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ROCKFORD CORPORATION
CONVERTIBLE SUBORDINATED DEBENTURE
AMENDMENT AGREEMENT
AND
AGREEMENT TO RENAME AS SENIOR NOTES
OCTOBER 28, 1994
Provident Mutual Life
Insurance Company of Philadelphia
0000 Xxxxxx Xxxxxx
Xxxxxxxxxxxx, XX. 00000
Ladies and Gentlemen:
The undersigned, Rockford Corporation, an Arizona corporation
(the "Company"), hereby agrees with you as follows:
1. AMENDMENT OF DEBENTURES AND REPLACEMENT WITH SENIOR NOTE.
1.1 Sale of Debentures by the Company. The Company issued and
sold to you (or your predecessor) as of January 12, 1988, $2,000,000 of its 10%
Convertible Subordinated Debentures (the "Debentures"), which had the terms and
granted to you the rights set forth in (1) the Convertible Subordinated
Debenture Purchase Agreement dated January 12, 1988 (the "Debenture Purchase
Agreement") and (2) the form of the Debentures.
1.2 Agreement to Amend. Subject to the terms and conditions of
this Agreement, and on the basis of the representations and warranties set forth
herein, you have agreed with the Company to amend the Debentures by renaming
them as Senior Notes (the "Senior Notes"), in principal amount equal to the
Debentures, bearing interest at the same rate as the Debentures, maturing at the
same time as the Debentures, and with amended terms as set forth in this
Agreement. The amendment is intended to effect the following substantive changes
to the Debentures:
(a) Renaming to Senior Notes. The Debentures
shall be renamed as "Senior Notes" in principal amount equal to the Debentures,
bearing interest at the same rate as the Debentures, maturing at the same time
as the Debentures, in the form of Exhibit A to this Agreement, and with amended
terms as set forth in this Agreement and in Exhibit A. The right of holders of
the Debentures to convert the Debentures into the Company's common stock shall
terminate and the Senior Notes shall not be convertible into other securities of
the Company.
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(b) Delivery of Warrants. Upon renaming of the
Debentures as Senior Notes and termination of the conversion rights, the Company
shall deliver to each holder of the Senior Notes warrants (the "Warrants"),
detachable at any time at the election of the holder, which shall entitle the
holder to purchase shares of Company's Common Stock. The Warrants (1) shall be
in the form of Exhibit B to this Agreement; (2) shall require payment of $6.50
per share in cash upon exercise (subject to adjustment as set forth in the
Warrants); (3) shall expire if not exercised before the close of business on
February 3, 2000; and (4) shall be exercisable to purchase 167,400 shares, a
number of shares equal to the number of shares into which the Debentures could
have been converted on the date when they are renamed as Senior Notes and
amended.
The Warrants shall be treated for all purposes as if they had been issued when
the Debentures were issued and shall represent the same right to acquire shares
of common stock as were established in the Debentures. The intended substantive
effect of the renaming of the Debentures as Senior Notes, the amendment of the
Senior Notes, and the delivery of the Warrants is (i) to separate the right to
purchase the Company's common shares, currently attached to the Debentures, into
a security that may be separately held, (ii) to extend the period to exercise
the Warrants from the maturity date of the Debentures to February 3, 2000, and
(iii) to reduce the price of the common shares issuable upon exercise of the
Warrants from $11.9474 per share to $6.50 per share.
(a) Replacement of Covenants. The
representations and warranties, affirmative covenants, and other matters set
forth in the original Debenture Purchase Agreement shall be replaced by the
corresponding representations and warranties, affirmative covenants, and other
matters set forth in this Agreement. The new financial covenants are
substantially the same as the covenants established in the revolving credit
facility entered into between the Company and Norwest Business Credit, Inc.
("NBCI") as of May 1994. This replacement will allow the Company to operate on
financial covenants consistent with the Company's financial projections and will
supersede the existing debt covenants with which the Company is currently unable
to comply.
1.3 Closing of Amendment.
(a) Offer to Holders. In order to accept the
Amendment, you must deliver this Agreement, duly executed by you, to Company
along with the original Debenture held by you.
(b) Closing Date. The closing of this Agreement
(the "Closing") shall take place on the date when Company has received this
Agreement executed by you, the Debentures or such other hour and date as you and
the Company shall agree in writing (the "Closing Date"). On or as soon as
possible after the Closing Date, the Company shall deliver to you (i) a Senior
Note registered in your name in principal amount equal to the principal amount
of the Debenture surrendered and (ii) a Warrant exercisable for the
corresponding number of shares.
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(c) Effect of Closing. As of the Closing Date,
the Debentures held by you shall be renamed for all purposes as the Senior
Notes, the Debentures and Debenture Purchase Agreement shall have no further
force or effect and shall be replaced, superseded, and amended in their entirety
by this Agreement, the Senior Notes, and the Warrants.
2. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to you as follows:
2.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Arizona.
The Company has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now conducted and as
proposed to be conducted. On the Closing Date the Company will be duly qualified
or authorized to do business and in good standing in each jurisdiction where the
character of the property owned or leased or the nature of the business
transacted makes such qualification or authorization necessary.
2.2 Capitalization. The authorized and outstanding capital
stock of the Company, and the options, warrants, agreements or similar rights
granted by the Company for the issue or sale by it of any securities, is as set
forth on Exhibit C. All of the issued and outstanding shares of the Common Stock
of the Company have been duly authorized and are validly issued, fully paid and
nonassessable. The Company has reserved 167,400 shares of its Common Stock for
issuance upon exercise of the Warrants. All outstanding shares of the Common
Stock of the Company were issued in compliance with all applicable Federal and
state securities or "blue sky" laws. There are in existence or contemplated no
options, warrants, agreements or similar rights granted by the Company for the
issue or sale by it of any securities, other than the transactions contemplated
by this Agreement and the transactions disclosed in Exhibit C.
2.3 Financial Position. The Company's Balance Sheets as at
September 30, 1993 and Statements of Income and Retained Earnings and of changes
in Financial Position for its fiscal year then ended, as audited by Ernst &
Young and as set forth in Exhibit D, are true and correct in all material
respects as at such dates and for the periods then ended.
2.4 Duly Issued. The shares of the Common Stock issuable upon
exercise of the Warrants, upon such exercise and upon payment of the Warrant
Price provided therein, will be validly issued, fully paid and nonassessable.
2.5 Authorization. This Agreement has been duly authorized,
executed and delivered by and on behalf of the Company, and constitutes the
valid and binding agreement of the Company, enforceable in accordance with its
terms. The Company has full power and lawful authority (1) to amend the
Debentures and rename them as the Senior Notes, (2) to deliver the Warrants on
the terms and conditions set forth in this Agreement, and (3) to issue the
Common Stock issuable upon exercise of the Warrants.
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2.6 Compliance with Laws. The Company is in compliance with
all laws, regulations and orders applicable to its business and properties, and
has all necessary permits and licenses.
2.7 Governmental Consents. Neither the execution and delivery
of this Agreement, nor the performance of the terms or consummation of the
transactions contemplated by the Company under this Agreement require any
consent, approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body, or any filings pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), or the securities
laws of any state other than those obtained prior to and effective as of the
Closing Date. Neither the Company nor any agent acting on its behalf has
offered, or will offer, to sell (or has solicited or will solicit any offer to
buy) the Debentures, the Senior Notes, the Warrants, or any shares of the Common
Stock of the Company issuable upon the exercise of the Warrants, so as to
require the registration of any of such securities under the Securities Act
other than as contemplated by Article 4 of this Agreement. Based in part on your
representations which are set forth in Article 3 of this Agreement, the offer,
sale and issuance of the Debentures pursuant to the Debenture Purchase
Agreement, the renaming of the Debentures as Senior Notes and amendment of the
Senior Notes, the delivery of the Warrants, and the offer, sale and issuance of
shares of the Common Stock to be issued upon exercise of the Warrants are exempt
from the registration requirements of the Securities Act.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
3.1 Investment Representation. You represent and warrant, and
in making the original sale to you of the Debentures, the renaming of the
Debentures as Senior Notes and amendment of the Senior Notes, and the delivery
to you of the Warrants it is specifically understood and agreed, that you
acquired the Debentures, that you agreed to the renaming and amendment of the
Senior Notes, that you are accepting the Warrants, and that you will (if you
choose to exercise the Warrants) acquire the shares of the Common Stock issuable
upon the exercise of the Warrants, for your own account and not with a view to
or for sale in connection with any distribution, and that you have no present
intention of distributing any of the same.
3.2 Stock Not Registered. You represent and acknowledge that
neither the Debentures, the Senior Notes, the Warrants, nor the shares of the
Common Stock issuable upon exercise of the Warrants have been registered under
the Securities Act or applicable state securities laws on the ground that the
original sale of the Debentures and the amendment, renaming, and delivery
provided for in this Agreement were and are exempt from registration under the
Securities Act. You acknowledge that the Company's reliance on such exemption is
predicated on your representations. You understand that the Senior Notes,
Warrants, and shares of Common Stock must be held indefinitely unless the offer
and sale are registered under the Securities Act and applicable state securities
laws or an exemption from registration is available. In particular, you are
aware that the Senior Note and Warrants, and any Common Stock issued on exercise
of the Warrants, may not be sold pursuant to Rule 144 promulgated under the
Securities Act unless all of the conditions of such rule are met. Among the
conditions for use of Rule 144 is the availability to the public of current
information about the Company. Such information is not now available and the
Company has no present plans to make such
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information available. You represent that, in the absence of an effective
registration statement covering the Senior Notes, Warrants, or any Common Stock
issued on exercise of the Warrants, you will sell, transfer, or otherwise
dispose of the Senior Notes, Warrants, or any Common Stock issued on exercise of
the Warrants, only in a manner consistent with your representations and then
only in accordance with the provisions of Section 4.1 of this Agreement. You
further represent and acknowledge that any certificate representing the Senior
Notes, Warrants, or the shares of the Common Stock issuable upon exercise of the
Warrants, will bear the legend set forth in Section 4.2 and that the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
with respect to such shares or make appropriate notations to such effect in its
own stock transfer records. You further represent and acknowledge that any
certificate representing the Senior Notes, Warrants, or the shares of the Common
Stock issuable upon exercise of the Warrants, may bear any legends required by
applicable state securities laws.
