mr. Bartol serves as
general partner; 31,782 shares held by GST Exempt Trust, a trust in which
Mr. Bartol has a beneficial interest; 15,971 shares underlying convertible
debentures; 4,095 shares underlying convertible debentures held by Mr.
Bartol's wife; and 8,600 shares underlying options. Mr. Bartol disclaims
beneficial ownership of the shares held by his wife. Mr. Bartol's address
is 353 Pampa Drive, Pagosa Springs, Colorado 81147.
(2) Includes 3,154,016 shares held by Monument Investors Limited Partnership,
for which Mr. Bartol serves as general partner; 602,493 shares held by
Boulder Investors Limited Partnership, for which Mr. Bartol serves as
general partner; 31,782 shares held by GST Exempt Trust, a trust in which
Mr. Bartol has a beneficial interest; 11,264 shares underlying convertible
debentures; 6,450 shares underlying options held by Mr. Bartol; and 6,450
shares underlying options held by Mr. Bartol's wife. Mr. Bartol disclaims
beneficial ownership of the shares held by his wife. Mr. Bartol's address
is 9200 Willow Pond Lane, Potomac, Maryland 20854.
(3) Monument Investors Limited Partnership's address is c/o Mr. T. Bartol, 9200
Willow Pond Lane, Potomac, Maryland 20854. It is controlled by Mr. T.
Bartol, Mr. N. Bartol, Pamela Carrio and Ann Farr Butterfield, the four
natural children of John and Caroline Bartol.
(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
53
<PAGE> 55
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.
54
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
As at June 28, 1999, we increased our authorized capital stock to
40,000,000 shares of common stock, $.01 par value per share. The following
summary is qualified in its entirety by reference to our articles of
incorporation and bylaws, copies of which are filed as exhibits to the
registration statement of which this prospectus is a part.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders, except for the election of
directors. The holders of common stock have cumulative voting rights with
respect to the election of directors and, as a result, minority shareholders may
be able to elect directors on the basis of their votes alone. Holders of common
stock are entitled to receive pro rata dividends as may be declared by the board
of directors out of funds legally available as dividends. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share pro rata in all assets remaining after payment of liabilities. Holders of
our common stock have no preemptive, conversion or other rights to subscribe for
additional securities. There are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of the offering
will be, validly issued, fully paid and nonassessable.
As at December 31, 1999, adjusted for the issuance of 67,488 shares after
December 31, 1999, upon exercise of warrants 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 287,444 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.
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 401,053
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.
55
<PAGE> 57
The holders of approximately 401,053 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 eleven directors.
Directors are elected at the annual shareholders meeting, with each director
holding office until his or her successor is elected. Our directors are not
classified and are elected annually. Our articles of incorporation require that:
- two-thirds of our board of directors approve any increase in the size of
our board of directors;
- the shareholders may remove a director only for cause; and
- only the board of directors may fill a vacancy on the board of directors.
These requirements may restrict the ability of a hostile bidder to gain control
of our board of directors by limiting the bidder's right to add new directors or
replace existing directors.
Our bylaws provide that special meetings of shareholders may be called only
by our President or a majority of the board of directors. Shareholders may not
call shareholders meetings and, under Arizona law, may act by written consent in
lieu of a meeting only if all shareholders sign the consent. Our bylaws require
that shareholders who wish to place an item on the agenda for a shareholders
meeting, or who wish to nominate a person for election as a director, must give
at least 30 days notice of the proposed agenda item or name of the person
nominated. Together, these restrictions may limit proxy contests seeking to
control us by:
- limiting shareholders' ability to call a special shareholders meeting;
- making shareholder action by written consent impossible as a practical
matter; and
- giving the board of directors advance notice of hostile annual meeting
proposals.
56
<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.
