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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 000-30138
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ROCKFORD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 86-0394353
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 SOUTH ROCKFORD DRIVE
TEMPE, ARIZONA 85281
(480) 967-3565
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
($.01 Par Value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $30,500,187 as of March 1, 2003.
There were 8,747,197 shares of Common Stock issued and outstanding as of
January 31, 2003.
Documents Incorporated by Reference: Portions of the registrant's
definitive Proxy Statement relating to the 2003 Annual Meeting of Stockholders
to be held on April 23, 2003, are incorporated by reference into Part III of
this report. Exhibit 99.9 to this report is also incorporated by reference into
Part I of this report.
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ROCKFORD CORPORATION
FORM 10-K
DECEMBER 31, 2002
TABLE OF CONTENTS
SECURITIES AND EXCHANGE COMMISSION
ITEM NUMBER AND DESCRIPTION PAGE
- --------------------------- ----
PART I
Item 1. Business ...................................................... 2
Item 2. Properties .................................................... 17
Item 3. Legal Proceedings ............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders ........... 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters, including Equity Compensation
Plan Information ............................................ 18
Item 6. Selected Financial Data ....................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .... 28
Item 8. Financial Statements and Supplementary Data ................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant ............ 51
Item 11. Executive Compensation ........................................ 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 51
Item 13. Certain Relationships and Related Transactions ................ 51
Item 14. Controls and Procedures........................................ 51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................. 51
Signatures ................................................................ 55
The market value of our voting stock held by non-affiliates shown on the
cover page is based on:
* Our estimate of the number of shares held by non-affiliates; and
* $5.89 per share, the price at which our shares were last sold on
December 31, 2002, as reported by The NASDAQ Stock Market.
Our calculation of the number of shares held by affiliates is a good faith
estimate for this Annual Report. Shares held by affiliates include all shares
beneficially owned by our executive officers and directors. They also include
shares held by any shareholder who beneficially owned more than 10% of our
shares, as disclosed in this report, except that we have not included in shares
held by affiliates the shares that may be beneficially owned by Quaker Capital
Management Corporation in light of its disclaimer of beneficial ownership. We
are not bound by this figure for any other purpose.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
WE MAKE FORWARD-LOOKING STATEMENTS IN THIS REPORT 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. OUR STATEMENTS MAY CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF
FINANCIAL CONDITION. YOU MAY IDENTIFY THESE STATEMENTS BY OUR USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "CONTINUE" OR OTHER SIMILAR WORDS.
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO MANY RISKS AND UNCERTAINTIES. WE
CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON OUR FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS AT THE DATE ON WHICH THEY ARE MADE. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DESCRIBED IN OUR FORWARD-LOOKING STATEMENTS. WE DISCLAIM
ANY OBLIGATION OR UNDERTAKING TO UPDATE OUR FORWARD-LOOKING STATEMENTS TO
REFLECT CHANGES IN OUR EXPECTATIONS OR CHANGES IN EVENTS, CONDITIONS, OR
CIRCUMSTANCES ON WHICH OUR EXPECTATIONS ARE BASED.
WHEN CONSIDERING OUR FORWARD-LOOKING STATEMENTS, YOU SHOULD KEEP IN MIND
THE RISK FACTORS AND OTHER CAUTIONARY STATEMENTS IDENTIFIED IN THIS REPORT AND
IN EXHIBIT 99.9, "RISK FACTORS THAT MAY AFFECT ROCKFORD'S OPERATING RESULTS,
BUSINESS PROSPECTS AND STOCK PRICE," WHICH IS INCORPORATED IN THIS REPORT BY
THIS REFERENCE. THE RISK FACTORS NOTED THROUGHOUT THIS REPORT, PARTICULARLY IN
THE DISCUSSION IN EXHIBIT 99.9, AND OTHER RISK FACTORS THAT WE HAVE NOT
ANTICIPATED OR DISCUSSED, COULD CAUSE OUR ACTUAL RESULTS TO DIFFER SIGNIFICANTLY
FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS.
OUR BUSINESS
Rockford designs, manufactures and distributes high performance audio
systems for the mobile, professional and home theater audio markets. Our mobile
audio products are sold primarily in the worldwide mobile audio aftermarket to
consumers who want to improve the audio systems in their cars, trucks, boats and
airplanes. We market our mobile audio products under the Rockford Fosgate,
Lightning Audio, Q-Logic and MB Quart brand names, selling products that include
digital and analog amplifiers, speakers, source units, CD changers and
accessories. Based on dollar sales in 2002 of all our brands, we rank first in
U.S. market share for mobile audio amplifiers and second for mobile audio
speakers.
We sell home theater products under the MB Quart, Fosgate Audionics and NHT
brands. We also sell professional audio products under the MB Quart, NHT and
Hafler brands. We acquired the NHT brand as a result of an acquisition during
the fourth quarter of 2002. Additionally during the fourth quarter of 2002 we
completed an investment in SimpleDevices Inc., which licenses its
standards-based SimpleWare and SimpleMedia Services software to consumer
electronics, PC, automotive and network equipment OEMs.
We believe our ability to deliver innovative and technologically advanced
products appeals to our consumers' desires for distinctive, leading-edge
products and powerful, high quality sound. We continue to develop new products
to capitalize on improvements in digital technology. Our Rockford Fosgate,
Lightning Audio, Q-Logic, MB Quart, NHT and Fosgate Audionics products have won
numerous consumer and industry awards.
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. We believe Rockford Fosgate is one of the most
preferred high performance mobile audio brands. Under this brand we
offer distinctive, leading-edge products and powerful, high quality
sound. Our Rockford Fosgate mobile audio products are marketed under
three primary brand names: (1) Punch-- the brand for the majority of
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our amplifiers, subwoofers, speakers and source units; (2) Power-- the
brand for our higher performing amplifiers, subwoofers, and speakers;
and (3) Type RF-- our highest performing mobile audio amplifiers. We
sell Rockford Fosgate products to Nissan for installation as part of
the factory installed audio system for three models of Nissan
vehicles, the Sentra SE-R, Xterra and Frontier Crew Cab. We also sell
Rockford Fosgate products under the Connecting Punch brand (for a full
line of mobile audio installation accessories) and the Punch Sport
brand (for promotional items and clothing);
* LIGHTNING AUDIO. We acquired Lightning Audio in 1999 with a view
toward marketing a line of mobile audio products under the Lightning
Audio brand. In addition to accessories (which it sold before the
acquisition), we now sell amplifiers, subwoofers and speakers under
our Storm, Bolt and Strike brands. The products under these three
Lightning Audio brands are more moderately priced than our Rockford
Fosgate products. Also under the Lightning Audio brand we have
introduced the InstallEdge.com business-to-business brand that offers
back shop supplies to mobile audio installation shops, custom home
audio installers and marine outfitters;
* FOSGATE AUDIONICS AND HAFLER. We distribute home theater speakers and
electronics under the Fosgate Audionics brand through conventional
retail channels. We acquired the Fosgate Audionics brand from its
creators, Jim Fosgate and Charles Wood, pioneers in the development of
surround sound applications for home theater use. Our target dealers
for this brand are specialty audio and home theater stores. We also
distribute professional amplifiers and speakers under our Hafler
brand;
* Q-LOGIC. Audio Innovations, a subsidiary acquired in 2001, develops
and markets Q-Logic speaker enclosures, Q-Forms kick panels and
Q-Customs enclosures. Each of these products is designed to hold
mobile audio speakers, providing an effective and convenient method
for installing improved speakers in cars, trucks and SUVs. These
products complement our existing Rockford Fosgate, Lightning Audio and
MB Quart products, since many consumers will purchase an Audio
Innovations product as the "box" to hold Rockford Fosgate, Lightning
Audio or MB Quart speakers;
* MB QUART. We acquired the MB Quart business and assets in 2001. MB
Quart is located in Obrigheim, Germany, where it develops, engineers
and manufactures speaker products. We sell MB Quart speakers primarily
for the mobile audio market, with strength in tweeter, coaxial and
component speakers, the speakers used to reproduce mid-range and
higher frequency sounds. The MB Quart mid-range and tweeter products
are priced even higher than our Rockford Fosgate brand speakers, and
offer German engineered precision to our customers. Our MB Quart brand
appeals to consumers who are willing to pay a premium price for some
of the best mobile audio speakers on the market. In addition to mobile
audio speakers, we also manufacture and distribute home audio speakers
and professional headphones under our MB Quart brand;
* SIMPLEDEVICES. During the fourth quarter of 2002, we completed an
investment in SimpleDevices Inc., which licenses standards-based
SimpleWare and SimpleMedia Services software to consumer electronics,
PC, automotive and network equipment OEMs. Its software enables a
variety of digital devices to access a centralized media database
through a unified interface and provides automation, synchronization,
scheduling, and unified interfaces and databases across compatible
devices;
* OMNIFI. Using SimpleDevices' technology, we introduced our new
wireless digital media transfer products under the OmniFi brand at the
2003 Consumer Electronics Show. Co-designed by Rockford Fosgate and
SimpleDevices, OmniFi products are digital audio receivers that use a
PC and home wireless network to deliver digital media to the home
stereo or to a storage device in the car. We plan to market OmniFi
devices both as a stand-alone brand and under our Rockford Fosgate and
Fosgate Audionics brands; and
* NHT. During the fourth quarter of 2002, we acquired the NHT (Now Hear
This) business and assets located in Benicia, California. NHT designs
high quality loudspeakers for the home theater, stereo, custom
installation and professional audio markets under the brand names of
NHT, Now Hear This, NHT Pro, Evolution, Super Audio and Architectural.
NHT's products are positioned to sell at premium price points through
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high-end specialty audio stores and custom installation design
showrooms. The products under our NHT brands are more moderately
priced than our Fosgate Audionics and MB Quart products.
GROWTH OF OUR BRANDS
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, Fosgate Audionics, Hafler,
Q-Logic, MB Quart, OmniFi and NHT among consumers and retailers. Key elements of
our growth strategy are to:
* Continue to introduce new and technologically innovative products;
* Acquire, develop and expand additional audio brands, taking advantage
of our technology and distribution strengths;
* Broaden our distribution by entering new distribution channels and
increasing penetration of our existing distribution channels;
* Capitalize on our worldwide brand recognition to increase sales in
international markets; and
* Expand our home theater and professional audio business.
As a result of our strong brands and growth strategy, we believe we can
grow our business and become a larger participant in the worldwide mobile,
professional and home theater audio markets.
OUR PRODUCTS
PERCENT OF SALES BY PRODUCT CLASS
Our sales since 2000 were divided among our principal product classes as
shown in the following table:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 2001 2002
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Product Class:
Amplifiers ................. 43.9% 41.9% 32.4%
Speakers ................... 35.1 32.5 36.3
Accessories ................ 14.2 15.3 18.4
Others(1) .................. 6.8 10.3 12.9
------ ------ ------
Total .......... 100.0% 100.0% 100.0%
====== ====== ======
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(1) Includes source units, enclosures, signal processors and other products of
which no single product class accounted for more than 10% of our sales in
any of these years.
Financial information about geographic segments may be found at Note 13 of
the Notes to our Consolidated Financial Statements, set forth at page 46 of this
report.
MOBILE AUDIO
We offer high performance mobile 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
mobile audio system and are typically not part of a standard factory
installed system. We also include signal processors as part of the
amplifier category. Signal processors accept input from a source unit,
modify the signal to enhance performance and deliver the modified
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signal to one or more amplifiers. For specialized applications, we
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 mobile audio
systems and are often the single most important improvement consumers
can make to their mobile audio systems;
* SOURCE UNITS. Source units are the control center for a mobile 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,
interconnect and speaker cables, carpet and fabric surface
applications, stiffening capacitors and battery clamps; and
* ENCLOSURES. Enclosures are used to enhance the bass sound of
subwoofers and to position higher frequency speakers in locations that
produce better sound. Enclosures include boxes for subwoofers,
installation adapters and replacement kick panels for improved speaker
placement.
Under our Rockford Fosgate brand we currently offer the following products:
Amplifiers: * 28 power amplifier models under our Punch, Power and
Type RF brands, with rated power from 75 to 1,500
watts, and minimum advertised prices from $179.99 to
$1,449.99. Our amplifiers include 1, 2 and 4 channel
alternatives, giving consumers the ability to select an
optimum configuration for their system;
* Four models of stand alone signal processors, with
minimum advertised prices from $149.99 to $399.99. One
of these processors, a surround sound processor
designed by Jim Fosgate, was the first commercially
available "Dolby Pro-Logic II" surround sound device
and is able to produce surround sound in the car from
any 2 channel source;
Speakers * 75 models of speakers and subwoofers under our Punch
and Power brands, with minimum advertised prices from
$59.99 to $1,799.99;
Source Units: * Nine models of source units with MP3 playback
compatibility, with minimum advertised prices from
$199.99 to $999.99;
Accessories: * Over 400 different accessories, including amplifier
installation kits, interconnect and speaker cables,
carpet/fabric/surface applications and stiffening
capacitors under our Connecting Punch brand name; and
* Various promotional materials and clothing under our
Punch Sport brand.
Under our Lightning Audio brand we currently offer the following products:
Amplifiers: * 15 power amplifier models under our Bolt, Strike and
Storm brands, with rated power from 60 to 2,000 watts
and minimum advertised prices from $99.95 to $999.95;
Speakers: * 46 speakers and subwoofers under our Bolt, Strike and
Storm brands, with minimum advertised prices from
$29.95 to $599.95;
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Accessories: * Over 1,000 different accessories, including
interconnect and speaker cables, stiffening capacitors,
battery clamps and installation kits;
* Various promotional materials and clothing under our
Urban Industrial Gear brand; and
* Various back shop supplies, including vehicle
harnesses, power distribution adapters, batteries, RCA
connectors, wire, wiring accessories and fuses under
our InstallEdge.com brand.
Under our Q-Logic brand we currently offer 63 speaker enclosure models (in
a variety of colors to match standard factory colors) in our Q-Logic, Q-Forms
and Q-Customs product lines. These models have suggested retail prices from
$29.95 to $319.95 for each enclosure.
Under our MB Quart brand in the U.S. we sell five mobile speaker lines,
including:
* 5 models of Q-Series speakers, with suggested retail prices from
$649.00 to $1,499.00 per pair;
* 14 models of Premium Series speakers, with suggested retail prices
from $479.00 to $829.00 per pair;
* 17 models of Reference Series speakers, with suggested retail prices
from $249.00 to $449.00 per pair;
* 12 models of Discus Series speakers, with suggested retail prices from
$109.00 to $399.00 per pair; and
* 5 models of Nautic Series speakers, specifically designed for use in
boats, with suggested retail prices from $249.00 to $449.00 per pair.
OEM PRODUCTS
Nissan North America offers a Rockford Fosgate branded OEM system for three
Nissan vehicles for model year 2003. Rockford Fosgate systems are standard in
Nissan's Xterra SE and optional in the Xterra XE, the Frontier Crew Cab,
Supercharged Frontier Crew Cab and the Sentra SE-R. Rockford's OEM systems
installed in these vehicles include a radio/ CD player, speakers and an
amplifier. For the 2004 model year Nissan has agreed to add a Rockford Fosgate
enclosure to the Rockford Fosgate systems available in the Sentra.
