U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1999,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-25866
PHOENIX GOLD INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-1066325
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9300 NORTH DECATUR STREET, PORTLAND, OREGON 97203
(Address of principal executive offices) (Zip code)
(503) 286-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
There were 3,244,345 shares of the issuer's common stock outstanding as of
July 31, 1999.
PHOENIX GOLD INTERNATIONAL, INC.
Form 10-Q for the Quarter Ended June 30, 1999
INDEX
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Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets at June 30, 1999
and September 30, 1998 (unaudited) 3
Statements of Earnings for the Three and Nine Months Ended
June 30, 1999 and 1998 (unaudited) 4
Statements of Cash Flows for the Nine Months Ended
June 30, 1999 and 1998 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
INDEX TO EXHIBITS 15
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
(Unaudited)
June 30, September 30,
1999 1998
----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,600 $ 2,602
Accounts receivable, net 4,467,743 4,287,965
Inventories 5,897,451 6,886,720
Prepaid expenses 262,797 169,621
Deferred taxes 427,000 446,000
----------------- ------------------
Total current assets 11,057,591 11,792,908
Property and equipment, net 2,064,870 2,522,005
Goodwill, net 185,734 217,702
Deferred taxes 425,000 567,000
Other assets 157,474 108,513
----------------- ------------------
Total assets $ 13,890,669 $ 15,208,128
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,358,613 $ 1,781,341
Line of credit - 900,000
Accrued payroll and benefits 258,708 420,209
Other accrued expenses 448,857 448,214
Current portion of long-term obligations 991,508 222,529
----------------- -----------------
Total current liabilities 3,057,686 3,772,293
Long-term obligations - 938,938
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none outstanding - -
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding - 3,244,345 and 3,464,745 shares 7,182,247 7,548,822
Retained earnings 3,650,736 2,948,780
------------------ ------------------
Total shareholders' equity 10,832,983 10,497,602
------------------ ------------------
Total liabilities and shareholders' equity $ 13,890,669 $ 15,208,128
================== ==================
SEE NOTES TO FINANCIAL STATEMENTS
3
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
June 30 June 30
------------------------------ --------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
Net sales $ 7,454,978 $ 7,687,304 $ 20,320,979 $ 20,358,800
Cost of sales 5,399,452 5,390,185 14,870,784 14,859,007
-------------- ------------- ------------- -------------
Gross profit 2,055,526 2,297,119 5,450,195 5,499,793
Operating expenses:
Selling 883,550 1,141,146 2,465,873 2,863,557
General and administrative 585,084 619,999 1,699,728 1,805,450
-------------- ------------- ------------ -------------
Total operating expenses 1,468,634 1,761,145 4,165,601 4,669,007
-------------- ------------- ------------ -------------
Income from operations 586,892 535,974 1,284,594 830,786
Other income (expense):
Interest expense (27,991) (86,400) (116,638) (271,190)
Other income, net - 961 - 8,936
-------------- ------------- ------------ -------------
Total other income (expense) (27,991) (85,439) (116,638) (262,254)
-------------- ------------- ------------ -------------
Earnings before income taxes 558,901 450,535 1,167,956 568,532
Income tax expense (223,000) (181,000) (466,000) (228,000)
-------------- ------------- ------------ -------------
Net earnings $ 335,901 $ 269,535 $ 701,956 $ 340,532
============== ============= ============ =============
Net earnings per share - basic and diluted $ 0.10 $ 0.08 $ 0.21 $ 0.10
============== ============= ============ ============
Average shares outstanding - basic and diluted 3,246,231 3,464,745 3,310,412 3,464,682
============== ============= ============ ============
SEE NOTES TO FINANCIAL STATEMENTS
4
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
----------------------------------
1999 1998
--------------- ---------------
Cash flows from operating activities:
Net earnings $ 701,956 $ 340,532
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 740,428 770,734
Deferred taxes 161,000 8,000
Changes in operating assets and liabilities:
Accounts receivable (179,778) (32,206)
Inventories 989,269 525,169
Prepaid expenses (93,176) (94,994)
Other assets (80,002) (13,955)
Accounts payable (422,728) (108,526)
Accrued expenses (160,858) (222,276)
-------------- --------------
Net cash provided by operating activities 1,656,111 1,617,030
Cash flows from investing activities:
Capital expenditures, net (220,284) (287,166)
-------------- --------------
Net cash used in investing activities (220,284) (287,166)
Cash flows from financing activities:
Line of credit, net (900,000) (1,060,364)
Repayment of long-term obligations (169,254) (296,347)
Purchase of common stock (366,575) -
Proceeds from exercise of stock options - 26,957
-------------- --------------
Net cash used in financing activities (1,435,829) (1,329,870)
-------------- --------------
Decrease in cash and cash equivalents (2) (6)
Cash and cash equivalents, beginning of period 2,602 2,603
-------------- --------------
Cash and cash equivalents, end of period $ 2,600 $ 2,597
============== ==============
Supplemental disclosures:
Cash paid for interest $ 130,000 $ 285,000
Cash paid for income taxes 220,000 44,000
SEE NOTES TO FINANCIAL STATEMENTS
5
PHOENIX GOLD INTERNATIONAL, INC.
