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 25, 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 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 3,026,945 shares of the issuer's common stock outstanding as of
July 31, 2000.
1
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PHOENIX GOLD INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
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Part I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Balance Sheets at June 30, 2000
and September 30, 1999 (unaudited) 3
Statements of Earnings for the Three and Nine Months Ended
June 30, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the Nine Months Ended
June 30, 2000 and 1999 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
INDEX TO EXHIBITS 13
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PHOENIX GOLD INTERNATIONAL, INC.
BALANCE SHEETS
(UNAUDITED)
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JUNE 30, SEPTEMBER 30,
2000 1999
--------------- ---------------
ASSETS
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Current assets:
Cash and cash equivalents $ 1,074,057 $ 868,458
Accounts receivable, net 3,967,342 4,794,799
Inventories 5,533,194 5,620,835
Prepaid expenses 247,541 213,677
Deferred taxes 340,000 315,000
--------------- ---------------
Total current assets 11,162,134 11,812,769
Property and equipment, net 939,917 1,055,531
Goodwill, net 148,365 178,081
Deferred taxes 610,000 600,000
Other assets 311,728 242,058
--------------- ---------------
Total assets $13,172,144 $13,888,439
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 383,144 $ 1,074,881
Accrued payroll and benefits 348,541 436,970
Other accrued expenses 387,837 379,782
Income taxes payable - 81,644
--------------- ---------------
Total current liabilities 1,119,522 1,973,277
Deferred gain on sale of facility 882,698 956,256
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 3,234,345 shares 6,550,928 7,155,997
Retained earnings 4,618,996 3,802,909
--------------- ---------------
Total shareholders' equity 11,169,924 10,958,906
--------------- ---------------
Total liabilities and shareholders' equity $13,172,144 $13,888,439
=============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
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Net sales $ 7,056,124 $ 7,454,978 $ 20,460,959 $ 20,320,979
Cost of sales 4,980,598 5,399,452 14,701,033 14,870,784
-------------- -------------- -------------- --------------
Gross profit 2,075,526 2,055,526 5,759,926 5,450,195
Operating expenses:
Selling 957,638 883,550 2,798,175 2,465,873
General and administrative 527,314 585,084 1,632,254 1,699,728
-------------- -------------- -------------- --------------
Total operating expenses 1,484,952 1,468,634 4,430,429 4,165,601
-------------- -------------- -------------- --------------
Income from operations 590,574 586,892 1,329,497 1,284,594
Other income (expense):
Interest expense - (27,991) - (116,638)
Other income, net 13,930 - 25,590 -
-------------- -------------- -------------- --------------
Total other income (expense) 13,930 (27,991) 25,590 (116,638)
-------------- -------------- -------------- --------------
Earnings before income taxes 604,504 558,901 1,355,087 1,167,956
Income tax expense (241,000) (223,000) (539,000) (466,000)
-------------- -------------- -------------- --------------
Net earnings $ 363,504 $ 335,901 $ 816,087 $ 701,956
============== ============== ============== ==============
Earnings per share - basic and diluted $ 0.12 $ 0.10 $ 0.27 $ 0.21
============== ============== ============== ==============
Average shares outstanding -
basic and diluted 3,028,946 3,246,231 3,077,960 3,310,412
============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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PHOENIX GOLD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
--------------- ---------------
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Cash flows from operating activities:
Net earnings $ 816,087 $ 701,956
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 475,567 740,428
Deferred taxes (35,000) 161,000
Changes in operating assets and liabilities:
Accounts receivable 827,457 (178,778)
Inventories 87,641 989,269
Prepaid expenses (33,864) (93,176)
Other assets (116,843) (80,002)
Accounts payable (691,737) (422,728)
Accrued expenses (162,018) (160,858)
--------------- ---------------
Net cash provided by operating activities 1,167,290 1,656,111
Cash flows from investing activities:
Capital expenditures, net (356,622) (220,284)
--------------- ---------------
Net cash used in investing activities (356,622) (220,284)
Cash flows from financing activities:
Line of credit, net - (900,000)
Repayment of long-term obligations - (169,254)
Purchase of common stock (605,069) (366,575)
--------------- ---------------
Net cash used in financing activities (605,069) (1,435,829)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 205,599 (2)
Cash and cash equivalents, beginning of period 868,458 2,602
--------------- ---------------
Cash and cash equivalents, end of period $ 1,074,057 $ 2,600
=============== ===============
Supplemental disclosures:
Cash paid for interest $ - $ 130,000
Cash paid for income taxes 658,000 220,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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, 1999 filed with the Securities and Exchange Commission. The
results of operations for the three- and nine-month periods ended June 30, 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
June 30, 2000 and the results of its operations for the three- and nine-month
periods ended June 30, 2000 and 1999 and its cash flows for the nine-months
ended June 30, 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 2000 and fiscal 1999 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 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new statement will require 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.
