**United StatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

 

**Form 10-K**

 

|   | **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                     |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                          |
|   |       | **For the fiscal  year ended September 29, 2002**                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                          |
| **or** |
|   |       |                                                                                                                                                                                                                          |
|   | **o**      | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                       |
|   |       |                                                                                                                                                                                                                          |
|   |       | **For the  transition period from                 to                 ** |

 

**Commission file number 0-25866**

 

**PHOENIX GOLDINTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 

| **OREGON**                                                       |   | **93-1066325**                            |
|------------------------------------------------------------------|--------|-------------------------------------------|
| (State  or other jurisdiction  of incorporation or organization) |   | (I.R.S.  Employer  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)       |

 

Securities registered pursuant to Section 12(b) ofthe Act:  **None**

 

Securities registered pursuant to Section 12(g) ofthe Act:  **Common Stock, no par value**

 

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ý  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference into Part III of this Form10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Act).  Yes o  No ý

 

The aggregate market value of the common stockheld by non-affiliates of the registrant was $806,700 as of March 28, 2002 and$1,002,095 as of November 29, 2002.

 

There were 3,006,945 shares of the registrant’scommon stock outstanding as of November 29, 2002.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Parts of registrant’s proxy statement dated on orabout January 3, 2003 prepared in connection with the annual meeting ofshareholders to be held on February 11, 2003 are incorporated by reference intoPart III of this report.

 

 

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**TABLE OFCONTENTS**

 
| **PART I**   |
|--------------|
|         |   |
| ITEM 1.      | BUSINESS |
|         |   |
| ITEM 2.      | PROPERTIES |
|         |   |
| ITEM 3.      | LEGAL PROCEEDINGS |
|         |   |
| ITEM  4.     | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|         |   |
| **PART II**  |
|         |   |
| ITEM  5.     | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
|         |   |
| ITEM 6.      | SELECTED FINANCIAL DATA |
|         |   |
| ITEM  7.     | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|         |   |
| ITEM  7A.    | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|         |   |
| ITEM  8.     | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA |
|         |   |
| ITEM  9.     | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|         |   |
| **PART III** |
|         |   |
| ITEM  10.    | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT |
|         |   |
| ITEM 11.     | EXECUTIVE COMPENSATION |
|         |   |
| ITEM  12.    | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS |
|         |   |
| ITEM  13.    | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS |
|         |   |
| ITEM 14.     | CONTROLS AND  PROCEDURES |
|         |   |
| **PART IV**  |
|         |   |
| ITEM  15.    | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |

 

2

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**PART I**

 

*Allstatements in this report that are not statements of historical results shouldbe considered “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including, without limitation, statements as toexpectations, beliefs and future financial performance, and are based oncurrent expectations and are subject to certain risks, trends and uncertaintiesthat could cause actual results to vary from those projected, which variancesmay have a material adverse effect on the Company.  Among the factors that could cause actual results to differmaterially are the following: competitive factors; the adverse effect ofreduced discretionary consumer spending; dependence on a significant customer;potential fluctuations in quarterly results and seasonality; fixed operatingexpenses; the need for the introduction of new products and productenhancements; dependence on suppliers; control by current shareholders; highinventory requirements; business conditions in international markets; theCompany’s dependence on key employees; the need to protect intellectualproperty; environmental regulation; and the potential delisting and limitedtrading volume of the Company’s common stock, as well as other factorsdiscussed in Exhibit 99.3 to the Phoenix Gold International, Inc. Annual Reporton Form 10-K for the fiscal year ended September 30, 2002 which is herebyincorporated by reference.  Given theseuncertainties, readers are cautioned not to place undue reliance on theforward-looking statements.  The Companydoes not intend to update its forward-looking statements.*

 

**Item 1.       Business**

 

Phoenix Gold International, Inc.(the “Company”), an Oregon corporation founded in 1991, designs, manufactures,markets and sells innovative, high quality and high performance electronics,accessories and speakers for the audio market. The Company sells its products under the brand names Phoenix Gold®,**CarverProfessionalÔ and**AudioSource®.  The Company’s products are used in car audio, professional soundand home audio/theater applications. The Company manufactures a majority of its electronics and a portion ofits accessories at its facility in Portland, Oregon.

 

The Company has expanded beyondits historical product line, car audio accessories, to sell today substantiallyall of the components used in car audio systems (other than “head units” suchas radios, tape decks and CD players). As the Company expanded its car audio product line from accessories toelectronics and speakers, it initially targeted car audio enthusiasts andaudiophiles with products that offer value by combining performance advantageswith distinctive appearance and superior craftsmanship.  The Company subsequently broadened its caraudio product line to offer similar performance characteristics at lower pricepoints.  The Company also designs andsells electronics, accessories and speakers for OEM customers.

 

In November 1995, the Companyexpanded its product line and distribution channels by acquiring substantiallyall of the assets of the professional sound division of CarverCorporation.  The Company, as licenseeof the name “Carver Professional,” designs, manufactures, markets and sellselectronic amplifiers and accessories for professional sound applications,including sales to OEM customers.

 

In the past, Phoenix Gold has sold its productsprimarily through independent sales representatives and distributors to caraudio, professional sound and specialty retailers in the United States and inmore than 40 countries worldwide.  InDecember 2000, the Company added an additional product line and significantadditional distribution channels with the acquisition of AudioSource, Inc. (“AudioSource”).  Under the AudioSource brand, the Companydesigns, markets and sells home audio/theater products.  These products include residential compactspeakers, powered subwoofers, amplifiers, preamplifiers, equalizers andsurround sound processors used in home theater and home audioapplications.  AudioSource sold its 

 

3

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products primarily to “big box” retailers, and was also a supplier toseveral Internet retailers.  As a resultof the acquisition, the Company gained an entrée to, and has begun sellingproducts directly to, retailers such as Sears, Roebuck and Co., Best Buy Co.,Inc. and Costco Wholesale Corporation. The AudioSource acquisition was part of the Company’s strategy tobroaden its product lines and distribution channels to increase sales.

 

**Products**

 

The Company has three productlines: electronics, accessories andspeakers.  The Company’s sales byproduct class are as follows:

 
|           |   | **Year ended September 30,** |   |
|----------------|--------|------------------------------|--------|
|           |   | **2002**                     |   | **2001** |   | **2000** |   |
| Product class: |   |                         |   |   |   |   |   |
| Electronics    |   | 51.8                         | %      | 53.8 | % | 55.2 | % |
| Accessories    |   | 23.0                         |   | 25.5 |   | 27.9 |   |
| Speakers       |   | 23.3                         |   | 17.9 |   | 13.7 |   |
| Other          |   | 1.9                          |   | 2.8 |   | 3.2 |   |
| Total          |   | 100.0                        | %      | 100.0 | % | 100.0 | % |

 

***Electronics.**** *The Company’s amplifiers, signal processors andother electronics are designed to deliver sonic excellence, system flexibilityand reliable performance.

 

*Amplifiers.*  The Company sells a total of 26car audio amplifiers in the Titanium, Tantrum and QX series at retail pricesranging from approximately $130 to $1,880. Amplifiers in the Titanium series, introduced in 1999 and expanded in2002, are the Company’s reference amplifiers, designed to deliver maximumperformance in expensive, high-end systems capable of driving multiplespeakers.  The Tantrum series,introduced in 2001, includes multi-channel amplifiers with built-in crossoversand offers at lower prices the performance and sonic excellence of the reference series amplifiers, except in themost demanding applications.  The QXseries, introduced in 1997 and updated in 2000, is designed to provide highperformance at even lower prices.  TheQX amplifier is the first of the Company’s electronics products to be designedand engineered by the Company and manufactured by a third party vendor.

 

Additionally, theCompany has periodically introduced limited edition theme amplifiers, such as“Frank Amp’n Stein,” “Son of Frank Amp’n Stein,” “Route 66,” “Outlaw 1845,”“Bandit 1895,” “Reactor,” and “Octane.” Retail prices range from approximately $500 to $2,500.

 

The Company sells a total of 22Carver Professional amplifiers for professional sound applications in the ZR,PM, PT, CV, PX and PXm series at retail prices ranging from approximately $535to $2,780.  The ZR series, introduced in2002, utilizes high efficiency, spread spectrum, switching digital technologydeveloped initially for the CV series. The ZR series was designed for multiple purposes, including instrumentamplification, fixed installations and touring applications and replaces the PMseries.  The PT series was designedspecifically for the touring sound industry for ease of transportability anduse in a variety of settings.  The CVcontractor series, introduced in 2001, also utilizes switching digitaltechnology.  The CV series amplifierswere designed for commercial and industrial applications, such as churches,warehouses, educational facilities and auditoriums.  The PX series, introduced in 1997 and the first series designedby the Company, includesmulti-application models that offer increased features and power at lower pricepoints.  The PXm series, introduced in1998 and the second series designed by the Company, expands the PX series andaddresses entry level price points and greater ease 

 

4

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of transportability.  Due to the introduction of the ZR series of professionalamplifiers in 2002, the Company expects the PM series will not providemeaningful revenue in the future.

 

The Company sells a total ofseven AudioSource amplifiers for home audio/theater use in a “modular” seriesand “separates” series at retail prices ranging from approximately $180 to$600.  The modular series features arack mountable chassis that allows the user flexibility to mix and match anamplifier, a preamplifier, and a mono or stereo equalizer in a singlechassis.  The separates series wasdesigned to place an amplifier, preamplifier and tuner in a single cabinet.

 

*Signal Processors.*  TheCompany sells a total of 16 car audio signal processors, including equalizers,line drivers, and active and passive crossovers.  Signal processors, which are sold both as upgrade components andas parts of complete systems, are used to increase the flexibility andperformance of audio systems.  Retailprices of car audio signal processors range from approximately $100 to$800.  The Company sells a total ofseven AudioSource home audio signal processors, including preamplifiers andequalizers at retail prices ranging from $130 to $550.

 

***Accessories. ***TheCompany manufacturers and distributes innovative, high qualityaccessories.  The Company sells over1,000 accessories, many of which are manufactured to the Company’s designspecifications, for use primarily in car audio aftermarket applications.  Car audio accessories include audio cables,speaker and power cables, connectors, clamps, adapters, capacitors, fuseblocks,distribution blocks, alternators, carpet, textiles and adhesives.  The Company continually improves itsaccessories line and introduces new and replacement accessories.  The Company is a single source from whichits dealers and distributors can purchase all of the accessories necessary toinstall a full range of car audio systems. Accessories are available either as individual items or combined in pre-packagedinstallation kits.

 

The Company’s accessories for usein professional sound and custom audio/video and home theater applicationsinclude crossovers, attenuators, transformers, speaker selectors, audio andvideo cables, connectors, wall plates and volume controls.  The Company manufactures Smart AudioManagement panels for the custom home audio/video market that provide forspeaker distribution and impedance matching.

 

***Speakers. ***The Companybegan selling speakers in 1994.  TheCompany offers a total of 40 car audio speakers in the Titanium, Tantrum and QXseries, including tweeters, midranges, subwoofers, coaxials and componentsystems.  The Titanium series,introduced in 2001 and expanded in 2002, are the Company’s reference speakers,designed to deliver maximum performance in expensive, high-end systems.  The Titanium subwoofer series featuresreproduction of tight, accurate bass in a small enclosure.  The Tantrum series, also introduced in 2001,features exceptional musicality, excursion and versatility at lower pricepoints.  The QX series, introduced in1998 and updated in 2001, is the Company’s lowest price point speakerline.  Retail prices of car audiospeakers range from approximately $40 to $900. The Company also sells a total of 18 AudioSource home audio/theaterspeakers at retail prices ranging from approximately $50 to $400.

 

**Sales, Marketing and Distribution**

 

The Company sells its productsprincipally in the United States, Canada, Central and South America, Europe,Japan, Southeast Asia, Australia and New Zealand.  In the United States, the Company sells its car audio,professional sound and home audio products through independent salesrepresentatives, distributors, audio and specialty dealers and massmerchandisers.  As a 

 

5

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result of the AudioSource acquisition, the Company gained an entrée to,and has begun selling home audio/theater products directly to, retailers suchas Sears, Roebuck and Co., Best Buy Co., Inc. and Costco Wholesale Corporation.  TheCompany sells its products internationally through distributors serving over 40countries.  International salesaccounted for 20.1%, 20.8% and 26.1% of net sales in fiscal years 2002, 2001and 2000, respectively.  Internationalsales are denominated in United States dollars and are generally shipped f.o.b.the Company’s facility in Portland, Oregon.

 

One OEM customer, Bose Corporation (“Bose”), accountedfor 12.8%, 10.7% and 11.0% of the Company’s net sales during the years endedSeptember 30, 2002, 2001 and 2000, respectively.  As of September 30, 2002, one customer accounted for 13.7% of netaccounts receivable.  As of September30, 2001, no customer accounted for 10% or more of net accounts receivable.

