**U.S. Securities and Exchange Commission**

**Washington, D.C.20549**

 

**Form 10-Q**

 

|   | **ý**                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|--------------------------------------------------|----------------------------------------------------------------------------------------------|
|   | **For the quarterly period ended June 30, 2002** |

 

**or**

** **

|   | **o**  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | **For the transition period from             to            ** |

** **

**Commission filenumber 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)       |
|                                                                 |        |                                          |  |  |

 

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 Act of1934 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

 

Therewere 3,006,945 shares of the issuer’s common stock outstanding as of July 31,2002.

 

 

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**PHOENIX GOLD INTERNATIONAL, INC.**

**Form 10-Q for the Quarter Ended June 30, 2002**

 

**INDEX**

 
| Part I.           | FINANCIAL INFORMATION |
|-------------------|-----------------------|
|              |                  |   |
|              | Item 1.               | Financial Statements |
|              |                  |   |
|              |                  | Balance Sheets at June 30, 2002 and  September 30, 2001 (unaudited) |
|              |                  |   |
|              |                  | Statements of Operations for  the Three and Nine Months Ended June 30, 2002 and 2001 (unaudited) |
|              |                  |   |
|              |                  | Statements of Cash Flows for  the Nine Months Ended June 30, 2002 and 2001 (unaudited) |
|              |                  |   |
|              |                  | Notes to Financial  Statements |
|              |                  |   |
|              | Item  2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|              |                  |   |
|              | Item  3.              | Quantitative  and Qualitative Disclosure About Market Risk |
|              |                  |   |
| Part II.          | OTHER INFORMATION     |
|              |                  |   |
|              | Item 6.               | Exhibits and  Reports on Form 8-K |
|              |                  |   |
| SIGNATURES        |
|              |
| INDEX TO EXHIBITS |

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

** **

**PHOENIX GOLD INTERNATIONAL, INC.**

**BALANCESHEETS**

**(Unaudited)**

 
|                                                                                                                              |   | **June 30,  2002** |       | **September  30,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|--------------------------|--------|
| **ASSETS**                                                                                                                        |   |               |       |                     |   |
|                                                                                                                              |   |               |       |                     |   |
| Current assets:                                                                                                                   |   |               |       |                     |   |
| Cash and cash  equivalents                                                                                                        |   | $                  | 239,982    |                     | $      | 1,002 |   |
| Accounts  receivable, net                                                                                                         |   | 4,992,125          |       | 5,343,499                |   |
| Inventories                                                                                                                       |   | 6,692,436          |       | 7,929,111                |   |
| Prepaid expenses                                                                                                                  |   | 265,108            |       | 267,892                  |   |
| Deferred taxes                                                                                                                    |   | 560,000            |       | 454,000                  |   |
| Total current  assets                                                                                                             |   | 12,749,651         |       | 13,995,504               |   |
|                                                                                                                              |   |               |       |                     |   |
| Property and  equipment, net                                                                                                      |   | 822,992            |       | 849,192                  |   |
| Goodwill, net                                                                                                                     |   | 242,659            |       | 279,807                  |   |
| Deferred taxes                                                                                                                    |   | 604,000            |       | 605,000                  |   |
| Other assets                                                                                                                      |   | 347,578            |       | 447,436                  |   |
| Total assets                                                                                                                      |   | $                  | 14,766,880 |                     | $      | 16,176,939 |   |
|                                                                                                                              |   |               |       |                     |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                    |   |               |       |                     |   |
|                                                                                                                              |   |               |       |                     |   |
| Current  liabilities:                                                                                                             |   |               |       |                     |   |
| Line of credit                                                                                                                    |   | $                  | —     |                     | $      | 1,157,707 |   |
| Accounts payable                                                                                                                  |   | 782,205            |       | 1,879,542                |   |
| Accrued payroll  and benefits                                                                                                     |   | 524,372            |       | 402,305                  |   |
| Accrued customer  rebates                                                                                                         |   | 583,229            |       | 331,873                  |   |
| Other accrued  expenses                                                                                                           |   | 573,266            |       | 479,248                  |   |
| Income taxes  payable                                                                                                             |   | 158,962            |       | 13,391                   |   |
| Total current  liabilities                                                                                                        |   | 2,622,034          |       | 4,264,066                |   |
|                                                                                                                              |   |               |       |                     |   |
| Deferred gain on  sale of facility                                                                                                |   | 686,543            |       | 760,100                  |   |
|                                                                                                                              |   |               |       |                     |   |
| Commitments and  contingencies                                                                                                    |   |               |       |                     |   |
|                                                                                                                              |   |               |       |                     |   |
| Shareholders’  equity:                                                                                                       |   |               |       |                     |   |
| Preferred stock;    Authorized – 5,000,000 shares; none outstanding                                                          |   | —             |       | —                   |   |
| Common stock, no  par value;   Authorized – 20,000,000 shares   Issued and outstanding – 3,006,945 and 3,006,945 shares |   | 6,511,528          |       | 6,511,528                |   |
| Retained  earnings                                                                                                                |   | 4,946,775          |       | 4,641,245                |   |
| Total  shareholders’ equity                                                                                                  |   | 11,458,303         |       | 11,152,773               |   |
| Total  liabilities and shareholders’ equity                                                                                  |   | $                  | 14,766,880 |                     | $      | 16,176,939 |   |

