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, 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) 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 3,248,745 shares of the issuer's common stock outstanding as of April
30, 1999.
1
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<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
-----
Part I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Balance Sheets at March 31, 1999 (unaudited)
and September 30, 1998 (audited) 3
Statements of Earnings for the Three and Six Months Ended
March 31, 1999 and 1998 (unaudited) 4
Statements of Cash Flows for the Six Months Ended
March 31, 1999 and 1998 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
SIGNATURES 13
INDEX TO EXHIBITS 14
</TABLE>
2
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<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
1999 1998
------------------ ------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,599 $ 2,602
Accounts receivable, net 3,919,912 4,287,965
Inventories 6,017,253 6,886,720
Prepaid expenses 294,504 169,621
Deferred taxes 410,000 446,000
------------------ ------------------
Total current assets 10,644,268 11,792,908
Property and equipment, net 2,191,329 2,522,005
Goodwill, net 197,892 217,702
Deferred taxes 565,000 567,000
Other assets 170,780 108,513
------------------ ------------------
Total assets $ 13,769,269 $ 15,208,128
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 794,065 $ 1,781,341
Line of credit 700,000 900,000
Accrued payroll and benefits 341,083 420,209
Other accrued expenses 377,581 448,214
Current portion of long-term obligations 214,890 222,529
------------------ ------------------
Total current liabilities 2,427,619 3,772,293
Long-term obligations 834,393 938,233
Shareholders' equity:
Preferred stock;
Authorized - 5,000,000 shares; none outstanding - -
Common stock, no par value;
Authorized - 20,000,000 shares
Issued and outstanding - 3,248,745 and 3,464,745 shares 7,192,422 7,548,822
Retained earnings 3,314,835 2,948,780
------------------ ------------------
Total shareholders' equity 10,507,257 10,497,602
------------------ ------------------
Total liabilities and shareholders' equity $ 13,769,269 $ 15,208,128
================== ==================
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
3
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<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31 MARCH 31
------------------------------ -------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 6,200,066 $ 6,613,495 $ 12,866,001 $ 12,671,496
Cost of sales 4,526,449 4,825,618 9,471,332 9,468,822
-------------- -------------- -------------- -------------
Gross profit 1,673,617 1,787,877 3,394,669 3,202,674
Operating expenses:
Selling 795,642 967,358 1,582,323 1,722,411
General and administrative 572,467 619,173 1,114,644 1,185,451
-------------- -------------- -------------- -------------
Total operating expenses 1,368,109 1,586,531 2,696,967 2,907,862
-------------- -------------- -------------- -------------
Income from operations 305,508 201,346 697,702 294,812
Other income (expense):
Interest expense (39,789) (87,351) (88,647) (184,790)
Other income, net - - - 7,975
-------------- -------------- -------------- -------------
Total other income (expense) (39,789) (87,351) (88,647) (176,815)
-------------- -------------- -------------- -------------
Earnings before income taxes 265,719 113,995 609,055 117,997
Income tax expense (106,000) (46,000) (243,000) (47,000)
-------------- -------------- -------------- -------------
Net earnings $ 159,719 $ 67,995 $ 366,055 $ 70,997
============== ============== ============== =============
Earnings per share - basic and diluted $ 0.05 $ 0.02 $ 0.11 $ 0.02
============== ============== ============== =============
Average shares outstanding - basic 3,248,745 3,464,745 3,342,503 3,464,650
============== ============== ============== =============
Average shares outstanding - diluted 3,248,745 3,464,745 3,342,503 3,465,587
============== ============== ============== =============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
4
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<TABLE>
<CAPTION>
PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
MARCH 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 366,055 $ 70,997
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 489,038 506,875
Deferred taxes 38,000 32,000
Changes in operating assets and liabilities:
Accounts receivable 368,053 396,323
Inventories 869,467 329,431
Prepaid expenses (124,883) (129,402)
Other assets (80,002) (10,576)
Accounts payable (987,276) (263,234)
Accrued expenses (149,759) (25,224)
--------------- ---------------
Net cash provided by operating activities 788,693 907,190
Cash flows from investing activities:
Capital expenditures, net (120,817) (168,069)
--------------- ---------------
Net cash used in investing activities (120,817) (168,069)
Cash flows from financing activities:
Line of credit, net (200,000) (571,100)
Repayment of long-term obligations (111,479) (194,979)
Purchase of common stock (356,400) -
Proceeds from exercise of stock options - 26,957
--------------- ---------------
Net cash used in financing activities (667,879) (739,122)
--------------- ---------------
Decrease in cash and cash equivalents (3) (1)
Cash and cash equivalents, beginning of period 2,602 2,603
--------------- ---------------
Cash and cash equivalents, end of period $ 2,599 $ 2,602
=============== ===============
Supplemental disclosures:
Cash paid for interest $ 80,000 $ 190,000
Cash paid for income taxes 120,000 -
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
5
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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 six-month periods ended March 31, 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
March 31, 1999 and the results of its operations for the three- and six-month
periods ended March 31, 1999 and 1998 and its cash flows for the six-months
ended March 31, 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 six months presented ended on March 31.