57
<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 3,726,025
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>
3,718,968 Date of this prospectus - Freely tradeable shares sold in
this offering; and
- Shares saleable under Rule 144(k)
that are not subject to the 180-day
lock-up
0 Filing of a registration statement on Option shares that are not subject to
Form S-8 to register for resale the 180-day lock-up
shares issued upon exercise of stock
options
0 90 days from the date of this Shares saleable under Rule 144 that
prospectus are not subject to the 180-day
lock-up or eligible for sale under
Rule 701
6,076,100 180 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>
58
<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 to any national securities exchange on which such securities are
traded. The Form 144 shall be signed by the person for whose account the
securities are to be sold and shall be transmitted for filing concurrently with
either the placing with a broker of an order to execute a sale of securities in
reliance on Rule 144 or the execution directly with a market maker of such a
sale. Neither the filing of such notice nor the failure of the Commission to
comment thereon shall be deemed to preclude the Commission from taking any
action it deems necessary or appropriate with respect to the sale of the
securities referred to in such notice. The owner may make sales only if current
public information is available about us.
If the restricted shares were purchased from us (or any affiliate of ours)
more than two years ago, then their owner may sell them under Rule 144(k)
without regard to the volume limitations or manner of sale, public information
or notice of sale requirements of Rule 144. This does not apply if the owner was
an affiliate of ours at any time during the 90 days before the sale.
STOCK OPTION RESTRICTIONS
Under Rule 701 under the Securities Act of 1933 persons who purchase shares
from us upon exercise of options granted before the date of this prospectus may
sell their shares in the public markets beginning 90 days after the date of this
prospectus. They make the sales in reliance on Rule 144 without having to comply
with its holding period requirements and, if they are not affiliates, without
having to comply with the rule's volume limitations, public information and
notice of sale requirements.
We intend to file one or more registration statements under the Securities
Act of 1933, covering the shares of common stock reserved for issuance under our
1994 and 1997 stock option plans. We plan this filing within 90 days after the
date of this prospectus. The registration statements will become effective upon
filing, thus permitting the resale of option shares in the public markets,
without restriction under the Securities Act of 1933 other than the limitations
applicable to affiliates or the 180-day lock ups described above.
See "Description of Capital Stock -- Registration Rights" for a description
of registration rights with respect to our common stock.
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<PAGE> 61
UNDERWRITING
The underwriters named below, acting through their representatives, Dain
Rauscher Incorporated and Needham & Company, Inc., have agreed, as described in
the underwriting agreement, to purchase from us and the selling shareholders the
number of shares of common stock listed opposite their names below. The
underwriting agreement describes the conditions on which the underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Dain Rauscher Incorporated..................................
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........................... $ $ $
By the selling shareholders....................... $ $ $
</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 without the prior written consent of the underwriters. This 180-day
period is known as the lock-up
60
<PAGE> 62
period. The representatives may, without notice and in their sole discretion,
allow any officer or director to dispose of common stock or other securities
prior to the expiration of the lock-up period. There are, however, currently no
agreements between the underwriters and any of our officers or directors
allowing any sale.
In addition, we have agreed that we will not issue, sell, offer to sell, or
otherwise dispose of any shares of our common stock or other securities during
the lock-up period without the prior consent of the underwriters. This agreement
does not include shares of common stock or other securities issued pursuant to
employee stock option plans, employee stock purchase plans, or common stock or
other securities outstanding on the date of this prospectus. However, we have
agreed that employee stock options issued during the lock-up period to our
officers and directors may not be exercised prior to the expiration of the
lock-up period. Any shares of common stock issued to our officers and directors
during the lock-up period pursuant to the exercise of stock options or other
securities outstanding on the date of this prospectus shall bear a restrictive
legend restricting the transfer of those shares during the lock-up period.
The underwriters have advised us that in connection with this offering,
some persons participating in this offering may engage in transactions that may
have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market.
