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 27, 1998
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) 288-2008
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the common stock held by non-affiliates of
the registrant was $1,455,780 as of November 30, 1998.
There were 3,464,745 shares of the registrant's common stock outstanding as of
November 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of registrant's proxy statement dated on or about January 6, 1999 prepared
in connection with the Annual Meeting of shareholders to be held on February 16,
1999 are incorporated by reference into Part III of this Report.
PART I
Item 1.Business
Phoenix Gold International, Inc. (the "Company") designs, markets and
sells innovative, high quality, high performance electronics and accessories for
the domestic and international car audio aftermarket, the professional sound
market and the custom audio/video and home theater markets. The Company also
designs, markets and sells innovative, high quality, high performance speakers
for the car audio aftermarket. 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,
such as sonic excellence, system flexibility and reliability, 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.
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 the domestic and international
professional sound market, including OEM customers.
Products
The Company has three product lines: electronics, accessories and speakers.
Electronics. The Company's amplifiers, signal processors and other
electronics are designed to deliver sonic excellence, system flexibility and
reliable performance. The Company sells car audio electronics designed for
audiophiles, serious audio enthusiasts and sound competitors.
Amplifiers. The Company sells a total of 24 car audio amplifiers in the
ZPA, ZX, XS, QX and Sapphire series at retail prices ranging from approximately
$180 to $1,650. Amplifiers in the ZPA series, introduced in 1996, are the
Company's reference amplifiers, designed to deliver maximum performance in
expensive, high end systems capable of driving multiple speakers. The ZX series,
also introduced in 1996, includes multi-channel amplifiers with built-in
crossovers and offers the performance and sonic excellence of the reference
series amplifiers except in the most demanding applications. The XS and QX
series, both introduced in 1997, and the Sapphire series, introduced in 1994,
are designed to provide high performance at 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 XS and QX series in 1997, the Company does not expect the Sapphire series to
provide meaningful revenue in the future.
Additionally, the Company has periodically introduced limited edition
theme amplifiers, such as "Frank Amp'n Stein," "Son of Frank Amp'n Stein,"
"Route 66," "Outlaw 1845" and "Bandit 1895". The "Reactor" was introduced in
1998. Retail prices range from approximately $500 to $2,500.
The Company sells a total of 19 Carver Professional amplifiers in the PM,
PT, CA, PX and PXm series at retail prices ranging from approximately $530 to
$2,800. The PM series was designed for multiple purposes, including instrument
amplification, fixed installations and touring applications. The PT series was
designed specifically for the touring sound industry for ease of
transportability and use in a variety of settings. The CA series amplifiers were
designed for fixed installation applications, including churches, warehouses and
auditoriums. The PX series, introduced in 1997 and the first series designed by
the Company, includes multi-application models that offer increased features and
power at lower price points. The PXm series, introduced in 1998 and the second
series designed by the Company, expands the PX series and addresses entry level
price points and greater ease of transportability.
Signal Processors. The Company sells a total of 14 car audio signal
processors, including equalizers, line drivers, and active and passive
crossovers. Signal processors, which are sold both as upgrade components and as
parts of complete systems, are used to increase the flexibility and performance
of audio systems. Retail prices of signal processors range from approximately
$110 to $630.
Accessories. The Company manufacturers and distributes innovative, high
quality accessories. The Company sells over 900 accessories, many of which are
manufactured to the Company's design specifications, for use primarily in car
audio aftermarket applications. Car audio accessories include audio cables,
speaker and power cables, connectors, clamps, adapters, capacitors, fuseblocks,
distribution blocks, alternators, carpet, textiles and adhesives. The Company
continually improves its existing accessories line and introduces new and
replacement accessories. The Company is a single source from which its dealers
and distributors can purchase all of the accessories necessary to install the
full range of car audio systems. Accessories are available either as individual
items or combined in pre-packaged installation kits.
The Company's accessories for use in professional sound and custom
audio/video and home theater applications include crossovers, attenuators,
transformers, speaker selectors, audio and video cables, connectors, wall plates
and volume controls. The Company manufactures Smart Audio Management panels for
the custom home audio/video market that provide for speaker distribution and
impedance matching.
Speakers. The Company began selling speakers in 1994. The Company offers a
total of 44 car audio speakers in the ZEROpoint, XMAX, XS, QX and Sapphire
series, including tweeters, midranges, subwoofers, coaxials and speaker
component systems. The ZEROpoint series is the Company's reference speaker
series and is designed to achieve audiophile level sound quality, transparency
and enhanced imaging in either the "on" or "off" axis listening position. 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. With the introduction of the QX series in 1998, the
Company does not expect the Sapphire series to provide meaningful revenue in the
future. 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 North 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 and sells certain of its car audio accessories through a mass
merchandising chain of stores. The Company sells its products internationally
through distributors serving approximately 50 countries. International sales
accounted for 32.4%, 39.2% and 39.2% of net sales in fiscal years 1998, 1997 and
1996, respectively. International sales are denominated in United States dollars
and are generally shipped f.o.b. the Company's facility in Portland, Oregon.
No customer accounted for 10% or more of the Company's net sales during
fiscal 1998, 1997 or 1996. As of September 30, 1998, one customer accounted for
15.5% of total accounts receivable and as of September 30, 1997, two customers
accounted for 11.4% and 10.8%, respectively, of total accounts receivable.
The Company offers its dealers and distributors complete product lines,
excellent service and support, and high performance, reliable products. The
Company believes these efforts enable it to attract and retain qualified dealers
and distributors. The Company recruits on a selective basis new dealers and
distributors for each of its product lines in specific geographic areas. Dealers
and distributors are chosen based on location, financial stability, technical
expertise, sales history, integrity, and installation and service capabilities.
The Company generally does not have written agreements with its car audio sales
representatives, dealers or distributors or its professional sound distributors.
The Company's written agreements with its professional sound representatives and
dealers are generally terminable upon no more than 30 days notice.
The Company markets its car audio products by participating in consumer
electronics trade shows and enthusiast events and by promoting its own
demonstration vehicles. The Company offers incentives to "Team Phoenix Gold"
competitors in regional, national and international car audio shows and
competitions and provides technical assistance, training and support from
Company engineers and technicians at "Tweek N Tune" workshops. The Company
advertises in car audio consumer magazines and its products have been reviewed
and profiled in national and international publications. The Company markets its
professional sound, custom audio/video and home theater products by
participating in trade shows, advertising in trade journals and magazines and
providing dealer support.
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 Monster Cable Products, Inc., Esoteric Audio USA
Group of Companies and Recoton Corp. The Company's principal car audio
electronics competitors include Rockford Fosgate, a division of Rockford Corp.