3.3 Investment Experience Etc. You represent that you (1) have
such knowledge and experience in financial and business matters that you are
capable of evaluating the merits and risks of the purchase of the Debentures, of
their renaming as Senior Notes and amendment, and of the acceptance of the
Warrants, (2) have a net worth significantly in excess of the amount of your
investment in the Debentures and are able to bear the economic risk of the
purchase of the Debentures and of the holding of the Senior Notes and Warrants,
(3) have had access to information with respect to the Company necessary to
permit you to make an informed investment decision, and (4) are an "accredited
investor" as that term is defined in paragraph (a) of Rule 501 of Regulation D
promulgated under the Securities Act.
3.4 Organization Etc. You represent and warrant to the Company
that, on the date hereof and on the Closing Date, (1) if you are a corporation,
you are duly organized and validly existing under the laws of your state of
incorporation, you are and will be in good standing under such laws and you have
the requisite corporate power and authority to enter into this Agreement, (2) if
you are a general or limited partnership, you are and will be a general or
limited partnership duly organized and validly existing under the laws of your
state of formation, and you are and will be in good standing under such laws,
and you have and will have all requisite partnership power and authority to
enter into this Agreement, (3) this Agreement has been duly authorized, executed
and delivered by you to the Company, and (4) upon execution and delivery by the
Company, this Agreement constitutes your valid and binding agreement,
enforceable in accordance with its terms.
4. SECURITIES ACT AND RELATED MATTERS.
4.1 Transfer Restrictions. You agree that you will not offer
for sale, sell or transfer all or any part of the Senior Notes or Warrants, or
the shares of the Common Stock or other securities issuable upon exercise of the
Warrants, unless and until (1) the sale of such securities is registered under
the Securities Act and all other qualifications and proceedings under other
state or federal laws or regulations required in connection with such sale or
transfer have been obtained or taken or (2) such securities are sold or
transferred in accordance with an available exemption from registration or
qualification under the Securities Act and any applicable state securities or
"blue sky" laws and the Company has received an opinion of
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counsel, which opinion and counsel shall each be reasonably satisfactory to the
Company, that registration is not required.
4.2 Legend on Certificate. Each certificate representing the
Senior Notes or Warrants, or any shares of the Common Stock or other securities
issued upon exercise of the Warrants, shall (unless in the opinion of counsel,
which opinion and counsel shall each be reasonably satisfactory to the Company,
the same is not necessary) bear a legend in substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAW OF ANY STATE. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
EFFECTIVE REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT REQUIRED."
Each certificate shall also bear any legends required by applicable state
securities laws. As used herein, "Restricted Security" means the Senior Notes
and Warrants, and shares of the Common Stock or other securities issued upon
exercise of the Warrants, and "Restricted Stock" means shares of Common Stock
issued upon exercise of the Warrants.
4.3 Registration Proposed by Company. If the Company proposes
to register any of its securities under the Securities Act (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 under the Securities Act is applicable or a
registration using any form that does not permit secondary sales of securities)
it will give written notice to every holder of Warrants or Restricted Stock of
its intention to do so. Upon written request of any such holders delivered to
the Company within 30 days after receipt of such written notice (which request
shall state the number of shares of Restricted Stock to be registered and the
intended method of disposition) the Company will use its best efforts in
connection with such registrations of securities to be sold for the Company's
account, at its own expense to the extent provided in Section 4.5, to register
under the Securities Act all shares of Restricted Stock requested to be
registered by holders, all to the extent required to permit disposition in
accordance with the intended method. If such registration relates to an
underwritten public offering by the Company, only shares of Restricted Stock
which the requesting holders agree to include in the underwriting may be
included in the registration and, if the sole or managing underwriter of the
offering determines that the aggregate number of shares of Restricted Stock
requested to be included in the registration should be limited to a lesser
number due to market conditions or the necessity of including in such
underwriting and registration shares to be sold for the account of the Company,
then each holder who has requested that shares of Restricted Stock be included
in such underwriting and registration may sell only a pro rata portion of shares
of Restricted Stock.
4.4 Registration Requested by Purchasers. Upon written request
of the holder or holders of 50% of the Warrants then outstanding (or any
combination of the Warrants and of
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Common Stock issued upon exercise of the Warrants which together, prior to such
conversion, would have constituted 50% of the Warrants) made at any time (a)
prior to the giving of written notice by the Company of its intention to
register any of its securities under the provisions of Section 4.3, which
registration becomes effective within six months following the giving of such
notice, and (b) after the later of (x) January 12, 1990 or (y) 12 months from
the effective date of any prior registration statement covering shares of the
Company's Common Stock, which request demands that the Company file a
registration statement under the Securities Act covering the registration of
Restricted Stock, the expected price to the public of which equals or exceeds
$7,500,000, then the Company will upon one occasion (l) promptly give written
notice of such proposed registration to every other holder of Restricted
Securities and (2) as expeditiously as possible and in any event within 90 days,
use its best efforts, at its own expense to the extent provided in Section 4.5,
to effect registration under the Securities Act of
(a) the sale of the Restricted Stock which the
Company has been requested to register pursuant to the written
request referred to above, and
(b) all other Restricted Stock the holders of which
shall make written request for registration to the Company,
such written request to be delivered to the Company within 30
days after the giving of the above written notice by the
Company,
all to the extent required to permit the disposition by the holders of the
securities so registered. The Company agrees that in-connection with effecting
any registration it will execute any required undertakings to file
post-effective amendments. The Company shall have no further obligations under
this Section 4.4 with respect to any subsequent registrations (1) after one
registration filed pursuant to any holder's request under this Section 4.4 (in
addition to any postponed registration as described below in this Section 4.4)
covering shares of Restricted Stock has become effective or (2) after you and
your permitted transferees hold, in the aggregate, an amount of the Warrants or
securities issued upon exercise of the Warrants, which constitute less than 10%
of the Warrants initially issued and sold pursuant to this Agreement.
Notwithstanding the foregoing if, within ten days following the receipt of the
request referred to in the first sentence of this Section 4.4, the Company shall
furnish to the requesting holder or holders a certificate stating that the
Company has determined to file within 60 days thereafter a registration
statement pertaining to an underwritten public offering of securities for the
account of the Company, then the Company shall not be obligated to effect a
registration pursuant to this Section 4.4 for a period of six months from the
date of such certificate, provided that the Company shall actively employ in
good faith all reasonable efforts to cause the registration statement for the
underwritten public offering to become effective as soon as reasonably
practicable. The Company shall not be entitled to delay the exercise of the
rights of the holders under this Section 4.4 by invoking the provisions of the
preceding sentence on more than one occasion.
4.5 Costs and Expenses. All costs and expenses in connection
with the registration of securities under Sections 4.3 and 4.4, including
Federal and state registration and filing fees, printing expenses (including the
number of preliminary and final prospectuses, post-effective amendments, and
supplements reasonably requested by the holders of Restricted
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Stock), and the fees and disbursements of counsel and of independent accountants
and other experts of the Company, shall be borne by the Company; provided,
however, that the Company shall not be obligated to pay underwriter's discounts
and commissions and fees and disbursements of counsel for the holders of
Restricted Stock. The Company will use its best efforts to keep effective any
registration for the period reasonably necessary to effect disposition in
accordance with the intended methods described in the requests for registration,
but if the Company is requested or required to maintain the registration
effective for more than six months, all out-of-pocket expenses of the Company
incurred in maintaining effectiveness after the initial six-month period shall
be borne by the holders of securities who have requested that effectiveness be
maintained in order to continue with the distribution, in such proportions as
they may agree upon.
4.6 Information. The holders of Restricted Stock covered by a
registration statement as provided in Sections 4.3 or 4.4 shall furnish in
writing to the Company such information regarding them, any Restricted Security
held by them, and the intended method of disposition of the Restricted Stock as
the Company shall reasonably request and as shall be required in connection with
the actions to be taken by the Company pursuant to Sections 4.3 or 4.4.
4.7 Blue Sky Registrations. In the case of any registration
under this Article 4 of any shares of Restricted Stock, the Company will use its
best efforts concurrently to register or qualify the same for sale under the
securities laws of those states in which registration or qualification is
required, except that the Company shall not be required to execute a general
consent to service or to qualify to do business in any state.
4.8 Lockup Agreement. In consideration for the Company
agreeing to its obligations under this Article 4, each holder of Restricted
Securities agrees that, in connection with any registration of the Company's
securities, upon the request of the underwriter(s) managing any underwritten
offering of the Company's securities, such holders shall execute an agreement
not to sell, make any short sale of, loan, grant any option for the purchase of,
or otherwise dispose of any Restricted Stock, other than shares included in the
registration, without the prior written consent of the underwriter(s) for the
period of time (not to exceed 90 days) from the effective date of the
registration as the underwriter(s) may specify.
4.9 Transferability. Provided that the requirements of Section
4.1 have been satisfied with respect to the sale or transfer of a Restricted
Security, any transferee shall be entitled to the rights and benefits of, and
shall be subject to the requirements of, Sections 4.2 through 4.8.