These transactions may include stabilizing bids, syndicate covering transactions
and the imposition of penalty bids. A "stabilizing bid" is a bid for or the
purchase of common stock on behalf of the underwriters for the purpose of
preventing or retarding a decline in the market price of the common stock. A
"syndicate covering transaction" is the bid for or the purchase of the common
stock on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that these transactions may be affected on
the Nasdaq SmallCap Market, Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
Needham & Company, Inc. rendered financial advisory services to us during
January 2000 in connection with a proposed acquisition and received a customary
fee 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
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<PAGE> 63
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 21.5 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...................................... $64,252 $70,016 $105,482
Export:
Other Americas.................................. 7,005 4,905 5,294
Europe.......................................... 7,819 6,599 7,337
Asia............................................ 8,347 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 21.5 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]
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.
We believe Hafler is the brand of choice among these working 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 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 7 of the underwriting agreement to be filed as
an exhibit to the registration statement, indemnifying our officers and
directors against certain liabilities.
II-1
<PAGE> 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+
10.10 Standard Industrial Lease -- Gross, and amendments and
addendum thereto, by and between Cloyce Clark and Rockford
Corporation+
10.11 Lease Agreement, and addenda thereto, by and between
Carbonneau Industries, Inc. and Rockford Corporation+
10.12 Master Lease Agreement and amendments thereto, by and
between Banc One Leasing Corporation and Rockford
Corporation+
10.13 Loan and Security Agreement by and between Rockford
Corporation and FINOVA Capital Corporation+
10.14 Employee 401(k) Deferred Compensation Plan and amendments
thereto,+
10.15 Manufacturing and Distribution Agreement by and between Path
Group, Inc. and Rockford Corporation**+
10.15.1 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+
</TABLE>
II-3
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.25 Amendment of Services and Option Agreement by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.26 Amendment of Services and Option Contract by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.27 Consulting and Option Contract by and between Rockford
Corporation and Grisanti, Galef & Goldress, Inc.+
10.28 Amendment and Renewal of Consulting and Option Contract by
and between Rockford Corporation and Grisanti, Galef &
Goldress, Inc.+
10.29 Amendment of Consulting and Option Contract by and between
Rockford Corporation and Grisanti, Galef & Goldress, Inc.+
10.30 Letter from Timothy Bartol, General Partner for the Boulder
Investors Partnership exercising rights under Bridge Loan
Conversion and Extension Agreement by and between Rockford
Corporation and Boulder Investors Ltd. Partnership, as
successor to Caroline S. Bartol+
10.31 Fifth Amendment to Bridge Loan Conversion and Extension
Agreement by and between Rockford Corporation and Boulder
Investors Ltd. Partnership, as successor to Caroline S.
Bartol+
10.32 Bridge Loan Conversion and Extension Agreement by and
between Rockford Corporation and Caroline S. Bartol+
10.33 Bridge Loan Agreement by and between Rockford Corporation
and Caroline S. Bartol+
10.34 1990 Restricted Stock Grant and Tax Loan Agreement and
Promissory Note+
10.35 Form of Indemnification Agreement+
10.35.1 Schedule for Indemnification Agreement+
10.36 FINOVA -- Schedule of Loan and Security Agreement+
10.37 Consent of Consumer Electronics Manufacturers Association+
10.38 Consent of NPD Intelect Market Tracking
21 List of Subsidiaries of Rockford Corporation+
23.1 Consent of Ernst & Young LLP, Independent Auditors*
23.2 Consent of Steptoe & Johnson LLP (included as part of
Exhibit 5)+
24 Power of Attorney. Reference is made to the signature page
of this registration statement which includes the power of
attorney+
27 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
II-4
<PAGE> 88
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.
