**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 28, 2003**                                                                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                   |
|   |       | **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 000-25866**

 

**PHOENIX GOLD INTERNATIONAL, INC.**

(Exact name of registrant asspecified 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) of the Act:  **None**

 

Securities registered pursuant to Section 12(g) of the Act:  **CommonStock, no par value**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference into Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

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

 

The aggregate market value of the common stock held by non-affiliatesof the registrant was $823,448 as of March 28, 2003.

 

There were 3,006,945 shares of the registrant’s common stockoutstanding as of November 28, 2003.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**Parts of registrant’s proxy statement dated on orabout January 5, 2004 prepared in connection with the annual meeting ofshareholders to be held on February 3, 2004 are incorporated by referenceinto Part III of this report.**

** **

** **

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**TABLE OF CONTENTS**

** **
|      | **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            |   |
|      |                                                                                             |   |
| ITEM  9A. | CONTROLS  AND PROCEDURES                                                                         |   |
|      |                                                                                             |   |
|      | **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.  | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                          |   |
|      |                                                                                             |   |
|      | **PART IV**                                                                                      |   |
|      |                                                                                             |   |
| ITEM  15. | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                |   |
|           |                                                                                                  |        |  |

 

2

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**PART I**

 

*All statements in this report that are not statements ofhistorical results should be considered “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995, including,without limitation, statements as to expectations, beliefs and future financialperformance, and are based on current expectations and are subject to certainrisks, trends and uncertainties that could cause actual results to vary fromthose projected, which variances may have a material adverse effect on theCompany.  Among the factors that couldcause actual results to differ materially are the following: competitivefactors; the adverse effect of reduced discretionary consumer spending;dependence on a significant customer; potential fluctuations in quarterlyresults and seasonality; fixed operating expenses relative to revenues; the needfor the introduction of new products and product enhancements; dependence onsuppliers; control by current shareholders; high inventory requirements;business conditions in international markets; the Company’s dependence on keyemployees; the need to protect intellectual property; environmental regulation;and the limited trading volume of the Company’s common stock, as well as otherfactors discussed in Exhibit 99.1 to the Phoenix Gold International, Inc.Annual Report on Form 10-K for the fiscal year ended September 28, 2003which is hereby incorporated by reference. Given these uncertainties, readers are cautioned not to place unduereliance on the forward-looking statements. The Company does 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 caraudio, professional sound and home audio/theater applications.  The Company manufactures certain electronicsand accessories at its facility in Portland, Oregon.

 

The Company has expanded beyond itshistorical product line, car audio accessories, to sell today substantially allof the components used in car audio systems (other than “head units” such asradios, tape decks and CD players).  Asthe Company expanded its car audio product line from accessories to electronicsand speakers, it initially targeted car audio enthusiasts and audiophiles withproducts that offer value by combining performance advantages with distinctiveappearance and superior craftsmanship. The Company subsequently broadened its car audio product line to offersimilar performance characteristics at lower price points.  The Company also designs and sellselectronics, accessories and speakers for OEM customers.

 

In November 1995, the Company expandedits product line and distribution channels by acquiring substantially all ofthe assets of the professional sound division of Carver Corporation.  The Company, as licensee of the name “CarverProfessional,” designs, manufactures, markets and sells electronic amplifiersand accessories for professional sound applications, including sales to OEMcustomers.

 

In the past, Phoenix Gold has sold itsproducts primarily through independent sales representatives and distributorsto car audio, professional sound and specialty retailers in the United Statesand in more than 40 countries worldwide. In December 2000, the Company added an additional product line andsignificant additional distribution channels with the acquisition ofAudioSource, Inc. (“AudioSource”). Under the AudioSource brand, the Company designs, markets and sells homeaudio/theater products.  These productsinclude residential

 

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compact speakers, powered subwoofers, amplifiers, preamplifiers,equalizers and surround sound processors used in home theater and home audioapplications.  AudioSource sold itsproducts primarily to “big box” retailers, and was also a supplier to severalInternet retailers.  As a result of theacquisition, the Company gained an entrée to, and has sold products directlyto, retailers such as Sears, Roebuck and Co., Best Buy Co., Inc. and CostcoWholesale Corporation.  The AudioSourceacquisition was part of the Company’s strategy to broaden its product lines anddistribution channels to increase sales.

 

**Products**

 

The Company has three product lines:electronics, accessories and speakers. The Company’s sales by product class are as follows:

 
|            |   | **Year ended September 30,** |   |
|-----------------|--------|-----------------------------------|--------|
|            |   | **2003**                          |   | **2002** |   | **2001** |   |
| Product  class: |   |                              |   |   |   |   |   |
| Electronics     |   | 52.4                              | %      | 51.8 | % | 53.8 | % |
| Accessories     |   | 18.1                              |   | 23.0 |   | 25.5 |   |
| Speakers        |   | 26.7                              |   | 23.3 |   | 17.9 |   |
| Other           |   | 2.8                               |   | 1.9 |   | 2.8 |   |
| Total           |   | 100.0                             | %      | 100.0 | % | 100.0 | % |

 

***Electronics.**** *The Company’s amplifiers, signalprocessors and other electronics are designed to deliver sonic excellence,system flexibility and reliable performance.

 

*Amplifiers.* The Company sells a total of 23 car audio amplifiers in the Titanium,Tantrum and Octane-R series at retail prices ranging from approximately $160 to$1,700.  Amplifiers in the Titaniumseries, introduced in 1999 and expanded in 2002, are the Company’s referenceamplifiers, designed to deliver maximum performance in expensive, high-end systemscapable of driving multiple speakers. The Tantrum series, introduced in 2001, includes multi-channelamplifiers with built-in crossovers and offers at lower prices the performanceand sonic excellence of the reference series amplifiers, except in the mostdemanding applications.  The Octane-Rseries, introduced in 2003, is designed to provide high performance at evenlower prices.  The Octane-R series ofamplifiers, replaced the QX series, and incorporates “tuner” inspiredattributes with street racing cosmetics. The Octane-R series is the second series of car audio amplifiers to bedesigned and engineered by the Company and manufactured by a third partyvendor.

 

Additionally, the Company has periodicallyintroduced limited edition theme amplifiers, such as “Frank Amp’n Stein,” “Sonof Frank Amp’n Stein,” “Route 66,” “Outlaw 1845,” “Bandit 1895,”  “Reactor,” and “Octane.”  Retail prices range from approximately $500to $2,500.

 

The Company sells a total of 20 CarverProfessional amplifiers for professional sound applications in the ZR, PM, PT,CV and PXm series at retail prices ranging from approximately $535 to$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 PXm series, introduced in 1998, includes multi-applicationmodels that offer increased features and power, including greater ease oftransportability, at entry-level

 

4

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price points.  Due to the introductionof the ZR series of professional amplifiers in 2002, the Company expects the PMseries will not provide meaningful revenue in the future.

 

The Company sells a total of six AudioSourceamplifiers for home audio/theater use in a “modular” series and “separates”series at retail prices ranging from approximately $180 to $600.  The modular series features a rack mountablechassis that allows the user flexibility to mix and match an amplifier, apreamplifier, and a mono or stereo equalizer in a single chassis.  The separates series was designed to placean amplifier, preamplifier and tuner in a single cabinet.

 

*Signal Processors.*  The Company sells a total of 17 car audio signal processors,including equalizers, line drivers, and active and passive crossovers.  Signal processors, which are sold both asupgrade components and as parts of complete systems, are used to increase theflexibility and performance of audio systems. Retail prices of car audio signal processors range from approximately$100 to $800.  The Company sells a totalof six AudioSource home audio signal processors, including preamplifiers andequalizers at retail prices ranging from $130 to $550.

 

***Accessories. ***The Companymanufacturers and distributes innovative, high quality accessories.  The Company sells over 1,000 accessories,many of which are manufactured to the Company’s design specifications, for useprimarily in car audio aftermarket applications.  Car audio accessories include audio cables, speaker and powercables, connectors, clamps, adapters, capacitors, fuseblocks, distributionblocks, carpet and textiles.  TheCompany continually improves its accessories line and introduces new andreplacement accessories.  The Company isa single source from which its dealers and distributors can purchase all of theaccessories necessary to install a full range of car audio systems.  Accessories are available either asindividual items or combined in pre-packaged installation kits.

 

The Company’s accessories for use in customaudio/video and home audio/theater applications include crossovers,attenuators, transformers, speaker selectors, audio and video cables,connectors, wall plates and volume controls. The Company manufactures Smart Audio Management panels for the customhome audio/video market that provide for speaker distribution and impedancematching.

 

***Speakers. ***The Companybegan selling speakers in 1994.  TheCompany offers a total of 35 car audio speakers in the Titanium, Tantrum-X andOctane-R series, including tweeters, midranges, subwoofers, coaxials andcomponent systems.  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 features reproductionof tight, accurate bass in a small enclosure. The Tantrum-X series, also introduced in 2001 and updated in 2003,features exceptional musicality, excursion and versatility at lower pricepoints.  The Octane-R series, introducedin 2003, is the Company’s lowest price point speaker line.  Retail prices of car audio speakers rangefrom approximately $50 to $800.  TheCompany sells a total of 16 home audio/theater speakers under the brand name ofPhoenix Gold at retail prices ranging from approximately $50 to $650.  The Company also sells a total of 16AudioSource home audio/theater speakers at retail prices ranging fromapproximately $50 to $270.

 

**Sales,Marketing and Distribution**

 

The Company sells its products principally inthe United States, Canada, Central and South America, Europe, Japan, SoutheastAsia, Australia and New Zealand.  In theUnited States, the Company sells its car audio, professional sound and homeaudio products through independent

 

5

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sales representatives, distributors, audio and specialty dealers andmass merchandisers.  As a result of theAudioSource acquisition, the Company gained an entrée to, and has sold homeaudio/theater products directly to, retailers such as Sears, Roebuck and Co.,Best Buy Co., Inc. and Costco Wholesale Corporation.  The Company sells its products internationally throughdistributors serving over 40 countries. International sales accounted for 22.4%, 20.1% and 20.8% of net sales infiscal years 2003, 2002 and 2001, respectively.  International sales are denominated in United States dollars andare generally shipped f.o.b. the Company’s facility in Portland, Oregon.

 

No customer accounted for 10% or more of theCompany’s net sales for the year ended September 30, 2003.  One OEM customer, Bose Corporation (“Bose”),accounted for 12.8% and 10.7% of the Company’s net sales during the years endedSeptember 30, 2002 and 2001, respectively.  For the years ended September 30, 2003, 2002, and 2001, theCompany’s five largest customers represented 29.5%, 31.7% and 29.7% of netsales.  As of September 30, 2003,no customer accounted for 10% or more of net accounts receivable.  As of September 30, 2002, one customeraccounted for 13.7% of net accounts receivable

 

Purchase orders from Bose havehistorically fluctuated significantly from quarter to quarter.  Although the Company has continued toreceive orders from Bose, the Company’s formal purchase agreement with Boseexpired in March 2001.  The Companyand Bose are currently negotiating a new purchase agreement.  There can be no assurance that the Companywill be able to negotiate a new purchase agreement with Bose on acceptableterms or that purchases will be made by Bose under any agreement.  The loss of Bose as a customer or anysignificant portion of Bose orders could have a material adverse effect on theCompany’s business, results of operations and financial condition.

