United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

 

 

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 ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

 

There were 3,006,945 shares of the issuer’s common stock outstanding as of January 31, 2003.

 

 

PHOENIX GOLD INTERNATIONAL, INC.

Form 10-Q for the Quarter Ended December 31, 2002

 

INDEX

 

Part I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Balance Sheets at December 31, 2002 and September 30, 2002 (unaudited)
		Statements of Operations for the Three Months Ended December 31, 2002 and 2001 (unaudited)
		Statements of Cash Flows for the Three Months Ended December 31, 2002 and 2001 (unaudited)
		Notes to Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk
	Item 4.	Controls and Procedures
Part II.	OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
INDEX TO EXHIBITS

 

2

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
(Unaudited)

 

		December 31, 2002			September 30, 2002
ASSETS
Current assets:
Cash and cash equivalents		$	497,920		$	214,814
Accounts receivable, net		2,726,461			3,610,939
Inventories		7,658,727			7,765,523
Prepaid expenses		293,816			188,140
Deferred taxes		746,000			572,000
Total current assets		11,922,924			12,351,416
Property and equipment, net		1,032,437			1,102,498
Deferred taxes		559,000			513,000
Other assets		404,297			552,336
Total assets		$	13,918,658		$	14,519,250
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,066,082		$	1,297,507
Accrued payroll and benefits		487,909			430,048
Accrued customer rebates		400,844			382,972
Other accrued expenses		432,322			498,684
Total current liabilities		2,387,157			2,609,211
Deferred gain on sale of facility		637,504			662,023
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 — 3,006,945 and 3,006,945 shares		6,511,528			6,511,528
Retained earnings		4,382,469			4,736,488
Total shareholders’ equity		10,893,997			11,248,016
Total liabilities and shareholders’ equity		$	13,918,658		$	14,519,250

 

See Notes to Financial Statements

 

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PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)

 

		Three Months Ended December 31,
		2002			2001
Net sales		$	5,223,934		$	6,860,245
Cost of sales		4,109,021			5,412,024
Gross profit		1,114,913			1,448,221
Operating expenses:
Selling		867,799			777,867
General and administrative		699,723			645,714
Total operating expenses		1,567,522			1,423,581
Income (loss) from operations		(452,609		)	24,640
Other income (expense):
Interest income		632			572
Interest expense		(14		)	(14,687		)
Other expense, net		(1,028		)	—
Total other expense		(410		)	(14,115		)
Earnings (loss) before income taxes		(453,019		)	10,525
Income tax benefit (expense)		167,000			(4,000		)
Earnings (loss) before cumulative effect of accounting change		(286,019		)	6,525
Cumulative effect of accounting change, net of tax		(68,000		)	—
Net earnings (loss)		$	(354,019	)	$	6,525
Earnings (loss) per share:
Before accounting change — basic and diluted		$	(0.10	)	$	0.00
Accounting change — basic and diluted		(0.02		)	0.00
Earnings (loss) per share — basic and diluted		$	(0.12	)	$	0.00
Average shares outstanding — basic and diluted		3,006,945			3,006,945

 

See Notes to Financial Statements

 

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PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)

 

		Three Months Ended December 31,
		2002			2001
Cash flows from operating activities:
Net earnings (loss)		$	(354,019	)	$	6,525
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		134,388			132,529
Cumulative effect of accounting change, net		68,000			—
Deferred taxes		(175,000		)	(10,000		)
Changes in operating assets and liabilities:
Accounts receivable		884,478			1,504,154
Inventories		106,796			415,904
Prepaid expenses		(105,676		)	(116,150		)
Accounts payable		(231,425		)	(965,359		)
Accrued expenses		9,371			(99,735		)
Net cash provided by operating activities		336,913			867,868
Cash flows from investing activities:
Capital expenditures, net		(53,807		)	(137,001		)
Net cash used in investing activities		(53,807		)	(137,001		)
Cash flows from financing activities:
Line of credit, net		—			(157,707		)
Net cash used in financing activities		—			(157,707		)
Increase in cash and cash equivalents		283,106			573,160
Cash and cash equivalents, beginning of period		214,814			1,002
Cash and cash equivalents, end of period		$	497,920		$	574,162
Supplemental disclosure:
Cash paid for interest		$	—		$	15,000
Cash paid for income taxes		—			12,000

 

See Notes to Financial Statements

 

5

 

PHOENIX GOLD INTERNATIONAL, INC.
Notes to Financial Statements
(Unaudited)

 

Note 1 - UNAUDITED FINANCIAL STATEMENTS

 

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted from these unaudited financial statements.  These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002 filed with the Securities and Exchange Commission.  The results of operations for the three-month period ended December 31, 2002 are not necessarily indicative of the operating results for the full year.  In the opinion of management, all adjustments, consisting only of normal recurring accruals, have been made to present fairly the Company’s financial position at December 31, 2002 and the results of its operations and its cash flows for the three-month periods ended December 31, 2002 and 2001.