NOTE 3 - PROSPECTIVE ACCOUNTING CHANGE
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
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NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Raw materials $ 2,294,735 $ 2,732,112
Work-in-process 8,682 8,527
Finished goods 3,646,583 4,058,828
Supplies 67,253 87,253
--------------------- ---------------------
Total inventories $ 6,017,253 $ 6,886,720
===================== =====================
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
MARCH 31, SEPTEMBER 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Machinery, equipment, and vehicles $ 4,595,458 $ 4,526,903
Leasehold improvements 1,575,320 1,527,834
Construction in progress 51,611 46,835
--------------------- ---------------------
6,222,389 6,101,572
Less accumulated depreciation
and amortization (4,031,060) (3,579,567)
--------------------- ---------------------
Total property and equipment, net $ 2,191,329 $ 2,522,005
===================== =====================
</TABLE>
NOTE 6 - LINE OF CREDIT
During December 1998, the Company renewed its $5.5 million revolving
operating line of credit on essentially the same terms through December 1999.
NOTE 7 - COMMITMENTS
The Board of Directors has authorized the Company to purchase up to $1.0
million of Company common stock. On December 15, 1998, the Company acquired
216,000 shares of its common stock from a third party for $356,400.
During December 1998, the Company exercised its option to purchase the
facility which it leases under an operating lease. The purchase price is $3.1
million and the closing is expected to occur on June 30, 1999. Management
intends to sell and leaseback the facility as soon as the purchase is completed.
The completion of the sale and leaseback transaction assumes that management is
able to locate a buyer and negotiate the sale and leaseback on acceptable terms
to the Company. There is no assurance that management will be able to identify a
buyer for the facility and to negotiate a sale and leaseback on acceptable
terms.
7
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net sales decreased $413,000, or 6.3%, to $6.2 million for the three
months ended March 31, 1999, compared to $6.6 million for the three months ended
March 31, 1998 due principally to decreased international sales. Domestic sales
increased $428,000, or 9.8%, to $4.8 million for the three months ended March
31, 1999 compared to $4.4 million for the three months ended March 31, 1998.
International sales decreased 37.8% to $1.4 million from $2.2 million in the
comparable 1998 period. The decrease resulted primarily from an 62.7% decrease
in sales to Europe offset in part by an 19.9% increase in sales to the Asian and
other international markets. International sales represented 22.4% and 33.7% of
net sales for the three months ended March 31, 1999 and 1998, respectively. The
Company expects international sales for fiscal 1999 to remain at levels lower
than historically achieved due to current world-wide economic conditions.
Net sales for the six months ended March 31, 1999 increased $195,000, or
1.5%, to $12.9 million from $12.7 million for the six months ended March 31,
1998 due to increased domestic sales offset in part by decreased international
sales. Domestic sales increased $1.6 million, or 19.4%, to $9.6 million for the
six months ended March 31, 1999 compared to $8.1 million for the six months
ended March 31, 1998. For the six months ended March 31, 1999, international
sales decreased 29.8% to $3.2 million from $4.6 million in the comparable 1998
period. The decrease resulted primarily from decreased sales to Europe and other
international markets. International sales represented 25.1% and 36.3% of net
sales for the six months ended March 31, 1999 and 1998, respectively.
Gross profit remained unchanged at 27.0% of net sales for the three months
ended March 31, 1999 and 1998, respectively. Gross profit increased to 26.4% of
net sales for the six months ended March 31, 1998 from 25.3% for the comparable
prior period. The increase was primarily due to an increased percentage of
domestic versus international sales for the six months ended March 31, 1999 as
compared to the first half of fiscal 1998.
Operating expenses consist of selling, general and administrative
expenses. Total operating expenses decreased $218,000, or 13.8%, to $1,368,000
for the three months ended March 31, 1999 compared to $1,587,000 for the three
months ended March 31, 1998. Operating expenses were 22.1% and 24.0% of net
sales in the respective three-month periods. Operating expenses decreased
$211,000, or 7.3%, to $2,697,000 for the six months ended March 31, 1999
compared to the comparable period in fiscal 1998. Operating expenses were 21.0%
and 22.9% of net sales in the respective six month periods.
