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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 24, 2000
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25866
PHOENIX GOLD INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-1066325
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9300 NORTH DECATUR STREET, PORTLAND, OREGON 97203
(Address of principal executive offices) (Zip code)
(503) 286-9300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the common stock held by non-affiliates of the
registrant was $837,405 as of November 30, 2000.
There were 3,026,945 shares of the registrant's common stock outstanding as of
November 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of registrant's proxy statement dated on or about January 5, 2001 prepared
in connection with the annual meeting of shareholders to be held on February 13,
2001 are incorporated by reference into Part III of this report.
1
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 9
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 8. FINACIAL STATEMENTS AND SUPPLEMENTARY DATA 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 14
ITEM 11. EXECUTIVE COMPENSATION 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 15
2
PART I
ALL STATEMENTS IN THIS REPORT THAT ARE NOT STATEMENTS OF HISTORICAL RESULTS
SHOULD BE CONSIDERED "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING, WITHOUT LIMITATION,
STATEMENTS AS TO EXPECTATIONS, BELIEFS AND FUTURE FINANCIAL PERFORMANCE, AND ARE
BASED ON CURRENT EXPECTATIONS AND ARE SUBJECT TO CERTAIN RISKS, TRENDS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO VARY FROM THOSE PROJECTED,
WHICH VARIANCES MAY HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY. AMONG THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING:
COMPETITIVE FACTORS; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND
SEASONALITY; THE ADVERSE EFFECT OF REDUCED DISCRETIONARY CONSUMER SPENDING;
DEPENDENCE ON A SIGNIFICANT CUSTOMER; THE NEED FOR THE INTRODUCTION OF NEW
PRODUCTS AND PRODUCT ENHANCEMENTS; DEPENDENCE ON SUPPLIERS; CONTROL BY CURRENT
SHAREHOLDERS; HIGH INVENTORY REQUIREMENTS; BUSINESS CONDITIONS IN INTERNATIONAL
MARKETS; THE COMPANY'S DEPENDENCE ON KEY EMPLOYEES; THE NEED TO PROTECT
INTELLECTUAL PROPERTY; ENVIRONMENTAL REGULATION; AND, THE POTENTIAL DELISTING OF
THE COMPANY'S COMMON STOCK AS WELL AS OTHER FACTORS DISCUSSED IN EXHIBIT 99.1 TO
THE PHOENIX GOLD INTERNATIONAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED SEPTEMBER 24, 2000 WHICH IS HEREBY INCORPORATED BY REFERENCE. GIVEN
THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS. THE COMPANY DOES NOT INTEND TO UPDATE ITS
FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
Phoenix Gold International, Inc. (the "Company") designs, markets and sells
innovative, high quality and high performance electronics, accessories and
speakers to the audio market. The Company's products are used in car audio
aftermarket, professional sound and custom audio/video and home theater
applications. The Company manufactures substantially all of its electronics and
a portion of its accessories at its facility in Portland, Oregon. The Company
was incorporated in Oregon in 1991.
The Company's car audio products encompass substantially all of the
components used in car audio systems (other than "head units" such as radios,
tape decks and CD players). The Company's car audio electronics include
amplifiers, equalizers, crossovers and line drivers. The Company's car audio
accessories include audio cables, speaker and power cables, connectors, clamps,
capacitors and fuseblocks. The Company's speaker products include subwoofers,
midranges, tweeters, coaxials and speaker component systems.
As the Company expanded its car audio product line from accessories to
electronics and speakers, it initially targeted car audio enthusiasts and
audiophiles with products that offer value by combining performance advantages
with distinctive appearance and superior craftsmanship. The Company subsequently
broadened its car audio product line to offer similar performance
characteristics at lower price points. The Company's primary target market is
car audio enthusiasts, typically 18 to 34 year old males who desire high
quality, high performance systems. The Company also sells to other consumers who
seek to increase the quality of their car audio systems either by upgrading
existing components or installing new systems. The Company also designs and
sells accessories and speakers to OEM customers.
In November 1995, the Company acquired substantially all of the assets
of the professional sound division of Carver Corporation. The Company, as
licensee of the name "Carver Professional," designs, manufactures, markets and
sells electronic amplifiers and accessories for professional sound applications,
including OEM customers.
3
PRODUCTS
The Company has three product lines: electronics, accessories and speakers.
The Company's sales by product class are as follows:
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Product class:
Electronics 55.6% 52.8% 52.3%
Accessories 28.4 30.7 35.7
Other (1) 16.0 16.5 12.0
-------------- -------------- --------------
Total 100.0% 100.0% 100.0%
============== ============== ==============
(1) Includes speakers and other products of which no single product class
accounted for more than 15% of sales in any one year.
ELECTRONICS. The Company's amplifiers, signal processors and other
electronics are designed to deliver sonic excellence, system flexibility and
reliable performance. The Company sells car audio electronics designed for
audiophiles, serious audio enthusiasts and sound competitors.
AMPLIFIERS. The Company sells a total of 22 car audio amplifiers in the
ZEROpoint ZXti, ZPA, ZX, XS and QX series at retail prices ranging from
approximately $150 to $1,880. Amplifiers in the ZEROpoint ZXti, ZPA and ZX
series, introduced between 1996 and 1999, are the Company's reference
amplifiers, designed to deliver maximum performance in expensive, high-end
systems capable of driving multiple speakers. The XS series, introduced in 1997,
includes multi-channel amplifiers with built-in crossovers and offers at lower
prices the performance and sonic excellence of the reference series amplifiers,
except in the most demanding applications. The QX series, introduced in 1997, is
designed to provide high performance at even lower prices. The QX amplifier is
the first of the Company's electronics products to be designed and engineered by
the Company and manufactured by a third party vendor. Due to the introduction of
the ZEROpoint ZXti series in 1999, the Company does not expect the ZPA and ZX
series to provide meaningful revenue in the future.
Additionally, the Company has periodically introduced limited edition theme
amplifiers, such as "Frank Amp'n Stein," "Son of Frank Amp'n Stein," "Route 66,"
"Outlaw 1845" and "Bandit 1895". The "Reactor" was introduced in 1998 and the
"Octane" was introduced in 2000. Retail prices range from approximately $500 to
$2,500.
The Company sells a total of 18 Carver Professional amplifiers in the PM,
PT, CA, PX and PXm series at retail prices ranging from approximately $535 to
$2,780. The PM series was designed for multiple purposes, including instrument
amplification, fixed installations and touring applications. The PT series was
designed specifically for the touring sound industry for ease of
transportability and use in a variety of settings. The CA series amplifiers were
designed for fixed installation applications, including churches, warehouses and
auditoriums. The PX series, introduced in 1997 and the first series designed by
the Company, includes multi-application models that offer increased features and
power at lower price points. The PXm series, introduced in 1998 and the second
series designed by the Company, expands the PX series and addresses entry level
price points and greater ease of transportability. The Company will introduce
the CV series of professional amplifiers in 2001 and expects the CA series will
not provide meaningful revenue in the future.
4
SIGNAL PROCESSORS. The Company sells a total of 14 car audio signal
processors, including equalizers, line drivers, and active and passive
crossovers. Signal processors, which are sold both as upgrade components and as
parts of complete systems, are used to increase the flexibility and performance
of audio systems. Retail prices of signal processors range from approximately
$110 to $700.
