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 December 31, 2000,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25866
PHOENIX GOLD INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-1066325
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9300 NORTH DECATUR STREET, PORTLAND, OREGON 97203
(Address of principal executive offices) (Zip code)
(503) 286-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 3,026,945 shares of the issuer's common stock outstanding as of
January 31, 2001.
1
PHOENIX GOLD INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2000
INDEX
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Part I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Balance Sheets at December 31, 2000
and September 30, 2000 (unaudited) 3
Statements of Earnings for the Three Months Ended
December 31, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the Three Months Ended
December 31, 2000 and 1999 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2000 2000
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 79,421 $ 1,653,683
Accounts receivable, net 4,321,570 4,170,885
Inventories 6,916,826 5,744,860
Prepaid expenses 368,549 229,049
Deferred taxes 350,000 315,000
-------------- --------------
Total current assets 12,036,366 12,113,477
Property and equipment, net 850,030 807,139
Goodwill, net 316,951 138,459
Deferred taxes 615,000 610,000
Other assets 553,954 285,127
-------------- --------------
Total assets $ 14,372,301 $ 13,954,202
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 345,338 $ -
Accounts payable 968,441 797,249
Accrued payroll and benefits 418,401 557,099
Other accrued expenses 426,100 346,318
Income taxes payable 19,911 40,910
-------------- --------------
Total current liabilities 2,178,191 1,741,576
Deferred gain on sale of facility 833,659 858,178
Commitments and contingencies - -
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none
outstanding - -
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding - 3,026,945 and
3,026,945 shares 6,550,928 6,550,928
Retained earnings 4,809,523 4,803,520
-------------- --------------
Total shareholders' equity 11,360,451 11,354,448
-------------- --------------
Total liabilities and shareholders'
equity $ 14,372,301 $ 13,954,202
============== ==============
SEE NOTES TO FINANCIAL STATEMENTS
3
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Net sales $ 5,630,957 $ 6,975,646
Cost of sales 4,277,414 5,174,877
------------ ------------
Gross profit 1,353,543 1,800,769
Operating expenses:
Selling 795,467 926,769
General and administrative 577,778 531,387
------------ ------------
Total operating expenses 1,373,245 1,458,156
------------ ------------
Income (loss) from operations (19,702) 342,613
Other income (expense):
Interest income 28,837 8,360
Interest expense (2,832) -
Other income, net 3,700 -
------------ ------------
Total other income (expense) 29,705 8,360
------------ ------------
Earnings before income taxes 10,003 350,973
Income tax expense (4,000) (139,000)
------------ ------------
Net earnings $ 6,003 $ 211,973
============ ============
Earnings per share - basic and diluted $ 0.00 $ 0.07
============ ============
Average shares outstanding - basic and diluted 3,026,945 3,156,721
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
4
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Cash flows from operating activities:
Net earnings $ 6,003 $ 211,973
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization 159,031 160,981
Deferred taxes (40,000) 15,000
Changes in operating assets and liabilities:
Accounts receivable 980,236 452,092
Inventories (301,481) (662,939)
Prepaid expenses (139,500) (60,999)
Other assets - (36,944)
Accounts payable 171,192 410,558
Accrued expenses (79,915) (165,152)
------------ ------------
Net cash provided by operating activities 755,566 324,570
Cash flows from investing activities:
Capital expenditures, net (139,043) (55,619)
Purchase of AudioSource assets (2,536,123) -
------------ ------------
Net cash used in investing activities (2,675,166) (55,619)
Cash flows from financing activities:
Line of credit, net 345,338 -
Purchase of common stock - (460,407)
------------ ------------
Net cash provided by (used in)
financing activities 345,338 (460,407)
------------ ------------
Decrease in cash and cash equivalents (1,574,262) (191,456)
Cash and cash equivalents, beginning of period 1,653,683 868,458
------------ ------------
Cash and cash equivalents, end of period $ 79,421 $ 677,002
============ ============
Supplemental disclosure:
Cash paid for interest $ 3,000 $ -
Cash paid for income taxes 65,000 70,000
SEE NOTES TO FINANCIAL STATEMENTS
5
PHOENIX GOLD INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from these unaudited financial statements. These unaudited
financial statements should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-K for the year
ended September 30, 2000 filed with the Securities and Exchange Commission. The
results of operations for the three-month period ended December 31, 2000 are not
necessarily indicative of the operating results for the full year. In the
opinion of management, all adjustments, consisting only of normal recurring
accruals, have been made to present fairly the Company's financial position at
December 31, 2000 and the results of its operations and its cash flows for the
three-month periods ended December 31, 2000 and 1999.
