**United States**

**Securities and ExchangeCommission**

**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 December 31, 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  file number 000-25866** |

 

| **PHOENIX GOLD INTERNATIONAL, INC.**                            |
|-----------------------------------------------------------------|
| (Exact name of registrant as  specified in its charter)         |
|                                                            |   |   |
| **OREGON**                                                      |   | **93-1066325** |
| (State or other jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |   |
| **9300 NORTH DECATUR STREET, PORTLAND, OREGON**                 |   | **97203** |
| (Address of principal executive  offices)                       |   | (Zip code) |
|                                                            |   |   |
| **(503) 286-9300**                                              |
| (Registrant’s telephone  number, including area code)      |

 

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

 

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

 

There were 3,006,945 shares of the issuer’scommon stock outstanding as of January 31, 2003.

 

 

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**PHOENIX GOLD INTERNATIONAL, INC.**

**Form 10-Q for the Quarter Ended December 31,2002**

 

**INDEX**

 
| Part I.            | FINANCIAL INFORMATION |
|--------------------|-----------------------|
|               |                  |
|               | Item 1.               | Financial Statements |
|               |                  |   |
|               |                  | Balance  Sheets at December 31, 2002 and September 30, 2002 (unaudited) |
|               |                  |   |
|               |                  | Statements of Operations for the Three Months Ended December 31, 2002  and 2001 (unaudited) |
|               |                  |   |
|               |                  | Statements of Cash Flows for the Three Months Ended December 31, 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 |
|               |                  |   |
|               | Item 4.               | Controls and Procedures |
|               |                  |   |
| Part II.           | OTHER INFORMATION     |
|               |                  |   |
|               | Item 6.               | Exhibits and Reports on Form 8-K |
|               |                  |   |
| SIGNATURES         |
|               |                  |   |
| CERTIFICATIONS     |
|               |                  |   |
| INDEX  TO EXHIBITS |
|                    |                       |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

** **

**PHOENIXGOLD INTERNATIONAL, INC.BALANCE SHEETS(Unaudited)**

** **
|                                                          |   | **December  31,  2002** |       | **September  30,  2002** |   |
|---------------------------------------------------------------|--------|-------------------------|------------|--------------------------|--------|
| **ASSETS**                                                    |   |                    |       |                     |   |
|                                                          |   |                    |       |                     |   |
| Current assets:                                               |   |                    |       |                     |   |
| Cash and cash equivalents                                     |   | $                       | 497,920    |                     | $      | 214,814 |   |
| Accounts receivable, net                                      |   | 2,726,461               |       | 3,610,939                |   |
| Inventories                                                   |   | 7,658,727               |       | 7,765,523                |   |
| Prepaid expenses                                              |   | 293,816                 |       | 188,140                  |   |
| Deferred taxes                                                |   | 746,000                 |       | 572,000                  |   |
| Total current assets                                          |   | 11,922,924              |       | 12,351,416               |   |
|                                                          |   |                    |       |                     |   |
| Property and equipment, net                                   |   | 1,032,437               |       | 1,102,498                |   |
| Deferred taxes                                                |   | 559,000                 |       | 513,000                  |   |
| Other assets                                                  |   | 404,297                 |       | 552,336                  |   |
| Total assets                                                  |   | $                       | 13,918,658 |                     | $      | 14,519,250 |   |
|                                                          |   |                    |       |                     |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                 |   |                    |       |                     |   |
|                                                          |   |                    |       |                     |   |
| Current liabilities:                                          |   |                    |       |                     |   |
| Accounts payable                                              |   | $                       | 1,066,082  |                     | $      | 1,297,507 |   |
| Accrued payroll and benefits                                  |   | 487,909                 |       | 430,048                  |   |
| Accrued customer rebates                                      |   | 400,844                 |       | 382,972                  |   |
| Other accrued expenses                                        |   | 432,322                 |       | 498,684                  |   |
| Total current liabilities                                     |   | 2,387,157               |       | 2,609,211                |   |
|                                                          |   |                    |       |                     |   |
| Deferred gain on sale of facility                             |   | 637,504                 |       | 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                                             |   | 4,382,469               |       | 4,736,488                |   |
| Total shareholders’ equity                               |   | 10,893,997              |       | 11,248,016               |   |
| Total liabilities and shareholders’ equity               |   | $                       | 13,918,658 |                     | $      | 14,519,250 |   |

 

**See Notes toFinancial Statements**

 