ACCESSORIES. The Company manufacturers and distributes innovative, high
quality accessories. The Company sells over 1,000 accessories, many of which are
manufactured to the Company's design specifications, for use primarily in car
audio aftermarket applications. Car audio accessories include audio cables,
speaker and power cables, connectors, clamps, adapters, capacitors, fuseblocks,
distribution blocks, alternators, carpet, textiles and adhesives. The Company
continually improves its existing accessories line and introduces new and
replacement accessories. The Company is a single source from which its dealers
and distributors can purchase all of the accessories necessary to install a full
range of car audio systems. Accessories are available either as individual items
or combined in pre-packaged installation kits.
The Company's accessories for use in professional sound and custom
audio/video and home theater applications include crossovers, attenuators,
transformers, speaker selectors, audio and video cables, connectors, wall plates
and volume controls. The Company manufactures Smart Audio Management panels for
the custom home audio/video market that provide for speaker distribution and
impedance matching.
SPEAKERS. The Company began selling speakers in 1994. The Company offers a
total of 42 car audio speakers in the XMAX, XS and QX series, including
tweeters, midranges, subwoofers, coaxials and component systems. The XMAX series
features reproduction of tight, accurate bass in a small enclosure. The XS
series features exceptional musicality, excursion and versatility at lower price
points. The QX series, introduced in 1998, is the Company's lowest price point
speaker line. Retail prices of speakers range from approximately $40 to $340.
SALES, MARKETING AND DISTRIBUTION
The Company sells its products through car audio and specialty retailers,
principally in the United States, Canada, Central and South America, Europe,
Japan, Southeast Asia, Australia and New Zealand. In the United States, the
Company sells its car audio, professional sound and home audio products through
independent sales representatives and distributors. The Company sells its
products internationally through distributors serving over 40 countries.
International sales accounted for 25.8%, 27.1% and 32.4% of net sales in fiscal
years 2000, 1999 and 1998, respectively. International sales are denominated in
United States dollars and are generally shipped f.o.b. the Company's facility in
Portland, Oregon.
One customer, Bose Corporation ("Bose"), accounted for 10.8% of the
Company's net sales during the year ended September 30, 2000. No single customer
accounted for 10% or more of the Company's net sales during fiscal 1999 and
1998. As of September 30, 2000 and 1999, one customer accounted for 22.2% and
15.0% of total accounts receivable.
The Company had significant sales of professional sound amplifiers and
other electronics to Bose during the year ended September 30, 2000. The
Company entered into its present purchase agreement with Bose in 1997 which
does not contain minimum or scheduled purchase requirements. Therefore,
purchase orders by Bose may fluctuate significantly from quarter to quarter over
the term of the agreement. The purchase agreement was extended beyond its
5
scheduled expiration date of December 31, 1999 to March 31, 2001. The Company
and Bose are currently negotiating a new purchase agreement. There can be no
assurance that the Company will be able to negotiate a purchase agreement with
Bose on acceptable terms. The loss of Bose as a customer or any significant
portion of Bose orders could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company offers its dealers and distributors complete product lines,
excellent service and support, and high performance, reliable products. The
Company believes these efforts enable it to attract and retain qualified dealers
and distributors. The Company recruits on a selective basis new dealers and
distributors for each of its product lines in specific geographic areas. Dealers
and distributors are chosen based on location, financial stability, technical
expertise, sales history, integrity, and installation and service capabilities.
The Company generally does not have written agreements with its car audio sales
representatives, dealers or distributors or its professional sound distributors.
The Company's written agreements with its professional sound representatives and
dealers are generally terminable upon no more than 30 days notice.
The Company markets its car audio products by participating in consumer
electronics trade shows and enthusiast events and by promoting its own
demonstration vehicles. The Company offers incentives to "Team Phoenix Gold"
competitors in regional, national and international car audio shows and
competitions and provides technical assistance, training and support from
Company engineers and technicians at "Tweek N Tune" workshops. The Company
advertises in car audio consumer magazines and its products have been reviewed
and profiled in national and international publications. The Company markets its
professional sound, custom audio/video and home theater products by
participating in trade shows, advertising in trade journals and magazines, and
providing dealer support.
Historically the Company's sales have been greater during the third (April
through June) and fourth (July through September) quarters of the Company's
fiscal year than during the first two fiscal quarters. Due to the seasonality of
its business, the Company's quarterly results of operations will not necessarily
be indicative of its results of operations for the year. The Company has only
minimal backlog because orders are typically filled within several days of
receipt. Backlog as of any particular date is not a reliable measure of sales
for any future period because orders constituting the Company's backlog are
subject to changes in delivery schedules or to cancellation at the option of the
purchaser without penalty.
COMPETITION
The markets for the Company's products are highly competitive and are
served by many United States and international manufacturers that market
their own lines of electronics, accessories and speakers through specialty
dealer networks and mass merchandise retail stores, as well as companies
that market generic products through the same distribution channels. The
Company's principal accessories competitors include Esoteric Audio USA Group of
Companies, Lightning Audio, Inc., a subsidiary of Rockford Corporation
("Rockford"), Monster Cable Products, Inc. and Recoton Corp. The Company's
principal car audio electronics competitors include MTX Corporation ("MTX"),
Orion Industries, Inc., Precision Power, Inc., Rockford Fosgate, a division of
Rockford, and Stillwater Design and Audio, Inc. ("Stillwater"). The Company's
principal professional sound competitors include Crest Audio, Inc., Crown
International, Inc. and QSC Audio Products, Inc. The Company's principal
speaker competitors include Boston Acoustics, Inc., JL Audio, Inc., MB Quart
Electronics USA, Inc., MTX, Rockford and Stillwater. Many competitors have
greater financial and other resources than the Company. The Company
6
competes principally on the basis of innovation, breadth of product line,
quality and reliability of products, name recognition, merchandising and
distribution organization, and price.
MANUFACTURING AND ASSEMBLY
MANUFACTURED PRODUCTS. The Company manufactures substantially all of its
electronics products and a portion of its accessories at its facility in
Portland, Oregon. Manufacturing processes include laser-cutting, computer
controlled metal fabrication, powder coating, automated insertion of components
into, and wave soldering of, circuit boards, toroid winding, plastic injection
molding, silk-screening graphics and quality control testing. For use in its
manufacturing activities, the Company also purchases components manufactured by
third parties according to design specifications developed by the Company. The
Company purchases substantially all of its raw materials, components and
subassemblies from approximately 180 suppliers located primarily in the United
States and the Pacific Rim. Certain of these materials, components and
subassemblies are obtained from a single supplier or a limited number of
suppliers. The Company's principal supplier is Team Phoenix Co. Ltd., an
unaffiliated company.
DISTRIBUTED ACCESSORIES. The Company distributes accessories, many of which
are manufactured to its design specifications by third parties. Substantially
all distributed accessories are subjected to quality control procedures at the
Company's facility and are marketed under the PHOENIX GOLD or CARVER
PROFESSIONAL tradenames.
DESIGNED SPEAKERS. The Company's speakers are manufactured by third parties
in the United States and Asia according to acoustical and electrical design
specifications developed by the Company. Speakers are subjected to quality
control procedures performed by the Company.
CUSTOMER SERVICE
The Company believes two of the most important elements in its business are
understanding consumers and their preferences, and providing high quality,
reliable products. The Company strives to understand the evolving needs and
preferences of consumers by communicating frequently with its sales
representatives, dealers and distributors, sponsoring "Team Phoenix Gold"
members and attending car audio competitions and car audio, professional sound
and custom audio/video and home theater trade shows. Company representatives
regularly seek suggestions from dealers for improved design and performance of
the Company's products.
