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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 26, 1999
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9300 NORTH DECATUR STREET, PORTLAND, OREGON 97203
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(Address of principal executive offices) (Zip code)
(503) 286-9300
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(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 $1,708,355 as of November 30, 1999.
There were 3,085,445 shares of the registrant's common stock outstanding as of
November 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of registrant's proxy statement dated on or about January 5, 2000 prepared
in connection with the annual meeting of shareholders to be held on February 15,
2000 are incorporated by reference into Part III of this report.
1
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 7
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 8
ITEM 6. SELECTED FINANCIAL DATA 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 8. FINANCIAL 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 13
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 14
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; 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; costs or expenditures
associated with remediating potential Year 2000 issues; and, environmental
regulation as well as other factors discussed in Exhibit 99.1 here to 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
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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.
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 23 car audio amplifiers in the
ZEROpoint ZXti, ZPA, ZX, XS and QX series at retail prices ranging from
approximately $180 to $1,650. Amplifiers in the ZEROpoint ZXti, ZPA and ZX
series, introduced between 1999 and 1996, 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. Retail
prices range from approximately $500 to $2,500.
The Company sells a total of 19 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.
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 900 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
4
replacement accessories. The Company is a single source from which its dealers
and distributors can purchase all of the accessories necessary to install the
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 43 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 27.1%, 32.4% and 39.2% of net sales in fiscal
years 1999, 1998 and 1997, 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 during
fiscal 1999, 1998 or 1997. As of September 30, 1999 and 1998, one customer
accounted for 15.0% and 15.5% of total accounts receivable.
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
5
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.
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, 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. and Rockford Fosgate, a division of Rockford Corp.
("Rockford"). 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 Design
and Audio, Inc. 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 and distribution organization, and price. The Company believes it
competes favorably with respect to each of these factors.
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 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. 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.
6
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 with its 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
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, 1999, the Company had 202 full-time employees,
including 167 in manufacturing, engineering and warehousing, 23 in sales and
marketing and 12 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
remaining 42,500 square feet of office, manufacturing and warehouse space are
subleased by the Company to a third party through January 2000. Annual rent for
the Company's facility is approximately $520,800 plus an annual
7
escalator of 2.5%. The lease expires 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.
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. A gain of $981,000 was deferred and will be
recognized over the ten-year lease term as a reduction in rent expense.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------
None.
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 in 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. 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, 1999 September 30, 1998
--------------------- ---------------------
Common Stock (PGLD) High Low High Low
- ------------------- ---------- --------- --------- ---------
First Quarter $ 2.063 $ 1.00 $ 6.50 $ 3.75
Second Quarter 4.25 1.375 3.938 2.75
Third Quarter 2.813 1.75 3.813 2.438
Fourth Quarter 2.938 2.125 2.563 1.75
At November 30, 1999, the approximate number of shareholders of record of
Common Stock was 140.
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
and minimum ratios of current assets to current liabilities and debt service
coverage may have such effect.
8
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------
As of or for the year ended September 30,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
OPERATING DATA:
Net sales $ 27,538,149 $ 26,484,715 $ 27,798,728 $ 26,563,142 $ 20,173,822
Net earnings (loss) (1) 854,129 (772,374) 410,095 (1,269,142) 1,881,277
Earnings (loss) per share
Basic $ 0.26 $ (0.22) $ 0.12 $ (0.37) $ 0.70
Diluted 0.26 (0.22) 0.12 (0.37) 0.67
Average shares outstanding
Basic 3,293,758 3,464,698 3,456,278 3,449,068 2,672,129
Diluted 3,293,758 3,464,698 3,535,288 3,449,068 2,798,877
BALANCE SHEET DATA:
Working capital $ 9,839,492 $ 8,020,615 $ 7,278,373 $ 6,033,190 $ 8,821,267
Total assets 13,888,439 15,208,128 17,455,149 19,832,527 14,509,249
Line of credit - 900,000 3,147,936 4,278,983 -
Long-term obligations - 938,233 494,927 171,995 286,189
Total shareholders' equity 10,958,906 10,497,602 11,243,019 10,788,998 12,013,188
Book value per share $ 3.39 $ 3.03 $ 3.25 $ 3.12 $ 3.49
(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 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%. The Company
believes international sales for fiscal 2000 to remain at levels lower than
historically achieved.
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.
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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.
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.
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.
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).