Notes to Financial Statements
(Unaudited)
Note 1 - UNAUDITED FINANCIAL STATEMENTS
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from these unaudited financial statements. These unaudited
financial statements should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-K for the year
ended September 30, 1998 filed with the Securities and Exchange Commission. The
results of operations for the three- and nine-month periods ended June 30, 1999
are not necessarily indicative of the operating results for the full year. In
the opinion of management, all adjustments, consisting only of normal recurring
accruals, have been made to present fairly the Company's financial position at
June 30, 1999 and the results of its operations for the three- and nine-month
periods ended June 30, 1999 and 1998 and its cash flows for the nine-months
ended June 30, 1999 and 1998.
Note 2 - REPORTING PERIODS
The Company's fiscal year is the 52-week or 53-week period ending the last
Sunday in September. Fiscal 1999 and fiscal 1998 are 52-week years and all
quarters are 13-week periods. For presentation convenience, the Company has
indicated in these financial statements that its fiscal year ended on September
30 and that the three and nine months presented ended on June 30.
Note 3 - SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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. 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.
6
Note 4 - INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
June 30, September 30,
1999 1998
--------------------- ---------------------
Raw materials $ 2,568,572 $ 2,732,112
Work-in-process 2,860 8,527
Finished goods 3,283,266 4,058,828
Supplies 42,753 87,253
--------------------- ---------------------
Total inventories $ 5,897,451 $ 6,886,720
===================== =====================
Note 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30, September 30,
1999 1998
---------------- ---------------
Machinery, equipment, and vehicles $ 4,703,106 $ 4,526,903
Leasehold improvements 1,595,605 1,527,834
Construction in progress - 46,835
--------------- ----------------
6,298,711 6,101,572
Less accumulated depreciation
and amortization (4,233,841) (3,579,567)
--------------- ----------------
Total property and equipment, net $ 2,064,870 $ 2,522,005
=============== ================
Note 6 - LINE OF CREDIT
During December 1998, the Company renewed the $5.5 million bank operating
line of credit on essentially the same terms through December 1999. As of June
30, 1999, the Company was eligible to borrow $5.1 million under the line of
credit. There were no borrowings outstanding under the line of credit at June
30, 1999.
Note 7 - COMMITMENT
The Board of Directors has authorized the Company to purchase up to $1.0
million of Company common stock through broker-effected transactions in the open
market. During the nine months ended June 30, 1999, the Company has acquired
220,400 shares of its common stock from third parties for $366,575.
7
Note 8 - SUBSEQUENT EVENT
During December 1998, the Company provided notice of its intent to
exercise its option to purchase the facility, which it leased through June 30,
1999. Subsequent to June 30, 1999, the Company completed the purchase of the
facility for $3.1 million. Additionally, on the same day, the Company sold the
facility and the existing improvements, with a remaining net book value of $1.0
million, for $5.1 million and then re-leased the facility. A gain of
approximately $1.0 million will be deferred and recognized over the ten-year
lease term as a reduction in rent expense. The net cash proceeds were used to
repay all of the remaining long-term obligations. Therefore, for financial
reporting purposes, the Company has reflected the long-term obligations existing
at June 30, 1999 as current liabilities as of such date.