HOME THEATER
We sell home theater products under our Fosgate Audionics, MB Quart and NHT
brands.
Our Fosgate Audionics products include two preamp/surround processors, two
multi-channel amplifiers, four passive speakers and three powered subwoofers,
with electronics retail prices from $2,995.00 to $12,995.00 and speaker retail
prices from $130.00 to $699.00.
MB Quart sells bookshelf, tower and in-wall speakers for use in home audio
and home theater systems, with suggested retail prices ranging from $99.00 to
$1,799.00 per pair.
Under our NHT brand we sell high performance audio component systems under
the Evolution, Super Audio and Architectural brand series.
* Evolution's modular components function as the building blocks to
create entirely self-customized high performance multi-channel
loudspeaker systems. The Evolution collection consists of two
satellite monitors with optional matching pedestals, two tower
loudspeaker configurations with satellite-matched bass modules and two
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freestanding subwoofer models. Listeners can create over a dozen
system configurations to get the utmost performance from current and
future digital entertainment media. Suggested retail prices range from
$900.00 for a pair of satellite monitors to $9,900 for a full surround
sound system.
* SuperAudio series offers bookshelf speakers, center channel speakers,
and powered subwoofers. Suggested retail prices range from $300 to
$2,750.
* Architectural is the brand name for NHT's in-wall speaker systems
designed for installation as part of a custom home theater system.
Suggested retail prices range from $200 to $1,000.
PROFESSIONAL AUDIO
NHT sells powered monitors to the professional recording studios market.
Suggested retail prices range from $500.00 for a pair of monitors to $6,600.00
for a surround sound monitoring system.
MB Quart sells headphones for professional use, with suggested retail
prices ranging from $150.00 to $1,944.00 per pair.
We sell professional audio amplifiers and speakers under the Hafler brand,
with amplifier suggested retail prices ranging from $199.00 to $2,200.00 and
speaker suggested retail prices ranging from $625.00 to $845.00. Recording
studios, broadcast studios, movie theaters, concert facilities, stadiums and
touring bands use our professional audio products.
AWARDS
Our branded products have won numerous consumer and industry awards,
including Autosound Grand Prix awards in every year from 1987 through 2002,
EIA/CES Innovation Awards at the Consumer Electronics Shows in every year from
1997 through 2003 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.
At the 2003 Consumer Electronics Show, Lightning Audio won one Innovations
Design and Engineering Award for the Storm X2 subwoofer, MB Quart won two
Innovations Design and Engineering Awards for the Vera Series speakers, and
Fosgate Audionics won one Innovation Design and Engineering Award for the FAP T1
home theater processor. In addition, our OmniFi digital audio receiver was
awarded the Consumer Electronic Association's Best of Innovations honoree in the
mobile electronics product category and Tech TV's Best of CES in the auto,
marine and RV category.
Additionally at the Consumer Electronics Show, our custom demonstration
vehicles, the Nissan Frontier in 2001 and the Nissan Xterra in 2002, were
awarded the prestigious "best of show" from United Entertainment Media.
Pro Audio Review Magazine declared our Hafler 9505 professional amplifier
"Best Amplifier of the 1990's" during 2001. Hafler products also won awards from
Pro Audio Review Magazine in 1996 and 1997, Mix Magazine in 1996 and 1998 and
Electronic Musician Magazine Editor's Choice Award in 1999, 2000 and 2001.
NHT has won many awards including three CES Innovations Design and
Engineering Awards in 1999, three Audio Video International Awards in 2001 and
the Electronic House-Product of the Year in 2002.
NEW BUSINESSES
On December 26, 2002, we acquired the NHT (Now Hear This) business and
assets located in Benicia, California from Recoton Corporation. NHT designs high
quality loudspeakers for the home theater, stereo, custom installation and
professional audio markets under the brand names of NHT, Now Hear This, NHT Pro,
Evolution, Super Audio and Architectural. NHT's products are positioned to sell
at premium price points through high-end specialty audio stores and custom
installation design showrooms. NHT is sold through an established network of
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approximately 200 dealers and custom installers. We plan to use the NHT
distribution network to sell our Fosgate Audionics and MB Quart home products.
On October 17, 2002, we completed the purchase of 51% of the fully diluted
common stock of SimpleDevices, Inc, which is 76% of the outstanding common stock
as at December 31, 2002. SimpleDevices is a software company that has developed
connected digital device applications for home, automobile and portable devices.
Its standards-based SimpleWare and SimpleMedia Services software leverages
industry standards, such as 802.11b and Universal Plug and Play, to extend home
networking technology beyond the PC or home gateway to a wide variety of digital
device applications. Its software enables a variety of digital devices to access
a centralized media database through a unified interface and provides
automation, synchronization, scheduling, and unified interfaces and databases
across compatible devices. Our new wireless digital media transfer system,
OmniFi, was introduced at the 2003 Consumer Electronics Show. Co-designed by
Rockford Fosgate and SimpleDevices, OmniFi products are digital audio receivers
that use a PC and home wireless network to deliver digital media to the home
stereo or to a storage device in the car.
In August, 2002, we signed a licensing agreement with Universal Studios
Consumer Products Group that will allow us to use the Universal trademarks
relating to the movie, THE FAST AND THE FURIOUS, and Universal Pictures'
upcoming sequel THE FAST AND THE FURIOUS 2, in connection with selected Rockford
Fosgate and Lightning Audio products. In addition, we have agreed to permit
Universal to use our Rockford Fosgate and Lightning Audio products in cars that
are expected to be featured in THE FAST AND THE FURIOUS 2, scheduled for release
in Summer 2003.
During 2001, we entered into an agreement to license the use of our
Rockford Fosgate brand and our proprietary "Punch" bass equalization circuit to
Milwaukee Electric Tool Corporation. Milwaukee is one of the leading sellers in
the U.S. of professional power tools. Our license agreement authorizes Milwaukee
to produce a portable radio boom box, capable of being powered by the battery
packs that also power Milwaukee's professional tools. The product carries both
the Milwaukee and the Rockford Fosgate brands. Milwaukee distributes the product
through its distribution network, which sells portable electric tools and
accessories through retail stores that sell tools to professional and
non-professional users. We do not bear any of the costs of manufacture or
distribution, but receive a small royalty for each unit sold. We believe this
product offers professional users, especially construction workers, a higher
quality mobile audio experience even in environments where they are limited to a
simple boom box. We started to generate revenues from this agreement in 2002.
Sales of this portable radio were approximately 155,000 units in 2002.
ENGINEERING AND DEVELOPMENT
Research and development is a primary focus of our business because of the
heavy demand by our core consumers for leading-edge products. We focus our
research and development efforts primarily on enhancing current products and
developing new products. Our expenditures for research and development were
approximately $2.8 million, $3.3 million and $6.0 million in 2000, 2001 and
2002, respectively.
As at December 31, 2002, our research and development staff (including the
recently acquired SimpleDevices and NHT staff as well as our other businesses)
consisted of approximately 35 design engineers, as well as other support staff,
dedicated to the development of our technology platform for future products.
They 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
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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 over one-half of our
existing product line annually. In 2002, approximately 47% of our net sales were
generated by sales of 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 believe 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:
* Software technology to allow consumers to schedule and synchronize
wireless media delivery to mobile and home audio devices;
* Powered speakers, which are speakers that include an integrated
amplifier;
* Remote bass and speaker controls;
* Active crossovers 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;
* Materials improvements that increase the durability and performance of
our products;
* Digital signal processing technology;
* Speaker enclosures; and
* Innovative speaker component materials.
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 high quality and
value. We believe 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 mobile audio magazines, newspapers and other publications as well as on
television, radio and the Internet. We participate in trade and consumer shows,
support users of our products in auto sound competitions and supply promotional
prizes and giveaways.
Our primary sales and marketing activities are listed below:
* 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 sales and installation personnel at our Rockford
Technical Training Institute;
* Participating in related professional and consumer trade shows; and
* Maintaining product and brand information for consumers and retailers
on our web sites.
9
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, WWW.INSTALLEDGE.COM,
WWW.FOSGATEAUDIONICS.COM, WWW.AIRESEARCH.COM, WWW.MBQUART.COM,
WWW.SIMPLEDEVICES.COM, WWW.HAFLER.COM and WWW.NHTHIFI.COM offer consumers and
retailers reliable and comprehensive information about our product offerings and
consumer services. Because our core mobile 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.
MOBILE AUDIO DISTRIBUTION
DOMESTIC DISTRIBUTION. We currently sell our mobile audio products in the
U.S. to approximately 2,450 independent retail stores. These 2,450 stores
include independent specialty dealers and audio/video retailers, who we may
appoint to sell some or all of our mobile audio brands. These stores also
include consumer electronics chains and catalog merchants. We sell MB Quart
products only in independent specialty dealers and audio/video retailers.
We sell directly to most of our authorized retail dealers using 44
independent sales representative firms who identify, recruit and sell to
retailers in their regions. We have entered into one-year agreements with each
of these sales representative 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 commissions based on sales
of our products to independent retailers in their territory. Commission amounts
range from 1% to 9.5% of sales depending upon (1) product category, (2) the
retailer involved in the purchase and (3) achievement of quarterly sales
targets.
We also permit some of our Rockford Fosgate brand sales representatives to
stock a small quantity of our Rockford Fosgate products for resale to smaller
dealers. These smaller dealers are generally located in rural areas, or
otherwise have very small volume potential, so that it is not economical for us
to appoint them as direct retailers. They nevertheless provide a useful
extension of our distribution system into more remote regions. Our stocking
representative program allows us to serve these dealers efficiently. In a few
instances where a sales representative is not available, we have appointed
independent distributors to handle smaller dealers in a particular territory.
We support our independent sales representative firms using an in-house
staff of 8 U.S. regional managers and 8 sales support staff members.
INTERNATIONAL DISTRIBUTION. We currently sell our mobile audio products in
76 other countries using independent distributors and sales representatives.
Independent distributors purchase products from us and resell them to retailers
in their designated territories. They assume inventory risk and take
responsibility for warranty service in their territory.
In Canada, Germany, Austria, Switzerland and Italy we sell our Rockford
Fosgate, Lightning Audio, and MB Quart products through 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, we are responsible for collecting
accounts receivable from our retailers and we retain responsibility for warranty
service. We are generally able to increase our penetration in these markets,
compared to an independent distribution model, because commissions to
independent sales representatives are less than the distributor mark-up,
allowing us to reduce prices to the consumer while we keep 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.
We support our international distributors and sales representatives using
an in-house staff of four international sales managers.
10
HOME THEATER AND PROFESSIONAL AUDIO DISTRIBUTION
We distribute NHT, Fosgate Audionics and MB Quart home theater products
through a mix of conventional independent retail stores and custom installation
firms. We sell to these customers using a network of manufacturers
representatives. Our dealers for the Fosgate Audionics brand are specialty audio
and home theater dealers, particularly those who follow a Home Theater
Specialists of America buying profile. We sell NHT through an established
network of approximately 200 dealers and believe we will be able to sell Fosgate
Audionics and MB Quart home theater products through many of these same stores.
In the U.S., we sell NHT and Hafler professional audio products primarily
through sales representatives, who sell to small specialty musical instrument
and pro audio dealers and to larger retail chains, such as Guitar Center. 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.
COMPETITION
Our markets are very competitive, highly fragmented, rapidly changing and
characterized by price competition and, in the mobile and home theater audio
markets, rapid product obsolescence. We compete in the mobile 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; and
* LARGE CONSUMER ELECTRONICS SUPPLIERS. These companies offer mobile
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:
* MOBILE AUDIO AMPLIFIERS: Alpine, Jensen, JL Audio, Kenwood, Kicker,
MTX, Pioneer and Sony;
* MOBILE AUDIO SPEAKERS: Boston Acoustics, Infinity, Jensen, JL Audio,
Kenwood, Kicker, MTX, Pioneer and Sony;
* MOBILE AUDIO SOURCE UNITS: Alpine, Fujitsu Eclipse, Kenwood,
Panasonic, Pioneer and Sony;
* MOBILE AUDIO ACCESSORIES: Monster Cable, Phoenix Gold and Stinger;
* PROFESSIONAL AUDIO AMPLIFIERS AND SPEAKERS: Crest, Crown, Eastern
Acoustic Works, Mackie Designs, Peavy, QSC, KRK and Tannoy; and
* HOME THEATER: Adcom, Audio Products Int'l, B&W, Bose, Boston
Acoustics, Harman Kardon, Infinity, JBL, Klipsh, Paradign, Polk Audio,
and Rotel.
11
According to NPD Intelect Market Tracking, based on U.S. dollar sales in
2002 of all our brands, we rank:
* First among our competitors in mobile audio amplifiers; and
* Second among our competitors in mobile audio speakers.
The addition of our NHT brand and introduction of new products under our MB
Quart and Fosgate Audionics brands should increase our market share for home
theater products, but our current market share is very small. Our professional
amplifiers and playback monitors have received broad acceptance in recording
studios and postproduction houses, however market share information is
unavailable in this category.
We also compete indirectly with automobile manufacturers, who may improve
the quality of original equipment sound systems, reducing demand for aftermarket
mobile audio products. They may also change the designs of their cars to make
installation of our products more difficult or expensive.
SimpleDevices is competing in a brand new market that has attracted the
attention of many potential competitors. A number of companies have introduced
software and hardware products that seek to play audio or video downloaded from
the Internet through consumers' home audio systems. Because this is a newly
emerging market, it is difficult to identify key competitors for SimpleDevices'
products; however, it is clear that there will be a number of competing
solutions that will vie for widespread consumer acceptance. Although we believe
SimpleDevices' products offer a number of significant advantages compared to the
alternatives announced to date, it is too early to say confidently whether
consumers will prefer SimpleDevices' technology over the alternatives.
MANUFACTURING
We believe our efficient production, sourcing and distribution capabilities
make us one of the preferred suppliers in the mobile audio aftermarket industry.
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. We manufacture Q-Logic enclosure and
kick panel products at our facilities in Stillwater, Oklahoma. We manufacture
most of our MB Quart products, and have begun to manufacture some Rockford
Fosgate speakers, at our facility in Obrigheim, Germany.
Hyundai Electronics supplies all of the source units we resell under the
Rockford Fosgate brand. Hyundai manufactures source units in accordance with our
specifications. We develop these units jointly with Hyundai and then purchase
them from Hyundai on an exclusive basis. Our agreement with Hyundai obligates us
to place monthly purchase orders with Hyundai and is subject to cancellation
charges for partially or totally cancelled orders. Our agreement with Hyundai
commenced April 8, 1999, and expires July 31, 2003. After July 31, 2003, we
anticipate continuing to purchase source units from Hyundai, which has indicated
a willingness to continue supply source units to us. For the year ended December
31, 2002, we paid Hyundai approximately $3.4 million under the agreement. Other
third parties manufacture our full-range speakers, home theater products and
various components according to our design specifications.