5. COMPANY'S AFFIRMATIVE COVENANTS. The Company shall comply with the
following requirements unless holders of not less than 50% in principal amount
of the Senior Notes then outstanding agree otherwise in writing. These
requirements shall terminate upon the earlier of (1) the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offering and sale of Common Stock, or any
security convertible into Common Stock, (other than a registration under which
more than 25% of Restricted Stock is not registered) or (2) the date when less
than 25% of the Senior Notes
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initially issued and sold under the Debenture Purchase Agreement and this
Agreement are held by the original holders of the Debentures or their permitted
transferees.
5.1 Reporting Requirements. The Company will deliver, or cause
to be delivered, to you each of the following:
(1) As soon as available, and in any event within 90 days
after the end of each fiscal year of the Company, audited financial statements
of the Company with the unqualified opinion of independent certified public
accountants selected by the Company, which annual financial statements shall
include the balance sheet of the Company as at the end of such fiscal year and
the related statements of income, retained earnings and cash flows of the
Company for the fiscal year then ended, all in reasonable detail and prepared in
accordance with generally accepted accounting principles consistently applied,
together with a certificate of the chief financial officer of the Company
stating (i) that such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied, (ii) whether such
officer has knowledge of the occurrence of any default hereunder and, if so,
stating in reasonable detail the facts with respect thereto, and (iii) all
relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Company is in compliance with the financial covenants set
forth in this Agreement;
(2) As soon as available and in any event within 60 days after
the end of each quarter, an unaudited balance sheet and statements of income and
retained earnings of the Company as at the end of and for such quarter and for
the year to date period then ended, in reasonable detail and stating in
comparative form the figures for the corresponding date and periods in the
previous year, all prepared in accordance with generally accepted accounting
principles consistently applied, subject to year-end audit adjustments and
together with a certificate of the chief financial officer of the Company
stating (i) that such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied, (ii) whether such
officer has knowledge of the occurrence of any default hereunder and, if so,
stating in reasonable detail the facts with respect thereto, and (iii) all
relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Company is in compliance with the financial covenants set
forth in this Agreement;
(3) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Company shall have sent to
its stockholders;
(4) promptly after the sending or filing thereof, copies of
all regular and periodic financial reports which the Company shall file with the
Securities and Exchange Commission or any national securities exchange;
(5) promptly upon knowledge thereof, notice of the violation
by the Company of any law, rule or regulation, the non-compliance with which
could materially and adversely affect its business or its financial condition;
and
(6) from time to time, with reasonable promptness, any and all
other materials, reports, records or information with respect to Company's
financial condition, operations, and affairs as you may request.
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5.2 Books and Records; Inspection and Examination. The Company
will keep accurate books, records and accounts pertaining to the Company's
business and financial condition and such other matters as you may from time to
time request in which true and complete entries will be made in accordance with
generally accepted accounting principles consistently applied and, upon your
request, will permit you or your officer, employee, attorney or accountant to
audit, review, make extracts from or copy any and all corporate and financial
books and records of the Company at all times during ordinary business hours and
to discuss the affairs of the Company with any of its directors, officers,
employees or agents.
5.3 Compliance with Laws; Environmental Indemnity. The Company
will (a) comply with the requirements of applicable laws and regulations, the
non-compliance with which would materially and adversely affect its business or
its financial condition and (b) comply with all applicable Environmental Laws
and obtain any permits, licenses or similar approvals required by any such
Environmental Laws. The Company will indemnify, defend and hold you harmless
from and against any claims, loss or damage to which you may be subjected as a
result of any past, present or future existence, use, handling, storage,
transportation or disposal of any hazardous waste or substance or toxic
substance by the Company or on property owned, leased or controlled by the
Company. This indemnification agreement shall survive the termination of this
Agreement and payment of the indebtedness hereunder.
5.4 Payment of Taxes and Other Claims. The Company will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it, prior to the date on which penalties attach thereto, (b) all federal,
state and local taxes required to be withheld by it, and (c) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
or charge upon any properties of the Company; provided, that the Company shall
not be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.
5.5 Maintenance of Properties. The Company will keep and
maintain its properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided, however,
that nothing in this section shall prevent the Company from discontinuing the
operation and maintenance of any of its properties if such discontinuance is in
its judgment desirable in the conduct of the Company's business.
5.6 Insurance. The Company will obtain and at all times
maintain insurance with insurers believed by the Company to be responsible and
reputable, in such amounts and against such risks as is usually carried by
companies engaged in similar business and owning similar properties in the same
general areas in which the Company operates.
5.7 Preservation of Corporate Existence. The Company will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
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5.8 Book Net Worth. The Company shall maintain on the last day
of each quarter occurring in each of the periods set forth below, the Book Net
Worth (as that term is defined in the Company's credit agreement with NBCI dated
May 3, 1994) which is greater than or equal to the amount set forth opposite
such period:
PERIOD BOOK NET WORTH
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Date hereof to and including June 29, 1994 ($4,232,000)
June 30, 1994 to and including September 29, 1994 ($3,300,000)
September 30, 1994 to and including December 30, 1994 ($2,850,000)
December 31, 1994 to and including March 30, 1995 ($3,100,000)
March 31, 1995 to and including June 29, 1995 ($2,650,000)
June 30, 1995 to and including September 29, 1995 ($1,000,000)
September 30, 1995 to and including December 30, 1995 ($ 800,000)
December 31, 1995 to and including March 30, 1996 ($ 900,000)
March 31, 1996 to and including June 29, 1996 ($ 400,000)
June 30, 1996 to and including September 29, 1996 $1,000,000
September 30, 1996 and thereafter $1,600,000
5.9 Earnings Before Interest and Taxes. The Company shall
maintain on each date set forth below operating income determined in accordance
with generally accepted accounting principles but before any deduction for
interest expenses and income taxes and calculated for all dates prior to
September 30, 1994 on a fiscal year to date basis, and thereafter, for the
twelve months ending on such date, which is greater than or equal to the amount
set forth opposite such date:
DATE EBIT
---- ----
June 30, 1994 $ 700,000
September 30, 1994 $2,500,000
December 31, 1994 $3,400,000
March 31, 1995 $3,500,000
June 30, 1995 $3,600,000
September 30, 1995 $3,800,000
December 31, 1995 $3,800,000
March 31, 1996 $4,000,000
June 30, 1996 $4,300,000
September 30, 1996 and each fiscal quarter
end thereafter $4,300,000
5.10 Interest Coverage. The Company shall maintain on each
date set forth below, the ratio of (i) the sum of its pre-tax net income, to
(ii) interest expense, in each case determined in accordance with generally
accepted accounting principles, and calculated for all dates prior to September
30, 1994 on a fiscal year to date basis, and thereafter, for the twelve
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12
months ending on such date, which is greater than or equal to the ratio set
forth opposite such date:
DATE RATIO
---- -----
June 30, 1994 1.65 to 1
September 30, 1994 2.00 to 1
December 31, 1994 2.00 to 1
March 31, 1995 2.00 to 1
June 30, 1995 2.00 to 1
September 30, 1995 2.00 to 1
December 31, 1995 2.00 to 1
March 31, 1996 2.00 to 1
June 30, 1996 2.00 to 1
September 30, 1996 and each fiscal quarter
end thereafter 2.00 to 1
5.11 Minimum Debt Service Coverage. The Company shall maintain
on each date set forth below, the ratio of (i) the sum of its after-tax net
income, depreciation and amortization expense and interest expense, to (ii) the
sum of its interest, capital expenditures and current maturities of long term
debt (excluding as long term debt, the indebtedness of the Company to NBCI
incurred pursuant to the credit agreement between Company and NBCI, or any
replacement of such indebtedness), in each case determined in accordance with
generally accepted accounting principles, and calculated for all dates prior to
September 30, 1994 on a fiscal year to date basis, and thereafter, for the
twelve months ending on such date, which is greater than or equal to the ratio
set forth opposite such date:
DATE RATIO
---- -----
June 30, 1994 1.20 to 1
September 30, 1994 1.25 to 1
December 31, 1994 1.50 to 1
March 31, 1995 1.50 to 1
June 30, 1995 1.50 to 1
September 30, 1995 1.50 to 1
December 31, 1995 1.50 to 1
March 31, 1996 1.50 to 1
June 30, 1996 1.50 to 1
September 30, 1996 and each fiscal quarter
end thereafter 1.50 to 1
6. COMPANY'S NEGATIVE COVENANTS. The Company shall comply with the
following requirements unless holders of not less than 50% in principal amount
of the Senior Notes then outstanding agree otherwise in writing. These
requirements shall terminate upon the earlier of (1) the closing of an
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offering and sale of Common Stock, or any
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13
security convertible into Common Stock, (other than a registration under which
more than 25% of Restricted Stock is not registered) or (2) the date when less
than 25% of the Senior Notes initially issued and sold under the Debenture
Purchase Agreement and this Agreement are held by the original holders of the
Debentures or their permitted transferees.
6.1 Dividends and Stock Repurchases. The Company will not
declare or pay any dividends (other than dividends payable solely in stock of
the Company) on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly; provided,
however, that if the Company is an S Corporation within the meaning of the
Internal Revenue Code of 1986, as amended, or shall become such an S Corporation
with your consent, and after first providing such supporting documentation as
you may request, the Company may pay dividends in an amount equal to the amount
of state and federal income tax which would be due by each shareholder with
respect to income deemed to be received by each shareholder from the Company as
a result of the Company's status as an S Corporation at the highest marginal
income tax rate for federal and state (for the state or states in which each
shareholder is liable for income taxes with respect to such income) income tax
purposes, after taking into account any deduction for state income taxes in
calculating the federal income tax liability.
6.2 Sale of Transfer of Assets; Suspension of Business
Operations. The Company will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary or (ii) all or a substantial part of
its assets to any other Person other than the sale of Inventory in the ordinary
course of business and will not liquidate, dissolve or suspend business
operations. The Company will not in any manner transfer any property without
prior or present receipt of full and adequate consideration.