("Rockford"), MTX Corporation ("MTX"), Orion Industries, Inc. and Precision
Power, Inc. The Company's principal professional sound competitors include Crown
International, Inc., QSC Audio Products, Inc. and Crest Audio, Inc. The
Company's principal speaker competitors include Rockford, MTX, Stillwater Design
and Audio, Inc., JL Audio, Inc., MB Quart Electronics USA, Inc. and Boston
Acoustics, Inc. Many competitors have greater financial and other resources than
the Company.
The Company competes principally on the basis of innovation, breadth of
product line, quality and reliability of products, name recognition,
merchandising and distribution organization, and price. The Company believes it
competes favorably with respect to each of these factors.
Manufacturing and Assembly
Manufactured Products. The Company manufactures substantially all of its
electronics products and a portion of its accessories at its facility in
Portland, Oregon. Manufacturing processes include laser-cutting, computer
controlled metal fabrication, powder coating, automated insertion of components
into and wave soldering of circuit boards, toroid winding, plastic injection
molding, silk-screening graphics and quality control testing. For use in its
manufacturing activities, the Company also purchases components manufactured by
third parties according to design specifications developed by the Company. The
Company purchases substantially all of its raw materials, components and
subassemblies from approximately 160 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 with its representatives, dealers and
distributors, sponsoring "Team Phoenix Gold" members and attending car audio
competitions and car audio, professional sound and custom audio/video and home
theater trade shows. Company representatives regularly seek suggestions from
dealers for improved design and performance of the Company's products.
Proper installation is critical to achieving optimum performance of car
audio systems. The Company offers an 18-month limited warranty on car audio
electronics installed by an authorized dealer or installer and increases the
warranty period to 36 months if the warranty card accompanying the product and a
copy of the original sales receipt are returned to the Company. If the product
is not installed by an authorized dealer or installer, the Company offers a
30-day limited warranty. The Company offers a five-year limited warranty on
professional sound electronics and a one-year limited warranty on speakers.
Intellectual Property
Phoenix Gold (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 no patents. The Company has an exclusive, paid-up license to use
the name Carver Professional through November 2000.
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, 1998, the Company had 241 full-time employees,
including 197 in manufacturing, engineering and warehousing, 29 in sales and
marketing and 15 in administration. Subsequent to year end, the Company
completed its plan of restructuring which involved the separation of certain
employees. At November 30, 1998, the Company had 212 full-time employees,
including 176 in manufacturing, engineering and warehousing, 22 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 approximately
12,500 square feet of office space and 100,000 square feet of manufacturing and
warehouse space of a 155,000 square foot building. Annual rent for the Company's
facilities is approximately $230,000. The lease expires June 30, 1999. The
Company has an option to extend the lease for one five-year term and has the
option to purchase the building for $3.1 million effective June 30, 1999. The
Company is currently evaluating the alternatives with respect to the five-year
lease renewal option or the purchase option. Additionally, in connection with
the restructuring plan implemented during fiscal 1998, the Company terminated a
lease on an adjacent building prior to its expiration. This resulted in the
write-off of certain leasehold improvements. 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
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock began trading on May 4, 1995 in the NASDAQ
National Market under the symbol "PGLD". On October 5, 1998, trading in the
Company's Common Stock was transferred to the NASDAQ SmallCap Market. As
reported by NASDAQ, the following table sets forth the range of high and low
closing bid prices per share for the Company's Common Stock.
Fiscal year ended Fiscal year ended
September 30, 1998 September 30, 1997
___________________ __________________
Common Stock (PGLD) High Low High Low
- --------------------------------- ------ --------- --------- ------
First Quarter ................. $ 6.50 $ 3.75 $ 7.25 $ 4.625
Second Quarter ................ 3.938 2.75 5.984 4.625
Third Quarter ............... 3.813 2.438 6.25 4.25
Fourth Quarter .................... 2.563 1.75 6.875 4.25
At November 30, 1998, the approximate number of shareholders of record of
Common Stock was 111.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company's existing credit agreements do not expressly limit or
prohibit the Company's ability to declare and pay dividends, although covenants
contained in such agreements related to a minimum level of tangible net worth
and minimum ratios of current assets to current liabilities and debt service
coverage may have such effect. 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.
Item 6. Selected Financial Data
As of or for the year ended September 30,
1998 1997 1996 1995 1994
Operating data:
Net sales ................ $ 26,484,715 $ 27,798,728 $ 26,563,142 $20,173,822 $ 16,222,183
Net earnings (loss)(1) (772,374) 410,095 (1,269,142) 1,881,277 1,303,940
Earnings (loss) per share
Basic ................ $ (0.22) $ 0.12 $ (0.37) $ 0.70 $ 0.60
Diluted (0.22) 0.12 (0.37) 0.67 0.57
Average shares outstanding
Basic ................ 3,464,698 3,456,278 3,449,068 2,672,129 2,180,000
Diluted .............. 3,464,698 3,535,288 3,449,068 2,798,877 2,270,207
Balance Sheet data:
Working capital .......... $ 8,020,615 $ 7,278,373 $ 6,033,190 $ 8,821,267 $ 1,858,727
Total assets ............. 15,208,128 17,455,149 19,832,527 14,509,249 9,400,070
Notes payable ............ 900,000 3,147,936 4,278,983 -- 1,885,762
Long-term obligations.... 938,233 494,927 171,995 286,189 1,456,937
Total shareholders' equity 10,497,602 11,243,019 10,788,998 12,013,188 2,898,924
Book value per share $ 3.03 $ 3.25 $ 3.12 $ 3.49 $ 1.33
(1) See Note 3 to Financial Statements describing non-recurring charges.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
All statements in this Report that are not statements of historical results
should be considered "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements as to expectations, beliefs and future financial performance, and are
based on current expectations and are subject to certain risks, trends and
uncertainties that could cause actual results to vary from those projected,
which variances may have a material adverse effect on the Company. Among the
factors that could cause actual results to differ materially are the following:
business conditions and growth in the car audio, professional sound and custom
audio/video and home theater markets and the general economy; business
conditions in international markets; the timing and size of orders by
distributors and OEM customers; competitive factors such as rival products and
price pressures; the failure of new products to compete successfully in existing
or new markets; the failure to achieve timely improvement in the manufacturing
ramp with respect to new products; changes in product mix; availability and
price of components, subassemblies and products supplied by third-party vendors;
and cost and yield issues associated with production at the Company's factory.
Comparison of Fiscal 1998 to Fiscal 1997
Net Sales. Net sales decreased $1.3 million, or 4.7%, to $26.5 million for
fiscal 1998 compared to $27.8 million for fiscal 1997, due principally to
decreased international sales. Domestic sales increased $1.0 million, or 6.0%,
to $17.9 million for fiscal 1998 compared to $16.9 million for fiscal 1997.