Most of our products use standard parts and components that can be
purchased from multiple sources. In a few instances, however, components or
products are sourced from one or a small number of suppliers to leverage dollars
and volumes. We also relied on Avnet, Inc. for approximately 8.4% of our
inventory purchases during 2002. We believe alternative sources are available
for all of our products. While we do not have guaranteed supply arrangements
with many of our suppliers, we have never experienced an inability to obtain
necessary components or other raw materials. We believe that our sourcing and
supply of components and other raw materials are adequate for our needs.
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.
12
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 raw materials and
finished goods inventory. Each of our facilities focuses on continuous
improvement, with quality control embedded in the manufacturing process. The
result has been improved flexibility, increased efficiency and greatly improved
cycle times.
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, but
are not limited to:
ROCKFORD FOSGATE(R) LIGHTNING AUDIO(R)
* Our "Diamond R" logo(R) * Strike(TM)
* The Punch(R) * Storm(TM)
* Type RF(TM) * Bolt(TM)
* Dead Skin(TM)
AUDIO INNOVATIONS(TM) OMNIFI(TM)
* Q-Logic(TM)
FOSGATE AUDIONICS(R) NHT(R)
Now Hear This(R)
INSTALLEDGE.COM(R)
MB QUART(R) HAFLER(R)
OUR GROWTH STRATEGY
Our goal is to design, produce and distribute the best engineered and most
recognized and respected brands of high performance mobile, professional and
home theater 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, Q-Logic, MB Quart, Hafler, Fosgate Audionics and NHT 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 enhance
the strength of our brands by continuing to introduce new and innovative
products. We believe our ability to deliver innovative products to market, with
a product design process that allows us to begin selling new products within six
to nine months after initial design work begins, appeals to consumers' desires
for leading-edge products and provides a significant competitive advantage.
In January 2003, at the Consumer Electronics Show, we announced the
redesign and launch of nearly 47% of our brand product lines. Highlights of the
new products and technology include:
For Rockford Fosgate:
* Type RF amplifiers;
* Six new source units;
* New technology or cosmetic upgrades for all amplifiers;
13
* A redesign of key subwoofer products for our Punch brand;
* A relaunch of the Punch brand full-range coaxial speakers; and
For Lightning Audio:
* A redesign of Bolt amplifiers;
* A redesign of Bolt and Storm woofers; and
* New Bolt amplifier model and a new Bolt full range speaker.
ACQUIRE, DEVELOP AND EXPAND ADDITIONAL AUDIO BRANDS. We continue to look
for opportunities to add new brands through acquisition or internal development.
During the 4th quarter of 2002, we completed acquisitions of the NHT business
and of a majority interest in SimpleDevices. We believe we have substantial
opportunities to acquire mobile, home and professional audio brands that will
complement our existing brand portfolio. We believe the introduction or
acquisition of additional brands will enable us to take advantage of our
distribution capabilities and our strengths in advanced technology design and
development. We also believe that offering additional brands with different
price points and target market segments will enable us to extend our product
range, complement our existing distribution channels and broaden our customer
base.
We have acquired a number of brands as part of this strategy, including:
* Lightning Audio, acquired in June 1999;
* Fosgate Audionics, acquired in 2000;
* Audio Innovations and its Q-Logic brand, acquired in 2001;
* MB Quart, acquired in 2001;
* SimpleDevices, acquired in 2002;
* NHT (Now Hear This). acquired in 2002.
BROADEN OUR DISTRIBUTION. We intend to broaden the distribution of our
products by entering new distribution channels and increasing penetration of our
existing distribution channels. We intend to increase our penetration of
specialty dealer, audio/video retailer, consumer electronics retailer and
catalog 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 for our premium brands while selectively developing
products for broader distribution using our lower priced brands. We believe
selective distribution of premium brands fosters retailers' loyalty to our
brands, enhances retailers' profit margins and encourages retailers to carry a
broad range of our products. In furtherance of this strategy, during the first
quarter of 2003 we have agreed to distribute selected Lightning Audio products
in Wal-Mart and Pep Boys stores in the United States.
CAPITALIZE ON INTERNATIONAL OPPORTUNITIES. We believe the Rockford Fosgate
and MB Quart brand names are recognized in many foreign countries as well as the
U.S. We intend to aggressively expand Rockford Fosgate, Lightning Audio,
Q-Logic, MB Quart, and Fosgate Audionics in international markets.
In 2000 we initiated a strategy of moving to a one-step distribution system
for Rockford Fosgate products 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. We currently sell our Rockford Fosgate
14
mobile audio products directly to retailers in Canada, Germany, Austria,
Switzerland and Italy, and through independent distributors in other countries.
EXPAND OUR PROFESSIONAL AUDIO BUSINESS AND ENTER THE HOME THEATER MARKET.
The NHT acquisition, which was completed in December 2002, brings diversity
and strength to our home audio family of brands. NHT gives us critical mass with
200 dealers for our home group. These dealers provide an immediate retail
channel for MB Quart and Fosgate Audionics home products. We sell home theater
products under our MB Quart brand and we have developed a line of home theater
products under our Fosgate Audionics brand, including two preamp/surround
processors, two multi-channel amplifiers, four passive speakers and three
powered subwoofers. We sell our MB Quart and Fosgate Audionics home theater
audio products through traditional retail channels.
SIGNIFICANT CUSTOMER AND SEASONALITY
Best Buy is a significant customer. We began selling a limited selection of
our products to Best Buy in early 1999 and currently sell to each of its more
than 450 stores nationwide. Best Buy is one of the largest volume specialty
retailers of consumer electronics and entertainment software in the U.S. During
2002 Rockford was Best Buy's second largest supplier of mobile audio equipment,
representing over 10% of Best Buy's mobile audio sales. Best Buy accounted for
16.3% of our sales for 2001 and 21.1% of our sales for 2002. We anticipate that
Best Buy will continue to account for a significant portion of our sales for the
foreseeable future.
Best Buy also generally helps us to smooth out our normal sales
seasonality. For our specialty and audio-video dealers, our peak-selling season
is in the spring and summer and our slowest season is typically in the fourth
quarter. We believe that we experience this seasonality because our core 16-24
year old consumers tend to buy mobile audio products during the spring and
summer when they are on semester breaks and when generally more favorable
weather facilitates installation of our products. Best Buy sales, while strong
in May and June, are not as concentrated among our core consumers and are also
strong in the fourth quarter.
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. The loss of Best Buy as a customer or significant reductions in its
purchases of our products would materially reduce our sales.
We believe our acquisition of NHT will also moderate the seasonality of our
sales in future years, since its sales tend to be more concentrated in the third
and fourth quarters of the year, which is a typical seasonality for the home
audio business.
PRODUCT SUPPORT
To maintain and enhance our relationships with retailers, we provide
numerous support services, including product and installation training, sales
training and technical and customer service support. Our web site provides
comprehensive and valuable information for dealers and distributors, including
product schematics, ad layouts and logos.
Our Rockford Technical Training Institute, one of the first and most
advanced of its kind in our industry, trains approximately 2,450 retail sales
and installation personnel per year on installation, sales and marketing
techniques that help them sell mobile 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. We offer repair services for products that 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 factory direct repair program that repairs and ships products
rapidly, reducing retailer and consumer inconvenience if our products fail to
perform properly.
15
For our international customers, we provide warranty and customer service
to consumers in the countries where we sell direct to retailers. These countries
include Canada, Germany, Austria, Switzerland and Italy. In other countries, our
distributors provide customer service and warranty support.
INFORMATION SYSTEMS
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;
* Provide accurate and timely information; and
* Facilitate integration of new acquisitions.
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. Data on our servers 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 Internet 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 developed
systems to accept orders from consumers over the Internet for distribution of
promotional accessories such as clothing.
We have also implemented Internet systems to provide accurate and timely
information to our suppliers in support of just-in-time delivery of components
to our manufacturing floor. These systems help us reduce cost by reducing our
inventory requirements and providing better information about our suppliers.
EMPLOYEES
As at December 31, 2002, we had 788 total employees. At that date, in the
U.S., 367 were engaged in manufacturing, 70 in research and development, 66 in
sales and marketing and 118 in administration. We also had 167 employees working
outside of the U.S. in various functions. We have never had a work stoppage and
none of our U.S. employees are unionized. The employees at MB Quart in
Obrigheim, Germany, are unionized and, in accordance with German law and custom,
are subject to an industry wide collective bargaining agreement. We believe our
employee relations are good.
Subsequent to December 31, 2002, we restructured several business
processes, which we believe will result in improved efficiencies and customer
service. This restructuring resulted in the reduction of approximately 8% of our
salaried staff in Arizona and Michigan.
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 substances by the U.S. Environmental Protection Agency. We
16
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.
ITEM 2. PROPERTIES
Our corporate headquarters and electronics manufacturing facilities are
located in Tempe, Arizona. In the U.S. we manufacture speakers at our facility
in Grand Rapids, Michigan and enclosures at our facility in Stillwater,
Oklahoma. We use warehouses strategically located in the U.S., Germany, and
Singapore. We believe these facilities enhance our ability to serve our markets
faster and more cost effectively than many of our competitors. MB Quart operates
and manufactures product in owned facilities in Obrigheim, Germany.
The following table contains information about our facilities as at
December 31, 2002, all of which are leased except for the MB Quart facilities
that we own:
APPROXIMATE
APPROXIMATE 2002 ANNUAL
FUNCTION LOCATION SQUARE FOOTAGE RENTAL EXPENSE LEASE EXPIRATION
- --------- -------- -------------- -------------- ----------------
Corporate headquarters and research
and development.................. Tempe, Arizona 30,000 $ 291,000 September 30, 2004
Information systems and RTTI ....... Tempe, Arizona 15,000 162,000 September 30, 2004
Manufacturing and purchasing........ Tempe, Arizona 22,000 147,000 December 31, 2004(1)
Warehousing, sales and customer
service.......................... Tempe, Arizona 25,000 167,000 December 31, 2004(1)
Warehousing ........................ Gilbert, Arizona 54,000 408,000 July 31, 2005
Manufacturing, research and
development, purchasing and
administration .................. Grand Rapids, Michigan 81,000 246,000 March 31, 2003(2)
Warehousing ........................ Grand Rapids, Michigan 45,000 201,000 November 30, 2003
Manufacturing, research and
development, warehousing and
administration .................. Stillwater, Oklahoma 69,000 109,000 June 30, 2006
Warehousing ........................ Stillwater, Oklahoma 25,000 72,000 December 31, 2003
Research and development, sales and
administration................... San Mateo, California 3,300 26,000 January 31, 2004
Warehousing and sales............... Mishima, Japan 7,500 110,000 April 30, 2011
Warehousing......................... Singapore 9,000 147,000 January 31, 2004
Warehousing and sales............... Bremen, Germany 20,000 109,000 December 30, 2006
Manufacturing, research and
development, sales, warehousing,
customer service, purchasing and
administration .................. Obrigheim, Germany 70,500 -- Owned
------- ----------
Total ................... 476,300 $2,195,000
======= ==========
- ----------
(1) We have the right to extend each of these leases for one additional
one-year term.
(2) We have the right to extend this lease for one additional one-year term.
Subsequent to December 31, 2002, we began the process of negotiating the
termination of the lease of our Japan location due to the closure of our
Japanese operations.
17
ITEM 3. LEGAL PROCEEDINGS
Since the date of our Annual Report for the year 2001, filed with the SEC
on March 29, 2002, the Fiori patent claim described in the Legal Proceedings
section of that Annual Report has continued into an intensive fact discovery
phase of proceedings. The products at issue in the case are now 16 of our Punch
brand amplifiers, which the plaintiff contends include circuitry that infringes
on his patents. We have incurred substantial costs of defense, at a rate greater
than we expected, which contributed to our increased research and development
costs during the year. We anticipate that discovery and motions in the case will
continue for at least the next two quarters and will cause us to incur
additional defense costs during that period. A trial is likely sometime after
the second quarter of 2003. We continue to believe that the claim involved in
the case is without merit and that we should ultimately prevail in this matter.
We are and may continue to be a party to various lawsuits and arbitrations
from time to time. As at December 31, 2002, we were not a party to any legal
proceedings that we believe are likely to have a material effect on our
business, other than the effect of the expense associated with the Fiori patent
matter described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our shareholders during the
fourth quarter of Fiscal Year 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on The NASDAQ National Market System under the
symbol "ROFO" since April 20, 2000, the date of our initial public offering.
Prior to that time, there was no public market for our common stock. The
following table sets forth the range of high and low sales prices for our common
stock for the periods indicated:
HIGH LOW
---- ---
For the quarter ended:
December 31, 2002 ...................... $ 6.59 $ 5.00
September 30, 2002 ..................... $ 10.75 $ 5.70
June 30, 2002 .......................... $ 10.35 $ 8.50
March 31, 2002 ......................... $ 9.53 $ 8.20
December 31, 2001 ...................... $ 8.58 $ 6.31
September 30, 2001 ..................... $ 7.48 $ 6.26
June 30, 2001 .......................... $ 8.35 $ 5.90
March 31, 2001 ......................... $ 7.75 $ 4.75
As at February 12, 2003, there were approximately 1,562 holders of record
of our common stock.
We have never declared, nor have we paid, any cash dividends on our common
stock. We currently intend to retain our earnings to finance future growth and,
therefore, do not anticipate paying cash dividends on our common stock in the
foreseeable future.
We have not made any sales of unregistered securities during the past three
years, except for (1) sales of our common stock to employees exercising their
stock options during the period prior to the effectiveness of a registration
statement on form S-8 relating to such sales and (2) the sale during March 2002
of 215,000 shares to Grisanti, Galef & Goldress, Inc. pursuant to the stock
options we granted to that firm in 1992.
18
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO BE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE OF WEIGHTED AVERAGE EXERCISE FUTURE ISSUANCE UNDER EQUITY
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING COMPENSATION PLANS (EXCLUDING
WARRANTS OPTIONS, SECURITIES
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------- ---------- ------------------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 1,478,016 4.9254 604,358
Stock Options
ESPP
Stock Awards
--------- ------ -------
Total 1,478,016 4.9254 604,358
Equity compensation plans
not approved by security holders None None None
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8, "Financial Statements and
Supplementary Data." The table contains selected consolidated financial data for
the years ended December 31, 1998, 1999, 2000, 2001 and 2002, derived from our
audited consolidated financial statements.