Proper installation is critical to achieving optimum performance of car
audio systems. The Company offers a three-year limited warranty on car audio
electronics and a one, two or three-year limited warranty on speakers installed
by an authorized dealer or installer. If an authorized dealer or installer does
not install the product, the Company offers a one-year limited warranty on car
audio electronics and speakers. The Company offers a five-year limited warranty
on professional sound electronics.
INTELLECTUAL PROPERTY
PHOENIX GOLD (R), PG (Phoenix Gold and Design) (R), CARVER PROFESSIONAL
(TM), POWERFLOW (TM), QUICKSILVER (TM), SAPPHIRE (TM) and ZEROPOINT (TM) are
the principal trademarks of the Company. The Company believes that PHOENIX
GOLD and CARVER PROFESSIONAL have strong brand name recognition, an important
competitive factor in its markets. The Company has obtained three design patents
related to its products. Carver Corporation has taken the position that the
7
Company's exclusive, paid-up license to use the name CARVER PROFESSIONAL expires
at the end of November 2000. The Company has brought a declaratory judgment
action against Carver Corporation to determine future rights to the tradename.
GOVERNMENTAL APPROVAL OF PRODUCTS
The Company is subject to and believes it is in compliance with certain
European Union regulations regarding electromagnetic standards and product
safety on substantially all of its electronics sold in the European Union. The
Company believes that additional similar regulations will be imposed in other
areas. Any inability by the Company to comply with such similar regulations on a
timely basis could have a material adverse effect on the Company.
EMPLOYEES
As of September 30, 2000, the Company had 190 full-time employees,
including 150 in manufacturing, engineering and warehousing, 26 in sales and
marketing and 14 in administration. The Company considers its employee relations
to be good.
ITEM 2. PROPERTIES
The Company's executive offices and manufacturing operations are located at
9300 North Decatur Street, Portland, Oregon. The Company leases a 155,000 square
foot building. Approximately 12,500 square feet of office space and 100,000
square feet of manufacturing and warehouse space are used by the Company. The
Company is seeking to obtain a tenant for the remaining 42,500 square feet of
office, manufacturing and warehouse space. This space was subleased to a third
party through May 2000. Annual rent for the Company's facility is approximately
$520,800 plus an annual escalator of 2.5%. The lease expires on June 30, 2009.
The Company has an option to extend the lease for one ten-year term. The Company
believes that its existing facilities are adequate to meet its needs for the
foreseeable future and that, if needed, suitable additional or alternative space
will be available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on May 4, 1995 on The NASDAQ
National Market under the symbol "PGLD". On October 5, 1998, trading in the
Company's Common Stock was transferred to The NASDAQ SmallCap Market. On
November 24, 2000, The NASDAQ Stock Market, Inc. notified the Company that its
Common Stock had failed to maintain a minimum market value of public float of
$1,000,000 over the last 30 consecutive trading days as required for continued
listing on The NASDAQ SmallCap Market. The Company was provided until February
22, 2001 to regain compliance with this rule or request a hearing with the
NASDAQ Listing Qualifications Panel.
As reported by NASDAQ, the following table sets forth the range of high and
low closing bid prices per share for the Company's Common Stock.
Fiscal year ended Fiscal year ended
September 30, 2000 September 30, 1999
------------------ ------------------
Common Stock (PGLD) High Low High Low
---------------------- -------- -------- ------- --------
First Quarter $3.00 $1.938 $2.063 $1.00
Second Quarter 3.313 2.25 4.25 1.375
Third Quarter 2.813 2.00 2.813 1.75
Fourth Quarter 2.375 1.875 2.938 2.125
At November 30, 2000, the approximate number of shareholders of record of
Common Stock was 134.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain all earnings for use in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. The Company's existing credit agreements do not expressly limit or
prohibit the Company's ability to declare and pay dividends, although covenants
contained in such agreements related to a minimum level of tangible net worth, a
minimum ratio of current assets to current liabilities and a maximum ratio of
interest bearing debt to tangible net worth may have such effect.
9
ITEM 6. SELECTED FINANCIAL DATA
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
OPERATING DATA:
Net sales $27,339,549 $27,538,149 $26,484,715 $27,798,728 $26,563,142
Net earnings
(loss) (1) 1,000,611 854,129 (772,374) 410,095 (1,269,142)
Earnings (loss)
per share
Basic $ 0.33 $ 0.26 $ (0.22) $ 0.12 $ (0.37)
Diluted 0.33 0.26 (0.22) 0.12 (0.37)
Average shares
outstanding
Basic 3,065,206 3,293,758 3,464,698 3,456,278 3,449,068
Diluted 3,065,206 3,293,758 3,464,698 3,535,288 3,449,068
BALANCE
SHEET DATA:
Working capital $10,371,901 $ 9,839,492 $ 8,020,615 $ 7,278,373 $ 6,033,190
Total assets 13,954,202 13,888,439 15,208,128 17,455,149 19,832,527
Line of credit - - 900,000 3,147,936 4,278,983
Long-term
obligations - - 938,233 494,927 171,995
Total
shareholders'
equity 11,354,448 10,958,906 10,497,602 11,243,019 10,788,998
Book value
per share $ 3.75 $ 3.39 $ 3.03 $ 3.25 $ 3.12
(1) See Note 2 to Financial Statements describing non-recurring charges for
1998. In 1996, the Company recorded a pre-tax charge of $1.1 million for
in-process research and development in connection with the purchase of
substantially all of the assets of the professional sound division of Carver
Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FISCAL 2000 TO FISCAL 1999
NET SALES. Net sales decreased $199,000, or 0.7%, to $27.3 million for
fiscal 2000 compared to $27.5 million for fiscal 1999, due principally to
decreased international sales. Domestic sales increased $216,000, or 1.1%, to
$20.3 million for fiscal 2000 compared to $20.1 million for fiscal 1999.
International sales decreased $415,000, or 5.6%, to $7,045,000 for fiscal 2000
compared to $7,460,000 for fiscal 1999. International sales accounted for 25.8%
and 27.1% of net sales in fiscal 2000 and fiscal 1999, respectively. Sales of
electronics increased 4.6% in fiscal 2000 compared to fiscal 1999. Speakers and
accessories decreased 6.3% and 8.0%, respectively. The Company expects
international sales for fiscal 2001 to remain at levels lower than historically
achieved.
GROSS PROFIT. Gross profit increased to 27.7% of net sales in fiscal 2000
from 25.9% in fiscal 1999. The increase in gross profit was primarily due to
sales mix and reduced depreciation expense which caused manufacturing overhead
to decrease as a percentage of sales.
OPERATING EXPENSES. Operating expenses increased $345,000, or 6.1%, to $6.0
million in fiscal 2000 compared to $5.6 million in fiscal 1999. Operating
expenses were 21.8% and 20.4% of net sales in fiscal 2000 and fiscal 1999,
respectively.
10
Selling expenses increased $363,000, or 10.7%, to $3.7 million in fiscal
2000 compared to $3.4 million in fiscal 1999. Selling expenses were 13.7% and
12.3% of net sales in fiscal 2000 and fiscal 1999, respectively. The increase in
selling expenses was primarily due to increased promotional, advertising and
trade show expenses to support sales of existing products and the introduction
of new products.
General and administrative expenses were approximately level at $2.2 million
in both fiscal 2000 and fiscal 1999. General and administrative expenses were
also 8.1% of net sales in both years. Historically, the Company has built
infrastructure and added personnel on an as-needed basis, resulting in
occasional increases in general and administrative expenses that are
disproportionate to increases in net sales. This policy has resulted in and may
continue to result in variations in general and administrative expenses as a
percentage of sales from period to period.
