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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

Commission File Number 000-30138

ROCKFORD CORPORATION

600 South Rockford Drive

     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  o

      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.  o

      The aggregate market value of the voting stock held by non-affiliates of the registrant was $41,089,584 as of March 15, 2002.

      There were 8,378,619 shares of Common Stock issued and outstanding as of March 15, 2002.

      Documents Incorporated by Reference: Portions of the registrant’s definitive Proxy Statement relating to the 2002 Annual Meeting of Stockholders to be held on May 8, 2002, are incorporated by reference into Part III of this report. Exhibit 99.1 to this report is also incorporated by reference into Part I of this report.

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ROCKFORD CORPORATION

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      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
	•	$8.80 per share, the price at which our shares were last sold on March 15, 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 I.     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 99.1, “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 99.1, 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 2001 of all our brands, we rank first in U.S. market share for mobile audio amplifiers and second for mobile audio speakers. We sell professional audio products under the Hafler and MB Quart brands. We also sell home theater products under the MB Quart and Fosgate Audionics brands. We acquired the Q-Logic and MB Quart brands as a result of acquisitions during the third quarter of 2001.

      We believe our ability to deliver innovative and technologically advanced products appeals to our consumers’ desires for distinctive, leading-edge products and powerful, high-quality sound. We continue to develop new products to capitalize on improvements in digital technology that have increased demand for high-performance audio products. Our Rockford Fosgate, Lightning Audio, Q-Logic, MB Quart and Hafler 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. We believe our core consumers, 16-24 year old males, view Rockford Fosgate as the “coolest” mobile audio brand. Many of these consumers devote a significant portion of their time and disposable income to their mobile audio systems. We target these consumers by offering distinctive, leading-edge products and powerful, high-quality sound supported by aggressive grass roots marketing. As a result of our consumers’ loyalty, we believe Rockford Fosgate has generated loyalty

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		among the retailers who use our brand, products and distinctive marketing programs as a “pull” brand to attract these consumers. Our Rockford Fosgate mobile audio products are marketed under three primary brand names: (1) Punch — the brand for the majority of 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, introduced at the 2002 Consumer Electronics Show. 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, 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. When we acquired Lightning Audio in 1999 it was a manufacturer and distributor of mobile audio accessories. We acquired Lightning Audio with a view toward marketing a complementary line of mobile audio products under the Lightning Audio brand. In addition to accessories, we now sell amplifiers and subwoofers under the Storm brand and amplifiers, a full line of speakers and subwoofers under the 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 will offer back shop supplies to mobile audio installation shops, custom home audio installers and marine outfitters;
	•	Hafler. We sell high-performance amplifiers and speakers to the professional audio market under our Hafler brand. Recording studios, broadcast studios, movie theaters, concert facilities, stadiums and touring bands use our Hafler professional audio products;
	•	Fosgate Audionics. We plan to 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 home theater line will use technology from our Hafler brand and we believe our home theater products will benefit from the strong reputation of our Hafler brand. Our target dealers for this brand are specialty audio and home theater stores;
	•	Q-Logic. Our recently acquired subsidiary, Audio Innovations, 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; and
	•	MB Quart. We recently acquired the MB Quart business and assets. 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.

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

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	•	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 and presence in Germany to increase sales in international markets; and
	•	Expand our professional audio business and enter the home theater market.

      As a result of our strong brands and growth strategy, we believe we can grow our business significantly and become a much larger participant in the worldwide mobile, professional and home theater audio markets.

Our Products

     Percent of Sales by Product Class

      Our sales since 1999 were divided among our principal product classes as shown in the following table:

      Financial information about operating and geographic segments may be found at Note 13 of the Notes to our Consolidated Financial Statements, set forth at page 47 of this report.

     Mobile Audio

      We offer a full line of 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 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

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		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:

      Under our Lightning Audio brand we currently offer the following products:

      Under our Q-Logic brand we currently offer 76 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.

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      Under our MB Quart brand in the U.S. we sell five mobile speaker lines, including:

	•	11 models of Q-Series speakers, with suggested retail prices from $649.00 to $1,499.00 per pair;
	•	10 models of Premium Series speakers, with suggested retail prices from $479.00 to $829.00 per pair;
	•	19 models of Reference Series speakers, with suggested retail prices from $249.00 to $449.00 per pair;
	•	20 models of Discus Series speakers, with suggested retail prices from $109.00 to $399.00 per pair; and
	•	2 models of Nautic Series speakers, specifically designed for use in boats, with suggested retail prices from $249.00 to $449.00 per pair.

