U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGEACT OF 1934
For the quarterly period ended December 26, 1999,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25866
PHOENIX GOLD INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-1066325
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9300 NORTH DECATUR STREET, PORTLAND, OREGON 97203
(Address of principal executive offices) (Zip code)
(503) 286-9300
(Registrant's telephone number, including area code)
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 [ ]
There were 3,049,445 shares of the issuer's common stock outstanding as of
January 31, 2000.
1
PHOENIX GOLD INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999
INDEX
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Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets at December 31, 1999
and September 30, 1999 (unaudited) 3
Statements of Earnings for the Three Months Ended
December 31, 1999 and 1998 (unaudited) 4
Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
INDEX TO EXHIBITS 13
2
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
(UNAUDITED)
December 31, September 30,
1999 1999
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 677,002 $ 868,458
Accounts receivable, net 4,342,707 4,794,799
Inventories 6,283,774 5,620,835
Prepaid expenses 274,676 213,677
Deferred taxes 315,000 315,000
-------------------- --------------------
Total current assets 11,893,159 11,812,769
Property and equipment, net 948,555 1,055,531
Goodwill, net 168,176 178,081
Deferred taxes 585,000 600,000
Other assets 266,002 242,058
-------------------- --------------------
Total assets $ 13,860,892 $ 13,888,439
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,485,439 $ 1,074,881
Accrued payroll and benefits 312,933 436,970
Other accrued expenses 284,667 379,782
Income taxes payable 135,644 81,644
-------------------- --------------------
Total current liabilities 2,218,683 1,973,277
Deferred gain on sale of facility 931,737 956,256
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none outstanding - -
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding - 3,078,445 and 3,234,345 shares 6,695,590 7,155,997
Retained earnings 4,014,882 3,802,909
-------------------- --------------------
Total shareholders' equity 10,710,472 10,958,906
-------------------- --------------------
Total liabilities and shareholders' equity $ 13,860,892 $ 13,888,439
==================== ====================
SEE NOTES TO FINANCIAL STATEMENTS
3
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
December 31,
----------------------------------------
1999 1998
------------------ ------------------
Net sales $ 6,893,627 $ 6,665,935
Cost of sales 5,092,858 4,944,883
------------------ ------------------
Gross profit 1,800,769 1,721,052
Operating expenses:
Selling 926,769 781,681
General and administrative 531,387 542,177
------------------ ------------------
Total operating expenses 1,458,156 1,328,858
------------------ ------------------
Income from operations 342,613 392,194
Other income (expense):
Interest expense - (48,858)
Other income, net 8,360 -
------------------ ------------------
Total other income (expense) 8,360 (48,858)
------------------ ------------------
Earnings before income taxes 350,973 343,336
Income tax expense (139,000) (137,000)
------------------ ------------------
Net earnings $ 211,973 $ 206,336
================== ==================
Earnings per share - basic and diluted $ 0.07 $ 0.06
================== ==================
Average shares outstanding - basic and diluted 3,156,721 3,436,261
================== ==================
SEE NOTES TO FINANCIAL STATEMENTS
4
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
----------------------------------
1999 1998
--------------- ---------------
Cash flows from operating activities:
Net earnings $ 211,973 $ 206,336
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 160,981 245,825
Deferred taxes 15,000 10,000
Changes in operating assets and liabilities:
Accounts receivable 452,092 (306,495)
Inventories (662,939) 565,208
Prepaid expenses (60,999) (84,817)
Other assets (36,944) -
Accounts payable 410,558 (583,986)
Accrued expenses (165,152) (226,414)
-------------- ---------------
Net cash provided by (used in) operating activities 324,570 (174,343)
Cash flows from investing activities:
Capital expenditures, net (55,619) (22,240)
--------------- ---------------
Net cash used in investing activities (55,619) (22,240)
Cash flows from financing activities:
Line of credit, net - 608,189
Repayment of long-term obligations - (55,209)
Purchase of common stock (460,407) (356,400)
--------------- ---------------
Net cash provided by (used in) financing activities (460,407) 196,580
--------------- ---------------
Decrease in cash and cash equivalents (191,456) (3)
Cash and cash equivalents, beginning of period 868,458 2,602
--------------- ---------------
Cash and cash equivalents, end of period $ 677,002 $ 2,599
=============== ===============
Supplemental disclosure:
Cash paid for interest $ - $ 50,000
Cash paid for income taxes
70,000 -
SEE NOTES TO FINANCIAL STATEMENTS
5
PHOENIX GOLD INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from these unaudited financial statements. These unaudited
financial statements should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-K for the year
ended September 30, 1999 filed with the Securities and Exchange Commission. The
results of operations for the three-month period ended December 31, 1999 are not
necessarily indicative of the operating results for the full year. In the
opinion of management, all adjustments, consisting only of normal recurring
accruals, have been made to present fairly the Company's financial position at
December 31, 1999 and the results of its operations and its cash flows for the
three-month periods ended December 31, 1999 and 1998.