Future rent expense under the facility operating lease is as follows:
Year ended September 30,
1999 $ 130,200
2000 524,055
2001 537,075
2002 550,095
2003 563,580
2004 578,460
Thereafter 2,951,355
---------------------
Total $ 5,834,820
=====================
8
Part I: FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
- ---------------------
Net sales decreased $232,000, or 3.0%, to $7.5 million for the three
months ended June 30, 1999, compared to $7.7 million for the three months ended
June 30, 1998 due principally to decreased international sales. Domestic sales
were unchanged at $5.2 million for the three months ended June 30, 1999 compared
to June 30, 1998. International sales decreased 9.3% to $2.3 million from $2.5
million in the comparable 1998 period. The decrease resulted primarily from
decreased sales to Canada and Latin America offset in part by increased sales to
Asia and Europe. International sales represented 30.2% and 32.3% of net sales
for the three months ended June 30, 1999 and 1998, respectively. The Company
expects international sales for fiscal 1999 to remain at levels lower than
historically achieved due to current worldwide economic conditions.
Net sales for the nine months ended June 30, 1999 decreased $38,000, or
0.2%, to $20.3 million from $20.4 million for the nine months ended June 30,
1998 due to decreased international sales offset in part by increased domestic
sales. International sales decreased $1.6 million, or 22.6%, to $5.5 million for
nine months ended June 30, 1999 compared to $7.1 million for the nine months
ended June 30, 1998. For the nine months ended June 30, 1999, domestic sales
increased 11.8% to $14.8 million from $13.3 million in the comparable 1998
period. The decrease in international sales resulted primarily from decreased
sales to Europe and other international markets. International sales represented
27.0% and 34.8% of net sales for the nine months ended June 30, 1999 and 1998,
respectively.
Gross profit decreased to 27.6% of net sales for the three months ended
June 30, 1999 from 29.9% of net sales for the three months ended June 30, 1998.
Gross profit decreased to 26.8% of net sales for the nine months ended June 30,
1999 from 27.0% for the comparable prior period. The decrease for the three
months ended June 30, 1999 was primarily due to decreased sales volume which
increased manufacturing overhead as a percentage of sales and manufacturing
inefficiencies due to new product introductions.
Operating expenses consist of selling, general and administrative
expenses. Total operating expenses decreased $293,000, or 16.6%, to $1,469,000
for the three months ended June 30, 1999 compared to $1,761,000 for the three
months ended June 30, 1998. Operating expenses were 19.7% and 22.9% of net sales
in the respective three-month periods. Operating expenses decreased $503,000, or
10.8%, to $4,166,000 for the nine months ended June 30, 1999 compared to
$4,669,000 in the comparable period in fiscal 1998. Operating expenses were
20.5% and 22.9% of net sales in the respective nine month periods.
Selling expenses decreased $258,000, or 22.6%, to $884,000 for the three
months ended June 30, 1999, compared to $1,141,000 for the comparable 1998
period. Selling expenses were 11.9% and 14.8% of net sales in the respective
three-month periods. Selling expenses decreased $398,000, or 13.9%, in the first
nine months of fiscal 1999, to $2.5 million, compared to $2.9 million for the
first nine months of fiscal 1998. Selling expenses were 12.1% and 14.1% of net
sales in the respective nine month periods. The decreased selling expenses were
due to reduced promotional activities and sales incentive programs.
9
General and administrative expenses decreased $35,000, or 5.6%, to
$585,000 for the three months ended June 30, 1999, compared to $620,000 for the
comparable fiscal 1998 period. General and administrative expenses were 7.8% and
8.1% of net sales in the respective three-month periods. General and
administrative expenses decreased $106,000, or 5.9% in the first nine months of
fiscal 1999, to $1,700,000, compared to $1,805,000 for the first nine months of
fiscal 1998. General and administrative expenses were 8.4% and 8.9% of net sales
in the respective nine month periods. The decreased general and administrative
expenses were due to lower payroll costs as a result of reductions in
administrative personnel.
Interest expense decreased by $58,000 to $28,000 for the three months
ended June 30, 1999, compared to $86,000 for the three months ended June 30,
1998. Interest expense decreased by $155,000 to $117,000 for the first nine
months of fiscal 1999 compared to $271,000 for the first nine months of fiscal
1998. The decrease was due to decreased borrowings and decreased interest rates
on the outstanding borrowings.
Net earnings were $336,000, or $0.10 per share (basic and diluted), for
the three months ended June 30, 1999, compared to net earnings of $270,000, or
$0.08 per share (basic and diluted), for the three months ended June 30, 1998.