We hereby undertake that for purposes of determining any liability under
the Securities Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by us pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
be deemed to be part of this registration statement as of the time it was
declared effective. We further undertake that for the purpose of determining any
liability under the Securities Act of 1933, as amended, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
II-5
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this Amendment No. 5 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 February 11, 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 February 11, 2000
- --------------------------------------------------- Officer, and Director
W. Gary Suttle (Principal Executive
Officer)
/s/ JAMES M. THOMSON* Vice President of Finance and February 11, 2000
- --------------------------------------------------- Chief Financial Officer,
James M. Thomson Secretary (Principal
Financial Officer)
/s/ D. LYNN THROWER* Corporate Controller February 11, 2000
- --------------------------------------------------- (Principal Accounting
D. Lynn Thrower Officer)
/s/ JERRY E. GOLDRESS* Director February 11, 2000
- ---------------------------------------------------
Jerry E. Goldress
/s/ TIMOTHY C. BARTOL* Director February 11, 2000
- ---------------------------------------------------
Timothy C. Bartol
/s/ NICHOLAS G. BARTOL* Director February 11, 2000
- ---------------------------------------------------
Nicholas G. Bartol
/s/ RALPH B. GODFREY* Director February 11, 2000
- ---------------------------------------------------
Ralph B. Godfrey
/s/ JOHN P. LLOYD* Director February 11, 2000
- ---------------------------------------------------
John P. Lloyd
*By: /s/ W. GARY SUTTLE
---------------------------------------------
W. Gary Suttle
Attorney-in-fact
</TABLE>
II-6
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1 Form of Underwriting Agreement+
3.1 Articles of Incorporation+
3.2 Restated Bylaws+
3.3 Amendment to Articles of Incorporation filed on January 12,
1988+
3.4 Amendment to Articles of Incorporation filed on May 12,
1999+
3.5 Amendment to Articles of Incorporation filed on May 17,
1999+
3.6 Amendments to Bylaws adopted by the board of directors on
May 14, 1999+
3.7 Amendment to Articles of Incorporation filed on July 1,
1999+
4.1 Specimen Common Stock Certificate+
4.2 Reference is made to the Articles of Incorporation, as
amended, and the Restated Bylaws, as amended, filed as
Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 for a description
of the rights of the holders of Common Stock.
5 Opinion of Steptoe & Johnson LLP+
10.1 1994 Stock Option Plan+
10.2 1997 Stock Option Plan+
10.3 1999 Employee Stock Purchase Plan as amended and restated+
10.4 Employment Agreement by and between Rockford Corporation and
W. Gary Suttle+
10.5 Indemnity Agreement by and between Rockford Corporation and
W. Gary Suttle+
10.6 Letter Agreement by and between Rockford Corporation and
Best Buy Corporation**+
10.7 Joint Development and Supply Agreement by and between
Rockford Corporation and Hyundai Electronics Industries Co.,
Ltd.**+
10.8 Form of Dealership Agreements+
10.9 Standard Industrial Commercial Multi-Tenant Lease -- Gross
American Industrial Real Estate Association Lease, and
amendments and addendum thereto, by and between Rockford
River LLC and Rockford Corporation+
10.10 Standard Industrial Lease -- Gross, and amendments and
addendum thereto, by and between Cloyce Clark and Rockford
Corporation+
10.11 Lease Agreement, and addenda thereto, by and between
Carbonneau Industries, Inc. and Rockford Corporation+
10.12 Master Lease Agreement and amendments thereto, by and
between Banc One Leasing Corporation and Rockford
Corporation+
10.13 Loan and Security Agreement by and between Rockford
Corporation and FINOVA Capital Corporation+
10.14 Employee 401(k) Deferred Compensation Plan and amendments
thereto,+
10.15 Manufacturing and Distribution Agreement by and between Path
Group, Inc. and Rockford Corporation**+
10.15.1 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+
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.24 Services and Option Agreement by and between W. Gary Suttle,
Caroline S. Bartol, individually and as representative of
the estate of John G. Bartol and Rockford Corporation+
10.25 Amendment of Services and Option Agreement by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.26 Amendment of Services and Option Contract by and between W.
Gary Suttle, Monument Investors Limited Partnership as
successor to Caroline S. Bartol and the estate of John G.