 

Purchase orders from Bose have historically fluctuatedsignificantly from quarter to quarter. Although the Company has continued to receive orders from Bose, theCompany’s formal purchase agreement with Bose expired in March 2001.  The Company and Bose are currentlynegotiating a new purchase agreement. There can be no assurance that the Company will be able to negotiate anew purchase agreement with Bose on acceptable terms or that purchases will bemade by Bose under any agreement.  Theloss of Bose as a customer or any significant portion of Bose orders could havea material adverse effect on the Company’s business, results of operations andfinancial condition.

 

The Company offers its dealers and distributorscomplete product lines, excellent service and support, and high performance,reliable products.  The Company believesthese efforts enable it to attract and retain qualified dealers anddistributors.  The Company recruits on aselective basis new dealers and distributors for each of its product lines inspecific geographic areas.  Dealers anddistributors are chosen based on location, financial stability, technicalexpertise, sales history, integrity, and installation and servicecapabilities.  The Company generallydoes not have written agreements with its car and home audio salesrepresentatives or distributors or its professional sound distributors and homeaudio dealers.  To the extent theCompany has written agreements with its car audio dealers and professionalsound representatives and dealers, such agreements are generally terminableupon no more than 30 days notice.

 

The Company markets its car audioproducts by participating in consumer electronics trade shows and enthusiastevents and by promoting its own demonstration vehicles.  The Company offers incentives to “TeamPhoenix Gold” competitors in regional, national and international car audioshows and competitions and provides technical assistance, training and supportfrom Company engineers and technicians at “Tweek N Tune” workshops.  The Company advertises in car audio consumermagazines and its products have been reviewed and profiled in national andinternational publications.  The Companymarkets its professional sound, custom audio/video and home audio and theaterproducts by participating in trade shows, advertising in trade journals andmagazines, and providing dealer support.

 

The car and home audio marketsare both somewhat seasonal, with the majority of car audio sales normallyoccurring in the period March through September and the majority of home audiosales normally occurring in the period September through March.  Historically, the Company’s sales weregreater during the third (April through June) and fourth (July throughSeptember) quarters of the Company’s fiscal year than during the first twofiscal quarters.  Due to the acquisitionof the AudioSource product line in fiscal 2001, the Company’s sales in fiscal2001 and 2002 have increased in the home audio market.  Although the business is somewhat lessseasonal, the Company’s quarterly results of operations will not necessarily beindicative of its 

 

6

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results of operations for the year.  The Company has only minimal backlog becauseorders are typically filled within several days of receipt.  In addition, backlog as of a particular dateis not a reliable measure of sales for any future period because ordersconstituting the Company’s backlog are subject to changes in delivery schedulesand to cancellation without penalty at the option of the customer.

 

**Competition**

 

The markets for the Company’s productsare highly competitive and are served by many United States and internationalmanufacturers that market their own lines of electronics, accessories andspeakers through specialty dealer networks and mass merchandise retail stores,as well as companies that market generic products through the same distributionchannels.  The Company’s principal caraudio electronics competitors include JL Audio, Inc. (“JL Audio”), LightningAudio, Inc. (“Lightning”), a subsidiary of Rockford Corporation (“Rockford”), MTXCorporation (“MTX”), Orion Industries, Inc., Precision Power, Inc.,Rockford Fosgate, a division of Rockford, and Stillwater Design and Audio, Inc.(“Stillwater”).  The Company’s principalaccessories competitors include Esoteric Audio USA Group of Companies, asubsidiary of MTX, Lightning, Monster Cable Products, Inc. (“MonsterCable”), Recoton Corporation (“Recoton”) and Rockford.  The Company’s principal professional soundcompetitors include Crest Audio, Inc., Crown International, Inc. and QSC Audio Products,Inc.  The Company’s principal car audiospeaker competitors include Boston Acoustics, Inc., JL Audio, Lightning,MB Quart Electronics USA, Inc., a subsidiary of Rockford, MTX, Rockfordand Stillwater.  The Company’s principalhome audio competitors include many international suppliers of consumerelectronics who target entry-level price points and domestic suppliers such asKLH Audio Systems, Monster Cable and Recoton. Many competitors have greater financial and other resources than theCompany.  The Company competesprincipally on the basis of innovation, breadth of product line, quality andreliability of products, name recognition, merchandising, distributionorganization and price.

 

**Manufacturing and Assembly**

 

***Manufactured Products.*** The Company manufactures a majority of itselectronics products and a portion of its accessories at its facility inPortland, Oregon.  Manufacturingprocesses include laser-cutting, computer controlled metal fabrication, powdercoating, automated insertion of components into, and wave soldering of, circuitboards, plastic injection molding, silk-screening graphics and quality controltesting.  For use in its manufacturingactivities, the Company also purchases components manufactured by third partiesaccording to design specifications developed by the Company.  The Company purchases substantially all ofits raw materials, components and subassemblies from approximately 160suppliers located primarily in the United States and the Pacific Rim.  Certain of these materials, components andsubassemblies are obtained from a single supplier or a limited number ofsuppliers.  The Company’s principalsupplier is Team Phoenix Co. Ltd., an unaffiliated company.

 

While the Company hashistorically attempted to ensure quality and control costs by manufacturingmany of its products, the Company has begun to shift the manufacture of certaincomponents, subassemblies and finished products offshore to long-term suppliersmeeting Company standards.  Suchoutsourcing allows the Company to target lower retail price points inconnection with sales to consumer electronic retailers.  The Company will continue to manufacture“Made in USA” products.  However, theCompany expects that outsourcing will permit the Company to broaden its productofferings and increase sales at acceptable margins.

 

7

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***Distributed Accessories.  ***The Company distributes accessories, many of whichare manufactured to its design specifications by third parties.  Substantially all distributed accessoriesare subjected to quality control procedures at the Company’s facility and aremarketed under the *Phoenix Gold*or *Carver Professional*tradenames.

 

***Designed Speakers. ***The Company’s speakers are manufactured by thirdparties in the United States, Europe and Asia according to acoustical andelectrical design specifications developed by the Company.  Speakers are subjected to quality controlprocedures performed by the Company.

 

**Customer Service**

 

The Company believes two of themost important elements in its business are understanding consumers and theirpreferences, and providing high quality, reliable products.  The Company strives to understand theevolving needs and preferences of consumers by communicating frequently withits sales representatives, dealers and distributors, sponsoring “Team PhoenixGold” members and attending car audio competitions and car audio, professionalsound and custom audio/video and home theater trade shows.  Company representatives regularly seek suggestionsfrom dealers for improved design and performance of the Company’s products.

 

Proper installation is criticalto achieving optimum performance of car audio systems.  The Company offers a three-year limitedwarranty on car audio electronics and a one, two or three-year limited warrantyon speakers installed by an authorized dealer or installer.  If an authorized dealer or installer doesnot install the product, the Company offers a one-year limited warranty on caraudio electronics and speakers.  The Companyoffers a five-year limited warranty on professional sound electronics andoffers a two-year limited warranty on home audio electronics and speakers.

 

**Intellectual Property**

 

*Phoenix Gold*®,*PG*(Phoenix Gold and Design)**®,*Carver Professional**Ô,**AudioSource* ®, *PowerFlow**Ô,**QuickSilver**Ô*, *Sapphire**Ô*, *Sonab* ®, and *ZEROpoint**Ô*  are the principal trademarks of theCompany.  The Company believes that *Phoenix Gold*and *CarverProfessional* have strong brand name recognition, an importantcompetitive factor in its markets.  TheCompany has obtained eleven design patents related to its products, whichexpire between 2010 and 2015.  CarverCorporation has taken the position that the Company’s exclusive, paid-uplicense to use the name *Carver Professional* expired at the end ofNovember 2000.  The Company has broughta declaratory judgment action against Carver Corporation to determine futurerights to the tradename.

 

**Governmental Approval of Products**

 

The Company is subject to and believes it is incompliance with certain European Union regulations regarding electromagneticstandards and product safety on substantially all of its electronics sold inthe European Union.  The Companybelieves that additional similar regulations will be imposed in otherareas.  Any inability by the Company tocomply with such similar regulations on a timely basis could have a materialadverse effect on the Company.

 

8

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**Employees**

 

As of September 30, 2002, theCompany had 157 full-time employees, including 105 in manufacturing andwarehousing, 28 in sales and marketing and 24 in administration andengineering. The Company considers its employee relations to be good.

 

**Item 2.       Properties**

 

The Company’s executive officesand manufacturing operations are located at 9300 North Decatur Street,Portland, Oregon.  The Company leases a155,000 square foot building. Approximately 15,000 square feet of office spaceand 140,000 square feet of manufacturing and warehouse space are used by theCompany.  Annual rent for the Company’sfacility is approximately $564,000 plus an annual escalator of 2.5%.  The leaseexpires on June 30, 2009.  TheCompany has an option to extend the lease for one ten-year term.  The Company believes that its existingfacilities are adequate to meet its needs for the foreseeable future and that,if needed, suitable additional or alternative space will be available oncommercially reasonable terms.

 

**Item 3.       Legal Proceedings**

 

None.

 

**Item 4.       Submissionof Matters to a Vote of Security Holders**

 

None.

 

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**PART II**

 

**Item 5.       Marketfor Registrant’s Common Equity and Related Stockholder Matters**

 

The Company’s Common Stock is traded on The NASDAQSmallCap Market under the symbol “PGLD”.

 

As reported by NASDAQ, the following table sets forththe range of high and low closing bid prices per share by quarter for theCompany’s Common Stock.

 
|                    |   | **Fiscal year ended  September 30, 2002** |   | **Fiscal year ended  September 30, 2001** |   |
|-------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
| **Common Stock (PGLD)** |   | **High**                                  |   | **Low**                                   |   | **High** |   | **Low** |   |
|                    |   |                                      |   |                                      |   |   |   |   |   |
| First Quarter           |   | $                                         | 1.15   |                                      | $      | 0.96 |   | $ | 1.875 |   | $ | 1.188 |   |
| Second Quarter          |   | 1.42                                      |   | 1.00                                      |   | 2.063 |   | 1.156 |   |
| Third Quarter           |   | 2.70                                      |   | 1.50                                      |   | 2.00 |   | 1.13 |   |
| Fourth Quarter          |   | 2.35                                      |   | 1.67                                      |   | 1.75 |   | 1.02 |   |
|                         |        |                                           |        |                                           |        |  |  |  |  |  |  |  |  |

 

At November 30, 2002, the approximate number of shareholders of record of Common Stockwas 134.

 

The Company has never declared orpaid any cash dividends on its Common Stock. The Company intends to retain all earnings for use in its business andtherefore does not anticipate paying any cash dividends in the foreseeablefuture.  The Company’s existing creditagreement does not expressly limit or prohibit the Company’s ability to declare and pay dividends, although covenantscontained in such agreement related to a minimum level of tangible net worth, aminimum ratio of current assets to current liabilities and a maximum ratio ofliabilities to tangible net worth may have such effect.

 

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**Item 6.       SelectedFinancial Data**

 
|                            |   | **As of or for the year ended September 30,** |       |
|---------------------------------|--------|-----------------------------------------------|------------|
|                            |   | **2002**                                      |       | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **Operating  data:**            |   |                                          | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net sales(1)                    |   | $                                             | 29,566,758 |   | $ | 27,198,155 |   | $ | 26,995,041 |   | $ | 27,229,958 |   | $ | 26,118,554 |   |
| Net earnings (loss)(2)          |   | 95,243                                        |       | (162,275 | ) | 1,000,611 |   | 854,129 |   | (772,374 | ) |
| Earnings (loss) per share       |   |                                          |       |   |   |   |   |   |   |   |   |
| Basic                           |   | $                                             | 0.03       |   | $ | (0.05 | ) | $ | 0.33 |   | $ | 0.26 |   | $ | (0.22 | ) |
| Diluted                         |   | 0.03                                          |       | (0.05 | ) | 0.33 |   | 0.26 |   | (0.22 | ) |
| Average shares outstanding      |   |                                          |       |   |   |   |   |   |   |   |   |
| Basic                           |   | 3,006,945                                     |       | 3,020,132 |   | 3,065,206 |   | 3,293,758 |   | 3,464,698 |   |
| Diluted                         |   | 3,015,391                                     |       | 3,020,132 |   | 3,065,206 |   | 3,293,758 |   | 3,464,698 |   |
|                            |   |                                          |       |   |   |   |   |   |   |   |   |
| **Balance Sheet  data:**        |   |                                          |       |   |   |   |   |   |   |   |   |
| Working capital                 |   | $                                             | 9,742,205  |   | $ | 9,731,438 |   | $ | 10,371,901 |   | $ | 9,839,492 |   | $ | 8,020,615 |   |
| Total assets                    |   | 14,519,250                                    |       | 16,176,939 |   | 13,954,202 |   | 13,888,439 |   | 15,208,128 |   |
| Line of credit                  |   | —                                        |       | 1,157,707 |   | — |   | — |   | 900,000 |   |
| Long-term obligations           |   | —                                        |       | — |   | — |   | — |   | 938,233 |   |
| Total shareholders’ equity |   | 11,248,016                                    |       | 11,152,773 |   | 11,354,448 |   | 10,958,906 |   | 10,497,602 |   |
|                            |   |                                          |       |   |   |   |   |   |   |   |   |
| Book value per share            |   | $                                             | 3.74       |   | $ | 3.71 |   | $ | 3.75 |   | $ | 3.39 |   | $ | 3.03 |   |

 

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(1) See Note 1 to Financial Statements describing reclassification.