NOTE 2 - REPORTING PERIODS
The Company's fiscal year is the 52-week or 53-week period ending the last
Sunday in September. Fiscal 2000 and fiscal 1999 are 52-week years and all
quarters are 13-week periods. For presentation convenience, the Company has
indicated in these financial statements that its fiscal year ended on September
30 and that the three months presented ended on December 31.
NOTE 3 - PROSPECTIVE ACCOUNTING CHANGE
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The new statement will require recognition of all
derivatives as either assets or liabilities on the balance sheet at fair value.
The new statement is effective for the year ending September 30, 2001.
Management has not yet completed an evaluation of the effect this standard will
have on the Company's financial statements.
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
December 31, September 30,
1999 1999
--------------------- ---------------------
Raw materials and work-in-process $ 2,700,594 $ 2,531,260
Finished goods and supplies 3,583,180 3,089,575
--------------------- ---------------------
Total inventories $ 6,283,774 $ 5,620,835
===================== =====================
6
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, September 30,
1999 1999
--------------------- ---------------------
Machinery, equipment and vehicles $ 4,748,414 $ 4,717,198
Leasehold improvements 28,232 3,829
--------------------- ---------------------
4,776,646 4,721,027
Less accumulated depreciation
and amortization (3,828,091) (3,665,496)
--------------------- ---------------------
Total property and equipment, net $ 948,555 $ 1,055,531
===================== =====================
NOTE 6 - LINE OF CREDIT
During December 1999, the Company renewed its revolving operating line of
credit through December 2000. The new agreement provides for borrowings of up to
$5.0 million subject to eligible accounts receivable and inventories and certain
additional limits. Interest on the borrowings is equal to the bank's prime
lending rate (8.5% at December 31, 1999) or LIBOR plus 1.75%. Borrowings under
the line of credit are secured by cash and cash equivalents, accounts receivable
and inventories. The line of credit contains covenants which require a minimum
level of tangible net worth, a minimum ratio of current assets to current
liabilities and a maximum ratio of interest bearing debt to tangible net worth.
As of December 31, 1999, the Company was eligible to borrow $5.0 million under
the line of credit. No borrowings were outstanding under the line of credit as
of that date.
NOTE 7 - SHAREHOLDERS' EQUITY
The Board of Directors has authorized the Company to purchase up to $1.0
million of Company common stock. During the three months ended December 31,
1999, the Company acquired 155,900 shares of its common stock for $460,000. From
the inception of the stock repurchase program, the Company has acquired $850,000
of Company common stock.
7
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net sales increased $228,000, or 3.4%, to $6.9 million for the three
months ended December 31, 1999 compared to $6.7 million for the three months
ended December 31, 1998 due principally to increased domestic sales. Domestic
sales increased $310,000, or 6.4%, to $5.1 million for the three months ended
December 31, 1999 compared to $4.8 million for the three months ended December
31, 1998. International sales decreased 4.5% to $1,762,000 for the three months
ended December 31, 1999, from $1,845,000 in the comparable 1998 period.
International sales represented 25.6% and 27.7% of net sales for the three
months ended December 31, 1999 and 1998, respectively. Sales of electronics and
speakers increased 9.3% and 60.0%, respectively for the three months ended
December 31, 1999 compared to the corresponding quarter in fiscal 1999. Sales of
accessories decreased 23.3% for the three months ended December 31, 1999
compared to the three months ended December 31, 1998. The Company expects
international sales for fiscal 2000 to remain at levels lower than historically
achieved.
Gross profit increased to 26.1% from 25.8% of net sales for the three
months ended December 31, 1999 and 1998, respectively, primarily due to
increased sales volume which caused manufacturing overhead to decrease as a
percentage of sales.
Operating expenses consist of selling, general and administrative
expenses. Total operating expenses increased $129,000, or 9.7%, to $1,458,000
for the three months ended December 31, 1999 compared to $1,329,000 for the
three months ended December 31, 1998. Operating expenses were 21.2% and 19.9% of
net sales in the respective three-month periods.
Selling expenses increased $140,000, or 17.8%, to $927,000 for the three
months ended December 31, 1999 compared to $787,000 for the comparable 1998
period. Selling expenses were 13.4% and 11.8% of net sales in the respective
three-month periods. The increased selling expenses in dollar amount were due to
higher payroll costs as a result of additional sales and marketing personnel,
increased salaries and wages and increased sales incentive programs.
General and administrative expenses decreased $11,000, or 2.0%, to
$531,000 for the three months ended December 31, 1999 compared to $542,000 for
the comparable fiscal 1999 period. General and administrative expenses were 7.7%
and 8.1% of net sales in the respective three-month periods. The decreased
general and administrative expenses were due to decreased engineering expenses
offset in part by higher payroll costs as a result of increased salaries and
wages.
Interest expense decreased by $49,000 to $0 for the three months ended
December 31, 1999 compared to $49,000 for the three months ended December 31,
1998. The decrease in interest expense was due to repayment of short and
long-term borrowings in fiscal 1999.