6.3 Accounting. The Company will not adopt any material change
in accounting principles other than as required by generally accepted accounting
principles. The Company will not adopt, permit or consent to any change in its
fiscal year.
6.4 Change in Ownership. Company will not issue or sell any
stock of the Company or permit or suffer to occur the sale, transfer,
assignment, pledge or other disposition of any shares of stock of the Company if
immediately thereafter Xxxxxxxx X. Xxxxxx or her lineal descendants are not
beneficial owners of at least 51% of the outstanding capital stock of the
Company.
7. CONDITIONS OF COMPANY'S OBLIGATION. The obligation of the Company to
effect this Agreement at the Closing is subject to the satisfaction, prior to or
at the Closing, of the condition that the representations and warranties
contained in Article 3 of this Agreement shall be correct when made and as of
the time of the Closing.
8. CONDITIONS OF YOUR OBLIGATION. Your obligation to effect this
Agreement at the Closing is subject to the satisfaction, prior to or at the
Closing, of the following conditions:
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14
8.1 Representations and Warranties Correct. The
representations and warranties contained in Article 2 of this Agreement shall be
correct when made and at and as of the time of the Closing.
8.2 Performance. The Company shall have performed and complied
with all agreements and conditions contained in this Agreement and required to
be performed or complied with by it prior to or at the Closing.
9. MISCELLANEOUS.
9.1 Expenses. The parties will each pay all of their own
expenses incurred by them in connection with this Agreement.
9.2 Survival of Representations and Warranties. All covenants,
agreements, representations and warranties made in or otherwise in writing in
connection with this Agreement shall survive the execution and delivery of this
Agreement and the issuance and delivery of the Senior Notes and Warrants.
9.3 Binding Effect Etc. All covenants, agreements,
representations and warranties contained in this Agreement shall bind and inure
to the benefit of the respective heirs, legal representatives, successors and
assigns of the parties. The rights of any transferee of a Restricted Security,
however, are subject to compliance with Section 4.1.
9.4 Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered or
five days after deposit in the United States mail, first class postage prepaid,
addressed as set forth below:
(1) If to the Company:
000 Xxxxx Xxxxx Xxxxx
Xxxxx, Xxxxxxx 00000
Attention: President
with a copy to:
Xxxxx and Roca
00 Xxxxx Xxxxxxx Xxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxxxx 00000
Attention: Xxxxx Xxxxx, Esq.
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15
(2) If to the Holder:
Provident Mutual Life Insurance Company of Philadelphia
0000 Xxxxxx Xxxxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000
Attention: _________________________
Any party may alter the person, officer or address to which
communications or copies are to be sent to it by giving notice.
9.5 Amendments and Waivers. Neither this Agreement nor any of
its terms may be changed, waived, discharged or terminated except in a writing
signed by all parties.
9.6 Controlling Law. This Agreement is being executed and
delivered, and the Senior Notes and Warrants are being delivered, in the State
of Arizona and shall be construed in accordance with and governed by the laws of
such state.
9.7 Counterparts. This Agreement may be executed in several
counterparts and each counterpart, when so executed and delivered and whether or
not each counterpart is executed by all the parties, shall constitute an
original instrument, but all such separate counterparts shall together
constitute this Agreement and be parts of the same instrument.
If you are in agreement with the foregoing, please sign the
form of acceptance appearing at the foot of the enclosed counterpart of this
Agreement and return the same to the Company, whereupon it will become a binding
agreement between you and the undersigned.
Yours very truly,
ROCKFORD CORPORATION
By: /s/ W. Xxxx Xxxxxx
------------------------
President
Attest /s/Xxxxx X. Xxxxxxx
------------------------
Secretary
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The foregoing agreement is accepted as of the date first above
written.
PROVIDENT MUTUAL LIFE INSURANCE COMPANY OF PHILADELPHIA
By: /s/
------------------------------
Title: /s/
------------------------------
Attest /s/
------------------------------
Title: /s/
------------------------------
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17
EXHIBIT A
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAW OF ANY
STATE. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF EFFECTIVE
REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT
REQUIRED."
ROCKFORD CORPORATION
SENIOR NOTE
DUE FEBRUARY 3, 1999
(RENAMING, AMENDING, AND REPLACING
A 10.5% CONVERTIBLE SUBORDINATED DEBENTURE
DUE FEBRUARY 3, 1999)
$1,000.00 October 28, 1994
This is a Senior Note due February 3, 1999 (the "Senior
Note"), issued by Rockford Corporation, an Arizona Corporation (the "Company")
pursuant to the terms of the Convertible Subordinated Debenture Amendment
Agreement and Agreement to Rename as Senior Note of even date herewith between
the Company and the original Holder hereof (the "Agreement"). Terms used and not
otherwise defined shall have the meaning given them in the Agreement.
1. Payment of Principal and Interest.
The Company, for value received, promises to pay to Xxx Xxxxx
or transferee (the "Holder") the principal amount of $1,000.00 on February 3,
1999 and to pay interest thereon at the rate of ten and one-half percent (10.5%)
per annum. Interest shall accrue from the date hereof and shall be paid
quarterly, on each January 15th, April 15th, July 15th, and October 15th
hereafter but commencing on April 15, 1989, until the principal is fully paid.
Interest shall be paid on the basis of a 360-day year of twelve 30-day months.
2. Payment Prior to Maturity.
At any time the Company may, at its option, redeem this Senior
Note in whole or in part by paying all interest accrued but unpaid to the date
fixed for redemption plus a redemption price fixed as follows:
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REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
Before February 2, 1995 105% of Par
February 3, 1995 to February 2, 1996 104% of Par
February 3, 1996 to February 2, 1997 103% of Par
February 3, 1997 to February 2, 1998 102% of Par
February 3, 1998 to February 2, 1999 101% of par
Notice of any redemption shall be given not less than thirty (30) days, but not
more than ninety (90) days, before the date fixed for redemption. By the date
fixed for redemption, the Holder shall surrender this Senior Note to the Company
at its principal executive offices in exchange for payment therefor. Upon due
tender of the accrued interest through the redemption date plus the redemption
price by the Company, this Senior Note shall not be deemed to be outstanding for
any purpose subsequent to the close of business on the date fixed for
redemption.
3. Subordination and Priority.
The indebtedness evidenced by this Senior Note, including the
principal and accrued interest, is expressly subordinate and subject in right of
payment and upon liquidation to the prior payment in full of all "Senior Debt,"
whether now outstanding or hereafter created, incurred, assumed or guaranteed.
The term "Senior Debt" shall mean the principal of, premium, if any, and
interest on (a) indebtedness (other than this Senior Note or any previously
subordinated indebtedness) of the Company pursuant to the Company's present
credit arrangements with Norwest Business Credit, Inc. ("NBCI") and Bank of
America Arizona ("BofA"), or pursuant to any refinancing or renewal of such
credit arrangements, (b) indebtedness of the Company which holders of not less
than 50% in principal amount of the Senior Notes agree, in writing, shall be
treated as Senior Debt, and (c) indebtedness incurred, assumed or guaranteed by
the Company in connection with the acquisition by it of any property or asset,
in an amount up to the cost of such property or asset, unless, in each case, by
the terms of the instrument creating or evidencing the indebtedness it is
expressly provided that such indebtedness is not superior in right of payment to
this Senior Note.
Senior Debt shall exclude, and the indebtedness evidenced by
this Senior Note is expressly senior and entitled to priority in payment and
upon liquidation with respect to, all capital stock of the Company, any
indebtedness issued after the date of this Debenture and convertible into shares
of the Company's Common Stock, and any other indebtedness that is not Senior
Debt. Senior Debt shall exclude, and the indebtedness evidenced by this Senior
Note is expressly of equal priority in payment and upon liquidation with respect
to, (1) indebtedness outstanding on the original issue date of this Senior Note
and convertible into shares of the Company's Common Stock and (2) a $2,000,000
Senior Note of Company issued to Provident Mutual Life Insurance Company of
Philadelphia.
- 2 -
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4. Events of Default.
An Event of Default shall occur upon the occurrence of any of
the following events:
Default in the payment of interest on this Senior Note when it
becomes due and payable, and continuance of such default for a period of ten
(10) days;
Default in the payment of the principal of this Senior Note
when it becomes due and payable;
Default by the Company under an acceleration prior to maturity
of, or the failure to pay at maturity, any third party indebtedness of the
Company aggregating not less than $250,000 for a period of thirty (30) days
after the same may become payable (which shall include any grace period but
shall not exceed 30 days);
The failure of the Company to comply for a period of not less
than thirty (30) consecutive days with any provision of the affirmative or
negative covenants contained in the Agreement;
The failure of the Company to pay final judgments not covered
by insurance or then subject to any appeal aggregating in excess of $250,000 for
thirty (30) days;
The entry of a decree or order by a court having jurisdiction
adjudging the Company a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of or in
respect of the Company under the Federal Bankruptcy Act or any other applicable
Federal or State law, or appointing a receiver, liquidator, assignee, trustee,
or other similar official of the Company or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
thirty (30) consecutive days; or
The institution by the Company of proceedings to be
adjudicated a bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under Federal or
State law, or the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee or other similar
official of the Company or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Company in furtherance of any such action.
5. Rights Upon Default; Acceleration of Indebtedness. Upon the
occurrence of an Event of Default:
The entire outstanding balance of the Senior Note, including
the entire balance of principal and all accrued interest, shall accelerate and
become immediately due and payable upon written notice to the Company by Holders
of not less than 50% in principal amount of the Senior Notes then outstanding;
and
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The Company may not pay dividends or make distributions to
holders of any class of its stock, or redeem or repurchase all or any part of
any class of its stock.
