United States
Securities and Exchange Commission
Washington, D.C. 20549
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF |
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For the fiscal year ended September 28, 2003 |
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TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF |
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For the transition period from to |
Commission file number 000-25866
PHOENIX GOLD INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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OREGON |
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93-1066325 |
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(State or
other jurisdiction |
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(I.R.S.
Employer |
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9300 NORTH DECATUR STREET, PORTLAND, OREGON |
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97203 |
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(Address of principal executive offices) |
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(Zip code) |
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(503) 286-9300 |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the 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 ý No o
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 into Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the common stock held by non-affiliates of the registrant was $823,448 as of March 28, 2003.
There were 3,006,945 shares of the registrant’s common stock outstanding as of November 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of registrant’s proxy statement dated on or about January 5, 2004 prepared in connection with the annual meeting of shareholders to be held on February 3, 2004 are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
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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; the adverse effect of reduced discretionary consumer spending; dependence on a significant customer; potential fluctuations in quarterly results and seasonality; fixed operating expenses relative to revenues; 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 limited trading volume 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 28, 2003 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”), an Oregon corporation founded in 1991, designs, manufactures, markets and sells innovative, high quality and high performance electronics, accessories and speakers for the audio market. The Company sells its products under the brand names Phoenix Gold®, Carver ProfessionalÔ and AudioSource®. The Company’s products are used in car audio, professional sound and home audio/theater applications. The Company manufactures certain electronics and accessories at its facility in Portland, Oregon.
The Company has expanded beyond its historical product line, car audio accessories, to sell today substantially all of the components used in car audio systems (other than “head units” such as radios, tape decks and CD players). 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 also designs and sells electronics, accessories and speakers for OEM customers.
In November 1995, the Company expanded its product line and distribution channels by acquiring 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 sales to OEM customers.
In the past, Phoenix Gold has sold its products primarily through independent sales representatives and distributors to car audio, professional sound and specialty retailers in the United States and in more than 40 countries worldwide. In December 2000, the Company added an additional product line and significant additional distribution channels with the acquisition of AudioSource, Inc. (“AudioSource”). Under the AudioSource brand, the Company designs, markets and sells home audio/theater products. These products include residential
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compact speakers, powered subwoofers, amplifiers, preamplifiers, equalizers and surround sound processors used in home theater and home audio applications. AudioSource sold its products primarily to “big box” retailers, and was also a supplier to several Internet retailers. As a result of the acquisition, the Company gained an entrée to, and has sold products directly to, retailers such as Sears, Roebuck and Co., Best Buy Co., Inc. and Costco Wholesale Corporation. The AudioSource acquisition was part of the Company’s strategy to broaden its product lines and distribution channels to increase sales.
Products
The Company has three product lines: electronics, accessories and speakers. The Company’s sales by product class are as follows:
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Year ended September 30, |
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2003 |
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2002 |
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2001 |
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Product class: |
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Electronics |
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52.4 |
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51.8 |
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53.8 |
% |
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Accessories |
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18.1 |
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23.0 |
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25.5 |
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Speakers |
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26.7 |
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23.3 |
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17.9 |
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Other |
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2.8 |
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1.9 |
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2.8 |
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Total |
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100.0 |
% |
100.0 |
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100.0 |
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Electronics. The Company’s amplifiers, signal processors and other electronics are designed to deliver sonic excellence, system flexibility and reliable performance.
Amplifiers. The Company sells a total of 23 car audio amplifiers in the Titanium, Tantrum and Octane-R series at retail prices ranging from approximately $160 to $1,700. Amplifiers in the Titanium series, introduced in 1999 and expanded in 2002, are the Company’s reference amplifiers, designed to deliver maximum performance in expensive, high-end systems capable of driving multiple speakers. The Tantrum series, introduced in 2001, 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 Octane-R series, introduced in 2003, is designed to provide high performance at even lower prices. The Octane-R series of amplifiers, replaced the QX series, and incorporates “tuner” inspired attributes with street racing cosmetics. The Octane-R series is the second series of car audio amplifiers to be designed and engineered by the Company and manufactured by a third party vendor.
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,” “Bandit 1895,” “Reactor,” and “Octane.” Retail prices range from approximately $500 to $2,500.