(2) In 1998, the Company recorded pre-tax, non-recurring charges of $1.1million related to implementation of a restructuring plan which included thephase-out of a product line and actions to reduce future operating costs.

 

**Item 7.****                   Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Application of Critical Accounting Policies**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make the appropriate application of certain accountingpolicies, many of which require estimates and assumptions about future eventsand their effect on amounts reported in the financial statements and relatednotes.  Since future events and theireffect cannot be determined with certainty, the actual results will inevitablydiffer from the estimates.  Such differencescould be material to the financial statements.

 

The Company’s accounting policies are disclosed inNote 1 to Financial Statements. During November 2001, the Emerging Issues TaskForce (EITF) of the Financial Accounting Standards Board issued EITF 01-9: *Accountingfor Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’sProducts*.  Beginning January1, 2002, the Company adopted EITF 01-9 and classified certain considerationgiven by the Company to its customers as a reduction of revenue rather than aselling expense.  Net sales and sellingexpense reported in prior periods have been reclassified to conform to thecurrent presentation.  The reclassificationhad no effect on previously reported income (loss) from operations, net earnings(loss) or shareholders’ equity.  Sellingallowances of approximately $901,000, $635,000, $629,000 and $674,000 for theyears ended September 30, 2001, 2000, 1999 and 1998 were reclassified asreductions of sales from selling expenses.

 

11

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Except as described above, there have been no materialchanges to the Company’s accounting policies during the year ended September30, 2002.  The more significant of thesepolicies include revenue recognition and the use of estimates (which inherentlyinvolve judgment and uncertainties) in establishing customer rebate andwarranty accrued liabilities and valuing accounts receivable, inventory,long-lived and deferred tax assets. Management has discussed the development and selection of these criticalaccounting policies with the Audit Committee of the Company’s Board ofDirectors, and the Audit Committee has reviewed the related disclosures.

 

Revenue Recognition

 

The Company recognizes revenue when all of thefollowing criteria are met: persuasive evidence of an arrangement exists;delivery has occurred; the seller’s price is fixed and determinable; andcollectibility is reasonably assured. These criteria are generally satisfied and the Company recognizesrevenue upon shipment.  The Company alsooffers certain of its customers the right to return products that do not meetthe standards agreed to with the customer. The Company records a provision forestimated sales returns and allowances on product related sales in the sameperiod as the related revenues are recorded. These estimates are based on historical sales returns, analysis ofcredit memo data and other known factors. The Company continuously monitorssuch product returns and while such returns have historically been minimal, theCompany may not continue to experience the same return rates that it has in thepast.  Any significant increase inproduct quality failure rates and the resulting credit returns could have amaterial adverse effect on the Company’s net sales and operating results forthe period or periods in which such returns materialize.

 

The Company also provides for certain sales allowanceswhich include sales rebates and co-op advertising incentives and othervolume-based incentives.  The Companyrecords a provision for estimated incentives based upon the incentives offeredto customers on product related sales in the same period as the relatedrevenues are recorded. If the historical data the Company uses to calculatethese estimates do not properly reflect future sales allowances, revenue couldbe misstated.

 

Products sold are covered by a warranty.  The Company accrues a warranty reserve forestimated costs to provide warranty services. The Company’s estimate of costs to service its warranty obligations isbased on historical experience and expectation of future conditions.  To the extent the Company experiencesincreased warranty claim activity or increased costs associated with servicingthose claims, its warranty accrual will increase accordingly and result indecreased gross profit.

 

Accounts Receivable

 

The Company performs ongoing credit evaluations of itscustomers and adjusts credit limits based upon payment history and thecustomer’s current creditworthiness, as determined by the review of thecustomer’s current credit information. The Company continuously monitors collections and payments fromcustomers and maintains a provision for estimated credit losses based upon theCompany’s historical experience and any specific customer collection issuesthat have been identified.  The Companyvalues accounts receivable net of an allowance for doubtful accounts.  The allowance is calculated based upon theCompany’s evaluation of specific customer accounts where the Company hasinformation that the customer may have an inability to meet its financialobligations (bankruptcy, etc.).  Inthese cases, the Company uses its judgment, based on the best available factsand circumstances, and records a specific reserve for that customer againstamounts due to reduce the receivable to the amount that is expected to becollected.  These specific reserves arere-evaluated and adjusted as additional information is received that affectsthe amount reserved.  The same techniqueused to compute the allowance at September 30, 2002 was used throughout fiscal2002.  However, the ultimate 

 

12

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collectibility of a receivable is dependent upon the financialcondition of an individual customer, which could change rapidly and withoutadvance warning.

 

The Company has had significantaccounts receivable or other amounts due from its customers or otherparties.  From time to time, certain ofthese account receivable or other amounts due have become unusually large and/oroverdue, and on occasion the Company has taken write-offs relating to accountsreceivable.  The failure of theCompany’s customers to pay in a timely manner or in full amounts due to theCompany could affect future liquidity and profitability.

 

Inventory

 

The Company values inventory at the lower of cost ormarket.  Cost is determined using theaverage cost method.  The Companycontinues to use the same techniques to value inventory as have been used inthe past.  The Company regularly reviewsinventory quantities on hand and records a provision for excess and obsoleteinventory based primarily on estimated product demand and productionrequirements for the next year. Customers may cancel their orders or change purchase volumes.  Any actions taken by customers that couldaffect the value of inventory are considered when determining the lower of costor market valuations.  These or otheractions could create excess inventory levels that would affect the valuation ofinventory. If the Company is not able to achieve its expectations of the netrealizable value of the inventory at its current value, then the Company wouldhave to adjust its reserves accordingly, which would reduce net earnings.

 

Long-Lived Assets

 

The Company evaluates the fair value and futurebenefits of long-lived assets by estimating undiscounted future cash flows ofthe related assets and reduces the carrying value of the long-lived assets bythe excess, if any, of the result of such calculation.  The Company believes that the carryingvalues and estimated useful lives continues to be appropriate at thistime.  Future adverse changes in marketconditions or poor operating results of the underlying long-lived assets couldresult in an inability to recover the carrying value of the long-lived assetsthat may not be reflected in the current carrying value, thereby possiblyrequiring an impairment charge in the future.

 

Deferred Tax Valuation Allowance

 

The Company records a valuation allowance to reducedeferred tax assets to the amount that is more likely than not to berealized.  Future taxable income andongoing prudent and feasible tax planning strategies are estimated in assessingthe need for the valuation allowance. Should the Company not be able to realize all or part of the deferredtax assets in the future, an adjustment to the deferred tax asset would berecorded to earnings in the period such determination was made by increasingthe valuation allowance to reduce the deferred tax assets to the amount that ismore likely than not to be realized.  Theeffect of such adjustment would be to reduce earnings.  The Company determined that a valuationallowance was not necessary at September 30, 2002.

 

**Comparison of Fiscal 2002 to Fiscal 2001**

 

*Net Sales.*  Net sales increased $2,369,000,or 8.7%, to $29,567,000 for fiscal 2002 compared to $27,198,000 for fiscal2001.  Domestic sales increased $2.1million, or 9.7%, to $23.6 million for fiscal 2002 compared to $21.5 millionfor fiscal 2001.  Sales of speakers andelectronics increased 39.3% and 4.1%, respectively, in fiscal 2002 compared tofiscal 2001.

 

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Sales of accessories decreased 2.7%.  The increased sales of speakers wereprimarily due to sales of AudioSource and new car audio products.  Sales of electronics to a significantcustomer increased $863,000, or 29.6%, to $3.8 million for fiscal 2002 comparedto $2.9 million in fiscal 2001.  Theamount and timing of purchase orders from this customer may fluctuate fromperiod to period.  International sales increased$289,000, or 5.1%, to $5,948,000 for fiscal 2002 compared to $5,659,000 forfiscal 2001.  The increase resultedprimarily from a 10.7% increase in sales to Asia and a 15.1% increase in salesto other international markets, offset in part by an 8.4% decrease in sales toEurope.  International sales accountedfor 20.1% of net sales in fiscal 2002 and 20.8% of net sales in fiscal 2001.

 

Because of the nature of the Company’s products, theCompany’s largest customers have historically tended to be large domesticretailers, and domestic and international distributors.  The Company is dependent upon its ability toretain existing customers and obtain new customers as well as develop newproduct lines for these customers.  TheCompany’s failure to retain existing customers, obtain new customers or developnew product lines could significantly affect future sales and profitability ofthe Company.  The Company had onecustomer during fiscal 2002 and 2001 that accounted for more than 10% of netsales.  As with many of the Company’scustomers, the timing and volume of activity can vary significantly from periodto period.  During the first quarter offiscal 2002, a large domestic retailer placed a large holiday season order forhome audio speakers.  Since a similarorder for audio products was not received for the first quarter of fiscal 2003and due to customer expectations for sluggish holiday sales, management expectsdecreased sales for the Company in the first quarter of fiscal 2003 as comparedto fiscal 2002.  The loss of businessfrom one or more principal customers or a change in the sales volume from aparticular customer could have a material adverse effect on the Company’s salesvolume and profitability.

 

*Gross Profit.*  Gross profit increased to 22.5%of net sales in fiscal 2002 from 21.8% in fiscal 2001.  The increase wasprimarily due to increased sales volume that caused fixed labor andmanufacturing overhead to decrease as a percentage of sales offset in part bychanges in sales mix.  Gross margins onsales of AudioSource products are less than gross margins on sales of otherCompany products.  Due to the range ofproducts that the Company sells, the product sales mix can produce a range ofgross margins.  Some markets in whichthe Company operates also yield lower gross margins than others.

 

*Operating Expenses. *Operating expensesincreased $226,000, or 3.6%, to $6,471,000 in fiscal 2002 compared to$6,245,000 in fiscal 2001.  Operatingexpenses were 21.9% and 23.0% of net sales in fiscal 2002 and fiscal 2001,respectively.  Historically, the Companyhas built infrastructure and added personnel on an as-needed basis, resultingin occasional increases in operating expenses that are disproportionate toincreases in net sales.  This policy hasresulted in and may continue to result in variations in operating expenses as apercentage of sales from period to period.

 

Selling expenses increased$110,000, or 3.0%, to $3.8 million in fiscal 2002 compared to $3.7 millionin fiscal 2001.  Selling expenses were12.9% and 13.6% of net sales in fiscal 2002 and fiscal 2001, respectively.  The increase in dollar amount was due toincreased personnel and payroll expenses, offset in part by decreasedadvertising expense.

 

General and administrativeexpenses increased $117,000, or 4.6%, to $2,659,000 in fiscal 2002 compared to$2,543,000 in fiscal 2001.  General andadministrative expenses were 9.0% and 9.3% of net sales in fiscal 2002 andfiscal 2001, respectively.  The increasein general and administrative expenses was due to increased engineeringexpenses as a result of additional

 

14

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engineering personnel and new product developmentactivities, offset in part by decreased professional fees.

 

*Other Income (Expense).*  Otherincome (expense) decreased by $53,000 to $9,000 of other expense for fiscal2002, compared to $44,000 of other income for fiscal 2001.  The Company had a gain on sale of equipmentand other income of $3,000 for fiscal 2002 as compared to $31,000 for fiscal2001.  Interest income decreased $25,000to $5,000 for fiscal 2002 as compared to $30,000 for fiscal 2001.  The decrease was due to the use of availablecash and cash equivalents to acquire certain assets of AudioSource on December15, 2000.

 

*TaxBenefit (Expense).* Tax expense was $70,000 for fiscal 2002 due to earnings before incometaxes for fiscal 2002.  The tax benefitwas $99,000 for fiscal 2001 due to a loss before income taxes for fiscal2001.  Deferred taxes of $572,000 and$513,000 are recorded as current and long-term assets at September 30, 2002 dueto the tax effects of temporary differences between the carrying amounts ofassets and liabilities for financial and tax reporting purposes.

 

*Net Earnings (Loss).*  Theincrease in sales and gross profit contributed to net earnings in fiscal 2002of $95,000, or $0.03 per share – basic and diluted (based on 3.0 million sharesoutstanding), compared to a net loss of $162,000 in fiscal 2001, or $0.05 pershare – basic and diluted (based on 3.0 million shares outstanding).

 

**Comparison of Fiscal 2001 to Fiscal 2000**

 

*Net Sales.*  Net sales increased $203,000,or 0.8%, to $27.2 million for fiscal 2001 compared to $27.0 million for fiscal2000, due principally to increased domestic sales.  Domestic sales increased $1.6 million, or 8.0%, to $21,539,000 for fiscal 2001 compared to $19,950,000for fiscal 2000.  Sales of speakersincreased 36.4% in fiscal 2001 compared to fiscal 2000.  The increased sales of speakers wereprimarily due to sales of AudioSource products.  Sales of electronics and accessories decreased 1.3% and 8.1%,respectively.  Sales of electronics to asignificant customer were essentially flat from a year ago.  International sales decreased $1.4 million,or 19.7%, to $5,659,000 for fiscal 2001 compared to $7,045,000 for fiscal2000.  The decrease resulted primarilyfrom a 21.7% decrease in sales to Europe and a 32.9% decrease in sales to otherinternational markets, offset in part by a 12.6% increase in sales toAsia.  International sales accounted for20.8% of net sales in fiscal 2001 and 26.1% of net sales in fiscal 2000.