NOTE 2 - REPORTING PERIODS
The Company's fiscal year is the 52-week or 53-week period ending the last
Sunday in September. Fiscal 2001 is a 53-week year. The quarter ended December
31, 2000 was a 14-week period. The quarters ending March 31, 2001, June 30, 2001
and September 30, 2001 are a 12-week period, 13-week period and a 14-week
period, respectively. Fiscal 2000 was a 52-week year and all quarters were
13-week periods. For presentation convenience, the Company has indicated in
these financial statements that its fiscal year ended on September 30 and that
the three months presented ended on December 31.
NOTE 3 - RECLASSIFICATION
During 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board issued EITF 00-10: ACCOUNTING FOR SHIPPING AND
HANDLING FEES AND COSTS. Beginning October 1, 2000, the Company adopted EITF
00-10 and classified all amounts billed to a customer in a sale transaction
related to shipping and handling to net sales. Net sales and cost of sales
amounts reported in prior periods have been reclassified to conform to the
current presentation. The reclassification had no effect on previously reported
gross profit, net earnings or shareholders' equity.
NOTE 4 - PURCHASE OF AUDIOSOURCE ASSETS
Effective December 15, 2000, the Company acquired for $2.5 million in cash
certain assets of AudioSource, Inc., an unrelated, privately-held corporation
based in Burlingame, California ("AudioSource"). The assets acquired included
certain accounts receivable, inventories, tangible personal property,
intellectual property and other assets used in the home theater and home audio
market. No liabilities of AudioSource were assumed by the Company. In addition,
AudioSource agreed not to compete with the Company in the home theater and home
audio market for four years. The purchase price was paid from available cash
reserves and from a drawdown under the Company's revolving line of credit.
6
The Company accounted for the acquisition of assets under the purchase
method of accounting and has included the results of operations of the assets
since the date acquired. The Company recorded approximately $1.1 million of
accounts receivable, $900,000 of finished goods inventories, $56,000 of tangible
personal property, $150,000 of intellectual property, $144,000 for the covenant
not to compete and $186,000 for goodwill. The tangible personal property will be
depreciated using the straight-line method over three years. The intellectual
property and goodwill will be amortized using the straight-line method over five
years. The covenant not to compete will be amortized using the straight-line
method over four years.
The following unaudited pro forma combined results of operations accounts
for the acquisition as if it had occurred at the beginning of fiscal 2000 or at
the beginning of the three-month period ended December 31, 2000. The pro forma
results give effect to the amortization of intellectual property, goodwill and
the covenant not to compete and the effects on interest income, interest expense
and income taxes.
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
2000 2000
-------------- --------------
Net sales $ 6,978,212 $ 32,186,613
Net earnings (loss) (194,655) 581,373
Earnings (loss) per share - basic
and diluted (0.06) 0.19
The proforma results may not be indicative of the results of operations that
would have occurred if the acquisition had been effective on the date indicated
or of the results that may be obtained in the future. The pro forma statements
should be read in conjunction with the financial statements and notes thereto of
the Company included in the Company's Annual Report of Form 10-K for the fiscal
year ended September 24, 2000.
NOTE 5 - INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
DECEMBER 31, SEPTEMBER 30,
2000 2000
-------------- --------------
Raw materials and work-in-process $ 2,758,652 $ 2,598,709
Finished goods and supplies 4,158,174 3,146,151
-------------- --------------
Total inventories $ 6,916,826 $ 5,744,860
============== ==============
7
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, SEPTEMBER 30,
2000 2000
-------------- --------------
Machinery and equipment $ 3,360,914 $ 3,205,936
Office equipment and furniture 1,670,872 1,638,315
Leasehold improvements 75,266 75,266
-------------- --------------
5,107,052 4,919,517
Less accumulated depreciation
and amortization (4,257,022) (4,112,378)
-------------- --------------
Total property and equipment, net $ 850,030 $ 807,139
============== ==============
NOTE 7 - LINE OF CREDIT
During January 2001, the Company renewed its revolving operating line of
credit through January 2002 on terms similar to those contained in the prior
agreement. As of December 31, 2000, the Company was eligible to borrow $3.4
million under the line of credit. Borrowings of $345,338 were outstanding under
the line of credit as of that date.