 

The Company offers its dealers anddistributors complete product lines, excellent service and support, and highperformance, reliable products.  TheCompany believes these efforts enable it to attract and retain qualifieddealers and distributors.  The Companyrecruits on a selective basis new dealers and distributors for each of itsproduct lines in specific geographic areas. Dealers and distributors are chosen based on location, financialstability, technical expertise, sales history, integrity, and installation andservice capabilities.  The Companygenerally does 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 audio products byparticipating in consumer electronics trade shows and enthusiast events and bypromoting its own demonstration vehicles. The Company offers incentives to “Team Phoenix Gold” competitors inregional, national and international car audio shows and competitions andprovides technical assistance, training and support from Company engineers andtechnicians at “Tweek N Tune” workshops. The Company advertises in car audio consumer magazines and its productshave been reviewed and profiled in national and internationalpublications.  The Company markets itsprofessional sound, custom audio/video and home audio/theater products byparticipating in trade shows, advertising in trade journals and magazines, andproviding dealer support.

 

The car and home audio markets are bothsomewhat seasonal, with the majority of car audio sales normally occurring inthe 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 through September) quarters of the Company’s fiscal year than duringthe first two fiscal quarters.  Due tothe

 

6

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acquisition of the AudioSource product line in fiscal 2001, theCompany’s sales in fiscal 2001, 2002 and 2003 have increased in the home audiomarket.  Although the business issomewhat less seasonal, the Company’s quarterly results of operations will notnecessarily be indicative of its 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 products arehighly 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”),MTX Corporation (“MTX”), Rockford Fosgate, a division of Rockford, andStillwater Design and Audio, Inc. (“Stillwater”).  The Company’s principal accessories competitors include EsotericAudio USA Group of Companies, a subsidiary of MTX, Lightning, Monster CableProducts, Inc. (“Monster Cable”), Stinger Electronics (“Stinger”), asubsidiary of AAMP of Florida, Inc. (“AAMP of America”), and Rockford.  The Company’s principal professional soundcompetitors include Crest Audio, Inc., Crown International, Inc., a subsidiaryof Harman International Industries, Inc., and QSC Audio Products, Inc.  The Company’s principal car audio speakercompetitors include Boston Acoustics, Inc., JL Audio, Lightning, MB QuartElectronics USA, Inc., a subsidiary of Rockford, MTX, Rockford andStillwater.  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 Stinger. 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.

 

**Manufacturingand Assembly**

 

***ManufacturedProducts.*** The Company manufactures certain electronics and accessories at itsfacility in Portland, Oregon. Manufacturing processes include laser-cutting, computer controlled metalfabrication, powder coating, automated insertion of components into, and wavesoldering of, circuit boards, 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 140suppliers 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.

 

While the Company has historically attemptedto ensure quality and control costs by manufacturing many of its electronic andaccessory products, the Company has been in the process of shifting themanufacturing of certain components, subassemblies and finished productsoffshore to suppliers meeting Company standards.  Such outsourcing allows the Company to target lower retail pricepoints in connection with sales to consumer electronic retailers.  The Company will continue to manufacture“Made in USA” products.  However, the

 

7

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Company expects that outsourcing will continue to increase and willpermit the Company to broaden its product offerings and increase sales atacceptable margins.

 

***DistributedAccessories. ***TheCompany distributes accessories, many of which are manufactured to its designspecifications by third parties in Asia. Substantially all distributed accessories are subjected to qualitycontrol procedures at the Company’s facility and are marketed under the *Phoenix Gold*tradename.

 

***DesignedSpeakers. ***TheCompany’s speakers are manufactured by third parties in the United States,Europe and Asia according to acoustical and electrical design specificationsdeveloped by the Company.  Speakers aresubjected to quality control procedures performed by the Company.

 

**CustomerService**

 

The Company believes two of the mostimportant elements in its business are understanding consumers and theirpreferences, and providing high quality, reliable products.  The Company strives to understand the evolvingneeds and preferences of consumers by communicating frequently with its salesrepresentatives, dealers and distributors, sponsoring “Team Phoenix Gold”members and attending car audio competitions and car audio, professional soundand custom audio/video and home theater trade shows.  Company representatives regularly seek suggestions from dealersfor improved design and performance of the Company’s products.

 

Proper installation is critical to achievingoptimum performance of car audio systems. The Company offers a two-year limited warranty on car audio electronicsand 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 a ninety-day limited warranty on speakers.  The Company offers a five-year limitedwarranty on professional sound electronics and offers a two-year limitedwarranty on home audio electronics and speakers.

 

**IntellectualProperty**

 

*Phoenix Gold*®,*PG*(Phoenix Gold andDesign)**®,*CarverProfessional**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 hasbrought a declaratory judgment action against Carver Corporation to determinefuture rights to the tradename.

 

**GovernmentalApproval of Products**

 

The Company is subject to andbelieves it is in compliance with certain European Union regulations regardingelectromagnetic standards and product safety on substantially all of itselectronics sold in the European Union. The Company believes that additional similar regulations will be imposedin other areas.  Any inability by theCompany to comply with such similar regulations on a timely basis could have amaterial adverse effect on the Company.

 

8

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**Employees**

 

As of September 30, 2003, the Companyhad 114 full-time employees, including 70 in manufacturing and warehousing, 22in sales and marketing, 12 in engineering and 10 in administration. The Companyconsiders its employee relations to be good.

 

**Item 2****.****           Properties**

 

The Company’s executive offices andmanufacturing operations are located at 9300 North Decatur Street, Portland,Oregon.  The Company leases a 155,000square foot building. Approximately 15,000 square feet of office space and140,000 square feet of manufacturing and warehouse space are used by theCompany.  Annual rent for the Company’sfacility is approximately $578,000 plus an annual escalator of 2.5%.  The lease expires on June 30, 2009.  The Company has an option to extend thelease for one ten-year term.  TheCompany believes that its existing facilities are adequate to meet its needsfor the foreseeable future and that, if needed, suitable additional oralternative space will be available on commercially reasonable terms.

 

**Item 3****.****           LegalProceedings**

 

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 begantrading on the Over-The-Counter (“OTC”) Bulletin Board on August 20, 2003under the symbol “PGLD”.  FromOctober 5, 1998 through August 19, 2003, the Company’s Common Stockwas traded on The Nasdaq SmallCap Market.

 

As reported by the OTC BulletinBoard and Nasdaq, the following table sets forth the range of high and lowclosing bid prices per share by quarter for the Company’s Common Stock.

 
|                     |   | **Fiscal year ended  September 30, 2003** |   | **Fiscal year ended  September 30, 2002** |   |
|--------------------------|--------|------------------------------------------------|--------|------------------------------------------------|--------|
| **Common  Stock (PGLD)** |   | **High**                                       |   | **Low**                                        |   | **High** |   | **Low** |   |
|                     |   |                                           |   |                                           |   |   |   |   |   |
| First  Quarter           |   | $                                              | 2.21   |                                           | $      | 1.51 |   | $ | 1.15 |   | $ | 0.96 |   |
| Second  Quarter          |   | 1.86                                           |   | 1.09                                           |   | 1.42 |   | 1.00 |   |
| Third  Quarter           |   | 1.46                                           |   | 1.06                                           |   | 2.70 |   | 1.50 |   |
| Fourth  Quarter          |   | 1.70                                           |   | 1.15                                           |   | 2.35 |   | 1.67 |   |
|                          |        |                                                |        |                                                |        |  |  |  |  |  |  |  |  |

 

The OTC market quotations reflectinter-dealer prices, without retail mark-up, mark-down or commissions and maynot necessarily represent actual transactions.

 

At November 30, 2003, the approximatenumber of shareholders of record of the Common Stock was 129.

 

The Company has never declared or paid anycash dividends on its Common Stock.  TheCompany intends to retain all earnings for use in its business and thereforedoes not anticipate paying any cash dividends in the foreseeable future.  The Company’s existing credit agreement doesnot expressly limit or prohibit the Company’s ability to declare and paydividends, although covenants contained in such agreement related to a minimumlevel of tangible net worth, a minimum ratio of current assets to currentliabilities and a maximum ratio of liabilities to tangible net worth may havesuch effect.

 

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**Item 6****.****           SelectedFinancial Data**

** **
|                              |   | **As of or for the year ended September 30,** |       |
|-----------------------------------|--------|----------------------------------------------------|------------|
|                              |   | **2003**                                           |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **Operating data:**               |   |                                               | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net sales                         |   | $                                                  | 24,831,536 |   | $ | 29,566,758 |   | $ | 27,198,155 |   | $ | 26,995,041 |   | $ | 27,229,958 |   |
| Net earnings  (loss)  (1)(2) |   | (807,146                                           | )          | 95,243 |   | (162,275 | ) | 1,000,611 |   | 854,129 |   |
| Earnings  (loss) per share        |   |                                               |       |   |   |   |   |   |   |   |   |
| Basic                             |   | $                                                  | (0.27      | ) | $ | 0.03 |   | $ | (0.05 | ) | $ | 0.33 |   | $ | 0.26 |   |
| Diluted                           |   | (0.27                                              | )          | 0.03 |   | (0.05 | ) | 0.33 |   | 0.26 |   |
| Average  shares outstanding       |   |                                               |       |   |   |   |   |   |   |   |   |
| Basic                             |   | 3,006,945                                          |       | 3,006,945 |   | 3,020,132 |   | 3,065,206 |   | 3,293,758 |   |
| Diluted                           |   | 3,006,945                                          |       | 3,015,391 |   | 3,020,132 |   | 3,065,206 |   | 3,293,758 |   |
|                              |   |                                               |       |   |   |   |   |   |   |   |   |
| **Balance Sheet data:**           |   |                                               |       |   |   |   |   |   |   |   |   |
| Working capital                   |   | $                                                  | 9,211,641  |   | $ | 9,742,205 |   | $ | 9,731,438 |   | $ | 10,371,901 |   | $ | 9,839,492 |   |
| Total assets                      |   | 14,008,572                                         |       | 14,519,250 |   | 16,176,939 |   | 13,954,202 |   | 13,888,439 |   |
| Line of  credit                   |   | 541,684                                            |       | — |   | 1,157,707 |   | — |   | — |   |
| Long-term  obligations            |   | —                                             |       | — |   | — |   | — |   | — |   |
| Total  shareholders’ equity  |   | 10,440,870                                         |       | 11,248,016 |   | 11,152,773 |   | 11,354,448 |   | 10,958,906 |   |
|                              |   |                                               |       |   |   |   |   |   |   |   |   |
| Book value  per share             |   | $                                                  | 3.47       |   | $ | 3.74 |   | $ | 3.71 |   | $ | 3.75 |   | $ | 3.39 |   |

 

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(1) See Note 1 to Financial Statements describing accountingchanges.  Beginning October 1,2002, the accounting for goodwill changed from an amortization method to animpairment-only approach.  Prior toOctober 1, 2002, goodwill was amortized using the straight-line methodover a period of five to twenty years.