 

Note 2 - REPORTING PERIODS

 

The Company’s fiscal year is the 52-week or 53-week period ending the last Sunday in September.  Fiscal 2003 and fiscal 2002 are 52-week years and all quarters are 13-week periods.  For presentation convenience, the Company has indicated in these financial statements that its fiscal year ended on September 30 and that the three months presented ended on December 31.

 

Note 3 - NEW ACCOUNTING PRONOUNCEMENTS

 

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.  SFAS No. 142 changed the accounting for goodwill and certain intangibles from an amortization method to an impairment-only approach.  Thus, amortization of goodwill and certain intangibles, including goodwill and certain intangibles recorded in past business combinations, cease upon adoption of SFAS No. 142.  Instead, goodwill and certain intangibles are now analyzed for impairment and written down and charged to operations only in periods in which the recorded goodwill and certain intangibles is more than its fair value.  SFAS No. 142 became effective for the Company’s fiscal year beginning October 1, 2002.

 

The Company completed the transitional goodwill impairment test and recorded an impairment loss of $68,000, net of tax of $45,000, or $0.02 per share, during the three months ended December 31, 2002.  In accordance with SFAS No. 142, the goodwill impairment loss is recognized as the effect of a change in accounting principle as of October 1, 2002.  Goodwill amortization expense for the three months ended December 31, 2001 was $12,000.

 

Included in other assets at December 31, 2002 are intangible assets of $299,000 consisting primarily of trademarks and a noncompetition agreement.  Amortization expense for the three months ended December 31, 2002 was $32,000.  The estimated future amortization expense of the intangible assets for the years ending September 30, 2003, 2004, 2005 and 2006 is $127,000, $119,000, $74,000 and $11,000. It is estimated that the intangible assets will be fully amortized in fiscal 2006.

 

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In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  This Statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business.  SFAS No. 144 maintains the method for recording an impairment of assets to be held under SFAS No. 121 and establishes a single accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale.  This Statement also broadens the presentation of discontinued operations to include more disposal transactions.  SFAS No. 144 became effective as of October 1, 2002.  The adoption of SFAS No. 144 did not have a material effect on the Company’s financial position or results of operations.

 

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others.  Included in other accrued expenses at December 31, 2002 is an accrual of approximately $240,000 for estimated warranty liabilities.  A majority of the products sold by the Company are covered by a warranty.  The estimated warranty liability is based on historical experience and expectation of future conditions.  The Company’s historical experience indicates that substantially all warranty services are provided within one year of product sale.  Warranty services incurred for products sold more than one year ago have not been significant.  Warranty expenses were approximately $70,000 during the three months ended December 31, 2002.

 

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure: An Amendment of FASB Statement No. 123.  This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The disclosure provisions of SFAS No. 148 are applicable for fiscal periods beginning after December 15, 2002.  The Company continues to account for its fixed plan stock options under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  The Company does not expect adoption of SFAS No. 148 to have a material effect on its financial position or results of operations.

 

Note 4 - INVENTORIES

 

Inventories are stated at the lower of cost or market and consist of the following:

 

		December 31, 2002			September 30, 2002
Raw materials and work-in-process		$	2,751,559		$	2,924,498
Finished goods		4,907,168			4,841,025
Total inventories		$	7,658,727		$	7,765,523

 

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Note 5 - PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

		December 31, 2002			September 30, 2002
Machinery and equipment		$	3,340,469		$	3,691,770
Office equipment and furniture		1,771,133			1,741,398
Leasehold improvements		172,710			170,494
		5,284,312			5,603,662
Less accumulated depreciation and amortization		(4,251,875		)	(4,501,164		)
Total property and equipment, net		$	1,032,437		$	1,102,498

 

Note 6 - LINE OF CREDIT

 

During January 2003, the Company extended its revolving operating line of credit through January 31, 2004.  The line of credit provides for borrowings up to $3.5 million at the bank’s prime lending rate plus 1%.  As of December 31, 2002, the Company was eligible to borrow $3.5 million under the line of credit.  No borrowings were outstanding under the line of credit as of that date.