 

**SeeNotes to Financial Statements**

 

3

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** **

**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTSOF OPERATIONS**

**(Unaudited)**

 
|                                           |   | **Three  Months Ended  June 30** |      | **Nine  Months Ended  June 30** |   |
|------------------------------------------------|--------|----------------------------------|-----------|---------------------------------|--------|
|                                           |   | **2002**                         |      | **2001**                        |   | **2002** |   | **2001** |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Net sales                                      |   | $                                | 8,063,132 |                            | $      | 7,402,182 |   | $ | 22,917,242 |   | $ | 18,886,041 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Cost of sales                                  |   | 6,007,312                        |      | 5,778,166                       |   | 17,545,997 |   | 14,696,366 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Gross profit                                   |   | 2,055,820                        |      | 1,624,016                       |   | 5,371,245 |   | 4,189,675 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Operating  expenses:                           |   |                             |      |                            |   |   |   |   |   |
| Selling                                        |   | 1,043,935                        |      | 1,014,875                       |   | 2,853,860 |   | 2,668,196 |   |
| General and  administrative                    |   | 656,516                          |      | 605,421                         |   | 1,997,836 |   | 1,789,808 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Total operating  expenses                      |   | 1,700,451                        |      | 1,620,296                       |   | 4,851,696 |   | 4,458,004 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Income (loss)  from operations                 |   | 355,369                          |      | 3,720                           |   | 519,549 |   | (268,329 | ) |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Other income  (expense):                       |   |                             |      |                            |   |   |   |   |   |
| Interest income                                |   | 2,001                            |      | 406                             |   | 3,119 |   | 29,436 |   |
| Interest expense                               |   | —                           |      | (977                            | )      | (16,670 | ) | (7,541 | ) |
| Gain on sale of  equipment and other, net      |   | —                           |      | 29,399                          |   | 2,532 |   | 33,103 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Total other  income (expense)                  |   | 2,001                            |      | 28,828                          |   | (11,019 | ) | 54,998 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Earnings (loss)  before income taxes           |   | 357,370                          |      | 32,548                          |   | 508,530 |   | (213,331 | ) |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Income tax  benefit (expense)                  |   | (143,000                         | )         | (13,000                         | )      | (203,000 | ) | 82,000 |   |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Net earnings  (loss)                           |   | $                                | 214,370   |                            | $      | 19,548 |   | $ | 305,530 |   | $ | (131,331 | ) |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Earnings (loss)  per share - basic and diluted |   | $                                | 0.07      |                            | $      | 0.01 |   | $ | 0.10 |   | $ | (0.04 | ) |
|                                           |   |                             |      |                            |   |   |   |   |   |
| Average shares  outstanding:                   |   |                             |      |                            |   |   |   |   |   |
| Basic                                          |   | 3,006,945                        |      | 3,019,692                       |   | 3,006,945 |   | 3,024,527 |   |
| Diluted                                        |   | 3,022,144                        |      | 3,021,819                       |   | 3,013,207 |   | 3,024,527 |   |

 

**SeeNotes to Financial Statements**

 