3

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**PHOENIXGOLD INTERNATIONAL, INC.STATEMENTS OF OPERATIONS(Unaudited)**

 
|                                                           |   | **Three  Months Ended  December 31,** |      |
|----------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                           |   | **2002**                              |      | **2001** |   |
|                                                           |   |                                  |      |   |   |
| Net sales                                                      |   | $                                     | 5,223,934 |   | $ | 6,860,245 |   |
|                                                           |   |                                  |      |   |   |
| Cost of sales                                                  |   | 4,109,021                             |      | 5,412,024 |   |
|                                                           |   |                                  |      |   |   |
| Gross profit                                                   |   | 1,114,913                             |      | 1,448,221 |   |
|                                                           |   |                                  |      |   |   |
| Operating expenses:                                            |   |                                  |      |   |   |
| Selling                                                        |   | 867,799                               |      | 777,867 |   |
| General and administrative                                     |   | 699,723                               |      | 645,714 |   |
|                                                           |   |                                  |      |   |   |
| Total operating expenses                                       |   | 1,567,522                             |      | 1,423,581 |   |
|                                                           |   |                                  |      |   |   |
| Income (loss) from operations                                  |   | (452,609                              | )         | 24,640 |   |
|                                                           |   |                                  |      |   |   |
| Other income (expense):                                        |   |                                  |      |   |   |
| Interest income                                                |   | 632                                   |      | 572 |   |
| Interest expense                                               |   | (14                                   | )         | (14,687 | ) |
| Other expense, net                                             |   | (1,028                                | )         | — |   |
|                                                           |   |                                  |      |   |   |
| Total other expense                                            |   | (410                                  | )         | (14,115 | ) |
|                                                           |   |                                  |      |   |   |
| Earnings (loss) before income taxes                            |   | (453,019                              | )         | 10,525 |   |
|                                                           |   |                                  |      |   |   |
| Income tax benefit (expense)                                   |   | 167,000                               |      | (4,000 | ) |
|                                                           |   |                                  |      |   |   |
| Earnings (loss) before cumulative effect of  accounting change |   | (286,019                              | )         | 6,525 |   |
|                                                           |   |                                  |      |   |   |
| Cumulative effect of accounting change, net  of tax            |   | (68,000                               | )         | — |   |
|                                                           |   |                                  |      |   |   |
| Net earnings (loss)                                            |   | $                                     | (354,019  | ) | $ | 6,525 |   |
|                                                           |   |                                  |      |   |   |
| Earnings (loss) per share:                                     |   |                                  |      |   |   |
| Before accounting change — basic and  diluted             |   | $                                     | (0.10     | ) | $ | 0.00 |   |
| Accounting change — basic and diluted                     |   | (0.02                                 | )         | 0.00 |   |
|                                                           |   |                                  |      |   |   |
| Earnings (loss) per share — basic and  diluted            |   | $                                     | (0.12     | ) | $ | 0.00 |   |
|                                                           |   |                                  |      |   |   |
| Average shares outstanding — basic and  diluted           |   | 3,006,945                             |      | 3,006,945 |   |

 

**See Notes toFinancial Statements**

 

4

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**PHOENIXGOLD INTERNATIONAL, INC.STATEMENTS OF CASH FLOWS(Unaudited)**

 
|                                                                                                  |   | **Three  Months Ended  December 31,** |       |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                                  |   | **2002**                              |       | **2001** |   |
|                                                                                                  |   |                                  | ** ** |   | ** ** |
| Cash flows from operating activities:                                                                 |   |                                  |       |   |   |
| Net earnings (loss)                                                                                   |   | $                                     | (354,019   | ) | $ | 6,525 |   |
| Adjustments to reconcile net earnings  (loss) to net cash provided by (used in) operating activities: |   |                                  |       |   |   |
| Depreciation and amortization                                                                         |   | 134,388                               |       | 132,529 |   |
| Cumulative effect of accounting change, net                                                           |   | 68,000                                |       | — |   |
| Deferred taxes                                                                                        |   | (175,000                              | )          | (10,000 | ) |
| Changes in operating assets and  liabilities:                                                         |   |                                  |       |   |   |
| Accounts receivable                                                                                   |   | 884,478                               |       | 1,504,154 |   |
| Inventories                                                                                           |   | 106,796                               |       | 415,904 |   |
| Prepaid expenses                                                                                      |   | (105,676                              | )          | (116,150 | ) |
| Accounts payable                                                                                      |   | (231,425                              | )          | (965,359 | ) |
| Accrued expenses                                                                                      |   | 9,371                                 |       | (99,735 | ) |
|                                                                                                  |   |                                  |       |   |   |
| Net cash provided by operating activities                                                             |   | 336,913                               |       | 867,868 |   |
|                                                                                                  |   |                                  |       |   |   |
| Cash flows from investing activities:                                                                 |   |                                  |       |   |   |
| Capital expenditures, net                                                                             |   | (53,807                               | )          | (137,001 | ) |
|                                                                                                  |   |                                  |       |   |   |
| Net cash used in investing activities                                                                 |   | (53,807                               | )          | (137,001 | ) |
|                                                                                                  |   |                                  |       |   |   |
| Cash flows from financing activities:                                                                 |   |                                  |       |   |   |
| Line of credit, net                                                                                   |   | —                                |       | (157,707 | ) |
|                                                                                                  |   |                                  |       |   |   |
| Net cash used in financing activities                                                                 |   | —                                |       | (157,707 | ) |
|                                                                                                  |   |                                  |       |   |   |
| Increase in cash and cash equivalents                                                                 |   | 283,106                               |       | 573,160 |   |
|                                                                                                  |   |                                  |       |   |   |
| Cash and cash equivalents, beginning of  period                                                       |   | 214,814                               |       | 1,002 |   |
|                                                                                                  |   |                                  |       |   |   |
| Cash and cash equivalents, end of period                                                              |   | $                                     | 497,920    |   | $ | 574,162 |   |
|                                                                                                  |   |                                  |       |   |   |
| Supplemental disclosure:                                                                              |   |                                  |       |   |   |
| Cash paid for interest                                                                                |   | $                                     | —     |   | $ | 15,000 |   |
| Cash paid for income taxes                                                                            |   | —                                |       | 12,000 |   |