Net earnings were $702,000, or $0.21 per share (basic and diluted), for the nine
months ended June 30, 1999, compared to net earnings of $341,000, or $0.10 per
share (basic and diluted), for the comparable 1998 period. The increase in net
earnings was due to cost control programs which reduced operating expenses in
dollar amount and as a percentage of sales.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary needs for funds are for working capital and, to a
lesser extent, capital expenditures. The Company financed its operations during
the nine months ended June 30, 1999 from cash generated from operating
activities. Net cash provided by operating activities was $1,656,000 for the
nine months ended June 30, 1999. When cash flow from operations exceeds current
needs, the Company historically has paid 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.
Inventories decreased $989,000, accounts payable decreased $423,000 and
accrued expenses decreased $161,000 during the nine months ended June 30, 1999
due to management's continuing efforts to improve working capital efficiency and
reduce outstanding liabilities. The line of credit was paid in full, a reduction
of $900,000, due to cash generated by operating activities.
The Company made capital expenditures of $220,000 for the nine months
ended June 30, 1999. Management anticipates that discretionary capital
expenditures for the remainder of fiscal 1999 will be approximately $100,000.
These anticipated expenditures will be financed first from cash provided from
operations and, if necessary, then from existing cash balances and proceeds from
the line of credit.
The Board of Directors has authorized the Company to purchase up to $1.0
million of Company common stock through broker-effected transactions in the open
market. During the nine months ended June 30, 1999, the Company has acquired
220,400 shares of its common stock from third parties for $366,575.
10
During December 1998, the Company provided notice of its intent to
exercise its option to purchase the facility, which it leased through June 30,
1999. Subsequent to June 30, 1999, the Company completed the purchase of the
facility for $3.1 million. Additionally, on the same day, the Company sold the
facility and the existing improvements, with a remaining net book value of $1.0
million, for $5.1 million and then re-leased the facility. A gain of
approximately $1.0 million will be deferred and recognized over the ten-year
lease term as a reduction in rent expense. The net cash proceeds were used to
repay all of the remaining long-term obligations. Therefore, for financial
reporting purposes, the Company has reflected the long-term obligations existing
at June 30, 1999 as current liabilities as of such date.
During December 1998, the Company renewed the $5.5 million revolving
operating line of credit on essentially the same terms through December 1999. As
of June 30, 1999, the Company was eligible to borrow $5.1 million under the line
of credit. There were no borrowings outstanding under the line of credit at June
30, 1999.
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.
YEAR 2000 CONVERSION
- --------------------
Many computer programs use only two digits to identify a year in a date
field within the program (e.g. "99" or "01"). If not corrected, computer
applications may fail or cause incorrect results by or at the year 2000. The
Company is in the process of preparing 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, its bank, 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, readily available business software. The Company is still assessing
the potential cost of Year 2000 conversion on its phone and voice-mail system.
However, at this time, the Company believes the effect of the Year 2000
conversion on its business will not be material.
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 $20,000, and the balance of the upgrades is believed to be readily
available. The Company has begun to implement such upgrades and expects to
complete the implementation during fiscal 1999. Additionally, the Company
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 expects to complete a contingency plan prior to year end.
Although no assurance can be given, 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.
11
FORWARD-LOOKING STATEMENTS
- --------------------------
This Report contains "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, that 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; changes in the number of
customers; the timing and size of orders by dealers, 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; cost and yield
issues associated with production at the Company's factory; and possible costs
and delays associated with Year 2000 computer incompatibilities.
12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.23 Purchase and Sale Agreement dated June 15, 1999 between
the Company and 6710 LLC
10.24 First Amendment to Purchase and Sale Agreement
dated June 15, 1999 between the Company and 6710 LLC
10.25 6710 LLC Commercial Lease dated June 30, 1999 between the
Company and 6710 LLC
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX GOLD INTERNATIONAL, INC.
/s/ Joseph K. O'Brien
--------------------------------------
Joseph K. O'Brien
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 10, 1999
14
INDEX TO EXHIBITS
Exhibit Page
------- ----
10.23 Purchase and Sale Agreement dated
June 15, 1999 between the Company and 6710 LLC 16
10.24 First Amendment to Purchase and Sale Agreement
dated June 15, 1999 between the Company and 6710 LLC 26
10.25 6710 LLC Commercial Lease dated June 30, 1999
between the Company and 6710 LLC 27
27 Financial Data Schedule 43
15