OTHER INCOME (EXPENSES). Other income, net of other expenses, increased
$149,000, to $51,000 of other income in fiscal 2000 from $97,000 of other
expense in fiscal 1999, primarily as a result of increased interest income and
decreased interest expense. The increase in interest income was due to a higher
average balance of cash equivalents during fiscal 2000. The decrease in interest
expense was due to repayment of all short and long-term borrowings in fiscal
1999.
NET EARNINGS. The increase in gross profit, increase in interest income
and decrease in interest expense contributed to net earnings in fiscal 2000 of
$1.0 million, or $0.33 per share - basic and diluted (based on 3.1 million
shares outstanding), compared to net earnings in fiscal 1999 of $854,000, or
$0.26 per share - basic and diluted (based on 3.3 million shares outstanding).
COMPARISON OF FISCAL 1999 TO FISCAL 1998
NET SALES. Net sales increased $1.1 million, or 4.0%, to $27.5 million for
fiscal 1999 compared to $26.5 million for fiscal 1998, due principally to
increased domestic sales. Domestic sales increased $2.2 million, or 12.2%, to
$20.1 million for fiscal 1999 compared to $17.9 million for fiscal 1998.
International sales decreased $1.1 million, or 13.0%, to $7.5 million for fiscal
1999 compared to $8.6 million for fiscal 1998. International sales accounted for
27.1% of net sales in fiscal 1999 and 32.4% of net sales in fiscal 1998. Sales
of electronics and speakers increased 4.9% and 44.3%, respectively, in fiscal
1999 compared to fiscal 1998. Sales of accessories decreased 10.8%.
GROSS PROFIT. Gross profit increased to 25.9% of net sales in fiscal 1999
from 24.7% in fiscal 1998. The increase was primarily due to increased sales
volume which decreased manufacturing overhead as a percentage of sales.
OPERATING EXPENSES. Operating expenses decreased $1.8 million, or 24.7%, to
$5.6 million in fiscal 1999 compared to $7.4 million in fiscal 1998. Operating
expenses were 20.4% and 28.1% of net sales in fiscal 1999 and fiscal 1998,
respectively.
Selling expenses decreased $642,000, or 15.9%, to $3.4 million in fiscal
1999 compared to $4.0 million in fiscal 1998. Selling expenses were 12.3% and
15.2% of net sales in fiscal 1999 and fiscal 1998, respectively. The decrease
was primarily due to reduced promotional activities and sales incentive
programs.
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General and administrative expenses decreased $318,000, or 12.5%, to $2.2
million in fiscal 1999 compared to $2.5 million in fiscal 1998. General and
administrative expenses were 8.1% and 9.6% of net sales in fiscal 1999 and
fiscal 1998, respectively. The decrease in general and administrative expenses
occurred principally because of lower payroll and related costs as a result of
reductions in administrative personnel and decreased professional fees.
In fiscal 1998, the Company took one-time, non-recurring charges of $1.1
million ($878,000 included in operating expenses and $233,000 included in cost
of sales) related to the implementation of a restructuring plan which included
the phase-out of a product line and actions to reduce future operating costs.
The $878,000 charge included in operating expenses was equal to 3.3% of net
sales in fiscal 1998.
OTHER EXPENSES. Other expenses, net of other income, decreased $217,000, or
69.0%, to $97,000 in fiscal 1999 from $314,000 in fiscal 1998, primarily due to
decreased borrowings and decreased interest rates on the outstanding borrowings.
NET EARNINGS (LOSS). The increase in domestic sales and decrease in
operating expenses contributed to net earnings in fiscal 1999 of $854,000, or
$0.26 per share - basic and diluted (based on 3.29 million shares outstanding),
compared to a net loss of $772,000 in fiscal 1998, or $0.22 per share - basic
and diluted (based on 3.46 million shares outstanding).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for funds are for working capital and, to a
lesser extent, for capital expenditures. The Company financed its operations in
fiscal 2000, 1999 and 1998 principally from funds generated from operating
activities. Net cash provided by operating activities in fiscal 2000, 1999 and
1998 was $1.8 million, $1.7 million and $2.3 million, respectively. In periods
prior to September 30, 1999, when cash flow from operations was less than
current needs, the Company increased the balance owing on its operating line of
credit. When cash flow exceeded current needs, the Company paid down in part the
balance owing on its operating line of credit rather than accumulating and
investing excess cash, which practices resulted in a low reported cash balance
in fiscal 1998.
During fiscal 2000, cash and cash equivalents increased $785,000, accounts
receivable decreased $624,000, inventories increased $124,000, accounts payable
decreased $278,000, leading to an increase in working capital of $532,000. Cash
and cash equivalents increased as a result of cash generated from operations
offset in part by purchases of Company common stock and capital expenditures.
Accounts receivable decreased due to decreased international sales and as a
result of management's continuing efforts to improve collections. Inventories
increased due to management's efforts to increase certain raw material and
finished goods inventories. Accounts payable decreased due to the timing of
payment due dates.
Capital expenditures were $377,000, $304,000 and $343,000 in fiscal years
2000, 1999 and 1998, respectively. These expenditures related primarily to
manufacturing automation, the acquisition of equipment for use by the Company's
administration, engineering and marketing departments and leasehold
improvements. The Company does not expect capital expenditures to exceed
$500,000 in fiscal 2001, and there are no outstanding commitments for any
capital expenditures. The anticipated expenditures will be financed from
available cash, cash provided by operations and, if necessary, proceeds from the
line of credit.
12
The Board of Directors in fiscal 1999 authorized the Company to purchase up
to $1.0 million of Company common stock. The Company purchased 207,400 shares of
common stock during fiscal 2000 at an aggregate cost of $605,000 and purchased
230,400 shares of common stock during fiscal 1999 at an aggregate cost of
$393,000. The purpose of the stock repurchase program was to help the Company
achieve its long-term goal of enhancing shareholder value.
During fiscal 1999, the Company purchased its leased office, warehouse and
manufacturing facility for $3,132,000 from its landlord. On the same day, the
Company sold the facility and the existing improvements, with a remaining net
book value of $924,000, for a net sales price of $5,037,000, and then leased the
facility from the purchaser. The resulting gain of $981,000 was deferred. The
Company will recognize the deferred gain over the ten-year lease term as a
reduction in rent expense. The net cash proceeds were used to repay $990,000 in
remaining long-term obligations and generated pre-tax cash of $915,000.
A $5.0 million revolving operating line of credit is available through
December 31, 2000. Interest on the borrowings is equal to the bank's prime
lending rate (9.5% at September 30, 2000) or LIBOR plus 1.75%. Borrowings under
the line of credit are limited to eligible accounts receivable and inventories
and certain additional limits. Borrowings under the line of credit are secured
by cash and cash equivalents, accounts receivable and inventories. The line of
credit contains covenants which require a minimum level of tangible net worth, a
minimum ratio of current assets to current liabilities and a maximum ratio on
interest bearing debt to tangible net worth. As of September 30, 2000, the
Company was eligible to borrow $5.0 million under the line of credit. No
borrowings were outstanding under the line of credit as of that date. The
Company expects to renew the revolving operating line of credit on similar terms
prior to December 31, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are not
material. As of September 30, 2000, the Company had cash and cash equivalents of
$1,654,000 compared to $868,000 as of September 30, 1999. The Company invests
its excess cash in highly liquid marketable securities with maturities of three
months or less at date of purchase. The Company's cash equivalents are generally
commercial paper and money market accounts. The Company does not invest in
derivative securities.