 

 

8

 

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

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: the adverse effect of reduced discretionary consumer spending; competitive factors; dependence on a significant customer; potential fluctuations in quarterly results and seasonality; fixed operating expenses; 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 and limited trading volume of the Company’s common stock, as well as other factors discussed in Exhibit 99.3 to the Phoenix Gold International, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2002, which exhibit 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.

 

Application of Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their effect on amounts reported in the financial statements and related notes.  Since future events and their effect cannot be determined with certainty, the actual results will inevitably differ from the estimates.  Such differences could be material to the financial statements.

 

The Company’s accounting policies are disclosed in its 2002 Annual Report on Form 10-K. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.  SFAS No. 142 changed the accounting for goodwill and certain intangibles from an amortization method to an impairment-only approach.  Thus, amortization of goodwill and certain intangibles, including goodwill and certain intangibles recorded in past business combinations, cease upon adoption of SFAS No. 142.  Instead, goodwill and certain intangibles are now analyzed for impairment and written down and charged to operations only in periods in which the recorded goodwill and certain intangibles is more than its fair value.  SFAS No. 142 became effective for the Company’s fiscal year beginning October 1, 2002.

 

The Company completed the transitional goodwill impairment test and recorded an impairment loss of $68,000, net of tax of $45,000, or $0.02 per share, during the three months ended December 31, 2002.  In accordance with SFAS No. 142, the goodwill impairment loss is recognized as the effect of a change in accounting principle as of October 1, 2002.  Goodwill amortization expense for the three months ended December 31, 2001 was $12,000.

 

9

 

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  This Statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business.  SFAS No. 144 maintains the method for recording an impairment of assets to be held under SFAS No. 121 and establishes a single accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale.  This Statement also broadens the presentation of discontinued operations to include more disposal transactions.  SFAS No. 144 became effective as of October 1, 2002.  The adoption of SFAS No. 144 did not have a material effect on the Company’s financial position or results of operations.

 

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others.  Included in other accrued expenses at December 31, 2002 is an accrual of approximately $240,000 for estimated warranty liabilities.  A majority of the products sold by the Company are covered by a warranty.  The estimated warranty liability is based on historical experience and expectation of future conditions.  The Company’s historical experience indicates that substantially all warranty services are provided within one year of product sale.  Warranty services incurred for products sold more than one year ago have not been significant.  Warranty expenses were approximately $70,000 during the three months ended December 31, 2002.

 

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure: An Amendment of FASB Statement No. 123.  This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The disclosure provisions of SFAS No. 148 are applicable for fiscal periods beginning after December 15, 2002.  The Company continues to account for its fixed plan stock options under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  The Company does not expect adoption of SFAS No. 148 to have a material effect on its financial position or results of operations.

 

Except as described above, there have been no material changes to the Company’s accounting policies during the three months ended December 31, 2002.  The more significant of the Company’s accounting policies include revenue recognition and the use of estimates (which inherently involve judgment and uncertainties) in establishing customer rebate and warranty accrued liabilities, valuing accounts receivable, inventory, long-lived and deferred tax assets.

 

Revenue Recognition

 

The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the seller’s price is fixed and determinable; and collectibility is reasonably assured.  These criteria are generally satisfied and the Company recognizes revenue upon shipment.  The Company also offers certain of its customers the right to return products that do not meet the standards agreed to with the customer. The Company records a provision for estimated sales returns and allowances on product related sales in the same period as the related revenues are recorded.  These estimates

 

10

 

are based on historical sales returns, analysis of credit memo data and other known factors. The Company continuously monitors such product returns and while such returns have historically been minimal, the Company may not continue to experience the same return rates that it has in the past.  Any significant increase in product quality failure rates and the resulting credit returns could have a material adverse effect on the Company’s net sales and operating results for the period or periods in which such returns materialize.

 

The Company also provides for certain sales allowances which include sales rebates, co-op advertising incentives and other volume-based incentives.  The Company records a provision for estimated incentives based upon the incentives offered to customers on product related sales in the same period as the related revenues are recorded. If the historical data the Company uses to calculate these estimates do not properly reflect future sales allowances, revenue could be misstated.