Bartol and Rockford Corporation+
10.27 Consulting and Option Contract by and between Rockford
Corporation and Grisanti, Galef & Goldress, Inc.+
10.28 Amendment and Renewal of Consulting and Option Contract by
and between Rockford Corporation and Grisanti, Galef &
Goldress, Inc.+
10.29 Amendment of Consulting and Option Contract by and between
Rockford Corporation and Grisanti, Galef & Goldress, Inc.+
10.30 Letter from Timothy Bartol, General Partner for the Boulder
Investors Partnership exercising rights under Bridge Loan
Conversion and Extension Agreement by and between Rockford
Corporation and Boulder Investors Ltd. Partnership, as
successor to Caroline S. Bartol+
10.31 Fifth Amendment to Bridge Loan Conversion and Extension
Agreement by and between Rockford Corporation and Boulder
Investors Ltd. Partnership, as successor to Caroline S.
Bartol+
10.32 Bridge Loan Conversion and Extension Agreement by and
between Rockford Corporation and Caroline S. Bartol+
10.33 Bridge Loan Agreement by and between Rockford Corporation
and Caroline S. Bartol+
10.34 1990 Restricted Stock Grant and Tax Loan Agreement and
Promissory Note+
10.35 Form of Indemnification Agreement+
10.35.1 Schedule for Indemnification Agreement+
10.36 FINOVA -- Schedule of Loan and Security Agreement+
10.37 Consent of Consumer Electronics Manufacturers Association+
10.38 Consent of NPD Intelect Market Tracking
21 List of Subsidiaries of Rockford Corporation+
23.1 Consent of Ernst & Young LLP, Independent Auditors*
23.2 Consent of Steptoe & Johnson LLP (included as part of
Exhibit 5)+
24 Power of Attorney. Reference is made to the signature page
of this registration statement which includes the power of
attorney+
27 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 10.15.1
ADDENDUM TO
MANUFACTURING AND DISTRIBUTION AGREEMENT
This Addendum to the Manufacturing and Distribution Agreement
("Agreement") between Rockford Corporation ("Rockford") and Path Group Inc.
("Path Group") dated June 11, 1998, which was effective on July 1, 1998. The
effective date of this Addendum shall be 30th day of July, 1999, and shall
continue in effect through the last day of the term of the Agreement.
1. TRANSITION PERIOD. Rockford and Path Group shall cooperate in
good faith to accomplish a transition of the operation of the
accessory business from Path Group to Rockford or Rockford's
designee commencing February 1, 2001 and ending on the
termination date of the Agreement, July 31, 2001. Starting on
February 1, 2001 and through the end of the term of the
Agreement Path will notify Rockford of the quantities of
product Path intends to purchase from its vendors and Rockford
will have three working days to give written notice of
disapproval of the quantities to Path Group. In exercising its
right to approve quantities of product ordered by Path,
Rockford undertakes not to interfere with Path's obligations
to meet reasonable demand for the products as set forth in the
Agreement. Beginning 60 days before the termination date, Path
undertakes to cooperate with Rockford to facilitate a smooth
hand-over of Path's Connecting Punch inventory ordering
process including providing product and vendor details so that
Rockford can prepare for direct ordering of Connecting Punch
products for delivery after the termination date.
2. RIGHT TO ACQUIRE COMPETING BUSINESS. Each party agrees to
waive its right to prohibit the other party from acquiring and
operating competing companies subject to the limitations set
forth in Section 3 below. Rockford contends that the Agreement
does not prohibit its acquisition of Lightning Audio as a
wholly owned subsidiary, while Path Group contends that the
acquisition of Lightning Audio by Rockford constitutes a
breach of the Agreement. However, in the spirit of cooperation
and compromise and without either party conceding the position
of the other party, Path Group agrees that Rockford may
acquire Lightning Audio as a wholly owned subsidiary without
such acquisition being a breach of the Agreement or the
Addendum.