The selected financial information for the years prior to 2002 do not
reflect financial results of the acquisitions of the NHT brand or SimpleDevices
business, which were completed in the fourth quarter of 2002. In addition, the
selected financial information for the years prior to 2001 do not reflect
financial results of the acquisitions of the Q-Logic or MB Quart brands, which
were completed in 2001.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statements of Income:
Net sales .................................... $ 87,577 $ 123,889 $ 144,640 $ 157,752 $ 168,918
Cost of goods sold ........................... 55,146 75,014 92,533 103,904 107,747
--------- --------- --------- --------- ---------
Gross profit ................................. 32,431 48,875 52,107 53,848 61,171
Operating expenses:
Sales and marketing ...................... 14,821 20,602 22,709 24,228 27,370
General and administrative ............... 10,211 13,465 13,036 15,771 17,718
Research and development ................. 1,876 2,277 2,831 3,322 6,014
--------- --------- --------- --------- ---------
Total operating expenses ............ 26,908 36,344 38,576 43,321 51,102
--------- --------- --------- --------- ---------
Operating income ............................. 5,523 12,531 13,531 10,527 10,069
Interest and other expense (income), net ..... 1,501 1,946 807 548 (74)
--------- --------- --------- --------- ---------
Income before tax ............................ 4,022 10,585 12,724 9,979 10,143
Income tax expense ........................... 1,717 4,088 4,714 3,756 3,903
Minority interest ............................ -- -- -- -- (40)
--------- --------- --------- --------- ---------
Net income ................................... $ 2,305 $ 6,497 $ 8,010 $ 6,223 $ 6,280
========= ========= ========= ========= =========
Net income per share:
Basic .................................... $ 0.52 $ 1.40 $ 1.17 $ 0.77 $ 0.74
========= ========= ========= ========= =========
Diluted .................................. $ 0.41 $ 1.04 $ 1.00 $ 0.70 $ 0.68
========= ========= ========= ========= =========
Shares used to calculate net income per share:
Basic .................................... 4,412 4,641 6,864 8,109 8,540
========= ========= ========= ========= =========
Diluted .................................. 5,951 6,289 8,009 8,913 9,301
========= ========= ========= ========= =========
19
DECEMBER 31,
--------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(IN THOUSANDS)
Consolidated Balance Sheet Data:
Working capital ............................ $ 13,488 $ 21,219 $ 37,179 $ 45,913 $ 52,354
Total assets ............................... 37,307 52,147 66,918 85,954 101,190
Current portion of long-term debt .......... 2,393 1,420 935 879 1,253
Long-term debt and capital lease obligations 14,292 17,342 434 10,553 10,027
Total liabilities .......................... 32,369 39,390 20,586 32,997 34,711
Shareholders' equity ....................... 4,907 12,757 46,332 52,957 65,546
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
HISTORY
Rockford was incorporated in 1980 to continue a high performance mobile
audio business founded in 1973 by mobile audio enthusiast Jim Fosgate. Rockford
developed and has consistently maintained a reputation for technical excellence.
Rockford's management team, led by Gary Suttle, our President and Chief
Executive Officer:
* Is focused on profitability, having established and implemented
specific financial objectives through improved business processes and
sophisticated management information systems;
* Has increased the number of new product introductions while keeping
the number of design engineers relatively constant;
* Implemented new sourcing and manufacturing strategies, increasing
product reliability, reducing product development time and reducing
product costs; and
* Implemented a more focused advertising and marketing strategy to
enhance Rockford's brand images.
We believe that we have the people, processes and systems in place to
enable us to continue to grow profitably.
BUSINESS
We generated over 97% of our sales in 2002 from our mobile audio products.
We anticipate that the addition of SimpleDevices and NHT, as well as the
development of our other home theater products, will cause home audio products
to capture a significantly greater percentage of our sales in 2003.
In the U.S., we sell our mobile audio products using commissioned
independent sales representative firms who are supported by our employee
regional managers. Internationally, we sell products in 76 countries. In Germany
we sell through wholly owned subsidiaries using commissioned independent sales
representatives. In Canada, Austria, Switzerland and Italy we sell through
commissioned independent sales representatives. In other countries, we sell our
products to independent distributors who resell them to retailers. We are in the
process of closing our Japanese subsidiary effective during the first quarter of
2003 and, after its closing, will sell our products to an independent
distributor who will sell them to Japanese retailers.
Best Buy is a significant customer and accounted for 16.7% of our sales in
2000, 16.3% in 2001 and 21.1% in 2002. Our business plan contemplates that Best
Buy will continue to account for a significant portion of our sales for the
foreseeable future. No other single customer accounted for more than 10% of our
sales in any year since 1999.
20
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, selected consolidated
statements of income data expressed as a percentage of net sales:
YEAR ENDED DECEMBER 31,
------------------------------
2000 2001 2002
------ ------ ------
Net sales .................................. 100.0% 100.0% 100.0%
Cost of goods sold ......................... 64.0 65.9 63.8
------ ------ ------
Gross profit ............................... 36.0 34.1 36.2
Operating expenses:
Sales and marketing .................. 15.7 15.4 16.2
General and administrative ........... 9.0 10.0 10.4
Research and development ............. 2.0 2.1 3.6
------ ------ ------
Total operating expenses ..... 26.7 27.5 30.2
------ ------ ------
Operating income ........................... 9.3 6.6 6.0
Interest and other expense, net ............ 0.5 0.3 0.0
------ ------ ------
Income before tax .......................... 8.8 6.3 6.0
Income tax expense ......................... 3.3 2.4 2.3
------ ------ ------
Minority interest .......................... -- -- --
Net income ................................. 5.5% 3.9% 3.7%
====== ====== ======
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, 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 and legal costs related to our
intellectual property.
GEOGRAPHIC DISTRIBUTION OF SALES
Since 2000, our sales by geographic region were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------ %
REGION(1) 2000 2001 2002 2002
- --------- -------- -------- -------- ------
(IN THOUSANDS)
United States ........... $121,375 $130,459 $135,830 80.4%
Other Americas .......... 7,289 9,469 7,871 4.7
Europe .................. 7,687 10,278 17,413 10.3
Asia .................... 8,289 7,546 7,804 4.6
-------- -------- -------- ------
Total sales ...... $144,640 $157,752 $168,918 100.0%
======== ======== ======== ======
(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.
21
IN THE FOLLOWING DISCUSSION, CERTAIN INCREASES OR DECREASES MAY DIFFER DUE
TO ROUNDING.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET SALES. Sales increased by $11.1 million, or 7.1%, to $168.9 million for
2002 from $157.8 million for 2001. Excluding currency effects, sales increased
by $10.5 million, or 6.6%, to $169.5 million for 2002. The increase in sales was
primarily attributable to the addition of sales from our MB Quart and Q-Logic
brands, increased sales of our Lightning Audio and Install Edge brands at big
box retailers and strong sales from our OEM business. The increase in sales was
partially offset by a decrease in Rockford Fosgate sales during the period. We
believe the decrease in Rockford Fosgate sales reflected the continued weak
retail environment for the mobile audio market and the resulting pressure on our
independent specialty dealer channel. Additionally, in an effort to build brand
image and solidify our relationships with core dealers, we discontinued shipping
to several of our Rockford Fosgate brand dealers who were not operating in a
manner consistent with our policies. We elected to forego these sales in order
to improve the quality of our dealer base and, if our efforts are successful,
anticipate increased sales to dealers who comply with our policies will, over
time, offset the forgone sales to these terminated dealers. Until the consumer
market strengthens, we are planning for sales of our flagship Rockford Fosgate
brand to be flat, compared to anticipated declines for the mobile audio market
as a whole, and expect that most of our sales growth will continue to come from
our newer brands.
U.S. sales increased by $5.3 million, or 4.1%, to $135.8 million for 2002
from $130.5 million for 2001, with the increase attributable to the factors
discussed above. International sales increased by $5.8 million, or 21.2%, to
$33.1 million for 2002 from $27.3 million for 2001. This increase was primarily
due to increased sales in Europe, Canada and Asia offset by a slight decrease in
sales in Latin America, due in part to the termination and replacement of our
Rockford Fosgate distributor in Latin America.
COST OF GOODS SOLD. Cost of goods sold increased by $3.8 million, or 3.7%,
to $107.7 million for 2002 from $103.9 million for 2001. Substantially all of
the increase was attributable to sales of our MB Quart and Q-Logic brands. As a
percent of sales, cost of goods sold decreased to 63.8% for 2002 from 65.9% for
2001. The primary reasons for the decrease as a percent of sales included a mix
shift toward higher margined products and cost reductions related to the direct
sourcing of our Connecting Punch accessories product.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
$3.1 million, or 13.0%, to $27.4 million for 2002 from $24.2 million for 2001.
As a percent of sales, sales and marketing expenses increased to 16.2% for 2002
from 15.4% for 2001. This increase was primarily due to higher cost structures
for our acquired MB Quart and Q-Logic brands, including higher freight costs as
a percent of sales associated with shipping Q-Logic product and increased duty
costs on shipping product to Canada.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.9 million, or 12.3%, to $17.7 million for 2002 from $15.8
million for 2001. The primary reasons for the increase in general and
administrative expenses were higher overhead cost structures for our MB Quart
and Q-Logic brands and our acquired SimpleDevices business and increased legal
costs. This increase was partially offset by the reduction of performance-based
compensation expense. Additionally, abandoned acquisition costs of less than
$0.1 million were written off during the first quarter of 2002 and $0.6 million
were written off in 2001. These were previously capitalized costs for a proposed
acquisition, which was abandoned and accordingly expensed. As a percent of
sales, general and administrative expenses increased to 10.5% for 2002 from
10.0% for 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $2.7 million, or 81.0%, to $6.0 million for 2002 from $3.3 million
for 2001. As a percent of sales, these expenses increased to 3.6% for 2002 from
2.1% for 2001. The increase was primarily due to increased legal costs
associated with the defense of a patent matter and personnel and product
development costs relating to our MB Quart and Q-Logic brands and our acquired
SimpleDevices business.
OPERATING INCOME. Operating income decreased by $0.4 million, or 4.4%, to
$10.1 million for 2002 from $10.5 million for 2001. As a percent of sales,
operating income decreased to 6.1% for 2002 from 6.6% for 2001. This decrease is
primarily attributable to increased general and administrative expenses
22
associated with higher overhead cost structures for our MB Quart and Q-Logic
brands and our acquired SimpleDevices business and increased research and
development expenses associated with legal costs relating to the defense of a
patent matter.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net, primarily
consists of interest expense and currency gains and losses. Interest and other
expense, net, decreased by $0.6 million to result in income of $0.1 million for
2002 compared to expense of $0.5 million for 2001. The decrease was primarily
due to foreign currency gains, which were partially offset by increased interest
expense due to the increased balance of our line of credit resulting from the MB
Quart, Q-Logic and NHT brand acquisitions and SimpleDevices business
acquisition.
INCOME TAX EXPENSE. Income tax expense increased by $0.1 million to $3.9
million for 2002 from $3.8 million for 2001. The effective income tax rates were
38.5% for 2002 and 37.6% for 2001. The primary reason for this increase in the
effective tax rate was a decrease in foreign tax benefits from foreign net
operating losses.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES. Sales increased by $13.2 million, or 9.1%, to $157.8 million for
2001 from $144.6 million for 2000. Excluding currency effects, sales increased
by $14.5 million, or 10.0%, to $159.1 million for 2001. The increase in sales
was primarily attributable to sales in the amount of $9.3 million under the
brands acquired in 2001, Q-Logic and MB Quart. Additionally, OEM sales to
Nissan, which began in the third quarter of 2001, and increased sales by
Lightning Audio and InstallEdge.com, contributed to the increase in sales. The
increase in sales was partially offset by a decrease in Rockford Fosgate sales
during the period, reflective of the soft consumer market. Until the consumer
market strengthens, we are planning for sales of our flagship Rockford Fosgate
brand to be flat, compared to anticipated declines for the mobile audio market
as a whole, and expect that most of our sales growth will come from our new
brands.
U.S. sales increased by $9.1 million, or 7.5%, to $130.5 million for 2001
from $121.4 million for 2000, with the increase attributable to the factors
discussed above. International sales increased by $4.0 million, or 17.2%, to
$27.3 million for 2001 from $23.3 million for 2000. This increase was primarily
due to increased sales in Europe, Latin America and Canada, offset by a slight
decrease in sales in Asia.
COST OF GOODS SOLD. Cost of goods sold increased by $11.4 million, or
12.3%, to $103.9 million for 2001 from $92.5 million for 2000. This increase was
primarily due to increased sales. As a percent of sales, cost of goods sold
increased to 65.9% for 2001 from 64.0% for 2000. The increase as a percent of
sales resulted from a mix shift toward lower margined products, a more
aggressive stance on pricing and promotional programs aimed at increasing market
share and end-of-life discounts on source units. Additionally, based on
Accounting Principles Board (APB) Opinion No. 16, BUSINESS COMBINATIONS, cost of
goods sold relating to the finished goods inventory purchased in the
acquisitions of Audio Innovations and MB Quart was higher than we expect our
manufactured cost to be. Once the finished goods inventory purchased through
these acquisitions is sold and we begin selling our newly manufactured
inventory, we believe cost of goods sold relating to these acquired product
lines will decrease.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased by
$1.5 million, or 6.6%, to $24.2 million for 2001 from $22.7 million for 2000.
This increase was primarily due to increased headcount in our sales and
marketing departments principally related to the acquisitions of Audio
Innovations and MB Quart and increased freight expense. As a percent of sales,
sales and marketing expenses decreased to 15.4% for 2001 from 15.7% for 2000.
The decrease as a percent of sales was primarily because some expenses in this
category are fixed and do not fluctuate with sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses,
including abandoned acquisition costs, increased by $2.8 million, or 21.5%, to
$15.8 million for 2001 from $13.0 million for 2000. Excluding abandoned
acquisition costs, general and administrative expenses increased by $2.2
million, or 16.9%, to $15.2 million for 2001 from $13.0 million for 2000. The
primary reason for the increase in general and administrative expenses was cost
structures in our two acquired businesses, Audio Innovations and MB Quart, that
did not yet reflect synergies we expect to create over the next several
quarters. Additionally, abandoned acquisition costs of $0.6 million were written
off during the third quarter of 2001. These were previously capitalized costs
for a proposed acquisition, which was abandoned and accordingly expensed. As a
percent of sales, general and
23
administrative expenses, including abandoned acquisition costs, increased to
10.0% for 2001 from 9.0% for 2000. Excluding abandoned acquisition costs,
general and administrative expenses increased to 9.6% of sales for 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.5 million, or 17.3%, to $3.3 million for 2001 from $2.8 million
for 2000. This increase was primarily due to increased personnel and product
development costs. As a percent of sales, these expenses increased to 2.1% for
2001 from 2.0% for 2000.
OPERATING INCOME. Operating income decreased by $3.0 million, or 22.2%, to
$10.5 million for 2001 from $13.5 million for 2000. This decrease primarily was
attributable to a mix shift toward lower margined products and a more aggressive
stance on pricing and promotional programs aimed at increasing market share, the
expensing of abandoned acquisition costs and end-of-life discounts on source
units. As a percent of sales, operating income decreased to 6.6% for 2001 from
9.3% for 2000. The primary reasons for this decrease are mentioned above.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net, primarily
consists of interest expense. Interest and other expense, net, decreased by $0.3
million, or 32.1%, to $0.5 million for 2001 from $0.8 million for 2000. Interest
expense decreased in 2001 primarily due to substantially lower market interest
rates.