6. Renaming and Replacement of Debenture.
This Senior Note is issued, pursuant to the terms of the
Agreement, to rename and amend the terms of a Debenture issued by the Company
and held by the Holder. This Senior Note shall supersede, replace and amend the
Debenture which shall, upon issuance of this Senior Note, have no further force
or effect.
7. Loss or Destruction of Senior Note.
The Company shall execute and deliver a new Senior Note of
like tenor and date upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Senior Note and, in the
case of loss, theft or destruction, of an indemnity by the original Holder
hereof or in case of any transfer upon such terms as may be satisfactory to the
Company, or, in the case of mutilation, upon surrender and cancellation of this
Senior Note.
8. Status Under Securities Laws.
No Registration. This Senior Note has not been and will not
be, registered under the Securities Act of 1933 (the "1933 Act"), the Arizona
Securities Act (the "Arizona Act") or the securities laws of any other
jurisdiction and must be held indefinitely without any transfer, sale or other
disposition unless subsequently registered under the 1933 Act, the Arizona Act
and the securities laws of any other applicable jurisdiction or, in the opinion
of counsel acceptable to the Company, registration is not required under such
Acts or laws.
Legend. There shall be endorsed on this Senior Note a legend
substantially to the following effect:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAW OF ANY STATE. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
EFFECTIVE REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT
REQUIRED."
Refusal to Transfer. The Company may refuse to effect a
transfer, sale or other disposition of this Senior Note by the Holder or its
successors or assigns otherwise than as expressly permitted by this Senior Note
and the Agreement.
9. Miscellaneous.
Agreement. This Senior Note and the terms of the indebtedness
evidenced hereby are issued and incurred subject to the terms of the Agreement,
the terms and conditions of which shall become binding upon any subsequent
Holder or transferee of this Senior Note.
- 4 -
21
Governing Law. This Senior Note and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed in accordance with the laws of the State of Arizona,
notwithstanding any Arizona or other conflict-of-law provisions to the contrary.
Binding Nature of Senior Note. This Senior Note shall be
binding upon any successors and assigns of the Company and shall inure to the
benefit of the Holder and its successors and assigns, except that the Holder may
not assign or transfer its rights under this Senior Note otherwise than by gift
or bequest, by operation of law, or as expressly permitted by this Senior Note.
Notices. All notices, requests, demands and other
communications required or permitted under this Senior Note shall be in writing
and shall be deemed to have been duly given, made and received when delivered or
five days after they are deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(1) If to the Company:
000 Xxxxx Xxxxx Xxxxx
Xxxxx, Xxxxxxx 00000
Attention: President
with a copy to:
Xxxxx and Xxxx
00 Xxxxx Xxxxxxx Xxxxxx, #0000
Xxxxxxx, Xxxxxxx 00000
Attention: Xxxxx Xxxxx, Esq.
(2) If to the Holder:
Xxx Xxxxx
0000 Xxxx Xxxxxxxx
Xxxx, Xxxxxxx 00000
Either party may alter the person, office or address to which
communications or copies are to be sent by giving notice.
10. Execution Date. The Company has caused this Senior Note to
be duly executed on the date written above.
ROCKFORD CORPORATION
By:/s/
----------------------------
President
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[Corporate Seal) Attest:
/s/
-----------------------------------------
Assistant Secretary
- 6 -
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EXHIBIT B
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAW OF ANY STATE. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED (EXCEPT TO A
COMMERCIAL BANK OR OTHER CORPORATION AFFILIATED WITH
SECURITY PACIFIC BANK ARIZONA) IN THE ABSENCE OF EFFECTIVE
REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL ACCEPTABLE
TO THIS COMPANY THAT REGISTRATION IS NOT REQUIRED."
WARRANT
TO PURCHASE UP TO 43 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M., PHOENIX TIME, ON FEBRUARY 3, 2000
ROCKFORD CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF ARIZONA
This certifies that, for value received, Xxx Xxxxx or the
registered holder hereof or assigns (the "Warrantholder") is entitled to
purchase from Rockford Corporation, an Arizona corporation (the "Company"), at
any time before 5:00 p.m., Phoenix time, on February 3, 2000, at the purchase
price per share of $ 6.50 (the "Warrant Price"), up to the number of shares of
Common Stock, no par value, of the Company set forth above (the "Shares"). The
number of Shares purchasable upon exercise of this Warrant and the Warrant Price
per share shall be subject to adjustment from time to time as set forth below.
1. Agreement. This Warrant was originally delivered pursuant
to the terms of the Convertible Subordinated Debenture Amendment Agreement and
Agreement to Rename as Senior Note between the Company and original
Warrantholder (the "Agreement"). In connection with the Agreement the Company
and the original Warrantholder agreed to (1) rename the Company's 10.5%
Convertible Subordinated Debentures due February 3, 1999 as the Company's
"Senior Notes due February 3, 1999" (the "Note") and (2) deliver the original of
this Warrant to purchase the Shares in order to separately evidence the right to
purchase the Shares (previously established in the Debentures) and amend the
terms for purchase of the Shares. This Warrant (i) evidences the right to
purchase the Shares, (ii) is issued under and in accordance with the Agreement,
(iii) is subject to the terms and provisions contained in the Agreement and the
Note, to all of which the Warrantholder by acceptance of this Warrant consents
and (iv) represents and evidences the same right to purchase the Shares
previously embodied in the Debentures (subject only to the changes set forth in
this Warrant or in the Agreement).
- 7 -
24
Capitalized terms used in this Warrant shall have the meanings ascribed to them
in the Note or Agreement. This Warrant may be exercised at any time after its
issuance and before 5:00 p.m., Phoenix time, on February 3, 2000.
2. Detachment from Note. This Warrant is originally issued
together with the Note; however, it may be transferred independently of the Note
at any time, subject to compliance with the transfer restrictions set forth in
the Agreement.
3. Expiration. Unless earlier exercised or expired, this
Warrants shall expire at 5:00 p.m. Phoenix time on February 3, 2000.
4. Exercise of Warrant.
Exercise. This Warrant may be exercised in whole or
in part by presentation of this Warrant with the Exercise Form on the reverse
side hereof duly executed and simultaneous payment of the Warrant Price (subject
to adjustment) at the principal office of the Company. Payment of such price
shall be made at the option of the Warrantholder in certified funds or by wire
transfer.
Exercise Price and Fractional Shares. This Warrant
is exercisable, at the option of the Warrantholder, to purchase shares of the
Company's Common Stock at the Warrant Price, subject to adjustment as provided
in this Warrant. The Company shall not be required to issue fractional shares of
Common Stock or other capital stock upon exercise of this Warrant and, in lieu
thereof, shall pay a cash adjustment based upon the then current fair market
value of the Common Stock as determined by the Board of Directors as at the last
business day prior to the date of exercise.
Adjustment Based Upon Stock Dividends, Combination of
Shares or Recapitalization. The Warrant Price and the number of Shares shall be
adjusted if the Company shall at any time after the original issuance of this
Warrant (i) pay a stock dividend on its Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares,
(iv) issue by reclassification of its shares of Common Stock any other special
capital stock of the Company, or (v) distribute to all holders of Common Stock
evidences of indebtedness (including indebtedness convertible into Common Stock
or other securities of Company), securities (including common or preferred stock
of Company), or assets (excluding cash dividends) or rights or warrants to
subscribe for Common Stock or other securities of Company (other than those
mentioned above). Upon the occurrence of an event or events requiring adjustment
of the Warrant Price or an adjustment to the number of Shares or other
securities issuable upon exercise of this Warrant, and thereafter, the
Warrantholder upon exercise of this Warrant shall be entitled to receive the
number of shares of Common Stock or other securities of the Company which the
Warrantholder would have owned or have been entitled to receive after the
happening of any of the events described above had this Warrant been exercised
immediately prior to the happening of such event.
- 2 -
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Adjustment Based Upon Stock Issuances. The Warrant
Price shall be adjusted if at any time after the original issuance of this
Warrant the Company issues, or issues rights or warrants to subscribe for or
purchase, Common Stock or securities convertible into or exchangeable for Common
Stock at less than the Warrant Price. Upon the occurrence of an event or events
requiring adjustment of the Warrant Price under this section the Warrant Price
shall be adjusted to be equal to the price of the new issue, and thereafter the
Warrantholder upon exercise of this Warrant shall be entitled to purchase the
Shares, or other securities of the Company which the Warrantholder is entitled
to receive, based upon the new Warrant Price per share.
Adjustment Based Upon Merger or Consolidation. In
case of any consolidation or merger to which the Company is a party (other than
a merger in which the Company is the surviving entity and which does not result
in any reclassification of or change in the outstanding Common Stock of the
Company), or in case of any sale or conveyance to another person, firm, or
corporation of the property of the Company as an entirety or substantially as an
entirety, the Warrantholder shall have the right, upon exercise of this Warrant,
to receive the kind and amount of securities and property (including cash)
receivable upon such consolidation, merger, sale or conveyance by a holder of
the number of shares of Common Stock or other securities into which such Warrant
might have been converted immediately prior to the consolidation, merger, sale,
or conveyance.
No Adjustment for Outstanding Exercise and Option
Rights and Certain Other Securities. No adjustment of the Warrant Price or
number of shares issuable upon exercise shall be made upon the issuance by the
Company of (1) Common Stock upon conversion or exchange of securities
convertible or exchangeable into Common Stock and outstanding on or before
February 3, 1989, (2) Common Stock upon exercise of any employee's stock option
outstanding on or before February 3, 1989, or (3) Common Stock or securities
convertible into Common Stock, or options to purchase Common Stock not included
in (1) or (2) above and not amounting to more than 10% of the Company's fully
diluted Common Stock issue, pursuant to an employee benefit plan of the Company.
5. Corporate Status of Shares To Be Issued. All shares of the
Company's Common Stock (or other securities in the event of an adjustment of the
Warrant Price or number of shares issuable upon exercise) which may be issued
upon the exercise of this Warrant shall, upon issuance and payment of the
Warrant Price, be fully paid and nonassessable.