3. ROCKFORD'S RELATIONSHIP WITH LIGHTNING AUDIO. Through the end
of the term of the Agreement, Rockford shall not allow
Lightning Audio accessories to be sold by the same
manufacturers' representatives or distributors who are selling
Rockford Products, provided, however, that Rockford and
Lightning Audio may continue to do business with
manufacturers' representatives and distributors who, at the
time of the acquisition of Lightning Audio by Rockford, are
doing business with both entities. Rockford shall maintain
entirely separate sales management groups for the Lightning
Audio accessories and Rockford Products. Path Group
acknowledges that Rockford may provide "back office" services,
such as warehousing and order processing, to Lightning Audio
under contract and without violation of the Agreement. Any
sales of Lightning Audio accessories to Best Buy through the
end of the term of the Agreement shall result in Rockford
paying a (*) commission to Path Group on such sales but only
in quarters when sales of Connecting Punch Accessories in any
quarter are less than the forecast sales for that quarter as
shown on the attached Exhibit 1. To the extent Rockford's
sales of amps and speakers to Best Buy are reduced, so that a
reduction in Connecting Punch sales to Best Buy are related to
a general decline in sales rather than to cannibalisation by
Lightning Audio sales, Path Group and Rockford will meet and
negotiate in good faith an adjustment to the forecast sales
shown on the attached Exhibit 1 to reflect the general decline
in sales. The commission will be paid by the 14th day of the
quarter following the quarter of sales. Rockford shall provide
a quarterly sales report identifying the sales of each product
sold by Lightning Audio to Best Buy.
(*) CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL MATERIAL HAS BEEN REDACTED
AND FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 2
4. INCENTIVE PROGRAMS. Rockford shall not eliminate or reduce the
level of incentives now in place for manufacturers'
representatives, dealers, and distributors of Connecting Punch
product in a manner that is different from any changes it
makes to the level of incentives offered for other
Rockford-Fosgate car audio products.
5. MARKETING AND SALES STRATEGIES. Rockford shall not reduce its
sales targets for the Connecting Punch line during the term of
the Agreement except on a basis consistent with changes in
sales target for other Rockford products.
6. DISPOSITION OF INVENTORY AT TERMINATION OF AGREEMENT. With the
exception of end of life items referenced in the Agreement and
in this Addendum, Rockford shall purchase all of Path Group's
current inventory that is on hand on July 31, 2001, or any
earlier termination date, up to a 180 day supply of Rockford
accessory inventory items. For the purposes of determining 180
days of inventory supply, the valuation will not be determined
by line of product but shall be determined by total dollar
value up to an amount equal to one half of the cost of gross
sales made in the previous twelve month period. Rockford shall
not have any obligation to purchase inventory ordered after
February 1, 2001, without its approval under section 1.
7. PAYMENT FOR INVENTORY BY ROCKFORD. Rockford shall pay Path
Group the landed cost for Path Group's inventory repurchased
under section 6 at the end of the term of the agreement or at
any earlier termination date, excluding end of life items.
Landed costs shall be defined as cost of product from the
vendor plus shipping charges, duty and any other reasonable
handling charges. Landed costs exclude amounts payable to Path
Group affiliates in excess of the amounts that an unaffiliated
third party would charge for the same services. The term
"Inventory" shall include items stored in Path and Rockford's
warehouse facilities by Path Group. Payment in full shall be
made within 7 days of the termination date.
8. OTHER INVENTORY. Rockford shall assist Path Group in good
faith to sell inventory that it does not purchase under
paragraph 7 including any end of life items. For current end
of life items, Rockford shall assist to make sales between the
date of this Addendum and the end of the term of the
Agreement. In addition to purchasing current inventory on
hand, Rockford shall also purchase all goods ordered by Path
from suppliers that are in transit or are otherwise
non-cancelable commitments at the valuation method and on the
terms set out in section 7. Rockford shall not have any
obligations to purchase inventory ordered after February 1,
2001, unless Rockford had approved the purchase of such
inventory under section 1.
9. CAPACITORS. Path Group has previously purchased stiffening
capacitors from Lightning Audio and has re-sold them to
Rockford. Path Group consents to Rockford's purchase of
stiffening capacitors directly from Lightning Audio and resale
under the "Connecting Punch" name. In consideration of this
consent:
(A) Rockford shall pay Path Group a (*) commission on
Rockford's sales of stiffening capacitors and
Capacitor Kits purchased from Lightning Audio. This
commission will be computed and paid based on
Rockford's net invoice sales of such capacitors to
Best Buy and International Distributors. With all
other customers, including US Domestic dealers, the
commission will computed and based upon the US Dealer
Price Sheet through the termination of the Agreement.
