**United StatesSecurities 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 March 31, 2003**                                                                                                                                                                                                                                                                              |
|                                 |
| **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 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

 

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

 

Therewere 3,006,945 shares of the issuer’s common stock outstanding as of April 30,2003.

 

 

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**PHOENIX GOLD INTERNATIONAL, INC.**

**Form 10-Q for the Quarter Ended March 31, 2003**

 

**INDEX**

 
| Part I.           | FINANCIAL INFORMATION |
|-------------------|-----------------------|
|              |                  |   |
|              | Item 1.               | Financial Statements |
|              |                  |   |
|              |                  | Balance Sheets at March 31, 2003 and  September 30, 2002 (unaudited) |
|              |                  |   |
|              |                  | Statements  of Operations for the Three and Six Months Ended March 31, 2003 and 2002  (unaudited) |
|              |                  |   |
|              |                  | Statements  of Cash Flows for the Six Months Ended March 31, 2003 and 2002 (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 4.               | Submission of Matters to a  Vote of Security Holders |
|              |                  |   |
|              | Item 6.               | Exhibits and Reports on Form  8-K |
|              |                  |   |
|              |                  |   |
| SIGNATURES        |
|              |                  |   |
| CERTIFICATIONS    |
|              |                  |   |
| INDEX TO EXHIBITS |

 

2

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**PARTI.    FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements**

 

**PHOENIX GOLD INTERNATIONAL, INC.**

**BALANCESHEETS**

**(Unaudited)**

 
|                                                                                                                    |   | **March 31,  2003** |       | **September  30,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|--------------------------|--------|
| **ASSETS**                                                                                                              |   |                |       |                     |   |
|                                                                                                                    |   |                |       |                     |   |
| Current assets:                                                                                                         |   |                |       |                     |   |
| Cash and cash  equivalents                                                                                              |   | $                   | 1,002      |                     | $      | 214,814 |   |
| Accounts  receivable, net                                                                                               |   | 2,981,968           |       | 3,610,939                |   |
| Inventories                                                                                                             |   | 7,485,565           |       | 7,765,523                |   |
| Prepaid expenses                                                                                                        |   | 249,179             |       | 188,140                  |   |
| Deferred taxes                                                                                                          |   | 999,000             |       | 572,000                  |   |
| Total current  assets                                                                                                   |   | 11,716,714          |       | 12,351,416               |   |
|                                                                                                                    |   |                |       |                     |   |
| Property and  equipment, net                                                                                            |   | 1,082,566           |       | 1,102,498                |   |
| Deferred taxes                                                                                                          |   | 536,000             |       | 513,000                  |   |
| Other assets                                                                                                            |   | 369,543             |       | 552,336                  |   |
| Total assets                                                                                                            |   | $                   | 13,704,823 |                     | $      | 14,519,250 |   |
|                                                                                                                    |   |                |       |                     |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                          |   |                |       |                     |   |
|                                                                                                                    |   |                |       |                     |   |
| Current  liabilities:                                                                                                   |   |                |       |                     |   |
| Line of credit                                                                                                          |   | $                   | 497,914    |                     | $      | — |   |
| Accounts payable                                                                                                        |   | 870,697             |       | 1,297,507                |   |
| Accrued payroll  and benefits                                                                                           |   | 359,994             |       | 430,048                  |   |
| Accrued customer  rebates                                                                                               |   | 321,051             |       | 382,972                  |   |
| Other accrued  expenses                                                                                                 |   | 523,802             |       | 498,684                  |   |
| Total current  liabilities                                                                                              |   | 2,573,458           |       | 2,609,211                |   |
|                                                                                                                    |   |                |       |                     |   |
| Deferred gain on  sale of facility                                                                                      |   | 612,984             |       | 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                                                                                                      |   | 4,006,853           |       | 4,736,488                |   |
| Total  shareholders’ equity                                                                                        |   | 10,518,381          |       | 11,248,016               |   |
| Total  liabilities and shareholders’ equity                                                                        |   | $                   | 13,704,823 |                     | $      | 14,519,250 |   |

 

**See Notes to Financial Statements**

 

3

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**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTSOF OPERATIONS**