The Company does not expect adoption of this statement to have a material impact
on its financial position or results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition, in December 1999. The Company believes that
compliance with the guidance provided in SAB No. 101 will not have a material
impact on future operating results.
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Note 4 - INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
JUNE 30, SEPTEMBER 30,
2000 1999
----------------- -----------------
Raw materials and work-in-process $ 2,220,501 $ 2,531,260
Finished goods and supplies 3,312,693 3,089,575
----------------- -----------------
Total inventories $ 5,533,194 $ 5,620,835
================= =================
Note 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30, SEPTEMBER 30,
2000 1999
----------------- -----------------
Machinery, equipment, and vehicles $ 4,996,939 $ 4,717,198
Leasehold improvements 75,266 3,829
----------------- -----------------
5,072,205 4,721,027
Less accumulated depreciation
and amortization (4,132,288) (3,665,496)
----------------- -----------------
Total property and equipment, net $ 939,917 $ 1,055,531
================= =================
Note 6 - LINE OF CREDIT
During December 1999, the Company renewed its revolving operating line of
credit through December 2000. The new agreement provides for borrowings of up to
$5.0 million subject to eligible accounts receivable and inventories and certain
additional limits. Interest on the borrowings is equal to the bank's prime
lending rate (9.5% at June 30, 2000) or LIBOR plus 1.75%. Borrowings under the
line of credit are secured by cash and cash equivalents, accounts receivable and
inventories. The line of credit contains covenants which require a minimum level
of tangible net worth, a minimum ratio of current assets to current liabilities
and a maximum ratio of interest bearing debt to tangible net worth. As of
June 30, 2000, the Company was eligible to borrow $4.9 million under the line of
credit. No borrowings were outstanding under the line of credit as of that date.
Note 7 - SHAREHOLDERS' EQUITY
The Board of Directors has authorized the Company to purchase up to $1.0
million of Company common stock. During the nine months ended June 30, 2000, the
Company acquired 207,400 shares of its common stock for $605,000. From the
inception of the stock repurchase program, the Company has acquired $998,000 of
Company common stock.
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 $399,000, or 5.4%, to $7.1 million for the three months
ended June 30, 2000 from $7.5 million for the three months ended June 30, 1999
due principally to decreased international sales. International sales decreased
19.6% to $1.8 million from $2.3 million in the comparable 1999 period. The
decrease resulted primarily from a 40.1% decrease in sales to Asia and a 39.0%
decrease in sales to Europe offset in part by a 21.2% increase in sales to other
international markets. International sales represented 25.7% and 30.2% of net
sales for the three months ended June 30, 2000 and 1999, respectively. Domestic
sales increased $42,000, or 0.8%, to $5.24 million for the three months ended
June 30, 2000 compared to $5.20 million for the three months ended
June 30, 1999. The Company expects international sales for fiscal 2000 to
remain at levels lower than historically achieved due to current world-wide
economic conditions.
Net sales for the nine months ended June 30, 2000 increased $140,000, or
0.7%, to $20.5 million from $20.3 million for the nine months ended
June 30, 1999 due to increased domestic sales offset in part by decreased
international sales. Domestic sales increased $372,000, or 2.5%, to $15.2
million for the nine months ended June 30, 2000 compared to $14.8 million for
the nine months ended June 30, 1999. For the nine months ended June 30, 2000,
international sales decreased 4.2% to $5.2 million from $5.5 million in the
comparable 1999 period. The decrease resulted primarily from a 23.8% decrease
in sales to Europe offset in part by a 33.6% increase in sales to Asia and a
9.4% increase in sales to other international markets. International sales
represented 25.6% and 26.9% of net sales for the nine months ended June 30, 2000
and 1999, respectively.
Gross profit increased to 29.4% of net sales for the three months ended
June 30, 2000 from 27.6% for the three months ended June 30, 1999. Gross profit
increased to 28.2% of net sales for the nine months ended June 30, 2000 from
26.8% for the comparable prior period. The increase was primarily due to sales
mix and reduced depreciation expense which caused manufacturing overhead to
decrease as a percentage of sales.
Operating expenses consist of selling, general and administrative expenses.
Total operating expenses increased $16,000, or 1.1%, to $1,485,000 for the three
months ended June 30, 2000 compared to $1,469,000 for the three months ended
June 30, 1999. Operating expenses were 21.0% and 19.7% of net sales in the
respective three-month periods. Operating expenses increased $265,000, or 6.4%,
to $4,430,000 for the nine months ended June 30, 2000 compared to $4,166,000 for
the comparable period in fiscal 1999. Operating expenses were 21.7% and 20.5% of
net sales in the respective nine-month periods.