International sales decreased $2.3 million, or 21.3%, to $8.6 million for fiscal
1998 compared to $10.9 million for fiscal 1997. International sales accounted
for 32.4% and 39.2% of net sales in fiscal 1998 and fiscal 1997, respectively.
Sales of electronics, speakers and accessories decreased 2.0%, 10.9% and 5.3%,
respectively, in fiscal 1998 compared to fiscal 1997. The Company expects
international sales for fiscal 1999 to remain at levels lower than historically
achieved.
Gross Profit. Gross profit increased to 24.7% of net sales in fiscal 1998
from 24.5% in fiscal 1997. The increase was primarily due to an increased
percentage of domestic versus international sales.
Operating Expenses. Operating expenses increased $1.8 million, or 31.6%,
to $7.4 million in fiscal 1998 compared to $5.7 million in fiscal 1997.
Operating expenses were 28.1% and 20.4% of net sales in fiscal 1998 and fiscal
1997, respectively.
Selling expenses increased $700,000, or 21.0%, to $4.0 million in fiscal
1998 compared to $3.3 million in fiscal 1997. Selling expenses were 15.2% and
12.0% of net sales in fiscal 1998 and fiscal 1997, respectively. The increase
was primarily due to increased promotional, advertising and trade show expenses
to support sales of existing products and the introduction of new products, and
increased domestic sales incentive programs reflecting increased domestic sales
volume.
General and administrative expenses increased $200,000, or 9.0%, to $2.5
million in fiscal 1998 compared to $2.3 million in fiscal 1997. General and
administrative expenses were 9.6% and 8.4% of net sales in fiscal 1998 and
fiscal 1997, respectively. The increase was due principally to increased bad
debt expense, higher legal expense and increased engineering expense.
Historically, the Company has built infrastructure and added personnel on an
as-needed basis, resulting in occasional increases in general and administrative
expenses that are disproportionate to increases in net sales. This policy has
resulted in and may continue to result in variations in general and
administrative expenses as a percentage of sales from period to period.
In fiscal 1998, the Company took one-time, non-recurring charges of $1.1
million related to the implementation of a restructuring plan which included the
phase-out of a product line and actions to reduce future operating costs. The
Company determined that an impairment of tooling and royalty costs associated
with the product line resulted from the phase-out of the product line. In
addition, the impairment of the product line required a $233,000 write-down of
inventories, which is included in cost of sales. The restructuring plan also
included the write-off of leasehold improvements in connection with the early
termination of a lease on an adjacent building and the separation of certain
employees. Future cash payments are not expected to be material and will be paid
by the end of the first quarter of fiscal 1999. The $900,000 charge included in
operating expenses was equal to 3.3% of net sales in fiscal 1998.
Other Expenses. Other expenses, net of other income, decreased $159,000,
or 33.7%, to $314,000 in fiscal 1998 from $473,000 in fiscal 1997, primarily as
a result of lower average debt levels during fiscal 1998 due to the reduction of
debt and lower interest rates on the outstanding borrowings.
Net Earnings (Loss). The decrease in international sales and increase in
operating expenses, including the non-recurring charges, contributed to a net
loss in fiscal 1998 of $772,000, or $0.22 per share - basic and diluted (based
on 3.46 million shares), compared to net earnings in fiscal 1997 of $410,000, or
$0.12 per share - basic and diluted (based on 3.54 million shares).
Comparison of Fiscal 1997 to Fiscal 1996
Net Sales. Net sales increased $1.2 million, or 4.7%, to $27.8 million for
fiscal 1997 compared to $26.6 million for fiscal 1996. Sales of speakers and
accessories increased 46.9% and 18.1%, respectively, in fiscal 1997 compared to
fiscal 1996. The increases in speaker and accessories sales resulted primarily
from higher unit sales of existing and new products. Electronics sales decreased
2.7% from fiscal 1996 due to lower sales of professional sound products.
International sales increased $500,000, or 4.8%, to $10.9 million for fiscal
1997 compared to $10.4 million for fiscal 1996. International sales accounted
for 39.2% of net sales in each of fiscal 1997 and fiscal 1996.
Gross Profit. Gross profit increased to 24.5% of net sales in fiscal 1997
from 23.1% in fiscal 1996. Gross profit is fiscal 1996 was impacted by increased
reserves for potentially obsolete raw materials and slow moving finished goods
inventories.
Operating Expenses. Operating expenses decreased $2.3 million, or 28.6%,
to $5.7 million in fiscal 1997 compared to $7.9 million in fiscal 1996.
Operating expenses were 20.4% and 29.8% of net sales in fiscal 1997 and fiscal
1996, respectively.
Selling expenses decreased $429,000, or 11.4%, to $3.3 million in fiscal
1997 compared to $3.8 million in fiscal 1996. Selling expenses were 12.0% and
14.1% of net sales in fiscal 1997 and fiscal 1996, respectively. The decrease
was primarily due to lower promotional, advertising and trade show expenses and
continuing cost control programs.
General and administrative expenses decreased $717,000, or 23.5%, to $2.3
million in fiscal 1997 compared to $3.0 million in fiscal 1996. General and
administrative expenses were 8.4% and 11.5% of net sales in fiscal 1997 and
fiscal 1996, respectively. The decrease in general and administrative expenses
occurred principally because of lower bad debt expense, lower professional fees
and continuing cost control programs.
In fiscal 1996, the Company took a one-time, pretax charge of $1.1 million
related to in-process research and development costs associated with the
purchase in November 1995 of Carver Corporation's professional sound division.
This charge was equal to 4.2% of net sales in fiscal 1996.
Other Expenses. Other expenses, net of other income, increased $233,000,
or 96.6%, to $473,000 in fiscal 1997 from $241,000 in fiscal 1996, primarily due
to higher interest rates on larger borrowings.
Net Earnings (Loss). The foregoing factors contributed to net earnings in
fiscal 1997 of $410,000, or $0.12 per share, compared to a net loss of $1.3
million in fiscal 1996, or $0.37 per share. The net loss for fiscal 1996, before
the one-time pretax charge of $1.1 million related to the acquisition of the
Carver professional sound division, was $571,000, or $0.17 per share.
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 1998 principally from funds generated from operating activities. Net cash
provided by operating activities in fiscal 1998 was $2.3 million as compared to
$945,000 in fiscal 1997, which allowed the Company to repay approximately $2.0
million in current and long-term financing. When cash flow from operations
exceeds current needs, the Company pays down in part the balance owing on its
operating line of credit rather than accumulating and investing excess cash,
resulting in low reported cash balances.