 

*Gross Profit.*  Gross profit decreased to 21.8%of net sales in fiscal 2001 from 25.7% in fiscal 2000.  The decrease was primarily due to changes insales mix as gross margins on sales of AudioSource products are less than grossmargins on sales of other Company products. Additionally, closeout discounts on certain older products and start-upcosts related to certain new products contributed to the decrease in grossprofit.

* *

*Operating Expenses. *Operating expensesincreased $927,000, or 17.4%, to $6,245,000 in fiscal 2001 compared to$5,318,000 in fiscal 2000.  Operatingexpenses were 23.0% and 19.7% of net sales in fiscal 2001 and fiscal 2000,respectively.

 

Selling expenses increased$588,000, or 18.9%, to $3.7 million in fiscal 2001 compared to$3.1 million in fiscal 2000. Selling expenses were 13.6% and 11.5% of net sales in fiscal 2001 andfiscal 2000, respectively.  The increasewas primarily due to increased personnel and consulting expenses in connectionwith the acquisition of AudioSource.

 

General and administrativeexpenses increased $339,000, or 15.4%, to $2.5 million in fiscal 2001compared to $2.2 million in fiscal 2000. General and administrative expenses were 9.3% 

 

15

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and 8.2% of net sales in fiscal 2001 and fiscal2000, respectively.  The increase ingeneral and administrative expenses was principally due to increasedengineering expenses as a result of additional engineering personnel and newproduct development activities. Additionally, increased professional fees were incurred related to theCompany’s compliance with the continued listing requirements of The Nasdaq SmallCapMarket.

 

*Other Income (Expense).*  Otherincome (expense) decreased $7,000, or 14.6%, to $44,000 in fiscal 2001 from$51,000 in fiscal 2000.  The Company hada gain on sale of equipment and other income of $31,000 for fiscal 2001compared to other income of $1,000 for fiscal 2000.  Interest income decreased $20,000 for fiscal 2001 due to the useof available cash and cashequivalents to acquire certain assets of AudioSource on December 15, 2000.  Interest expense increased $17,000 fromfiscal 2000 due to the temporary use of the operating line of credit for theacquisition of AudioSource assets and to support working capital requirementsrelated to increased sales activity during the last half of fiscal 2001.

 

*Net Earnings (Loss).*  Thedecrease in gross profit and increase in operating expenses contributed to anet loss in fiscal 2001 of $162,000, or $0.05 per share – basic and diluted(based on 3.0 million shares outstanding), compared to net earnings of $1.0 million in fiscal 2000,or $0.33 per share – basic and diluted (based on 3.1 million sharesoutstanding).

 

**Liquidityand Capital Resources**

 

The Company’s primary needs forfunds are for working capital and, to a lesser extent, for capital expenditures.  The Company financed its operations in fiscal 2002, 2001 and 2000principally from cash generated from operating activities and borrowings underits revolving line of credit.  Net cashprovided by operating activities in fiscal 2002, 2001 and 2000 was $2.1million, $246,000 and $1.8 million, respectively.  When cash flow from operations is less than current needs, theCompany increases the balance owing on its operating line of credit.  When cash flow exceeds current needs, theCompany pays down the balance owing on its operating line of credit rather thanaccumulating and investing excess cash, which practice resulted in low reportedcash balances in fiscal 2001.

 

The Company’s future cash flows from operations aredependent upon, but not limited to:

 

•                       the abilityof the Company to attract new and retain existing customers,

•                       the volumeof sales for these customers, or the loss of business of one or more primarycustomer,

•                       changes insales mix,

•                       changes ingeneral economic conditions,

•                       management’seffectiveness in managing the manufacturing process, and

•                       the abilityto collect in full and in a timely manner amounts due to the Company.

 

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.  The assets acquired included certainaccounts receivable, inventories, tangible personal property, intellectualproperty and other assets used in the home theater and home audio market.  No liabilities of AudioSource were assumedby the Company.  The purchase price waspaid from available cash reserves and from a drawdown under the Company’srevolving line of credit.

 

During fiscal 2002, cashand cash equivalents increased by $214,000 due principally to increased netearnings.  Accounts receivable decreasedby $1.7 million due to decreased sales 

 

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during the last quarter of fiscal 2002 as compared to the last quarterof fiscal 2001.  Inventories decreasedby $164,000 due to decreased raw materials and finished goods as managementexpects decreased sales in the first quarter of fiscal 2003 as compared to thefirst quarter of fiscal 2002. Outstanding borrowings under the line of credit of $1.2 million atSeptember 30, 2001 were repaid in fiscal 2002 due to collections of accountsreceivable.  Accounts payable decreased$582,000 due to the timing of payment due dates and decreased inventories.  Accrued expenses increased $98,000 due toincreased sales incentive accruals and increased accruals for payroll andbenefits.  Overall, net working capitalremained unchanged at $9.7 million at September 30, 2002 and 2001.

 

Capital expenditures were$712,000, $481,000 and $377,000 in fiscal years 2002, 2001 and 2000,respectively.  These expendituresrelated primarily to manufacturing tooling and automation, the acquisition ofequipment for use by the Company’s administration, engineering and marketingdepartments and leasehold improvements. The Company does not expect capital expenditures to exceed$500,000 in fiscal 2003, and there are no outstanding commitments for anycapital expenditures.  The anticipatedexpenditures will be financed from available cash, cash provided by operationsand, if necessary, proceeds from the line of credit.

 

A $3.5 million revolvingoperating line of credit is available through January 31, 2003.  Interest on the borrowings is equal to thebank’s prime lending rate (4.75% at September 30, 2002).  Borrowings under the line of credit arelimited to eligible accounts receivable and inventories and certain additionallimits.  Borrowings under the line ofcredit are secured by cash and cash equivalents, accounts receivable andinventories.  The line of creditcontains covenants which require a minimum level of tangible net worth, aminimum ratio of current assets to current liabilities and a maximum ratio ofliabilities to net tangible net worth. As of September 30, 2002, Phoenix Gold was eligible to borrow $3.5million under the line of credit.  Noborrowings were outstanding under the line of credit as of September 30,2002.  The Company expects to renew therevolving operating line of credit on similar terms prior to January 31, 2003.

 

The Company has disclosedadditional information pertaining to obligations and commitments to make futurecash payments in Note 8 to the financial statements.  Minimum future rentals under operating leases having initial orremaining terms of one year or more for the periods ending September 30, 2003,2004, 2005, 2006, 2007 and thereafter are $564,000, $578,000, $593,000,$608,000, $623,000 and $1,126,000, respectively.

 

The Company believes that cashgenerated from operations and cash available through its credit facility shouldbe sufficient to meet working capital and capital expenditure requirements forthe next twelve months.

 

**Prospective Accounting Changes**

 

In July 2001, the FinancialAccounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, *BusinessCombinations*, and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 changes the accounting forbusiness combinations by requiring that the purchase method of accounting beused for all business combinations initiated after June 30, 2001.  Use of the pooling-of-interests method willbe prohibited.  The adoption of SFAS No.141 did not have a material effect on the Company’s financial position orresults of operations.

 

SFAS No. 142 changes the accounting for goodwill andcertain intangibles from an amortization method to an impairment-onlyapproach.  Thus, amortization of goodwilland certain intangibles, including goodwill and certain intangibles recorded inthe past business 

 

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combinations, will cease upon adoption of SFAS No. 142.  Instead, goodwill and certain intangibles willbe analyzed for impairment and written down and charged to operations only inperiods in which the recorded goodwill and certain intangibles is more than itsfair value.  SFAS No. 142 will beeffective for the Company’s fiscal year beginning October 1, 2002.  Amortization expense for the years endedSeptember 30, 2002, 2001 and 2000 was $50,000, $43,000 and $40,000.  The Company has completed the two-steptransitional goodwill impairment test required by SFAS No. 142.  In accordance with SFAS No. 142, anygoodwill impairment loss will be recognized as the effect of a change inaccounting principle as of October 1, 2002. The Company has determined that the impairment loss will approximate$68,000, net of tax, or $0.02 per share for the fiscal year ending September30, 2003.

 

In August 2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  This Statement supercedes FASB Statement No.121*,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets toBe Disposed Of*, and the accounting and reporting provisions ofAccounting Principles Board Opinion No. 30, *Reporting the Results of Operations, Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions*, for the disposal ofa segment of a business.  SFAS No. 144maintains the method for recording an impairment of assets to be held underSFAS No. 121 and establishes a single accounting model based on the framework establishedin SFAS No. 121 for long-lived assets to be disposed of by sale.  This Statement also broadens thepresentation of discontinued operations to include more disposaltransactions.  SFAS No. 144 will beeffective for the Company’s fiscal year beginning October 1, 2002.  Management believes the adoption of thisStatement will not have a material effect on the Company’s financialstatements.

 

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**Item 7A.   Quantitative and Qualitative Disclosures About Market Risk**

 

The Company has assessed itsexposure to market risks for its financial instruments and has determined thatits exposures to such risks are not material. As of September 30, 2002, the Company had cash and cash equivalents of$215,000 compared to $1,000 as of September 30, 2001.  When the Company has repaid any borrowings outstanding under itsline of credit and has excess cash, then the Company has historically investedits excess cash in highly liquid marketable securities with maturities of threemonths or less at date of purchase.  TheCompany’s cash equivalents are generally commercial paper and money marketaccounts.  The Company does not investin derivative securities.

 

The Company sells its productsand purchases its inventory primarily in United States dollars, therefore itsexposure to currency exchange rate fluctuations is not material.  The Company does not engage in foreigncurrency hedging activities.

 

The Company borrows from time totime under its revolving line of credit. Any borrowings outstanding under the line of credit bear interest at avariable rate based on the prime rate. The Company is not a party to interest rate swaps or caps.

 

**Item 8.       FinancialStatements and Supplementary Data**

 

Pages 25 through 41 of thisAnnual Report on Form 10-K are incorporated herein by reference.

 

**Item 9.****                     Changes In and Disagreements With Accountants onAccounting and Financial Disclosure**

 

None.

 

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**PART III**

 

**Item 10.     Directorsand Executive Officers of the Registrant**

 

The information required by thisitem is incorporated by reference to the information under the captions“Election of Directors” and “Section 16(a) Beneficial Ownership ReportingCompliance” in the Company’s definitive Proxy Statement to be filed pursuant toRegulation 14A, which Proxy Statement is anticipated to be filed with theSecurities and Exchange Commission within 120 days after the end ofRegistrant’s fiscal year ended September 29, 2002.

 

**Item 11.     ExecutiveCompensation**

 

The information required by thisitem is incorporated by reference to the information under the caption“Executive Compensation” in the Company’s definitive Proxy Statement to befiled pursuant to Regulation 14A, which Proxy Statement is anticipated to befiled with the Securities and Exchange Commission within 120 days after the endof Registrant’s fiscal year ended September 29, 2002.

 

**Item 12.****            Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters**

 

Certain information required bythis item is incorporated by reference to the information under the caption“Security Ownership of Certain Beneficial Owners and Management” in theCompany’s definitive Proxy Statement to be filed pursuant to Regulation 14A,which Proxy Statement is anticipated to be filed with the Securities andExchange Commission within 120 days after the end of Registrant’s fiscal yearended September 29, 2002.

 

The following table providesinformation at September 30, 2002 with respect to the Company’s equitycompensation plans under which equity securities of the Company are authorizedfor issuance.

 
|                                                             |   | **Equity Compensation Plan Information**                                                                 |   |
|------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|
| **Plan Category**                                                |   | **(a)  Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** |   | **(b)  Weighted-average  exercise price of  outstanding options,  warrants and rights** |   | **(c)  Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column  (a))** |   |
| Equity compensation plans approved by security holders           |   | 280,925                                                                                                  |   | $ | 4.48 |   | 214,330 |   |
|                                                             |   |                                                                                                     |   |   |   |   |   |
| Equity compensation plans not approved by  security holders |   | 16,200                                                                                                   |   | $ | 2.82 |   | — |   |
|                                                             |   |                                                                                                     |   |   |   |   |   |
| Total                                                            |   | 297,125                                                                                                  |   | $ | 4.39 |   | 214,330 |   |

 

See Note 9 to the FinancialStatements for a description of the equity compensation plans.

 

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**Item 13.     CertainRelationships and Related Transactions**

 

None.

 

**Item 14.Controls and Procedures**

 

The Company’s Chairman and ChiefExecutive Officer and the Chief Financial Officer have reviewed the disclosurecontrols and procedures relating to the Company within the 90 days precedingthe date of this report and concluded that such controls and procedures areeffective to make known to them all material information about the financialand operational activities of the Company. There were no deficiencies identified in such controls or procedures andthere have been no changes in such controls and procedures since suchevaluation that could significantly affect their effectiveness.