 

(2) For the year ended September 30, 2003, the Company recorded animpairment loss of $68,000, net of an income tax benefit of $45,000, or $0.02per share, for the adoption of the goodwill accounting change.

 

**Item 7****.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Applicationof Critical Accounting Policies**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make the appropriate application of certainaccounting policies, many of which require estimates and assumptions aboutfuture events and their effect on amounts reported in the financial statementsand related notes.  Since future events andtheir effect cannot be determined with certainty, the actual results willinevitably differ from the estimates. Such differences could be material to the financial statements.

 

The Company’s accounting policies aredisclosed in Note 1 to the Company’s Financial Statements for the fiscal yearended September 30, 2003.  InJuly 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 142, *Goodwill andOther Intangibles Assets*. SFAS No. 142 changed the accounting for goodwill and certain intangiblesfrom an amortization method to an impairment-only approach.  Thus, amortization of goodwill and certainintangibles, including goodwill and certain intangibles recorded in the pastbusiness combinations, ceased upon adoption of SFAS No. 142.  Instead, goodwill and certain intangibles arenow 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 becameeffective for the Company’s fiscal year beginning October 1, 2002.

 

11

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The Company completed thetransitional goodwill impairment test and recorded an impairment loss of$68,000, net of an income tax benefit of $45,000, or $0.02 per share, for theyear ended September 30, 2003.  Inaccordance with SFAS No. 142, the goodwill impairment loss is recognized as theeffect of a change in accounting principle as of October 1, 2002.  Goodwill amortization expense for the yearsended September 30, 2002 and 2001 was $50,000 and $43,000.

 

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 disposal transactions.  SFAS No. 144 became effective as of October 1,2002.  The adoption of SFAS No. 144 didnot have a material effect on the Company’s financial position or results ofoperations.

 

In November 2002, the FASBissued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees Including Indirect Guarantees of Indebtedness of Others*.  Included in other accrued expenses atSeptember 30, 2003 is an accrual of $340,000 for estimated warranty liabilities.  A majority of the products sold by the Company are covered by awarranty.  The estimated warrantyliability is based on historical experience and expectation of futureconditions.  The Company’s historicalexperience indicates that substantially all warranty services are providedwithin one year of product sale. Warranty services incurred for products more than one year after salehave not been significant.  Warrantyexpenses were $290,000 during the year ended September 30, 2003.

 

In December 2002, the FASBissued SFAS No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure: An Amendment of FASB Statement No. 123*.  This Statement amends SFAS No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFASNo. 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The disclosure provisions of SFAS No. 148are applicable for fiscal periods beginning after December 15, 2002.  The Company continues to account for itsfixed plan stock options under the recognition and measurement principles ofAccounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued toEmployees*, and related interpretations.  The adoption of SFAS No. 148 did not have a material effect onthe Company’s financial position or results of operations.

 

Except as described above, therehave been no material changes to the Company’s accounting policies during theyear ended September 30, 2003.  Themore significant of the Company’s accounting policies include revenuerecognition and the use of estimates (which inherently involve judgment anduncertainties) in establishing customer rebate and warranty accruedliabilities, and valuing accounts receivable, inventory and long-lived anddeferred tax assets.  Management hasdiscussed the development and selection of these critical accounting

 

12

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policies with the Audit Committee of the Company’sBoard of Directors, and the Audit Committee has reviewed the relateddisclosures.

 

Revenue Recognition

 

The Company recognizes revenue when all ofthe following 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 salesallowances which include sales rebates and co-op advertising incentives andother volume-based incentives.  TheCompany records a provision for estimated incentives based upon the incentivesoffered to customers on product related sales in the same period as the relatedrevenues are recorded.  If thehistorical data the Company uses to calculate these estimates do not properlyreflect future sales allowances, revenue could be 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 creditevaluations of its customers and adjusts credit limits based upon paymenthistory and the customer’s current creditworthiness, as determined by thereview of the customer’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, 2003 was used throughoutfiscal 2003.  However, the ultimatecollectibility of a receivable is dependent upon the financial condition of anindividual customer, which could change rapidly and without advance warning.

 

13

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The Company has had significant accountsreceivable or other amounts due from its customers or other parties.  From time to time, certain of these accountreceivable or other amounts due have become unusually large and/or overdue, andon 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 ofcost or market.  Cost is determinedusing the average cost method.  TheCompany continues to use the same techniques to value inventory as have beenused in the past.  The Company regularlyreviews inventory quantities on hand and records a provision for excess andobsolete inventory 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 andfuture benefits of long-lived assets by estimating undiscounted future cashflows of the related assets and reduces the carrying value of the long-livedassets by the 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 toreduce deferred 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. The effect of such adjustment would be to reduce earnings.  The Company determined that a valuationallowance was not necessary at September 30, 2003.

 

**Comparisonof Fiscal 2003 to Fiscal 2002**

 

*Net Sales.* Net sales decreased $4.7 million, or 16.0%, to $24,832,000 for fiscal2003 compared to $29,567,000 for fiscal 2002. Domestic sales decreased $4.3 million, or 18.4%, to $19.3 million forfiscal 2003 compared to $23.6 million for fiscal 2002.  Sales of electronics, accessories andspeakers decreased 16.5%, 35.6%, and 6.3%, respectively.  Sales of electronics to a significantcustomer decreased $1,734,000, or 45.9%, to $2,044,000 for fiscal 2003 comparedto $3,778,000 in fiscal 2002.  The amountand timing of purchase orders from this customer have historically fluctuatedfrom period to period.  During the firstquarter of fiscal 2002,

 

14

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a large domestic retailer placed a large holiday season order for homeaudio speakers.  Since a similar orderfor audio products was not received for the first quarter of fiscal 2003, salesof speakers decreased in fiscal 2003. International sales decreased $394,000, or 6.6%, to $5,554,000 forfiscal 2003 compared to $5,948,000 for fiscal 2002.  The decrease resulted primarily from a 33.5% decrease in sales toAsia, offset in part by a 4.2% increase in sales to Europe and a 4.5% increasein sales to other international markets. International sales accounted for 22.4% of net sales in fiscal 2003 and20.1% of net sales in fiscal 2002.

 

Because of the nature of the Company’sproducts, the Company’s largest customers have historically tended to be largedomestic retailers, 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.  No customer accounted for10% or more of the Company’s net sales for fiscal 2003.  The Company had one customer during fiscal2002 that accounted for more than 10% of net sales.  As with many of the Company’s customers, the timing and volume ofactivity can vary significantly from period to period.  The loss of business from one or moreprincipal customers or a change in the sales volume from a particular customercould have a material adverse effect on the Company’s sales volume andprofitability.

 

*Gross Profit.* Gross profit increased to 23.1% of net sales in fiscal 2003 from 22.5%in fiscal 2002.  The increase wasprimarily due to changes in sales mix and reduced direct labor costs.  Due to the range of products that theCompany sells, the product sales mix can produce variances in grossmargins.  Some markets in which theCompany operates also yield lower gross margins than others.

 

Historically, the Company has built infrastructureand added personnel on an as-needed basis, resulting in occasional changes inmanufacturing and operating expenses that are disproportionate to changes innet sales.  This policy has resulted inand may continue to result in variations in cost of sales and operatingexpenses as a percentage of sales from period to period.  On February 25, 2003, the Companyreorganized and reduced its workforce, including the reassignment of certainproduction personnel.  These actionsreduced the Company’s workforce by approximately 22%.  Further, in March 2003, the Company implemented a 5%company-wide pay reduction.

 

*Operating Expenses. *Operatingexpenses increased $392,000, or 6.1%, to $6.9 million in fiscal 2003 comparedto $6.5 million in fiscal 2002. Operating expenses were 27.6% and 21.9% of net sales in fiscal 2003 andfiscal 2002, respectively.

 

Selling and marketing expenses decreased$33,000, or 0.9%, to $3,779,000 in fiscal 2003 compared to $3,812,000 in fiscal2002.  Selling and marketing expenseswere 15.2% and 12.9% of net sales in fiscal 2003 and fiscal 2002,respectively.  The decrease in dollaramount was primarily due to decreased commissions paid to independentrepresentatives selling the Company’s products, decreased advertising anddecreased consulting expenses, offset in part by increased payroll expensesassociated with certain personnel increases.

 

Research and development expenses increased$450,000, or 63.9%, to $1,153,000 in fiscal 2003 compared to $703,000 in fiscal2002.  Research and development expenseswere 4.6% and 2.4% of net sales in fiscal 2003 and fiscal 2002,respectively.  The increase wasprincipally due to additional engineering personnel, increased consultingexpenses and new product development activities.

 

15

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General and administrative expenses decreased$25,000, or 1.3%, to $1,931,000 in fiscal 2003 compared to $1,956,000 in fiscal2002.  General and administrativeexpenses were 7.8% and 6.6% of net sales in fiscal 2003 and fiscal 2002,respectively.  The decrease in dollaramount was due to decreased depreciation and amortization expense and decreasedconsulting expense, offset in part by increased property and liabilityinsurance expenses and professional fees.

 

*Other Income (Expense).*  Other expense increased by $29,000 to$38,000 of other expense in fiscal 2003 from $9,000 of other expense in fiscal2002.  Interest expense increased due tothe use of the operating line of credit to finance operating activities andcapital expenditures during fiscal 2003.

 

*Income Tax Benefit (Expense).*  Forfiscal 2003, the tax benefit was $423,000 due to a loss before income taxes forthe period.  For fiscal 2002, the taxexpense was $70,000 due to earnings before income taxes for the period.  Deferred taxes of $973,000 and $507,000 arerecorded as current and long-term assets, respectively, at September 30,2003 due to the tax effects of the temporary differences between the carryingamounts of assets and liabilities for financial and tax reporting purposes anda net operating loss carryforward resulting from the net loss for fiscal2003.  Additionally, an income taxreceivable of $90,000 is recorded at September 30, 2003 due to a carrybackof the net loss related to a refund of previously paid income taxes.

 

*Cumulative Effect of Accounting Change.*  OnOctober 1, 2002, the Company adopted SFAS No. 142 and recorded a goodwillimpairment loss of $68,000, net of tax of $45,000, or $0.02  per share – basic and diluted (based on 3.0million shares outstanding) as the effect of a change in accountingprinciple.  Goodwill amortizationexpense for the year ended September 30, 2002 was $50,000.