INCOME TAX EXPENSE. Income tax expense decreased by $0.9 million to $3.8
million for 2001 from $4.7 million for 2000 due primarily to the decrease in our
taxable income. The effective income tax rates were 37.6% for 2001 and 37.0% for
2000. The primary reason for this increase in the effective tax rate was a
decrease in foreign tax benefits from foreign net operating losses.
QUARTERLY RESULTS OF OPERATIONS
Our sales on a quarterly basis reflect the seasonality of the mobile 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. Our newly
acquired NHT business has seasonality that somewhat offsets this core business,
with higher sales in the 3rd and 4th quarters. Because NHT is a smaller
business, we expect our business to remain seasonal for the foreseeable future.
The following tables show selected consolidated quarterly statements of
income data that were derived from our unaudited financial statements for each
of the eight quarters ended December 31, 2002, 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.
24
CONSOLIDATED STATEMENT OF INCOME DATA
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2001 2001 2001 2001 2002 2002 2002 2002
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ............................. $ 37,363 $ 44,803 $ 36,562 $ 39,024 $ 43,734 $ 51,228 $ 40,583 $ 33,373
Cost of goods sold .................... 24,083 29,306 24,577 25,938 27,212 31,199 26,315 23,021
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit .......................... 13,280 15,497 11,985 13,086 16,522 20,029 14,268 10,352
Operating expenses:
Sales and marketing ................. 5,780 6,235 5,962 6,251 7,244 7,594 6,302 6,231
General and administrative .......... 3,374 4,326 3,823 4,248 4,651 5,925 4,539 2,601
Research and development ............ 770 691 925 936 976 1,148 1,805 2,086
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses .......... 9,924 11,252 10,710 11,435 12,871 14,667 12,646 10,918
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ............... 3,356 4,245 1,275 1,651 3,651 5,362 1,622 (566)
Interest and other
expense (income), net ................. 204 96 (67) 315 184 (337) 278 (199)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before tax .............. 3,152 4,149 1,342 1,336 3,467 5,699 1,344 (367)
Income tax expense .................... 1,160 1,563 489 544 1,289 2,112 519 (17)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) before
minority interest ..................... 1,992 2,586 853 792 2,178 3,587 825 (350)
Minority interest ..................... -- -- -- -- -- -- -- (40)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ..................... $ 1,992 $ 2,586 $ 853 $ 792 $ 2,178 $ 3,587 $ 825 $ (310)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic ............................... $ 0.25 $ 0.32 $ 0.10 $ 0.10 $ 0.26 $ 0.42 $ 0.10 $ (0.04)
======== ======== ======== ======== ======== ======== ======== ========
Diluted ............................. $ 0.23 $ 0.29 $ 0.10 $ 0.09 $ 0.24 $ 0.38 $ 0.09 $ (0.03)
======== ======== ======== ======== ======== ======== ======== ========
Shares used to calculate net
income per share:
Basic ............................... 8,007 8,082 8,172 8,174 8,275 8,508 8,656 8,712
======== ======== ======== ======== ======== ======== ======== ========
Diluted ............................. 8,834 8,925 8,957 8,935 9,216 9,384 9,406 9,117
======== ======== ======== ======== ======== ======== ======== ========
PERCENT OF SALES FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
2001 2001 2001 2001 2002 2002 2002 2002
-------- -------- -------- -------- -------- -------- -------- --------
Net sales ............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................... 64.5 65.4 67.2 66.5 62.2 60.9 64.8 69.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit .......................... 35.5 34.6 32.8 33.5 37.8 39.1 35.2 31.0
Operating expenses:
Sales and marketing ................. 15.4 13.9 16.3 16.0 16.6 14.8 15.5 18.6
General and administrative .......... 9.0 9.7 10.5 10.9 10.7 11.6 11.2 7.8
Research and development ............ 2.1 1.5 2.5 2.4 2.2 2.2 4.5 6.3
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses .......... 26.5 25.1 29.3 29.3 29.5 28.6 31.2 32.7
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) ............... 9.0 9.5 3.5 4.2 8.3 10.5 4.0 (1.7)
Interest and other
expense (income), net ................. 0.6 0.2 (0.2) 0.8 0.4 (0.6) 0.7 (0.6)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before tax .............. 8.4 9.3 3.7 3.4 7.9 11.1 3.3 (1.1)
Income tax expense .................... 3.1 3.5 1.4 1.4 2.9 4.1 1.3 (0.1)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) before
minority interest ..................... 5.3% 5.8% 2.3% 2.0% 5.0% 7.0% 2.0% (1.0)
Minority interest ..................... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.1)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ..................... 5.3% 5.8% 2.3% 2.0% 5.0% 7.0% 2.0% (0.9)%
===== ===== ===== ===== ===== ===== ===== =====
25
LIQUIDITY AND CAPITAL RESOURCES
We have financed our business primarily using existing working capital,
cash flows from operations, the proceeds from our initial public offering, and
bank borrowings. On June 28, 2001, we entered into a $30.0 million revolving
credit facility with Bank of America, N.A. and Bank One, Arizona, N.A. This
credit facility replaced a $20.0 million line previously maintained with another
financial institution. We had working capital of $52.4 million at December 31,
2002, compared to $45.9 million at December 31, 2001. At December 31, 2002, we
maintained $0.3 million of cash and cash equivalent balances.
As at December 31, 2002, we had a balance of $8.5 million on our $30.0
million bank credit facility, which is collateralized by substantially all of
our assets and consists of a swing line of credit and a revolving line of
credit. The swing line of credit has a variable interest rate per annum of
Prime. The revolving line of credit has a blended variable interest rate of
LIBOR plus 150 basis points. As at December 31, 2002, the bank credit facility
had a weighted average interest rate of 3.1% per annum. The bank credit facility
is scheduled to mature on June 28, 2004. The bank credit facility contains
provisions that, among other things, require that we maintain certain minimum
levels of EBITDA and debt service coverage and also limit the amount of debt
incurred and capital expenditures annually.
During the second quarter of 2002 we extended our $5.0 million capital
lease credit facility under which we can fund leases until June 28, 2003, 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, 2002, the capital lease credit facility had an outstanding balance of $2.4
million with a weighted average interest rate of 5.72% per annum.
Net cash provided by operating activities was $4.9 million for the twelve
months ended December 31, 2002, and $7.5 million for the twelve months ended
December 31, 2001. Net cash provided by operating activities for the twelve
months ended December 31, 2002, was lower than net income for the period,
primarily due to increases in accounts receivable and inventory.
Net cash used in investing activities was $9.7 million for the twelve
months ended December 31, 2002, and $16.5 million for the twelve months ended
December 31, 2001. Net cash used in investing activities for the twelve months
ended December 31, 2002, was primarily related to the acquisitions of
SimpleDevices and NHT in the fourth quarter of 2002 and to purchases of
property, plant and equipment. Net cash used in investing activities for the
twelve months ended December 31, 2001, was primarily related to the acquisitions
of Audio Innovations and MB Quart in the third quarter of 2001 and to purchases
of property, plant and equipment.
Net cash provided by financing activities was $1.2 million for the twelve
months ended December 31, 2002, and $9.0 million for the twelve months ended
December 31, 2001. Net cash provided by financing activities for the twelve
months ended December 31, 2002, was primarily a result of the proceeds from the
exercise of stock options, which was partially offset by net repayments of our
bank credit facility.
We believe our existing resources and anticipated cash flows from
operations, coupled with availability on our credit facility, will be sufficient
to meet our cash needs for the next twelve months. However, should we pursue an
acquisition larger than our existing resources can support, we may need to seek
additional debt or equity resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our consolidated
financial statements. We evaluate our estimates and judgments on an on-going
basis. We base our estimates on historical experience and on assumptions that we
believe to be reasonable under the circumstances. Our experience and assumptions
form the basis for our judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
vary from what we anticipate and different assumptions or estimates about the
future could change our reported results. We believe the following accounting
policies are the most critical to us, in that they are important to the
26
portrayal of our financial statements and they require our most difficult,
subjective or complex judgments in the preparation of our consolidated financial
statements:
REVENUE RECOGNITION. We recognize revenue pursuant to Staff Accounting
Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. Accordingly, we
recognize revenue and record sales, net of related discounts, when all of the
following criteria are met:
* Persuasive evidence of an arrangement exists;
* Ownership has transferred to the customer;
* The price to the customer is fixed or determinable; and
* Collectability is reasonably assured.
We sell almost all of our products F.O.B. our facility, so that upon
shipment of products, the above criteria are met and revenue is recognized.
Additionally, Rockford recognizes revenue from the sale of software in
accordance with SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenue is recorded from
packaged software and license fees when persuasive evidence of an arrangement
exists, the software product has been shipped, the fees are fixed and
determinable, collectibility is reasonably assured and vendor-specific objective
evidence of fair value exists for any undeliverable products or services
("elements") of the arrangement.
We also record reductions to revenue for estimated customer returns and
additional sales incentive offerings such as growth and volume incentive rebates
and prompt pay discounts based on historical rates. Should a greater proportion
of customers return product or redeem incentives than we estimate, we may need
to make additional reductions to revenue.
INTANGIBLE ASSETS. On January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. When we account for acquired businesses as
purchases, we allocate purchase prices to the assets, definite-lived intangible
assets, and liabilities acquired based on the estimated fair values on the
respective acquisition dates. Based on these values, any excess purchase price
over the fair value of the net assets acquired is allocated to goodwill
Prior to January 1, 2002, we amortized goodwill over the useful life of the
underlying asset, not to exceed 15 years. On January 1, 2002, we began
accounting for goodwill under the provisions of SFAS Nos. 141 and 142. As at
December 31, 2002, we had gross goodwill of $7,291,000 and accumulated
amortization of $401,000. For the year ended December 31, 2002, we did not
recognize amortization expense related to goodwill. We completed two
acquisitions in the third quarter of 2001and two acquisitions in the fourth
quarter of 2002 and have not recorded any amortization for these acquisitions on
amounts allocated to goodwill in accordance with SFAS No. 141. Application of
the non-amortization provisions of SFAS No. 142 resulted in an increase in
income from continuing operations before income taxes of approximately $168,000
for the year ended December 31, 2002.
In assessing the recoverability of our goodwill and other intangibles, we
must make assumptions about estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for these assets not previously recorded. Some factors we
consider important which could trigger an impairment review include the
following:
* Significant underperformance relative to expected historical or
projected future operating results;
* Significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
* Our market capitalization relative to net book value; and
* Significant negative industry or economic trends.
We have tested goodwill for impairment using the two-step process
prescribed in SFAS No. 142. The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if any. We
performed the first of the required impairment tests for goodwill as at December
31, 2002, and determined that our goodwill is not impaired and it is not
necessary to undertake the second step in the two-step process. During the year
ended December 31, 2002, we did not record any impairment losses related to
goodwill and other intangible assets.
27
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful
accounts, based on historical rates, for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances might be required.
EXCESS AND OBSOLETE INVENTORY. We maintain a reserve for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those we project, additional inventory write-downs might be
required. Any change to the reserve arising from forecast revisions is reflected
in cost of sales in the period the revision is made.
WARRANTY. We maintain a warranty reserve, based on historical rates, for
costs associated with the repair or replacement of product that fails to meet
our standard warranty against defects in material and workmanship. Should actual
product failure rates differ from our estimates, revisions to our estimated
accruals would be required.
NEW ACCOUNTING STANDARDS. In December 2002, FASB issued SFAS No. 148,
ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE. SFAS No. 148
amends FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to
provide alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation. Statement 148 also amends the
disclosure provisions of SFAS No. 123 and APB Opinion No. 28, INTERIM FINANCIAL
REPORTING, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS No. 148 are applicable
to all companies with stock-based employee compensation, regardless of whether
they account for that compensation using the fair value method of SFAS No. 123
or the intrinsic value method of APB Opinion No. 25. As allowed by SFAS No. 123,
we have elected to continue to use the accounting method prescribed by APB
Opinion No. 25 and had adopted the disclosure requirements of SFAS No. 123. We
do not expect the adoption of this statement to have an impact on our results of
operations or financial position.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 supersedes Emerging Issues Task
Force (EITF) No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION
BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING). SFAS No. 146 eliminates the provisions of EITF No. 94-3
that required a liability to be recognized for certain exit or disposal
activities at the date an entity committed to an exit plan. SFAS No. 146
requires a liability for costs associated with an exit or disposal activity to
be recognized when the liability is incurred. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. We do not
expect the adoption of this statement to have an impact on our results of
operations or financial position.
INFLATION. Inflation has not had a significant impact on our operations
since we operate in a market that requires continuing price decreases. We do not
anticipate that inflation will not have a significant impact on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are in the areas of interest rate risk
and foreign currency exchange rate risk. We do not use derivative financial
instruments. Our holdings of cash equivalents are subject to interest rate
fluctuations, but we believe this risk is immaterial due to the short-term
nature of these investments and the relatively small cash balances we carry. At
December 31, 2002, we had a balance of $8.5 million outstanding on our $30.0
million bank credit facility, which is also subject to interest rate
fluctuations.
The value of the U.S. dollar affects our financial results. Changes in
exchange rates may positively or negatively affect our revenues, gross margins,
operating expenses and shareholders' equity as expressed in U.S. dollars.
Historically, our exposure to currency exchange rate fluctuations was modest due
to the fact that we sold our products primarily in U.S. dollars and held only a
small percentage of our assets outside the U.S. However, we conduct a growing
portion of our business in foreign currency and are increasing our billings in
28
local currencies in Japan, Canada and Europe. During 2002, $22.9 million or
13.5% of our sales were denominated in a currency other than U.S. dollars.
