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 March 31, 1998, 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) 288-2008
- ------------------------------------------------------------------------------
(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 3,464,745 shares of the issuer's common stock outstanding as of
April 30, 1998.
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<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
Form 10-Q for the Quarter Ended March 31, 1998
INDEX
Part I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Balance Sheets at March 31, 1998 (unaudited)
and September 30, 1997 (audited) 3
Statements of Operations for the Three and Six Months Ended
March 31, 1998 and 1997 (unaudited) 4
Statements of Cash Flows for the Six Months Ended
March 31, 1998 and 1997 (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 4. Submission of Matters to a Vote of Security Holders 12
SIGNATURES 13
INDEX TO EXHIBITS 14
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
March 31, September 30,
1998 1997
------------------ ------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,602 $ 2,603
Accounts receivable, net 4,790,307 5,186,630
Inventories 6,849,389 7,178,820
Prepaid expenses 376,925 247,523
Deferred taxes 349,000 380,000
------------------ ------------------
Total current assets 12,368,223 12,995,576
Property and equipment, net 3,175,803 3,478,827
Goodwill, net 237,513 257,324
Deferred taxes 230,000 231,000
Other assets 487,027 492,422
------------------ ------------------
Total assets $ 16,498,566 $ 17,455,149
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,295,515 $ 1,558,749
Notes payable 2,576,836 3,147,936
Accrued payroll and benefits 296,348 373,512
Other accrued expenses 293,277 241,337
Current portion of long-term obligations 365,799 395,669
------------------ ------------------
Total current liabilities 4,827,775 5,717,203
Long-term obligations 329,818 494,927
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 3,792,151 3,721,154
------------------ ------------------
Total shareholders' equity 11,340,973 11,243,019
------------------ ------------------
Total liabilities and shareholders' equity $ 16,498,566 $ 17,455,149
================== ==================
See Notes to Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31 March 31
------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 6,613,495 $ 6,263,430 $ 12,671,496 $ 11,835,706
Cost of sales 4,825,618 4,765,382 9,468,822 9,360,529
-------------- -------------- ------------- --------------
Gross profit 1,787,877 1,498,048 3,202,674 2,475,177
Operating expens
Selling 967,358 744,340 1,722,411 1,511,754
General and administrative 619,173 657,266 1,185,451 1,258,922
-------------- -------------- ------------- --------------
Total operating expenses 1,586,531 1,401,606 2,907,862 2,770,676
-------------- -------------- ------------- --------------
Income (loss) from operations 201,346 96,442 294,812 (295,499)
Other income (expense):
Interest expense (87,351) (138,496) (184,790) (252,338)
Other income, net - - 7,975 1,280
-------------- -------------- ------------- --------------
Total other income (expense) (87,351) (138,496) (176,815) (251,058)
-------------- -------------- ------------- --------------
Earnings (loss) before income taxes 113,995 (42,054) 117,997 (546,557)
Income tax benefit (expense) (46,000) 17,000 (47,000) 209,000
-------------- -------------- ------------- --------------
Net earnings (loss) $ 67,995 $ (25,054) $ 70,997 $ (337,557)
============== ============= ============= ==============
Net earnings (loss) per share - basic and diluted $ 0.02 $ (0.01) $ 0.02 $ (0.10)
============== ============= ============= ==============
See Notes to Financial Statements
</TABLE>
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<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 70,997 $ (337,557)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 506,875 483,810
Deferred taxes 32,000 (213,239)
Changes in operating assets and liabilities:
Accounts receivable 396,323 831,379
Inventories 329,431 730,145
Prepaid expenses (129,402) (72,382)
Other assets (10,576) (68,154)
Accounts payable (263,234) (1,726,379)
Accrued expenses (25,224) (232,015)
---------------- ----------------
Net cash provided by (used in) operating activities 907,190 (604,392)
Cash flows from investing activities:
Capital expenditures, net (168,069) (156,211)
---------------- ----------------
Net cash used in investing activities (168,069) (156,211)
Cash flows from financing activities:
Notes payable, net (571,100) 24,602
Proceeds from long-term obligations - 800,000
Repayment of long-term obligations (194,979) (63,996)
Proceeds from exercise of stock options 26,957 -
---------------- ----------------
Net cash provided by (used in) financing activities (739,122) 760,606
---------------- ----------------
Increase (decrease) in cash and cash equivalents (1) 3
Cash and cash equivalents, beginning of period 2,603 2,599
---------------- ----------------
Cash and cash equivalents, end of period $ 2,602 $ 2,602
================ ================
Supplemental disclosures:
Cash paid for interest $ 190,122 $ 252,655
Cash paid for income taxes - 169,859
See Notes to Financial Statements
</TABLE>
<PAGE>
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-KSB for the year
ended September 30, 1997 filed with the Securities and Exchange Commission. The
results of operations for the three- and six-month periods ended March 31, 1998
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
March 31, 1998 and the results of its operations for the three- and six-month
periods ended March 31, 1998 and 1997 and its cash flows for the six-months
ended March 31, 1998 and 1997.