The commission will be paid by the 14th of the month
following the month of sale. Rockford shall provide a
monthly sales report identifying the sales of
capacitors and capacitor kits.
(B) All components required to assemble capacitor kits
(excluding capacitors) will continue to be supplied
to Rockford by Path Group.
(*) CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
<PAGE> 3
(C) Rockford will purchase Path Group's current inventory
of the capacitors and Capacitor Kits as of the date
of this Addendum at landed costs. Current inventory
is inventory on Rockford's current price sheets at
the time of the purchase and includes all inventory
on hand and in transit or ordered and non-cancelable
from Path's vendors.
Payment in full shall be made within 7 days.
10. DELETING PRODUCTS FROM PRICE LIST. Mutual agreement of the
Parties shall be required before products are deleted from the
price list.
11. ADDING PRODUCTS TO PRICE LIST. In accordance with its
obligations under the current Agreement, Path Group will
consult with Rockford and secure Rockford's approval before
adding new product to the price list which Path Group
determines will enhance the Connecting Punch line. Rockford
will not unreasonably withhold its approval of new product
proposed by Path. Any new Products added after the date of
this Addendum will be exclusive under the terms of the
Agreement.
12. CONSOLIDATION OF SHIPMENTS. Rockford shall not consolidate
shipments of any Lightning Audio accessories with any
Rockford-Fosgate, Punch, or Connecting Punch branded product.
13. INJUNCTIVE RELIEF. Either party shall be entitled to sue for
damages and/or to seek injunctive relief as a remedy for an
uncured breach of this Addendum by the other party.
14. CONTINUATION OF AGREEMENT. Except as amended in this Addendum,
the Agreement continues in full force and effect and both
parties retain their rights and obligations under the
Agreement.
15. COVENANT OF GOOD FAITH AND FAIR DEALING. The parties agree to
go forward with their performance of the Agreement and this
Addendum in good faith and agree to deal fairly with the other
Party so that each Party receives the benefits of their
bargain under these agreements.
ROCKFORD CORPORATION
By /s/ W. Gary Suttle
-------------------------------
Its President and CEO
---------------------
PATH GROUP INC.
By
-------------------------------
Its
---------------------
<PAGE> 1
Rockford Corporation Warrant Ownership Exhibit 10.19
As of February
<TABLE>
<CAPTION>
Initial Maximum
Senior Note Number of
Warrant Holder Principal Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Vrolyk Partnership 97-A 3.45 10,750
</TABLE>
<PAGE> 1
Exhibit 10.22
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Debenture Holder Amount On Conversion
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.5% Debentures:
Carrio Cabling Corporation $500,000 204,761
Nicholas G. Bartol $7,507.50 3,074
Timothy C. Bartol $7,507.50 3,074
Ann Farr Bartol $7,507.50 3,074
Pamela B. Carrio $7,507.50 3,074
Mary Brigham Paul $7,507.50 3,074
Rebecca Paul Harris $7,507.50 3,074
Timothy C. Bartol $20,000.00 8,190
Nick G. Bartol $39,000.00 15,971
Renee F. Bartol $10,000.00 4,095
The J. Goldress Trust, $20,000.00 8,190
Jerry E. Goldress, Trustee
Suttle Brothers Investments LLC $21,000.00 8,600
Suttle Brothers Investments LLC $31,500.00 12,900
</TABLE>
<PAGE> 2
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Debenture Holder Amount On Conversion
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lee Katz $1,406.25 575
Richard J. Puricelli $1,406.25 575
Carole O'Connor $1,406.25 575
Richard D. Saunders $1,406.25 575