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**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
|                                                                                                   |   | **Nine  Months Ended  June 30,** |       |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                                                   |   | **2002**                         |       | **2001** |   |
|                                                                                                   |   |                             | ** ** |   | ** ** |
| Cash flows from  operating activities:                                                                 |   |                             |       |   |   |
| Net earnings  (loss)                                                                                   |   | $                                | 305,530    |   | $ | (131,331 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash provided by (used in) operating  activities: |   |                             |       |   |   |
| Depreciation and  amortization                                                                         |   | 394,109                          |       | 441,622 |   |
| Deferred taxes                                                                                         |   | (105,000                         | )          | (115,000 | ) |
| Changes in  operating assets and liabilities (net of amounts acquired):                                |   |                             |       |   |   |
| Accounts  receivable                                                                                   |   | 351,374                          |       | 767,819 |   |
| Inventories                                                                                            |   | 1,236,675                        |       | 66,136 |   |
| Prepaid expenses                                                                                       |   | 2,784                            |       | (52,138 | ) |
| Accounts payable                                                                                       |   | (1,097,337                       | )          | 255,388 |   |
| Accrued expenses                                                                                       |   | 613,012                          |       | 151,242 |   |
|                                                                                                   |   |                             |       |   |   |
| Net cash  provided by operating activities                                                             |   | 1,701,147                        |       | 1,383,738 |   |
|                                                                                                   |   |                             |       |   |   |
| Cash flows from  investing activities:                                                                 |   |                             |       |   |   |
| Capital  expenditures, net                                                                             |   | (304,460                         | )          | (352,644 | ) |
| Purchase of  AudioSource assets                                                                        |   | —                           |       | (2,536,123 | ) |
|                                                                                                   |   |                             |       |   |   |
| Net cash used in  investing activities                                                                 |   | (304,460                         | )          | (2,888,767 | ) |
|                                                                                                   |   |                             |       |   |   |
| Cash flows from  financing activities:                                                                 |   |                             |       |   |   |
| Line of credit,  net                                                                                   |   | (1,157,707                       | )          | — |   |
| Common stock  repurchased                                                                              |   | —                           |       | (39,400 | ) |
|                                                                                                   |   |                             |       |   |   |
| Net cash used in  financing activities                                                                 |   | (1,157,707                       | )          | (39,400 | ) |
|                                                                                                   |   |                             |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                                      |   | 238,980                          |       | (1,544,429 | ) |
|                                                                                                   |   |                             |       |   |   |
| Cash and cash  equivalents, beginning of period                                                        |   | 1,002                            |       | 1,653,683 |   |
|                                                                                                   |   |                             |       |   |   |
| Cash and cash  equivalents, end of period                                                              |   | $                                | 239,982    |   | $ | 109,254 |   |
|                                                                                                   |   |                             |       |   |   |
| Supplemental  disclosures:                                                                             |   |                             |       |   |   |
| Cash paid for  interest                                                                                |   | $                                | 17,000     |   | $ | 8,000 |   |
| Cash paid for  income taxes                                                                            |   | 162,000                          |       | 76,000 |   |

 

**See Notes to Financial Statements**

 

5

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**PHOENIX GOLD INTERNATIONAL, INC.**

**Notesto Financial Statements**

**(Unaudited)**

 

**Note 1 -UNAUDITED FINANCIAL STATEMENTS**

 

Certain information and note disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have been omittedfrom these unaudited financial statements. These unaudited financial statements should be read in conjunction withthe financial statements and notes included in the Company’s Annual Report onForm 10-K for the year ended September 30, 2001 filed with the Securities andExchange Commission.  The results ofoperations for the three- and nine-month periods ended June 30, 2002 are notnecessarily indicative of the operating results for the full year.  In the opinion of management, alladjustments, consisting only of normal recurring accruals, have been made topresent fairly the Company’s financial position at June 30, 2002 and theresults of its operations for the three- and nine-month periods ended June 30,2002 and 2001 and its cash flows for the nine-months ended June 30, 2002 and2001.

 

**Note 2 -REPORTING PERIODS**

 

The Company’s fiscal year is the 52-week or 53-weekperiod ending the last Sunday in September. Fiscal 2002 is a 52-week year and all quarters are 13-week periods.  Fiscal 2001 was a 53-week year.  The quarters ended December 31, 2000, March31, 2001, June 30, 2001 and September 30, 2001 were a 14-week period, 12-weekperiod, 13-week period and a 14-week period, respectively.  For presentation convenience, the Companyhas indicated in these financial statements that its fiscal year ended onSeptember 30 and that the three and nine months presented ended on June 30.