Note 2 - REPORTING PERIODS
The Company's fiscal year is the 52-week or 53-week period ending the last
Sunday in September. Fiscal 1998 and fiscal 1997 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 six months presented ended on March 31.
Note 3 - PROSPECTIVE ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the year ending September 30,
1999. Reclassification of earlier financial statements for comparative purposes
is required.
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.
<PAGE>
Note 4 - INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
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<CAPTION>
March 31, September 30,
1998 1997
--------------------- ---------------------
<S> <C> <C>
Raw materials $ 2,710,586 $ 2,818,409
Work-in-process 8,111 11,867
Finished goods 4,002,143 4,204,428
Supplies 128,549 144,116
===================== =====================
Total inventories $ 6,849,389 $ 7,178,820
===================== =====================
</TABLE>
Note 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
--------------------- ---------------------
<S> <C> <C>
Machinery, equipment, and vehicles $ 4,656,748 $ 4,434,003
Leasehold improvements 1,615,109 1,590,012
Construction in progress 67,304 155,052
--------------------- ---------------------
6,339,161 6,179,067
Less accumulated depreciation
and amortization (3,163,358) (2,700,240)
===================== =====================
Total property and equipment, net $ 3,175,803 $ 3,478,827
===================== =====================
</TABLE>
Note 6 - NOTE PAYABLE
During December 1997, the Company renewed the $5.5 million revolving bank
operating line of credit through December 1998. Borrowings under the renewed
line of credit are limited to eligible accounts receivable and inventories and
are subject to certain additional limits. Interest on borrowings is equal to the
bank's prime lending rate (8.5% at March 31, 1998) plus an additional percentage
based on debt service coverage. Beginning January 1, 1998, the additional
percentage was 1.00% which decreased to 0.50% effective April 1, 1998.
Borrowings under the line of credit are secured only by accounts receivable,
inventories and certain equipment. 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 March 31, 1998,
the Company was in compliance with the above covenants.
<PAGE>
Note 7 - EARNINGS (LOSS) PER SHARE
Effective beginning in fiscal 1998, the Company adopted SFAS No. 128,
Earnings Per Share. SFAS No. 128 established new standards for computing and
presenting earnings per share. The earnings (loss) per share calculation is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 67,995 $ (25,054) $ 70,997 $ (337,557)
=============== =============== =============== ===============
Shares used in per share calculation:
Weighted average shares outstanding 3,464,745 3,464,650 3,454,605 3,454,605
Effect of dilutive options and warrants - - 937 -
--------------- --------------- --------------- ---------------
Weighted average shares outstanding - diluted 3,464,745 3,454,605 3,465,587 3,454,605
=============== =============== =============== ===============
Net earnings (loss) per share - basic and diluted $ 0.02 $ (0.01) $ 0.02 $ (0.10)
=============== =============== =============== ===============
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Net sales increased $350,000, or 5.6%, to $6.6 million for the three
months ended March 31, 1998, compared to $6.3 million for the three months ended
March 31, 1997. Sales of electronics products in the quarter ended March 31,
1998 increased 11.8% from the quarter ended March 31, 1997. Increased sales of
car audio electronics were partially offset by decreased sales of professional
sound electronics. Car audio electronic sales increased due to the continuing
success of the XS and QX series of car audio amplifiers that are designed to
address lower price points. Sales of professional audio electronics decreased
due to weaker distribution and dealer demand, and softness in Asia. Sales of
speakers increased 33.1% due to the introduction of the new XS products and
growth in XMAX sales. Sales of accessories decreased 10.3% in the second quarter
of fiscal 1998 compared to the corresponding quarter in fiscal 1997 due to
increased competition and market softness in Asia.