      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 2002 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 2002 Consumer Electronics Show, Rockford Fosgate won three Innovations Design and Engineering Awards and Lightning Audio won two Innovations Design and Engineering Awards.

      Our custom demonstration vehicles were named “best of show” at each of the 2001 and 2002 Consumer Electronics Shows.

  OEM Products

      Nissan North America offers a Rockford Fosgate branded OEM system for three Nissan vehicles for model year 2002. 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 2003 model year Nissan has agreed to add a Rockford Fosgate enclosure to the Rockford Fosgate systems available in the Xterra.

  Professional Audio

      We sell professional audio amplifiers and speakers under the Hafler brand. Recording studios, broadcast studios, movie theaters, concert facilities, stadiums and touring bands use our professional audio products. Due to manufacturing and technical similarities with our mobile audio products, many processes and technologies are shared and developed across our brands.

      Under our Hafler brand we currently offer the following professional audio products:

      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.

      MB Quart sells headphones for professional use, with suggested retail prices ranging from $150.00 to $1,944.00 per pair.

  Home Theater

      We are developing a complete line of home theater products under our new Fosgate Audionics brand. Our Fosgate Audionics products are expected to include two preamp/surround processors, two multi-channel

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      MB Quart sells bookshelf, tower and in-wall speakers, with suggested retail prices ranging from $99.00 to $1,799.00 per pair.

  New Products and New Businesses

      On January 7, 2002, at the annual Consumer Electronics Show, we announced the redesign and launch of a majority of our product lines for 2002. Our core Rockford Fosgate line of amplifiers and sub-woofers, our Lightning Audio line of entry-level performance systems, our Q-Logic enclosures and our Fosgate Audionics brand all featured new technologies and products.

      On January 6, 2001, we announced the launch of InstallEdge.com, a division that offers installation parts to home, mobile and marine audio dealers. InstallEdge.com’s core business is back shop supplies that are used by mobile audio install shops, custom home installers and marine outfitters.

      On August 1, 2001, we acquired the Audio Innovations business and its Q-Logic brand by purchasing all of the outstanding shares of common stock of Audio Innovations, Inc., an Oklahoma corporation. Audio Innovations develops and markets branded mobile audio products including Q-Logic speaker enclosures, Q-Forms kick panels and Q-Customs enclosures. Each of these products are 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 a Q-Logic product as the “box” to hold Rockford Fosgate, Lightning Audio or MB Quart speakers. Audio Innovations has an additional business, GSC, which sells garage storage cabinets for home use.

      On September 1, 2001, we acquired the assets of MB Quart Akustik GmbH including all of the stock of its U.S. subsidiary, M.B. Quart Electronics (USA), Inc. MB Quart Akustik GmbH had been placed into receivership under German bankruptcy law in May 2001 when its principal banks refused to provide additional funding because of defaults under their loan agreements with MB Quart Akustik GmbH. MB Quart Akustik GmbH had been the subject of a leveraged buyout in 1998 and, in our view, failed principally because of inadequate capitalization after the buyout, unstable management and poor marketing decisions in its European home audio business. We believe that we will be able to correct these issues and complete a turnaround that new management began just before the receivership.

      MB Quart, located in Obrigheim, Germany, develops, engineers and manufactures speaker products and technologies, primarily for the mobile audio market. Its strength in the mobile audio market is in tweeter, coaxial and component speakers, the speakers used to reproduce mid-range and higher frequency sounds for quality audio systems. In this market, it is a highly respected “premium” brand. In addition to mobile audio speakers, MB Quart also manufactures and distributes home speakers and professional headphones. MB Quart’s U.S. headquarters, warehousing and marketing facility was located in Walpole, Massachusetts. We closed this facility in December 2001 and relocated the U.S. operations to our existing facilities.

      During 2001 we also licensed 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 will carry both the Milwaukee and the Rockford Fosgate brands. Milwaukee will distribute 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 will not bear any of the costs of manufacture or distribution, but will receive a small royalty for each unit sold. We do not expect the revenues from this agreement to be significant, but believe it will offer another avenue to enhance the value of our

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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 $2.3 million, $2.8 million and $3.3 million in 1999, 2000 and 2001, respectively.

      As at December 31, 2001, our research and development staff (including Q-Logic and MB Quart) consisted of 20 design engineers, as well as other support staff, dedicated to product development. 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.