 

**Note 3 -RECLASSIFICATION**

 

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

 

Selling allowances ofapproximately $419,000 and $766,000 for the three- and nine-month periods endedJune 30, 2002 were classified as reductions of sales.  Selling allowances of approximately $423,000 and $616,000 for thethree- and nine-month periods ended June 30, 2001 were reclassified asreductions of sales from selling expenses. Selling allowances of approximately $901,000, $635,000, $630,000 and$675,000 for the years ended September 30, 2001, 2000, 1999 and 1998 were alsoreclassified as reductions of sales from selling expenses.

 

**Note 4 -INVENTORIES**

 

Inventories are stated at thelower of cost or market and consist of the following:

 

6

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|                               |   | **June 30,  2002** |      | **September  30,  2001** |   |
|------------------------------------|--------|--------------------|-----------|--------------------------|--------|
|                               |   |               |      |                     |   |
| Raw materials  and work-in-process |   | $                  | 3,070,238 |                     | $      | 2,973,815 |   |
| Finished goods                     |   | 3,622,198          |      | 4,955,296                |   |
| Total  inventories                 |   | $                  | 6,692,436 |                     | $      | 7,929,111 |   |

 

**Note 5 -PROPERTY AND EQUIPMENT**

 

Property and equipment consist ofthe following:

 
|                                            |   | **June 30,  2002** |      | **September  30,  2001** |   |
|-------------------------------------------------|--------|--------------------|-----------|--------------------------|--------|
|                                            |   |               |      |                     |   |
| Machinery and  equipment                        |   | $                  | 3,525,136 |                     | $      | 3,364,582 |   |
| Office equipment  and furniture                 |   | 1,670,171          |      | 1,588,580                |   |
| Leasehold  improvements                         |   | 167,729            |      | 105,414                  |   |
|                                            |   | 5,363,036          |      | 5,058,576                |   |
| Less accumulated  depreciation and amortization |   | (4,540,044         | )         | (4,209,384               | )      |
| Total property  and equipment, net              |   | $                  | 822,992   |                     | $      | 849,192 |   |

 

**Note 6 - LINE OFCREDIT**

 

During March 2002, the Companyrenewed its revolving operating line of credit through January 2003.  Terms of the new revolving line of creditagreement provide for borrowings up to $3.5 million at the bank’s prime lendingrate.  Borrowings under the line ofcredit are limited to eligible accounts receivable and inventories and aresubject to certain additional limits, and are secured by cash and cashequivalents, accounts receivable and inventories.  The line of credit contains covenants which require a minimumlevel of tangible net worth, a minimum ratio of current assets to currentliabilities and a maximum ratio of liabilities to net tangible net worth.  As of June 30, 2002, the Company waseligible to borrow $3.5 million under the line of credit.  No borrowings were outstanding under theline of credit as of that date.

 

**Note7 - PROSPECTIVE ACCOUNTING STANDARDS**

 

In July 2001, the FASB issued Statement on FinancialAccounting Standards (SFAS) No. 142, *“Goodwill and Other Intangible Assets.” *SFAS No. 142 changes theaccounting for goodwill and certain intangibles from an amortization method toan impairment-only approach.  Thus,amortization of goodwill and certain intangibles, including goodwill and certainintangibles recorded in connection with past business combinations, will ceaseupon adoption of SFAS No. 142.  Instead,goodwill and certain intangibles will be analyzed for impairment and writtendown and charged to operations only in periods in which the recorded goodwilland certain intangibles is more than its fair value.  SFAS No. 142 will be effective for the Company’s fiscal yearbeginning October 1, 2002.  Managementis currently assessing but has not yet determined the effect of SFAS No. 142 onits financial position and results of operations.  For the three- and nine-month periods ended June 30, 2002, theCompany recorded amortization expense of $12,383 and $37,148 related togoodwill.

 

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 Assetsto Be Disposed Of*,” and the accounting and reporting provisions ofAccounting Principles Board Opinion No. 30, “*Reporting the Results of Operations,Reporting the Effects of Disposal of a Segment of a*

 

7

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*Business,and Extraordinary, Unusual and Infrequently Occurring Events and Transactions*,”for the disposal of a segment of a business. SFAS No. 144 maintains the method for recording an impairment of assetsto be held under SFAS No. 121 and establishes a single accounting model basedon the framework established in SFAS No. 121 for long-lived assets to bedisposed of by sale.  This Statementalso broadens the presentation of discontinued operations to include moredisposal transactions.  SFAS No. 144 willbe effective for the Company’s fiscal year beginning October 1, 2002.  Management believes the adoption of thisStatement will not have a material effect on the Company’s financialstatements.