Selling expenses decreased $172,000, or 17.8%, to $796,000 for the three
months ended March 31, 1999, compared to $967,000 for the comparable 1998
period. Selling expenses were 12.8% and 14.6% of net sales in the respective
three-month periods. Selling expenses decreased 8.1% in the first half of fiscal
1999, to $1.6 million, compared to $1.7 million for the first half of fiscal
1998. Selling expenses were 12.3% and 13.6% of net sales in the respective six
month periods. The decreased selling expenses were due to reduced promotional
activities and sales incentive programs.
8
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General and administrative expenses decreased $47,000, or 7.5%, to
$572,000 for the three months ended March 31, 1999, compared to $619,000 for the
comparable fiscal 1998 period. General and administrative expenses were 9.2% and
9.4% of net sales in the respective three-month periods. General and
administrative expenses decreased 6.0% in the first half of fiscal 1999, to $1.1
million, compared to $1.2 million for the first half of fiscal 1998. General and
administrative expenses were 8.7% and 9.4% of net sales in the respective six
month periods. The decreased general and administrative expenses were due to
lower payroll costs as a result of decreases in personnel.
Interest expense decreased by $48,000 to $40,000 for the three months
ended March 31, 1999, compared to $87,000 for the three months ended March 31,
1998. Interest expense decreased by $96,000 to $89,000 for the first half of
fiscal 1999 compared to $185,000 for the first half of fiscal 1998. The decrease
was due to decreased borrowings and lower interest rates on the outstanding
borrowings.
Net earnings were $160,000, or $0.05 per share (basic and diluted), for
the three months ended March 31, 1999, compared to net earnings of $68,000, or
$0.02 per share (basic and diluted), for the three months ended March 31, 1998.
Net earnings were $366,000, or $0.11 per share (basic and diluted), for the six
months ended March 31, 1999, compared to net earnings of $71,000, or $0.02 per
share (basic and diluted), for the comparable 1998 period. The increase in net
earnings was due to improved gross margin and 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 six months ended March 31, 1999 from cash generated from operating
activities. Net cash provided by operating activities was $789,000 for the six
months ended March 31, 1999. 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 $368,000, inventories decreased by $869,000
and accounts payable decreased $987,000 during the first half of fiscal 1999 due
to management's continuing efforts to improve working capital efficiency and
reduce outstanding liabilities. Prepaid expenses increased $125,000 during the
six months ended March 31, 1999, primarily due to trade show deposits and
insurance costs incurred in the beginning of the Company's fiscal year. The line
of credit was decreased by $200,000 due to cash generated by reductions in
accounts receivable and inventories. Overall, net working capital increased
$196,000 during the first half of fiscal 1999.
During November 1998, the Board of Directors authorized the Company to
purchase up to $1.0 million of Company common stock. On December 15, 1998, the
Company acquired 216,000 shares of its common stock from a third party for
$356,400 financed by borrowings under the Company's operating line of credit.
9
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The Company made capital expenditures of $121,000 for the six months ended
March 31, 1999. Management anticipates that discretionary capital expenditures
for the remainder of fiscal 1999 will be approximately $200,000. These
anticipated expenditures will be financed by proceeds from the line of credit
and cash provided from operations.
During December 1998, the Company exercised its option to purchase the
office and manufacturing facility which it leases under an operating lease. The
purchase price is $3.1 million and the closing is expected to occur on June 30,
1999. Management intends to sell and leaseback the facility as soon as the
purchase is completed. The completion of the sale and leaseback transaction
assumes that management is able to locate a buyer and negotiate the sale and
leaseback on acceptable terms to the Company. There is no assurance that
management will be able to identify a buyer for the facility and to negotiate a
sale and leaseback on acceptable terms.
During December 1998, the Company renewed its $5.5 million revolving
operating line of credit on essentially the same terms through December 1999. As
of March 31, 1999, the Company was eligible to borrow $4.4 million under the
line of credit. Borrowings under the line of credit were $700,000 as of that
date.
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
- --------------------
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, readily 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 $20,000, 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 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.
10
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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; and cost and yield
issues associated with production at the Company's factory.