At December 31, 2002, we had not engaged in any foreign currency hedging
activities, but instead have attempted to minimize currency exposure risk
through "natural hedges," which balance foreign denominated assets with foreign
denominated liabilities. There can be no assurance that such an approach will be
successful, especially if a significant and sudden decline occurs in the value
of local currencies. During the first quarter of 2003 our Board of Directors
approved and we began to implement a new foreign currency hedging policy. The
goal of the program is to provide stability to the U.S. Dollar values of
non-function currency cash flows. Although it is impossible to eliminate all
currency risk, implementation of this program should mitigate the risk of
significant changes in our earnings due to short-term foreign exchange
fluctuations.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Consolidated Financial Statements of Rockford Corporation and Subsidiaries
Report of Independent Auditors ............................................................................ 31
Consolidated Balance Sheets as at December 31, 2001 and 2002 .............................................. 32
Consolidated Statements of Income for the years ended December 31, 2000, 2001 and 2002 .................... 33
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 2001 and 2002 ...... 34
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002 ................ 35
Notes to Consolidated Financial Statements ................................................................ 36
Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts.............................. 52
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Rockford Corporation
We have audited the accompanying consolidated balance sheets of Rockford
Corporation and subsidiaries (Rockford) as of December 31, 2002 and 2001, and
the related consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 2002, 2001 and 2000. Our audits also
included the financial statement schedule listed in the Index to Consolidated
Financial Statements and Schedule. These financial statements and schedule are
the responsibility of Rockford's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Rockford
Corporation and subsidiaries at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for the years ended December
31, 2002, 2001 and 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, 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 7, 2003, except for Note 15 for which the date is February 19, 2003
31
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
2001 2002
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 2,411 $ 304
Accounts receivable, less allowances of $2,613 and $2,996 at
December 31, 2001 and 2002, respectively .................................... 28,036 32,890
Inventories, net .............................................................. 28,165 32,445
Deferred income taxes ......................................................... 4,500 5,160
Income taxes receivable ....................................................... 1,874 1,844
Prepaid expenses and other .................................................... 3,371 4,395
-------- --------
Total current assets ............................................................. 68,357 77,038
Property and equipment, net ...................................................... 9,976 15,262
Deferred income taxes ............................................................ 394 292
Goodwill, net .................................................................... 6,303 6,890
Other assets ..................................................................... 924 1,708
-------- --------
Total assets ..................................................................... $ 85,954 $101,190
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 9,089 $ 10,753
Accrued salaries and incentives ............................................... 2,451 1,978
Accrued warranty .............................................................. 4,815 4,595
Other accrued expenses ........................................................ 5,210 6,105
Current portion of notes payable, long-term debt and capital
lease obligations ........................................................... 879 1,253
-------- --------
Total current liabilities ........................................................ 22,444 24,684
Notes payable and long-term debt, less current portion ........................... 9,720 8,611
Capital lease obligations, less current portion .................................. 833 1,416
Minority interest ................................................................ -- 933
SHAREHOLDERS' EQUITY
Common stock, $.01 par value. Authorized shares -- 40,000,000
Issued shares -- 8,196,619 and 8,747,197 shares at December 31,
2001 and 2002, respectively ................................................. 82 87
Additional paid-in capital .................................................... 30,341 35,131
Retained earnings ............................................................. 22,918 29,198
Accumulated other comprehensive income (loss) ................................. (384) 1,130
-------- --------
Total shareholders' equity ....................................................... 52,957 65,546
-------- --------
Total liabilities and shareholders' equity ....................................... $ 85,954 $101,190
======== ========
See accompanying notes.
32
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ....................................... $ 144,640 $ 157,752 $ 168,918
Cost of goods sold .............................. 92,533 103,904 107,747
--------- --------- ---------
Gross profit .................................... 52,107 53,848 61,171
Operating expenses:
Sales and marketing ........................... 22,709 24,228 27,370
General and administrative .................... 13,036 15,771 17,718
Research and development ...................... 2,831 3,322 6,014
--------- --------- ---------
Total operating expenses ........................ 38,576 43,321 51,102
--------- --------- ---------
Operating income ................................ 13,531 10,527 10,069
Other (income) expense:
Interest ...................................... 793 455 528
Other (income) expense ........................ 14 93 (602)
--------- --------- ---------
Income before income taxes ...................... 12,724 9,979 10,143
Income tax expense .............................. 4,714 3,756 3,903
--------- --------- ---------
Income before minority interest ................. 8,010 6,223 6,240
Minority interest ............................... -- -- (40)
--------- --------- ---------
Net income ...................................... $ 8,010 $ 6,223 $ 6,280
========= ========= =========
Net income per common share:
Basic ......................................... $ 1.17 $ 0.77 $ 0.74
========= ========= =========
Diluted ....................................... $ 1.00 $ 0.70 $ 0.68
========= ========= =========
Weighted average shares:
Basic ......................................... 6,864 8,109 8,540
========= ========= =========
Diluted ....................................... 8,009 8,913 9,301
========= ========= =========
See accompanying notes.
33
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
-------- -------- -------- -------- ------------- --------
(IN THOUSANDS)
Balance at December 31, 1999 ................... 4,753 48 3,686 8,685 338 12,757
Currency translation ......................... -- -- -- -- (285) (285)
Net income ................................... -- -- -- 8,010 -- 8,010
--------
Comprehensive income ......................... 7,725
--------
Issuance of shares from
Initial Public Offering .................... 2,543 25 24,077 -- -- 24,102
Conversion of subordinated debt to
common stock ............................... 400 4 972 -- -- 976
Exercise of stock options .................... 190 2 535 -- -- 537
Issuance of shares for employee
stock purchase plan ........................ 33 -- 135 -- -- 135
Exercise of warrants ......................... 78 1 99 -- -- 100
-------- -------- -------- -------- -------- --------
Balance at December 31, 2000 ................... 7,997 80 29,504 16,695 53 46,332
Currency translation ......................... -- -- -- -- (437) (437)
Net income ................................... -- -- -- 6,223 -- 6,223
--------
Comprehensive income ......................... 5,786
--------
Exercise of stock options .................... 149 1 440 -- -- 441
Issuance of shares for employee
stock purchase plan ........................ 51 1 397 -- -- 398
-------- -------- -------- -------- -------- --------
Balance at December 31, 2001 ................... 8,197 $ 82 $ 30,341 $ 22,918 $ (384) $ 52,957
Currency translation ......................... -- -- -- -- 1,514 1,514
Net income ................................... -- -- -- 6,280 -- 6,280
--------
Comprehensive income ......................... 7,794
--------
Exercise of stock options .................... 500 5 1,039 -- -- 1,044
Tax benefit related to
non-qualified option exercises ............. -- -- 3,453 -- -- 3,453
Issuance of shares for employee
stock purchase plan ........................ 50 -- 298 -- -- 298
-------- -------- -------- -------- -------- --------
Balance at December 31, 2002 ................... 8,747 $ 87 $ 35,131 $ 29,198 $ 1,130 $ 65,546
======== ======== ======== ======== ======== ========
See accompanying notes.
34
ROCKFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income .................................................................... $ 8,010 $ 6,223 $ 6,280
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................................. 3,396 3,880 4,475
Gain on sale of property and equipment .................................... (3) (6) (10)
Deferred income tax ....................................................... (251) 834 (95)
Provision for doubtful accounts ........................................... 249 969 861
Provision for inventory allowances ........................................ 616 1,332 1,490
Minority interest ......................................................... -- -- (40)
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (7,656) 2,359 (4,757)
Inventories ............................................................. (6,096) (3,403) (4,616)
Prepaid expenses and other .............................................. 657 (522) 782
Accounts payable ........................................................ (324) 1,093 (105)
Accrued salaries and incentives ......................................... (2,507) (1,743) (473)
Accrued warranty ........................................................ 1,109 (113) (265)
Income taxes payable (receivable) ....................................... 130 (2,334) 1,045
Other accrued expenses .................................................. 181 (1,020) 343
-------- -------- --------
Net cash provided by (used in) operating activities ........................... (2,489) 7,549 4,915
INVESTING ACTIVITIES
Purchases of property and equipment ........................................... (3,851) (5,300) (6,751)
Proceeds from sale of property and equipment .................................. 3 6 10
Acquisitions of business, net of cash acquired ................................ -- (11,292) (2,413)
Decrease (increase) in other assets ........................................... (252) 123 (572)
-------- -------- --------
Net cash used in investing activities ......................................... (4,100) (16,463) (9,726)
FINANCING ACTIVITIES
Net proceeds from notes payable and long-term debt ............................ 249 1,122 1,723
Proceeds from (payments on) notes payable
and long-term debt .......................................................... (15,719) 7,910 (1,109)
(Payments on) capital lease obligations ....................................... (697) (859) (766)
Proceeds from initial public offering ......................................... 24,102 -- --
Proceeds from employee stock purchase plan .................................... 135 398 298
Proceeds from exercise of stock options and warrants .......................... 637 441 1,044
-------- -------- --------
Net cash provided by financing activities ..................................... 8,707 9,012 1,190
Effect of exchange rate changes on cash ....................................... (285) (437) 1,514
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......................... 1,833 (339) (2,107)
Cash and cash equivalents at beginning of year ................................ 917 2,750 2,411
-------- -------- --------
Cash and cash equivalents at end of year ...................................... $ 2,750 $ 2,411 $ 304
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Conversion of subordinated debt to common stock ............................... $ 976 $ -- $ --
======== ======== ========
See accompanying notes.
35
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 mobile audio systems under the
Rockford Fosgate, Lightning Audio, Q-Logic, MB Quart and NHT brand names for the
worldwide mobile audio aftermarket. Rockford also sells professional audio
products under the NHT, MB Quart and Hafler brand names and home theater audio
products under the NHT, MB Quart and Fosgate Audionics brand names. Rockford was
organized and incorporated under the laws of the State of Arizona on July 22,
1980. Corporate headquarters are located in Tempe, Arizona. Manufacturing
facilities are located in Tempe, Arizona; Grand Rapids, Michigan; Stillwater,
Oklahoma; and Obrigheim, Germany. Rockford uses warehouses located in the United
States, Germany, Singapore and 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. On April
20, 2000, Rockford completed its initial public offering.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Rockford and
its wholly owned subsidiaries in the United States, 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. 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, 2002, Rockford has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses, notes payable, long-term debt and capital lease obligations. 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.
REVENUE RECOGNITION
Rockford recognizes revenue and records sales, net of related discounts,
when all of the following criteria are met:
* Persuasive evidence of an arrangement exists;
* Ownership has transferred to the customer;
* The price to the customer is fixed or determinable; and
* Collectability is reasonably assured.
Upon shipment of products, the above criteria are met and revenue is recognized.
36
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, Rockford recognizes revenue from the sale of software in
accordance with SOP 97-2, SOFTWARE REVENUE RECOGNITION. Revenue is recorded from
packaged software and license fees when persuasive evidence of an arrangement
exists, the software product has been shipped, the fees are fixed and
determinable, collectibility is reasonably assured and vendor-specific objective
evidence of fair value exists for any undelivered products or services
("elements") of the arrangement.
Rockford also records reductions to revenue for estimated customer returns
and additional sales incentive offerings such as growth and volume incentive
rebates and prompt pay discounts based on historical rates. Should a greater
proportion of customers return product or redeem incentives than estimated by
Rockford, Rockford may be required to make additional reductions to revenue.
SHIPPING AND HANDLING COSTS
Rockford records product shipping costs as freight expense in direct sales
and marketing expense. Customers are billed for shipping, which is then recorded
as a recovery of freight, or reduction of freight expense. However, customers
are often eligible for a freight discount, depending on the size of the order or
payment terms. Freight discounts taken by customers reduce the recovery of
freight expense. Handling costs charged to customers are minimal. Freight
expense for the years ended December 31, 2000, 2001 and 2002 was approximately
$3,061,000, $3,978,000 and $5,469,000, respectively.
ACCOUNTS RECEIVABLE
Rockford sells its products principally to mobile audio, home audio, and
professional audio 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, 2001 and
2002, net accounts receivable includes approximately $4,580,000 and $7,436,000,
respectively, due from overseas businesses.
Rockford maintains an allowance for doubtful accounts, based on historical
rates, for estimated losses resulting from the inability of its customers to
make required payments. Rockford has included in the allowance for accounts
receivable at December 31, 2001 and 2002, approximately $1,812,000 and
$2,262,000, respectively, for doubtful accounts. If the financial condition of
Rockford's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances might be required.
Rockford also maintains allowances for prompt pay and freight discounts,
based on historical rates for discounts offered to customers for invoices paid
under 40 to 60 days of issuance. Rockford has included in its allowance for
accounts receivable at December 31, 2001 and 2002, approximately $673,000 and
$734,000, respectively, with respect to customers expected to use such discounts
after year-end. Should a greater proportion of customers take advantage of these
discounts than estimated by Rockford, additional reductions to revenue might be
required.
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.
Rockford maintains a reserve for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less favorable than
those Rockford projected, additional inventory write-downs might be required.
37
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 two to ten year life. The building acquired in the MB Quart
acquisition, located in Obrigheim, Germany, is being depreciated over a period
of 25 years. 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 (FASB)
Statement of Financial Accounting Standards (SFAS) No. 144, 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. Impairment, if any, is based on the excess
of the carrying amount over the fair value of those assets and is recorded in
the period in which the determination is made.
INTANGIBLE ASSETS
On January 1, 2002, Rockford adopted SFAS No. 141, BUSINESS COMBINATION,
and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Purchase prices of
acquired businesses that are accounted for as purchases have been allocated to
the assets and liabilities acquired based on the estimated fair values on the
respective acquisition dates. Based on these values, the excess purchase prices
over the fair value of the net assets acquired were allocated to goodwill.
Prior to January 1, 2002, Rockford amortized goodwill over the useful life
of the underlying asset, not to exceed 15 years. On January 1, 2002, Rockford
began accounting for goodwill under the provisions of SFAS Nos. 141 and 142 and
discontinued the amortization of goodwill. As at December 31, 2002, Rockford had
gross goodwill of $7,291,000 and accumulated amortization of $401,000. For the
year ended December 31, 2002, Rockford did not recognize amortization expense
related to goodwill. Rockford completed two acquisitions in the third quarter of
2001 and two acquisitions in the fourth quarter of 2002 and has not recorded any
amortization for these acquisitions on amounts allocated to goodwill in
accordance with SFAS No. 141. Application of the non-amortization provisions of
SFAS No. 142 resulted in an increase in income from continuing operations before
income taxes of approximately $168,000 for the year ended December 31, 2002.
In assessing the recoverability of Rockford's goodwill and other
intangibles, Rockford must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, Rockford may
be required to record impairment charges for these assets not previously
recorded. Some factors considered important which could trigger an impairment
review include the following:
* Significant underperformance relative to expected historical or
projected future operating results;
* Significant changes in the manner of use of the acquired assets or the
strategy for the overall business;
* Rockford's market capitalization relative to net book value; and
* Significant negative industry or economic trends.
Rockford has tested goodwill for impairment using the two-step process
prescribed in SFAS No. 142. The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if any. Rockford
performed the first of the required impairment tests for goodwill as of December
31, 2002 and determined that goodwill is not impaired and it is not necessary to
record any impairment losses related to goodwill and other intangible assets.
38
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net income, basic earnings per share and diluted earnings per share for the
years ended December 31, 2000, 2001 and 2002, respectively, adjusted to exclude
amortization expense no longer required due to the adoption of SFAS No. 142, are
as follows (net of tax, in thousands, except per share data):
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net income .............................. $ 8,010 $ 6,223 $ 6,280
Add back: goodwill amortization ................ 102 107 --
--------- --------- ---------
Adjusted net income .............................. $ 8,112 $ 6,330 $ 6,280
========= ========= =========
Reported earnings per share - basic .............. $ 1.17 $ 0.77 $ 0.74
Add back: goodwill amortization ................ 0.01 0.01 --
--------- --------- ---------
Adjusted earnings per share - basic .............. $ 1.18 $ 0.78 $ 0.74
========= ========= =========
Reported earnings per share - diluted ............ $ 1.00 $ 0.70 $ 0.68
Add back: goodwill amortization ................ 0.01 0.01 --
--------- --------- ---------
Adjusted earnings per share - diluted ............ $ 1.01 $ 0.71 $ 0.68
========= ========= =========
ADVERTISING
Rockford expenses advertising as incurred. Advertising expense for the
years ended December 31, 2000, 2001 and 2002 was approximately $1,948,000,
$1,912,000 and $2,365,000, respectively.