 

8

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**Item 2:****                    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-LookingStatements**

 

*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; the need to introduce new products and productenhancements; dependence on suppliers; control by current shareholders; highinventory requirements; business conditions in international markets; theCompany’s dependence on key employees; the need to protect intellectualproperty; environmental regulation; and the limited trading volume of theCompany’s common stock, as well as other factors discussed in Exhibit 99.1 tothe Phoenix Gold International, Inc. Annual Report on Form 10-K for the fiscalyear ended September 30, 2001 which exhibit is hereby incorporated byreference.  Given these uncertainties,readers are cautioned not to place undue reliance on the forward-lookingstatements.  The Company does not intendto update its forward-looking statements.*

 

**Application of Critical AccountingPolicies**

 

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

 

The Company’s accounting policies are disclosed it its2001 Annual Report on Form 10-K. During November 2001, the Emerging Issues TaskForce (EITF) of the Financial Accounting Standards Board issued EITF 01-9: *Accountingfor Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’sProducts*.  Beginning January1, 2002, the Company adopted EITF 01-9 and classified certain considerationgiven by the Company to its customers as a reduction of revenue rather than aselling expense.  Net sales and sellingexpense reported in prior periods have been reclassified to conform to thecurrent presentation.  Thereclassification had no effect on previously reported income (loss) fromoperations, net earnings (loss) or shareholders’ equity.  Selling allowances ofapproximately $419,000 and $766,000 for the three- and nine-month periods endedJune 30, 2002 were classified as reductions of sales.  Selling allowances of approximately $423,000 and $616,000 for thethree- and nine-month periods ended June 30, 2001 were reclassified as reductionsof sales from selling expenses.  Sellingallowances of approximately $901,000, $635,000, $630,000 and $675,000 for theyears ended September 30, 2001, 2000, 1999 and 1998 were also reclassified asreductions of sales from selling expenses.

 

Except as described above, there have been no materialchanges to these policies during the nine months ended June 30, 2002.  The more significant of these policiesinclude revenue recognition and the use of estimates (which inherently involvejudgment and uncertainties) in 

 

9

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valuing accounts receivable, inventory, long-lived and deferred taxassets, and establishing customer rebate and warranty accrued liabilities.

 

Revenue Recognition

 

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

 

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

 

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

 

Accounts Receivable

 

The Company performs ongoing credit evaluations of itscustomers and adjusts credit limits based upon payment history and thecustomer’s current creditworthiness, as determined by the review of thecustomer’s current credit information. The Company continuously monitors collections and payments fromcustomers and maintains a provision for estimated credit losses based upon theCompany’s historical experience and any specific customer collection issuesthat have been identified.  The Companyvalues accounts receivable net of an allowance for doubtful accounts.  The allowance is calculated based upon theCompany’s evaluation of specific customer accounts where the Company hasinformation that the customer may have an inability to meet its financialobligations (bankruptcy, etc.).  Inthese cases, the Company uses its judgment, based on the best available factsand circumstances, and records a specific reserve for that customer against amountsdue 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 this allowance at September 30, 2001 has been used throughoutthe first nine months of fiscal 2002. However, the ultimate collectibility of a receivable is dependent uponthe financial condition of an individual customer, which could change rapidlyand without advance warning.

 

10

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

 

Inventory

 

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

 

Long-lived Assets

 

The Company evaluates the fair value and futurebenefits of long-lived assets by estimating undiscounted future cash flows ofthe related assets and reduces the carrying value of the long-lived assets bythe excess, if any, of the result of such calculation.  The Company believes that the carrying valuesand estimated useful lives continues to be appropriate at this time.  Future adverse changes in market conditionsor poor operating results of the underlying long-lived assets could result inan inability to recover the carrying value of the long-lived assets that maynot be reflected in the current carrying value, thereby possibly requiring animpairment charge in the future.