      As a result of these efforts, we have reduced product development time-to-market from up to 24 months to an average of six to nine months. By contrast, we believe that most of our competitors average over 12 months. Our objective is to introduce new products or re-engineer at least one-third of our existing product line annually. In 2001, approximately 80% 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:

	•	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 that the combination of our hard-hitting advertising campaigns with our rugged and durable product offerings has created worldwide recognition and loyalty among our core consumers. Our products are promoted with advertisements in mobile audio magazines, newspapers and other publications as well as on television, radio and the Internet. We participate

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      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.

      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.hafler.com, www.installedge.com, www.fosgateaudionics.com, www.airesearch.com, and www.mbquart.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, who we may appoint to sell some or all of our mobile audio brands other than MB Quart. 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 43 independent sales representative firms who identify, recruit and sell to retailers in their regions. Our representative firms employ approximately 400 field personnel who make regular calls on dealers in their region. 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% 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 11 U.S. regional managers and eight sales support staff members.

      International Distribution. We currently sell our mobile audio products in 59 other countries using independent distributors and sales representatives. Independent distributors purchase products from us and

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      In Canada, Germany, Austria, Switzerland and Japan we sell our Rockford Fosgate 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 five international sales managers.

  Professional Audio and Home Theater Distribution

      In the U.S., we sell professional audio products primarily through sales representatives, who sell to small specialty musical instrument and recording dealers and to larger retail chains, such as Guitar Center. 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. Our professional products are used in these applications and we are attempting to increase Hafler’s penetration in these markets. We also sell Hafler professional audio products internationally, through approximately 37 independent distributors in over 37 countries.

      We distribute MB Quart home theater speakers, and plan to distribute Fosgate Audionics home theater products, through conventional retail channels via a network of manufacturers representatives. Our target 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.

Competition

      Our markets are very competitive, highly fragmented, rapidly changing and characterized by price competition and, in the mobile audio market, 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

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	•	Mobile Audio Amplifiers: Alpine, Jensen, 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, 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, Bose, Boston Acoustics, Denon, Harman Kardon, Infinity, JBL, Klipsh, Polk Audio, Rotel, Sony and Yamaha.

      According to NPD Intelect Market Tracking, based on U.S. dollar sales in 2001 of all our brands, we rank:

	•	First among our competitors in mobile audio amplifiers; and
	•	Second among our competitors in mobile audio speakers.

      We believe we have a significant share of the market for professional amplifiers in recording studios and a small share in the remainder of the professional audio market, but do not have information allowing us to rank ourselves in those markets. We have a very small share of the market for home theater audio products.

      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.

Manufacturing

      We believe our efficient production, sourcing and distribution capabilities make us one of the preferred suppliers in the mobile audio aftermarket.

      We manufacture amplifiers, signal processors and various accessories at our facilities in Tempe, Arizona, and mid-range speakers, woofers and subwoofers at our facility in Grand Rapids, Michigan. Audio Innovations manufactures its products at our facilities in Stillwater, Oklahoma. MB Quart manufactures its products 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. For the year ended December 31, 2001, we paid Hyundai approximately $9.6 million under the agreement.

      Other third parties manufacture our full-range speakers 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, as is the case with source units acquired from Hyundai. We also relied on Avnet, Inc. for approximately 10.3% of our inventory purchases during 2001. We believe alternative sources are available for all of our products. While we do not have guaranteed supply arrangements with any of our suppliers, other than Hyundai, 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 U.S. speaker and electronic manufacturing facilities. Cellular manufacturing provides flexibility and efficiency because any cell

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      We use advanced surface mount technology in our electronics manufacturing. Surface mount technology is accurate, increases the density of circuits and reduces labor content. Our flexible manufacturing and in-house engineering capabilities are a key part of our efforts to shorten lead times from concept to production, respond rapidly to changing demand and reduce our parts and raw materials inventory. Each of our facilities focus on continuous improvement, with quality control embedded in the manufacturing process. The result has been improved flexibility, increased efficiency and greatly improved cycle times.