 

*Net Earnings (Loss).*  The decrease in sales and gross profit and the increase inresearch and development expenses contributed to a net loss in fiscal 2003 of$807,000, or $0.27 per share – basic and diluted (based on 3.0 million sharesoutstanding), compared to net earnings of $95,000 in fiscal 2002, or $0.03 pershare – basic and diluted (based on 3.0 million shares outstanding).

 

**Comparisonof Fiscal 2002 to Fiscal 2001**

 

*Net Sales.* Net sales increased $2,369,000, or 8.7%, to $29,567,000 for fiscal 2002compared to $27,198,000 for fiscal 2001. Domestic sales increased $2.1 million, or 9.7%, to $23.6 million for fiscal2002 compared to $21.5 million for fiscal 2001.  Sales of speakers and electronics increased 39.3% and 4.1%,respectively, in fiscal 2002 compared to fiscal 2001.  Sales of accessories decreased 2.7%.  The increased sales of speakers were primarily due to sales ofAudioSource and new car audio products. Sales of electronics to a significant customer increased $863,000, or29.6%, to $3.8 million for fiscal 2002 compared to $2.9 million in fiscal 2001.  International sales increased $289,000, or5.1%, to $5,948,000 for fiscal 2002 compared to $5,659,000 for fiscal2001.  The increase resulted primarilyfrom a 10.7% increase in sales to Asia and a 15.1% increase in sales to otherinternational markets, offset in part by an 8.4% decrease in sales to Europe.  International sales accounted for 20.1% ofnet sales in fiscal 2002 and 20.8% of net sales in fiscal 2001.

 

*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.

 

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*Operating Expenses. *Operatingexpenses increased $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.

 

Selling and marketing 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.

 

Research and development expenses increased$203,000, or 40.7%, to $703,000 in fiscal 2002 compared to $500,000 in fiscal2001.  Research and development expenseswere 2.4% and 1.8% of net sales in fiscal 2002 and fiscal 2001,respectively.  The increase in researchand development expenses was due to increased engineering expenses as a resultof additional engineering personnel and new product development activities.

 

General and administrative expenses decreased$87,000, or 4.3%, to $1,956,000 in fiscal 2002 compared to $2,043,000 in fiscal2001.  General and administrativeexpenses were 6.6% and 7.5% of net sales in fiscal 2002 and fiscal 2001,respectively.  The decrease in generaland administrative expenses was due to decreased professional fees.

 

*Other Income (Expense).*  Other income (expense) decreased by $53,000to $9,000 of other expense for fiscal 2002, compared to $44,000 of other incomefor fiscal 2001.  The Company had a gainon sale of equipment and other income of $3,000 for fiscal 2002 as compared to$31,000 for fiscal 2001.  Interestincome decreased $25,000 to $5,000 for fiscal 2002 as compared to $30,000 forfiscal 2001.  The decrease was due tothe use of available cash and cash equivalents to acquire certain assets ofAudioSource on December 15, 2000.

 

*Tax Benefit (Expense).*  Tax expense was $70,000 for fiscal 2002 dueto earnings before income taxes for fiscal 2002.  The tax benefit was $99,000 for fiscal 2001 due to a loss beforeincome taxes for fiscal 2001.  Deferredtaxes of $572,000 and $513,000 are recorded as current and long-term assets atSeptember 30, 2002 due to the tax effects of temporary differences betweenthe carrying amounts of assets and liabilities for financial and tax reportingpurposes.

 

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

 

**Liquidityand Capital Resources**

 

The Company’s primary needs for funds are forworking capital and, to a lesser extent, for capital expenditures.  In fiscal 2003, the Company financed itsoperations from net borrowings of $542,000 under its revolving line ofcredit.  Net cash used by operatingactivities in fiscal 2003 was $323,000. In 2002 and 2001, the Company financed its operations principally fromcash generated from operating activities and borrowings under its revolvingline of credit.  Net cash provided byoperating activities in fiscal 2002 and 2001 was $2.1 million and $246,000,respectively.  When cash flow fromoperations is less than current needs, the Company increases the balance owingon its operating line of credit.  Whencash flow exceeds current needs, the Company pays down the balance owing on itsoperating line of credit rather than accumulating and investing excess cash,which practice resulted in low reported cash balances in fiscal 2003 and 2001.

 

17

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The Company’s future cash flows from operations are dependent upon, butnot limited to:

 

•                  the ability of the Company to attractnew and retain existing customers,

•                  the volume of sales to thesecustomers, or the loss of business of one or more primary customer,

•                  changes in sales mix,

•                  changes in general economicconditions,

•                  management’s effectiveness inmanaging the manufacturing process, and

•                  the ability to collect in full and ina timely manner amounts due to the Company.

 

During fiscal 2003, cash and cash equivalentsdecreased by $170,000 due principally to the net loss.  Accounts receivable increased by $148,000due to decreased collections during the last quarter of fiscal 2003 as comparedto the last quarter of fiscal 2002. Inventories decreased by $611,000 due to decreased purchases of rawmaterials.  Accounts payable decreased$233,000 due to the timing of payment due dates and decreased inventories.  Accrued expenses increased $86,000 due toincreased other accrued expenses. Overall, net working capital decreased $531,000 from $9.7 million atSeptember 30, 2002 to $9.2 million at September 30, 2003, primarilydue to the net loss.

 

Capital expenditures were $389,000, $712,000and $481,000 in fiscal years 2003, 2002 and 2001, respectively.  These expenditures related primarily tomanufacturing tooling and automation, the acquisition of equipment for use bythe Company’s administration, engineering and marketing departments andleasehold improvements.  The Companydoes not expect capital expenditures to exceed $500,000 in fiscal 2004, andthere are no outstanding commitments for any capital expenditures.  The anticipated expenditures will befinanced from available cash, cash provided by operations and, if necessary,proceeds from the line of credit.

 

A $3.5 million revolving operating line ofcredit is available through January 31, 2004.  Interest on the borrowings is equal to the bank’s prime lendingrate plus 1% (5.00% at September 30, 2003).  Borrowings under the line of credit are limited to eligibleaccounts receivable and inventories and are subject to 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.  Asof September 30, 2003, Phoenix Gold was eligible to borrow $3.5 millionunder the line of credit, of which borrowings of $541,684 wereoutstanding.  The Company expects torenew the revolving operating line of credit on similar terms prior toJanuary 31, 2004.

 

The Company has disclosed additionalinformation pertaining to obligations and commitments to make future cashpayments in Note 8 to the Company’s Financial Statements for the fiscal yearended September 30, 2003.  Minimumfuture rentals under operating leases having initial or remaining terms of oneyear or more for the periods ending September 30, 2004, 2005, 2006, 2007,2008 and thereafter are $578,000, $593,000, $608,000, $623,000, $638,000 and$488,000, respectively.

 

The Company believes that cash generated fromoperations and cash available through its credit facility should be sufficientto meet working capital and capital expenditure requirements for the nexttwelve months.

 

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**Item 7A****.****           Quantitativeand Qualitative Disclosures About Market Risk**

 

The Company has assessed its exposure tomarket risks for its financial instruments and has determined that itsexposures to such risks are not material. As of September 30, 2003, the Company had cash and cash equivalentsof $45,000 compared to $215,000 as of September 30, 2002.  When the Company has repaid any borrowingsoutstanding under its line of credit and has excess cash, then the Company hashistorically invested its excess cash in highly liquid marketable securitieswith maturities of three months or less at date of purchase.  The Company’s cash equivalents are generallycommercial paper and money market accounts. The Company does not invest in derivative securities.

 

The Company sells its products and purchasesits inventory primarily in United States dollars, therefore its exposure tocurrency exchange rate fluctuations is not material.  The Company does not engage in foreign currency hedging activities.

 

The Company borrows from time to time underits revolving line of credit.  Anyborrowings outstanding under the line of credit bear interest at a variablerate based on the prime rate.  TheCompany is not a party to interest rate swaps or caps.  The Company believes that a 100 basis pointincrease or decrease in the interest rate on borrowings outstanding under theline of credit would not materially affect the results of operations of theCompany.

 

**Item 8****.****           FinancialStatements and Supplementary Data**

 

Pages 26 through 42 of this Annual Report onForm 10-K are incorporated herein by reference.

 

**Item 9****.****           ChangesIn and Disagreements With Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A**.           Controls and Procedures

** **

The Company’s Chairman and Chief ExecutiveOfficer and the Chief Financial Officer have reviewed the disclosure controlsand procedures relating to the Company at September 30, 2003 and concludedthat such controls and procedures were effective to provide reasonableassurance that all material information about the financial and operationalactivities of the Company was made known to them.  There were no changes in the Company’s internal control overfinancial reporting during the quarter ended September 30, 2003 thatmaterially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART III**

 

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

 

The information required by this item isincorporated by reference to the information under the captions “Election ofDirectors” and “Section 16(a) Beneficial Ownership Reporting Compliance”in the Company’s definitive Proxy Statement to be filed pursuant to Regulation14A, 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 28, 2003.

 

**Item 11****.****    ExecutiveCompensation**

 

The information required by this item isincorporated by reference to the information under the caption “ExecutiveCompensation” in the Company’s definitive Proxy Statement to be filed pursuantto Regulation 14A, which Proxy Statement is anticipated to be filed with theSecurities and Exchange Commission within 120 days after the end of Registrant’sfiscal year ended September 28, 2003.

 

**Item 12****.****    SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

Certain information required by this item isincorporated by reference to the information under the caption “SecurityOwnership of Certain Beneficial Owners and Management” in the Company’sdefinitive Proxy Statement to be filed pursuant to Regulation 14A, which ProxyStatement is anticipated to be filed with the Securities and ExchangeCommission within 120 days after the end of Registrant’s fiscal year endedSeptember 28, 2003.

 

The following table provides information atSeptember 30, 2003 with respect to the Company’s equity compensation plansunder which equity securities of the Company are authorized for issuance.

 

EquityCompensation 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            |   | 249,375                                                                                                  |   | $                                                                                       | 4.69   |                                                                                                                                                        | 245,880 |   |
|                                                               |   |                                                                                                     |   |                                                                                    |   |                                                                                                                                                        |    |
| Equity  compensation plans not approved by   security holders |   | 16,200                                                                                                   |   | $                                                                                       | 2.82   |                                                                                                                                                        | —  |   |
|                                                               |   |                                                                                                     |   |                                                                                    |   |                                                                                                                                                        |    |
| Total                                                              |   | 265,575                                                                                                  |   | $                                                                                       | 4.58   |                                                                                                                                                        | 245,880 |   |

 

See Note 9 tothe Financial Statements for a description of the equity compensation plans.

 

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**Item 13****.****    CertainRelationships and Related Transactions**

 

None.

 

#### **Item 14**.    Principal Accountant Fees andServices

#### ** **

The information required by this item isincorporated by reference to the information under the caption “Audit CommitteeReport and Related Matters” 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 28, 2003.