 

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**PART IV**

 

**Item 15****.     Exhibits,Financial Statement Schedules, and Reports on Form 8-K**

 

(a)     Exhibits

 
| 3 (i)      |   | 1995 Restated Articles of Incorporation and Articles  of Amendment (incorporated by reference to Exhibit 3(i) to Registration  Statement on Form SB-2 effective May 3, 1995 (Registration No. 93-90588))                                                              |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                  |
| 3 (i) (a)  |   | Articles of Amendment to Articles of Incorporation  filed April 7, 1995 (incorporated by reference to Exhibit 3(i) (a) to  Registration Statement on Form SB-2 effective May 3, 1995 (Registration No.  93-90588))                                                    |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 3 (ii) (a) |   | Amended Restated Bylaws dated December 1, 1999  (incorporated by reference to Exhibit 3 (ii) (a) to Form 10-Q filed with the  Securities and Exchange Commission for the quarterly period ended December  26, 1999)                                                   |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 4          |   | Articles 2, 5 and 6 of Exhibit 3(i) and Article 6 of  Exhibit 3(ii) (a) are incorporated herein by reference                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 10.1       |   | Amended and Restated 1995 Stock Option Plan  (incorporated by reference to Appendix A to the Company’s definitive proxy  statement filed with the Securities and Exchange Commission on January 15,  1997) (1)                                                   |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 10.1a      |   | Form of Incentive Stock Option Agreement  (incorporated by reference to Exhibit 10.1(a) to Registration Statement on Form  SB-2 effective May 3, 1995 (Registration No. 93-90588)) (1)                                                                                |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 10.2       |   | Form of Nonstatutory Stock Option Agreement  (incorporated by reference to Exhibit 10.1(b) to Registration Statement on  Form SB-2 effective May 3, 1995 (Registration No. 93-90588)) (1)                                                                             |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 10.3       |   | Form of Indemnity Agreement (incorporated by  reference to Exhibit 10.6 to Registration Statement on Form SB-2 effective  May 3, 1995 (Registration No. 93-90588))                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 10.4       |   | Nonstatutory Stock Option Agreement dated February  18, 1997 between the Company and Frank G. Magdlen (incorporated by reference  to Exhibit 10.16 to Form 10-KSB filed with the Securities and Exchange  Commission for the fiscal year ended September 30, 1997)(1) |
|       |   |                                                                                                                                                                                                                                                                  |   |
| 10.5       |   | Revolving Credit Agreement dated March 15, 2002  between the Company and U.S. Bank National Association (incorporated by  reference to Exhibit 10.21 to Form 10-Q filed with the Securities and  Exchange Commission for the quarterly period ended March 31, 2002)   |
|       |   |                                                                                                                                                                                                                                                                  |   |

 

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| 10.6   |   | Revolving Credit Note dated March 15, 2002 made by  the Company in favor of U.S. Bank National Association (incorporated by  reference to Exhibit 10.22 to Form 10-Q filed with the Securities and  Exchange Commission for the quarterly period ended March 31, 2002) |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.7   |   | Nonstatutory Stock Option Agreement dated February  16, 1999 between the Company and Frank G. Magdlen (incorporated by reference  to Exhibit 10.1 to Form 10-Q filed with the Securities and Exchange  Commission for the quarterly period ended March 31, 1999)(1)    |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.8   |   | Purchase and Sale Agreement dated June 15, 1999  between the Company and 6710 LLC (incorporated by reference to Exhibit 10.23  to Form 10-Q filed with the Securities and Exchange Commission for the  quarterly period ended June 30, 1999)                           |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.9   |   | First Amendment to Purchase and Sale Agreement dated  June 15, 1999 between the Company and 6710 LLC (incorporated by reference to  Exhibit 10.24 to Form 10-Q filed with the Securities and Exchange Commission  for the quarterly period ended June 30, 1999)        |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.10  |   | 6710 LLC Commercial Lease dated June 30, 1999  between the Company and 6710 LLC (incorporated by reference to Exhibit 10.19  to Form 10-Q filed with the Securities and Exchange Commission for the  quarterly period ended June 30, 1999)                             |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.11  |   | Nonstatutory Stock Option Agreement dated February  15, 2000 between the Company and Frank G. Magdlen (incorporated by reference  to Exhibit 10.20 to Form 10-Q filed with the Securities and Exchange  Commission for the quarterly period ended March 26, 2000)(1)   |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.12  |   | Asset Purchase Agreement Between AudioSource, Inc.  and Phoenix Gold International, Inc. as of December 15, 2000 (incorporated by  reference to Exhibit 1 to Form 8-K filed with the Securities and Exchange  Commission on December 29, 2000)                         |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.13  |   | Nonstatutory Stock Option Agreement dated February  13, 2001 between the Company and Robert A. Brown (incorporated by reference  to Exhibit 10.18 to Form 10-Q filed with the Securities and Exchange  Commission for the quarterly period ended March 25, 2001)(1)    |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.14  |   | Nonstatutory Stock Option Agreement dated February  13, 2001 between the Company and Edward A. Foehl (incorporated by reference  to Exhibit 10.19 to Form 10-Q filed with the Securities and Exchange Commission  for the quarterly period ended March 25, 2001)(1)    |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.15  |   | Nonstatutory Stock Option Agreement dated February  13, 2001 between the Company and Frank G. Magdlen (incorporated by reference  to Exhibit 10.20 to Form 10-Q filed with the Securities and Exchange  Commission for the quarterly period ended March 25, 2001)(1)   |
|   |   |                                                                                                                                                                                                                                                                   |   |
| 10.16  |   | Nonstatutory Stock Option Agreement dated February  12, 2002 between the Company and Robert A. Brown (incorporated by reference  to Exhibit 10.18 to Form 10-Q filed with the Securities and Exchange  Commission for the quarterly period ended March 31, 2002)(1)    |
|   |   |                                                                                                                                                                                                                                                                   |   |

 

23

----

 
| 10.17  |   | Nonstatutory Stock Option Agreement dated February  12, 2002 between the Company and Edward A. Foehl (incorporated by reference  to Exhibit 10.19 to Form 10-Q filed with the Securities and Exchange  Commission for the quarterly period ended March 31, 2002)(1)  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                 |   |
| 10.18  |   | Nonstatutory Stock Option Agreement dated February  12, 2002 between the Company and Frank G. Magdlen (incorporated by reference  to Exhibit 10.20 to Form 10-Q filed with the Securities and Exchange  Commission for the quarterly period ended March 31, 2002)(1) |
|   |   |                                                                                                                                                                                                                                                                 |   |
| 23.1   |   | Consent of Deloitte & Touche LLP, Independent  Auditors                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                 |   |
| 99.1   |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                 |   |
| 99.2   |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                 |   |
| 99.3   |   | Certain Factors to Consider in Connection with  Forward-Looking Statements                                                                                                                                                                                           |

 

(b)     Reportson Form 8-K

 

None.

 

----

(1)**    **Management contract orcompensatory plan or arrangement.

 

24

----

 

**INDEX TO FINANCIAL STATEMENTS**

 
| Independent Auditors’  Report                                                                            |
|---------------------------------------------------------------------------------------------------------------|
|                                                                                                          |
| Balance Sheets at September 30, 2002 and  2001                                                                |
|                                                                                                          |
| Statements  of Operations   for each of the three years in the period ended September 30, 2002                |
|                                                                                                          |
| Statements of  Shareholders’ Equity   for each of the three years in the period ended September 30, 2002 |
|                                                                                                          |
| Statements  of Cash Flows  for each of the three years in the period ended September 30, 2002                 |
|                                                                                                          |
| Notes to Financial  Statements                                                                                |

 

25

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**INDEPENDENTAUDITORS’ REPORT**

 

 

The Board of Directors and Shareholders

Phoenix Gold International, Inc.

 

 

We have audited the accompanying balance sheets of Phoenix GoldInternational, Inc. as of September 30, 2002 and 2001, and the relatedstatements of operations, shareholders’ equity and cash flows for each of thethree years in the period ended September 30, 2002.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in allmaterial respects, the financial position of Phoenix Gold International, Inc.as of September 30, 2002 and 2001, and the results of its operations and itscash flows for each of the three years in the period ended September 30, 2002,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
| /s/ DELOITTE & TOUCHE LLP |
|-------------------------------|
|                          |
|                          |
| Portland, Oregon              |
| November 5, 2002              |

 

26

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**PHOENIX GOLD INTERNATIONAL, INC.**

**BALANCE SHEETS**

 
|                                                                                                                 |   | **September 30,** |       |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                 |   | **2002**          |       | **2001** |   |
| **ASSETS**                                                                                                           |   |              |       |   |   |
|                                                                                                                 |   |              |       |   |   |
| Current assets:                                                                                                      |   |              |       |   |   |
| Cash and cash equivalents                                                                                            |   | $                 | 214,814    |   | $ | 1,002 |   |
| Accounts receivable, net                                                                                             |   | 3,610,939         |       | 5,343,499 |   |
| Inventories                                                                                                          |   | 7,765,523         |       | 7,929,111 |   |
| Prepaid expenses                                                                                                     |   | 188,140           |       | 267,892 |   |
| Deferred taxes                                                                                                       |   | 572,000           |       | 454,000 |   |
| Total current assets                                                                                                 |   | 12,351,416        |       | 13,995,504 |   |
|                                                                                                                 |   |              |       |   |   |
| Property and equipment, net                                                                                          |   | 1,102,498         |       | 849,192 |   |
| Goodwill, net                                                                                                        |   | 230,276           |       | 279,807 |   |
| Deferred taxes                                                                                                       |   | 513,000           |       | 605,000 |   |
| Other assets                                                                                                         |   | 322,060           |       | 447,436 |   |
|                                                                                                                 |   |              |       |   |   |
| Total assets                                                                                                         |   | $                 | 14,519,250 |   | $ | 16,176,939 |   |
|                                                                                                                 |   |              |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                        |   |              |       |   |   |
|                                                                                                                 |   |              |       |   |   |
| Current liabilities:                                                                                                 |   |              |       |   |   |
| Line of credit                                                                                                       |   | $                 | —     |   | $ | 1,157,707 |   |
| Accounts payable                                                                                                     |   | 1,297,507         |       | 1,879,542 |   |
| Accrued payroll and benefits                                                                                         |   | 430,048           |       | 402,305 |   |
| Accrued customer rebates                                                                                             |   | 382,972           |       | 331,873 |   |
| Other accrued expenses                                                                                               |   | 498,684           |       | 479,248 |   |
| Income taxes payable                                                                                                 |   | —            |       | 13,391 |   |
| Total current liabilities                                                                                            |   | 2,609,211         |       | 4,264,066 |   |
|                                                                                                                 |   |              |       |   |   |
| Deferred gain on sale of facility                                                                                    |   | 662,023           |       | 760,100 |   |
|                                                                                                                 |   |              |       |   |   |
| 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 - 3,006,945 and 3,006,945 shares |   | 6,511,528         |       | 6,511,528 |   |
| Retained earnings                                                                                                    |   | 4,736,488         |       | 4,641,245 |   |
| Total shareholders’ equity                                                                                      |   | 11,248,016        |       | 11,152,773 |   |
|                                                                                                                 |   |              |       |   |   |
| Total liabilities and shareholders’ equity                                                                      |   | $                 | 14,519,250 |   | $ | 16,176,939 |   |

 

**See Notes to Financial Statements**

 

27

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**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTS OF OPERATIONS**

 
|                                  |   | **Year Ended September 30,** |       |
|---------------------------------------|--------|------------------------------|------------|
|                                  |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                  |   |                         |       |   |   |   |   |
| Net sales                             |   | $                            | 29,566,758 |   | $ | 27,198,155 |   | $ | 26,995,041 |   |
|                                  |   |                         |       |   |   |   |   |
| Cost of sales                         |   | 22,921,324                   |       | 21,258,205 |   | 20,069,720 |   |
|                                  |   |                         |       |   |   |   |   |
| Gross profit                          |   | 6,645,434                    |       | 5,939,950 |   | 6,925,321 |   |
|                                  |   |                         |       |   |   |   |   |
|                                  |   |                         |       |   |   |   |   |
| Operating expenses:                   |   |                         |       |   |   |   |   |
| Selling                               |   | 3,812,154                    |       | 3,702,242 |   | 3,114,150 |   |
| General and administrative            |   | 2,659,290                    |       | 2,542,748 |   | 2,203,780 |   |
|                                  |   |                         |       |   |   |   |   |
| Total operating expenses              |   | 6,471,444                    |       | 6,244,990 |   | 5,317,930 |   |
|                                  |   |                         |       |   |   |   |   |
| Income (loss) from operations         |   | 173,990                      |       | (305,040 | ) | 1,607,391 |   |
|                                  |   |                         |       |   |   |   |   |
| Other income (expense):               |   |                         |       |   |   |   |   |
| Interest income                       |   | 5,386                        |       | 29,958 |   | 50,226 |   |
| Interest expense                      |   | (16,670                      | )          | (16,788 | ) | — |   |
| Gain on sale of assets and other, net |   | 2,537                        |       | 30,595 |   | 994 |   |
|                                  |   |                         |       |   |   |   |   |
| Total other income (expense)          |   | (8,747                       | )          | 43,765 |   | 51,220 |   |
|                                  |   |                         |       |   |   |   |   |
| Earnings (loss) before income taxes   |   | 165,243                      |       | (261,275 | ) | 1,658,611 |   |
|                                  |   |                         |       |   |   |   |   |
| Income tax benefit (expense)          |   | (70,000                      | )          | 99,000 |   | (658,000 | ) |
|                                  |   |                         |       |   |   |   |   |
| Net earnings (loss)                   |   | $                            | 95,243     |   | $ | (162,275 | ) | $ | 1,000,611 |   |
|                                  |   |                         |       |   |   |   |   |
| Earnings (loss) per share:            |   |                         |       |   |   |   |   |
| Basic and diluted                     |   | $                            | 0.03       |   | $ | (0.05 | ) | $ | 0.33 |   |
|                                  |   |                         |       |   |   |   |   |
| Average shares outstanding:           |   |                         |       |   |   |   |   |
| Basic                                 |   | 3,006,945                    |       | 3,020,132 |   | 3,065,206 |   |
| Diluted                               |   | 3,015,391                    |       | 3,020,132 |   | 3,065,206 |   |