During fiscal 1998, accounts receivable decreased $899,000, inventories
decreased $292,000, accounts payable increased $223,000 and note payable
decreased $2.2 million, leading to an increase in working capital of $742,000.
The decreases in accounts receivable and inventories and increase in accounts
payable is a result of management efforts to increase cash flow from operations
in order to reduce short and long-term borrowings.
Capital expenditures were $343,000, $483,000 and $1.4 million in fiscal
years 1998, 1997 and 1996, respectively. These expenditures related primarily to
manufacturing automation and the commencement of certain manufacturing processes
in-house, leasehold improvements to the Company's leased facility and the
acquisition of equipment for use by the Company's administration, engineering
and marketing departments. The Company does not expect capital expenditures to
exceed $400,000 in fiscal 1999. The Board of Directors has also authorized the
Company to purchase up to $1.0 million of Company common stock. On December 10,
1998, the Company entered into an agreement with a third party to purchase
216,000 shares of Company common stock for approximately $351,000. These
anticipated expenditures will be financed from proceeds of short-term debt and
lease financing, and cash provided from operations.
A $5.5 million revolving operating line of credit is available through
December 31, 1998. Interest on the borrowings is equal to the bank's prime
lending rate (8.5% at September 30, 1998) or LIBOR plus an additional
percentage. At September 30, 1998, the borrowings bore interest at 7.94%.
Borrowings under the line of credit are limited to eligible accounts receivable
and inventories, and are subject to certain additional limits. Borrowings under
the line of credit are secured by accounts receivable, inventories and certain
other assets. The line of credit contains covenants which require a minimum
level of tangible net worth and minimum ratios of current assets to current
liabilities and debt service coverage. As of September 30, 1998, the Company was
eligible to borrow $4.6 million under the line of credit. Borrowings under the
line of credit were $900,000 as of that date. The Company expects to renew the
revolving operating line of credit on similar terms prior to December 31, 1998.
In July 1998, the Company completed a $1,125,000 five-year lease financing
at an interest rate of 8.25%. The proceeds were used to repay approximately
$500,000 of long-term financing which had interest rates of 10.3% and 11.1%. The
remaining proceeds of approximately $625,000 were used to pay down the bank
operating line of credit. Additionally, the financing agreement provides up to
$200,000 for future equipment term financing. The agreement also contains
covenants which require a minimum level of net worth and a minimum ratio of debt
service coverage.
As of September 30, 1998, the Company's capital lease obligations totaled
$1,128,000, including a current portion of $209,000, at annual interest rates
ranging from 5.0% to 8.25%.
Year 2000 Conversion
The Company has begun a process to prepare its computer systems and
applications for the Year 2000 date conversion. The process includes a review of
information systems used in the Company's internal business as well as by third
party vendors, manufacturers and suppliers. The Company has substantially
completed its internal assessment of Year 2000 conversion requirements. The
Company's products do not include embedded technology, such as microcontrollers,
the Company's third party interfaces, such as those with its vendors and
customers, are not computerized, and the Company's information systems utilize
standard, ready available business software. As a result, the Company believes
the effect of the Year 2000 conversion on its business will not be material.
Information systems that are determined not to be Year 2000 compliant will
be modified, upgraded or replaced through acquisition and implementation of "off
the shelf" upgrades to existing information system software. A portion of the
upgrades has already been acquired from third party vendors at a cost of less
than $10,000, and the balance of the upgrades is believed to be readily
available. The Company plans to implement such upgrades during fiscal 1999 and
believes the aggregate cost of all such upgrades 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 certain systems at the Company, or systems at entities that
provide services or goods for the Company, will operate in the Year 2000. The
Company is continuing to evaluate the risks to the Company of failure to be Year
2000 compliant and to develop a contingency plan. Although it is not currently
anticipated, the inability to complete the Company's Year 2000 conversion on a
timely basis or the failure of a system at the Company or at an entity that
provides services and goods to the Company is not expected to have a material
impact on future operating results, financial condition or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are not
material.
Item 8. Financial Statements
See pages 17 through 32.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
This is hereby incorporated by reference to the information under the
captions "Proposal 1: Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's definitive Proxy Statement to
be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be
filed with the Securities and Exchange Commission within 120 days after the end
of Registrant's fiscal year ended September 27, 1998.
Item 11. Executive Compensation
This is hereby incorporated by reference to the information under the
caption "Proposal 1: Election of Directors" of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A, which Proxy Statement is
anticipated to be filed with the Securities and Exchange Commission within 120
days after the end of Registrant's fiscal year ended September 27, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This is hereby incorporated by reference to the information under the
caption "Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A,
which Proxy Statement is anticipated to be filed with the Securities and
Exchange Commission within 120 days after the end of Registrant's fiscal year
ended September 27, 1998.
Item 13. Certain Relationships and Related Transactions
None
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
Articles of Incorporation and Bylaws
3 (i) 1995 Restated Articles of Incorporation and Articles of Amendment
(incorporated by reference to Exhibit 3(i) to Registration Statement on Form
SB-2 effective May 3, 1995 (Registration No.93-90588))
3 (i) (a) Articles of Amendment filed April 7, 1995 (incorporated by
reference to Exhibit 3(i) (a) to Registration Statement on Form SB-2 effective
May 3, 1995 (Registration No. 93-90588))
3 (ii) Restated Bylaws (incorporated by reference to Exhibit 3(ii) to
Registration Statement on Form SB-2 effective May 3, 1995(Registration No.