**(Unaudited)**

 
|                                                           |   | **Three  Months Ended  March 31** |      | **Six Months  Ended  March 31** |   |
|----------------------------------------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                                                           |   | **2003**                          |      | **2002**                        |   | **2003** |   | **2002** |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Net sales                                                      |   | $                                 | 5,419,229 |                            | $      | 7,993,865 |   | $ | 10,643,163 |   | $ | 14,854,110 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Cost of sales                                                  |   | 4,264,872                         |      | 6,126,661                       |   | 8,373,893 |   | 11,538,685 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Gross profit                                                   |   | 1,154,357                         |      | 1,867,204                       |   | 2,269,270 |   | 3,315,425 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Operating  expenses:                                           |   |                              |      |                            |   |   |   |   |   |
| Selling                                                        |   | 986,097                           |      | 1,032,058                       |   | 1,853,896 |   | 1,809,925 |   |
| General and  administrative                                    |   | 767,053                           |      | 695,606                         |   | 1,466,776 |   | 1,341,320 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Total operating  expenses                                      |   | 1,753,150                         |      | 1,727,664                       |   | 3,320,672 |   | 3,151,245 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Income (loss)  from operations                                 |   | (598,793                          | )         | 139,540                         |   | (1,051,402 | ) | 164,180 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Other income  (expense):                                       |   |                              |      |                            |   |   |   |   |   |
| Interest income                                                |   | 113                               |      | 546                             |   | 745 |   | 1,118 |   |
| Interest expense                                               |   | (3,117                            | )         | (1,983                          | )      | (3,131 | ) | (16,670 | ) |
| Other income,  net                                             |   | 4,181                             |      | 2,532                           |   | 3,153 |   | 2,532 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Total other  income (expense)                                  |   | 1,177                             |      | 1,095                           |   | 767 |   | (13,020 | ) |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Earnings (loss)  before income taxes                           |   | (598,616                          | )         | 140,635                         |   | (1,050,635 | ) | 151,160 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Income tax  benefit (expense)                                  |   | 222,000                           |      | (56,000                         | )      | 389,000 |   | (60,000 | ) |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Earnings (loss)  before cumulative effect of accounting change |   | (375,616                          | )         | 84,635                          |   | (661,635 | ) | 91,160 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Cumulative  effect of accounting change, net of tax            |   | —                            |      | —                          |   | (68,000 | ) | — |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Net earnings  (loss)                                           |   | $                                 | (375,616  | )                               | $      | 84,635 |   | $ | (729,635 | ) | $ | 91,160 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Earnings (loss)  per share:                                    |   |                              |      |                            |   |   |   |   |   |
| Before  accounting change – basic and diluted             |   | $                                 | (0.12     | )                               | $      | 0.03 |   | $ | (0.22 | ) | $ | 0.03 |   |
| Accounting  change – basic and diluted                    |   | 0.00                              |      | 0.00                            |   | (0.02 | ) | 0.00 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Earnings (loss)  per share – basic and diluted            |   | $                                 | (0.12     | )                               | $      | 0.03 |   | $ | (0.24 | ) | $ | 0.03 |   |
|                                                           |   |                              |      |                            |   |   |   |   |   |
| Average shares  outstanding:                                   |   |                              |      |                            |   |   |   |   |   |
| Basic                                                          |   | 3,006,945                         |      | 3,006,945                       |   | 3,006,945 |   | 3,006,945 |   |
| Diluted                                                        |   | 3,006,945                         |      | 3,007,563                       |   | 3,006,945 |   | 3,006,945 |   |

 

**SeeNotes to Financial Statements**

 

4

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**PHOENIX GOLD INTERNATIONAL, INC.**