11
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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 16, 1999. 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:
<TABLE>
<CAPTION>
Shares Shares Shares Broker
Name Voted for Withheld Abstaining Non-votes
<S> <C> <C> <C> <C>
Keith A. Peterson 3,185,765 9,650 0 0
Timothy G. Johnson 3,182,765 12,650 0 0
Robert A. Brown 3,185,765 9,650 0 0
Edward A. Foehl 3,185,765 9,650 0 0
Frank G. Magdlen 3,182,765 12,650 0 0
</TABLE>
2. The shareholders voted to ratify management's selection of auditors for
fiscal 1999 by the affirmative vote of 3,186,061 shares, with 9,100 shares
voting against ratification and 254 shares abstaining. There were no broker
non-votes with respect to this proposition.
12
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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 7, 1999
13
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
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<S> <C>
10.1 Nonstatutory Stock Option Agreement dated February 16, 1999
between the Company and Frank G. Magdlen 15
27 Financial Data Schedule 20
</TABLE>
14
EXHIBIT 10.1
PHOENIX GOLD INTERNATIONAL, INC.
GRANT NSO-15
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of February 16, 1999 between PHOENIX GOLD
INTERNATIONAL, INC., an Oregon corporation (the "Company"), and FRANK G. MAGDLEN
(the "Optionee").
Optionee has been granted a nonstatutory stock option to purchase shares
of the Company's Common Stock, without par value per share (the "Common Stock"),
in the amount indicated below. This option is granted outside of the Company's
Amended and Restated 1995 Stock Option Plan (the "Plan"). Nonetheless, certain
of the terms and conditions of the Plan are incorporated into this Option
Agreement by reference.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained in this Option Agreement, the parties agree as follows:
1. GRANT. The Company grants to Optionee, upon the terms and conditions
set forth below, the right and option (the "Option") to purchase 1,400 shares of
Common Stock at an exercise price of $3.125 per share (the "Exercise Price").
The Option is a Nonstatutory Stock Option and is not intended to qualify as an
Incentive Stock Option under Section 422 of the Code.
2. TERM OF OPTION. Subject to reductions in the term of the Option as
provided in this Option Agreement, the Option shall continue in effect until
February 15, 2004, and may be exercised during such term only in accordance with
the provisions of the Plan and this Option Agreement.
3. VESTING SCHEDULE. The Option may be exercised, in whole or in part, in
accordance with the following schedule: (a) on the first anniversary of the date
hereof, one-third of the shares purchasable under the Option may be purchased,
in whole or in part, at any time thereafter until the Option expires; and (b)
continuing on each of the second and third anniversaries of the date hereof, an
additional one-third of the shares purchasable under the Option may be purchased
at any time thereafter until the Option expires.
4. EXERCISE OF OPTION.
A. RIGHT TO EXERCISE. The Option is exercisable during its term in
accordance with the vesting schedule set forth above in Section 3 and the
applicable provisions of this Option Agreement. In the event that the Optionee's
service with the Company terminates during the term of the Option, the
exercisability of the Option shall be governed by the applicable provisions of
the Plan, as if the Option had been granted under the Plan, and this Option
Agreement.
15
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B. METHOD OF EXERCISE. The Option is exercisable by delivery of an
exercise notice, which notice shall state the election to exercise the Option,
the number of shares of Common Stock in respect of which the Option is being
exercised (the "Exercised Shares"), and such other representations and
agreements as may be required by the Company pursuant to the provisions of the
Plan. In addition, Optionee agrees to execute, as a condition of Option
exercise, such agreements respecting the Exercised Shares as the Committee, in
its reasonable discretion, determines to be required under the terms of
agreements to which the Company is a party or otherwise advisable and in the
best interests of the Company. The exercise notice shall be signed by Optionee
and shall be delivered in person or by certified mail to the Secretary of the
Company. The exercise notice shall be accompanied by payment of the aggregate
Exercise Price as to all the Exercised Shares. The Option shall be deemed to be
exercised upon receipt by the Company of such fully executed exercise notice
accompanied by such aggregate Exercise Price. For income tax purposes the
Exercised Shares shall be considered transferred to Optionee on the date the
Option is exercised with respect to such Exercised Shares.
5. CONDITIONS. The obligations of the Company under this Option
Agreement shall be subject to the approval of such state or federal authorities
or agencies as may have jurisdiction in the matter. The Company will use its
best efforts to take such steps as may be required by state or federal law or
applicable regulations, including rules and regulations of the Securities and
Exchange Commission and any national securities exchange on which the Common
Stock may then be listed, in connection with the issuance or sale of any shares
acquired pursuant to this Option Agreement or the listing of such shares on any
such exchange. The Company shall not be obligated to issue or deliver shares of
Common Stock under this Option Agreement if, upon advice of its legal counsel,
such issuance or delivery would violate state or federal securities laws.
6. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of Optionee:
(a) cash; or
(b) check; or
(c) delivery of such documentation as the Committee and Optionee's
broker shall require to effect an exercise of the Option and delivery to the
Company of the sale or margin loan proceeds required to pay the aggregate
Exercise Price of the Exercised Shares; or
(d) surrender of other shares of Common Stock which have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.
7. RESTRICTION ON TRANSFER. The Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution or, with
the consent of the Committee, pursuant to a qualified domestic relations order
(a "QDRO") as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, and may be exercised during the lifetime of
Optionee only by Optionee or Optionee's guardian or legal representative or
Optionee's permitted assignee or transferee pursuant to a QDRO. The terms of the
Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and permitted assigns of Optionee.
16
<PAGE>
8. Legends. All certificates representing any of the shares of Common
Stock subject to the provisions of this Option Agreement may, in the sole
discretion of the Committee, have endorsed thereon the following legends:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED."
(b) Any legend required to be placed thereon by applicable Blue Sky
laws of any state.
(c) Any legend required to be placed thereon by any applicable
shareholder agreement.
9. EMPLOYMENT; SERVICE. Nothing in the Plan or in this Option
Agreement shall (a) confer upon the Optionee any right with respect to
employment with the Company or any affiliate of the Company or (ii) interfere in
any way with the right of the Company or any affiliate of the Company to
terminate the Optionee's employment (or service as a Director, in accordance
with applicable corporate law, or service as a Consultant) at any time for any
reason, with or without cause.
10. THE PLAN. Although the Option has been granted outside of the
Plan, the parties desire that the Option be subject to the terms and conditions
of the Plan as if it had been granted under the Plan.
11. DEFINITIONS. Any capitalized term in this Option Agreement which
is not defined herein and which is defined in the Plan shall have the same
definition as in the Plan.
12. GOVERNING LAW. To the extent that federal laws (such as the Code
and the federal securities laws) do not otherwise control, the Plan and this
Option Agreement shall be construed in accordance with the laws of the state of
Oregon.
13. HEADINGS. Headings contained in this Option Agreement are for
reference purposes and shall not affect the meaning or interpretation of this
Option Agreement.
14. GENERAL. Optionee and the Company agree that the Option is granted
under and governed by the terms and conditions of this Option Agreement and
governed by the terms and conditions of the Plan as set forth in Section 10.
Optionee has reviewed the Plan and this Option Agreement in their entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Option Agreement and fully understands all provisions of the Plan and Option
Agreement. Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Committee upon any questions relating to the
Plan and Option Agreement.
17
<PAGE>
OPTIONEE: PHOENIX GOLD INTERNATIONAL, INC.
/s/ Frank G. Magdlen By: /s/ Keith A. Peterson
- --------------------------------- -----------------------------
Signature Keith A. Peterson, President
FRANK G. MAGDLEN By: /s/ Timothy G. Johnson
- --------------------------------- -----------------------------
Print Name Timothy G. Johnson, Executive
Vice President
- ---------------------------------
Social Security Number
18
<PAGE>
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase shares of Common
Stock as set forth in this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement, and further agrees that any joint or community property interest
shall be similarly bound. The undersigned hereby appoints the undersigned's
spouse as attorney-in-fact for the undersigned with respect to any amendment or
exercise of rights under the Plan or this Option Agreement.
/s/ Sherri Magdlen
-------------------------------------
Spouse of Optionee
SHERRI MAGDLEN
-------------------------------------
Print name
February 28, 1999
-------------------------------------
Date signed
19
<TABLE> <S> <C>
<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, 1999 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-26-1999
<PERIOD-END> MAR-28-1999
<CASH> 2,599
<SECURITIES> 0
<RECEIVABLES> 3,919,912
<ALLOWANCES> 0
<INVENTORY> 6,017,253
<CURRENT-ASSETS> 10,644,268
<PP&E> 6,222,389
<DEPRECIATION> 4,031,060
<TOTAL-ASSETS> 13,769,269
<CURRENT-LIABILITIES> 2,427,619
<BONDS> 834,393
<COMMON> 7,192,422
0
0
<OTHER-SE> 3,314,835
<TOTAL-LIABILITY-AND-EQUITY> 13,769,269
<SALES> 12,866,001
<TOTAL-REVENUES> 12,866,001
<CGS> 9,471,332
<TOTAL-COSTS> 9,471,332
<OTHER-EXPENSES> 2,696,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,647
<INCOME-PRETAX> 609,055
<INCOME-TAX> 243,000
<INCOME-CONTINUING> 366,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 366,055
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