The Company sells a total of 20 Carver Professional amplifiers for professional sound applications in the ZR, PM, PT, CV and PXm series at retail prices ranging from approximately $535 to $2,780. The ZR series, introduced in 2002, utilizes high efficiency, spread spectrum, switching digital technology developed initially for the CV series. The ZR series was designed for multiple purposes, including instrument amplification, fixed installations and touring applications and replaces the PM series. The PT series was designed specifically for the touring sound industry for ease of transportability and use in a variety of settings. The CV contractor series, introduced in 2001, also utilizes switching digital technology. The CV series amplifiers were designed for commercial and industrial applications, such as churches, warehouses, educational facilities and auditoriums. The PXm series, introduced in 1998, includes multi-application models that offer increased features and power, including greater ease of transportability, at entry-level
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price points. Due to the introduction of the ZR series of professional amplifiers in 2002, the Company expects the PM series will not provide meaningful revenue in the future.
The Company sells a total of six AudioSource amplifiers for home audio/theater use in a “modular” series and “separates” series at retail prices ranging from approximately $180 to $600. The modular series features a rack mountable chassis that allows the user flexibility to mix and match an amplifier, a preamplifier, and a mono or stereo equalizer in a single chassis. The separates series was designed to place an amplifier, preamplifier and tuner in a single cabinet.
Signal Processors. The Company sells a total of 17 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 car audio signal processors range from approximately $100 to $800. The Company sells a total of six AudioSource home audio signal processors, including preamplifiers and equalizers at retail prices ranging from $130 to $550.
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, carpet and textiles. The Company continually improves its 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 custom audio/video and home audio/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 35 car audio speakers in the Titanium, Tantrum-X and Octane-R series, including tweeters, midranges, subwoofers, coaxials and component systems. The Titanium series, introduced in 2001 and expanded in 2002, are the Company’s reference speakers, designed to deliver maximum performance in expensive, high-end systems. The Titanium subwoofer series features reproduction of tight, accurate bass in a small enclosure. The Tantrum-X series, also introduced in 2001 and updated in 2003, features exceptional musicality, excursion and versatility at lower price points. The Octane-R series, introduced in 2003, is the Company’s lowest price point speaker line. Retail prices of car audio speakers range from approximately $50 to $800. The Company sells a total of 16 home audio/theater speakers under the brand name of Phoenix Gold at retail prices ranging from approximately $50 to $650. The Company also sells a total of 16 AudioSource home audio/theater speakers at retail prices ranging from approximately $50 to $270.
Sales, Marketing and Distribution
The Company sells its products 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
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sales representatives, distributors, audio and specialty dealers and mass merchandisers. As a result of the AudioSource acquisition, the Company gained an entrée to, and has sold home audio/theater products directly to, retailers such as Sears, Roebuck and Co., Best Buy Co., Inc. and Costco Wholesale Corporation. The Company sells its products internationally through distributors serving over 40 countries. International sales accounted for 22.4%, 20.1% and 20.8% of net sales in fiscal years 2003, 2002 and 2001, respectively. International sales are denominated in United States dollars and are generally shipped f.o.b. the Company’s facility in Portland, Oregon.
No customer accounted for 10% or more of the Company’s net sales for the year ended September 30, 2003. One OEM customer, Bose Corporation (“Bose”), accounted for 12.8% and 10.7% of the Company’s net sales during the years ended September 30, 2002 and 2001, respectively. For the years ended September 30, 2003, 2002, and 2001, the Company’s five largest customers represented 29.5%, 31.7% and 29.7% of net sales. As of September 30, 2003, no customer accounted for 10% or more of net accounts receivable. As of September 30, 2002, one customer accounted for 13.7% of net accounts receivable
Purchase orders from Bose have historically fluctuated significantly from quarter to quarter. Although the Company has continued to receive orders from Bose, the Company’s formal purchase agreement with Bose expired in March 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 new purchase agreement with Bose on acceptable terms or that purchases will be made by Bose under any agreement. 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 and home audio sales representatives or distributors or its professional sound distributors and home audio dealers. To the extent the Company has written agreements with its car audio dealers and professional sound representatives and dealers, such agreements 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 audio/theater products by participating in trade shows, advertising in trade journals and magazines, and providing dealer support.
The car and home audio markets are both somewhat seasonal, with the majority of car audio sales normally occurring in the period March through September and the majority of home audio sales normally occurring in the period September through March. Historically, the Company’s sales were 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
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acquisition of the AudioSource product line in fiscal 2001, the Company’s sales in fiscal 2001, 2002 and 2003 have increased in the home audio market. Although the business is somewhat less seasonal, 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. In addition, backlog as of a 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 and to cancellation without penalty at the option of the customer.