 

**See Notes to Financial Statements**

 

28

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**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTS OF SHAREHOLDERS’ EQUITY**

 
|                          |   | **Common Stock** |   | **Retained  Earnings** |      | **Total** |   |
|-------------------------------|--------|------------------|--------|------------------------|-----------|-----------|--------|
| **Shares**                    |   | **Amount**       |
|                          |   |             |   |                   |      |      |   |   |   |
| Balance at September 30, 1999 |   | 3,234,345        |   | $                      | 7,155,997 |      | $      | 3,802,909 |   | $ | 10,958,906 |   |
|                          |   |             |   |                   |      |      |   |   |   |
| Purchase of common stock      |   | (207,400         | )      | (605,069               | )         | —    |   | (605,069 | ) |
|                          |   |             |   |                   |      |      |   |   |   |
| Net earnings                  |   | —           |   | —                 |      | 1,000,611 |   | 1,000,611 |   |
|                          |   |             |   |                   |      |      |   |   |   |
| Balance at September 30, 2000 |   | 3,026,945        |   | 6,550,928              |      | 4,803,520 |   | 11,354,448 |   |
|                          |   |             |   |                   |      |      |   |   |   |
| Purchase of common stock      |   | (20,000          | )      | (39,400                | )         | —    |   | (39,400 | ) |
|                          |   |             |   |                   |      |      |   |   |   |
| Net loss                      |   | —           |   | —                 |      | (162,275  | )      | (162,275 | ) |
|                          |   |             |   |                   |      |      |   |   |   |
| Balance at September 30, 2001 |   | 3,006,945        |   | 6,511,528              |      | 4,641,245 |   | 11,152,773 |   |
|                          |   |             |   |                   |      |      |   |   |   |
| Net earnings                  |   | —           |   | —                 |      | 95,243    |   | 95,243 |   |
|                          |   |             |   |                   |      |      |   |   |   |
| Balance at September 30, 2002 |   | 3,006,945        |   | $                      | 6,511,528 |      | $      | 4,736,488 |   | $ | 11,248,016 |   |

 

**See Notes to Financial Statements**

 

29

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**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTS OF CASH FLOWS**

 
|                                                                                                  |   | **Year Ended September 30,** |       |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                  |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                                                                  |   |                         | ** ** |   | ** ** |   | ** ** |
| Cash flows from operating activities:                                                                 |   |                         |       |   |   |   |   |
| Net earnings (loss)                                                                                   |   | $                            | 95,243     |   | $ | (162,275 | ) | $ | 1,000,611 |   |
| Adjustments to reconcile net earnings (loss) to net cash  provided by (used in) operating activities: |   |                         |       |   |   |   |   |
| Depreciation and amortization                                                                         |   | 535,856                      |       | 572,202 |   | 621,198 |   |
| Deferred taxes                                                                                        |   | (26,000                      | )          | (134,000 | ) | (10,000 | ) |
| Changes in operating assets and liabilities (net of amounts  acquired):                               |   |                         |       |   |   |   |   |
| Accounts receivable                                                                                   |   | 1,732,560                    |       | (41,693 | ) | 623,914 |   |
| Inventories                                                                                           |   | 163,588                      |       | (1,313,766 | ) | (124,025 | ) |
| Prepaid expenses                                                                                      |   | 79,752                       |       | (38,843 | ) | (15,372 | ) |
| Other assets                                                                                          |   | —                       |       | — |   | (97,196 | ) |
| Accounts payable                                                                                      |   | (582,035                     | )          | 1,082,293 |   | (277,632 | ) |
| Accrued expenses                                                                                      |   | 98,278                       |       | 310,009 |   | 86,665 |   |
| Income taxes payable                                                                                  |   | (13,391                      | )          | (27,519 | ) | (40,734 | ) |
|                                                                                                  |   |                         |       |   |   |   |   |
| Net cash provided by operating activities                                                             |   | 2,083,851                    |       | 246,408 |   | 1,767,429 |   |
|                                                                                                  |   |                         |       |   |   |   |   |
| Cash flows from investing activities:                                                                 |   |                         |       |   |   |   |   |
| Purchase of AudioSource                                                                               |   | —                       |       | (2,536,123 | ) | — |   |
| Capital expenditures, net                                                                             |   | (712,332                     | )          | (481,273 | ) | (377,135 | ) |
|                                                                                                  |   |                         |       |   |   |   |   |
| Net cash used in investing activities                                                                 |   | (712,332                     | )          | (3,017,396 | ) | (377,135 | ) |
|                                                                                                  |   |                         |       |   |   |   |   |
| Cash flows from financing activities:                                                                 |   |                         |       |   |   |   |   |
| Line of credit, net                                                                                   |   | (1,157,707                   | )          | 1,157,707 |   | — |   |
| Common stock repurchased                                                                              |   | —                       |       | (39,400 | ) | (605,069 | ) |
|                                                                                                  |   |                         |       |   |   |   |   |
| Net cash provided by (used in) financing activities                                                   |   | (1,157,707                   | )          | 1,118,307 |   | (605,069 | ) |
|                                                                                                  |   |                         |       |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                                      |   | 213,812                      |       | (1,652,681 | ) | 785,225 |   |
|                                                                                                  |   |                         |       |   |   |   |   |
| Cash and cash equivalents, beginning of year                                                          |   | 1,002                        |       | 1,653,683 |   | 868,458 |   |
|                                                                                                  |   |                         |       |   |   |   |   |
| Cash and cash equivalents, end of year                                                                |   | $                            | 214,814    |   | $ | 1,002 |   | $ | 1,653,683 |   |
|                                                                                                  |   |                         |       |   |   |   |   |
| Supplemental disclosures:                                                                             |   |                         |       |   |   |   |   |
| Cash paid for interest                                                                                |   | $                            | 17,000     |   | $ | 17,000 |   | $ | — |   |
| Cash paid for income taxes                                                                            |   | 159,000                      |       | 63,000 |   | 709,000 |   |

 

**See Notes to Financial Statements**

 

30

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**PHOENIX GOLD INTERNATIONAL, INC.**

**NOTES TO FINANCIAL STATEMENTS**

ThreeYears Ended September 30, 2002

 

**Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature of Business.*  PhoenixGold International, Inc. (“Phoenix Gold” or the “Company”) designs, markets andsells electronics, accessories and speakers to the audio market.  The Company’s products are used in car audioaftermarket, professional sound and custom audio/video and home theaterapplications.  A majority of theelectronics and certain accessories are manufactured in Portland, Oregon.  Phoenix Gold sells its products primarily inNorth America, South America, Europe and Asia through selected audio andaudio/video specialty dealers, distributors and certain mass merchandisers.

 

*Reporting Periods.*  TheCompany’s fiscal year is the 52 or 53 weeks ending the last Sunday inSeptember.  Fiscal years 2002 and 2000were 52 weeks.  Fiscal year 2001 was 53weeks.  For presentation convenience,these periods have been presented in these financial statements as years endedSeptember 30.

 

*Estimates.*  The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andreported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

*Cash and Cash Equivalents*.  Cash andcash equivalents include all highly liquid investments with maturities of threemonths or less from date of purchase. The Company’s cash equivalents are generally commercial paper and moneymarket accounts.

 

*Inventories.*  Inventories are stated at thelower of cost or market.  Cost isdetermined by the average cost method. Raw materials inventories generally consist of component parts.  Finished goods and work-in-processinventories include materials, labor and manufacturing overhead.  The markets in which Phoenix Gold competesare characterized by intense competition, rapid technological change andfrequent new product introductions. Phoenix Gold maintains a significant investment in inventories and,therefore, is subject to the risk of losses on write-downs to market andinventory obsolescence.

 

*Property and Equipment.*  Propertyand equipment are recorded at cost. Depreciation is provided using the straight–line method over theestimated useful lives (generally three to seven years) of the relatedassets.  Leasehold improvements areamortized over the estimated useful lives of the assets or the terms of thelease, whichever is shorter.

 

*Goodwill.*  Goodwill is amortized using thestraight-line method over a period of five to twenty years.  Accumulated amortization was $341,000 and$292,000 as of September 30, 2002 and 2001.  See *Prospective Accounting Changes*.

 

31

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*Financial Instruments and Fair Values*.  Thecarrying amounts reported in the balance sheet for cash and cash equivalents,accounts receivable, accounts payable, accrued expenses and line of creditapproximate fair value because of the immediate or short-term maturity of thesefinancial instruments.

 

*Revenue Recognition. *Revenue isrecognized when the product has shipped and all significant obligations of theCompany have been satisfied.  Thecustomer takes title and assumes the risks and rewards of ownership of theproducts when the merchandise is shipped. At the time of revenue recognition, provisions are made for anticipatedwarranty expenses and sales discounts, returns, allowances and rebates.

 

Phoenix Gold maintains anallowance for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments.  A portion of Phoenix Gold’s customer base may be susceptible todownturns in the retail industry, particularly in the consumer electronicsindustry.  If the financial condition ofPhoenix Gold’s customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.

 

Phoenix Gold charges many of itscustomers shipping and freight costs related to the delivery of itsproducts.  Accordingly, the Companyfollows the provisions of Emerging Issues Task Force (EITF) Issue No. 00-10, *Accountingfor Shipping and Handling Fees and Costs*.  Amounts charged to customers for shipping and handling costs areincluded in net sales and the related shipping and handling costs are recordedin cost of sales in the statement of operations.

 

*Advertising. *Phoenix Gold expenses advertising asincurred.  Advertising expense for theyears ended September 30, 2002, 2001 and 2000 was approximately $103,000,$157,000 and $144,000.

 

*Stock Options. *Phoenix Goldapplies the intrinsic value-based method of accounting to account for stockoptions.  No compensation cost isrecognized because the option exercise price is equal to or greater than themarket price of the underlying stock on the date of grant.

 

*Income Taxes.*  Income taxes are accounted forunder the asset and liability method. Deferred tax assets and liabilities are recognized for the tax effectsof temporary differences between the carrying amounts of assets and liabilitiesfor financial and tax reporting purposes. Deferred tax assets are reduced by a valuation allowance when it is morelikely than not that some portion of the deferred tax assets will not berealized.

 

*Earnings (Loss) Per Share*.  Basicearnings (loss) per share is based on the average number of common sharesoutstanding during each period.  Dilutedearnings per share reflects the potential shares issuable upon assumed exerciseof the outstanding stock options based on the treasury stock method.

 

*Comprehensive Income*.  Therewere no differences between net earnings (loss) and comprehensive income (loss)for the years ended September 30, 2002, 2001 and 2000.

 

*Segment Information*.  PhoenixGold operates in a single industry segment as described in Note 10.

 

32

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*Prospective Accounting Changes*.  In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)No. 141, *BusinessCombinations*, and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 changes the accounting forbusiness combinations by requiring that the purchase method of accounting beused for all business combinations initiated after June 30, 2001.  Use of the pooling-of-interests method willbe prohibited.  The adoption of SFAS No.141 did not have a material effect on the Company’s financial position orresults of operations.

 

SFAS No. 142 changes the accounting for goodwill andcertain intangibles from an amortization method to an impairment-onlyapproach.  Thus, amortization ofgoodwill and certain intangibles, including goodwill and certain intangiblesrecorded in the past business combinations, will cease upon adoption of SFASNo. 142.  Instead, goodwill and certainintangibles will be analyzed for impairment and written down and charged tooperations only in periods in which the recorded goodwill and certain intangiblesis more than its fair value.  SFAS No.142 will be effective for the Company’s fiscal year beginning October 1,2002.  Amortization expense for theyears ended September 30, 2002, 2001 and 2000 was $50,000, $43,000 and$40,000.  The Company has completed thetwo-step transitional goodwill impairment test required by SFAS No. 142.  In accordance with SFAS No. 142, anygoodwill impairment loss will be recognized as the effect of a change inaccounting principle as of October 1, 2002. The Company has determined that the impairment loss will approximate$68,000, net of tax, or $0.02 per share for the fiscal year ending September30, 2003.