The Company sells its products primarily in United States dollars, therefore
its exposure to currency exchange rate fluctuations is not material. The Company
does not engage in foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 18 through 32 of this Annual Report on Form 10-K are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This is hereby incorporated by reference the information under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A, which Proxy Statement is anticipated to be filed with the
Securities and Exchange Commission within 120 days after the end of Registrant's
fiscal year ended September 24, 2000.
ITEM 11. EXECUTIVE COMPENSATION
This is hereby incorporated by reference the information under the caption
"Election of Directors" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed
with the Securities and Exchange Commission within 120 days after the end of
Registrant's fiscal year ended September 24, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This is hereby incorporated by reference the information under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A,
which Proxy Statement is anticipated to be filed with the Securities and
Exchange Commission within 120 days after the end of Registrant's fiscal year
ended September 24, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This is hereby incorporated by reference the information under the caption
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is
anticipated to be filed with the Securities and Exchange Commission within 120
days after the end of Registrant's fiscal year ended September 24, 2000.
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
3(i) 1995 Restated Articles of Incorporation and Articles of Amendment
(incorporated by reference to Exhibit 3(i) to Registration
Statement on Form SB-2 effective May 3, 1995 (Registration No.
93-90588))
3(i)(a) Articles of Amendment filed April 7, 1995 (incorporated by
reference to Exhibit 3(i) (a) to Registration Statement on Form
SB-2 effective May 3, 1995 (Registration No. 93-90588))
3(ii)(a) Amended Restated Bylaws dated December 1, 1999 (incorporated by
reference to Exhibit 3 (ii) (a) to Form 10-Q filed with the
Securities and Exchange Commission for the quarterly period
ended December 26, 1999)
4 Articles 2, 5 and 6 of Exhibit 3(i) and Article 6 of Exhibit 3(ii)
are incorporated herein by reference
10.1 Amended and Restated 1995 Stock Option Plan (incorporated by
reference to Appendix A to the Company's definitive proxy
statement filed with the Securities and Exchange Commission on
January 15, 1997) (1)
10.1a Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.1(a) to Registration Statement on Form
SB-2 effective May 3, 1995 (Registration No. 93-90588)) (1)
10.2 Form of Nonstatutory Stock Option Agreement (incorporated by
reference to Exhibit 10.1(b) to Registration Statement on Form
SB-2 effective May 3, 1995 (Registration No. 93-90588)) (1)
10.3 License Agreement between the Company and Carver Corporation dated
as of November 20, 1995 (incorporated by reference to Exhibit
2.3 to Form 8-K filed with the Securities and Exchange Commission
on December 1, 1995)
10.4 License Agreement dated September 30, 1993 between the Company
and Intersonics Technology Corporation, and amendments
(incorporated by reference to Exhibit 10.2 to Form 10-QSB/A
(Amendment No. 1) filed with the Securities and Exchange
Commission for the quarterly period ended December 31, 1995) (2)
10.5 Third Amendment to License Agreement dated as of January 15, 1996
between the Company and Intersonics Technology Corporation
(incorporated by reference to Exhibit 10.3 to Form 10-QSB filed
with the Securities and Exchange Commission for the quarterly
period ended March 31, 1997) (2)
15
10.6 Form of Indemnity Agreement (incorporated by reference to Exhibit
10.6 to Registration Statement on Form SB-2 effective May 3, 1995
(Registration No. 93-90588))
10.7 Nonstatutory Stock Option Agreement dated February 18, 1997
between the Company and Frank G. Magdlen (incorporated by
reference to Exhibit 10.16 to Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended
September 30, 1997)(1)
10.8 Loan Agreement dated December 1, 1999 between the Company and
U.S. Bank National Association (incorporated by reference to
Exhibit 10.18 to Form 10-Q filed with the Securities and Exchange
Commission for the quarterly period ended December 26, 1999)
10.9 Promissory Note dated December 1, 1999 made by the Company in
favor of U.S. Bank National Association (incorporated by
reference to Exhibit 10.19 to Form 10-Q filed with the Securities
and Exchange Commission for the quarterly period ended
December 26, 1999)
10.10 Nonstatutory Stock Option Agreement dated February 16, 1999
between the Company and Frank G. Magdlen (incorporated by
reference to Exhibit 10.1 to Form 10-Q filed with the Securities
and Exchange Commission for the quarterly period ended
March 31, 1999)(1)
10.11 Purchase and Sale Agreement dated June 15, 1999 between the
Company and 6710 LLC (incorporated by reference to Exhibit 10.23
to Form 10-Q filed with the Securities and Exchange Commission
for the quarterly period ended June 30, 1999)
10.12 First Amendment to Purchase and Sale Agreement dated
June 15, 1999 between the Company and 6710 LLC (incorporated by
reference to Exhibit 10.24 to Form 10-Q filed with the Securities
and Exchange Commission for the quarterly period ended
June 30, 1999)
10.13 6710 LLC Commercial Lease dated June 30, 1999 between the Company
and 6710 LLC (incorporated by reference to Exhibit 10.19 to Form
10-Q filed with the Securities and Exchange Commission for the
quarterly period ended June 30, 1999)
10.14 Nonstatutory Stock Option Agreement dated February 16, 1999
between the Company and Frank G. Magdlen (incorporated by
reference to Exhibit 10.1 to Form 10-Q filed with the Securities
and Exchange Commission for the quarterly period ended
March 31, 1999)(1)
16
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
27 Financial Data Schedule
99.1 Certain Factors to Consider in Connection with Forward-Looking
Statements (Incorporated by reference to Exhibit 99.1 to Form
10-K filed with the Securities and Exchange Commission for the
year ended September 24, 2000)
(b) Reports on Form 8-K
None.
- --------------------------------
(1)Management contract or compensatory plan or arrangement.
(2)Certain material contained in this exhibit has been omitted and filed
separately with the Securities and Exchange Commission pursuant to an
application for confidential treatment under Rule 24b-2 promulgated
under the Securities exchange Act of 1934, as amended.
17
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 19
Balance Sheets at September 30, 2000 and 1999 20
Statements of Operations
for the Three Years Ended September 30, 2000 21
Statements of Shareholders' Equity
for the Three Years Ended September 30, 2000 22
Statements of Cash Flows
for the Three Years Ended September 30, 2000 23
Notes to Financial Statements 24
18
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Phoenix Gold International, Inc.