 

**See Notes toFinancial Statements**

 

5

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**PHOENIXGOLD INTERNATIONAL, INC.Notes to Financial Statements(Unaudited)**

 

**Note 1 - UNAUDITED FINANCIAL STATEMENTS**

 

Certaininformation and note disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been omitted from these unaudited financialstatements.  These unaudited financialstatements should be read in conjunction with the financial statements andnotes included in the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2002 filed with the Securities and Exchange Commission.  The results of operations for thethree-month period ended December 31, 2002 are not necessarily indicative ofthe operating results for the full year. In the opinion of management, all adjustments, consisting only of normalrecurring accruals, have been made to present fairly the Company’s financialposition at December 31, 2002 and the results of its operations and its cashflows for the three-month periods ended December 31, 2002 and 2001.

 

**Note 2 - REPORTING PERIODS**

 

The Company’sfiscal year is the 52-week or 53-week period ending the last Sunday inSeptember.  Fiscal 2003 and fiscal 2002are 52-week years and all quarters are 13-week periods.  For presentation convenience, the Companyhas indicated in these financial statements that its fiscal year ended onSeptember 30 and that the three months presented ended on December 31.

 

**Note 3 - NEW ACCOUNTINGPRONOUNCEMENTS**

 

In July 2001,the Financial Accounting Standards Board (FASB)issued Statement of Financial AccountingStandards (SFAS) No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 142 changed the accounting forgoodwill and certain intangibles from an amortization method to animpairment-only approach.  Thus,amortization of goodwill and certain intangibles, including goodwill andcertain intangibles recorded in past business combinations, cease upon adoptionof SFAS No. 142.  Instead, goodwill andcertain intangibles are now analyzed for impairment and written down andcharged to operations only in periods in which the recorded goodwill andcertain intangibles is more than its fair value.  SFAS No. 142 became effective for the Company’s fiscal yearbeginning October 1, 2002.

 

The Companycompleted the transitional goodwill impairment test and recorded an impairmentloss of $68,000, net of tax of $45,000, or $0.02 per share, during the threemonths ended December 31, 2002.  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 threemonths ended December 31, 2001 was $12,000.

 

Included inother assets at December 31, 2002 are intangible assets of $299,000 consistingprimarily of trademarks and a noncompetition agreement.  Amortization expense for the three monthsended December 31, 2002 was $32,000. The estimated future amortization expense of the intangible assets forthe years ending September 30, 2003, 2004, 2005 and 2006 is $127,000, $119,000,$74,000 and $11,000. It is estimated that the intangible assets will be fullyamortized in fiscal 2006.

 

6

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In August2001, the FASB issued SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*.  ThisStatement supercedes SFAS No. 121*, Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*, and the accounting andreporting provisions of Accounting Principles Board Opinion No. 30, *Reportingthe Results of Operations, Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions*, for the disposal of a segment of a business.  SFAS No. 144 maintains the method forrecording an impairment of assets to be held under SFAS No. 121 and establishesa single accounting model based on the framework established in SFAS No. 121for long-lived assets to be disposed of by sale.  This Statement also broadens the presentation of discontinuedoperations to include more disposal transactions.  SFAS No. 144 became effective as of October 1, 2002.  The adoption of SFAS No. 144 did not have amaterial effect on the Company’s financial position or results of operations.