NOTE 8 - NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The new statement requires
recognition of all derivatives as either assets or liabilities on the balance
sheet at fair value. The new statement is effective for the year ending
September 30, 2001, as deferred by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133. The Company adopted SFAS No. 133 effective October 1, 2000.
Adoption of SFAS No. 133 had no material effect on the financial statements.
8
ITEM 2: 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:
COMPETITIVE FACTORS; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND
SEASONALITY; THE ADVERSE EFFECT OF REDUCED DISCRETIONARY CONSUMER SPENDING;
DEPENDENCE ON A SIGNIFICANT CUSTOMER; THE NEED FOR THE INTRODUCTION OF NEW
PRODUCTS AND PRODUCT ENHANCEMENTS; DEPENDENCE ON SUPPLIERS; CONTROL BY CURRENT
SHAREHOLDERS; HIGH INVENTORY REQUIREMENTS; BUSINESS CONDITIONS IN INTERNATIONAL
MARKETS; THE COMPANY'S DEPENDENCE ON KEY EMPLOYEES; THE NEED TO PROTECT
INTELLECTUAL PROPERTY; ENVIRONMENTAL REGULATION; AND THE POTENTIAL DELISTING OF
THE COMPANY'S COMMON STOCK, AS WELL AS OTHER FACTORS DISCUSSED IN EXHIBIT 99.1
TO THE PHOENIX GOLD INTERNATIONAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED SEPTEMBER 24, 2000 WHICH EXHIBIT IS HEREBY INCORPORATED BY
REFERENCE. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS. THE COMPANY DOES NOT INTEND TO
UPDATE ITS FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
---------------------
Net sales decreased $1.3 million, or 19.3%, to $5.6 million for the three
months ended December 31, 2000 compared to $7.0 million for the three months
ended December 31, 1999 due principally to decreased sales to a significant
domestic customer and decreased international sales. Sales of electronics,
speakers and accessories decreased 23.7%, 26.1% and 3.9%, respectively, for the
three months ended December 31, 2000 compared to the corresponding quarter in
fiscal 2000. Domestic sales decreased $914,000, or 17.5%, to $4.3 million for
the three months ended December 31, 2000 compared to $5.2 million for the three
months ended December 31, 1999. Sales of electronics to a significant domestic
customer decreased $657,000, or 51.2%, to $627,000 for the three months ended
December 31, 2000 compared to $1,284,000 for the comparable period in fiscal
2000. Additionally, sales of speakers to a domestic OEM customer decreased
during the quarter. Purchase orders by these customers may fluctuate
significantly from quarter to quarter.
International sales decreased $430,000, or 24.4%, to $1,332,000 for the
three months ended December 31, 2000 from $1,762,000 in the comparable 1999
period. International sales represented 23.7% and 25.3% of total net sales for
the three months ended December 31, 2000 and 1999, respectively. The Company
expects international sales for fiscal 2001 to remain at levels lower than
historically achieved.
Gross profit decreased to 24.0% from 25.8% of net sales for the three months
ended December 31, 2000 and 1999, respectively, primarily due to decreased sales
volume which caused manufacturing overhead to increase as a percentage of sales.
9
Operating expenses consist of selling, general and administrative expenses.
Total operating expenses decreased $85,000, or 5.8%, to $1,373,000 for the three
months ended December 31, 2000 compared to $1,458,000 for the three months ended
December 31, 1999. Operating expenses were 24.4% and 20.9% of net sales in the
respective three-month periods.
Selling expenses decreased $131,000, or 14.2%, to $795,000 for the three
months ended December 31, 2000 compared to $927,000 for the comparable 1999
period. Selling expenses were 14.1% and 13.3% of net sales in the respective
three-month periods. The decreased selling expenses in dollar amount were due to
reduced sales incentives resulting from the decreased sales volume.
General and administrative expenses increased $46,000, or 8.7%, to $578,000
for the three months ended December 31, 2000 compared to $531,000 for the
comparable fiscal 2000 period. General and administrative expenses were 10.3%
and 7.6% of net sales in the respective three-month periods. The increased
general and administrative expenses were primarily due to increased engineering
expenses related to new product development activities.
Other income increased by $21,000 to $30,000 for the three months ended
December 31, 2000 compared to $8,000 for the three months ended December 31,
1999. The increase in other income was due to increased interest income from
increased average balances of cash equivalents.