We have audited the accompanying balance sheets of Phoenix Gold International,
Inc. as of September 30, 2000 and 1999, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Phoenix Gold International, Inc. as of
September 30, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
November 1, 2000
19
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
SEPTEMBER 30,
----------------------------
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,653,683 $ 868,458
Accounts receivable, net 4,170,885 4,794,799
Inventories 5,744,860 5,620,835
Prepaid expenses 229,049 213,677
Deferred taxes 315,000 315,000
------------- -------------
Total current assets 12,113,477 11,812,769
Property and equipment, net 807,139 1,055,531
Goodwill, net 138,459 178,081
Deferred taxes 610,000 600,000
Other assets 285,127 242,058
------------- -------------
Total assets $ 13,954,202 $ 13,888,439
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 797,249 $ 1,074,881
Accrued payroll and benefits 557,099 436,970
Other accrued expenses 346,318 379,782
Income taxes payable 40,910 81,644
------------- -------------
Total current liabilities 1,741,576 1,973,277
Deferred gain on sale of facility 858,178 956,256
Commitments and contingencies - -
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none
outstanding - -
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding - 3,026,945 and
3,234,345 shares 6,550,928 7,155,997
Retained earnings 4,803,520 3,802,909
------------- -------------
Total shareholders' equity 11,354,448 10,958,906
------------- -------------
Total liabilities and shareholders' equity $ 13,954,202 $ 13,888,439
============= =============
SEE NOTES TO FINANCIAL STATEMENTS
20
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net sales $ 27,339,549 $ 27,538,149 $ 26,484,715
Cost of sales 19,779,261 20,415,267 19,950,805
------------- ------------- -------------
Gross profit 7,560,288 7,122,882 6,533,910
Operating expenses:
Selling 3,749,117 3,386,595 4,029,059
General and administrative 2,203,780 2,221,742 2,540,064
Non-recurring charges - - 878,147
------------- ------------- -------------
Total operating expenses 5,952,897 5,608,337 7,447,270
------------- ------------- -------------
Income (loss) from operations 1,607,391 1,514,545 (913,360)
Other income (expense):
Interest income 50,226 8,844 -
Interest expense - (117,821) (323,530)
Other income, net 994 11,561 9,516
------------- ------------- -------------
Total other income (expense) 51,220 (97,416) (314,014)
------------- ------------- -------------
Earnings (loss) before income taxes 1,658,611 1,417,129 (1,227,374)
Income tax benefit (expense) (658,000) (563,000) 455,000
------------- ------------- -------------
Net earnings (loss) $ 1,000,611 $ 854,129 $ (772,374)
============= ============= =============
Earnings (loss) per share:
Basic and diluted $ 0.33 $ 0.26 $ (0.22)
============= ============= =============
Average shares outstanding:
Basic and diluted 3,065,206 3,293,758 3,464,698
============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS
21
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
-------------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------ ------------ ------------ -------------
Balance at September 30, 1997 $ 3,458,985 $ 7,521,865 $ 3,721,154 $ 11,243,019
Issuance of stock upon
exercise of options 5,760 26,957 - 26,957
Net loss - - (772,374) (772,374)
------------ ------------ ------------ -------------
Balance at September 30, 1998 3,464,745 7,548,822 2,948,780 10,497,602
Purchase of common stock (230,400) (392,825) - (392,825)
Net earnings - - 854,129 854,129
------------ ------------ ------------ -------------
Balance at September 30, 1999 3,234,345 7,155,997 3,802,909 10,958,906
Purchase of common stock (207,400) (605,069) - (605,069)
Net earnings - - 1,000,611 1,000,611
------------ ------------ ------------ -------------
Balance at September 30, 2000 $ 3,026,945 $ 6,550,928 $ 4,803,520 $ 11,354,448
============ ============ ============ =============
SEE NOTES TO FINANCIAL STATEMENTS
22
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 1,000,611 $ 854,129 $ (772,374)
Adjustments to reconcile net
earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 621,198 905,029 1,036,627
Deferred taxes (10,000) 98,000 (402,000)
Non-recurring charges - - 878,147
Changes in operating assets
and liabilities:
Accounts receivable 623,914 (506,834) 898,665
Inventories (124,025) 1,265,885 292,100
Prepaid expenses (15,372) (44,056) (24,936)
Other assets (97,196) (177,603) (13,953)
Accounts payable (277,632) (706,460) 222,592
Accrued expenses 86,665 (51,671) 178,574
Income taxes payable (40,734) 81,644 -
------------ ------------ ------------
Net cash provided by operating
activities 1,767,429 1,718,063 2,293,442
Cash flows from investing activities:
Proceeds from sale of facility - 5,036,912 -
Exercise of purchase option for
facility - (3,131,857) -
Capital expenditures, net (377,135) (303,675) (342,630)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (377,135) 1,601,380 (342,630)
Cash flows from financing activities:
Line of credit, net - (900,000) (2,247,936)
Proceeds from long-term obligations - - 1,125,000
Repayment of long-term obligations - (1,160,762) (854,834)
Purchase of common stock (605,069) (392,825) -
Proceeds from exercise of stock options - - 26,957
------------ ------------ ------------
Net cash used in financing activities (605,069) (2,453,587) (1,950,813)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents 785,225 865,856 (1)
Cash and cash equivalents, beginning of
period 868,458 2,602 2,603
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,653,683 $ 868,458 $ 2,602
============ ============ ============
Supplemental disclosures:
Cash paid for interest $ - $ 139,000 $ 334,000
Cash paid for income taxes 709,000 460,000 44,000
SEE NOTES TO FINANCIAL STATEMENTS
23
PHOENIX GOLD INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Three Years Ended September 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. Phoenix Gold International, Inc. ("Phoenix Gold" or the
"Company") designs, markets and sells electronics, accessories and speakers to
the audio market. The Company's products are used in car audio aftermarket,
professional sound and custom audio/video and home theater applications.
Substantially all of the electronics and certain accessories are manufactured in
Portland, Oregon. Phoenix Gold sells its products primarily in North America,
South America, Europe and Asia through selected audio and audio-video specialty
dealers and distributors.
REPORTING PERIODS. The Company's fiscal year is the 52 or 53 weeks ending
the last Sunday in September. Fiscal years 2000, 1999 and 1998 were 52 weeks.
For presentation convenience, these periods have been presented in these
financial statements as years ended September 30.
ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all highly
liquid investments with maturities of three months or less from date of
purchase. The Company's cash equivalents are generally commercial paper and
money market accounts.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined by the average cost method. Raw materials inventories generally
consist of component parts. Finished goods and work-in-process inventories
include materials, labor and manufacturing overhead.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives (generally three to seven years) of the related assets. Leasehold
improvements are amortized over the estimated useful lives of the assets or the
terms of the lease, whichever is shorter.
GOODWILL. Goodwill is amortized using the straight-line method over a
period of five to twenty years. Accumulated amortization was $248,000 and
$209,000 as of September 30, 2000 and 1999.
FINANCIAL INSTRUMENTS AND FAIR VALUES. The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the immediate or
short-term maturity of these financial instruments.
REVENUE RECOGNITION. Revenue is recognized upon shipment of the product,
net of related discounts.
24
ADVERTISING. Phoenix Gold expenses advertising as incurred. Advertising
expense for the years ended September 30, 2000, 1999 and 1998 was approximately
$144,000, $124,000 and $275,000.
STOCK OPTIONS. Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, is followed to account for stock options. No
compensation cost is recognized because the option exercise price is equal to or
greater than the market price of the underlying stock on the date of grant.
INCOME TAXES. Certain items of income and expense are not reported in tax
returns and financial statements in the same year. The tax effects of temporary
differences are reported as deferred taxes. Deferred tax assets are reduced by a
valuation allowance when it is more likely than not that some portion of the
deferred tax assets will not be realized.
EARNINGS (LOSS) PER SHARE. Basic earnings (loss) per share is based on the
average number of common shares outstanding during each period. Diluted earnings
per share reflects the potential shares issuable upon assumed exercise of the
outstanding stock options and warrants based on the treasury stock method.
COMPREHENSIVE INCOME. There were no differences between net earnings (loss)
and comprehensive income (loss) for the years ended September 30, 2000, 1999 and
1998.
SEGMENT INFORMATION. Phoenix Gold operates in a single industry segment
as described in Note 10.