 

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**PART IV**

 

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

 
| (a)    |   | Exhibits                                       |   |                                                                                                                                                                                                                          |
|--------|--------|------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                           |   |                                                                                                                                                                                                                          |
|   |   | (1)    Financial Statements          |
|   |   |                                           |   |                                                                                                                                                                                                                          |
|   |   |                                           |   | Independent Auditors’ Report                                                                                                                                                                                             |
|   |   |                                           |   | Balance Sheets at September 30, 2003  and 2002                                                                                                                                                                           |
|   |   |                                           |   | Statements of Operations  for each of the three years in the period ended September 30, 2003                                                                                                                             |
|   |   |                                           |   | Statements of Shareholders’ Equity  for each of the three years in the period ended September 30, 2003                                                                                                              |
|   |   |                                           |   | Statements of Cash Flows  for each of the three years in the period ended September 30, 2003                                                                                                                             |
|   |   |                                           |   | Notes to Financial Statements                                                                                                                                                                                                 |
|   |   |                                           |   |                                                                                                                                                                                                                          |
|   |   | (2)    Financial Statement Schedules |
|   |   |                                           |   |                                                                                                                                                                                                                          |
|   |   |                                           |   | All schedules have been omitted since they  are either not required or the information is included in the financial  statements included herewith                                                                             |
|   |   |                                           |   |                                                                                                                                                                                                                          |
|   |   | (3)    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)                                |

 

22

----

 
|   |   | 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)                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                   |
|   |   | 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   |   | Amendment date January 30, 2003 to  Loan Agreement and Note dated March 15, 2002 between the Company and  U.S. Bank National Association (incorporated by reference to Exhibit 10.19 to  Form 10-Q filed with the Securities and Exchange Commission for the quarterly  period ended December 31, 2002) |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                   |
|   |   | 10.8   |   | 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)                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                   |
|   |   | 10.9   |   | 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)                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                   |
|   |   | 10.10  |   | 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)                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                   |
|   |   | 10.11  |   | 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)                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                   |
|   |   | 10.12  |   | 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)                                       |

 

23

----

 
|   |   | 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)  |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 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  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)  |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 14     |   | Code of Ethics adopted for the Company’s  Principal Executive Officer, Principal Financial Officer, Principal  Accounting Officer or Controller, or persons performing similar functions                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 23.1   |   | Consent of Deloitte & Touche LLP,  Independent Auditors                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 31.1   |   | Certification of the Chief Executive  Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 31.2   |   | Certification of the Chief Financial  Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 32.1   |   | 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                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 32.2   |   | 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                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                             |
|   |   | 99.1   |   | Certain Factors to Consider in Connection  with Forward-Looking Statements                                                                                                                                                                                                       |

 

----

|   |   | (1)    Management contract or compensatory plan or  arrangement. |
|--------|--------|---------------------------------------------------------------------------------|

 

24

----

 
| (b)    |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
|   |   | A current report on Form 8-K dated  July 23, 2003 was filed on July 24, 2003 to report the Company’s  operating results for the three months ended June 30, 2003.                                                                                                                                                                           |
|   |
|   |   | A current report on Form 8-K dated  August 20, 2003 was filed on August 20, 2003 to report a decision  of a Nasdaq Listings Qualifications Panel that effective August 20, 2003  the common stock of the Company would no longer be traded on The Nasdaq  SmallCap Market but will instead be eligible for quotation on the OTC  Bulletin Board. |

 

25

----

 

**INDEXTO FINANCIAL STATEMENTS**

 
| Independent Auditors’ Report                                                                                |   |
|------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                             |   |
| Balance Sheets at September 30, 2003  and 2002                                                              |   |
|                                                                                                             |   |
| Statements of Operations for each of the three years in the period  ended September 30, 2003                |   |
|                                                                                                             |   |
| Statements of Shareholders’ Equity for each  of the three years in the period ended September 30, 2003 |   |
|                                                                                                             |   |
| Statements of Cash Flows for each of the three years in the period  ended September 30, 2003                |   |
|                                                                                                             |   |
| Notes to Financial Statements                                                                                    |   |

 

26

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

 

The Board of Directors and ShareholdersPhoenix Gold International, Inc.

 

We have audited the accompanying balance sheets of Phoenix GoldInternational, Inc. as of September 30, 2003 and 2002, and the relatedstatements of operations, shareholders’ equity and cash flows for each of thethree years in the period ended September 30, 2003.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements 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, 2003 and 2002, and the results of its operations andits cash flows for each of the three years in the period endedSeptember 30, 2003, in conformity with accounting principles generallyaccepted in the United States of America.

 

 
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
|                          |
| Portland, Oregon              |
| December 5, 2003         |

 

27

----

 

**PHOENIX GOLD INTERNATIONAL, INC.**

**BALANCESHEETS**

 
|                                                                                                                  |   | **September 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                                                  |   | **2003**               |       | **2002** |   |
| **ASSETS**                                                                                                            |   |                   |       |   |   |
|                                                                                                                  |   |                   |       |   |   |
| Current  assets:                                                                                                      |   |                   |       |   |   |
| Cash and  cash equivalents                                                                                            |   | $                      | 44,614     |   | $ | 214,814 |   |
| Accounts  receivable, net                                                                                             |   | 3,758,997              |       | 3,610,939 |   |
| Inventories                                                                                                           |   | 7,154,455              |       | 7,765,523 |   |
| Prepaid  expenses                                                                                                     |   | 194,332                |       | 188,140 |   |
| Deferred  taxes                                                                                                       |   | 973,000                |       | 572,000 |   |
| Income tax  receivable                                                                                                |   | 90,000                 |       | — |   |
| Total current  assets                                                                                                 |   | 12,215,398             |       | 12,351,416 |   |
|                                                                                                                  |   |                   |       |   |   |
| Property and  equipment, net                                                                                          |   | 984,082                |       | 1,102,498 |   |
| Deferred  taxes                                                                                                       |   | 507,000                |       | 513,000 |   |
| Other assets                                                                                                          |   | 302,092                |       | 552,336 |   |
|                                                                                                                  |   |                   |       |   |   |
| Total assets                                                                                                          |   | $                      | 14,008,572 |   | $ | 14,519,250 |   |
|                                                                                                                  |   |                   |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                         |   |                   |       |   |   |
|                                                                                                                  |   |                   |       |   |   |
| Current  liabilities:                                                                                                 |   |                   |       |   |   |
| Line of  credit                                                                                                       |   | $                      | 541,684    |   | $ | — |   |
| Accounts  payable                                                                                                     |   | 1,064,981              |       | 1,297,507 |   |
| Accrued  payroll and benefits                                                                                         |   | 397,163                |       | 430,048 |   |
| Accrued  customer rebates                                                                                             |   | 335,786                |       | 382,972 |   |
| Other  accrued expenses                                                                                               |   | 664,143                |       | 498,684 |   |
| Total  current liabilities                                                                                            |   | 3,003,757              |       | 2,609,211 |   |
|                                                                                                                  |   |                   |       |   |   |
| Deferred  gain on sale of facility                                                                                    |   | 563,945                |       | 662,023 |   |
|                                                                                                                  |   |                   |       |   |   |
| 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                                                                                                    |   | 3,929,342              |       | 4,736,488 |   |
| Total  shareholders’ equity                                                                                      |   | 10,440,870             |       | 11,248,016 |   |
|                                                                                                                  |   |                   |       |   |   |
| Total  liabilities and shareholders’ equity                                                                      |   | $                      | 14,008,572 |   | $ | 14,519,250 |   |

 

**See Notes to Financial Statements**

 

28

----

 

**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTSOF OPERATIONS**

 
|                                                                            |   | **Year Ended September 30,** |       |
|---------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                            |   | **2003**                          |       | **2002** |   | **2001** |   |
|                                                                            |   |                              |       |   |   |   |   |
| Net sales                                                                       |   | $                                 | 24,831,536 |   | $ | 29,566,758 |   | $ | 27,198,155 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Cost of  sales                                                                  |   | 19,092,431                        |       | 22,921,324 |   | 21,258,205 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Gross profit                                                                    |   | 5,739,105                         |       | 6,645,434 |   | 5,939,950 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Operating  expenses:                                                            |   |                              |       |   |   |   |   |
| Selling and  marketing                                                          |   | 3,778,670                         |       | 3,812,154 |   | 3,702,242 |   |
| Research and  development                                                       |   | 1,153,059                         |       | 703,391 |   | 499,933 |   |
| General and  administrative                                                     |   | 1,931,262                         |       | 1,955,899 |   | 2,042,815 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Total operating  expenses                                                       |   | 6,862,991                         |       | 6,471,444 |   | 6,244,990 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Income  (loss) from operations                                                  |   | (1,123,886                        | )          | 173,990 |   | (305,040 | ) |
|                                                                            |   |                              |       |   |   |   |   |
| Other income  (expense):                                                        |   |                              |       |   |   |   |   |
| Interest  income                                                                |   | 745                               |       | 5,386 |   | 29,958 |   |
| Interest  expense                                                               |   | (40,111                           | )          | (16,670 | ) | (16,788 | ) |
| Gain on sale  of assets and other, net                                          |   | 1,106                             |       | 2,537 |   | 30,595 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Total other  income (expense)                                                   |   | (38,260                           | )          | (8,747 | ) | 43,765 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Earnings  (loss) before income taxes and cumulative effect of accounting change |   | (1,162,146                        | )          | 165,243 |   | (261,275 | ) |
|                                                                            |   |                              |       |   |   |   |   |
| Income tax  benefit (expense)                                                   |   | 423,000                           |       | (70,000 | ) | 99,000 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Earnings  (loss) before cumulative effect of accounting change                  |   | (739,146                          | )          | 95,243 |   | (162,275 | ) |
|                                                                            |   |                              |       |   |   |   |   |
| Cumulative  effect of accounting change, net of income tax benefit of $45,000   |   | (68,000                           | )          | — |   | — |   |
|                                                                            |   |                              |       |   |   |   |   |
| Net earnings  (loss)                                                            |   | $                                 | (807,146   | ) | $ | 95,243 |   | $ | (162,275 | ) |
|                                                                            |   |                              |       |   |   |   |   |
| Earnings  (loss) per share: basic and diluted                                   |   |                              |       |   |   |   |   |
| Before  accounting change                                                       |   | $                                 | (0.25      | ) | $ | 0.03 |   | $ | (0.05 | ) |
| Accounting  change                                                              |   | (0.02                             | )          | 0.00 |   | 0.00 |   |
|                                                                            |   |                              |       |   |   |   |   |
| Earnings  (loss) per share                                                      |   | $                                 | (0.27      | ) | $ | 0.03 |   | $ | (0.05 | ) |
|                                                                            |   |                              |       |   |   |   |   |
| Average  shares outstanding:                                                    |   |                              |       |   |   |   |   |
| Basic                                                                           |   | 3,006,945                         |       | 3,006,945 |   | 3,020,132 |   |
| Diluted                                                                         |   | 3,006,945                         |       | 3,015,391 |   | 3,020,132 |   |

 

**See Notes to Financial Statements**

 

29

----

 