COMPARISON OF FISCAL 1998 TO FISCAL 1997
NET SALES. Net sales decreased $1.3 million, or 4.7%, to $26.5 million for
fiscal 1998 compared to $27.8 million for fiscal 1997, due principally to
decreased international sales. Domestic sales increased $1.0 million, or 6.0%,
to $17.9 million for fiscal 1998 compared to $16.9 million for fiscal 1997.
International sales decreased $2.3 million, or 21.3%, to $8.6 million for fiscal
1998 compared to $10.9 million for fiscal 1997. International sales accounted
for 32.4% and 39.2% of net sales in fiscal 1998 and fiscal 1997, respectively.
Sales of electronics, speakers and accessories decreased 2.0%, 10.9% and 5.3%,
respectively, in fiscal 1998 compared to fiscal 1997.
GROSS PROFIT. Gross profit increased to 24.7% of net sales in fiscal 1998
from 24.5% in fiscal 1997. The increase was primarily due to an increased
percentage of domestic versus international sales.
OPERATING EXPENSES. Operating expenses increased $1.8 million, or 31.6%, to
$7.4 million in fiscal 1998 compared to $5.7 million in fiscal 1997. Operating
expenses were 28.1% and 20.4% of net sales in fiscal 1998 and fiscal 1997,
respectively.
10
Selling expenses increased $700,000, or 21.0%, to $4.0 million in fiscal
1998 compared to $3.3 million in fiscal 1997. Selling expenses were 15.2% and
12.0% of net sales in fiscal 1998 and fiscal 1997, respectively. The increase
was primarily due to increased promotional, advertising and trade show expenses
to support sales of existing products and the introduction of new products, and
increased domestic sales incentive programs reflecting increased domestic sales
volume.
General and administrative expenses increased $200,000, or 9.0%, to $2.5
million in fiscal 1998 compared to $2.3 million in fiscal 1997. General and
administrative expenses were 9.6% and 8.4% of net sales in fiscal 1998 and
fiscal 1997, respectively. The increase was due principally to increased bad
debt expense, higher legal expense and increased engineering expense.
In fiscal 1998, the Company took one-time, non-recurring charges of $1.1
million 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
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 $233,000 write-down of
inventories, which is included in cost of sales. 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. Future cash payments were not material and were paid by the end of
the first quarter of fiscal 1999. 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 $159,000, or
33.7%, to $314,000 in fiscal 1998 from $473,000 in fiscal 1997, primarily as a
result of lower average debt levels during fiscal 1998 due to the reduction of
debt and lower interest rates on the outstanding borrowings.
NET EARNINGS (LOSS). The decrease in international sales and increase in
operating expenses, including the non-recurring charges, contributed to a net
loss in fiscal 1998 of $772,000, or $0.22 per share - basic and diluted (based
on 3.46 million shares outstanding), compared to net earnings in fiscal 1997 of
$410,000, or $0.12 per share - basic and diluted (based on 3.54 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 1999, 1998 and 1997 principally from funds generated from operating
activities. Net cash provided by operating activities in fiscal 1999, 1998 and
1997 was $1.7 million, $2.3 million and $945,000, respectively. When cash flow
from operations 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 resulted in low reported cash balances in fiscal
1998 and 1997.
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. A gain of $981,000 was deferred.
11
The net cash proceeds were used to repay $990,000 in remaining long-term
obligations and generated pre-tax cash of $915,000.
During fiscal 1999, cash and cash equivalents increased $866,000, accounts
receivable increased $507,000, inventories decreased $1.3 million, accounts
payable decreased $706,000 and line of credit decreased $900,000, leading to an
increase in working capital of $1.8 million. The increase in cash and cash
equivalents is a result of the facility purchase, sale and leaseback and cash
generated from operations. The increase in accounts receivable was due to
increased net sales. The decreases in inventories and accounts payable is a
result of management efforts to increase cash flow from operations in order to
reduce short and long-term bank borrowings.
Capital expenditures were $304,000, $343,000 and $483,000 in fiscal years
1999, 1998 and 1997, respectively. These expenditures related primarily to
manufacturing automation and the acquisition of equipment for use by the
Company's administration, engineering and marketing departments. The Company
does not expect capital expenditures to exceed $400,000 in fiscal 2000. The
anticipated expenditures will be financed from available cash, cash provided by
operations and, if necessary, proceeds from a line of credit. The Board of
Directors has also authorized the Company to purchase up to $1.0 million of
Company common stock. The Company purchased 230,400 shares of common stock
during fiscal 1999 at an aggregate cost of $393,000. The purpose of the stock
repurchase program is to help the Company achieve its long-term goal of
enhancing shareholder value.