 

Products sold are covered by a warranty.  The Company accrues a warranty reserve for estimated costs to provide warranty services.  The Company’s estimate of costs to service its warranty obligations is based on historical experience and expectation of future conditions.  To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, its warranty accrual will increase accordingly and result in decreased gross profit.

 

Accounts Receivable

 

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by the review of the customer’s current credit information.  The Company continuously monitors collections and payments from customers and maintains a provision for estimated credit losses based upon the Company’s historical experience and any specific customer collection issues that have been identified.  The Company values accounts receivable net of an allowance for doubtful accounts.  The allowance is calculated based upon the Company’s evaluation of specific customer accounts where the Company has information that the customer may have an inability to meet its financial obligations (bankruptcy, etc.).  In these cases, the Company uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected.  These specific reserves are re-evaluated and adjusted as additional information is received that affects the amount reserved.  The same technique used to compute the allowance at September 30, 2002 was used at December 31, 2002.  However, the ultimate collectibility of a receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without advance warning.

 

The Company has had significant accounts receivable or other amounts due from its customers or other parties.  From time to time, certain of these account receivable or other amounts due have become unusually large and/or overdue, and on occasion the Company has taken write-offs relating to accounts receivable.  The failure of the Company’s customers to pay in a timely manner or in full amounts due to the Company could affect future liquidity and profitability.

 

Inventory

 

The Company values inventory at the lower of cost or market.  Cost is determined using the average cost method.  The Company continues to use the same techniques to value inventory as have been used in the past.  The Company regularly reviews inventory quantities on hand and

 

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records a provision for excess and obsolete inventory based primarily on estimated product demand and production requirements for the next year.  Customers may cancel their orders or change purchase volumes.  Any actions taken by customers that could affect the value of inventory are considered when determining the lower of cost or market valuations.  These or other actions could create excess inventory levels that would affect the valuation of inventory. If the Company is not able to achieve its expectations of the net realizable value of the inventory at its current value, then the Company would have to adjust its reserves accordingly, which would reduce net earnings.

 

Long-Lived Assets

 

The Company evaluates the fair value and future benefits of long-lived assets by estimating undiscounted future cash flows of the related assets and reduces the carrying value of the long-lived assets by the excess, if any, of the result of such calculation.  The Company believes that the carrying values and estimated useful lives continues to be appropriate at this time.  Future adverse changes in market conditions or poor operating results of the underlying long-lived assets could result in an inability to recover the carrying value of the long-lived assets that may not be reflected in the current carrying value, thereby possibly requiring an impairment charge in the future.

 

Deferred Tax Valuation Allowance

 

The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.  Future taxable income and ongoing prudent and feasible tax planning strategies are estimated in assessing the need for the valuation allowance.  Should the Company not be able to realize all or part of the deferred tax assets in the future, an adjustment to the deferred tax asset would be recorded to earnings in the period such determination was made by increasing the valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.  The effect of such adjustment would be to reduce earnings.  The Company determined that a valuation allowance was not necessary at December 31, 2002.

 

Results of Operations

 

Net sales decreased $1.6 million, or 23.9%, to $5,224,000 for the three months ended December 31, 2002 compared to $6,860,000 for the three months ended December 31, 2001. Domestic sales decreased $1.3 million, or 22.4%, to $4.3 million for the three months ended December 31, 2002 compared to $5.6 million for the three months ended December 31, 2001.  Sales of electronics to a significant domestic customer decreased $261,000, or 28.2%, to $664,000 for the three months ended December 31, 2002 compared to $925,000 for the comparable period in fiscal 2002.  Additionally, sales of speakers to a domestic OEM customer decreased during the quarter.  Purchase orders by these customers may fluctuate significantly from quarter to quarter.  Sales of speakers, electronics and accessories decreased 60.3%, 7.7% and 6.6%, respectively, for the three months ended December 31, 2002 compared to the corresponding quarter in fiscal 2002.  The decreased sales of speakers were primarily due to decreased sales of AudioSource products.  During the first quarter of fiscal 2002, a large domestic retailer placed a large holiday season order for home audio speakers.  A similar order was not received for the first quarter of fiscal 2003.

 

International sales decreased $385,000, or 30.3%, to $886,000 for the three months ended December 31, 2002 compared to $1.3 million for the three months ended December 31, 2001. 

 

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International sales represented 17.0% and 18.5% of total net sales for the three months ended December 31, 2002 and 2001, respectively.  The decrease resulted primarily from a 38.5% decrease in sales to Asia and a 35.6 % decrease in sales to other international markets.