 

In August 2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  This Statement supercedes FASB Statement No.121*,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets toBe Disposed Of*, and the accounting and reporting provisions ofAccounting Principles Board Opinion No. 30, *Reporting the Results of Operations, Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions*, for the disposal ofa segment of a business.  SFAS No. 144maintains the method for recording an impairment of assets to be held underSFAS No. 121 and establishes a single accounting model based on the frameworkestablished in SFAS No. 121 for long-lived assets to be disposed of bysale.  This Statement also broadens thepresentation of discontinued operations to include more disposaltransactions.  SFAS No. 144 will beeffective for the Company’s fiscal year beginning October 1, 2002.  The Company does not expect adoption of SFASNo. 144 to have a material effect on its financial position or results ofoperations.

 

*Reclassification*.  DuringNovember 2001, the EITF of the FASB issued EITF 01-9: *Accounting for Consideration Given by aVendor to a Customer or a Reseller of the Vendor’s Products*.  Beginning January 1, 2002, the Companyadopted EITF 01-9 and classified certain consideration given by the Company toits customers as a reduction of revenue rather than a selling expense.  Net sales and selling expense reported inprior periods have been reclassified to conform to the currentpresentation.  The reclassification hadno effect on previously reported income (loss) from operations, net earnings(loss) or shareholders’ equity.

 

Selling allowances ofapproximately $901,000 and $635,000 for the years ended September 30, 2001 and2000 were reclassified as reductions of sales from selling expenses.

 

33

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**Note 2 - 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 acquiredincluded certain accounts receivable, inventories, tangible personal property,intellectual property and other assets used in the home theater and home audiomarket.  No liabilities of AudioSourcewere assumed by the Company.  Inaddition, AudioSource agreed not to compete with the Company in the hometheater and home audio market for four years. The purchase price was paid from available cash reserves and from adrawdown under the Company’s revolving line of credit.

 

The Company accounted for the acquisition of assetsunder the purchase method of accounting and has included the results ofoperations of the assets since the date acquired.  The Company recorded approximately $1.1 million of accountsreceivable, $900,000 of finished goods inventories, $56,000 of tangiblepersonal property, $150,000 of intellectual property, $144,000 for the covenantnot to compete and $186,000 for goodwill. Depreciation for the tangible personal property is computed using thestraight-line method over three years. Amortization for the covenant not tocompete is computed using the straight-line method over four years.  Amortization for the intellectual propertyand goodwill is computed using the straight-line method over five years.  The amortization of goodwill will beeffected by the adoption of SFAS No. 142 (See Note 1).

 

The following unaudited pro forma combined results ofoperations accounts for the acquisition as if it had occurred at the beginningof fiscal 2000 or at the beginning of fiscal 2001.  The pro forma results give effect to the amortization ofintellectual property, goodwill and the covenant not to compete and the effectson interest income, interest expense and income taxes.

 
|                                          |   | **2001** |       | **2000** |   |
|-----------------------------------------------|--------|----------|------------|----------|--------|
|                                          |   |     |       |     |   |
| Net sales                                     |   | $        | 28,545,410 |     | $      | 31,551,646 |   |
| Net earnings (loss)                           |   | (362,933 | )          | 581,373  |   |
| Earnings (loss) per share - basic and diluted |   | (0.12    | )          | 0.19     |   |
|                                               |        |          |            |          |        |  |  |

 

The proforma results may not be indicative of theresults of operations that would have occurred if the acquisition had beeneffective on the date indicated or of the results that may be obtained in thefuture.

 

34

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**Note 3 - ACCOUNTS RECEIVABLE**

 

Accounts receivable consist ofthe following:

 
|                            |   | **2002** |      | **2001** |   |
|---------------------------------|--------|----------|-----------|----------|--------|
|                            |   |     |      |     |   |
| Accounts receivable             |   | $        | 3,905,939 |     | $      | 5,633,499 |   |
| Allowance for doubtful accounts |   | (295,000 | )         | (290,000 | )      |
| Total accounts receivable, net  |   | $        | 3,610,939 |     | $      | 5,343,499 |   |

 

**Note 4 - INVENTORIES**

 

Inventories consistof the following:

** **
|                              |   | **2002**  |      | **2001**  |   |
|-----------------------------------|--------|-----------|-----------|-----------|--------|
|                              |   |      |      |      |   |
| Raw materials and work-in-process |   | $         | 2,924,498 |      | $      | 2,973,815 |   |
| Finished goods                    |   | 4,841,025 |      | 4,955,296 |   |
| Total inventories                 |   | $         | 7,765,523 |      | $      | 7,929,111 |   |

 

**Note 5 - PROPERTY AND EQUIPMENT**

 

Property andequipment consist of the following:

 
|                                           |   | **2002**   |      | **2001**   |   |
|------------------------------------------------|--------|------------|-----------|------------|--------|
|                                           |   |       |      |       |   |
| Machinery and equipment                        |   | $          | 3,691,770 |       | $      | 3,364,582 |   |
| Office equipment and furniture                 |   | 1,741,398  |      | 1,588,580  |   |
| Leasehold improvements                         |   | 170,494    |      | 105,414    |   |
|                                           |   | 5,603,662  |      | 5,058,576  |   |
| Less accumulated depreciation and amortization |   | (4,501,164 | )         | (4,209,384 | )      |
| Total property and equipment, net              |   | $          | 1,102,498 |       | $      | 849,192 |   |

 

During 1999, Phoenix Goldpurchased its leased office, warehouse and manufacturing facility for$3,132,000 from its landlord.  On thesame day, the Company sold the facility and the existing improvements, with aremaining net book value of $924,000, for a net sales price of $5,037,000, andthen leased the facility from the purchaser. The resulting gain of $981,000 was deferred.  Phoenix Gold will recognize the deferred gain over the ten-yearlease term as a reduction in rent expense.

 

35

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**Note 6 - FINANCING AGREEMENT**

 

A $3.5 million revolvingoperating line of credit is availablethrough January 31, 2003.  Interest onthe borrowings is equal to the bank’s prime lending rate (4.75% at September30, 2002).  Borrowings under the line ofcredit are limited to eligible accounts receivable and inventories and certainadditional limits.  Borrowings under theline of credit are secured by cash and cash equivalents, accounts receivableand inventories.  The line of creditcontains covenants which require a minimum level of tangible net worth, aminimum ratio of current assets to current liabilities and a maximum ratio ofliabilities to net tangible net worth. As of September 30, 2002, Phoenix Gold was eligible to borrow $3.5million under the line of credit.  Noborrowings were outstanding under the line of credit as of September 30,2002.  As of September 30, 2001,borrowings of $1,157,707 were outstanding under the line of credit at aweighted average interest rate of 5.59%.

 

**Note 7 - TAXES**

 

Income tax benefit (expense):

 
|           |   | **2002** |    | **2001** |   | **2000** |   |
|----------------|--------|----------|---------|----------|--------|----------|--------|
| Current:       |   |     |    |     |   |     |   |
| Federal        |   | $        | (86,000 | )        | $      | (31,000  | )      | $ | (550,000 | ) |
| State          |   | (10,000  | )       | (4,000   | )      | (118,000 | )      |
| Total current  |   | (96,000  | )       | (35,000  | )      | (668,000 | )      |
|           |   |     |    |     |   |     |   |
| Deferred:      |   |     |    |     |   |     |   |
| Federal        |   | 23,000   |    | 120,000  |   | 9,000    |   |
| State          |   | 3,000    |    | 14,000   |   | 1,000    |   |
| Total deferred |   | 26,000   |    | 134,000  |   | 10,000   |   |
| Total          |   | $        | (70,000 | )        | $      | 99,000   |   | $ | (658,000 | ) |

 

Effective income tax rates are asfollows:

 
|                                       |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Taxes at statutory federal income tax rate |   | (34.0    | )%     | 34.0     | %      | (34.0    | )%     |
| State taxes, net of federal benefit        |   | (4.4     | )      | 4.4      |   | (4.4     | )      |
| Other, net                                 |   | (4.0     | )      | (0.5     | )      | (1.3     | )      |
| Total                                      |   | (42.4    | )%     | 37.9     | %      | (39.7    | )%     |

 

36

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The tax effects of temporarydifferences which give rise to deferred tax assets and deferred tax liabilitiesare as follows:

 
|                                  |   | **2002**  |      | **2001**  |   |
|---------------------------------------|--------|-----------|-----------|-----------|--------|
|                                  |   |      |      |      |   |
| Deferred tax liability - depreciation |   | $         | (81,000   | )         | $      | (27,000 | ) |
|                                  |   |      |      |      |   |
| Deferred tax assets:                  |   |      |      |      |   |
| Accrued expenses                      |   | 344,000   |      | 295,000   |   |
| Deferred gain on sale of facility     |   | 254,000   |      | 289,000   |   |
| Goodwill and other intangibles        |   | 340,000   |      | 343,000   |   |
| Inventory valuation                   |   | 228,000   |      | 159,000   |   |
| Total deferred tax assets             |   | 1,166,000 |      | 1,086,000 |   |
| Net deferred taxes                    |   | $         | 1,085,000 |      | $      | 1,059,000 |   |
|                                  |   |      |      |      |   |
| Current deferred tax asset            |   | $         | 572,000   |      | $      | 454,000 |   |
| Long-term deferred tax asset          |   | 513,000   |      | 605,000   |   |
| Net deferred taxes                    |   | $         | 1,085,000 |      | $      | 1,059,000 |   |

 

**Note 8 - COMMITMENTS**

 

Phoenix Gold leases its office,warehouse and manufacturing facility under a ten–year operating leaseagreement that expires on June 30, 2009. Terms of the lease include an option to extend the length of the leasefor ten additional years.

 

Minimum future rentals underoperating leases having initial or remaining terms of one year or more are asfollows:

 
| September 30, |   |      |      |
|---------------|--------|-----------|-----------|
| 2003          |   | $         | 564,000   |   |
| 2004          |   | 578,000   |      |
| 2005          |   | 593,000   |      |
| 2006          |   | 608,000   |      |
| 2007          |   | 623,000   |      |
| Thereafter    |   | 1,126,000 |      |
| Total         |   | $         | 4,092,000 |   |

 

Rent expense under operatingleases for the years ended September 30, 2002, 2001 and 2000 was $557,000,$549,000 and $398,000.

 

37

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**Note 9 -SHAREHOLDERS’ EQUITY AND STOCK OPTION PLAN**

 

Phoenix Gold’s Board of Directors and shareholdersadopted and approved a stock option plan (the “Stock Option Plan”) on January27, 1995.  Under the Stock Option Planas amended July 16, 1996, the Board of Directors may grant incentive and nonqualifiedoptions to employees, directors and consultants to purchase up to 515,000shares of common stock.

 

In general, options to purchase common stock may notbe granted at less than fair market value at the date of grant.  Options generally become exercisable ratablyover a three to five year period and expire five to ten years after the date ofgrant.  The Stock Option Plan expires in2005.  The Stock Option Plan can also beterminated by the Board of Directors at any time without shareholder approvalwith respect to shares of common stock not subject to outstanding options.

 

Information relating to option activity for the StockOption Plan is set forth below:

 
|               |   |                              |   | **Outstanding Options** |   | **Exercisable**                        |   |
|--------------------|--------|-----------------------------------|--------|-------------------------|--------|----------------------------------------|--------|
|               |   | **Shares  Available  for Option** |   | **Number  of  Shares**  |   | **Weighted  Average  Exercise  Price** |   | **Number  of  Shares** |   | **Weighted  Average  Exercise  Price** |   |
|               |   |                              |   |                    |   |                                   |   |   |   |   |   |
| September 30, 1999 |   | 165,480                           |   | 329,775                 |   | $                                      | 4.85   |   | 271,508 |   | $ | 4.87 |   |
|               |   |                              |   |                    |   |                                   |   |   |   |   |   |
| Granted            |   | (2,800                            | )      | 2,800                   |   | 3.38                                   |   |   |   |   |   |
| Canceled           |   | 22,200                            |   | (22,200                 | )      | 4.79                                   |   |   |   |   |   |
| September 30, 2000 |   | 184,880                           |   | 310,375                 |   | 4.85                                   |   | 278,809 |   | 4.87 |   |
|               |   |                              |   |                    |   |                                   |   |   |   |   |   |
| Granted            |   | (15,000                           | )      | 15,000                  |   | 1.28                                   |   |   |   |   |   |
| Canceled           |   | 19,200                            |   | (19,200                 | )      | 4.68                                   |   |   |   |   |   |
| September 30, 2001 |   | 189,080                           |   | 306,175                 |   | 4.68                                   |   | 288,375 |   | 4.87 |   |
|               |   |                              |   |                    |   |                                   |   |   |   |   |   |
| Granted            |   | (15,000                           | )      | 15,000                  |   | 1.19                                   |   |   |   |   |   |
| Canceled           |   | 40,250                            |   | (40,250                 | )      | 4.75                                   |   |   |   |   |   |
| September 30, 2002 |   | 214,330                           |   | 280,925                 |   | $                                      | 4.48   |   | 253,741 |   | $ | 4.83 |   |

 

The following table summarizes information about stockoptions outstanding under the Stock Option Plan at September 30, 2002:

 
|                           |   | **Outstanding**        |   | **Exercisable**                                     |   |
|--------------------------------|--------|------------------------|--------|-----------------------------------------------------|--------|
| **Range of  Exercise  Prices** |   | **Number   of Shares** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number   of Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                           |   |                   |   |                                                |   |   |   |   |   |   |   |   |   |
| $   1.19                  | -      | $   1.28     |   | 30,000                                              |   | 8.7 |   | $ | 1.23 |   | 3,750 |   | $ | 1.28 |   |
| $   3.13                  | -      | $   3.38     |   | 5,600                                               |   | 1.9 |   | 3.25 |   | 4,666 |   | 3.22 |   |
| $   4.00                  | -      | $   4.75     |   | 158,925                                             |   | 2.5 |   | 4.64 |   | 158,925 |   | 4.64 |   |
| $   5.15                  | -      | $   5.50     |   | 85,000                                              |   | 3.1 |   | 5.30 |   | 85,000 |   | 5.30 |   |
|                           |   | $ 11.75                |   | 1,400                                               |   | 3.3 |   | 11.75 |   | 1,400 |   | 11.75 |   |
|                           |   |                   |   | 280,925                                             |   | 3.3 |   | $ | 4.48 |   | 253,741 |   | $ | 4.83 |   |

 

38

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At September 30, 2002, nonqualified options topurchase 16,200 shares of common stock were outstanding at exercise pricesranging from $1.15 to $4.63 per share. Such options become exercisable ratably over a three-year period andexpire from 2004 to 2007.  At September30, 2002, Phoenix Gold has reserved 511,455 shares of common stock for issuanceupon exercise of the stock options.