A $5.5 million revolving operating line of credit is available through
December 31, 1999. Interest on the borrowings is equal to the bank's prime
lending rate (8.25% at September 30, 1999) or LIBOR plus an additional
percentage. Borrowings under the line of credit are limited to eligible accounts
receivable and inventories, and are subject to certain additional limits.
Borrowings under the line of credit are secured by accounts receivable,
inventories and certain other assets. The line of credit contains covenants
which require a minimum level of tangible net worth and minimum ratios of
current assets to current liabilities and debt service coverage. As of September
30, 1999, the Company was eligible to borrow $5.3 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, 1999.
YEAR 2000 CONVERSION
Many computer programs use only two digits to identify a year in a date
field within the program (e.g. "99" or "01"). If not corrected, computer
applications may fail or cause incorrect results by or at the year 2000. The
Company has substantially completed the process of preparing its computer
systems and applications for the Year 2000 date conversion. The process included
a review of information systems used in the Company's internal business as well
as by third party vendors, its bank, component and speaker manufacturers and
other suppliers. The Company's products do not include embedded technology, such
as microcontrollers. The Company's third party interfaces, such as those with
its vendors and customers, are not computerized, and the Company's information
systems utilize standard, ready available business software. The Company is
still assessing the potential cost of any required conversion of its phone and
voice-mail system. However, at this time, the Company believes the effect of the
Year 2000 conversion on its business will not be material.
12
Information systems determined not to be Year 2000 compliant were modified,
upgraded or replaced through acquisition and implementation of "off the shelf"
upgrades to existing information system software. The upgrades were acquired
from third party vendors at a cost of less than $20,000.
There can be no assurance, however, because of the existence of numerous
systems and related components within the Company and the interdependency of
these systems, that certain systems at the Company, or systems at entities that
provide services or goods for the Company, will operate in the Year 2000. The
Company is continuing to evaluate the risks to the Company of failure to be Year
2000 compliant and expects to complete a contingency plan prior to year end.
Although there can be no assurance, the failure of a system at the Company or at
an entity that provides services and goods to the Company is not expected to
have a material impact on future operating results, financial condition or cash
flows.
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, 1999, the Company had cash and cash equivalents of
$868,000 compared to $3,000 as of September 30, 1998. The Company invests its
excess cash in highly liquid marketable securities with maturities of three
months or less at date of purchase. The Company does not invest in derivative
securities.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------------
This is hereby incorporated by reference the information under the
captions "Proposal 1: Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of 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 26, 1999.
13
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------
This is hereby incorporated by reference the information under the caption
"Proposal 1: Election of Directors" of 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 26, 1999.
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" of 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 26, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
Articles of Incorporation and Bylaws
------------------------------------
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) Restated Bylaws (incorporated by reference to Exhibit 3(ii) to
Registration Statement on Form SB-2 effective May 3, 1995
(Registration No. 93-90588))
Instruments Defining Rights of Security Holders
-----------------------------------------------
4 Articles 2, 5 and 6 of Exhibit 3(i) and Article 6 of Exhibit 3(ii)
are incorporated herein by reference
14
Material Contracts
------------------
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 Lease Agreement between the Company and BB&S Development Company
dated February 2, 1994 (incorporated by reference to Exhibit 10.2
to Registration Statement on Form SB-2 effective May 3, 1995
(Registration No. 93-90588))
10.4 Amendment dated January 12, 1996 to Lease Agreement between the
Company and BB&S Development Company dated February 2, 1994
(incorporated by reference to Exhibit 10.1 to Form 10-QSB filed
with the Securities and Exchange Commission for the quarterly
period ended December 31, 1995)
10.5 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)
10.6 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)
10.7 Third Amendment 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)
10.8 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))
10.9 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)
15
10.10 Master Equipment Lease Agreement dated July 15, 1998 between the
Company and First Security Leasing Company (incorporated by
reference to Exhibit 10.18 to Form 10-Q filed with the Securities
and Exchange Commission for the quarterly period ended June 30,
1998)