Net earnings were $6,000, or $0.00 per share - basic and diluted (based on
3.03 million shares outstanding), for the three months ended December 31, 2000,
compared to net earnings of $212,000, or $0.07 per share - basic and diluted
(based on 3.16 million shares outstanding) for the three months ended December
31, 1999. The decrease in net earnings in the first quarter of fiscal 2001
compared to the corresponding quarter in fiscal 2000 was due to decreased sales
offset in part by reduced operating expenses and increased other income.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's primary needs for funds are for working capital and, to a
lesser extent, for capital expenditures. The Company financed its operations
during the first quarter of fiscal 2001 from cash generated from operating
activities and a borrowing under its revolving operating line of credit. Net
cash provided by operating activities was $756,000 for the three months ended
December 31, 2000.
Effective December 15, 2000, the Company acquired for $2.5 million in cash
certain assets of AudioSource, Inc., an unrelated, privately-held corporation
based in Burlingame, California ("AudioSource"). The assets acquired included
certain accounts receivable, inventories, tangible personal property,
intellectual property and other assets used in the home theater and home audio
market. No liabilities of AudioSource were assumed by the Company. The purchase
price was paid from available cash reserves and from a drawdown under the
Company's revolving line of credit.
Cash and cash equivalents decreased by $1,574,000 during the three
months ended December 31, 2000 due principally to the AudioSource acquisition.
Accounts receivable decreased by $980,000 net of amounts acquired from
AudioSource during the first quarter of fiscal 2001 due to a decrease in sales
compared to the fourth quarter of fiscal 2000. Inventories increased by $301,000
net of amounts acquired from AudioSource during the first quarter of
10
fiscal 2001 due to management's efforts to increase certain electronics,
speakers and accessories inventories. Prepaid expenses increased $140,000 during
the three months ended December 31, 2000 primarily due to trade show deposits
and insurance costs incurred at the beginning of the Company's fiscal year.
Accounts payable increased $171,000 during the first quarter of fiscal 2001 due
to the increase in inventories and timing of payment due dates. Accrued expenses
decreased $80,000 due to lower accrued payroll and benefits at December 31,
2000. Overall, net working capital decreased $514,000 during the first quarter
of fiscal 2001 due to the AudioSource acquisition.
The Company made capital expenditures of $139,000 in the three months ended
December 31, 2000. Management anticipates that discretionary capital
expenditures for the remainder of fiscal 2001 will not exceed $400,000. These
anticipated expenditures will be financed from available cash, cash provided
from operations and, if necessary, proceeds from the line of credit.
During January 2001, the Company renewed its revolving operating line of
credit through January 2002 on terms similar to those contained in the prior
agreement. As of December 31, 2000, the Company was eligible to borrow $3.4
million under the line of credit. Borrowings of $345,000 were outstanding under
the line of credit as of that date.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are not
material. As of December 31, 2000, the Company had cash and cash equivalents of
$79,000 compared to $1,654,000 as of September 30, 2000. The Company invests its
excess cash in highly liquid marketable securities with maturities of three
months or less at date of purchase. The Company's cash equivalents are generally
commercial paper and money market accounts. The Company does not invest in
derivative securities.
The Company sells its products primarily in United States dollars, therefore
its exposure to currency exchange rate fluctuations is not material. The Company
does not engage in foreign currency hedging activities.
The Company borrows from time to time under its revolving line of credit.
Any borrowings outstanding under the line of credit bear interest at a variable
rate based on the prime rate or LIBOR plus 1.75%. The Company has not engaged in
interest rate swaps or caps.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.15 Loan Agreement dated January 29, 2001 between the Company
and U.S. Bank National Association
10.16 Promissory Note dated January 29, 2001 made by the Company
in favor of U.S. Bank National Association
(b) Reports on Form 8-K
A current report on Form 8-K dated December 15, 2000, was
filed on December 29, 2000 to disclose an acquisition of
assets from AudioSource, Inc.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX GOLD INTERNATIONAL, INC.
/s/ Joseph K. O'Brien
---------------------------------
Joseph K. O'Brien
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: February 14, 2001
13
INDEX TO EXHIBITS
Exhibit Page
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10.15 Loan Agreement dated January 29, 2001 between the
Company and U.S. Bank National Association 15
10.16 Promissory Note dated January 29, 2001 made by the
Company in favor of U.S. Bank National Association 22
14