Net sales for the six months ended March 31, 1998 increased $836,000, or
7.1%, to $12.7 million from $11.8 million for the six months ended March 31,
1997. Sales of electronics products increased 14.7% in the first half of fiscal
1998 compared to the first half of fiscal 1997. Sales of speakers increased 9.9%
and sales of accessories declined 3.6% in the respective periods.
For the three months ended March 31, 1998, international sales decreased
6.2% to $2.3 million from $2.4 million in the comparable 1997 period. The
decrease resulted primarily from an 86.0% decrease in sales to Asia offset in
part by an 40.9% increase in sales to the European markets. International sales
represented 34.3% and 38.6% of net sales for the three months ended March 31,
1998 and 1997, respectively. The Company remains cautious about future sales in
Asia.
For the six months ended March 31, 1998, international sales increased
3.6% to $4.6 million from $4.5 million in the comparable 1997 period. The
increase resulted primarily from increased sales to Europe offset in part by
reduced sales to Asia. International sales represented 36.6% and 37.8% of net
sales for the six months ended March 31, 1998 and 1997, respectively.
Gross profit increased to 27.0% from 23.9% of net sales for the three
months ended March 31, 1998 and 1997, respectively. Gross profit increased to
25.3% of net sales for the six months ended March 31, 1998 from 20.9% for the
comparable prior period. The increases were primarily due to an increased
percentage of domestic versus international sales, changes in product mix and
increased sales volume which decreased manufacturing overhead as a percentage of
sales.
Operating expenses consist of selling, general and administrative
expenses. Total operating expenses increased $185,000, or 13.2%, to $1,587,000
for the three months ended March 31, 1998 compared to $1,402,000 for the three
months ended March 31, 1997. Operating expenses were 24.0% and 22.4% of net
sales in the respective three-month periods. Operating expenses increased
$137,000, or 5.0%, to $2,908,000 for the six months ended March 31, 1998
compared to the comparable period in fiscal 1997. Operating expenses were 22.9%
and 23.4% of net sales in the respective six month periods.
<PAGE>
Selling expenses increased $223,000, or 30.0%, to $967,000 for the three
months ended March 31, 1998, compared to $744,000 for the comparable 1997
period. Selling expenses were 14.6% and 11.9% of net sales in the respective
three-month periods. Selling expenses increased 13.9% in the first half of
fiscal 1998, to $1.7 million, compared to $1.5 million for the first half of
fiscal 1997. Selling expenses were 13.6% and 12.8% of net sales in the
respective six month periods. The increased selling expenses were due to
promotion of new products and domestic sales incentive programs.
General and administrative expenses decreased $38,000, or 5.8%, to
$619,000 for the three months ended March 31, 1998, compared to $657,000 for the
comparable fiscal 1997 period. General and administrative expenses were 9.4% and
10.5% of net sales in the respective three-month periods. General and
administrative expenses decreased 5.8% in the first half of fiscal 1998, to $1.2
million, compared to $1.3 million for the first half of fiscal 1997. General and
administrative expenses were 9.4% and 10.6% of net sales in the respective six
month periods. The decreased general and administrative expenses were due to
lower bad debt expense and continuing cost control programs.
Interest expense decreased by $51,000 to $87,000 for the three months
ended March 31, 1998, compared to $138,000 for the three months ended March 31,
1997. Interest expense decreased by $68,000 to $185,000 for the first half of
fiscal 1998 compared to $252,000 for the first half of fiscal 1997. The decrease
was due to decreased borrowings.