Craig D. Crisman $1,406.25 575
Marvin A. Davis $1,406.25 575
Brian R. Stone $1,406.25 575
Martin M. Batt $1,406.25 575
Ronald N. Trout & $4,922.00 2,015
Jonie Schuster Trout, Community Property
The Principal Financial Group $10,000.00 4,095
IRA, Ronald N. Trout, Owner
The Principal Financial Group $15,755.00 6,452
IRA, Alan R. Zimmerman, Owner
Christopher D. Barnes $2,817.00 1,153
</TABLE>
<PAGE> 3
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Debenture Holder Amount On Conversion
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Principal Financial Group $3,521.00 1,441
(401K) William E. Turner, Jr., Owner
The Principal Financial Group $11,056.00 4,527
IRA, Angie Gitch, Owner
The Principal Financial Group $5,000.00 2,047
IRA, H. Christopher Parvin, Owner
Wayne Harris $82,068.86 33.609
The Principal Financial Group $17,931.14 7,343
IRA, Wayne Harris, Owner
Christine Trapp $704.00 288
</TABLE>
<PAGE> 4
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Debenture Holder Amount On Conversion
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Matthew Clonts $1,760.00 720
The Principal Financial Group $5,000.00 2,047
IRA, Leslie K. Ferris, Owner
Mark Albers $1,760.00 720
The Principal Financial Group $3,520.00 1,441
IRA, Mark Albers, Owner
The Principal Financial Group $50,000.00 20,476
IRA - James M. Thomson
The Principal Financial Group $7,042.00 2,883
IRA, - David Boshes, Owner
The Principal Financial Group $13,000.00 5,323
IRA - David Boshes, Owner
The Principal Financial Group $114.00 47
IRA, Victoria L. Hodson, Owner
The Principal Financial Group $4,250.39 1,740
IRA, David Richards, Owner
Var & Co., $23,606.00 9,667
First Trust National Association
Graham Humes $1,225.00 501
Gordon A. Jr. & Blair B. MacInnes $1,531.00 626
John P. Lloyd & $5,000.00 2,047
Beverly A Lloyd, Joint Tenants
</TABLE>
<PAGE> 5
Rockford Corporation Debenture Ownership
As of December 31, 1998
<TABLE>
<CAPTION>
Number of Shares
Group Debenture Holder Amount On Conversion
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John P. Lloyd & $10,000.00 4,095
John M. Lloyd, Joint Tenants
</TABLE>
<PAGE> 1
EXHIBIT 10.38
February 07, 2000
Mr. Jim Hirschberg
Director
NPD Intelect Market Tracking
900 West Shore Road
Port Washington, New York 11050
Dear Mr. Hirschberg;
This letter will confirm our conversation regarding the release of data for
Rockford Corporation's filing of the S-1. NPD Intelect Market Tracking
authorizes Rockford Corporation to release market data solely for the S-1
document. Any information used for other than the S-1 document is prohibited.
If you agree, please sign below and return back to me.
/s/ James M. Thomson
- ------------------------
James M. Thomson
Chief Financial Officer
Rockford Corporation
/s/ Jim Hirschberg
- ------------------------
Jim Hirschberg
Director
NPD Intelect Market Tracking
<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 5 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
February 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 917
<SECURITIES> 0
<RECEIVABLES> 22,011
<ALLOWANCES> 3,700
<INVENTORY> 15,871
<CURRENT-ASSETS> 42,342
<PP&E> 20,237
<DEPRECIATION> 14,696
<TOTAL-ASSETS> 51,222
<CURRENT-LIABILITIES> 21,123
<BONDS> 18,762
0
0
<COMMON> 48
<OTHER-SE> 12,709
<TOTAL-LIABILITY-AND-EQUITY> 51,222
<SALES> 123,889
<TOTAL-REVENUES> 123,889
<CGS> 75,014
<TOTAL-COSTS> 75,014
<OTHER-EXPENSES> 36,626
<LOSS-PROVISION> 991
<INTEREST-EXPENSE> 1,671
<INCOME-PRETAX> 10,578
<INCOME-TAX> 4,088
<INCOME-CONTINUING> 6,497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,497
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.04
</TABLE>