 

Deferred Tax Valuation Allowance

 

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

 

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**Resultsof Operations**

 

Net sales increased $661,000, or 8.9%, to $8.1 millionfor the three months ended June 30, 2002 from $7.4 million for the three monthsended June 30, 2001.  Domestic salesincreased $519,000, or 8.8%, to $6.4 million for the three months ended June30, 2002 compared to $5.9 million for the three months ended June 30,2001.  Sales of electronics and speakersincreased 4.0% and 32.4%, respectively, for the three months ended June 30,2002 compared to the corresponding quarter in fiscal 2001.  Sales of accessories decreased 3.2% for thethree months ended June 30, 2002 compared to the three months ended June 30,2001.  The increased sales ofelectronics and speakers were primarily due to sales of Phoenix Gold and OEMproducts.  Sales of electronics to asignificant customer decreased $178,000, or 22.5%, to $612,000 for the threemonths ended June 30, 2002 compared to $790,000 for the corresponding quarterin fiscal 2001.  International salesincreased 9.6% to $1.6 million from $1.5 million in the comparable 2001period.  The increase resulted primarilyfrom a 76.3% increase in sales to Asia offset in part by a 12.5% decrease insales to Europe.  International salesrepresented 20.1% and 20.0% of net sales for the three months ended June 30,2002 and 2001, respectively.

 

Net sales for the nine months ended June 30, 2002increased $4.0 million, or 21.3%, to $22.9 million from $18.9 million for thenine months ended June 30, 2001. Domestic sales increased $3.7 million, or 24.9%, to $18.5 million forthe nine months ended June 30, 2002 compared to $14.8 million for the ninemonths ended June 30, 2001.  Sales ofelectronics to a significant customer increased $949,000, or 48.7%, to $2.9million for the nine months ended June 30, 2002 compared to $1.95 million forthe comparable period in fiscal 2001 due to increased sales to such customerduring the three months ended December 31, 2001 as compared to thecorresponding period in fiscal 2001. The amount and timing of purchase orders from this customer mayfluctuate from period to period.  Forthe nine months ended June 30, 2002, international sales increased 8.4% to $4.4million from $4.1 million in the comparable 2001 period.  The increase resulted primarily from a 26.1%increase in sales to Asia and a 22.5% increase in sales to other internationalmarkets, offset in part by a 14.3% decrease in sales to Europe.  International sales represented 19.2% and21.5% of net sales for the nine months ended June 30, 2002 and 2001,respectively.

 

Because of the nature of the Company’s products, theCompany’s largest customers have historically tended to be large domesticretailers, and domestic and international distributors.  The Company is dependent upon its ability toretain existing customers and obtain new customers as well as develop newproduct lines for these customers.  TheCompany’s failure to retain existing customers, obtain new customers or developnew product lines could significantly affect future sales and profitability ofthe Company.  The Company had onecustomer during fiscal 2001 and 2000 that accounted for more than 10% of netsales.  The Company also has onecustomer during the nine months ended June 30, 2002 that accounted for morethan 10% of net sales.  As with many ofthe Company’s customers, the timing and volume of activity can varysignificantly from period to period. The loss of business from one or more principal customers or a change inthe sales volume from a particular customer could have a material adverseeffect on the Company’s sales volume and profitability.

 

Gross profit increased to 25.5% of net sales for thethree months ended June 30, 2002 from 21.9% for the three months ended June 30,2001.  Gross profit increased to 23.4%of net sales for the nine months ended June 30, 2002 from 22.2% for thecomparable prior period.  The increasewas primarily due to changes in sales mix as the gross margin on sales ofPhoenix Gold branded products is higher than the gross margin on sales of otherCompany products. ** **Due to the range of products that the Companysells, the product sales mix can produce a range of 

 

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gross margins. Some markets in which the Company operates also yield lower grossmargins than others.

 

Operating expenses consist of selling, general andadministrative expenses.  Totaloperating expenses increased $80,000, or 4.9%, to $1.7 million for the threemonths ended June 30, 2002 compared to $1.6 million for the three months endedJune 30, 2001.  Operating expenses were21.1% and 21.9% of net sales in the respective three-month periods.  Operating expenses increased $394,000, or8.8%, to $4.9 million for the nine months ended June 30, 2002 compared to $4.5million for the comparable period in fiscal 2001.  Operating expenses were 21.2% and 23.6% of net sales in therespective nine-month periods.

 

Selling expenses increased $29,000, or 2.9%, to$1,044,000 for the three months ended June 30, 2002 compared to $1,015,000 forthe comparable 2001 period.  Sellingexpenses were 12.9% and 13.7% of net sales in the respective three-monthperiods.  Selling expenses increased7.0% in the first nine months of fiscal 2002, to $2.9 million, compared to $2.7million for the first nine months of fiscal 2001.  Selling expenses were 12.5% and 14.1% of net sales in therespective nine-month periods.  Theincreased selling expenses were due to increased personnel and payrollexpenses, and commissions paid to independent representatives selling theCompany’s products.