 

In November2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees Including Indirect Guarantees of Indebtedness ofOthers*.  Included in otheraccrued expenses at December 31, 2002 is an accrual of approximately $240,000for estimated warranty liabilities.  Amajority of the products sold by the Company are covered by a warranty.  The estimated warranty liability is based onhistorical experience and expectation of future conditions.  The Company’s historical experienceindicates that substantially all warranty services are provided within one yearof product sale.  Warranty servicesincurred for products sold more than one year ago have not beensignificant.  Warranty expenses wereapproximately $70,000 during the three months ended December 31, 2002.

 

In December2002, the FASB issued SFAS 148, *Accounting for Stock-Based Compensation — Transition and Disclosure: AnAmendment of FASB Statement No. 123*.  This Statement 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 ofSFAS No. 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 APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations.  TheCompany does not expect adoption of SFAS No. 148 to have a material effect onits financial position or results of operations.

 

**Note4 - INVENTORIES**

 

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

 
|                              |   | **December  31,  2002** |      | **September  30,  2002** |   |
|-----------------------------------|--------|-------------------------|-----------|--------------------------|--------|
|                              |   |                    |      |                     |   |
| Raw materials and work-in-process |   | $                       | 2,751,559 |                     | $      | 2,924,498 |   |
| Finished goods                    |   | 4,907,168               |      | 4,841,025                |   |
| Total inventories                 |   | $                       | 7,658,727 |                     | $      | 7,765,523 |   |

 

7

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**Note5 - PROPERTY AND EQUIPMENT**

 

Property and equipment consist of the following:

 
|                                            |   | **December  31,  2002** |      | **September  30,  2002** |   |
|-------------------------------------------------|--------|-------------------------|-----------|--------------------------|--------|
|                                            |   |                    |      |                     |   |
| Machinery and equipment                         |   | $                       | 3,340,469 |                     | $      | 3,691,770 |   |
| Office equipment and furniture                  |   | 1,771,133               |      | 1,741,398                |   |
| Leasehold improvements                          |   | 172,710                 |      | 170,494                  |   |
|                                            |   | 5,284,312               |      | 5,603,662                |   |
| Less accumulated depreciation and  amortization |   | (4,251,875              | )         | (4,501,164               | )      |
| Total property and equipment, net               |   | $                       | 1,032,437 |                     | $      | 1,102,498 |   |

 

**Note6 - LINE OF CREDIT**

 

During January 2003, the Company extended its revolving operating lineof credit through January 31, 2004.  Theline of credit provides for borrowings up to $3.5 million at the bank’s primelending rate plus 1%.  As of December31, 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.

 

 

8

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**Item2****.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

*All statements in this report that are notstatements of historical results should be considered “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, including, without limitation, statements as to expectations, beliefsand future financial performance, and are based on current expectations and aresubject to certain risks, trends and uncertainties that could cause actualresults to vary from those projected, which variances may have a materialadverse effect on the Company.  Amongthe factors that could cause actual results to differ materially are thefollowing: the adverse effect of reduced discretionary consumer spending;competitive factors; dependence on a significant customer; potentialfluctuations in quarterly results and seasonality; fixed operating expenses;the need for the introduction of new products and product enhancements;dependence on suppliers; control by current shareholders; high inventoryrequirements; business conditions in international markets; the Company’sdependence on key employees; the need to protect intellectual property;environmental regulation; and the potential delisting and limited tradingvolume of the Company’s common stock, as well as other factors discussed inExhibit 99.3 to the Phoenix Gold International, Inc. Annual Report on Form 10-Kfor the fiscal year ended September 30, 2002, which exhibit is herebyincorporated by reference.  Given theseuncertainties, readers are cautioned not to place undue reliance on theforward-looking statements.  The Companydoes not intend to update its forward-looking statements.*

 

**Applicationof Critical Accounting Policies**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makethe appropriate application of certain accounting policies, many of whichrequire estimates and assumptions about future events and their effect onamounts reported in the financial statements and related notes.  Since future events and their effect cannotbe determined with certainty, the actual results will inevitably differ fromthe estimates.  Such differences couldbe material to the financial statements.

 

The Company’saccounting policies are disclosed in its 2002 Annual Report on Form 10-K. InJuly 2001, the Financial AccountingStandards Board (FASB) issued Statementof Financial Accounting Standards (SFAS) No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 142 changed the accounting forgoodwill and certain intangibles from an amortization method to animpairment-only approach.  Thus,amortization of goodwill and certain intangibles, including goodwill andcertain intangibles recorded in past business combinations, cease upon adoptionof SFAS No. 142.  Instead, goodwill andcertain intangibles are now analyzed for impairment and written down andcharged to operations only in periods in which the recorded goodwill andcertain intangibles is more than its fair value.  SFAS No. 142 became effective for the Company’s fiscal yearbeginning October 1, 2002.