**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTSOF SHAREHOLDERS’ EQUITY**

 
|                                |   | **Common Stock** |   | **Retained  Earnings** |      |      |      |
|-------------------------------------|--------|------------------|--------|------------------------|-----------|-----------|-----------|
|                                |   | **Shares**       |   | **Amount**             |      |      | **Total** |   |
|                                |   |             |   |                   |      |      |      |   |   |
| 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 |   |
|                                |   |             |   |                   |      |      |      |   |   |
| Net loss                            |   | —           |   | —                 |      | (807,146  | )         | (807,146 | ) |
|                                |   |             |   |                   |      |      |      |   |   |
| Balance at  September 30, 2003 |   | 3,006,945        |   | $                      | 6,511,528 |      | $         | 3,929,342 |   | $ | 10,440,870 |   |

 

**See Notes to Financial Statements**

 

30

----

 

**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTSOF CASH FLOWS**

 
|                                                                                                   |   | **Year Ended September 30,** |       |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                   |   | **2003**                          |       | **2002** |   | **2001** |   |
|                                                                                                   |   |                              | ** ** |   | ** ** |   | ** ** |
| Cash flows  from operating activities:                                                                 |   |                              |       |   |   |   |   |
| Net earnings  (loss)                                                                                   |   | $                                 | (807,146   | ) | $ | 95,243 |   | $ | (162,275 | ) |
| Adjustments  to reconcile net earnings (loss) to net cash provided by (used in) operating  activities: |   |                              |       |   |   |   |   |
| Depreciation  and amortization                                                                         |   | 546,218                           |       | 535,856 |   | 572,202 |   |
| Cumulative  effect of accounting change, net of tax                                                    |   | 68,000                            |       | — |   | — |   |
| Deferred  taxes                                                                                        |   | (350,000                          | )          | (26,000 | ) | (134,000 | ) |
| Changes in  operating assets and liabilities (net of amounts acquired):                                |   |                              |       |   |   |   |   |
| Accounts  receivable                                                                                   |   | (148,058                          | )          | 1,732,560 |   | (41,693 | ) |
| Inventories                                                                                            |   | 611,068                           |       | 163,588 |   | (1,313,766 | ) |
| Prepaid  expenses                                                                                      |   | (6,192                            | )          | 79,752 |   | (38,843 | ) |
| Income tax  receivable                                                                                 |   | (90,000                           | )          | — |   | — |   |
| Accounts  payable                                                                                      |   | (232,526                          | )          | (582,035 | ) | 1,082,293 |   |
| Accrued  expenses                                                                                      |   | 85,388                            |       | 98,278 |   | 310,009 |   |
| Income taxes  payable                                                                                  |   | —                            |       | (13,391 | ) | (27,519 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| Net cash  provided by (used in) operating activities                                                   |   | (323,248                          | )          | 2,083,851 |   | 246,408 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| Cash flows  from investing activities:                                                                 |   |                              |       |   |   |   |   |
| Purchase of  AudioSource                                                                               |   | —                            |       | — |   | (2,536,123 | ) |
| Capital  expenditures, net                                                                             |   | (388,636                          | )          | (712,332 | ) | (481,273 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| Net cash  used in investing activities                                                                 |   | (388,636                          | )          | (712,332 | ) | (3,017,396 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| Cash flows  from financing activities:                                                                 |   |                              |       |   |   |   |   |
| Line of  credit, net                                                                                   |   | 541,684                           |       | (1,157,707 | ) | 1,157,707 |   |
| Common stock  repurchased                                                                              |   | —                            |       | — |   | (39,400 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| Net cash  provided by (used in) financing activities                                                   |   | 541,684                           |       | (1,157,707 | ) | 1,118,307 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                                      |   | (170,200                          | )          | 213,812 |   | (1,652,681 | ) |
|                                                                                                   |   |                              |       |   |   |   |   |
| Cash and  cash equivalents, beginning of year                                                          |   | 214,814                           |       | 1,002 |   | 1,653,683 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| Cash and  cash equivalents, end of year                                                                |   | $                                 | 44,614     |   | $ | 214,814 |   | $ | 1,002 |   |
|                                                                                                   |   |                              |       |   |   |   |   |
| Supplemental  disclosures:                                                                             |   |                              |       |   |   |   |   |
| Cash paid  for interest                                                                                |   | $                                 | 40,000     |   | $ | 17,000 |   | $ | 17,000 |   |
| Cash paid  for income taxes                                                                            |   | —                            |       | 159,000 |   | 63,000 |   |

 

**See Notes to Financial Statements**

 

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**PHOENIX GOLD INTERNATIONAL, INC.**

**NOTESTO FINANCIAL STATEMENTS**

Three Years EndedSeptember 30, 2003

 

**Note1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature of Business.*  Phoenix Gold International, Inc. (“Phoenix Gold” or the“Company”) designs, markets and sells electronics, accessories and speakers tothe audio market.  The Company’sproducts are used in car audio aftermarket, professional sound and customaudio/video and home theater applications. Certain electronics and accessories are manufactured in Portland,Oregon.  Phoenix Gold sells its productsprimarily in North America, South America, Europe and Asia through selectedaudio and audio/video specialty dealers, distributors and certain massmerchandisers.

 

*Reporting Periods.*  The Company’s fiscal year is the 52 or 53 weeks ending the lastSunday in September.  Fiscal years 2003and 2002 were 52 weeks.  Fiscal year2001 was 53 weeks.  For presentationconvenience, these periods have been presented in these financial statements asyears ended September 30.

 

*Estimates.* The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

*Cash and Cash Equivalents*.  Cash and cash equivalents include all highlyliquid investments with maturities of three months or less from date ofpurchase.  The Company’s cashequivalents are generally commercial paper and money market accounts.

 

*Inventories.* Inventories are stated at the lower of cost or market.  Cost is determined by the average costmethod.  Raw materials inventoriesgenerally consist of component parts. Finished goods and work-in-process inventories include materials, laborand manufacturing overhead.  The marketsin which Phoenix Gold competes are characterized by intense competition, rapidtechnological change and frequent new product introductions.  Phoenix Gold maintains a significantinvestment in inventories and, therefore, is subject to the risk of losses onwrite-downs to market and inventory obsolescence.

 

*Property and Equipment.*  Property and equipment are recorded atcost.  Depreciation is provided usingthe straight-line method over the estimated useful lives (generally three toseven years) of the related assets. Leasehold improvements are amortized over the estimated useful lives ofthe assets or the terms of the lease, whichever is shorter.

 

*Long-lived Assets.*  Phoenix Gold’s long-lived assets arereviewed for impairment when circumstances indicate that the carrying amountmay not be recoverable.  If the sum ofexpected undiscounted future cash flows is less than the carrying amount of theasset, a loss is recognized based on the amount by which the carrying valueexceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flowsdiscounted at a rate commensurate with the risk involved.

 

32

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*Goodwill.* Beginning October 1, 2002, the accounting for goodwill changed froman amortization method to an impairment-only approach.  Prior to October 1, 2002, goodwill wasamortized using the straight-line method over a period of five to twentyyears.  See*Accounting Changes*.

 

*Financial Instruments and Fair Values*.  The carrying amounts reported in the balancesheet for cash and cash equivalents, accounts receivable, accounts payable,accrued expenses and line of credit approximate fair value because of theimmediate or short-term maturity of these financial instruments.

 

*Revenue Recognition. *Revenueis recognized when the product has shipped and all significant obligations ofthe Company 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 an allowance fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments.  Aportion of Phoenix Gold’s customer base may be susceptible to downturns in theretail industry, particularly in the consumer electronics industry.  If the financial condition of Phoenix Gold’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.

 

Phoenix Gold charges many of its customersshipping and freight costs related to the delivery of its products.  Accordingly, the Company follows theprovisions 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. *PhoenixGold expenses advertising as incurred. Advertising expense for the years ended September 30, 2003, 2002and 2001 was $39,000, $103,000 and $157,000.

 

*Stock Options. *PhoenixGold applies the intrinsic value-based method of accounting to account forstock options.  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.

 

Phoenix Gold has elected to continue to accountfor stock options under the intrinsic value-based method of accountingprescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued toEmployees*, and related interpretations.  However, as required by SFAS No. 123, *Accounting for Stock-BasedCompensation,* the Company has computed for pro forma disclosurepurposes the value of options granted during the years ended September 30,2003, 2002 and 2001 using the Black-Scholes option pricing model.  No stock options were granted during theyear ended September 30, 2003.  Theweighted average estimated fair value of options granted during 2002 and 2001was $0.95 and $1.15 per share.  Theweighted average assumptions used for stock options granted during the yearsended September 30, 2002 and 2001 were a risk free interest rate of 4.25%and 5.00%, an expected dividend yield of 0% and 0%, an expected life of 8.9years and 8.9 years, and an expected volatility of 82.4% and 80.6%.

 

The Black-Scholes option valuationmodel was developed for use in estimating the fair value of traded options thathave no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions, including the

 

33

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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 stock options.

 

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

 
|                                    |   | **2003** |     | **2002** |   | **2001** |   |
|-----------------------------------------|--------|----------|----------|----------|--------|----------|--------|
|                                    |   |     |     |     |   |     |   |
| Net earnings  (loss) – as reported |   | $        | (807,146 | )        | $      | 95,243   |   | $ | (162,275 | ) |
| Pro forma  stock compensation expense   |   | (2,000   | )        | (9,000   | )      | (38,000  | )      |
| Net earnings  (loss) – pro forma   |   | $        | (809,146 | )        | $      | 86,243   |   | $ | (200,275 | ) |
|                                    |   |     |     |     |   |     |   |
| Earnings  (loss) per share:             |   |     |     |     |   |     |   |
| Basic and  diluted – as reported   |   | $        | (0.27    | )        | $      | 0.03     |   | $ | (0.05 | ) |
| Basic and  diluted – pro forma     |   | (0.27    | )        | 0.03     |   | (0.07    | )      |

 

The effects of applying SFAS No. 123 toprovide pro forma disclosure are not likely to represent net earnings (loss)and earnings (loss) per share for future years since options vest over severalyears, additional awards may occur in future years, and assumptions used forany additional awards may vary from the current assumptions.

 

*Income Taxes.* Income taxes are accounted for under the asset and liabilitymethod.  Deferred tax assets andliabilities are recognized for the tax effects of temporary differences betweenthe carrying amounts of assets and liabilities for financial and tax reportingpurposes.  Deferred tax assets arereduced by a valuation allowance when it is more likely than not that someportion of the deferred tax assets will not be realized.

 

*Earnings (Loss) Per Share*.  Basic earnings (loss) per share is based onthe average number of common shares outstanding during each period.  Diluted earnings per share reflects thepotential shares issuable upon assumed exercise of the outstanding stockoptions based on the treasury stock method.

 

*Comprehensive Income (loss)*.  There were no differences between netearnings (loss) and comprehensive income (loss) for the years endedSeptember 30, 2003, 2002 and 2001.