10.11 Lease Schedule to Master Equipment Lease Agreement dated July 15,
1998 between the Company and First Security Leasing Company
(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, 1998)
10.12 Loan Agreement dated December 18, 1998 between the Company and
U.S. Bank National Association (incorporated by reference to
Exhibit 10.1 to Form 10-Q filed with the Securities and Exchange
Commission for the quarterly period ended December 31, 1998)
10.13 Promissory Note dated December 28, 1998 made by the Company in
favor of U.S. Bank National Association (incorporated by
reference to Exhibit 10.2 to Form 10-Q filed with the Securities
and Exchange Commission for the quarterly period ended December
31, 1998)
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)
10.15 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)
10.16 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)
10.17 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)
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
(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, 1999 and 1998 20
Statements of Operations
for the Three Years Ended September 30, 1999 21
Statements of Shareholders' Equity
for the Three Years Ended September 30, 1999 22
Statements of Cash Flows
for the Three Years Ended September 30, 1999 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, 1999 and 1998, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Portland, Oregon
November 5, 1999
19
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 868,458 $ 2,602
Accounts receivable, net 4,794,799 4,287,965
Inventories 5,620,835 6,886,720
Prepaid expenses 213,677 169,621
Deferred taxes 315,000 446,000
------------ ------------
Total current assets 11,812,769 11,792,908
Property and equipment, net 1,055,531 2,522,005
Goodwill, net 178,081 217,702
Deferred taxes 600,000 567,000
Other assets 242,058 108,513
------------ ------------
Total assets $ 13,888,439 $ 15,208,128
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,074,881 $ 1,781,341
Line of credit - 900,000
Accrued payroll and benefits 436,970 420,209
Other accrued expenses 379,782 448,214
Income taxes payable 81,644 -
Current portion of long-term obligations - 222,529
------------ ------------
Total current liabilities 1,973,277 3,772,293
Long-term obligations - 938,233
Deferred gain on sale of facility 956,256 -
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none outstanding - -
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding - 3,234,345 and 3,464,745 shares 7,155,997 7,548,822
Retained earnings 3,802,909 2,948,780
------------ ------------
Total shareholders' equity 10,958,906 10,497,602
------------ ------------
Total liabilities and shareholders' equity $ 13,888,439 $ 15,208,128
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
20
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 1998 1997
-------------- ------------ ------------
Net sales $ 27,538,149 $ 26,484,715 $ 27,798,728
Cost of sales 20,415,267 19,950,805 20,981,845
------------- ------------ ------------
Gross profit 7,122,882 6,533,910 6,816,883
Operating expenses:
Selling 3,386,595 4,029,059 3,329,339
General and administrative 2,221,742 2,540,064 2,331,128
Non-recurring charges - 878,147 -
------------- ------------ ------------
Total operating expenses 5,608,337 7,447,270 5,660,467
------------- ------------ ------------
Income (loss) from operations 1,514,545 (913,360) 1,156,416
Other income (expense):
Interest expense (117,821) (323,530) (499,818)
Other income, net 20,405 9,516 26,497
------------- ------------ ------------
Total other income (expense) (97,416) (314,014) (473,321)
------------- ------------- ------------
Earnings (loss) before income taxes 1,417,129 (1,227,374) 683,095
Income tax benefit (expense) (563,000) 455,000 (273,000)
------------- ------------ ------------
Net earnings (loss) $ 854,129 $ (772,374) $ 410,095
============= ============ ============
Earnings (loss) per share:
Basic and diluted $ 0.26 $ (0.22) $ 0.12
============= ============ ============
Average shares outstanding:
Basic 3,293,758 3,464,698 3,456,278
============= ============ ============
Diluted 3,293,758 3,464,698 3,535,288
============= ============ ============
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, 1996 3,454,605 $ 7,477,939 $ 3,311,059 $ 10,788,998
Issuance of stock upon
exercise of options 4,380 20,498 - 20,498
Tax benefit of stock options - 23,428 - 23,428
Net earnings - - 410,095 410,095
------------ ---------------- --------------- ----------------
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
============ ================= =============== ================
SEE NOTES TO FINANCIAL STATEMENTS
22
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Year Ended September 30,
-------------------------------------------------------------
1999 1998 1997
--------------- ---------------- ----------------
Cash flows from operating activities:
Net earnings (loss) $ 854,129 $ (772,374) $ 410,095
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 905,029 1,036,627 985,401
Deferred taxes 98,000 (402,000) 144,761
Non-recurring charges - 878,147 -
Changes in operating assets and liabilities:
Accounts receivable (506,834) 898,665 (67,270)
Inventories 1,265,885 292,100 1,792,740
Prepaid expenses (44,056) (24,936) 38,254
Other assets (177,603) (13,953) (69,964)
Accounts payable (706,460) 222,592 (1,970,701)
Accrued expenses (51,671) 178,574 (215,562)
Income taxes payable 81,644 - (102,356)
--------------- ---------------- ----------------
Net cash provided by operating activities 1,718,063 2,293,442 945,398