Net earnings were $68,000, or $0.02 earnings per share (basic and diluted)
for the three months ended March 31, 1998, compared to a net loss of $25,000, or
$0.01 loss per share (basic and diluted) for the three months ended March 31,
1997. Net earnings were $71,000, or $0.02 earnings per share (basic and diluted)
for the six months ended March 31, 1998, compared to a net loss of $338,000, or
$0.10 loss per share (basic and diluted) for the comparable 1997 period. The
increase in net earnings was due to increased sales, improved gross margin and
reduced operating expenses 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 six months ended March 31, 1998 from cash generated from operating
activities. Net cash provided by operating activities was $907,000 for the six
months ended March 31, 1998. 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 investing and accumulating excess cash, resulting in low
reported cash balances.
Accounts receivable decreased $396,000, inventories decreased by $329,000
and accounts payable decreased $263,000 during the first half of fiscal 1998,
leading to a increase in working capital of $262,000 during the six-month
period.
Prepaid expenses increased $129,000 during the six months ended March 31,
1998, primarily due to trade show deposits and insurance costs incurred in the
beginning of the Company's fiscal year.
<PAGE>
The Company made capital expenditures of $168,000 for the six months ended
March 31, 1998. Management anticipates that discretionary capital expenditures
for the remainder of fiscal 1998 will be approximately $300,000. These
anticipated expenditures will be financed from proceeds of short-term debt and
cash provided from operations.
During December 1997, the Company renewed the $5.5 million revolving bank
operating line of credit through December 1998. Borrowings under the renewed
line of credit are limited to eligible accounts receivable and inventories and
are subject to certain additional limits. Interest on borrowings is equal to the
bank's prime lending rate (8.5% at March 31, 1998) plus an additional percentage
based on debt service coverage. Beginning January 1, 1998, the additional
percentage was 1.00% which decreased to 0.50% effective April 1, 1998.
Borrowings under the line of credit are secured only by accounts receivable,
inventories and certain equipment. 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 March 31, 1998,
the Company was eligible to borrow $5.4 million under the line of credit.
Borrowings under the line of credit were $2.6 million as of that date.
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 including Asia; 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.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on February 17, 1998. Voting
common shareholders took the following actions at the meeting:
1. The shareholders elected the following nominees to the Company's Board of
Directors to serve until the next annual meeting of shareholders or until their
successors are elected and qualified:
Shares Shares Shares
Name Voted for Withheld Abstaining
Keith A. Peterson 3,408,270 4,775 0
Timothy G. Johnson 3,408,370 4,675 0
Frank G. Magdlen 3,408,370 4,675 0
2. The shareholders voted to ratify management's selection of auditors for
fiscal 1998 by the affirmative vote of 3,377,404 shares, with 34,312 shares
voting against ratification and 1,329 shares abstaining.
<PAGE>
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: May 5, 1998
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
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27 Financial Data Schedule 15
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PHOENIX
GOLD INTERNATIONAL, INC.'S FINANCIAL STATEMENTS CONTAINED IN ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDING MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-END> MAR-29-1998
<CASH> 2,602
<SECURITIES> 0
<RECEIVABLES> 4,790,307
<ALLOWANCES> 0
<INVENTORY> 6,849,389
<CURRENT-ASSETS> 12,368,223
<PP&E> 6,339,161
<DEPRECIATION> 3,163,358
<TOTAL-ASSETS> 16,498,566
<CURRENT-LIABILITIES> 4,827,775
<BONDS> 329,818
0
0
<COMMON> 7,548,822
<OTHER-SE> 3,792,151
<TOTAL-LIABILITY-AND-EQUITY> 16,498,566
<SALES> 12,671,496
<TOTAL-REVENUES> 12,671,496
<CGS> 9,468,822
<TOTAL-COSTS> 9,468,822
<OTHER-EXPENSES> 2,907,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,790
<INCOME-PRETAX> 117,997
<INCOME-TAX> 47,000
<INCOME-CONTINUING> 70,997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,997
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