INCOME TAXES
Rockford accounts for income taxes under the provisions of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under this method, deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
NET INCOME PER COMMON SHARE
Rockford reports net income per common share in accordance with SFAS No.
128, EARNINGS PER SHARE. Diluted net income per share includes the dilutive
effects of options, warrants and convertible securities.
SIGNIFICANT CUSTOMER
Rockford has sales to one customer representing 16.7 percent, 16.3 percent
and 21.1 percent of net sales for the years ended December 31, 2000, 2001 and
2002, respectively.
39
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. 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 statements of income 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 the market price at the
date of the grant. Rockford accounts for stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related Interpretations. Rockford has adopted the disclosure-only
provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and
accordingly, recognizes no compensation expense for the employee stock option
grants. Stock option grants to non-employees are charged to expense based upon
the fair value of the options granted.
The following table represents the effect on net income and earnings per
share if Rockford had applied the fair value based method and recognition
provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to
stock-based employee compensation:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income as reported ............... $ 8,010 $ 6,223 $ 6,280
Proforma SFAS No. 123 expense ........ (248) (327) (327)
------- ------- -------
Proforma net income .................. $ 7,762 $ 5,896 $ 5,953
======= ======= =======
Proforma income per common share
Basic .............................. $ 1.13 $ 0.74 $ 0.70
======= ======= =======
Diluted ............................ $ .97 $ 0.66 $ 0.64
======= ======= =======
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. See Note 8 for
further discussion of Rockford's stock-based employee compensation.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 and 2001 consolidated
financial statements to conform them to the 2002 presentation.
40
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE. SFAS No. 148 amends FASB Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. Statement 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. As allowed by SFAS No. 123, Rockford has elected
to continue to use the accounting method prescribed by APB Opinion No. 25 and
had adopted the disclosure requirements of SFAS No. 123.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 supersedes Emerging Issues Task
Force (EITF) No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION
BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING). SFAS No. 146 eliminates the provisions of EITF No. 94-3
that required a liability to be recognized for certain exit or disposal
activities at the date an entity committed to an exit plan. SFAS No. 146
requires a liability for costs associated with an exit or disposal activity to
be recognized when the liability is incurred. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. Rockford does
not expect the adoption of this statement to have an impact on its results of
operations or financial position.
2. ACQUISITIONS
NOW HEAR THIS (NHT). On December 26, 2002, Rockford acquired the NHT (Now
Hear This) business and assets from Recoton Corporation. The assets acquired and
liabilities assumed were recorded at their fair values at the date of the
acquisition. The remaining portion of the purchase price was assigned to
goodwill in the amount of $261,000. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of NHT
were included in Rockford's consolidated results of operations beginning
December 26, 2002. The acquisition was not significant under the requirements of
the Securities and Exchange Commission.
SIMPLEDEVICES, INC. On October 17, 2002, Rockford purchased 63,336,955
shares of common stock of SimpleDevices, Inc. These shares represent
approximately 76% of SimpleDevices' outstanding common stock as at December 31,
2002. Rockford's investment of $3.5 million was paid to SimpleDevices, not to
its shareholders, and is being used for working capital, the payment of a
convertible promissory note and for other corporate purposes. Rockford financed
the investment price using borrowings from its line of credit. The assets
acquired and liabilities assumed were recorded at their fair values at the date
of acquisition. The remaining portion of the purchase price was assigned to
goodwill in the amount of $563,000. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of operations of
SimpleDevices were included in Rockford's consolidated results of operations
effective October 1, 2002, excluding minority interest. The acquisition was not
significant under the requirements of the Securities and Exchange Commission.
41
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MB QUART. On September 1, 2001, Rockford acquired MB Quart GmbH as a
subsidiary of Rockford's existing German subsidiary, Rockford Europe GmbH.
Through MB Quart GmbH, Rockford entered into agreements with Dr. Werner
Schreiber, a receiver appointed under German bankruptcy law to manage the
business of MB Quart Akustik GmbH. Under these agreements, MB Quart GmbH
acquired substantially all of the operating assets of MB Quart Akustik GmbH, and
Rockford directly acquired all of the stock of the U.S. subsidiary, M.B. Quart
Electronics (USA), Inc. Rockford paid approximately $6 million for all of these
assets. Rockford financed the purchase price, as well as working capital
requirements for this acquired business, using borrowings from its line of
credit. The assets acquired and liabilities assumed were recorded at their fair
values at the date of acquisition. The remaining portion of the purchase price
was assigned to property and equipment with $248,000 being assigned to goodwill.
The acquisition was accounted for using the purchase method of accounting and
accordingly, the results of operations of MB Quart were included in Rockford's
consolidated results of operations beginning on September 1, 2001. The
acquisition was not significant under the requirements of the Securities and
Exchange Commission.
AUDIO INNOVATIONS. On August 1, 2001, Rockford acquired the Audio
Innovations business by purchasing all of the outstanding shares of common stock
of Audio Innovations, Inc., an Oklahoma corporation. Rockford paid the
shareholders of Audio Innovations $4 million ($3.8 million cash and $0.2 million
payable to the selling shareholders) at the closing and paid approximately $1.9
million to settle outstanding Audio Innovations debt. Rockford also anticipates
making payments of $500,000 to the selling shareholders over the three years
after the closing if Audio Innovations meets agreed upon profitability and sales
goals; during 2002 Rockford paid $161,000 of this amount. Rockford financed the
purchase price using borrowings from its line of credit. The assets acquired and
liabilities assumed were recorded at their fair values at the date of
acquisition with $3.9 million recorded as goodwill. The acquisition was
accounted for using the purchase method of accounting and accordingly, the
results of operations of Audio Innovations were included in Rockford's
consolidated results of operations beginning on August 1, 2001. The acquisition
was not significant under the requirements of the Securities and Exchange
Commission.
LIGHTNING AUDIO. On June 30, 1999, Rockford completed an 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 paid $600,000 of additional consideration
over two years subsequent to the purchase of Lightning Audio based on the
achievement of certain performance goals. Through December 31, 1999, the former
owners of Lightning Audio had earned $274,000 in additional consideration. The
remaining $326,000 was earned in the year ending December 31, 2000. Rockford
recorded approximately $2,027,000 of goodwill with respect to the initial
purchase and the additional consideration paid during 1999 and 2000. This
goodwill was being amortized over 15 years until January 1, 2002, at which time
Rockford began accounting for the goodwill under the provisions of SFAS Nos. 141
and 142. 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.
3. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
--------------------
2001 2002
-------- --------
(IN THOUSANDS)
Raw materials ............. $ 9,361 $ 9,053
Work in progress .......... 1,424 2,330
Finished goods ............ 20,263 24,386
-------- --------
31,048 35,769
Less allowances ........... (2,883) (3,324)
-------- --------
$ 28,165 $ 32,445
======== ========
42
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
--------------------
2001 2002
-------- --------
(IN THOUSANDS)
Land ............................................... $ 398 $ 421
Building ........................................... 1,138 1,195
Machinery and equipment ............................ 16,050 19,500
Tooling equipment .................................. 7,839 9,331
Leasehold improvements ............................. 2,822 3,152
Furniture and fixtures ............................. 1,617 2,249
Computer software .................................. -- 2,663
Construction in process ............................ 1,592 2,846
-------- --------
31,456 41,357
Less accumulated depreciation and amortization ..... (21,480) (26,095)
-------- --------
$ 9,976 $ 15,262
======== ========
Unamortized computer software of $2,663,000 was acquired in connection with
the SimpleDevices acquisition. Amortization expense of $78,000 was incurred
since the effective date of acquisition of October 1, 2002.
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
DECEMBER 31,
------------------
2001 2002
------- -------
(IN THOUSANDS)
$30,000,000 line of credit with a lender
collateralized by substantially all assets.
Swing line and revolving line interest payments
at Prime and LIBOR plus 150 basis points,
respectively. All remaining principal and interest
is due and payable June 2004. Borrowings under
this line of credit are limited to a borrowing
base as defined and adjusted in the agreement ...... $ 9,300 $ 8,461
Other ................................................ 500 339
------- -------
9,800 8,800
Less current portion ................................. (80) (189)
------- -------
$ 9,720 $ 8,611
======= =======
Annual maturities of notes payable and long-term debt for the five years
succeeding December 31, 2002, are $189,000 in 2003 and $8,611,000 in 2004.
Interest payments were approximately $793,000, $455,000 and $571,000 for the
years ended December 31, 2000, 2001 and 2002, respectively.
At December 31, 2002, Rockford had $21,539,000 available on its $30,000,000
bank credit facility. This credit facility contains covenants that place various
restrictions on financial ratios, levels of indebtedness and capital
expenditures, among other things. Management believes Rockford was in compliance
with all debt covenants at December 31, 2002.
43
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 August 2007.
Property and equipment includes the following amounts for leases that have
been capitalized:
DECEMBER 31,
----------------------
2001 2002
------- -------
(IN THOUSANDS)
Equipment .................................... $ 5,571 $ 7,179
Less accumulated amortization ................ (3,785) (5,038)
------- -------
$ 1,786 $ 2,141
======= =======
Amortization of leased assets is included in depreciation and amortization
expense.
During the years ended December 31, 2001 and 2002, Rockford acquired
approximately $1,276,000 and $1,608,000 of equipment under capital leases,
respectively.
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, 2002:
CAPITAL OPERATING
LEASES LEASES
------- -------
(IN THOUSANDS)
2003 ......................................... $ 1,147 $ 2,521
2004 ......................................... 938 1,670
2005 ......................................... 582 708
2006 ......................................... -- 344
2007 ......................................... -- 595
------- -------
Total minimum lease payments ................. 2,667 $ 5,838
=======
Less amounts representing interest ........... (187)
-------
Present value of net minimum lease ........... 2,480
Less current portion ......................... (1,064)
-------
$ 1,416
=======
Total rental expense for all operating leases was approximately $2,032,000,
$2,545,000 and $2,800,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.
44
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Significant components of Rockford's deferred tax assets are:
DECEMBER 31,
-------------------
2001 2002
------ ------
(IN THOUSANDS)
Deferred tax assets:
Inventory basis .......................... $ 728 $1,382
Basis in receivables ..................... 829 1,243
Book over tax depreciation ............... 394 292
Accrued warranty ......................... 1,790 1,646
Net operating loss carryforward .......... 280 284
Accrued liabilities and other ............ 954 605
------ ------
Total deferred tax assets .................. $4,894 $5,452
====== ======
At December 31, 2002, Rockford had federal net operating loss carryforwards
for federal income tax purposes of approximately $1,927,000 which will begin to
expire in 2011 if not previously utilized. All of the net operating loss is
attributable to Rockford's acquisition of M.B. Quart Electronics (USA), Inc in
2001. As such, it is limited for tax purposes under Internal Revenue Code
section 382, which limits the annual utilization of net operating losses. The
deferred tax asset relating to the net operating losses is shown net of the
estimated amount that will expire as a result of this annual limitation.
Significant components of the federal and state income tax expense
(benefit) are:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
(IN THOUSANDS)
Current:
Federal expense ................... $ 4,472 $ 3,060 $ 3,693
State expense ..................... 423 59 326
Foreign expense (benefit) ......... 70 (88) 206
------- ------- -------
Total current expense ............... 4,965 3,031 4,225
Deferred:
Federal expense (benefit) ......... (233) 671 (305)
State expense (benefit) ........... (18) 54 (17)
------- ------- -------
Total deferred expense (benefit) .... (251) 725 (322)
------- ------- -------
$ 4,714 $ 3,756 $ 3,903
======= ======= =======
45
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of Rockford's effective income tax rate to the federal
statutory rate follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
(IN THOUSANDS)
Federal statutory rate .............. $ 4,453 $ 3,493 $ 3,550
State tax net of federal benefit .... 273 64 178
Nondeductible items ................. 231 148 103
Higher (lower) foreign tax rates .... (99) 267 149
ETI benefit ......................... (107) (129) (31)
Other, net .......................... (37) (87) (46)
------- ------- -------
$ 4,714 $ 3,756 $ 3,903
======= ======= =======
Rockford's income (loss) attributable to foreign operations amounted to
approximately $285,000, $(969,000) and $164,000 for the years ended December 31,
2000, 2001 and 2002, respectively.
For the years ended December 31, 2000, 2001 and 2002, Rockford made tax
payments of $5,305,000 (net of $524,000 in refunds), $5,266,000 (net of $14,000
in refunds) and $870,000 respectively.
8. COMMON STOCK GRANTS AND OPTIONS
Rockford has elected to follow APB Opinion No. 25 and related
Interpretations in Accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB Opinion No. 25, when the exercise price of Rockford's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Rockford has provided stock option plans for certain employees and
directors. Under the plans, options to purchase common stock of Rockford will be
granted to certain employees and directors at the fair value of the underlying
common stock. The options generally have a term of ten years and become
exercisable over three years commencing on the date of the grant. Options
granted prior to December 31, 1996, vested 100 percent upon completion of
Rockford's initial public offering on April 20, 2000. Under certain
circumstances, Rockford has the right to repurchase common stock acquired under
the options at the fair value price.
46
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Proforma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if Rockford has accounted for its employee stock options granted subsequent
to December 31, 1994, under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black
Scholes-pricing model with the following weighted average assumptions:
2000 2001 2002
--------- ----------- --------------
Expected life of the award .... 5 years 5 years Not applicable
Dividend yield ................ 0 percent 0 percent Not applicable
Risk-free interest rate ....... 6 percent 4.5 percent Not applicable
Expected volatility ........... .97 .75 Not applicable
As Rockford did not grant stock options in 2002, the assumptions stated
above are not applicable for the year ended December 31, 2002.
Option activity under the stock option plan during the years ended December
31, 2000, 2001 and 2002 is as follows:
OUTSTANDING OPTIONS
-----------------------------
SHARES AVAILABLE WEIGHTED AVERAGE
UNDER OPTION SHARES EXERCISE PRICE
------------ ---------- --------------
Outstanding at December 31, 1999 ....... 336,984 1,772,381 $ 3.55
Granted ................................ (81,500) 81,500 10.83
Exercised .............................. -- (192,352) 2.42
Expired or cancelled ................... 43,163 (43,163) 4.76
---------- ---------- ------
Outstanding at December 31, 2000 ....... 298,647 1,618,366 4.06
Granted ................................ (302,814) 302,814 6.61
Exercised .............................. -- (149,325) 3.12
Expired or cancelled ................... 4,225 (4,225) 6.02
---------- ---------- ------
Outstanding at December 31, 2001 ....... 58 1,767,630 4.55
Authorized ............................. 600,000 -- --
Exercised .............................. -- (285,314) 2.52
Expired ................................ 4,300 (4,300) 4.19
---------- ---------- ------
Outstanding at December 31, 2002 ....... 604,358 1,478,016 $ 4.93
========== ========== ======
The weighted average fair value of options granted during the years ended
December 31, 2000 and 2001, was $2.85 and $4.24, respectively. No options were
granted during 2002.