 

The Companycompleted the transitional goodwill impairment test and recorded an impairmentloss of $68,000, net of tax of $45,000, or $0.02 per share, during the threemonths ended December 31, 2002.  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 threemonths ended December 31, 2001 was $12,000.

 

9

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In August 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*. This Statement supercedes SFAS No. 121*, Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of*, andthe accounting and reporting provisions of Accounting Principles Board OpinionNo. 30, *Reportingthe Results of Operations, Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions*, for the disposal of a segment of a business.  SFAS No. 144 maintains the method forrecording an impairment of assets to be held under SFAS No. 121 and establishesa single accounting model based on the framework established in SFAS No. 121for long-lived assets to be disposed of by sale.  This Statement also broadens the presentation of discontinuedoperations to include more disposal transactions.  SFAS No. 144 became effective as of October 1, 2002.  The adoption of SFAS No. 144 did not have amaterial effect on the Company’s financial position or results of operations.

 

In November2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees Including Indirect Guarantees of Indebtedness ofOthers*.  Included in otheraccrued expenses at December 31, 2002 is an accrual of approximately $240,000for estimated warranty liabilities.  Amajority of the products sold by the Company are covered by a warranty.  The estimated warranty liability is based onhistorical experience and expectation of future conditions.  The Company’s historical experienceindicates that substantially all warranty services are provided within one yearof product sale.  Warranty servicesincurred for products sold more than one year ago have not beensignificant.  Warranty expenses wereapproximately $70,000 during the three months ended December 31, 2002.

 

In December2002, the FASB issued SFAS 148, *Accounting for Stock-Based Compensation — Transition and Disclosure: AnAmendment of FASB Statement No. 123*.  This Statement 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 ofSFAS No. 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 APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations.  TheCompany does not expect adoption of SFAS No. 148 to have a material effect onits financial position or results of operations.

 

Except as describedabove, there have been no material changes to the Company’s accounting policiesduring the three months ended December 31, 2002.  The more significant of the Company’s accounting policies includerevenue recognition and the use of estimates (which inherently involve judgmentand uncertainties) in establishing customer rebate and warranty accruedliabilities, valuing accounts receivable, inventory, long-lived and deferredtax assets.

 

Revenue Recognition

 

The Companyrecognizes revenue when all of the following criteria are met: persuasiveevidence of an arrangement exists; delivery has occurred; the seller’s price isfixed and determinable; and collectibility is reasonably assured.  These criteria are generally satisfied andthe Company recognizes revenue upon shipment. The Company also offers certain of its customers the right to returnproducts that do not meet the standards agreed to with the customer. TheCompany records a provision for estimated sales returns and allowances onproduct related sales in the same period as the related revenues arerecorded.  These estimates 

 

10

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are based on historical salesreturns, analysis of credit memo data and other known factors. The Companycontinuously monitors such product returns and while such returns havehistorically been minimal, the Company may not continue to experience the samereturn rates that it has in the past. Any significant increase in product quality failure rates and theresulting credit returns could have a material adverse effect on the Company’snet sales and operating results for the period or periods in which such returnsmaterialize.

 

The Companyalso provides for certain sales allowances which include sales rebates, co-opadvertising incentives and other volume-based incentives.  The Company records a provision forestimated incentives based upon the incentives offered to customers on productrelated sales in the same period as the related revenues are recorded. If thehistorical data the Company uses to calculate these estimates do not properlyreflect future sales allowances, revenue could be misstated.

 

Products soldare covered by a warranty.  The Companyaccrues a warranty reserve for estimated costs to provide warranty services.  The Company’s estimate of costs to serviceits warranty obligations is based on historical experience and expectation offuture conditions.  To the extent theCompany experiences increased warranty claim activity or increased costsassociated with servicing those claims, its warranty accrual will increaseaccordingly and result in decreased gross profit.

 

Accounts Receivable

 

The Companyperforms ongoing credit evaluations of its customers and adjusts credit limitsbased upon payment history and the customer’s current creditworthiness, asdetermined by the review of the customer’s current credit information.  The Company continuously monitorscollections and payments from customers and maintains a provision for estimatedcredit losses based upon the Company’s historical experience and any specificcustomer collection issues that have been identified.  The Company values accounts receivable net of an allowance fordoubtful accounts.  The allowance iscalculated based upon the Company’s evaluation of specific customer accountswhere the Company has information that the customer may have an inability tomeet its financial obligations (bankruptcy, etc.).  In these cases, the Company uses its judgment, based on the bestavailable facts and circumstances, and records a specific reserve for thatcustomer against amounts due to reduce the receivable to the amount that isexpected to be collected.  Thesespecific reserves are re-evaluated and adjusted as additional information isreceived that affects the amount reserved. The same technique used to compute the allowance at September 30, 2002was used at December 31, 2002.  However,the ultimate collectibility of a receivable is dependent upon the financialcondition of an individual customer, which could change rapidly and withoutadvance warning.