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 (303,675) (342,630) (446,540)
--------------- ---------------- -----------------
Net cash provided by (used in) investing activities 1,601,380 (342,630) (446,540)
Cash flows from financing activities:
Line of credit, net (900,000) (2,247,936) (1,131,047)
Proceeds from long-term obligations - 1,125,000 800,000
Repayment of long-term obligations (1,160,762) (854,834) (211,733)
Purchase of common stock (392,825) - -
Proceeds from exercise of stock options - 26,957 43,926
--------------- ---------------- ----------------
Net cash used in financing activities (2,453,587) (1,950,813) (498,854)
--------------- ---------------- ----------------
Increase (decrease) in cash and cash equivalents 865,856 (1) 4
Cash and cash equivalents, beginning of period 2,602 2,603 2,599
--------------- ----------------- -----------------
Cash and cash equivalents, end of period $ 868,458 $ 2,602 $ 2,603
=============== ================= =================
Supplemental disclosures:
Cash paid for interest $ 139,000 $ 334,000 $ 513,000
Cash paid for income taxes 460,000 44,000 222,000
Equipment financed by long-term obligations - - 36,168
SEE NOTES TO FINANCIAL STATEMENTS
23
PHOENIX GOLD INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Three Years Ended September 30, 1999
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.
REPORTING PERIODS. The Company's fiscal year is the 52 or 53 weeks ending
the last Sunday in September. Fiscal years 1999, 1998 and 1997 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
generally accepted accounting principles 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.
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 ten years) of the related assets. Leasehold
improvements and equipment under capital leases 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 $197,000 and
$157,000 as of September 30, 1999 and 1998.
FINANCIAL INSTRUMENTS AND FAIR VALUES. The carrying amounts reported in the
balance sheet for cash, accounts receivable, accounts payable, accrued expenses
and line of credit approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount for long-term debt
approximated its fair value because the related interest rates were comparable
to the rates then currently available for debt with similar terms and
maturities.
REVENUE RECOGNITION. Revenue is recognized upon shipment of the product.
24
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. In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
REPORTING COMPREHENSIVE INCOME. Phoenix Gold adopted SFAS No. 130 effective
October 1, 1998. There was no effect on the Company as a result of adopting SFAS
No. 130, as there were no differences between net earnings (loss) and
comprehensive income (loss) for the years ended September 30, 1999, 1998 and
1997.
SEGMENT INFORMATION. In June 1997, the FASB issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No.
131 established standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also established standards for related disclosures about products and services,
geographic areas and major customers. This statement superseded SFAS No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 became
effective for the year ended September 30, 1999. Phoenix Gold operates in a
single industry segment as described in Note 12. Adoption of SFAS No. 131 did
not result in any additional disclosures in the notes to financial statements
and had no impact on the financial statements.
PROSPECTIVE ACCOUNTING CHANGE. In June 1998, the FASB issued 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, 2002. Management has not yet completed an evaluation of the
effect this standard will have on the Company's financial statements.
NOTE 2 - NON-RECURRING CHARGES
Non-recurring charges consist of the following:
1999 1998 1997
----------- ------------- ----------
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:
1999 1998
------------------- --------------------
Accounts receivable $ 5,069,799 $ 4,587,965
Allowance for doubtful accounts (275,000) (300,000)
------------------- --------------------
Total accounts receivable, net $ 4,794,799 $ 4,287,965
=================== ====================
NOTE 4 - INVENTORIES
Inventories consist of the following:
1999 1998
------------------- --------------------
Raw materials and work-in-process $ 2,531,260 $ 2,740,639
Finished goods 3,063,566 4,058,828
Supplies 26,009 87,253
------------------- --------------------
Total inventories $ 5,620,835 $ 6,886,720
=================== ====================
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1999 1998
------------------- --------------------
Machinery, equipment and vehicles $ 4,717,198 $ 4,526,903
Leasehold improvements 3,829 1,527,834
Construction in progress - 46,835
------------------- --------------------
4,721,027 6,101,572
Less accumulated depreciation
and amortization (3,665,496) (3,579,567)
------------------- --------------------
Total property and equipment, net $ 1,055,531 $ 2,522,005
=================== ====================
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. A gain of $981,000 was deferred and will be
recognized 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 - LINE OF CREDIT
A $5.5 million revolving operating line of credit is available through
December 31, 1999. Interest on the borrowings is equal to the bank's prime
lending rate (8.25% at September 30, 1999) or LIBOR plus an additional
percentage. Borrowings under the line of credit are limited to eligible accounts
receivable and inventories and are subject to certain additional limits.