93-90588))
Instruments Defining Rights of Security Holders
4 Articles 2, 5 and 6 of Exhibit 3(i) and Article 6 of Exhibit 3(ii)
are incorporated herein by reference
Material Contracts
10.1 Amended and Restated 1995 Stock Option Plan (incorporated by reference
to Appendix A to the Company's definitive proxy statement filed with the
Securities and Exchange Commission on January 15, 1997) (1)
10.1a Form of Incentive Stock Option Agreement (incorporated by reference
to Exhibit 10.1(a) to Registration Statement on Form SB-2 effective May 3,
1995(Registration No. 93-90588)) (1)
10.2 Form of Nonstatutory Stock Option Agreement (incorporated by reference
to Exhibit 10.1(b) to Registration Statement on Form SB-2 effective May 3,
1995(Registration No. 93-90588)) (1)
10.3 Lease Agreement between the Company and BB&S Development Company dated
February 2, 1994 (incorporated by reference to Exhibit 10.2 to Registration
Statement on Form SB-2 effective May 3, 1995 (Registration No. 93-90588)
10.4 Amendment dated January 12, 1996 to Lease Agreement between the
Company and BB&S Development Company dated February 2, 1994 (incorporated by
reference to Exhibit 10.1 to Form 10-QSB filed with the Securities and Exchange
Commission for the quarterly period ended December 31, 1995)
10.5 License Agreement between the Company and Carver Corporation dated as
of November 20, 1995 (incorporated by reference to Exhibit 2.3 to Form 8-K filed
with the Securities and Exchange Commission on December 1, 1995)
10.6 License Agreement dated September 30, 1993 between the Company and
Intersonics Technology Corporation, and amendments (incorporated by reference to
Exhibit 10.2 to Form 10-QSB/A (Amendment No. 1) filed with the Securities and
Exchange Commission for the quarterly period ended December 31, 1995) (2)
10.7 Third Amendment dated as of January 15, 1996 between the Company and
Intersonics Technology Corporation (incorporated by reference to Exhibit 10.3 to
Form 10-QSB filed with the Securities and Exchange Commission for the quarterly
period ended March 31, 1997) (2)
10.8 Loan Agreement between the Company and United States National Bank of
Oregon ("USNB") dated February 4, 1997 (incorporated by reference to Exhibit
10.1 to Form 10-QSB filed with the Securities and Exchange Commission for the
quarterly period ended December 31,1996)
10.9 Amendment dated April 18, 1997 to Loan Agreement between the Company
and USNB dated February 4, 1997 (incorporated by reference to Exhibit 10.1 to
Form 10-QSB filed with the Securities and Exchange Commission for the quarterly
period ended March 31, 1997)
10.10 First Amendment dated June 27, 1997 to Loan Agreement between the
Company and USNB dated February 4, 1997 (incorporated by reference to Exhibit
10.1 to Form 10-QSB filed with the Securities and Exchange Commission for the
quarterly period ended June 30, 1997)
10.11 Second Amendment dated September 26, 1997 to Loan Agreement between
the Company and USNB dated February 4, 1997 (incorporated by reference to
Exhibit 10.11 to Form 10-KSB filed with the Securities and Exchange Commission
for the fiscal year ended September 30, 1997)
10.12 Commercial Security Agreement between the Company and USNB dated as
of January 1, 1997 (incorporated by reference to Exhibit 10.11 to Form 10-KSB
filed with the Securities and Exchange Commission for the fiscal year ended
September 30, 1996)
10.13 Promissory Note dated February 3, 1997 made by the Company in favor
of USNB (incorporated by reference to Exhibit 10.1 to Form 10-QSB filed with the
Securities and Exchange Commission for the quarterly period ended December 31,
1996)
10.14 Amendment to Promissory Note dated February 3, 1997 made by the
Company in favor of USNB (incorporated by reference to Exhibit 10.2 to Form
10-QSB filed with the Securities and Exchange Commission for the quarterly
period ended June 30, 1997)
10.15 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))
10.16 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)
10.17 Nonstatutory Stock Option Agreement dated February 18, 1997 between
the Company and Matthew W. Chapman (incorporated by reference to Exhibit 10.17
to Form 10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended September 30, 1997)(1)
10.18 Master Equipment Lease Agreement dated July 15, 1998 between the
Company and First Security Leasing Company (incorporated by reference to Exhibit
10.18 to Form 10-Q filed with the Securities and Exchange Commission for the
quarterly period ended June 30, 1998)
10.19 Lease Schedule to Master Equipment Lease Agreement dated July 15,
1998 between the Company and First Security Leasing Company (incorporated by
reference to Exhibit 10.19 to Form 10-Q filed with the Securities and Exchange
Commission for the quarterly period ended June 30, 1998)
23.1Consent of Deloitte & Touche LLP, Independent Auditors
27 Financial Data Schedule
(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.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report 18
Balance Sheets at September 30, 1998 and 1997 19
Statements of Operations
for the Three Years Ended September 30, 1998 20
Statements of Shareholders' Equity
for the Three Years Ended September 30, 1998 21
Statements of Cash Flows
for the Three Years Ended September 30, 1998 22
Notes to Financial Statements 23
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, 1998 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Phoenix Gold International, Inc. as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
December 10, 1998
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
September 30,
-------------
1998 1997
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............ $ 2,602 $ 2,603
Accounts receivable, net ............. 4,287,965 5,186,630
Inventories .......................... 6,886,720 7,178,820
Prepaid expenses .................... 169,621 247,523
Deferred taxes ........................ 446,000 380,000
-------- -----------
Total current assets ............. 11,792,908 12,995,576
Property and equipment, net ............ . 2,522,005 3,478,827
Goodwill, net ........................... 217,702 257,324
Deferred taxes ........................... 567,000 231,000
Other assets .............................. 108,513 492,422
----------- -----------
Total assets ...................... $15,208,128 $17,455,149
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................... $ 1,781,341 $ 1,558,749
Note payable ....................... . 900,000 3,147,936
Accrued payroll and benefits ......... 420,209 373,512
Other accrued expenses .............. 448,214 241,337
Current portion of long-term obligations 222,529 395,669
--------- -----------
Total current liabilities .......... 3,772,293 5,717,203
Long-term obligations .................... 938,233 494,927
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none outstanding
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding -
3,464,745 and 3,458,985 shares ...... 7,548,822 7,521,865
Retained earnings .................... 2,948,780 3,721,154
----------- -----------
Total shareholders' equity ........ 10,497,602 11,243,019
----------- -----------
Total liabilities and
shareholders' equity ............. $15,208,128 $17,455,149
=========== ===========
See Notes to Financial Statements
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Year Ended September 30,
--------------------------
1998 1997 1996
----- ----- -----
Net sales .................. $ 26,484,715 $ 27,798,728 $ 26,563,142
Cost of sales ............. 19,950,805 20,981,845 20,432,478
------------ ------------ ------------
Gross profit ......... 6,533,910 6,816,883 6,130,664
Operating expenses:
Selling ................. 4,029,059 3,329,339 3,757,981
General and administrative 2,540,064 2,331,128 3,048,573
Non-recurring charges ..... 878,147 -- 1,120,500
---------- ----------- ------------
Total operating expenses ... 7,447,270 5,660,467 7,927,054
------------ ------------ ------------
Income (loss) from operations (913,360) 1,156,416 (1,796,390)
Other income (expense):
Interest expense ...... (323,530) (499,818) (260,233)
Other income, net 9,516 26,497 19,495