 

*Segment Information*.  Phoenix Gold operates in a single industrysegment as described in Note 10.  TheCompany uses a single manufacturing facility to produce similar products forits customers.  The same executive teammanages the manufacturing facility and sales management for all processes.  Phoenix Gold does not manage using separateprofit and loss analysis for individual processes or components of itsbusiness, nor does it have multiple facilities that produce different products.

 

*Accounting Changes*.  In July 2001, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, *Goodwill andOther Intangibles Assets*. SFAS No. 142 changed the accounting for goodwill and certain intangiblesfrom an amortization method to an impairment-only approach.  Thus, amortization of goodwill and certainintangibles, including goodwill and certain intangibles recorded in the pastbusiness combinations, ceased upon adoption of SFAS No. 142.  Instead, goodwill and certain intangiblesare now analyzed for impairment and written down and charged to operations only

 

34

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in periods in which the recorded goodwill and certain intangibles ismore than its fair value.  SFAS No. 142became effective for the Company’s fiscal year beginning October 1, 2002.

 

The Company completed thetransitional goodwill impairment test and recorded an impairment loss of$68,000, net of an income tax benefit of $45,000, or $0.02 per share, for theyear ended September 30, 2003.  Inaccordance with SFAS No. 142, the goodwill impairment loss is recognized as theeffect of a change in accounting principle as of October 1, 2002.  Goodwill amortization expense for the yearsended September 30, 2002 and 2001 was $50,000 and $43,000.

 

Included in other assets atSeptember 30, 2003 are intangible assets of $204,000 consisting primarilyof trademarks and a noncompetition agreement. Amortization expense for the year ended September 30, 2003 was$127,000.  The estimated future amortizationexpense of the intangible assets for the years ending September 30, 2004,2005 and 2006 is $119,000, $74,000 and $11,000.  It is estimated that the intangible assets will be fullyamortized in fiscal 2006.

 

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 becameeffective as of October 1, 2002. The adoption of SFAS No. 144 did not have a material effect on theCompany’s financial position or results of operations.

 

In November 2002, the FASBissued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees Including Indirect Guarantees of Indebtedness of Others*.  Included in other accrued expenses atSeptember 30, 2003 is an accrual of $340,000 for estimated warranty liabilities.  A majority of the products sold by the Company are covered by awarranty.  The estimated warrantyliability is based on historical experience and expectation of futureconditions.  The Company’s historicalexperience indicates that substantially all warranty services are providedwithin one year of product sale. Warranty services incurred for products more than one year after salehave not been significant.  Warranty expenseswere $290,000 during the year ended September 30, 2003.

 

In December 2002, the FASB issued SFASNo. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure: An Amendment of FASBStatement No. 123*.  ThisStatement amends SFAS No. 123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The disclosure provisions of SFASNo. 148 are applicable for fiscal periods beginning after December 15,2002.  The Company continues to accountfor its fixed plan stock options under the recognition and measurementprinciples of Accounting Principles Board (APB) Opinion No. 25, *Accountingfor*

 

35

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*Stock Issued to Employees*, and relatedinterpretations.  The adoption of SFASNo. 148 did not have a material effect on the Company’s financial position orresults of operations.

 

*Reclassifications*.  Certain amounts in the prior period financial statements havebeen reclassified to conform to the current year presentation.  The reclassifications had no effect onpreviously reported income (loss) from operations, net earnings (loss) orshareholders’ equity.

 

**Note2 - PURCHASE OF AUDIOSOURCE ASSETS**

 

Effective December 15, 2000, the Companyacquired for $2.5 million in cash certain assets of AudioSource, Inc., anunrelated, 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.  In addition,AudioSource agreed not to compete with the Company in the home theater and homeaudio market for four years.  Thepurchase price was paid from available cash reserves and from a drawdown underthe Company’s revolving line of credit.

 

The Company accounted for the acquisition ofassets under 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 propertyis computed using the straight-line method over five years.  As discussed in Note 1, goodwill is nolonger amortized due to the adoption of SFAS No. 142.

 

The following unaudited pro forma combinedresults of operations accounts for the acquisition as if it had occurred at thebeginning of fiscal 2001.  The pro formaresults give effect to the amortization of intellectual property, goodwill andthe covenant not to compete and the effects on interest income, interestexpense and income taxes.

 
|                                |   | **2001** |       |
|-------------------------------------|--------|----------|------------|
|                                |   |     |       |
| Net sales                           |   | $        | 28,545,410 |   |
| Net loss                            |   | (362,933 | )          |
| Loss per  share - basic and diluted |   | (0.12    | )          |
|                                     |        |          |            |  |

 

The proforma results may not be indicative ofthe results 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.

 

36

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**Note3 - ACCOUNTS RECEIVABLE**

 

Accounts receivable consist of the following:

 
|                             |   | **2003** |      | **2002** |   |
|----------------------------------|--------|----------|-----------|----------|--------|
|                             |   |     |      |     |   |
| Accounts  receivable             |   | $        | 4,058,997 |     | $      | 3,905,939 |   |
| Allowance  for doubtful accounts |   | (300,000 | )         | (295,000 | )      |
| Total  accounts receivable, net  |   | $        | 3,758,997 |     | $      | 3,610,939 |   |

** **

**Note 4 - INVENTORIES**

** **

Inventories consist of the following:

** **
|                               |   | **2003**  |      | **2002**  |   |
|------------------------------------|--------|-----------|-----------|-----------|--------|
|                               |   |      |      |      |   |
| Raw  materials and work-in-process |   | $         | 2,229,338 |      | $      | 2,924,498 |   |
| Finished  goods                    |   | 4,925,117 |      | 4,841,025 |   |
| Total  inventories                 |   | $         | 7,154,455 |      | $      | 7,765,523 |   |

 

**Note5 - PROPERTY AND EQUIPMENT**

 

Property and equipment consist of thefollowing:

 
|                                            |   | **2003**   |      | **2002**   |   |
|-------------------------------------------------|--------|------------|-----------|------------|--------|
|                                            |   |       |      |       |   |
| Machinery  and equipment                        |   | $          | 3,493,630 |       | $      | 3,691,770 |   |
| Office  equipment and furniture                 |   | 1,767,609  |      | 1,741,398  |   |
| Leasehold  improvements                         |   | 175,335    |      | 170,494    |   |
|                                            |   | 5,436,574  |      | 5,603,662  |   |
| Less  accumulated depreciation and amortization |   | (4,452,492 | )         | (4,501,164 | )      |
| Total  property and equipment, net              |   | $          | 984,082   |       | $      | 1,102,498 |   |

 

During 1999, Phoenix Gold purchased itsleased office, warehouse and manufacturing facility for $3,132,000 from itslandlord.  On the same day, the Companysold the facility and the existing improvements, with a remaining net bookvalue of $924,000, for a net sales price of $5,037,000, and then leased thefacility from the purchaser.  Theresulting gain of $981,000 was deferred. Phoenix Gold will recognize the deferred gain over the ten-year leaseterm as a reduction in rent expense.

 

37

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**Note 6 - FINANCING AGREEMENT**

 

A $3.5 million revolving operating line ofcredit is available through January 31, 2004.  Interest on the borrowings is equal to the bank’s prime lendingrate plus 1% (5.00% at September 30, 2003).  Borrowings under the line of credit are limited to eligibleaccounts receivable and inventories and are subject to 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 tangible net worth.  Asof September 30, 2003, Phoenix Gold was eligible to borrow $3.5 million underthe line of credit, of which borrowings of $541,684 were outstanding.  No borrowings were outstanding under theline of credit as of September 30, 2002.

 

**Note7 - TAXES**

 

Income tax benefit (expense):

 
|           |   | **2003** |    | **2002** |   | **2001** |   |
|----------------|--------|----------|---------|----------|--------|----------|--------|
| Current:       |   |     |    |     |   |     |   |
| Federal        |   | $        | 73,000  |     | $      | (86,000  | )      | $ | (31,000 | ) |
| State          |   | —   |    | (10,000  | )      | (4,000   | )      |
| Total current  |   | 73,000   |    | (96,000  | )      | (35,000  | )      |
|           |   |     |    |     |   |     |   |
| Deferred:      |   |     |    |     |   |     |   |
| Federal        |   | 310,000  |    | 23,000   |   | 120,000  |   |
| State          |   | 40,000   |    | 3,000    |   | 14,000   |   |
| Total deferred |   | 350,000  |    | 26,000   |   | 134,000  |   |
| Total          |   | $        | 423,000 |     | $      | (70,000  | )      | $ | 99,000 |   |

 

Effective income tax rates are as follows:

 
|                                        |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| 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                                  |   | (2.0     | )      | (4.0     | )      | (0.5     | )      |
| Total                                       |   | 36.4     | %      | (42.4    | %)     | 37.9     | %      |

 

38

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The tax effects of temporary differenceswhich give rise to deferred tax assets and deferred tax liabilities are asfollows:

** **
|                                        |   | **2003**  |       | **2002**  |       |
|---------------------------------------------|--------|-----------|------------|-----------|------------|
|                                        |   |      | ** ** |      | ** ** |
| Deferred tax  liability – depreciation |   | $         | (83,000    | )         | $          | (81,000 | ) |
|                                        |   |      |       |      |       |
| Deferred tax  assets:                       |   |      |       |      |       |
| Net operating loss carryforwards            |   | 241,000   |       | —    |       |
| Accrued expenses                            |   | 404,000   |       | 344,000   |       |
| Deferred gain on sale of facility           |   | 216,000   |       | 254,000   |       |
| Goodwill and other intangibles              |   | 374,000   |       | 340,000   |       |
| Inventory valuation                         |   | 328,000   |       | 228,000   |       |
| Total deferred tax assets                   |   | 1,563,000 |       | 1,166,000 |       |
| Net deferred taxes                          |   | $         | 1,480,000  |      | $          | 1,085,000 |   |
|                                        |   |      |       |      |       |
| Current  deferred tax asset                 |   | $         | 973,000    |      | $          | 572,000 |   |
| Long-term  deferred tax asset               |   | 507,000   |       | 513,000   |       |
| Net deferred taxes                          |   | $         | 1,480,000  |      | $          | 1,085,000 |   |

 

AtSeptember 30, 2003, Phoenix Gold has a federal net operating losscarryforward of $530,000 available to offset future taxable income through 2023and a state net operating loss carryforward of $860,000 available to offsetfuture taxable income through 2018.  TheCompany has recorded a deferred tax asset for the tax benefit of suchcarryforwards.

 

**Note8 - COMMITMENTS**

 

Phoenix Gold leases its office, warehouse andmanufacturing facility under a ten-year operating lease agreement that expireson June 30, 2009.  Terms of thelease include an option to extend the length of the lease for ten additionalyears.