 

General and administrative expenses increased $51,000,or 8.4%, to $657,000 for the three months ended June 30, 2002 compared to$605,000 for the comparable 2001 period. General and administrative expenses were 8.1% and 8.2% of net sales inthe respective three-month periods. General and administrative expenses increased $208,000, or 11.6%, in thefirst nine months of fiscal 2002, to $2.0 million, compared to $1.8 million forthe first nine months of fiscal 2001.  General and administrative expenses were 8.7% and 9.5% of netsales in the respective nine-month periods. The increased general and administrative expenses were primarily due toincreased engineering expenses related to new product development activities.

 

Other income (expense) decreased by $27,000 to $2,000of other income for the three months ended June 30, 2002, compared to $29,000of other income for the three months ended June 30, 2001.  Other income (expense) decreased by $66,000to $11,000 of other expense for the nine months ended June 30, 2002, comparedto $55,000 of other income for the corresponding period in fiscal 2001.  The Company had a gain on sale of equipmentof $29,000 for the three months ended June 30, 2001.  Interest income decreased $26,000 for the nine months ended June30, 2002 as compared to the corresponding period in fiscal 2001.  The decrease was due to the use of availablecash and cash equivalents to acquire certain assets of AudioSource on December15, 2000.  Interest expense increasedfor the nine months ended June 30, 2002 from the prior period due to thetemporary use of the operating line of credit to finance increased inventoryduring the first half of fiscal 2002 to support increased sales.

 

Tax expense was $143,000 and $203,000 for the three-and nine-month periods ended June 30, 2002 due to the earnings before incometaxes in the respective three- and nine-month periods.  For the three-month period ended June 30,2001, the tax expense was $13,000 due to the earnings before income taxes forthe period.  For the nine-month periodended June 30, 2001, the tax benefit was $82,000 due to a loss before incometaxes in the period.  Deferred taxes of$560,000 and $604,000 are recorded as current and long-term assets at June 30,2002 due to the tax effects of temporary differences between the carryingamounts of assets and liabilities for financial and tax reporting purposes.

 

Net earnings were $214,000, or $0.07 per share - basicand diluted, for the three months ended June 30, 2002, compared to net earningsof $20,000, or $0.01 per share - basic and diluted, for the three months endedJune 30, 2001.  Net earnings were$306,000, or $0.10 per 

 

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share - basic and diluted, for the nine months ended June 30, 2002,compared to a net loss of $131,000, or $0.04 per share - basic and diluted, forthe comparable 2001 period.  All pershare amounts are based on 3.0 million shares outstanding.  The increase in net earnings during the morerecent three- and nine-month periods was due to increased sales and grossprofit, offset in part by increased operating expenses.

 

**Liquidityand Capital Resources**

 

The Company’s primary needs for funds are for workingcapital and, to a lesser extent, capital expenditures.  The Company financed its operations duringthe nine months ended June 30, 2002 from cash generated from operatingactivities and borrowings under its revolving line of credit.  Net cash provided by operating activitieswas $1.7 million for the nine months ended June 30, 2002.  When cash flow from operations is less thancurrent needs, the Company increases the balance owing on its operating line ofcredit.  When cash flow from operationsexceeds current needs, the Company pays down the balance owing on its operatingline of credit rather than investing and accumulating excess cash, whichpractice resulted in low reported cash balances in fiscal 2001.

 

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

 

•                       the ability of the Company toattract new and retain existing customers,

•                       the volume of sales for 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 fulland in a timely manner amounts due to the Company.

 

Cash and cash equivalents increased by $239,000 duringthe nine months ended June 30, 2002 due principally to increased netearnings.  Accounts receivable decreasedby $351,000 due to collections of the accounts receivable offset in part byincreased sales for the nine months ended June 30, 2002.  Inventories decreased by $1.2 million due tosales of finished goods acquired late in fiscal 2001 to support increased salesin the first half of fiscal 2002 offset by purchases of raw materials for themanufacture of new products.  Accountspayable decreased $1.1 million due to the timing of payment due dates and thedecrease in inventories.  Accruedexpenses increased $613,000 due to sales incentive accruals related toincreased sales, increased accruals for payroll and benefits and increasedaccrued income taxes payable at June 30, 2002. Overall, net working capital increased $396,000 to $10.1 million at June30, 2002 from $9.7 million at September 30, 2001 due to increased net earnings.