Intellectual Property

      We rely upon a combination of trade secret and trademark laws, non-disclosure agreements and patents to protect our proprietary rights. We have registered many trademarks and trade names both in the U.S. and internationally and are committed to maintaining and protecting them. We believe our trademarks and trade names are material to our business and are well known among consumers in our principal markets. Our principal trademarks and trade names include:

	•	Rockford Fosgate®

	• Our “Diamond R” logo
	• The Punch®
	• Connecting Punch®
	• Fanatic X™
	• Fanatic P™
	• Car Audio for Fanatics®
	• Type RF
	• Practice Safe Sound®
	• RF Arrow Design™
	• RF Punch & Design™
	• RF Arrow with Oval™
	• Punch Sport®
	• RTTI Interactive™
	• TOPAZ™

	•	Lightning Audio®

	• Strike™
	• Storm™
	• Bolt™
	• InstallEdge.com®
	• Dead Skin Fanatic
	• Urban Industrial Gear™

	•	Audio Innovations™

	• Q™
	• Q-Logic™
	• Q-Forms™
	• Q-Customs™

	•	MB Quart®

	• Q-Series
	• Discus
	• Nautic
	• Fosgate Audionics®

	•	Hafler®

	• The Standard

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 and Fosgate Audionics 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 recent years, this strategy has been effective both in launching our new products and increasing sales of our core products.

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      For Rockford Fosgate:

	•	Type RF amplifiers;
	•	Five new source units;
	•	New technology or cosmetic upgrades for all amplifiers;
	•	A redesign of key subwoofer products for our Punch brand;
	•	A relaunch of the Punch brand full-range coaxial speakers; and
	•	A redesign of the f’nX component speaker systems.

      For Lightning Audio:

	•	A redesign of Strike and Storm amplifiers;
	•	A redesign of all Strike woofers;
	•	New Bolt amplifier model and a new Bolt full range speaker; and
	•	New accessory products for the Storm brands.

      We are developing products to add video capabilities to our Rockford Fosgate mobile audio systems, with the goal of allowing our consumers to watch DVD movies in their cars. We are developing a new line of home theater products under our Fosgate Audionics brand. We expect this line will include initially two preamp/surround processors, two multi-channel amplifiers, four passive speakers and three powered subwoofers. For our recently acquired brands, we are continuing to develop new speaker enclosure products for Q-Logic and are working on significant further improvement to our MB Quart product lines.

      Acquire, Develop and Expand Additional Audio Brands. We continue to look for opportunities to add new brands through acquisition or internal development. We believe that we have substantial opportunities to acquire car, home and professional audio brands that will complement our existing brand portfolio. We believe that 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, was the first brand in our acquisition strategy. For this brand we developed new mobile audio products marketed at more moderate price points than our Rockford Fosgate products;
	•	We acquired the Fosgate Audionics brand in late 2000 and are developing a new line of home theater products;
	•	We acquired the Audio Innovations business and its Q-Logic brand in 2001, providing products that complement our existing Rockford Fosgate, Lightning Audio and MB Quart products. Many consumers will purchase an Audio Innovations product as the “box” to hold Rockford Fosgate, Lightning Audio or MB Quart speakers; and
	•	We acquired MB Quart in 2001. MB Quart’s strength in the mobile speaker market is in tweeter, coaxial and component speakers, the speakers used to reproduce mid-range and higher frequency sounds for quality audio systems. In this market, it is a highly respected “premium” brand and we expect it to add to our distribution strength by providing a “super premium” alternative to our Rockford Fosgate products. Its home audio speakers and professional headphones should also complement our Hafler and Fosgate Audionics product lines.

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      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. We believe selective distribution fosters retailers’ loyalty to our brands, enhances retailers’ profit margins and encourages retailers to carry a broad range of our products.

      Capitalize on International Opportunities. We believe that the Rockford Fosgate and MB Quart brand names are as widely recognized in many foreign countries as they are in the U.S. We intend to aggressively expand Rockford Fosgate, Lightning Audio, Q-Logic, MB Quart, Fosgate Audionics and Hafler 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 mobile audio products directly to retailers in Canada, Germany, Austria, Switzerland and Japan, and through independent distributors in other countries.

      Expand Our Professional Audio Business and Enter the Home Theater Market. Our Hafler professional audio products are designed for use in recording studios, a small but demanding segment of the professional audio market. We believe our strength in this niche market positions us well for expansion into other professional audio segments if we introduce new products that address the needs of those segments. For example, our new C-Series amplifiers are designed for touring and cinema users who need higher powered amplifiers with lower weight. We believe that sales of Hafler professional products will increase substantially if we devote additional resources to the development and distribution of new products.