------------ ------------ ------------
Total other income
(expense) ............ (314,014) (473,321) (240,738)
------------ ------------ ------------
Earnings (loss)
before income taxes .... (1,227,374) 683,095 (2,037,128)
Income tax benefit (expense) 455,000 (273,000) 767,986
------------ ------------ ------------
Net earnings (loss) ...... $ (772,374) $ 410,095 $ (1,269,142)
============ ============ ============
Earnings (loss) per share -
basic and diluted ..... (0.22) 0.12 (0.37)
============ ============ ============
Average shares outstanding
- basic ............... 3,464,698 3,456,278 3,449,068
============ ============ ============
Average shares outstanding
- diluted ............ 3,464,698 3,535,288 3,449,068
============ ============ ============
See Notes to Financial Statements
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Retained
Shares Amount Earnings Total
---------- ----------- ---------- ------------
Balance at September 30, 1995 ............ 3,445,000 $ 7,432,987 $4,580,201 $ 12,013,188
Issuance of stock upon
exercise of options 9,605 44,952 -- 44,952
Net loss ................................. -- -- (1,269,142) (1,269,142)
------------- ---------- ----------- -----------
Balance at September 30, 1996 ............ 3,454,605 7,477,939 3,311,059 10,788,998
Issuance of stock upon
exercise of options 4,380 20,498 -- 20,498
Tax benefit of stock options -- 23,428 -- 23,428
Net earnings ............................. -- -- 410,095 410,095
---------- --------- --------- -----------
Balance at September 30, 1997 ............ 3,458,985 7,521,865 3,721,154 11,243,019
Issuance of stock upon
exercise of options 5,760 26,957 -- 26,957
Net loss ................. -- -- (772,374) (772,374)
---------- ----------- ---------- ------------
Balance at September 30, 1998 ............. 3,464,745 $ 7,548,822 $2,948,780 $ 10,497,602
========== =========== ========== ============
See Notes to Financial Statements
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Year Ended September 30,
-------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net earnings (loss) $ (772,374) $ 410,095 $(1,269,142)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,036,627 985,401 850,696
Deferred taxes (402,000) 144,761 (942,147)
Non-recurring charges 878,147 -- 1,120,500
Changes in operating assets and liabilities:
Accounts receivable 898,665 (67,270) (1,293,887)
Inventories 292,100 1,792,740 (3,709,016)
Prepaid expenses (24,936) 38,254 42,270
Other assets (13,953) (69,964) (223,612)
Accounts payable 222,592 (1,970,701) 2,207,367
Accrued expenses 178,574 (215,562) 326,415
Income taxes payable -- (102,356) 72,363
----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,293,442 945,398 (2,818,193)
Cash flows from investing activities:
Capital expenditures, net (342,630) (446,540) (1,348,286)
Acquisition of Carver
professional sound division -- -- (1,792,616)
----------- ----------- -----------
Net cash used in investing activities (342,630) (446,540) (3,140,902)
Cash flows from financing activities:
Notes payable, net (2,247,936) (1,131,047) 3,928,983
Proceeds from long-term obligations 1,125,000 800,000 --
Repayment of long-term obligations (854,834) (211,733) (113,804)
Proceeds from exercise of stock options 26,957 43,926 44,952
----------- ----------- -----------
Net cash provided by (used in)
financing activities (1,950,813) (498,854) 3,860,131
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (1) 4 (2,098,964)
Cash and cash equivalents, beginning of period 2,603 2,599 2,101,563
----------- ----------- -----------
Cash and cash equivalents,
end of period $ 2,602 $ 2,603 $ 2,599
=========== =========== ===========
Supplemental disclosures:
Cash paid for interest $ 334,000 $ 513,000 $ 215,280
Cash paid for income taxes 44,000 222,000 102,000
Equipment financed by long-term obligations -- 36,168 16,145
Note payable issued for Carver acquisition -- -- 350,000
See Notes to Financial Statements
PHOENIX GOLD INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Three Years Ended September 30, 1998
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business. Phoenix Gold International, Inc. ("Phoenix Gold" or
the "Company") designs and sells electronics and accessories for the domestic
and international car audio aftermarket, the professional sound market and
custom audio/video and home theater markets. Phoenix Gold also designs and sells
speakers for the car audio aftermarket and the home theater market.
Substantially all of the electronics and certain accessories are manufactured in
Portland, Oregon.
Reporting Periods. The Company's fiscal year is the 52 or 53 weeks ending
the last Sunday in September. Fiscal years 1998 and 1997 were 52 weeks and
fiscal 1996 was 53 weeks. For presentation convenience, these periods have been
presented in these financial statements as years ended September 30.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include all highly
liquid investments with original maturities of three months or less.
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 3 to 10 years) of the related assets. Leasehold
improvements and equipment under capital leases are amortized over the estimated
useful lives of the assets or the terms of the lease, whichever is shorter.
Goodwill. Goodwill arising at the Company's inception is amortized using
the straight-line method over a period of twenty years. Goodwill arising from
the acquisition of the Carver professional sound division is amortized using the
straight-line method over a period of five years. Accumulated amortization was
$157,000 and $117,000 as of September 30, 1998 and 1997.
Financial Instruments and Fair Values. The carrying amounts reported in
the balance sheet for cash, accounts receivable, accounts payable, accrued
expenses and note payable approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying amount for
long-term debt approximates its fair value because the related interest rates
are comparable to rates currently available for debt with similar terms and
maturities.
Revenue Recognition. Revenue is recognized upon shipment of the product.
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. In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. SFAS No. 128 established new standards for
computing and presenting earnings per share and superseded APB Opinion No. 15,
Earnings Per Share. SFAS No. 128 was adopted on October 1, 1997. 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. Earnings (loss) per share under SFAS No. 128
for the years ended September 30, 1997 and 1996 did not differ from the earnings
(loss) per share previously reported.
Prospective Accounting Change. In June 1997, the FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS No. 131 will be
effective for the year ending September 30, 1999 and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. Phoenix Gold operates in a single industry segment as described
in Note 13. Adoption of SFAS No. 131 may result in additional disclosures in the
notes to financial statements, but will have no impact on the financial
statements.
Note 2 - ACQUISITION
Effective November 20, 1995, substantially all of the assets of the
professional sound division of Carver Corporation were acquired. The purchase
price was $2.1 million consisting of $1.8 million in cash and a $350,000 note
payable. The Company accounted for the acquisition under the purchase method of
accounting and recorded in-process research and development expenses of $1.1
million, finished goods of $780,000, other intangibles of $110,000 and goodwill
of $132,000.
The following unaudited pro forma combined results of operations accounts
for the acquisition as if it had occurred at the beginning of fiscal 1996. The
pro forma results give effect to cost of goods sold, amortization of goodwill
and the effects on interest expense, interest income and taxes. However, a
one-time, nonrecurring, pretax charge of $1.1 million relating to the purchase
price allocated to in-process research and development expenses has not been
included in the following pro forma results.