 

The Company has had significant accounts receivable or other amountsdue from its customers or other parties. From time to time, certain of these account receivable or other amountsdue have become unusually large and/or overdue, and on occasion the Company hastaken write-offs relating to accounts receivable.  The failure of the Company’s customers to pay in a timely manneror in full amounts due to the Company could affect future liquidity andprofitability.

 

Inventory

 

The Companyvalues inventory at the lower of cost or market.  Cost is determined using the average cost method.  The Company continues to use the sametechniques to value inventory as have been used in the past.  The Company regularly reviews inventoryquantities on hand and 

 

11

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records a provision for excessand obsolete inventory based primarily on estimated 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 Companyevaluates the fair value and future benefits of long-lived assets by estimatingundiscounted future cash flows of the related assets and reduces the carryingvalue of the long-lived assets by the excess, if any, of the result of suchcalculation.  The Company believes thatthe carrying values and estimated useful lives continues to be appropriate atthis time.  Future adverse changes inmarket conditions or poor operating results of the underlying long-lived assetscould result in an inability to recover the carrying value of the long-livedassets that may not be reflected in the current carrying value, therebypossibly requiring an impairment charge in the future.

 

Deferred Tax ValuationAllowance

 

The Companyrecords a valuation allowance to reduce deferred tax assets to the amount thatis more likely than not to be realized. Future taxable income and ongoing prudent and feasible tax planningstrategies are estimated in assessing the need for the valuationallowance.  Should the Company not beable to realize all or part of the deferred tax assets in the future, anadjustment to the deferred tax asset would be recorded to earnings in theperiod such determination was made by increasing the valuation allowance toreduce the deferred tax assets to the amount that is more likely than not to berealized.  The effect of such adjustmentwould be to reduce earnings.  TheCompany determined that a valuation allowance was not necessary at December 31,2002.

 

**Results of Operations**

 

Net salesdecreased $1.6 million, or 23.9%, to $5,224,000 for the three months endedDecember 31, 2002 compared to $6,860,000 for the three months ended December31, 2001. Domestic sales decreased $1.3 million, or 22.4%, to $4.3 million forthe three months ended December 31, 2002 compared to $5.6 million for the threemonths ended December 31, 2001.  Salesof electronics to a significant domestic customer decreased $261,000, or 28.2%,to $664,000 for the three months ended December 31, 2002 compared to $925,000for the comparable period in fiscal 2002. Additionally, sales of speakers to a domestic OEM customer decreasedduring the quarter.  Purchase orders bythese customers may fluctuate significantly from quarter to quarter.  Sales of speakers, electronics andaccessories decreased 60.3%, 7.7% and 6.6%, respectively, for the three monthsended December 31, 2002 compared to the corresponding quarter in fiscal2002.  The decreased sales of speakerswere primarily due to decreased sales of AudioSource products.  During the first quarter of fiscal 2002, alarge domestic retailer placed a large holiday season order for home audiospeakers.  A similar order was notreceived for the first quarter of fiscal 2003.

 

Internationalsales decreased $385,000, or 30.3%, to $886,000 for the three months endedDecember 31, 2002 compared to $1.3 million for the three months ended December31, 2001.  

 

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International sales represented17.0% and 18.5% of total net sales for the three months ended December 31, 2002and 2001, respectively.  The decreaseresulted primarily from a 38.5% decrease in sales to Asia and a 35.6 % decreasein sales to other international markets.

 

Because of thenature of the Company’s products, the Company’s largest customers havehistorically tended to be large domestic retailers, and domestic andinternational distributors.  The Companyhad one customer during the three months ended December 31, 2002 that accountedfor more than 10% of net sales.  Thetiming and volume of customer activity can vary significantly from period toperiod.  Management expects decreasedsales for the Company in the second quarter of fiscal 2003 as compared to thesecond quarter of fiscal 2002 due to the continuing reduced spending byconsumers on discretionary items.  Theloss of business from one or more principal customers or a change in the salesvolume to a particular customer could have a material adverse effect on theCompany’s sales volume and profitability.

 

Gross profitremained essentially unchanged from a year ago at 21.3% of net sales for thethree months ended December 31, 2002 compared to 21.1% of net sales for thethree months ended December 31, 2001.  Due to the range of products that the Companysells, the product sales mix can produce a range of gross margins.  Some markets in which the Company operatesalso yield lower gross margins than others. Gross margins on sales of AudioSource products are less than grossmargins on sales of other Company products. The change in sales mix was partially offset by the decrease insales volume.  The decrease in salesvolume caused fixed labor and manufacturing overhead to increase as apercentage of sales.