 

The Company’s capital expenditures were $304,000 forthe nine months ended June 30, 2002. Management anticipates that discretionary capital expenditures formanufacturing and office equipment during the remainder of fiscal 2002 will beapproximately $300,000.  Theseanticipated expenditures will be financed from available cash, cash providedfrom operations and, if necessary, proceeds from the line of credit.

 

During March 2002, the Companyrenewed its revolving operating line of credit through January 2003.  Terms of the new revolving line of creditagreement provide for borrowings up to $3.5 million at the bank’s prime lendingrate.  Borrowings under the line ofcredit are limited to eligible accounts receivable and inventories and certainadditional limits, and are secured by cash and cash equivalents, accountsreceivable and inventories.  The line ofcredit contains covenants which require a minimum level of tangible net worth,a minimum ratio of current assets to current 

 

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liabilities and a maximum ratio of liabilities tonet tangible net worth.  As of June 30,2002, the Company was eligible to borrow $3.5 million under the line ofcredit.  No borrowings were outstandingunder the line of credit as of that date.

 

The Company has disclosed additional informationpertaining to obligations and commitments to make future cash payments in thefinancial statements contained in its 2001 Annual Report on Form 10-K, note 8.

 

The Company believes that cash generated fromoperations and through its credit facility will be sufficient to meet its cashrequirements for the next twelve months.

 

**AccountingPronouncements**

 

In July 2001, the FASB issued SFAS No. 142, *“Goodwilland Other Intangible Assets.” *SFASNo. 142 changes the accounting for goodwill and certain intangibles from anamortization method to an impairment-only approach.  Thus, amortization of goodwill and certain intangibles, includinggoodwill and certain intangibles recorded in connection with past businesscombinations, will cease upon adoption of SFAS No. 142.  Instead, goodwill and certain intangibleswill be analyzed for impairment and written down and charged to operations onlyin periods in which the recorded goodwill and certain intangibles is more thanits fair value.  SFAS No. 142 will beeffective for the Company’s fiscal year beginning October 1, 2002.  Management is currently assessing but hasnot yet determined the effect of SFAS No. 142 on its financial position andresults of operations.  For the three-and nine-month periods ended June 30, 2002, the Company recorded amortizationexpense of $12,383 and $37,148 related to goodwill.

 

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 Assetsto Be Disposed Of*,” and the accounting and reporting provisions ofAccounting Principles Board Opinion No. 30, “*Reporting the Results of Operations,Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions*,”for the disposal of a segment of a business. SFAS No. 144 maintains the method for recording an impairment of assetsto be held under SFAS No. 121 and establishes a single accounting model basedon the framework established in SFAS No. 121 for long-lived assets to bedisposed of by sale.  This Statementalso broadens the presentation of discontinued operations to include moredisposal transactions.  SFAS No. 144will be effective for the Company’s fiscal year beginning October 1, 2002.  Management believes the adoption of thisStatement will not have a material effect on the Company’s financialstatements.

 

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# **Item 3.       Quantitative andQualitative Disclosure About Market Risk**

 

The Company has assessed itsexposure to market risks for its financial instruments and has determined thatits exposures to such risks are not material. As of June 30, 2002, the Company had cash and cash equivalents of$240,000 compared to $1,000 as of September 30, 2001.  The Company invests its excess cash in highly liquid marketablesecurities with 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 sell its products andpurchases its inventories primarily in United States dollars, therefore itsexposure to currency exchange rate fluctuations is not material.  The Company does not engage in foreign currencyhedging activities.

 

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

### ** **

### **16**

### ****

###  

### **PART II.    OTHER INFORMATION**

 

# **Item 6. Exhibitsand Reports on Form 8-K**

 

(b)              Reports on Form 8-K

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                          | PHOENIX GOLD INTERNATIONAL, INC.                                                                                             |
|-------------------------------|------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                         |
|                          |                                                                                                                         |
|                          | /s/ Joseph K. O’Brien                                                                                                   |   |
|                          | Joseph K. O’Brien  Vice President, Chief Financial Officer  and Secretary  (Principal Financial and Accounting Officer) |
|                          |                                                                                                                         |
| Dated:   August 14, 2002 |                                                                                                                         |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit** |   |                                                                                                                                                   | **Page** |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|        |   |                                                                                                                                                   |     |
| 99.1        |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 | 20       |
|        |   |                                                                                                                                                   |     |
| 99.2        |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 | 21       |

 

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