 

Phoenix Gold has elected to continue to account forstock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board OpinionNo. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  However, as required by SFAS No. 123, *Accountingfor Stock-Based Compensation,* the Company has computed for pro formadisclosure purposes the value of options granted during the years endedSeptember 30, 2002, 2001 and 2000 using the Black-Scholes option pricingmodel.  The weighted average estimatedfair value of options granted during 2002, 2001 and 2000 was $0.95, $1.15 and$2.35 per share.  The weighted averageassumptions used for stock option grants during the years ended September 30,2002, 2001 and 2000 were a risk free interest rate of 4.25%, 5.00% and 6.75%,an expected dividend yield of 0%, 0% and 0%, an expected life of 8.9 years, 8.9years and 5.0 years and an expected volatility of 82.4%, 80.6% and 81.8%.

 

The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, option valuation models require the input of highlysubjective assumptions, including the expected stock price volatility.  Because the Company’s options havecharacteristics significantly different from those of traded options andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in the opinion of management, the existing models do notnecessarily provide a reliable single measure of the fair value of theCompany’s outstanding options.

 

For purposes of the pro forma disclosures, theestimated fair value of the stock-based awards is amortized over the vesting period.  Pro forma net earnings (loss) and earnings(loss) per share is as follows:

 
|                                 |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                 |   |     |   |     |   |     |   |
| Pro forma net earnings (loss)        |   | $        | 86,000 |     | $      | (200,000 | )      | $ | 938,000 |   |
| Pro forma earnings (loss) per share: |   |     |   |     |   |     |   |
| Basic and diluted                    |   | 0.03     |   | (0.07    | )      | 0.31     |   |
|                                      |        |          |        |          |        |          |        |  |  |  |

 

The effects of applying SFAS No. 123 to provide proforma disclosure are not likely to represent net earnings (loss) and earnings(loss) per share for future years since options vest over several years,additional awards are anticipated in future years, and assumptions used for anyadditional awards may vary from the current assumptions.

 

During 1999, Phoenix Gold began acquiring shares ofits common stock in connection with a stock repurchase program announced inNovember 1998.  That program authorizedthe Company to purchase common stock from time-to-time on the open market orpursuant to negotiated transactions at price levels the Company deemedattractive.  For the year endedSeptember 30, 2002, no shares were purchased. For the years ended September 30, 2001 and 2000, Phoenix Gold purchased20,000 shares of common stock for $39,400 and 207,400 shares of common stockfor $605,069.

 

39

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**Note 10 - SALES AND MAJOR CUSTOMERS**

 

Phoenix Gold operates in a singleindustry segment:  the design,manufacture and sales of electronics, accessories and speakers for use in theaudio market.  Net sales by geographicregion are as follows:

 
|                |   | **2002**  |       | **2001**  |   | **2000**   |   |
|---------------------|--------|-----------|------------|-----------|--------|------------|--------|
|                |   |      |       |      |   |       |   |
| United States       |   | $         | 23,618,689 |      | $      | 21,539,403 |   | $ | 19,949,863 |   |
| International:      |   |      |       |      |   |       |   |
| Europe              |   | 1,941,074 |       | 2,119,131 |   | 2,707,278  |   |
| Asia                |   | 1,724,052 |       | 1,556,817 |   | 1,382,724  |   |
| Other               |   | 2,282,943 |       | 1,982,804 |   | 2,955,176  |   |
| Total international |   | 5,948,069 |       | 5,658,752 |   | 7,045,178  |   |
| Net sales           |   | $         | 29,566,758 |      | $      | 27,198,155 |   | $ | 26,995,041 |   |

 

One customer accounted for 12.8%, 10.7% and 11.0% ofthe Company’s net sales during the years ended September 30, 2002, 2001 and2000.  As of September 30, 2002, onecustomer accounted for 13.7% of net accounts receivable.  As of September 30, 2001, no customeraccounted for 10% or more of net accounts receivable.  As of September 30, 2002 and 2001, approximately 37.7% and 24.2%of net accounts receivable are attributable to export sales.

 

**Note 11- BENEFIT PLAN**

 

Phoenix Gold adopted a profit sharing and 401(k)savings plan in September 1997, which covers substantially all employees.  Participating employees may defer up to 15%of their compensation, subject to certain regulatory limitations.  The Company matches 100% of employeecontributions up to $750 of each participating employee’s compensation.  The matching contribution expense was$44,000, $45,000 and $58,000 for the years ended September 30, 2002, 2001 and2000.

 

The profit sharing and 401(k) savings plan alsopermits the Company to make discretionary profit sharing contributions to allemployees.  Discretionary profit sharingcontributions are determined annually by the Board of Directors.  No profit sharing expense was approved forthe years ended September 30, 2002, 2001 and 2000.

 

40

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**QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

The following is a summary of operating results byquarter for the years ended September 30, 2002 and 2001:

 
|                       |   | **December  31** |      | **March 31** |   | **June 30** |   | **September  30** |      | **Total** |   |
|----------------------------|--------|------------------|-----------|--------------|--------|-------------|--------|-------------------|-----------|-----------|--------|
|                       |   |             |      |         |   |        |   |              |      |      |   |
| **2002 quarter ended**     |   |             |      |         |   |        |   |              |      |      |   |
|                       |   |             |      |         |   |        |   |              |      |      |   |
| Net sales                  |   | $                | 6,860,245 |         | $      | 7,993,865   |   | $                 | 8,063,132 |      | $      | 6,649,516 |   | $ | 29,566,758 |   |
| Gross profit               |   | 1,448,221        |      | 1,867,204    |   | 2,055,820   |   | 1,274,189         |      | 6,645,434 |   |
| Net earnings (loss)        |   | 6,525            |      | 84,635       |   | 214,370     |   | (210,287          | )         | 95,243    |   |
| Earnings (loss)  per share |   | 0.00             |      | 0.03         |   | 0.07        |   | (0.07             | )         | 0.03      |   |
|                       |   |             |      |         |   |        |   |              |      |      |   |
| **2001 quarter ended**     |   |             |      |         |   |        |   |              |      |      |   |
|                       |   |             |      |         |   |        |   |              |      |      |   |
| Net sales                  |   | $                | 5,527,160 |         | $      | 5,956,699   |   | $                 | 7,402,182 |      | $      | 8,312,114 |   | $ | 27,198,155 |   |
| Gross profit               |   | 1,249,746        |      | 1,315,913    |   | 1,624,016   |   | 1,750,275         |      | 5,939,950 |   |
| Net earnings  (loss)       |   | 6,003            |      | (156,882     | )      | 19,548      |   | (30,944           | )         | (162,275  | )      |
| Earnings (loss)  per share |   | 0.00             |      | (0.05        | )      | 0.01        |   | (0.01             | )         | (0.05     | )      |

 

41

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | PHOENIX GOLD INTERNATIONAL, INC. |
|--------|----------------------------------|
|   |                             |   |   |
|   |                             |   |   |
|   | By:                              | /s/ Keith A. Peterson |   |
|   |                             | Keith A. Peterson |   |
|   |                             | Chairman and  Chief Executive Officer |   |
|   |                             |   |   |
|   | Date:                            | December 23, 2002 |   |

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**              |   | **Capacity**                      |   | **Date**          |
|----------------------------|--------|-----------------------------------|--------|-------------------|
|                       |   |                              |   |              |
| /s/ Keith A. Peterson      |   | Chairman and Chief                |   | December 23, 2002 |
| Keith A. Peterson          |   | Executive Officer                 |   |              |
|                       |   | (Principal Executive Officer)     |   |              |
|                       |   |                              |   |              |
| /s/ Timothy G. Johnson     |   | President, Chief Operating        |   | December 23, 2002 |
| Timothy G. Johnson         |   | Officer and Director              |   |              |
|                       |   |                              |   |              |
| /s/ Joseph K. O’Brien |   | Vice President, Chief Financial   |   | December 23, 2002 |
| Joseph K. O’Brien     |   | Officer and Secretary (Principal  |   |              |
|                       |   | Financial and Accounting Officer) |   |              |
|                       |   |                              |   |              |
| /s/ Robert A. Brown        |   | Director                          |   | December 23, 2002 |
| Robert A. Brown            |   |                              |   |              |
|                       |   |                              |   |              |
| /s/ Edward A. Foehl        |   | Director                          |   | December 23, 2002 |
| Edward A. Foehl            |   |                              |   |              |
|                       |   |                              |   |              |
| /s/ Frank G. Magdlen       |   | Director                          |   | December 23, 2002 |
| Frank G. Magdlen           |   |                              |   |              |

 

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**CERTIFICATION**

 

I, Keith A. Peterson, certify that:

 
| 1.     | I have reviewed this annual report on Form 10-K of  Phoenix Gold International, Inc.;                                                                                                                                                                                                                                                                                                     |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 2.     | Based on my knowledge, this annual report does not  contain any untrue statement of a material fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this annual report;                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this annual report, fairly present in  all material respects the financial condition, results of operations and cash  flows of the registrant as of, and for, the periods presented in this annual  report;                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and have:                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                       | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this annual report is being  prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                       | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this annual report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                       | presented in this annual report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 5.     | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of the registrant’s board of directors (or  persons performing the equivalent functions):                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                       | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                       | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 6.     | The registrant’s other certifying officers and I  have indicated in this annual report whether there were significant changes  in internal controls or in other factors that could significantly affect  internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses. |

 

 
| December 23, 2002 |
|-------------------|
| (date)            |
|              |   |
|              | /s/  Keith A.  Peterson |   |
|              | Chairman and Chief Executive Officer |
|              | (Principal Executive Officer) |

 

43

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**CERTIFICATION**

 

I, Joseph K. O’Brien, certify that:

 
| 1.     | I have reviewed this annual report on Form 10-K of  Phoenix Gold International, Inc.;                                                                                                                                                                                                                                                                                                     |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 2.     | Based on my knowledge, this annual report does not  contain any untrue statement of a material fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this annual report;                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 3.     | Based on my knowledge, the financial statements, and  other financial information included in this annual report, fairly present in  all material respects the financial condition, results of operations and cash  flows of the registrant as of, and for, the periods presented in this annual  report;                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 4.     | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and have:                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                       | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this annual report is being  prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                       | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this annual report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                       | presented in this annual report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 5.     | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of the registrant’s board of directors (or  persons performing the equivalent functions):                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                       | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                       | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 6.     | The registrant’s other certifying officers and I  have indicated in this annual report whether there were significant changes  in internal controls or in other factors that could significantly affect  internal controls subsequent to the date of our most recent evaluation,  including any corrective actions with regard to significant deficiencies and  material weaknesses. |

 

 
| December 23, 2002 |
|-------------------|
| (date)            |
|              |   |
|              | /s/  Joseph  K. O’Brien |   |
|              | Vice President, Chief Financial  Officer and Secretary (Principal  Financial and Accounting Officer) |

 

44

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**EXHIBITINDEX**

 

 
| **Exhibit** |   | **Description**                                                                                                                                              |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                         |
| 23.1        |   | Consent of  Deloitte & Touche LLP, Independent Auditors                                                                                                  |
|        |   |                                                                                                                                                         |
| 99.1        |   | Certification of  the Chief Executive Officer pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|        |   |                                                                                                                                                         |
| 99.2        |   | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002       |
|        |   |                                                                                                                                                         |
| 99.3        |   | Certain Factors  to Consider in Connection with Forward-Looking Statements                                                                                   |

 

45

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