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
|                                                                                                   |   | **Six Months  Ended  March 31,** |       |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                                                   |   | **2003**                         |       | **2002** |   |
|                                                                                                   |   |                             | ** ** |   | ** ** |
| Cash flows from  operating activities:                                                                 |   |                             |       |   |   |
| Net earnings  (loss)                                                                                   |   | $                                | (729,635   | ) | $ | 91,160 |   |
| Adjustments to  reconcile net earnings (loss) to net cash provided by (used in) operating  activities: |   |                             |       |   |   |
| Depreciation and  amortization                                                                         |   | 267,346                          |       | 267,995 |   |
| Cumulative  effect of accounting change, net                                                           |   | 68,000                           |       | — |   |
| Deferred taxes                                                                                         |   | (405,000                         | )          | (55,000 | ) |
| Changes in  operating assets and liabilities:                                                          |   |                             |       |   |   |
| Accounts  receivable                                                                                   |   | 628,971                          |       | 770,962 |   |
| Inventories                                                                                            |   | 279,958                          |       | 1,432,925 |   |
| Prepaid expenses                                                                                       |   | (61,039                          | )          | (94,491 | ) |
| Accounts payable                                                                                       |   | (426,810                         | )          | (988,943 | ) |
| Accrued expenses                                                                                       |   | (106,857                         | )          | 81,052 |   |
|                                                                                                   |   |                             |       |   |   |
| Net cash  provided by (used in) operating activities                                                   |   | (485,066                         | )          | 1,505,660 |   |
|                                                                                                   |   |                             |       |   |   |
| Cash flows from  investing activities:                                                                 |   |                             |       |   |   |
| Capital  expenditures, net                                                                             |   | (226,660                         | )          | (203,911 | ) |
|                                                                                                   |   |                             |       |   |   |
| Net cash used in  investing activities                                                                 |   | (226,660                         | )          | (203,911 | ) |
|                                                                                                   |   |                             |       |   |   |
| Cash flows from  financing activities:                                                                 |   |                             |       |   |   |
| Line of credit,  net                                                                                   |   | 497,914                          |       | (1,157,707 | ) |
|                                                                                                   |   |                             |       |   |   |
| Net cash  provided by (used in) financing activities                                                   |   | 497,914                          |       | (1,157,707 | ) |
|                                                                                                   |   |                             |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                                      |   | (213,812                         | )          | 144,042 |   |
|                                                                                                   |   |                             |       |   |   |
| Cash and cash  equivalents, beginning of period                                                        |   | 214,814                          |       | 1,002 |   |
|                                                                                                   |   |                             |       |   |   |
| Cash and cash  equivalents, end of period                                                              |   | $                                | 1,002      |   | $ | 145,044 |   |
|                                                                                                   |   |                             |       |   |   |
| Supplemental  disclosures:                                                                             |   |                             |       |   |   |
| Cash paid for  interest                                                                                |   | $                                | 3,000      |   | $ | 17,000 |   |
| Cash paid for  income taxes                                                                            |   | —                           |       | 12,000 |   |

 

**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 normally includedin financial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been omitted from theseunaudited financial statements.  Theseunaudited financial statements should be read in conjunction with the financialstatements and notes included in the Company’s Annual Report on Form 10-K forthe year ended September 30, 2002 filed with the Securities and ExchangeCommission.  The results of operations forthe three- and six-month periods ended March 31, 2003 are not necessarilyindicative 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 March 31, 2003 and theresults of its operations for the three- and six-month periods ended March 31,2003 and 2002 and its cash flows for the six-months ended March 31, 2003 and2002.

 

**Note 2 -REPORTING PERIODS**

 

The Company’s fiscal year is the 52-week or 53-weekperiod ending the last Sunday in September. Fiscal 2003 and fiscal 2002 are 52-week years and all quarters are13-week periods.  For presentationconvenience, the Company has indicated in these financial statements that itsfiscal year ended on September 30 and that the three and six months presentedended on March 31.

 

**Note 3 - NEWACCOUTING PRONOUNCEMENTS**

 

In July 2001, the FinancialAccounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, *Goodwill andOther Intangible Assets*. SFAS No. 142 changed the accounting for goodwill and certain intangiblesfrom an amortization method to an impairment-only approach.  Thus, amortization of goodwill and certainintangibles, including goodwill and certain intangibles recorded in pastbusiness combinations, cease upon adoption of SFAS No. 142.  Instead, goodwill and certain intangiblesare now 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 becameeffective for the Company’s fiscal year beginning October 1, 2002.

 

The Company completed the transitional goodwillimpairment test and recorded an impairment loss of $68,000, net of tax of $45,000,or $0.02 per share, during the six months ended March 31, 2003.  In accordance with SFAS No. 142, thegoodwill impairment loss is recognized as the effect of a change in accountingprinciple as of October 1, 2002. Goodwill amortization expense for the three- and six-month periods endedMarch 31, 2002 was $12,000 and $25,000.

 

Included in other assets at March 31, 2003 areintangible assets of $268,000 consisting primarily of trademarks and anoncompetition agreement.  Amortizationexpense for the three and six months ended March 31, 2003 was $32,000 and$64,000.  The estimated futureamortization expense of the intangible assets for the years ending September30, 2003, 2004, 2005 and 2006 is $127,000, $119,000, $74,000 and $11,000. It isestimated that the intangible assets will be fully amortized in fiscal 2006.