The Board of Directors of Rockford prior to 1995 granted a consulting firm,
which provided 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. Rockford determined that the $1.51 price per share was equal to or
more than the fair value at the date of the grant. The stock options were fully
vested at December 31, 1999 and fully exercised on March 5, 2002. These stock
options were not included in the table above.
47
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options under the
plans outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE OUTSTANDING AT EXERCISE
RANGE OF EXERCISE PRICES DECEMBER 31, 2002 LIFE PRICE DECEMBER 31, 2002 PRICE
- ------------------------ ----------------- ---- ----- ----------------- -----
$1.51 ................. 173,100 2.0 years $ 1.51 173,100 $ 1.51
$2.44-- $3.45 ......... 303,752 3.6 years 2.82 303,752 2.82
$4.19-- $5.81 ......... 460,475 5.1 years 4.51 459,975 4.51
$6.00-- $6.68 ......... 294,189 6.4 years 6.62 143,282 6.62
$7.67-- $11.00 ........ 246,500 8.6 years 8.68 244,000 8.66
---------- ----------
1,478,016 1,324,109
9. EARNINGS PER SHARE
YEAR ENDED DECEMBER 31,
------------------------
2000 2001 2002
------ ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Numerator:
Net income .................................................... $8,010 $6,223 $6,280
Effect of dilutive securities interest impact of
convertible debentures ...................................... 18 -- --
------ ------ ------
Numerator for diluted net income per share, income available
to common stockholders after assumed conversions .............. $8,028 $6,223 $6,280
====== ====== ======
Denominator:
Denominator for basic net income per share, weighted
average shares .............................................. 6,864 8,109 8,540
Effect of dilutive securities:
Employee stock options ........................................ 949 799 755
Warrants ...................................................... 11 5 6
Convertible debentures ........................................ 185 -- --
------ ------ ------
Dilutive potential common shares .............................. 1,145 804 761
------ ------ ------
Denominator for diluted net income per share, adjusted
weighted average shares and assumed conversions ............... 8,009 8,913 9,301
====== ====== ======
Basic net income per share ...................................... $ 1.17 $ 0.77 $ 0.74
====== ====== ======
Diluted net income per share .................................... $ 1.00 $ 0.70 $ 0.68
====== ====== ======
48
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CONTINGENCIES
Since the date of our Annual Report for the year 2001, filed with the SEC
on March 29, 2002, the Fiori patent claim described in the Legal Proceedings
section of that Annual Report has continued into an intensive fact discovery
phase of proceedings. The products at issue in the case are now 16 of our Punch
brand amplifiers, which the plaintiff contends include circuitry that infringes
on his patents. We have incurred substantial costs of defense, at a rate greater
than we expected, which contributed to our increased research and development
costs during the year. We anticipate that discovery and motions in the case will
continue for at least the next two quarters and will cause us to incur
additional defense costs during that period. A trial is likely sometime after
the second quarter of 2003. We continue to believe that the claim involved in
the case is without merit and that we should ultimately prevail in this matter.
Rockford is a party to legal proceedings, which arise in 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, 2000, 2001 and 2002, were approximately $388,000, $395,000
and $484,000, 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 Rockford's 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 maximum of 1,000 shares in each six-month
purchase period. The price per share purchased under the plan will generally be
85 percent of the fair market value of the shares. A total of 134,000 shares
have been issued since inception of this plan.
13. SEGMENT INFORMATION
Rockford operates its business under the mobile audio, professional and
home theater audio and OEM segments. For each of the periods ended December 31,
2000, 2001 and 2002, the professional and home theater audio and OEM segments
were not significant and, accordingly, no additional disclosures of operations
information about the segments are required. Below is geographic information for
revenues of Rockford:
REGION(1) 2000 2001 2002
- --------- -------- -------- --------
(IN THOUSANDS)
United States ........................... $121,375 $130,459 $135,830
Other Americas .......................... 7,289 9,469 7,871
Europe .................................. 7,687 10,278 17,413
Asia .................................... 8,289 7,546 7,804
-------- -------- --------
Total sales from external customers ..... $144,640 $157,752 $168,918
======== ======== ========
- ----------
(1) Revenues are attributed to geographic regions based on the location of
customers.
49
ROCKFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended December 31, 2000, 2001 and 2002, sales to one customer
accounted for 16.7 percent, 16.3 percent and 21.1 percent of those periods' net
sales, respectively. Rockford's long-lived assets outside of the United States
consist of the land and building used in Rockford's MB Quart operations and
located in Obrigheim, Germany.
14. INTERIM FINANCIAL RESULTS (UNAUDITED)
The following tables set forth certain unaudited consolidated financial
information for each of the four quarters in the years ended December 31, 2001
and 2002. In management's opinion, this unaudited quarterly information has been
prepared on the same basis as the audited consolidated financial statements and
include all necessary adjustments, consisting only of normal recurring
adjustments that management considers necessary for a fair presentation of the
unaudited quarterly results when read in conjunction with the consolidated
financial statements and notes. Rockford believes that quarter-to-quarter
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance.
YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- -----
Net Sales ......................... $ 43,734 $ 51,228 $ 40,583 $ 33,373 $168,918
Gross Profit ...................... 16,522 20,029 14,268 10,352 61,171
Operating Income (Loss) ........... 3,651 5,362 1,622 (566) 10,069
Net Income (Loss) ................. 2,178 3,587 825 (310) 6,280
Basic Income (Loss) Per Share ..... 0.26 0.42 0.10 (0.04) 0.74
Diluted Income(Loss) Per Share .... 0.24 0.38 0.09 (0.03) 0.68
YEAR ENDED DECEMBER 31, 2001
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- -----
Net Sales ......................... $ 37,363 $ 44,803 $ 36,562 $ 39,024 $157,752
Gross Profit ...................... 13,280 15,497 11,985 13,086 53,848
Operating Income .................. 3,356 4,245 1,275 1,651 10,527
Net Income ........................ 1,992 2,586 853 792 6,223
Basic Income Per Share ............ 0.25 0.32 0.10 0.10 0.77
Diluted Income Per Share .......... 0.23 0.29 0.10 0.09 0.70
15. SUBSEQUENT EVENTS
On February 19, 2003, Rockford announced its intentions to discontinue
operations and dissolve its Japan subsidiary by mid-2003. Rockford intends to
sell its products in Japan using an independent distributor. Management has not
determined the impact of this dissolution on its results of operations or
financial position.
On February 19, 2003, Rockford announced the restructuring of several
business processes, which are expected to result in improved efficiencies and
customer service. This restructuring resulted in the reduction of approximately
8% of Rockford's salaried staff in Arizona and Michigan.
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
sections entitled "Executive Officers and Board of Directors" and "Section 16(A)
Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement for
our Annual Meeting of Stockholders to be held April 23, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
sections entitled "Executive Compensation," "Executive Officers and Board of
Directors -- Director Compensation," "Related Party Transactions -- Suttle
Employment Agreement" and "Stock Price Performance Graph" in our definitive
Proxy Statement for our Annual Meeting of Stockholders to be held April 23,
2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the
section entitled "Principal Shareholders and Shareholdings of Officers and
Directors" in our definitive Proxy Statement for our Annual Meeting of
Stockholders to be held April 23, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Related Party Transactions" in our definitive Proxy Statement
for our Annual Meeting of Stockholders to be held April 23, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective.
(b) There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page 28 of this report.
51
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ROCKFORD CORPORATION
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
----------- ------ -------- -------------- ---------- -------------
(IN THOUSANDS)
December 31, 2002 ................
Receivable allowances .......... $2,613 $ 861 $5,108(3) $5,586(1) $2,996
Inventory reserve .............. 2,883 1,490 354(4) 1,403(2) 3,324
December 31, 2001
Receivable allowances .......... 1,427 $ 969 $2,966(3) $2,749(1) $2,613
Inventory reserve .............. 1,446 1,332 1,431(4) 1,326(2) 2,883
December 31, 2000
Receivable allowances .......... 1,830 249 3,010(3) 3,662(1) 1,427
Inventory reserve .............. 1,649 616 -- 819(2) 1,446
(1) Deductions taken by customers for prompt payment and freight discounts.
Includes accounts written off net of recoveries.
(2) Reserved inventory sold or scrapped.
(3) Amounts netted against sales.
(4) Inventory reserves relating to inventory acquired in connection with
acquisitions.
Other financial statement schedules have not been presented, as they are
not applicable.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Articles of Incorporation+
3.2 Restated Bylaws as amended through July 27, 2000++
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+
3.7 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 3.7 for a description of the rights of the
holders of Common Stock.
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 of W. Gary Suttle+
10.5 Indemnity Agreement of 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+
52
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.9.1 Amendment to Standard Industrial Commercial Multi-Tenant Lease--
Gross American Industrial Real Estate Association Lease, by and
between Rockford River LLC and Rockford Corporation+
10.10 Standard Industrial Lease-- Gross, and amendments and addendum
thereto, by and between Cloyce Clark and Rockford Corporation+
10.10.1 Amendment to Standard Industrial Lease-- Gross by and between
Cloyce Clark and Rockford Corporation+
10.11 Lease Agreement, and addenda thereto, by and between Carbonneau
Industries, Inc. and Rockford Corporation+
10.11.1 Amendment to Lease Agreement by and between Carbonneau
Industries, Inc. and Rockford Corporation+
10.12 Master Lease Agreement and amendments thereto, by and between
Banc One Leasing Corporation and Rockford Corporation+
10.14 Employee 401(k) Deferred Compensation Plan and amendments
thereto+
10.16 Product Sales Agreement by and between Rockford Corporation and
Avnet Electronics Marketing**+
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.+
10.35 Form of Indemnification Agreement+
10.35.1 Schedule for Indemnification Agreement+
10.39 Financing Lease Schedule No. 1000100950 by and between Banc One
Leasing Corporation and Rockford Corporation+
10.40 Sublease Agreement by and between Cerprobe Corporation and
Rockford Corporation+++
10.41 Sublease Agreement by and between Van's Delivery Service, Inc.
and Rockford Acoustic Designs, Inc.+++
10.42 Asset Purchase Agreement among James and Norma Fosgate and
Rockford Corporation**+++
10.43 Credit Agreement among Rockford Corporation, the Subsidiaries of
Rockford Corporation, Bank One, Arizona, N.A., and Bank of
America, N.A. (previously numbered Exhibit 10.39)#
10.44 Stock Purchase Agreement among Rockford Corporation, Audio
Innovations, Inc., and the shareholders of Audio Innovations,
Inc. (previously numbered Exhibit 10.40)**#
10.45 English translation of the Asset Purchase Agreement between a
subsidiary of Rockford Corporation and Dr. Werner Schreiber, a
receiver under German bankruptcy law. Under this deed, the
subsidiary acquired the assets of MB Quart Akustik GmbH
(previously numbered Exhibit 10.41)##
10.46 English translation of the Deed between a subsidiary of Rockford
Corporation and Dr. Werner Schreiber, a receiver under German
bankruptcy law. Under this deed, the subsidiary acquired the 1
real estate assets of MB Quart Akustik GmbH (previously numbered
Exhibit 10.42)##
10.47 English translation of the Deed between Rockford Corporation and
Dr. Werner Schreiber, a receiver under German bankruptcy law.
Under this Deed, Rockford acquired the shares of M.B. Quart
Electronics (USA), Inc. (the U.S. Subsidiary of MB Quart Akustik
GmbH) (previously numbered Exhibit 10.43)##
10.48 2002 Stock Option Plan ###
10.49 License Agreement between Rockford Corporation and Milwaukee
Electric Tool Corporation ###
53
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.50 Stock Purchase Agreement between Rockford and SimpleDevices,
Inc., dated as of October 16, 2002.####**
10.51 Second Amended and Restated Voting Agreement among Rockford,
SimpleDevices, Inc., and the Shareholders of SimpleDevices, dated
as of October 16, 2002. ####**
10.52 Master Merchandising License Agreement between Rockford and
Universal Studios Licensing LLLP, dated as of August 16, 2002.
####**
10.53 Product Placement Agreement between Rockford and Universal
Pictures, a division of Universal City Studios LLLP, dated as of
August 16, 2002. ####**
21 List of Subsidiaries of Rockford Corporation
23.1 Consent of Independent Auditors
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for W.
Gary Suttle.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
James M. Thomson.
99.9 RISK FACTORS THAT MAY AFFECT ROCKFORD'S OPERATING RESULTS,
BUSINESS PROSPECTS AND STOCK PRICE
- ----------
** Portions of the document have been omitted and filed separately with the
Commission under a request for confidential treatment.
+ Previously filed with registration statement effective April 19, 2000
and/or amendments
++ Previously filed on August 11, 2000 with our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
+++ Previously filed on March 13, 2001 with our Annual Report on Form 10-K for
the year ended December 31, 2000.
# Previously filed on August 14, 2001 with our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
## Previously filed on November 14, 2001 with our Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.
### Previously filed on March 29, 2002 with our Annual Report on Form 10-K for
the year ended December 30, 2001.
#### Previously filed on November 12, 2002 with our Quarterly Report on Form
10-Q for the quarter ended September 30, 2002.
54
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d), as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on March 7, 2003.
ROCKFORD CORPORATION
By: /s/ W. GARY SUTTLE
-------------------------------------
W. Gary Suttle
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ W. GARY SUTTLE President, Chief Executive Officer and March 7, 2003
- -------------------------- Director (Principal Executive Officer)
W. Gary Suttle
Vice President of Finance and Chief March 7, 2003
/s/ JAMES M. THOMSON Financial Officer, Secretary
- -------------------------- (Principal Financial Officer)
James M. Thomson
/s/ JERRY E. GOLDRESS Director March 7, 2003
- --------------------------
Jerry E. Goldress
/s/ TIMOTHY C. BARTOL Director March 7, 2003
- --------------------------
Timothy C. Bartol
/s/ NICHOLAS G. BARTOL Director March 7, 2003
- --------------------------
Nicholas G. Bartol
/s/ RALPH B. GODFREY Director March 7, 2003
- --------------------------
Ralph B. Godfrey
/s/ JOHN P. LLOYD Director March 7, 2003
- --------------------------
John P. Lloyd
55
CERTIFICATIONS
I, W. Gary Suttle, certify that:
1. I have reviewed this annual report on Form 10-K of Rockford
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact of omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in the internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether of not there were any significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 7, 2003
/s/ W. Gary Suttle
----------------------------------------
W. Gary Suttle
President and CEO
Principal Executive Officer
56
I, James M. Thomson, certify that:
1. I have reviewed this annual report on Form 10-K of Rockford
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact of omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in the internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether of not there were any significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 7, 2003
/s/ James M. Thomson
----------------------------------------
James M. Thomson
Chief Financial Officer
Principal Financial Officer
57