Selling expenses increased $74,000, or 8.4%, to $958,000 for the three months
ended June 30, 2000 compared to $884,000 for the comparable 1999 period. Selling
expenses were 13.6% and 11.9% of net sales in the respective three-month
periods. Selling expenses increased 13.5% in the first nine months of fiscal
2000, to $2.8 million, compared to $2.5 million for the first nine months of
fiscal 1999. Selling expenses were 13.7% and 12.1% of net sales in the
respective nine month periods. The increased selling expenses were due to
increased promotional activities and sales incentive programs.
8
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General and administrative expenses decreased $58,000, or 9.9%, to $527,000
for the three months ended June 30, 2000 compared to $585,000 for the comparable
1999 period. General and administrative expenses were 7.5% and 7.8% of net sales
in the respective three-month periods. General and administrative expenses
decreased $67,000, or 4.0%, in the first nine months of fiscal 2000, to
$1,632,000, compared to $1,700,000 for the first nine months of fiscal 1999.
General and administrative expenses were 8.0% and 8.4% of net sales in the
respective nine-month periods. The decreased general and administrative expenses
were due to lower depreciation and bad debt expenses offset in part by higher
payroll costs.
Interest expense decreased by $28,000 to $0 for the three months ended
June 30, 2000, compared to $28,000 for the three months ended June 30, 1999.
Interest expense decreased by $117,000 to $0 for the first nine months of
fiscal 2000 compared to $117,000 for the first nine months of fiscal 1999. The
decrease in interest expense was due to repayment of all short and long-term
borrowings in fiscal 1999.
Net earnings were $364,000, or $0.12 per share - basic and diluted (based on
3.0 million shares outstanding), for the three months ended June 30, 2000,
compared to net earnings of $336,000, or $0.10 per share - basic and diluted
(based on 3.2 million shares outstanding), for the three months ended
June 30, 1999. Net earnings were $816,000, or $0.27 per share - basic and
diluted (based on 3.1 million shares outstanding), for the nine months ended
June 30, 2000, compared to net earnings of $702,000, or $0.21 per share -
basic and diluted (based on 3.3 million shares outstanding), for the comparable
1999 period. The increase in net earnings was due to improved gross margin and
reduced interest expense.
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, 2000 from cash generated from operating
activities. Net cash provided by operating activities was $1,167,000 for the
nine months ended June 30, 2000. In periods prior to September 30, 1999, when
cash flow from operations was less than current needs, the Company increased the
balance owing on its operating line of credit. When cash flow from operations
exceeded current needs, the Company paid down the balance owing on its operating
line of credit rather than investing and accumulating excess cash, which
practices resulted in low reported cash balances.
Cash and cash equivalents increased by $206,000 during the nine months ended
June 30, 2000 due principally to net earnings offset in part by purchases of
Company common stock. Accounts receivable decreased by $827,000 due to decreased
international sales and as a result of management's continuing efforts to
improve collections. Inventories decreased by $88,000 due to management's
efforts to decrease raw materials and increase certain finished goods
inventories. Accounts payable decreased $692,000 due to the timing of payment
due dates. Prepaid expenses increased $34,000 primarily due to trade show
deposits and insurance costs incurred in the beginning of the Company's fiscal
year. Overall, net working capital increased $203,000 during the first nine
months of fiscal 2000 due to net earnings of $816,000 offset in part by the
Company acquiring 207,400 shares of its common stock for $605,000.
9
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The Company made capital expenditures of $357,000 for the nine months ended
June 30, 2000. Management anticipates that discretionary capital expenditures
for leasehold improvements and manufacturing and office equipment during the
remainder of fiscal 2000 will be approximately $100,000. These anticipated
expenditures will be financed from available cash, cash provided from operations
and, if necessary, proceeds from the line of credit.
During December 1999, the Company renewed its revolving operating line of
credit through December 2000. The new agreement provides for borrowings of up to
$5.0 million subject to eligible accounts receivable and inventories and certain
additional limits. Interest on the borrowings is equal to the bank's prime
lending rate (9.5% at June 30, 2000) or LIBOR plus 1.75%. Borrowings under the
line of credit are secured by cash and cash equivalents, accounts receivable and
inventories. The line of credit contains covenants which require a minimum level
of tangible net worth, a minimum ratio of current assets to current liabilities
and a maximum ratio of interest bearing debt to tangible net worth. As of
June 30, 2000, the Company was eligible to borrow $4.9 million under the line
of credit. No borrowings were outstanding under the line of credit as of that
date.
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; 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; costs or expenditures
associated with remediating potential Year 2000 issues; and, environmental
regulation as well as other factors discussed in Exhibit 99.1 to the Company's
1999 Annual Report on Form 10-K which are 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.
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 June 30, 2000, the Company had cash and cash equivalents of
$1,074,000 compared to $868,000 as of September 30, 1999. The Company invests
its excess cash in highly liquid marketable securities with maturities of three
months or less at date of purchase. The Company does not invest in derivative
securities.
10
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
11
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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: August 3, 2000
12
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INDEX TO EXHIBITS
Exhibit Page
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27 Financial Data Schedule 14
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