Borrowings under the line of credit are secured by accounts receivable,
inventories and certain other assets. The line of credit contains covenants
which require a minimum level of tangible net worth and minimum ratios of
current assets to current liabilities and debt service coverage. As of September
30, 1999, the Company was eligible to borrow $5.3 million under the line of
credit. No borrowings were outstanding under the line of credit as of that date.
Borrowings as of September 30, 1998 were $900,000 and bore interest at 7.94%.
A $350,000 note payable to Carver Corporation related to the acquisition of
the professional sound division was paid in full in 1997. The note bore interest
at a rate of 6%.
NOTE 7 - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1999 1998
------------------- -----------------
Capital lease obligations, paid in full $ - $ 1,127,775
Term note, payable in monthly installments,
including interest at 5.9%, paid in full - 27,586
Term note, payable in monthly installments,
including interest at 9.0%, paid in full - 5,401
------------------- -----------------
- 1,160,762
Less current portion - (222,529)
------------------- -----------------
Total long-term obligations $ - $ 938,233
=================== =================
During July 1998, the Company completed a $1,125,000 five-year lease
financing at an interest rate of 8.25% which was repaid in July 1999.
27
NOTE 8 - 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,
2000 $ 524,000
2001 537,000
2002 550,000
2003 564,000
2004 578,000
Thereafter 2,951,000
--------------
Total $ 5,704,000
==============
Rent expense under operating leases for the three years ended September 30,
1999, 1998 and 1997 was $255,000, $365,000 and $333,000.
NOTE 9 - TAXES
Income tax benefit (expense):
1999 1998 1997
------------------ ------------------ -----------------
Current:
Federal $ (412,000) $ 47,000 $ (112,000)
State (53,000) 6,000 (16,239)
------------------ ------------------ -----------------
Total current (465,000) 53,000 (128,239)
Deferred:
Federal (87,000) 368,000 (127,000)
State (11,000) 34,000 (17,761)
------------------ ------------------ ------------------
Total deferred (98,000) 402,000 (144,761)
------------------ ------------------ ------------------
Total $ (563,000) $ 455,000 $ (273,000)
================== ================== ==================
Effective income tax rates are as follows:
1999 1998 1997
----------------- ---------------- -----------------
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) (1.6)
----------------- ---------------- -----------------
Total (39.7%) 37.1% (40.0%)
================= ================ =================
28
The tax effects of temporary differences which give rise to deferred tax
assets and deferred tax liabilities are as follows:
1999 1998
------------- --------------
Deferred tax liability - depreciation $ (133,000) $ (72,000)
Deferred tax assets:
Accrued expenses 138,000 286,000
Deferred gain on sale of facility 367,000 -
Goodwill and other intangibles 366,000 550,000
Inventory valuation 177,000 249,000
-------------- ---------------
Total deferred tax assets 1,048,000 1,085,000
-------------- ---------------
Net deferred taxes $ 915,000 $ 1,013,000
============== ===============
Current deferred tax asset $ 315,000 $ 446,000
Long-term deferred tax asset 600,000 567,000
-------------- ---------------
Net deferred taxes $ 915,000 $ 1,013,000
=============== ===============
NOTE 10 - 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 $63,000, $77,000
and $10,000 for the years ended September 30, 1999, 1998 and 1997.
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, 1999,
1998 and 1997.
NOTE 11 - 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.