 

Operatingexpenses consist of selling, general and administrative expenses.  Total operating expenses increased $144,000,or 10.1%, to $1,568,000 for the three months ended December 31, 2002 comparedto $1,424,000 for the three months ended December 31, 2001.  Operating expenses were 30.0% and 20.8% ofnet sales in the respective three-month periods.

 

Sellingexpenses increased $90,000, or 11.6%, to $868,000 for the three months endedDecember 31, 2002 compared to $778,000 for the comparable fiscal 2002period.  Selling expenses were 16.6% and11.3% of net sales in the respective three-month periods.  The increased selling expenses were due toincreased personnel and payroll expenses.

 

General andadministrative expenses increased $54,000, or 8.4%, to $700,000 for the threemonths ended December 31, 2002 compared to $646,000 for the comparable fiscal2002 period.  General and administrativeexpenses were 13.4% and 9.4% of net sales in the respective three-monthperiods.  The increased general andadministrative expenses were primarily due to increased engineering expenses asa result of additional engineering personnel and new product developmentactivities.

 

Other expensedecreased by $13,600 to $400 of other expense for the three months endedDecember 31, 2002 compared to $14,000 of other expense for the three monthsended December 31, 2001.  The decreasein other expense was due to decreased interest expense attributable todecreased average balances outstanding under the line of credit.

 

The taxbenefit was $167,000 for the three months ended December 31, 2002 due to a lossbefore income taxes for the period.  Taxexpense was $4,000 for the three months ended December 31, 2001 due to earningsbefore income taxes for the period. Deferred taxes of $746,000 and $559,000 are recorded as current andlong-term assets at December 31, 2002 due to the tax effects of temporarydifferences between the carrying amounts of assets and 

 

13

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liabilities for financial andtax reporting purposes and a net operating loss carryforward resulting from thenet loss for the three months ended December 31, 2002.

 

On October 1,2002, the Company adopted SFAS No. 142 and recorded a goodwill impairment lossof $68,000, net of tax of $45,000, or $0.02 per share - basic and diluted(based on 3.0 million shares outstanding) as the effect of a change inaccounting principle.  Goodwillamortization expense for the three months ended December 31, 2001 was $12,000.

 

The net losswas $354,000, or $0.12 per share - basic and diluted (based on 3.0 millionshares outstanding), for the three months ended December 31, 2002, compared tonet earnings of $6,000, or $0.00 per share - basic and diluted (based on 3.0million shares outstanding) for the three months ended December 31, 2001.  Decreased sales and increased operatingexpenses resulted in the net loss.

 

**Liquidity and Capital Resources**

 

The Company’sprimary needs for funds are for working capital and, to a lesser extent, forcapital expenditures.  The Companyfinanced its operations during the first quarter of fiscal 2003 from cashgenerated from operating activities. Net cash provided by operating activities was $337,000 for the threemonths ended December 31, 2002.  Whencash flow from operations is less than current needs, the Company increases thebalance owing on its operating line of credit. When cash flow exceeds current needs, the Company pays down the balanceowing on its operating line of credit rather than accumulating and investingexcess cash, which practice may result in low reported cash balances.

 

The Company’sfuture cash flows from operations are dependent upon several factors including,but not limited to:

 

-                    theability of the Company to attract new and retain existing customers,

-                    thevolume of sales for these customers, or the loss of business of one or more primarycustomer,

-                    changesin sales mix,

-                    changesin general economic conditions,

-                    management’seffectiveness in managing the manufacturing process, and

-                    theability to collect in full and in a timely manner amounts due to the Company.

 

Cash and cashequivalents increased by $283,000 during the three months ended December 31,2002 due principally to collections of outstanding accounts receivables andreduction in inventories offset in part by the net loss of $354,000.  Accounts receivable decreased by $884,000during the first quarter of fiscal 2003 due to a decrease in sales in the firstfiscal quarter of 2003 compared to the fourth quarter of fiscal 2002.  Inventories decreased by $107,000 during thefirst quarter of fiscal 2003 due to decreased purchases of raw materials.  Prepaid expenses increased $106,000 duringthe three months ended December 31, 2002 primarily due to trade show depositsand insurance costs incurred at the beginning of the Company’s fiscal year.  Accounts payable decreased $231,000 duringthe first quarter of fiscal 2003 due to the decrease in inventories and timingof payment due dates.  Overall, networking capital decreased $206,000 to $9.5 million at December 31, 2002 from$9.7 million at September 30, 2002.