 

Minimum future rentals under operating leaseshaving initial or remaining terms of one year or more are as follows:

 
| September 30, |   |    |      |
|--------------------|--------|---------|-----------|
| 2004               |   | $       | 578,000   |   |
| 2005               |   | 593,000 |      |
| 2006               |   | 608,000 |      |
| 2007               |   | 623,000 |      |
| 2008               |   | 638,000 |      |
| 2009               |   | 488,000 |      |
| Total              |   | $       | 3,528,000 |   |

 

Rent expense under operating leases for theyears ended September 30, 2003, 2002 and 2001 was $587,000, $569,000 and$561,000.

 

39

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**Note9 - SHAREHOLDERS’ EQUITY AND STOCK OPTION PLAN**

 

Phoenix Gold’s Board of Directors andshareholders adopted and approved a stock option plan (the “Stock Option Plan”)on January 27, 1995.  Under theStock Option Plan as amended July 16, 1996, the Board of Directors maygrant incentive and nonqualified options to employees, directors andconsultants to purchase up to 515,000 shares of common stock.

 

In general, options to purchase common stockmay not be 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 forthe Stock Option 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,  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 |   |
|                     |   |                              |   |                    |   |                                   |   |   |   |   |   |
| Canceled                 |   | 31,550                            |   | (31,550                 | )      | 2.90                                   |   |   |   |   |   |
| September 30,  2003 |   | 245,880                           |   | 249,375                 |   | $                                      | 4.69   |   | 241,875 |   | $ | 4.79 |   |

 

The following table summarizes informationabout stock options outstanding under the Stock Option Plan atSeptember 30, 2003:

 
|                         |   | **Outstanding**     |   | **Exercisable**                                   |   |
|------------------------------|--------|---------------------|--------|---------------------------------------------------|--------|
| **Range of  ExercisePrices** |   | **Numberof Shares** |   | **Weighted  Average  Remaining  ContractualLife** |   | **Weighted  Average  ExercisePrice** |   | **Numberof Shares** |   | **Weighted  Average  ExercisePrice** | ** ** |
|                         |   |                |   |                                              |   |   |   |   |   |   |   |
|                         |   |                | $      | 1.28                                              |   |   | 15,000 |   | 7.3 |   | $ | 1.28 |   | 7,500 |   | $ | 1.28 |   |
| $                            | 3.13   | -                   | $      | 3.38                                              |   |   | 5,600 |   | 0.9 |   | 3.25 |   | 5,600 |   | 3.25 |   |
| $                            | 4.63   | -                   | $      | 4.75                                              |   |   | 147,375 |   | 1.7 |   | 4.69 |   | 147,375 |   | 4.69 |   |
| $                            | 5.15   | -                   | $      | 5.50                                              |   |   | 80,000 |   | 2.0 |   | 5.29 |   | 80,000 |   | 5.29 |   |
|                         |   |                | $      | 11.75                                             |   |   | 1,400 |   | 2.3 |   | 11.75 |   | 1,400 |   | 11.75 |   |
|                         |   |                |   |                                              |   |   | 249,375 |   | 2.1 |   | $ | 4.69 |   | 241,875 |   | $ | 4.79 |   |

 

40

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At September 30, 2003, nonqualifiedoptions to purchase 16,200 shares of common stock were outstanding at exerciseprices ranging from $1.15 to $4.63 per share. Such options become exercisable ratably over a three-year period andexpire from 2004 to 2007.  AtSeptember 30, 2003, Phoenix Gold has reserved 511,455 shares of commonstock for issuance upon exercise of the stock options.

 

During 1999, Phoenix Gold began acquiringshares of its common stock in connection with a stock repurchase programannounced in November 1998.  Thatprogram authorized the Company to purchase common stock from time-to-time onthe open market or pursuant to negotiated transactions at price levels theCompany deemed attractive.  For theyears ended September 30, 2003 and 2002, no shares were purchased.  For the year ended September 30, 2001,Phoenix Gold purchased 20,000 shares of common stock for $39,400.

 

**Note10 - SALES AND MAJOR CUSTOMERS**

 

Phoenix Gold operates in a single industrysegment:  the design, manufacture andsale of electronics, accessories and speakers for use in the audio market.  Net sales by geographic region are asfollows:

 
|                 |   | **2003**  |       | **2002**  |   | **2001**   |   |
|----------------------|--------|-----------|------------|-----------|--------|------------|--------|
|                 |   |      |       |      |   |       |   |
| United  States       |   | $         | 19,277,837 |      | $      | 23,618,689 |   | $ | 21,539,403 |   |
| International:       |   |      |       |      |   |       |   |
| Europe               |   | 2,023,341 |       | 1,941,074 |   | 2,119,131  |   |
| Asia                 |   | 1,145,699 |       | 1,724,052 |   | 1,556,817  |   |
| Other                |   | 2,384,659 |       | 2,282,943 |   | 1,982,804  |   |
| Total  international |   | 5,553,669 |       | 5,948,069 |   | 5,658,752  |   |
| Net sales            |   | $         | 24,831,536 |      | $      | 29,566,758 |   | $ | 27,198,155 |   |

 

No customer accounted for 10% or more of theCompany’s net sales for the year ended September 30, 2003.  One customer accounted for 12.8% and 10.7%of the Company’s net sales during the years ended September 30, 2002 and2001.  For the years endedSeptember 30, 2003, 2002, and 2001, the Company’s five largest customersrepresented 29.5%, 31.7% and 29.7% of net sales.  As of September 30, 2003, no customer accounted for 10% ormore of net accounts receivable.  As ofSeptember 30, 2002, one customer accounted for 13.7% of net accountsreceivable.  As of September 30,2003 and 2002, approximately 26.1% and 37.7% of net accounts receivable areattributable to export sales.

 

**Note11 - BENEFIT PLAN**

 

Phoenix Gold has a profit sharing and 401(k)savings plan that covers substantially all employees.  Participating employees may defer a percentage of theircompensation within certain regulatory limitations.  The Company matches 100% of employee contributions up to $750 ofeach participating employee’s compensation. The matching contribution expense was $46,000, $44,000 and $45,000 forthe years ended September 30, 2003, 2002 and 2001.

 

The profit sharing and 401(k) savings planalso permits the Company to make discretionary profit sharing contributions toall employees.  Discretionary profitsharing contributions are determined annually by the Board of Directors.  No profit sharing expense was approved forthe years ended September 30, 2003, 2002 and 2001.

 

41

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**QUARTERLYFINANCIAL DATA (UNAUDITED)**

 

The following is a summary of operatingresults by quarter for the years ended September 30, 2003 and 2002:

 
|                                                           |   | **December 31** |      | **March 31** |   | **June 30** |   | **September 30** |      | **Total** |   |
|----------------------------------------------------------------|--------|----------------------|-----------|-------------------|--------|------------------|--------|-----------------------|-----------|-----------|--------|
|                                                           |   |                 |      |              |   |             |   |                  |      |      |   |
| **2003 quarter ended**                                         |   |                 |      |              |   |             |   |                  |      |      |   |
| Net sales                                                      |   | $                    | 5,223,934 |              | $      | 5,419,229        |   | $                     | 8,032,132 |      | $      | 6,156,060 |   | $ | 24,831,536 |   |
| Gross profit                                                   |   | 1,114,913            |      | 1,154,357         |   | 2,191,242        |   | 1,278,593             |      | 5,739,105 |   |
| Earnings  (loss) before cumulative effect of accounting change |   | (286,019             | )         | (375,616          | )      | 224,093          |   | (301,604              | )         | (739,146  | )      |
| Net earnings  (loss)                                           |   | (354,019             | )         | (375,616          | )      | 224,093          |   | (301,604              | )         | (807,146  | )      |
| Earnings  (loss) per share:                                    |   |                 |      |              |   |             |   |                  |      |      |   |
| Before  accounting change                                      |   | (0.10                | )         | (0.12             | )      | 0.07             |   | (0.10                 | )         | (0.25     | )      |
| Accounting  change                                             |   | (0.02                | )         | —            |   | —           |   | —                |      | (0.02     | )      |
| Total                                                          |   | (0.12                | )         | (0.12             | )      | 0.07             |   | (0.10                 | )         | (0.27     | )      |
|                                                           |   |                 |      |              |   |             |   |                  |      |      |   |
| **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      |   |

 

42

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to 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 19, 2003 |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Signature**              |   | **Capacity**                      |                            | **Date** |
|----------------------------|--------|-----------------------------------|---------------------------------|----------|
|                       |   |                              |                            |     |
|                       |   |                              |                            |     |
| /s/ Keith A. Peterson      |   |                              | Chairman and Chief              |     | December 19, 2003 |
| Keith A. Peterson          |   | Executive Officer                 |                            |     |
|                       |   | (Principal Executive Officer)     |                            |     |
|                       |   |                              |                            |     |
|                       |   |                              |                            |     |
| /s/ Timothy G. Johnson     |   |                              | President, Chief Operating      |     | December 19, 2003 |
| Timothy G. Johnson         |   | Officer and Director              |                            |     |
|                       |   |                              |                            |     |
|                       |   |                              |                            |     |
| /s/ Joseph K. O’Brien |   |                              | Vice President, Chief Financial |     | December 19, 2003 |
| Joseph K. O’Brien     |   | Officer and Secretary (Principal  |                            |     |
|                       |   | Financial and Accounting Officer) |                            |     |
|                       |   |                              |                            |     |
|                       |   |                              |                            |     |
| /s/ Robert A. Brown        |   |                              | Director                        |     | December 19, 2003 |
| Robert A. Brown            |   |                              |                            |     |
|                       |   |                              |                            |     |
|                       |   |                              |                            |     |
| /s/ Edward A. Foehl        |   |                              | Director                        |     | December 19, 2003 |
| Edward A. Foehl            |   |                              |                            |     |
|                       |   |                              |                            |     |
|                       |   |                              |                            |     |
| /s/ Frank G. Magdlen       |   |                              | Director                        |     | December 19, 2003 |
| Frank G. Magdlen           |   |                              |                            |     |

 

43

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**EXHIBITINDEX**

 
| **Exhibit** |   | **Description**                                                                                                                                                                                |   |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|        |   |                                                                                                                                                                                           |   |
| 14          |   | Code of  Ethics adopted for the Company’s Principal Executive Officer, Principal  Financial Officer, Principal Accounting Officer or Controller, or persons  performing similar functions |   |
|        |   |                                                                                                                                                                                           |   |
| 23.1        |   | Consent of  Deloitte & Touche LLP, Independent Auditors                                                                                                                                    |   |
|        |   |                                                                                                                                                                                           |   |
| 31.1        |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               |   |
|        |   |                                                                                                                                                                                           |   |
| 31.2        |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               |   |
|        |   |                                                                                                                                                                                           |   |
| 32.1        |   | 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                               |   |
|        |   |                                                                                                                                                                                           |   |
| 32.2        |   | 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                               |   |
|        |   |                                                                                                                                                                                           |   |
| 99.1        |   | Certain  Factors to Consider in Connection with Forward-Looking Statements                                                                                                                     |   |

 

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