29
Information relating to option activity for the Stock Option Plan is set
forth below:
Outstanding Options Exercisable
----------------------------- -----------------------------
Weighted Weighted
Shares Number Average Number Average
Available Of Exercise of Exercise
for Option Shares Price Shares Price
------------ ----------- ---------- ------------ ------------
September 30, 1996 209,530 295,865 $ 5.06 161,764 $ 4.97
Granted (239,545) 239,545 5.34
Exercised - (4,380) 4.68
Canceled 38,930 (38,930) 6.28
------------ -----------
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
============ ===========
The following table summarizes information about stock options outstanding
under the Stock Option Plan at September 30, 1999:
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 2,800 4.4 $ 3.125 - $ 3.125
$ 4.00 - $ 4.75 237,575 5.1 4.67 196,908 4.68
$ 5.15 - $ 5.50 88,000 3.4 5.31 73,200 5.27
$ 11.75 1,400 1.3 11.75 1,400 11.75
----------- -------------- ---------- ---------- --------------
329,775 4.6 $ 4.85 271,508 $ 4.87
=========== ============== =========== ========== ==============
At September 30, 1999 and 1998, there were outstanding warrants to purchase
up to 110,000 shares of common stock at $8.10 per share. Such warrants became
exercisable on May 4, 1996 and expire on May 3, 2000.
30
At September 30, 1999, nonqualified options to purchase 5,000 and 1,400
shares of common stock were outstanding at $4.63 and $3.125 per share. Such
options become exercisable ratably over a three-year period and expire in 2007
and 2004. At September 30, 1999, Phoenix Gold has reserved 611,655 shares of
common stock for issuance upon exercise of the stock options and warrants.
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, 1999
and 1998 using the Black-Scholes option pricing model. The weighted average
estimated fair value of options granted during 1999, 1998 and 1997 was $2.09,
$2.45 and $4.52 per share. The weighted average assumptions used for stock
option grants during the years ended September 30, 1999, 1998 and 1997 were a
risk free interest rate of 5.00%, 5.75% and 6.25%, an expected dividend yield of
0%, 0% and 0%, an expected life of 5.0 years, 5.0 years and 7.1 years and an
expected volatility of 79.0%, 67.8% and 94.6%.
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.
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:
1999 1998 1997
----------- ---------- ----------
Pro forma net earnings (loss) $ 789,000 $ (781,000) $ 306,000
Pro forma earnings (loss) per share 0.24 (0.23) 0.09
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 authorizes 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. The Company purchased 230,400 shares
of common stock in 1999 at an aggregate cost of $392,825.
31
NOTE 12 - 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:
1999 1998 1997
--------------- -------------- -------------
United States $ 20,078,164 $ 17,903,217 $ 16,894,741
International:
Europe 3,746,786 4,624,273 5,565,352
Asia 1,157,670 945,600 2,245,232
Other 2,555,529 3,011,625 3,093,403
--------------- -------------- -------------
Total international 7,459,985 8,581,498 10,903,987
--------------- -------------- --------------
Net sales $ 27,538,149 $ 26,484,715 $ 27,798,728
=============== ============== ==============
No customer accounted for 10% or more of the Company's net sales during the
years ended September 30, 1999, 1998 or 1997. As of September 30, 1999 and 1998,
one customer accounted for approximately 15.0% and 15.5% of total accounts
receivable.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of operating results by quarter for the years
ended September 30, 1999 and 1998:
1999 QUARTER ENDED DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 TOTAL
- ------------------ --------------- ------------ ------------ -------------- --------------
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
1998 QUARTER ENDED
Net sales $ 6,058,001 $ 6,613,495 $ 7,687,304 $ 6,125,915 $ 26,484,715
Gross profit 1,414,797 1,787,877 2,297,119 1,034,117 6,533,910
Net earnings (loss) (1) 3,002 67,995 269,535 (1,112,906) (722,374)
Earnings (loss) per share 0.00 0.02 0.08 (0.32) (0.22)
(1) See Note 2 to Financial Statements describing non-recurring charges.
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 10, 1999
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 10, 1999
- ---------------------- Chief Executive Officer
Keith A. Peterson (Principal Executive Officer)
/s/ Timothy G. Johnson Executive Vice President, December 10, 1999
- ---------------------- Chief Operating Officer and
Timothy G. Johnson Director
/s/ Joseph K. O'Brien Chief Financial Officer and December 10, 1999
- ---------------------- Secretary (Principal Financial
Joseph K. O'Brien and Accounting Officer)
/s/ Robert A. Brown Director December 10, 1999
- ----------------------
Robert A. Brown
/s/ Edward A. Foehl Director December 10, 1999
- ----------------------
Edward A. Foehl
/s/ Frank G. Magdlen Director December 10, 1999
- ----------------------
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