      We sell home theater products under our MB Quart brand and we are developing a line of home theater products under our new Fosgate Audionics brand, including two preamp/surround processors, two multi-channel amplifiers, four passive speakers and three powered subwoofers. These products will replace the Hafler home theater speakers that we sold over the Internet during 2000 and early 2001. We intend to 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 2001 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 16.7% of our sales for 2000 and 16.3% of our sales for 2001.

      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.

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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 3,000 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 unique rapid factory direct repair program that repairs and ships products within 24 hours of receipt, reducing retailer and consumer inconvenience if our products fail to perform properly.

      For our international customers, 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 Japan. In other countries, our distributors provide customer service and warranty support.

Information Systems

      We have a fully integrated system based on a Novell network, Oracle applications and databases, Microsoft Office applications and a Cisco infrastructure. Our information systems are designed to respond quickly to inquiries from our managers, employees, suppliers and customers. They are designed to support our efforts to:

	•	Produce high-quality products;
	•	Reduce working capital requirements;
	•	Decrease the time to market for new products;
	•	Deliver orders faster;
	•	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. For 2001,

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Employees

      As at December 31, 2001, we had 802 total employees. At that date, in the U.S., 427 were engaged in manufacturing, 49 in research and development, 47 in sales and marketing and 88 in administration. We also had 191 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.

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 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. We use warehouses strategically located in the U.S., Germany, Singapore and Japan that 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.

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      The following table contains information about our facilities as at December 31, 2001, all of which are leased except for the MB Quart facilities that we own:

      Subsequent to December 31, 2001, we entered into a one-year lease for an existing building in Stillwater, Oklahoma, near our current manufacturing and warehousing facilities. The new lease is for approximately 21,200 square feet with an annual rental of approximately $72,000. We will use the new space to meet additional warehousing needs.

Item 3.  Legal Proceedings

      In 1998, Integrated Electronic Technologies (IET) alleged in correspondence that our patented TOPAZ circuit design infringed a patent of IET. The TOPAZ circuit is used in our higher-priced “Punch” line of mobile audio amplifiers and in our Hafler professional amplifiers. After several meetings with IET and its counsel during the spring and summer of 2000, we reiterated to IET our position that our TOPAZ circuit does not infringe on any of IET’s patents. IET did not communicate with us after the summer of 2000 until our counsel received a demand letter from IET’s new “litigation counsel” on March 1, 2001, stating that IET had filed a complaint relating to this claim but was seeking to settle the matter before serving the complaint upon us. IET served the complaint on us on June 26, 2001, and we filed an answer on July 16, 2001. Our answer denied all liability, asserted various defenses, and requested a finding that our products do not infringe on any

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      In addition to the above, we are and may continue to be a party to various lawsuits and arbitrations from time to time. As at December 31, 2001, we were not a party to any legal proceedings that we believe are material.

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 2001.

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:

      As at March 1, 2002, there were approximately 1,565 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.

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

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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.

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      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 2001 from our mobile audio products.

      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 59 countries. In Japan and Germany we sell through wholly owned subsidiaries using commissioned independent sales representatives. In Canada, Austria and Switzerland we sell through commissioned independent sales representatives. In other countries, we sell our products to independent distributors who resell them to retailers.

      Best Buy is a significant customer and accounted for 19.9% of our sales in 1999 (including its $4.4 million initial purchase of our products to stock its distribution channel), 16.7% in 2000 and 16.3% in 2001. Our growth plan contemplates that Best Buy will continue to account for a significant portion of our sales for the foreseeable future. No other single customer accounts for more than 10% of our sales.

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Results of Operations

      The following table shows, for the periods indicated, selected consolidated statements of income data expressed as a percentage of net sales:

      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.

  Geographic Distribution of Sales

      Since 1999, our sales by geographic region were as follows:

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  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 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.

These criteria are satisfied and, accordingly, we recognize revenue upon shipment of product.

      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 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, 2001, we had gross goodwill of $6,704,000 and accumulated amortization of $401,000. For the year ended December 31, 2001, we recognized $168,000 of amortization expense. We completed two acquisitions in the third quarter of 2001 and have not recorded any amortization for these acquisitions on amounts preliminarily allocated to goodwill in accordance with SFAS No. 141. Application of the non-amortization provisions of SFAS No. 142 is expected to result in an increase in income from continuing operations before income taxes of approximately $168,000 in 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.