PROSPECTIVE ACCOUNTING CHANGE. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The new
statement will require recognition of all derivatives as either assets or
liabilities on the balance sheet at fair value. The new statement is effective
for the year ending September 30, 2001, as deferred by SFAS No. 137, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE
DATE OF FASB STATEMENT NO. 133. The Company does not expect adoption of this
statement to have a material impact on its financial position or results of
operations.
NOTE 2 - NON-RECURRING CHARGES
Non-recurring charges consist of the following:
2000 1999 1998
------------- ------------- -------------
Impairment of product line $ - $ - $ 913,147
Restructuring of operations - - 198,000
------------- ------------- -------------
Total non-recurring
charges - - 1,111,147
Less inventory write-down
included in cost of sales - - (233,000)
------------- ------------- -------------
Total non-recurring
charges $ - $ - $ 878,147
============= ============= =============
25
In 1998, Phoenix Gold took one-time, non-recurring charges of $1.1 million
related to implementation of a restructuring plan which included the phase-out
of a product line and actions to reduce future operating costs. The Company
determined that an impairment of tooling and royalty costs associated with the
product line resulted from the phase-out of the product line. In addition, the
impairment of the product line required a write-down of inventories, which is
included in cost of sales in the Statement of Operations for the year ended
September 30, 1998. The restructuring plan also included the write-off of
leasehold improvements in connection with the early termination of a lease on an
adjacent building and the separation of certain employees. During 1999, Phoenix
Gold completed its restructuring plan. Cash payments were not material.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
2000 1999
-------------- --------------
Accounts receivable $ 4,455,885 $ 5,069,799
Allowance for doubtful accounts (285,000) (275,000)
-------------- --------------
Total accounts receivable, net $ 4,170,885 $ 4,794,799
============== ==============
NOTE 4 - INVENTORIES
Inventories consist of the following:
2000 1999
-------------- --------------
Raw materials and work-in-process $ 2,598,709 $ 2,531,260
Finished goods 3,146,151 3,089,575
-------------- --------------
Total inventories $ 5,744,860 $ 5,620,835
============== ==============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2000 1999
-------------- --------------
Machinery and equipment $ 3,205,936 $ 3,114,553
Office equipment and furniture 1,638,315 1,602,645
Leasehold improvements 75,266 3,829
-------------- --------------
4,919,517 4,721,027
Less accumulated depreciation
and amortization (4,112,378) (3,665,496)
-------------- --------------
Total property and equipment, net $ 807,139 $ 1,055,531
============== ==============
26
During 1999, Phoenix Gold purchased its leased office, warehouse and
manufacturing facility for $3,132,000 from its landlord. On the same day, the
Company sold the facility and the existing improvements, with a remaining net
book value of $924,000, for a net sales price of $5,037,000, and then leased the
facility from the purchaser. The resulting gain of $981,000 was deferred.
Phoenix Gold will recognize the deferred gain over the ten-year lease term as a
reduction in rent expense. The net cash proceeds were used to repay $990,000 in
remaining long-term obligations.
NOTE 6 - FINANCING AGREEMENTS
A $5.0 million revolving operating line of credit is available through
December 31, 2000. Interest on the borrowings is equal to the bank's prime
lending rate (9.50% at September 30, 2000) or LIBOR plus 1.75%. Borrowings under
the line of credit are limited to eligible accounts receivable and inventories
and certain additional limits. Borrowings under the line of credit are secured
by cash and cash equivalents, accounts receivable and inventories. The line of
credit contains covenants which require a minimum level of tangible net worth, a
minimum ratio of current assets to current liabilities and a maximum ratio of
interest bearing debt to net tangible net worth. As of September 30, 2000,
Phoenix Gold was eligible to borrow $5.0 million under the line of credit. No
borrowings were outstanding under the line of credit as of September 30, 2000
and 1999.
During July 1998, the Company completed a $1,125,000 five-year lease
financing at an interest rate of 8.25%, which financing was repaid in July 1999.
NOTE 7 - COMMITMENTS
Phoenix Gold leases its office, warehouse and manufacturing facility under a
ten-year operating lease agreement. Terms of the lease include an option to
extend the length of the lease for ten additional years.
Minimum future rentals under operating leases having initial or remaining
terms of one year or more are as follows:
September 30,
2001 $ 537,000
2002 551,000
2003 564,000
2004 578,000
2005 593,000
Thereafter 2,357,000
---------------
Total $ 5,180,000
===============
Rent expense under operating leases for the years ended September 30, 2000,
1999 and 1998 was $288,000, $255,000 and $365,000.
27
NOTE 8 - TAXES
Income tax benefit (expense):
2000 1999 1998
-------------- -------------- --------------
Current:
Federal $ (550,000) $ (412,000) $ 47,000
State (118,000) (53,000) 6,000
-------------- -------------- --------------
Total current (668,000) (465,000) 53,000
Deferred:
Federal 9,000 (87,000) 368,000
State 1,000 (11,000) 34,000
-------------- -------------- --------------
Total deferred 10,000 (98,000) 402,000
-------------- -------------- --------------
Total $ (658,000) (563,000) 455,000
============== ============== ==============
Effective income tax rates are as follows:
2000 1999 1998
-------------- -------------- --------------
Taxes at statutory
Federal income tax rate (34.0%) (34.0%) 34.0%
State taxes, net of
Federal benefit (4.4) (4.4) 4.4
Other, net (1.3) (1.3) (1.3)
-------------- -------------- --------------
Total (39.7%) (39.7%) 37.1%
============== ============== ==============
The tax effects of temporary differences which give rise to deferred tax
assets and deferred tax liabilities are as follows:
2000 1999
-------------- --------------
Deferred tax liability - depreciation $ (64,000) $ (133,000)
Deferred tax assets:
Accrued expenses 170,000 138,000
Deferred gain on sale of facility 330,000 367,000
Goodwill and other intangibles 344,000 366,000
Inventory valuation 145,000 177,000
-------------- --------------
Total deferred tax assets 989,000 1,048,000
-------------- --------------
Net deferred taxes $ 925,000 $ 915,000
============== ==============
Current deferred tax asset $ 315,000 $ 315,000
Long-term deferred tax asset 610,000 600,000
-------------- --------------
Net deferred taxes $ 925,000 915,000
============== ==============
28
NOTE 9 - SHAREHOLDERS' EQUITY AND STOCK OPTION PLAN
Phoenix Gold's Board of Directors and shareholders adopted and approved a
stock option plan (the "Stock Option Plan") on January 27, 1995. Under the Stock
Option Plan, the Board of Directors may grant incentive and nonqualified options
to employees, directors and consultants to purchase up to 315,000 shares of
common stock. On July 16, 1996, the Stock Option Plan was amended to reserve an
additional 200,000 shares for issuance.
In general, options to purchase common stock may not be granted at less than
fair market value at the date of grant. Options generally become exercisable
ratably over a three to five year period and expire five to ten years after the
date of grant. The Stock Option Plan expires in 2005. The Stock Option Plan can
also be terminated by the Board of Directors at any time without shareholder
approval with respect to shares of common stock not subject to outstanding
options.