1996
------------
Net sales .... $ 26,991,519
Net loss (657,791)
Loss per share (0.19)
The pro forma amounts may not be indicative of the results that would have
occurred if the acquisition had been effective on the date indicated, or the
results that may be obtained in the future.
Note 3 - NON-RECURRING CHARGES
Non-recurring charges consist of the following:
1998 1997 1996
---------- ---------- ----------
Impairment of product line $ 913,147 $ -- $ --
Restructuring of operations 198,000 -- --
In-process research & development -- -- 1,120,500
--------- ---------- ----------
Total non-recurring charges .... ................ 1,111,147 -- 1,120,500
Less inventory write-down included in
cost of sales
(233,000) -- --
-------- ---------- -----------
Total non-recurring charges $ 878,147 $ -- $ 1,120,500
========== =========== ===========
In the fourth quarter of 1998, the Company began to implement a
restructuring plan which included the phase-out of a product line and actions to
reduce future operating costs. A pre-tax provision of $1.1 million was recorded
for these actions. With the phase-out of the product line, the Company
determined that an impairment of tooling and royalty costs associated with the
product line existed. 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. Additionally, the
restructuring plan 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.
Note 4 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1998 1997
----------- -----------
Accounts receivable ............................ $ 4,587,965 $ 5,446,630
Allowance for doubtful accounts ................ (300,000) (260,000)
----------- -----------
Total accounts receivable, net ............. $ 4,287,965 $ 5,186,630
=========== ===========
Note 5 - INVENTORIES
Inventories consist of the following:
1998 1997
----------- -----------
Raw materials .................................. $ 2,732,112 $ 2,818,409
Work-in-process 8,527 11,867
Finished goods ................................. 4,058,828 4,204,428
Supplies ....................................... 87,253 144,116
=========== ===========
Total inventories .......................... $ 6,886,720 $ 7,178,820
=========== ===========
Note 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1998 1997
----------- -----------
Machinery, equipment, and vehicles ............. $ 4,526,903 $ 4,434,003
Leasehold improvements ......................... 1,527,834 1,590,012
Construction in progress ....................... 46,835 155,052
6,101,572 6,179,067
Less accumulated depreciation
and amortization ............................. (3,579,567) (2,700,240)
=========== ===========
Total property and equipment, net .......... $ 2,522,005 $ 3,478,827
=========== ===========
Note 7 - NOTE PAYABLE
A $5.5 million revolving operating line of credit is available through
December 31, 1998. Interest on the borrowings is equal to the bank's prime
lending rate (8.5% at September 30, 1998) or LIBOR plus an additional
percentage. At September 30, 1998, the borrowings bore interest at 7.94%.
Borrowings under the line of credit are limited to eligible accounts receivable
and inventories and are subject to certain additional limits. Borrowings under
the line of credit are secured by accounts receivable, inventories and certain
other assets. The line of credit contains covenants which require a minimum
level of tangible net worth and minimum ratios of current assets to current
liabilities and debt service coverage. As of September 30, 1998, the Company was
eligible to borrow $4.6 million under the line of credit. Borrowings under the
line of credit were $900,000 as of that date. Borrowings as of September 30,
1997 were $3.1 million and bore interest at 10.00%.
A $350,000 note payable to Carver Corporation related to the acquisition
of the professional sound division was paid in full in 1997. The note bore
interest at a rate of 6%.
Note 8 - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1998 1997
----------- ---------
Capital lease obligations, secured by equipment ... $ 1,127,775 $ 161,210
Term note, due April 2002, payable in monthly
installments, including interest at 5.9%,
secured by equipment ............................ 27,586 34,709
Term note, due August 1999, payable in monthly
installments, including interest at 9.0%,
secured by equipment
5,401 10,809
Term note, payable in monthly installments,
including interest at 11.1%, paid in full ---- 684,498
----------- ---------
1,160,762 890,596
Less current portion .............................. (222,529) (395,669)
----------- ---------
Total long-term obligations ................... $ 938,233 $ 494,927
=========== =========
Maturities on long-term obligations are as follows:
September 30,
1999 $ 222,529
2000 216,040
2001 234,377
2002 245,985
2003 241,831
--------
Total $ 1,160,762
=========
During July 1998, the Company completed a $1,125,000 five-year lease
financing at an interest rate of 8.25%. The financing agreement provides up to
$200,000 of future equipment term financing. The agreement also contains
covenants which require a minimum level of tangible net worth and a minimum
ratio of debt service coverage.
Note 9 - COMMITMENTS
The Company leases its office, warehouse and manufacturing facility under
a five-year operating lease agreement. Terms of the lease include an option to
purchase the facility and an option to extend the length of the lease for five
additional years. The Company also leases manufacturing equipment under capital
lease agreements.
Minimum future rentals under capital and operating leases having initial
or remaining terms of one year or more are as follows:
Capital Operating
Leases Leases
----------- --------
September 30,
1999 $ 293,664 $172,350
2000 275,349
2001 275,349
2002 275,349
2003 252,404
-------- ----------
1,372,115 $172,350
========
Less amount representing interest .............................. (244,340)
--------
Present value of minimum lease payments ...................... $ 1,127,775
========
Rent expense under operating leases for the three years ended September 30,
1998, 1997 and 1996 was $365,000, $333,000 and $348,000.
On December 10, 1998, the Company entered into an agreement with a third
party to purchase 216,000 shares of Company common stock for approximately
$351,000.
Note 10 - TAXES
Income tax benefit (expense):
1998 1997 1996
--------- --------- ---------
Current:
Federal ........ $ 47,000 $(112,000) $(155,831)
State 6,000 (16,239) (18,330)
--------- --------- ---------
Total current 53,000 (128,239) (174,161)
Deferred:
Federal ........ 368,000 (127,000) 842,974
State .......... 34,000 (17,761) 99,173
--------- --------- ---------
Total deferred 402,000 (144,761) 942,147
========= ========= =========
Total ...... $ 455,000 $(273,000) $ 767,986
========= ========= =========
Effective income tax rates are as follows:
1998 1997 1996
------ ------ ------
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) (1.6) (0.7)
----- ----- -----
Total
37.1% (40.0%) 37.7%
====== ===== =====
The tax effects of temporary differences which give rise to deferred tax
assets and deferred tax liabilities are as follows:
1998 1997
------------- ---------
Deferred tax liability - depreciation $ (72,000) $(179,000)
Deferred tax assets:
Accrued expenses .................. 286,000 154,000
Goodwill and other intangibles .... 550,000 410,000
Inventory valuation ............... 249,000 226,000
----------- ---------
Total deferred tax assets ....... 1,085,000 790,000
=========== =========
Net deferred taxes ............ $ 1,013,000 $ 611,000
=========== =========
Current deferred tax asset .......... $ 446,000 $ 380,000
Long-term deferred tax asset ........ 567,000 231,000
----------- ---------
Net deferred taxes ............ $ 1,013,000 $ 611,000
=========== =========
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 $77,000 and
$10,000 for the years ended September 30, 1998 and 1997.
