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