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 car audio electronics competitors include JL Audio, Inc. (“JL Audio”), Lightning Audio, Inc. (“Lightning”), a subsidiary of Rockford Corporation (“Rockford”), MTX Corporation (“MTX”), Rockford Fosgate, a division of Rockford, and Stillwater Design and Audio, Inc. (“Stillwater”). The Company’s principal accessories competitors include Esoteric Audio USA Group of Companies, a subsidiary of MTX, Lightning, Monster Cable Products, Inc. (“Monster Cable”), Stinger Electronics (“Stinger”), a subsidiary of AAMP of Florida, Inc. (“AAMP of America”), and Rockford. The Company’s principal professional sound competitors include Crest Audio, Inc., Crown International, Inc., a subsidiary of Harman International Industries, Inc., and QSC Audio Products, Inc. The Company’s principal car audio speaker competitors include Boston Acoustics, Inc., JL Audio, Lightning, MB Quart Electronics USA, Inc., a subsidiary of Rockford, MTX, Rockford and Stillwater. The Company’s principal home audio competitors include many international suppliers of consumer electronics who target entry-level price points and domestic suppliers such as KLH Audio Systems, Monster Cable and Stinger. Many competitors have greater financial and other resources than the Company. The Company competes principally on the basis of innovation, breadth of product line, quality and reliability of products, name recognition, merchandising, distribution organization and price.
Manufacturing and Assembly
Manufactured Products. The Company manufactures certain electronics and 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, 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 140 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.
While the Company has historically attempted to ensure quality and control costs by manufacturing many of its electronic and accessory products, the Company has been in the process of shifting the manufacturing of certain components, subassemblies and finished products offshore to suppliers meeting Company standards. Such outsourcing allows the Company to target lower retail price points in connection with sales to consumer electronic retailers. The Company will continue to manufacture “Made in USA” products. However, the
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Company expects that outsourcing will continue to increase and will permit the Company to broaden its product offerings and increase sales at acceptable margins.
Distributed Accessories. The Company distributes accessories, many of which are manufactured to its design specifications by third parties in Asia. Substantially all distributed accessories are subjected to quality control procedures at the Company’s facility and are marketed under the Phoenix Gold tradename.
Designed Speakers. The Company’s speakers are manufactured by third parties in the United States, Europe 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 two-year limited warranty on car audio electronics and 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 a ninety-day limited warranty on speakers. The Company offers a five-year limited warranty on professional sound electronics and offers a two-year limited warranty on home audio electronics and speakers.
Intellectual Property
Phoenix Gold ®, PG (Phoenix Gold and Design) ®, Carver Professional Ô, AudioSource ®, PowerFlow Ô, QuickSilver Ô, Sapphire Ô, Sonab ®, and ZEROpoint Ô 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 eleven design patents related to its products, which expire between 2010 and 2015. Carver Corporation has taken the position that the Company’s exclusive, paid-up license to use the name Carver Professional expired 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.
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Employees
As of September 30, 2003, the Company had 114 full-time employees, including 70 in manufacturing and warehousing, 22 in sales and marketing, 12 in engineering and 10 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 15,000 square feet of office space and 140,000 square feet of manufacturing and warehouse space are used by the Company. Annual rent for the Company’s facility is approximately $578,000 plus an annual escalator of 2.5%. The lease expires on June 30, 2009. The Company has an option to extend the lease for one ten-year term. The Company believes that its existing facilities are adequate to meet its needs for the foreseeable future and that, if needed, suitable additional or alternative space will be available on commercially reasonable terms.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The Company’s Common Stock began trading on the Over-The-Counter (“OTC”) Bulletin Board on August 20, 2003 under the symbol “PGLD”. From October 5, 1998 through August 19, 2003, the Company’s Common Stock was traded on The Nasdaq SmallCap Market.
As reported by the OTC Bulletin Board and Nasdaq, the following table sets forth the range of high and low closing bid prices per share by quarter for the Company’s Common Stock.
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Fiscal year ended |
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Fiscal year ended |
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Common Stock (PGLD) |
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High |
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Low |
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High |
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Low |
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First Quarter |
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$ |
2.21 |
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$ |
1.51 |
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$ |
1.15 |
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$ |
0.96 |
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Second Quarter |
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1.86 |
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1.09 |
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1.42 |
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1.00 |
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Third Quarter |
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1.46 |
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1.06 |
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2.70 |
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1.50 |
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Fourth Quarter |
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1.70 |
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1.15 |
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2.35 |
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1.67 |
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The OTC market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
At November 30, 2003, the approximate number of shareholders of record of the Common Stock was 129.
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 agreement does not expressly limit or prohibit the Company’s ability to declare and pay dividends, although covenants contained in such agreement related to a minimum level of tangible net worth, a minimum ratio of current assets to current liabilities and a maximum ratio of liabilities to tangible net worth may have such effect.