 

Because of the nature of the Company’s products, the Company’s largest customers have historically tended to be large domestic retailers, and domestic and international distributors.  The Company had one customer during the three months ended December 31, 2002 that accounted for more than 10% of net sales.  The timing and volume of customer activity can vary significantly from period to period.  Management expects decreased sales for the Company in the second quarter of fiscal 2003 as compared to the second quarter of fiscal 2002 due to the continuing reduced spending by consumers on discretionary items.  The loss of business from one or more principal customers or a change in the sales volume to a particular customer could have a material adverse effect on the Company’s sales volume and profitability.

 

Gross profit remained essentially unchanged from a year ago at 21.3% of net sales for the three months ended December 31, 2002 compared to 21.1% of net sales for the three months ended December 31, 2001.  Due to the range of products that the Company sells, the product sales mix can produce a range of gross margins.  Some markets in which the Company operates also yield lower gross margins than others.  Gross margins on sales of AudioSource products are less than gross margins on sales of other Company products.  The change in sales mix was partially offset by the decrease in sales volume.  The decrease in sales volume caused fixed labor and manufacturing overhead to increase as a percentage of sales.

 

Operating expenses consist of selling, general and administrative expenses.  Total operating expenses increased $144,000, or 10.1%, to $1,568,000 for the three months ended December 31, 2002 compared to $1,424,000 for the three months ended December 31, 2001.  Operating expenses were 30.0% and 20.8% of net sales in the respective three-month periods.

 

Selling expenses increased $90,000, or 11.6%, to $868,000 for the three months ended December 31, 2002 compared to $778,000 for the comparable fiscal 2002 period.  Selling expenses were 16.6% and 11.3% of net sales in the respective three-month periods.  The increased selling expenses were due to increased personnel and payroll expenses.

 

General and administrative expenses increased $54,000, or 8.4%, to $700,000 for the three months ended December 31, 2002 compared to $646,000 for the comparable fiscal 2002 period.  General and administrative expenses were 13.4% and 9.4% of net sales in the respective three-month periods.  The increased general and administrative expenses were primarily due to increased engineering expenses as a result of additional engineering personnel and new product development activities.

 

Other expense decreased by $13,600 to $400 of other expense for the three months ended December 31, 2002 compared to $14,000 of other expense for the three months ended December 31, 2001.  The decrease in other expense was due to decreased interest expense attributable to decreased average balances outstanding under the line of credit.

 

The tax benefit was $167,000 for the three months ended December 31, 2002 due to a loss before income taxes for the period.  Tax expense was $4,000 for the three months ended December 31, 2001 due to earnings before income taxes for the period.  Deferred taxes of $746,000 and $559,000 are recorded as current and long-term assets at December 31, 2002 due to the tax effects of temporary differences between the carrying amounts of assets and

 

13

 

liabilities for financial and tax reporting purposes and a net operating loss carryforward resulting from the net loss for the three months ended December 31, 2002.

 

On October 1, 2002, the Company adopted SFAS No. 142 and recorded a goodwill impairment loss of $68,000, net of tax of $45,000, or $0.02 per share - basic and diluted (based on 3.0 million shares outstanding) as the effect of a change in accounting principle.  Goodwill amortization expense for the three months ended December 31, 2001 was $12,000.

 

The net loss was $354,000, or $0.12 per share - basic and diluted (based on 3.0 million shares outstanding), for the three months ended December 31, 2002, compared to net earnings of $6,000, or $0.00 per share - basic and diluted (based on 3.0 million shares outstanding) for the three months ended December 31, 2001.  Decreased sales and increased operating expenses resulted in the net loss.

 

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 during the first quarter of fiscal 2003 from cash generated from operating activities.  Net cash provided by operating activities was $337,000 for the three months ended December 31, 2002.  When cash flow from operations is less than current needs, the Company increases the balance owing on its operating line of credit.  When cash flow exceeds current needs, the Company pays down the balance owing on its operating line of credit rather than accumulating and investing excess cash, which practice may result in low reported cash balances.

 

The Company’s future cash flows from operations are dependent upon several factors including, but not limited to:

 

-                    the ability of the Company to attract new and retain existing customers,

-                    the volume of sales for these customers, or the loss of business of one or more primary customer,

-                    changes in sales mix,

-                    changes in general economic conditions,

-                    management’s effectiveness in managing the manufacturing process, and

-                    the ability to collect in full and in a timely manner amounts due to the Company.