6. Issuance of Stock Certificate. Upon the exercise of this
Warrant, the Company shall forthwith issue to the Warrantholder a certificate or
certificates representing the number of shares of its Common Stock (or other
securities in the event of an adjustment of the Warrant Price or number of
shares issuable upon exercise) to which the Warrant relates.
7. Partial Exercise and Exchange. Upon any partial exercise of
this Warrant, there shall be signed and issued to the Warrantholder a new
Warrant in respect of the Shares as to which this Warrant shall not have been
exercised. This Warrant may be exchanged, at the office of the Company by
surrender of this Warrant properly endorsed for transfer, exercise, or exchange,
for one or more new Warrants for the same aggregate number of Shares as
evidenced by the Warrant or Warrants exchanged.
- 3 -
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8. Loss or Destruction of Warrant. The Company shall execute
and deliver a new Warrant of like tenor and date upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, of an indemnity by
the original Warrantholder, or, in case of any transfer, upon such terms as may
be satisfactory to the Company, or, in the case of mutilation, upon surrender
and cancellation of this Warrant.
9. Status of Holder of Warrant. This Warrant shall not entitle
the Warrantholder to any voting rights or other rights as a shareholder of the
Company, and no dividends shall be payable or accrue in respect of this Warrant
or the securities issuable upon exercise, unless and until this Warrant is
exercised. Upon the exercise of this Warrant, the Warrantholder shall, to the
extent permitted by law, be deemed to be the holder of record of the shares of
Common Stock or other securities issuable upon such exercise, notwithstanding
that the stock transfer books of the Company are then closed or that the
certificates representing such shares of Common Stock or other securities are
not then actually delivered.
10. Reservation of Shares. The Company shall reserve out of
its authorized shares of Common Stock (and other securities in the event of an
adjustment of the Warrant Price or number of shares issuable upon exercise) a
number of shares sufficient to enable it to comply with its obligation to issue
the Shares (and other securities in the event of an adjustment of the Warrant
Price or number of shares issuable upon exercise) upon the exercise of this
Warrant.
11. Status Under Securities Laws.
No Registration. This Warrant has not been, and the
securities issuable upon exercise hereof will not be, registered under the
Securities Act of 1933 (the "1933 Act"), the Arizona Securities Act (the
"Arizona Act") or the securities laws of any other jurisdiction and must be held
indefinitely without any transfer, sale or other disposition unless subsequently
registered under the 1933 Act, the Arizona Act and the securities laws of any
other applicable jurisdiction or, in the opinion of counsel acceptable to the
Company, registration is not required under such Acts or laws.
Legend. There shall be endorsed on this Warrant and
on the certificates evidencing any securities issued upon the exercise of this
Warrant a legend substantially to the following effect:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAW OF ANY
STATE. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED (EXCEPT TO A COMMERCIAL
BANK OR OTHER CORPORATION AFFILIATED WITH SECURITY
PACIFIC BANK ARIZONA) IN THE ABSENCE OF EFFECTIVE
REGISTRATION STATEMENTS OR AN OPINION OF COUNSEL
ACCEPTABLE TO THIS COMPANY THAT REGISTRATION IS NOT
REQUIRED."
- 4 -
27
Restriction on Other Securities. Except upon certain
limited circumstances, the restrictions on the transfer of this Warrant and any
securities issued upon the exercise of this Warrant will also apply to any and
all shares of capital stock or other securities issued or otherwise acquired on
account of the exercise of the Warrant including, without limitation, shares and
securities issued or acquired as a result of any stock dividend, stock split or
exchange or any distribution of shares or securities pursuant to any corporate
reorganization, reclassification or similar event.
12. Refusal to Transfer. The Company may refuse to effect a
transfer, sale or other disposition of this Warrant or any part thereof by the
Warrantholder or its successors or assigns except as expressly permitted by this
Warrant and the Agreement, which contains additional provisions governing any
transfer of this Warrant. The Company may also refuse to effect a transfer,
sale, or other disposition of any Shares or other securities issued upon
exercise of this Warrant which would be in violation of any express prohibition
in this Warrant or in the Agreement.
13. Governing Law. This Warrant is delivered and is intended
to be performed in the State of Arizona and shall be construed and enforced in
accordance with the laws of such state.
14. Execution. In witness whereof, the Company has caused this
Warrant to be signed by its duly authorized officers on __________, _____.
ROCKFORD CORPORATION
[SEAL)
By:/s/
-----------------------
President
ATTEST:
/s/
---------------------------
Assistant Secretary
- 5 -
28
ROCKFORD CORPORATION
EXERCISE FORM
Rockford Corporation
000 Xxxxx Xxxxx Xxxxx
Xxxxx, Xxxxxxx 00000
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Warrant, and to purchase thereunder, 43
shares of Common Stock (the "Shares") provided for therein, and requests that
certificates for the Shares be issued in the name of:
(Please Print Name, Address and Social Security Number)
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Warrantholder or his Assignee as below indicated and delivered to the address
stated below.
Dated:____________________________
Name of Warrantholder or Assignee:_____________________________________
(Please Print)
Address:________________________________________________________________________
________________________________________________________________________
Authorized Signature:___________________________________________________________
Signature Guaranteed:_______________________________________________
Note: The name of the Warrantholder must correspond with
the name as written upon the face of this Warrant
certificate in every particular, without alteration
or enlargement or any change whatever, unless this
Warrant has been assigned.
- 6 -
29
ASSIGNMENT
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ___________________________________________________________________________
(Please Print Name, Address and Social Security Number)
a Warrant to purchase _________ shares of Common Stock and hereby irrevocably
constituting and appointing ______________________________ Attorney to transfer
said Warrant on the books of the Company, with full power of substitution in the
premises.
___________________________
Name of Registered Holder
Dated: ___________ 19____
___________________________
Authorized Signature
Signature Guaranteed: ___________________________
Note: The signature of this assignment must correspond with the name as written
above upon the fact of this Warrant certificate in every particular, without
alteration or enlargement of any change whatever.
- 7 -
30
EXHIBIT D
Consolidated Financial Statements
and Other Financial Information
ROCKFORD CORPORATION
September 30, 1994
31
Rockford Corporation
Consolidated Financial Statements
and Other Financial Information
Years ended September 30, 1994 and 1993
CONTENTS
Report of Independent Auditors............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Stockholders' Equity (Deficit).................. 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6
Other Financial Information
Report of Independent Auditors on Other Financial Information.............. 16
Consolidating Balance Sheet................................................ 17
Consolidating Statement of Operations...................................... 19
32
[ERNST & YOUNG LLP letterhead]
Report of Independent Auditors
The Board of Directors and Stockholders
Rockford Corporation
We have audited the accompanying consolidated balance sheets of Rockford
Corporation and subsidiaries as of September 30, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 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 positions of Rockford
Corporation and subsidiaries at September 30, 1994 and 1993, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 23, 0000
-0-
00
Xxxxxxxx Corporation
Consolidated Balance Sheets
SEPTEMBER 30
1994 1993
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash $ 120 $ 765
Accounts receivable, less allowances of $715,000 in 1994 and
$733,000 in 1993 10,539 9,601
Inventories, net 5,885 6,289
Prepaid expenses, insurance receivable, and other 634 1,835
Deferred income taxes 2,100 --
-------- --------
Total current assets 19,278 18,490
Property and equipment, net 3,015 3,052
Deferred income taxes 170 --
Other assets, net of accumulated amortization of $683,000 in 1994 and
$506,000 in 1993 282 371
-------- --------
Total assets $ 22,745 $ 21,913
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 300 $ 917
Accounts payable 5,264 6,463
Current portion of notes payable, long-term debt, and capital lease
obligations 1,587 13,240
Accrued payroll, commissions, and other 2,750 2,370
Accrued warrant 1,570 1,300
Income taxes payable 400 231
-------- --------
Total current liabilities 11,871 24,521
Notes payable and long-term debt, less current portion 10,778 2,133
Capital lease obligations, less current portion 51 48
-------- --------
10,829 2,181
Lease commitments and contingencies -- --
Stockholders' equity (deficit):
Common stock, $.01 par value
Authorized shares - 10,000,000
Issued and outstanding shares - 608,061 6 6
Additional paid-in-capital 765 770
Deferred stock grants -- (29)
Accumulated deficit (531) (5,436)
Currency translation adjustments (195) (100)
-------- --------
Total stockholders' equity (deficit) 45 (4,789)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 22,745 $ 21,913
======== ========
See accompanying notes.
-2-
34
Rockford Corporation
Consolidated Statements of Operations
YEAR ENDED SEPTEMBER 30
1994 1993
-------- --------
(In thousands)
Sales, net of returns and discounts of $12,215,000 in 1994 and
$11,171,000 in 1993 $ 63,051 $ 57,449
Cost of goods sold 39,565 41,479
-------- --------
Gross profit 23,486 15,970
Operating expenses:
Engineering 1,347 1,435
Commissions 4,159 4,010
Marketing expenses 5,076 6,137
Freight programs 1,450 1,465
General and administrative 6,430 5,262
-------- --------
18,462 18,309
-------- --------
Operating income (loss) 5,024 (2,339)
Other income (expense):
Interest expense (1,593) (1,591)
Other (96) 1,048
-------- --------
Income (loss) before benefit (provision) for income taxes and cumulative
effect of a change in accounting for income taxes 3,335 (2,882)
Benefit (provision) for income taxes 1,570 (90)
-------- --------
Income (loss) before cumulative effect of accounting change 4,905 (2,972)
Cumulative effect as of September 30, 1992 of change in method of
accounting for income taxes -- (827)
-------- --------
Net income (loss) $ 4,905 $ (3,799)
======== ========
See accompanying notes.