Information relating to option activity for the Stock Option Plan is set
forth below:
Outstanding Options Exercisable
--------------------- --------------------
Shares Number Weighted Number Weighted
Available of Average of Average
for Shares Exercise Shares Exercise
Option Price Price
---------- ---------- ---------- ---------- ---------
September 30, 1997 8,915 492,100 $ 5.10 221,615 $ 4.97
Granted (11,550) 11,550 4.00
Exercised - (5,760) 4.68
Canceled 128,575 (128,575) 5.74
---------- ----------
September 30, 1998 125,940 369,315 4.85 258,383 4.86
Granted (2,800) 2,800 3.125
Exercised - -
Canceled 42,340 (42,340) 4.72
---------- ----------
September 30, 1999 165,480 329,775 4.85 271,508 4.87
Granted (2,800) 2,800 3.375
Exercised - -
Canceled 22,200 (22,200) 4.79
---------- ----------
September 30, 2000 184,880 310,375 $ 4.85 278,809 $ 4.87
========== ==========
29
The following table summarizes information about stock options outstanding
under the Stock Option Plan at September 30, 2000:
Outstanding Exercisable
------------------------------------ ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices of Shares Life Price of Shares Price
- ----------------- ----------- ----------- ----------- ----------- ---------
$ 3.125 - $ 3.375 5,600 3.9 $ 3.25 934 $ 3.125
$ 4.00 - $ 4.75 218,375 4.8 4.66 198,275 4.67
$ 5.15 - $ 5.50 85,000 5.1 5.30 78,200 5.29
$11.75 1,400 0.3 11.75 1,400 11.75
----------- ----------- ----------- ----------- ---------
310,375 4.8 $ 4.85 278,809 $ 4.87
=========== =========== =========== =========== =========
At September 30, 1999, there were outstanding warrants to purchase up to
110,000 shares of common stock at $8.10 per share. Such warrants expired on May
3, 2000.
At September 30, 2000, nonqualified options to purchase 7,800 shares of
common stock were outstanding at exercise prices ranging from $3.125 to $4.63
per share. Such options become exercisable ratably over a three-year period and
expire from 2004 to 2007. At September 30, 2000, Phoenix Gold has reserved
503,055 shares of common stock for issuance upon exercise of the stock options.
Phoenix Gold has elected to continue to account for stock options according
to APB Opinion No. 25. However, as required by SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company has computed for pro forma disclosure
purposes the value of options granted during the years ended September 30, 2000,
1999 and 1998 using the Black-Scholes option pricing model. The weighted average
estimated fair value of options granted during 2000, 1999 and 1998 was $2.35,
$2.09 and $2.45 per share. The weighted average assumptions used for stock
option grants during the years ended September 30, 2000, 1999 and 1998 were a
risk free interest rate of 6.75%, 5.00% and 5.75%, an expected dividend yield of
0%, 0% and 0%, an expected life of 5.0 years, 5.0 years and 5.0 years and an
expected volatility of 81.8%, 79.0% and 67.8%.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.
30
For purposes of the pro forma disclosures, the estimated fair value of the
stock-based awards is amortized over the vesting period. Pro forma net earnings
(loss) and earnings (loss) per share is as follows:
2000 1999 1998
------------- ------------ ------------
Pro forma net earnings (loss) $ 938,000 $ 789,000 $ (781,000)
Pro forma earnings (loss) per
share 0.31 0.24 (0.23)
The effects of applying SFAS No. 123 to provide pro forma disclosure are not
likely to represent net earnings (loss) and earnings (loss) per share for future
years since SFAS No. 123 does not apply to grants prior to October 1, 1995,
options vest over several years, additional awards are anticipated in future
years and assumptions used for any additional awards may vary from the current
assumptions.
During 1999, Phoenix Gold began acquiring shares of its common stock in
connection with a stock repurchase program announced in November 1998. That
program authorized the Company to purchase up to $1.0 million of common stock
from time to time on the open market or pursuant to negotiated transactions at
price levels the Company deems attractive. In 1999, Phoenix Gold purchased
230,400 shares of common stock for $392,825. In 2000, Phoenix Gold purchased
207,400 shares of common stock for $605,069.
NOTE 10 - SALES AND MAJOR CUSTOMERS
Phoenix Gold operates in a single industry segment: the design, manufacture
and sales of electronics, accessories and speakers for use in the audio market.
Net sales by geographic region are as follows:
2000 1999 1998
-------------- -------------- --------------
United States $ 20,294,371 $ 20,078,164 $ 17,903,217
International:
Europe 2,707,278 3,746,786 4,624,273
Asia 1,382,724 1,157,670 945,600
Other 2,955,176 2,555,529 3,011,625
-------------- -------------- --------------
Total international 7,045,178 7,459,985 8,581,498
-------------- -------------- --------------
Net sales $ 27,339,549 $ 27,538,149 $ 26,484,715
============== ============== ==============
One customer accounted for 10.8% of the Company's net sales during the year
ended September 30, 2000. No customer accounted for 10% or more of the Company's
net sales during the years ended September 30, 1999 and 1998. As of September
30, 2000 and 1999, one customer accounted for approximately 22.2% and 15.0% of
net accounts receivable. As of September 30, 2000 and 1999, approximately 37.1%
and 42.1% of net accounts receivable is attributable to export sales.
31
NOTE 11 - BENEFIT PLAN
Phoenix Gold adopted a profit sharing and 401(k) savings plan in September
1997 which covers substantially all employees. Participating employees may defer
up to 15% of their compensation, subject to certain regulatory limitations. The
Company matches 100% of employee contributions up to $750 of each participating
employee's compensation. The matching contribution expense was $58,000, $63,000
and $77,000 for the years ended September 30, 2000, 1999 and 1998.
The profit sharing and 401(k) savings plan also permits the Company to make
discretionary profit sharing contributions to all employees. Discretionary
profit sharing contributions are determined annually by the Board of Directors.
No profit sharing expense was approved for the years ended September 30, 2000,
1999 and 1998.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of operating results by quarter for the years
ended September 30, 2000 and 1999:
2000 QUARTER ENDED DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER TOTAL
30
----------- ---------- ----------- ------------- -----------
Net sales $6,893,627 $6,511,208 $7,056,124 $6,878,590 $27,339,549
Gross profit 1,800,769 1,883,631 2,075,526 1,800,362 7,560,288
Net earnings 211,973 240,610 363,504 184,524 1,000,611
Earnings per share 0.07 0.08 0.12 0.06 0.33
1999 QUARTER ENDED
Net sales $6,665,935 $6,200,066 $7,454,978 $7,217,170 $27,538,149
Gross profit 1,721,052 1,673,617 2,055,526 1,672,687 7,122,882
Net earnings 206,336 159,719 335,901 152,173 854,129
Earnings per share 0.06 0.05 0.10 0.05 0.26
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOENIX GOLD INTERNATIONAL, INC.
By: /s/ Keith A. Peterson
--------------------------------
Keith A. Peterson
Chairman, President and
Chief Executive Officer
Date: December 14, 2000
Pursuant to requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Keith A. Peterson Chairman, President and December 14, 2000
- ------------------------- Chief Executive Officer
Keith A. Peterson (Principal Executive Officer)
/s/ Timothy G. Johnson Executive Vice President, December 14, 2000
- ------------------------- Chief Operating Officer and
Timothy G. Johnson Director
/s/ Joseph K. O'Brien Chief Financial Officer and December 14, 2000
- ------------------------- Secretary (Principal Financial
Joseph K. O'Brien and Accounting Officer)
/s/ Robert A. Brown Director December 14, 2000
- -------------------------
Robert A. Brown
/s/ Edward A. Foehl Director December 14, 2000
- -------------------------
Edward A. Foehl
/s/ Frank G. Magdlen Director December 14, 2000
- -------------------------
Frank G. Magdlen
33
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
23.1 Consent of Deloitte & Touche LLP, Independent Auditors 35
27 Financial Data Schedule 36
99.1 Certain Factors to Consider in Connection with
Forward-Looking Statements 37
34