 

Cash and cash equivalents increased by $283,000 during the three months ended December 31, 2002 due principally to collections of outstanding accounts receivables and reduction in inventories offset in part by the net loss of $354,000.  Accounts receivable decreased by $884,000 during the first quarter of fiscal 2003 due to a decrease in sales in the first fiscal quarter of 2003 compared to the fourth quarter of fiscal 2002.  Inventories decreased by $107,000 during the first quarter of fiscal 2003 due to decreased purchases of raw materials.  Prepaid expenses increased $106,000 during the three months ended December 31, 2002 primarily due to trade show deposits and insurance costs incurred at the beginning of the Company’s fiscal year.  Accounts payable decreased $231,000 during the first quarter of fiscal 2003 due to the decrease in inventories and timing of payment due dates.  Overall, net working capital decreased $206,000 to $9.5 million at December 31, 2002 from $9.7 million at September 30, 2002.

 

The Company invested $54,000 in capital expenditures in the three months ended December 31, 2002.  Management anticipates that discretionary capital expenditures for the

 

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remainder of fiscal 2003 will not exceed $500,000.  These anticipated expenditures will be financed from available cash, cash provided from operations and, if necessary, proceeds from the line of credit.

 

During January 2003, the Company extended its revolving operating line of credit through January 31, 2004.  The line of credit provides for borrowings up to $3.5 million at the bank’s prime lending rate plus 1%.  As of December 31, 2002, the Company was eligible to borrow $3.5 million under the line of credit.  No borrowings were outstanding under the line of credit as of that date.

 

The Company has disclosed additional information pertaining to obligations and commitments to make future cash payments in the financial statements contained in its 2002 Annual Report on Form 10-K, note 8.  Minimum future rentals under operating leases having initial or remaining terms of one year or more for the years ending September 30, 2003, 2004, 2005, 2006, 2007 and thereafter are $564,000, $578,000, $593,000, $608,000, $623,000 and $1,126,000, respectively.

 

The Company believes that cash generated from operations and cash available through its credit facility should be sufficient to meet working capital and capital expenditure requirements for the next twelve months.

 

Item 3.    Quantitative and Qualitative Disclosure 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 December 31, 2002, the Company had cash and cash equivalents of $498,000 compared to $215,000 as of September 30, 2002.  When the Company has repaid any borrowings outstanding under its line of credit and has excess cash, then the Company has historically invested 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 and purchases its inventory 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.

 

The Company borrows from time to time under its revolving operating line of credit.  Any borrowings outstanding under the line of credit bear interest at a variable rate based on the prime rate.  The Company is not a party to interest rate swaps or caps.

 

Item 4.    Controls and Procedures

 

The Company’s Chairman and Chief Executive Officer and the Chief Financial Officer have reviewed the disclosure controls and procedures relating to the Company within the 90 days preceding the date of this report and concluded that such controls and procedures are effective to make known to them all material information about the financial and operational activities of the Company.  There were no deficiencies identified in such controls or procedures and there have been no changes in such controls and procedures since such evaluation that could significantly affect their effectiveness.

 

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PART II.  OTHER INFORMATION

 

 

Item 6.    Exhibits and Reports on Form 8-K

 

 

	(a) Exhibits
		10.19		Amendment dated January 30, 2003 to Loan Agreement and Note dated March 15, 2002 between the Company and U.S. Bank National Association
		99.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
		99.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002
	(b) Reports on Form 8-K
		None

 

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SIGNATURES

 

 

Pursuant to the requirements 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.
	/s/ Joseph K. O’Brien
	Joseph K. O’Brien
	Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)
Dated:  February 12, 2003

 

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CERTIFICATION

 

I, Keith A. Peterson, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Phoenix Gold International, Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)                   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

(c)                    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)                    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b)                   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

February 12, 2003
	/s/  Keith A. Peterson
	Chairman and Chief Executive Officer (Principal Executive Officer)

 

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CERTIFICATION

 

I, Joseph K. O’Brien, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Phoenix Gold International, Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(d)                   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(e)                    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

(f)                      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(c)                    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(d)                   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

February 12, 2003
	/s/  Joseph K. O’Brien
	Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

 

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INDEX TO EXHIBITS

 

 

Exhibit
10.19		Amendment dated January 30, 2003 to Loan Agreement and Note dated March 15, 2002 between the Company and U.S. Bank National Association
99.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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