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      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 of January 1, 2002, and determined that the carrying amount of our goodwill is not impaired. In addition, we will be reviewing our classification of intangible assets between goodwill and other identifiable intangibles. During the year ended December 31, 2001, we did not record any impairment losses related to goodwill and other intangible assets.

      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.

      In the following discussion, certain increases or decreases may differ due to rounding.

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.

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      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.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

      Net Sales. Sales increased by $20.7 million, or 16.7%, to $144.6 million for 2000 from $123.9 million for 1999. The increase in sales primarily was attributable to having a full year of sales for Lightning Audio, which we acquired in June 1999, and an increase in sales to mobile audio specialty dealers. Sales to mobile audio specialty dealers increased by $9.5 million, or 11.8%, to $90.2 million for 2000 from $80.7 million for 1999. This increase primarily was due to improved market conditions in the first half of 2000, enhanced incentive programs and the launch of a competitively priced line of amplifiers and speakers.

      U.S. sales increased by $15.9 million, or 15.1%, to $121.4 million for 2000 from $105.5 million for 1999. U.S. sales of Lightning Audio products increased by $7.4 million, or 264.3%, to $10.2 million in 2000 from $2.8 million in 1999, reflecting a full year of accessory sales in 2000 and the addition of Lightning Audio speakers and amplifiers beginning in the second quarter of 2000. U.S. sales to mobile audio specialty dealers for Rockford Fosgate increased by $6.9 million, or 10.9%, to $70.1 million for 2000 from $63.2 million for 1999. International sales increased by $4.8 million, or 26.1%, to $23.2 million for 2000 from $18.4 million for 1999. Sales in all international regions increased, however they were led by increased sales in Asia and Latin America as a result of these regions’ improving economic conditions during the first half of 2000.

      Cost of Goods Sold. Cost of goods sold increased by $17.5 million, or 23.3%, to $92.5 million for 2000 from $75.0 million for 1999. This increase was primarily due to increased sales. However, as a percent of sales, cost of goods sold also increased to 64.0% for 2000 from 60.5% for 1999. The reason for the increase as a percent of sales was primarily due to end-of-life discounting resulting in lower margin sales and product mix as the market shifted to lower priced and lower margined products during the second half of 2000.

      Sales and Marketing Expenses. Sales and marketing expenses increased by $2.1 million, or 10.2%, to $22.7 million for 2000 from $20.6 million for 1999. The increase was related to increased sales commissions as

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      General and Administrative Expenses. General and administrative expenses decreased by $0.5 million, or 3.7%, to $13.0 million for 2000 from $13.5 million for 1999. The primary reasons for the decrease were a decrease in expenses relating to our financial performance-based employee incentive program and controlled operational spending. As a percent of sales, these expenses decreased to 9.0% for 2000 from 10.9% for 1999. The decrease as a percent of sales primarily was because some expenses in this category are fixed and do not fluctuate with sales.

      Research and Development Expenses. Research and development expenses increased by $0.5 million, or 21.7%, to $2.8 million for 2000 from $2.3 million for 1999. This increase was primarily due to increased personnel and product development costs. As a percent of sales, these expenses increased to 2.0% for 2000 from 1.9% for 1999.

      Operating Income. Operating income increased by $1.0 million, or 8.0%, to $13.5 million for 2000 from $12.5 million for 1999. This increase primarily was attributable to the increase in Lightning Audio sales. The primary reasons for this increase are mentioned above. As a percent of sales, operating income decreased to 9.3% for 2000 from 10.1% for 1999. The primary reasons for this decrease are also mentioned above.

      Interest and Other Expense, Net. Interest and other expense, net, primarily consists of interest expense. Interest and other expense, net, decreased by $1.1 million, or 57.9%, to $0.8 million for 2000 from $1.9 million for 1999. Interest expense decreased in 2000 due to the repayment of our line of credit with proceeds from our initial public offering on April 20, 2000.

      Income Tax Expense. Income tax expense increased by $0.6 million to $4.7 million for 2000 from $4.1 million for 1999. The effective income tax rates were 37.0% for 2000 and 38.6% for 1999. The primary reason for this decrease in the effective tax rate was a decrease in foreign tax expense and a permanent lowering of state income tax rates.

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.

      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, 2001, and also show that data expressed as a percent of sales for the periods indicated. We believe these unaudited financial results were prepared on a basis consistent with our audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our consolidated results of operations for those periods. The results of operations for any quarter are not necessarily indicative of the results of any future period.

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Consolidated Statement of Income Data