-3-
35
Rockford Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
Common Stock Additional Deferred Currency
----------------- Paid-In Stock Accumulated Translation
Shares Amount Capital Grants Deficit Adjustments Total
------ ------ ------- ------ ------- ----------- -----
Balance at October 1, 1992 608 $ 6 $ 770 $ (58) $(1,637) $ 89 $ (830)
Amortization of deferred stock grants -- -- -- 29 -- -- 29
Currency translation -- -- -- -- -- (189) (189)
Net loss -- -- -- -- (3,799) -- (3,799)
----- ------- ------- ------- ------- ------- -------
Balance at September 30, 1993 608 6 770 (29) (5,436) (100) (4,789)
Amortization of deferred stock grants -- -- -- 24 -- -- 24
Deferred stock grants canceled -- -- (5) 5 -- -- --
Currency translation -- -- -- -- -- (95) (95)
Net income -- -- -- -- 4,905 -- 4,905
----- ------- ------- ------- ------- ------- -------
Balance at September 30, 1994 608 $ 6 $ 765 $ -- $ (531) $ (195) $ 45
===== ======= ======= ======= ======= ======= =======
See accompanying notes.
-4-
36
Rockford Corporation
Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30
1994 1993
-------- --------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 4,905 $ (3,799)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change -- 827
Depreciation and amortization 1,484 1,499
Deferred income taxes (2,270) --
Provision for doubtful accounts -- 753
Provision for inventory allowances 513 1,765
Currency translation (95) (189)
Amortization of deferred stock grants 24 29
Changes in operating assets and liabilities:
Accounts receivable (938) (1,768)
Inventories (109) 92
Prepaid expenses, insurance receivable, and other 1,201 (964)
Bank overdraft (617) 229
Accounts payable 208 2,438
Accrued payroll, bonus, commissions, and other 380 73
Accrued warrant 270 1,100
Discontinued operations -- (240)
Income taxes payable 169 231
-------- --------
Net cash provided by operating activities 5,125 2,076
INVESTING ACTIVITIES
Purchases of property and equipment (1,204) (1,224)
Increase in other assets (88) (26)
-------- --------
Net cash used by investing activities (1,292) (1,250)
FINANCING ACTIVITIES
Proceeds from notes payable and long-term debt 8,436 322
Payments on notes payable and long-term debt (12,569) (479)
Payments on capital lease obligations (345) (674)
-------- --------
Net cash used by financing activities (4,478) (831)
-------- --------
Net decrease in cash (645) (5)
Cash at beginning of year 765 770
-------- --------
Cash at end of year $ 120 $ 765
======== ========
See accompanying notes.
-5-
37
Rockford Corporation
Notes to Consolidated Financial Statements
September 30, 1994
1. ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Rockford Corporation (Company) is presently engaged in the business of
manufacturing and distributing car audio electronics and speaker systems under
the division names of "Rockford Fosgate," "Rockford Acoustic Designs (formerly
Xxxxxxxxxx)," "Xxxxxx" and "Perfect Interface." The Company was organized and
incorporated under the laws of the State of Arizona on July 22, 1980, and has
manufacturing facilities in Tempe, Arizona and Grand Rapids, Michigan.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned and majority owned subsidiaries in Germany and Japan.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
RECEIVABLES
The Company sells its products principally to automotive stereo dealers
primarily in the United States, Europe and Asia. At September 30, 1994 and 1993,
net accounts receivable include approximately $475,000 and $247,000,
respectively, due from overseas businesses.
The Company also offers a prompt pay discount for certain invoices paid under 40
days of issuance and has included in its allowance for receivables at September
30, 1994 and 1993, approximately $180,000 with respect to accounts utilizing
such discounts after year-end.
INVENTORIES
Inventories consist principally of raw materials of electronic and mechanical
components used in the manufacturing of amplifier and speaker systems and
finished goods. Inventories are carried at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
computed principally on the straight-line method for financial reporting
purposes over a three to five year life.
-6-
38
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounted for income taxes under the provisions of Accounting
Principles Board Opinion Number 11 through September 30, 1992. Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" was issued
by the Financial Accounting Standards Board in February 1992 and was adopted by
the Company as of October 1, 1992 (see Note 6).
RESEARCH AND DEVELOPMENT
During the years ended September 30, 1994 and 1993, research and development
expense of approximately $1,347,000 and $1,435,000, respectively, was charged to
expense as incurred.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with FASB Statement No. 52. All balance sheet accounts
have been translated using the current exchange rates at the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year. The gains and losses resulting from the change in exchange rates
from year to year have been reported separately as a component of stockholders'
equity (deficit). The effect on the statement of operations of transaction gains
and losses is insignificant.
RECLASSIFICATIONS
Certain amounts in the 1993 financial statements have been changed to conform
them to the 1994 presentation.
-7-
39
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
2. INVENTORIES
Inventories consisted of the following at September 30:
1994 1993
------- -------
(In thousands)
Raw materials $ 4,019 4,847
Work in progress 222 572
Finished goods 3,046 2,835
------- -------
7,287 8,254
Less allowances (1,402) (1,965)
------- -------
5,885 $ 6,289
======= =======
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
1994 1993
------- -------
(In thousands)
Machinery and equipment $ 6,353 $ 5,842
Furniture and fixtures 191 185
Leasehold improvements 597 477
Vehicles 74 85
Demo equipment 108 108
Drawings and technical data 146 127
Tooling equipment 1,410 817
------- -------
8,879 7,641
Less accumulated depreciation and amortization (5,864) (4,589)
------- -------
$ 3,015 $ 3,052
======= =======
-8-
40
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at September 30:
1994 1993
------ ------
(In thousands)
$12,000,000 line of credit with a lender, paid in full during 1994 $ -- $8,888
$9,500,000 line of credit with a lender collateralized by substantially all
assets, with interest payments due monthly at the prime rate plus three
percent through December 31, 1994 (10.75 percent at September 30, 1994) and
at the prime rate plus two percent effective January 1, 1995 until April 1997
when all remaining principle and interest is due. Borrowings under this line
of credit are limited to the borrowing base defined substantially as a
percentage of inventory, as defined, and 75 percent of eligible accounts
receivable, as defined and adjusted in the agreement 6,848 --
10.5 percent senior note payable to a bank, collateralized by substantially all
assets, payable in monthly installments of $50,243, including interest until
May 31, 1995 when all remaining principal and interest is due and payable. In
connection with this senior note payable, warrants were issued to purchase up
to 39,161 shares of the Company's common stock at $36.00 per share, expiring
June 1995; the exercisable warrants are being reduced pro rata based on
payments on the outstanding loan balance 1,322 1,622
10 percent subordinated, convertible debentures, unsecured, interest payable
semiannually until January 1998 when all remaining principal and interest is
due and payable, convertible into common shares at $11.95 per share
Subsequent to year-end, the subordinated convertible debentures were amended
to senior notes, unsecured, subordinated, no conversion rights, with interest
payable quarterly. In connection with the amendment, detachable warrants were
issued to purchase up to 167,400 shares of the Company's commons stock at
$6.50 per share, expiring February 2000 2,000 2,000
-9-
41
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
1994 1993
(In thousands)
10.5 percent subordinated, convertible debentures, unsecured, interest payable
quarterly until February 1999 when all remaining principal and interest is
due and payable, convertible into common shares at $23.00 per share
Subsequent to year-end, the subordinated convertible debentures were amended
to senior notes, unsecured, subordinated, with no conversion rights. In
connection with the amendment, detachable warrants were issued to purchase up
to 54,696 shares of the Company's common stock at $6.50 per share, expiring
February 2000 $1,258 $1,258
7.5 percent subordinated, convertible debentures to a related parties,
unsecured, interest payable quarterly until January 1995, when all remaining
principal and interest is due and payable, convertible into common shares at
$.75 per share 150 150
7 percent subordinated, convertible debentures to a related parties, unsecured,
interest payable quarterly until March 1996 when all remaining principal and
interest is due and payable, convertible into common shares at rates ranging
from $.01 share to $1 per share 150 150
10.5 percent subordinated, convertible debentures to a related parties,
unsecured, interest payable quarterly until February 1999 when all remaining
principal and interest is due and payable, convertible into common shares at
$23.00 per share. Subsequent to year-end, the subordinated convertible
debentures were amended to senior notes, unsecured, subordinated, with no
conversion rights. In connection with the amendment, detachable warrants were
issued to purchase up to 16,609 shares of the Company's common stock at $6.50
per share, expiring February 2000 382 382
-10-
42
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
1994 1993
(In thousands)
7 percent promissory note to a vendor, paid in full during 1994 $ -- $ 296
8.75 percent note payable to a financing company collateralized by equipment,
payable in monthly installments of $5,576, including interest, until February
1998 when all remaining principal and interest is due and payable 193 241
Other 4 6
------- -------
12,307 15,033
Less current portion 1,529 12,900
------- -------
$10,778 $ 2,133
======= =======
Maturities of notes payable and long-term debt for the five years succeeding
September 30, 1994 are $1,529,000 in 1995, $200,000 in 1996, $6,896,000 in 1997,
$2,048,000 in 1998, and $1,634,000 in 1999. Interest payments were approximately
$1,490,000 and $1,597,000 for the years ended September 30, 1994 and 1993,
respectively.
During 1994, the Company converted $1,407,000 of vendor payables to short-term
promissory notes in noncash transactions. The promissory notes were paid in full
during the fiscal year ended September 30, 1994.
The Company's $9,500,000 line of credit, its 10.5 percent senior note payable
with an outstanding balance at September 30, 1994 of $1,322,000, and its 10
percent subordinated, convertible debentures contain convenants which place
various restrictions on financial ratios, levels of indebtedness and capital
expenditures, among other things.