The profit sharing and 401(k) savings plan also permits the Company to
make discretionary profit sharing contributions to all employees. Discretionary
profit sharing contributions are determined annually by the Board of Directors.
No profit sharing expense was approved for the years ended September 30, 1998
and 1997.
Note 12 - 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 shall 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
------------------ -----------------------
Weighted Weighted
Shares Number Average Number Average
Available of Exercise of Exercise
for Option Shares Price Shares Price
- -------------------------------------- -------- -------- --------- -------
September 30, 1995 17,325 297,675 $ 4.92 120,613 $4.92
Reserved 200,000 -- -
Granted (10,295) 10,295 9.57
Exercised (9,605) 4.68
Canceled 2,500 (2,500) 8.22
------- ------- -----
September 30, 1996 209,530 295,865 5.06 161,764 4.97
Granted (239,545) 239,545 5.34
Exercised -- (4,380) 4.68
Canceled 38,930 (38,930) 6.28
---------- -------
September 30, 1997 8,915 492,100 5.10 221,615 4.97
Granted (11,550) 11,550 4.00
Exercised (5,760) 4.68
Canceled 128,575 ( 128,575) 5.74
---------- ---------
September 30, 1998 125,940 369,315 $ 4.85 258,383 $4.86
========== ========
The following table summarizes information about stock options outstanding
under the Stock Option Plan at September 30, 1998:
Outstanding Exercisable
---------------------------------- -----------------------
Weighted
Average . Weighted Weighted
Range of Remaining Average Average
Exercise Number ontractual Exercise Number Exercise
Prices of Shares Life Price of Shares Price
- ----------- -------- ---------- ---------- -------- ----------
$4.00-$4.75 277,915 6.2 $ 4.67 190,850 $ 4.69
$5.15-$5.50 90,000 4.5 5.31 66,600 5.25
$11.75 1,400 2.3 11.75 933 11.75
---------- ------- ------ -------- --------
369,315 5.7 $ 4.85 258,383 $ 4.86
======== ========== ======= ======= =========
At September 30, 1998 and 1997, there were outstanding warrants to purchase
up to 110,000 shares of common stock at $8.10 per share. Such warrants became
exercisable on May 4, 1996 and expire on May 3, 2000.
At September 30, 1998, a nonqualified option to purchase 5,000 shares of
common stock was outstanding at $4.63 per share. Such option becomes exercisable
ratably over a three- year period and expires in 2007.
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, 1998 and 1997 using the Black-Scholes option pricing model. The
weighted average estimated fair value of options granted during 1998 and 1997
was $2.45 and $4.52 per share. The weighted average assumptions used for stock
option grants during the years ended September 30, 1998 and 1997 were a risk
free interest rate of 5.75% and 6.25%, an expected dividend yield of 0% and 0%,
an expected life of 5.0 years and 7.1 years and an expected volatility of 67.8%
and 94.6%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options.
For purposes of the pro forma disclosures, the estimated fair value of the
stock-based awards is amortized over the vesting period. Pro forma net earnings
(loss) and earnings (loss) per share is as follows:
1998 1997
---------------- --------
Pro forma net earnings (loss) ..... $ (781,301) $306,039
Pro forma earnings (loss) per share (0.23) 0.09
The effects of applying SFAS No. 123 for providing 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.
Note 13 - SALES AND MAJOR CUSTOMERS
Phoenix Gold operates in a single industry segment: the manufacturing and
sales of electronics, accessories and speaker products for use in car and
professional sound audio and custom home audio and video applications. Net sales
by geographic region are as follows:
1998 1997 1996
----------- ----------- -----------
United States ......... $17,903,217 $16,894,741 $16,161,385
International:
Europe .............. 4,624,273 5,565,352 5,578,371
Asia ................ 945,600 2,245,232 2,054,498
Other ............... 3,011,625 3,093,403 2,768,888
----------- ----------- -----------
Total international 8,581,498 10,903,987 10,401,757
=========== =========== ===========
Net sales ......... $26,484,715 $27,798,728 $26,563,142
=========== =========== ===========
No customer accounted for 10% or more of the Company's net sales during
the years ended September 30, 1998, 1997 or 1996. As of September 30, 1998, one
customer accounted for approximately 15.5% of total accounts receivable and as
of September 30, 1997, two customers accounted for approximately 11.4% and 10.8%
of total accounts receivable.
Note 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of operating results by quarter for the years
ended September 30, 1998 and 1997:
1998 quarter ended ...... December 31 March 31 June 30 September 30 Total
---------- ---------- ----------- ----------- ------------
Net sales ............... $6,058,001 $6,613,495 $ 7,687,304 $ 6,125,915 $ 26,484,715
Gross profit ............ 1,414,797 1,787,877 2,297,119 1,034,117 6,533,910
Net earnings (loss) (1) . 3,002 67,995 269,535 (1,112,906) (772,374)
Earnings (loss) per share 0.00 0.02 0.08 (0.32) (0.22)
1997 quarter ended
Net sales ............... $ 5,572,276 $6,263,430 $8,263,509 $7,699,513 $ 27,798,728
Gross profit ............ 977,129 1,498,048 2,482,196 1,859,510 6,816,883
Net earnings (loss) ..... (312,503) (25,054) 585,933 161,719 410,095
Earnings (loss) per share (0.09) (0.01) 0.17 0.05 0.12
(1) See Note 3 to Financial Statements describing non-recurring charges.
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 15, 1998
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 15, 1998
Keith A. Peterson Chief Executive Officer
(Principal Executive Officer)
/s/ Timothy G. Johnson
- ------------------------------------- Executive Vice President, December 15, 1998
Timothy G. Johnson Chief Operating Officer and
Director
/s/ Joseph K. O'Brien
- ------------------------------------ Chief Financial Officer and December 15, 1998
Joseph K. O'Brien Secretary (Principal Financial
and Accounting Officer)
/s/ Robert A. Brown
- ------------------------------------ Director December 15, 1998
Robert A. Brown
/s/ Edward A. Foehl
................................... Director December 15, 1998
Edward A. Foehl
/s/ Frank G. Magdlen
................................. Director December 15, 1998
Frank G. Magdlen
EXHIBIT INDEX
Exhibit Description .......................................... Page
23.1 Consent of Deloitte & Touche LLP, Independent Auditors 35
27 Financial Data Schedule .............................. 36