 

The Companyinvested $54,000 in capital expenditures in the three months ended December 31,2002.  Management anticipates thatdiscretionary capital expenditures for the 

 

14

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remainder of fiscal 2003 willnot exceed $500,000.  These anticipatedexpenditures will be financed from available cash, cash provided fromoperations and, if necessary, proceeds from the line of credit.

 

During January 2003, the Company extended its revolving operating lineof credit through January 31, 2004.  Theline of credit provides for borrowings up to $3.5 million at the bank’s primelending rate plus 1%.  As of December31, 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 information pertaining toobligations and commitments to make future cash payments in the financialstatements contained in its 2002 Annual Report on Form 10-K, note 8.  Minimum future rentals under operatingleases having initial or remaining terms of one year or more for the yearsending September 30, 2003, 2004, 2005, 2006, 2007 and thereafter are $564,000,$578,000, $593,000, $608,000, $623,000 and $1,126,000, respectively.

 

The Company believes that cash generated from operations and cashavailable through its credit facility should be sufficient to meet workingcapital and capital expenditure requirements for the next twelve months.

 

**Item 3****.    Quantitative and Qualitative DisclosureAbout Market Risk**

 

The Company has assessed its exposure to market risks for its financialinstruments and has determined that its exposures to such risks are notmaterial.  As of December 31, 2002, theCompany had cash and cash equivalents of $498,000 compared to $215,000 as ofSeptember 30, 2002.  When the Companyhas repaid any borrowings outstanding under its line of credit and has excesscash, then the Company has historically invested its excess cash in highlyliquid marketable securities with maturities of three months or less at date ofpurchase.  The Company’s cashequivalents are generally commercial paper and money market accounts.  The Company does not invest in derivative securities.

 

The Companysells its products and purchases its inventory primarily in United Statesdollars, therefore its exposure to currency exchange rate fluctuations is notmaterial.  The Company does not engagein foreign currency hedging activities.

 

The Companyborrows from time to time under its revolving operating line of credit.  Any borrowings outstanding under the line ofcredit bear interest at a variable rate based on the prime rate.  The Company is not a party to interest rateswaps or caps.

 

**Item4.    Controls and Procedures**

 

The Company’s Chairman and Chief Executive Officer and the ChiefFinancial Officer have reviewed the disclosure controls and procedures relatingto the Company within the 90 days preceding the date of this report andconcluded that such controls and procedures are effective to make known to themall material information about the financial and operational activities of theCompany.  There were no deficienciesidentified in such controls or procedures and there have been no changes insuch controls and procedures since such evaluation that could significantlyaffect their effectiveness.

 

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**PART II. OTHER INFORMATION**

 

 

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

 

 
|   | (a) Exhibits             |   |   |
|--------|--------------------------|--------|--------|
|   |                     |   |   |
|   |                     | 10.19  |   | Amendment  dated January 30, 2003 to Loan Agreement and Note dated March 15, 2002  between the Company and U.S. Bank National Association |
|   |                     |   |   |   |
|   |                     | 99.1   |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |                     |   |   |   |
|   |                     | 99.2   |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002 |
|   |                     |   |   |   |
|   | (b) Reports  on Form 8-K |
|   |                     |   |
|   |                     | None   |

 

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#### **SIGNATURES**

 

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly 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:  February 12, 2003 |                                                                                                 |

 

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## **CERTIFICATION**

 

I, Keith A. Peterson, certifythat:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Phoenix Gold International,Inc.;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                    designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                   evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)                    presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                   anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| February 12,  2003 |                                                                  |
|--------------------|-----------------------------------------------------------------------|
|               |                                                                  |
|               |                                                                  |
|               | /s/  Keith A. Peterson                                           |   |
|               | Chairman and  Chief Executive Officer   (Principal Executive Officer) |

 

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## **CERTIFICATION**

 

I, Joseph K. O’Brien, certifythat:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Phoenix Gold International,Inc.;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(d)                   designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

(e)                    evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(f)                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(c)                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(d)                   anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| February 12,  2003 |                                                                                                 |
|--------------------|------------------------------------------------------------------------------------------------------|
|               |                                                                                                 |
|               |                                                                                                 |
|               | /s/  Joseph K. O’Brien                                                                     |   |
|               | Vice  President, Chief Financial Officer and Secretary  (Principal Financial and Accounting Officer) |

 

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**INDEX TO EXHIBITS**

 

 
| **Exhibit** |   |                                                                                                                                                   |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                   |
| 10.19       |   | Amendment  dated January 30, 2003 to Loan Agreement and Note dated March 15, 2002  between the Company and U.S. Bank National Association              |
|        |   |                                                                                                                                                   |
| 99.1        |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|        |   |                                                                                                                                                   |
| 99.2        |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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