5. LEASES
The Company leases equipment under capital leases. The Company also leases
certain manufacturing, warehouse and office facilities and computer hardware and
software under noncancelable operating leases that expire in various years
through April 1999.
-11-
43
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
5. LEASES (CONTINUED)
Property and equipment includes the following amounts for leases that have been
capitalized at September 30:
1994 1993
------- -------
(In thousands)
Equipment $ 625 $ 2,249
Less accumulated amortization (478) (1,818)
------- -------
$ 147 $ 431
======= =======
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital leases and noncancelable operating leases
with initial terms of one year or more consisted of the following at September
30, 1994:
CAPITAL OPERATING
LEASES LEASES
------ ------
(In thousands)
1995 $ 74 $1,319
1996 25 1,230
1997 24 1,238
1998 -- 601
1999 -- 157
Thereafter -- 111
------ ------
Total minimum lease payments 123 $4,656
======
Amounts representing interest 14
------
Present value of net minimum lease payments (including
current portion of $58,000) $ 109
======
Total rental expense for all operating leases was approximately $995,000 and
$740,000 for the years ended September 30, 1994 and 1993, respectively.
-12-
44
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Effective October 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method too the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes" (FAS 109). As permitted under
the new rules, prior years' financial statements have not been restated. The
cumulative effect of adopting FAS 109 as of October 1, 1992 was to increase the
net loss by $827,000.
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. Significant components of
the Company's deferred tax assets as of September 30, 1994 are as follows:
1994 1993
------- -------
(In thousands)
Deferred tax assets:
Inventory allowances $ 556 $ 736
Receivables allowances 258 214
Book over tax depreciation 170 124
Accrued liabilities and other 636 485
Research and development 208 219
Alternative minimum tax credit carryforward 244 315
Net operating loss carryforwards - state 198 300
------- -------
Total deferred tax assets 2,270 2,393
Less valuation allowance for deferred tax assets -- (2,393)
Less current portion of deferred tax assets (2,100) --
------- -------
Deferred tax assets long-term $ 170 $ --
======= =======
The valuation allowance decreased by $2,393,000 during 1994 based upon
management's assessment that a valuation allowance was no longer required with
the recent improvements in the Company's financial results. During 1993, the
valuation allowance was increased by $1,330,000 from the amount existing at
adoption based on that year's losses.
-13-
45
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the federal and state income tax expense (benefit)
are:
1994 1993
------- -------
(In thousands)
Current:
Federal expense $ 590 $ 50
State expense 110 40
------- -------
Total current 700 90
Deferred:
Federal (benefit) (2,135) --
State (benefit) (135) --
------- -------
Total deferred (benefit) (2,270) --
------- -------
Deferred tax assets long-term $(1,570) $ 90
======= =======
The Company's effective tax rate differs from the statutory rates primarily due
to the noninclusion of foreign income and (losses) of approximately $223,000,
net, in 1994 and $(159,000), net, in 1993, utilization of net operating loss
carryforwards, as well as the deferred tax asset valuation allowance changes
during 1994 and 1993.
At September 30, 1994, the Company had a net operating loss carryforward of
approximately $3,950,000 for state income tax purposes which expires during 1996
through 1998.
7. COMMON STOCK GRANTS AND OPTIONS
In May 1990, the Board of Directors granted certain officers and employees
common stock grants as compensation and additional incentive to provide
continued services to the Company. The stock was granted at its fair market
value as determined by management at the date of the grant. If the officers' or
employees' employment with the Company is terminated during the four year
incentive period for any reason, the officer or employee shall be required to
forfeit all unvested stock issued under the stock grant program. The Company
charged to expense, under the stock grant program, $24,000 and $29,000 as
compensation in 1994 and 1993, respectively.
The Board of Directors of the Company granted a certain consulting firm, which
is providing executive and other consulting services to the Company, options to
purchase 50,000 shares of its authorized but unissued common stock at a price of
$23 per share (amended to $6.50 per share subsequent to year-end), protected
against dilution, as defined, and expiring in August 1999. The price per share
exceeded the fair market value at the date of the grant. These stock options
shall be contingent upon the Company's stock being publicly traded, or the
Company being
-14-
46
Rockford Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK GRANTS AND OPTIONS (CONTINUED)
merged into or acquired by a private or publicly owned concern, and if such
event occurs, the stock options will vest 100 percent and shall be exercisable
only within 90 days after such event. The stock options shall vest 25 percent on
August 1, 1992, and 25 percent each year thereafter provided that the consulting
firm shall be, each vesting date, still performing the services required of
them.
Subsequent to year-end, the Board authorized the implementation of an incentive
stock option plan for certain employees. Under the plan, options to purchase
common stock of the Company will be granted to certain employees at the fair
market value of the underlying common stock. Up to 250,000 shares may be offered
under this plan.
8. LIFE INSURANCE PROCEEDS
During 1993, the Company received proceeds of approximately $1,000,000 from a
claim filed under a key man life insurance policy due to the death of a member
of the Board of Directors. The proceeds are recorded in other income in the 1993
financial statements.
9. CONTINGENCIES
The Company is a party to legal proceedings which arise out of the ordinary
course of business. Based upon advice from outside legal counsel, management is
of the opinion that these matters will have no material effect on the Company's
consolidated financial position.
10. BENEFIT PLAN
During 1990, the Company's Board of Directors elected to establish the Rockford
Corporation 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. The company 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 years ended
September 30, 1994 and 1993 were approximately $140,000 and $71,000,
respectively.
-15-
47
OTHER FINANCIAL INFORMATION
48
[ERNST & YOUNG LLP letterhead]
Report of Independent Auditors on
Other Financial Information
The Board of Directors and Stockholders
Rockford Corporation
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The following financial information,
included on pages 17 through 19, is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Ernst & Young LLP
November 23, 1994
-16-
49
Rockford Corporation
Consolidating Balance Sheet
September 30, 1994
(In thousands)
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
ASSETS
Current assets:
Cash $ 120 $ -- $ 60 $ 34 $ 26
Accounts receivable 11,254 (1,844) 12,604 121 373
Less allowance for doubtful accounts (715) -- (696) (19) --
-------- -------- -------- -------- --------
Net accounts receivable 10,539 (1,844) 11,908 102 373
Inventories 7,287 (109) 7,105 -- 291
Less allowances (1,402) -- (1,402) -- --
-------- -------- -------- -------- --------
Net inventories 5,885 (109) 5,703 -- 291
Prepaid expenses and other 634 -- 522 32 80
Notes receivable -- (564) 564 -- --
Deferred income taxes 2,100 -- 2,100 -- --
-------- -------- -------- -------- --------
Total current assets 19,278 (2,517) 20,857 168 770
Property and equipment, net 3,015 -- 2,895 38 82
Deferred income taxes 170 -- 170 -- --
Other assets, net 282 (175) 377 50 30
-------- -------- -------- -------- --------
Total assets $ 22,745 $ (2,692) $ 24,299 $ 256 $ 882
======== ======== ======== ======== ========
-17-
50
Rockford Corporation
Consolidating Balance Sheet -- Continued
September 30, 1994
(In thousands)
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft $ 300 $ -- $ 300 $ -- $ --
Accounts payable 5,264 (1,844) 5,185 1,060 863
Current portion of notes payable, long-term debt, and --
capital lease obligations 1,587 -- 1,587 --
Accrued payroll, bonus, commissions, and other 2,750 -- 2,749 (24) 25
Accrued warranty 1,570 -- 1,570 -- --
Income taxes payable 400 -- 400 -- --
-------- -------- -------- -------- --------
Total current liabilities 11,871 (1,844) 11,791 1,036 888
Notes payable and long-term debt, less current portion 10,778 (564) 10,778 454 110
Capital lease obligations, less current portion 51 -- 51 -- --
-------- -------- -------- -------- --------
10,829 (564) 10,829 454 110
Stockholders' equity (deficit):
Common stock 6 (216) 6 117 99
Additional paid-in capital 765 -- 765 -- --
Deferred stock grants -- -- -- -- --
Retained earnings (accumulated deficit) (531) (68) 980 (1,047) (324)
Currency translation adjustments (195) -- -- (304) 109
-------- -------- -------- -------- --------
Total stockholders' equity (deficit) 45 (284) 1,679 (1,234) (116)
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity (deficit) $ 22,745 $ (2,692) $ 24,299 $ 256 $ 882
======== ======== ======== ======== ========
-18-
51
Rockford Corporation
Consolidating Statement of Operations
Year Ended September 30, 1994
(In thousands)
Consolidation Rockford Rockford Rockford
Consolidated Adjustments Corporation Germany Japan
------------ ----------- ----------- ------- -----
Net sales $ 63,051 $ (1,788) $ 61,804 $ 1,922 $ 1,113
Cost of goods sold 39,565 (1,788) 39,711 969 673
-------- -------- -------- -------- --------
Gross profit 23,486 0 22,093 953 440
Operating expenses:
Engineering 1,347 -- 1,347 -- --
Commissions 4,159 -- 3,964 195 --
Marketing expenses 5,076 -- 4,610 211 255
Freight programs 1,450 -- 1,417 33 --
General and administrative 6,430 -- 5,947 230 253
-------- -------- -------- -------- --------
18,462 -- 17,285 669 508
-------- -------- -------- -------- --------
Operating income (loss) 5,024 -- 4,808 284 (68)
Other income (expense):
Interest expense (1,593) -- (1,577) (16) --
Other (96) -- (119) 23 --
-------- -------- -------- -------- --------
Income (loss) before benefit for income taxes 3,335 -- 3,112 291 (68)
Income tax benefit 1,570 -- 1,570 -- --
-------- -------- -------- -------- --------
Net income (loss) $ 4,905 $ -- $ 4,682 $ 291 $ (68)
======== ======== ======== ======== ========
-19-