Net earnings were $212,000, or $0.07 per share - basic and diluted (based
on 3.16 million shares outstanding), for the three months ended December 31,
1999, compared to net earnings of $206,000, or $0.06 per share - basic and
diluted (based on 3.44 million shares outstanding) for the three months ended
December 31, 1998. The increase in net earnings in the first quarter
8
of fiscal 2000 compared to the corresponding quarter in fiscal 1999 was due to
increased sales, improved gross margin and reduced interest expense.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary needs for funds are for working capital and, to a
lesser extent, for capital expenditures. The Company financed its operations
during the first quarter of fiscal 2000 from cash generated from operating
activities. Net cash provided by operating activities was $325,000 for the three
months ended December 31, 1999. When cash flow from operations was less than
current needs, the Company increased the balance owing on its operating line of
credit. When cash flow from operations exceeded current needs, the Company paid
down in part the balance owing on its operating line of credit rather than
investing and accumulating excess cash which resulted in low reported cash
balances in periods prior to September 30, 1999.
Cash and cash equivalents decreased by $191,000 during the three months
ended December 31, 1999 due principally to purchases of Company common stock.
Accounts receivable decreased by $452,000 during the first quarter of fiscal
2000 due to a decrease in sales in the first quarter of fiscal 2000 as compared
to the fourth quarter of fiscal 1999. Inventories increased by $663,000 and
accounts payable increased $411,000 during the first quarter of fiscal 2000 due
to management's efforts to increase certain electronics, speakers and
accessories inventories. Prepaid expenses increased $61,000 during the three
months ended December 31, 1999 primarily due to trade show deposits and
insurance costs incurred at the beginning of the Company's fiscal year. Accrued
expenses decreased $165,000 due to lower accrued payroll and benefits at
December 31, 1999. Overall, net working capital decreased $165,000 during the
first quarter of fiscal 1999 due to the Company acquiring 155,900 shares of its
common stock for $460,000.
The Company made capital expenditures of $56,000 in the three months ended
December 31, 1999. Management anticipates that discretionary capital
expenditures for the remainder of fiscal 2000 will not exceed $400,000. These
anticipated expenditures will be financed from available cash, cash provided
from operations and, if necessary, proceeds from the line of credit.
During December 1999, the Company renewed its revolving operating line of
credit through December 2000. The new agreement provides for borrowings of up to
$5.0 million subject to eligible accounts receivable and inventories and certain
additional limits. Interest on the borrowings is equal to the bank's prime
lending rate (8.5% at December 31, 1999) or LIBOR plus 1.75%. Borrowings under
the line of credit are secured by cash and cash equivalents, accounts receivable
and inventories. The line of credit contains covenants which require a minimum
level of tangible net worth, a minimum ratio of current assets to current
liabilities and a maximum ratio of interest bearing debt to tangible net worth.
As of December 31, 1999, the Company was eligible to borrow $5.0 million under
the line of credit. No borrowings were outstanding under the line of credit as
of that date.
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are not
material. As of December 31, 1999, the Company had cash and cash equivalents of
$677,000 compared to $868,000 as of September 30, 1999. The Company invests its
excess cash in highly liquid marketable securities with maturities of three
months or less at date of purchase. The Company does not invest in derivative
securities.
9
YEAR 2000 CONVERSION
- --------------------
The Company has completed the process of preparing its computer systems
and applications for the Year 2000 date conversion. 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 systems software. The upgrades were acquired from third party
vendors at a cost of less than $20,000. As of the date of filing of this
Quarterly Report on Form 10-Q, the Company believes the effect of the Year 2000
conversion on its business was not and will not be material.
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 undetected Year 2000 issues could not materially adversely
affect our business in the future.
FORWARD-LOOKING STATEMENTS
- --------------------------
All statements in this report that are not statements of historical results
should be considered "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements as to expectations, beliefs and future financial performance, and are
based on current expectations and are subject to certain risks, trends and
uncertainties that could cause actual results to vary from those projected,
which variances may have a material adverse effect on the Company. Among the
factors that could cause actual results to differ materially are the following:
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 to the Company's
1999 Annual Report on Form 10-K 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.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(ii)(a) Amended Restated Bylaws dated December 1, 1999
10.18 Loan Agreement dated December 1, 1999 between the
Company and U.S. National Bank Association
10.19 Promissory Note dated December 1, 1999 made by the
Company in favor of U.S. National Bank Association
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX GOLD INTERNATIONAL, INC.
/s/ Joseph K. O'Brien
-------------------------------------
Joseph K. O'Brien
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: February 7, 2000
12
INDEX TO EXHIBITS
EXHIBIT PAGE
------- ----
3(ii)(a) Amended Restated Bylaws dated December 1, 1999 14
10.18 Loan Agreement dated December 1, 1999 between the Company
and U.S. National Bank Association 38
10.19 Promissory Note dated December 1, 1999 made by the Company
in favor of U.S. National Bank Association 44
27 Financial Data Schedule 53
13