 

6

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In August 2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  This Statement supercedes SFAS No. 121*, Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of*, and the accounting and reporting provisions ofAccounting Principles Board Opinion No. 30, *Reporting the Results of Operations, Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions*, for the disposal ofa segment of a business.  SFAS No. 144maintains the method for recording an impairment of assets to be held under SFASNo. 121 and establishes a single accounting model based on the frameworkestablished in SFAS No. 121 for long-lived assets to be disposed of bysale.  This Statement also broadens thepresentation of discontinued operations to include more disposal transactions.  SFAS No. 144 became effective as of October1, 2002.  The adoption of SFAS No. 144did not have a material effect on the Company’s financial position or resultsof operations.

 

In November 2002, the FASB issued Interpretation No.45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees Including IndirectGuarantees of Indebtedness of Others*.  Included in other accrued expenses at March 31, 2003 is anaccrual of approximately $265,000 for estimated warranty liabilities.  A majority of the products sold by theCompany are covered by a warranty.  Theestimated warranty liability is based on historical experience and expectationof future conditions.  The Company’shistorical experience indicates that substantially all warranty services areprovided within one year of product sale. Warranty services incurred for products sold more than one year ago havenot been significant.  Warranty expenseswere approximately $140,000 during the six months ended March 31, 2003.

 

In December 2002, the FASB issued SFAS No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure: An Amendment of FASBStatement No. 123*.  ThisStatement amends SFAS No. 123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The disclosure provisions 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 Accounting Principles Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  The adoption of SFAS No. 148 did not have amaterial effect on the Company’s financial position or results ofoperations.  See Note 7.

 

**Note 4 -INVENTORIES**

 

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

** **
|                               |   | **March 31,  2003** |      | **September  30,  2002** |   |
|------------------------------------|--------|---------------------|-----------|--------------------------|--------|
|                               |   |                |      |                     |   |
| Raw materials  and work-in-process |   | $                   | 2,722,599 |                     | $      | 2,924,498 |   |
| Finished goods                     |   | 4,762,966           |      | 4,841,025                |   |
|                               |   |                |      |                     |   |
| Total  inventories                 |   | $                   | 7,485,565 |                     | $      | 7,765,523 |   |

 

7

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**Note 5 -PROPERTY AND EQUIPMENT**

 

Property and equipment consist ofthe following:

 
|                                       |   | **March 31,  2003** |      | **September  30,  2002** |   |
|--------------------------------------------|--------|---------------------|-----------|--------------------------|--------|
|                                       |   |                |      |                     |   |
| Machinery and  equipment                   |   | $                   | 3,428,348 |                     | $      | 3,691,770 |   |
| Office equipment  and furniture            |   | 1,849,301           |      | 1,741,398                |   |
| Leasehold  improvements                    |   | 175,335             |      | 170,494                  |   |
|                                       |   | 5,452,984           |      | 5,603,662                |   |
| Accumulated  depreciation and amortization |   | (4,370,418          | )         | (4,501,164               | )      |
|                                       |   |                |      |                     |   |
| Total property  and equipment, net         |   | $                   | 1,082,566 |                     | $      | 1,102,498 |   |

 

**Note 6 - LINE OFCREDIT**

 

During January 2003, the Companyextended its revolving operating line of credit through January 31, 2004.  The line of credit provides for borrowingsup to $3.5 million at the bank’s prime lending rate plus 1%.  As of March 31, 2003, the Company waseligible to borrow $3.5 million under the line of credit.  As of March 31, 2003, borrowings of $497,914were outstanding under the line of credit.

 

**Note 7 - STOCK OPTION PLAN**

 

At March 31, 2003, the Company has one stock-basedemployee compensation plan, which is described more fully in Note 9 to thefinancial statements included in the Company’s Annual Report on Form 10-K forthe year ended September 30, 2002 filed with the Securities and ExchangeCommission.  The Company accounts forthis Plan under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock issued to Employees*, and related interpretations.  No stock-based compensation cost isreflected in net earnings (loss), as all options granted under this Plan had anexercise price equal to or greater than the market value of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net earnings (loss) and earnings(loss) per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
|                                                                                                                                      |   | **Three  Months Ended  March 31** |     | **Six Months  Ended  March 31** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|----------|---------------------------------|--------|
|                                                                                                                                      |   | **2003**                          |     | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                                                                                      |   |                              |     |                            |   |   |   |   |   |
| Net earnings  (loss), as reported                                                                                                         |   | $                                 | (375,616 | )                               | $      | 84,635 |   | $ | (729,635 | ) | $ | 91,160 |   |
|                                                                                                                                      |   |                              |     |                            |   |   |   |   |   |
| Total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |   | —                            |     | (2,000                          | )      | — |   | (5,000 | ) |
|                                                                                                                                      |   |                              |     |                            |   |   |   |   |   |
| Pro forma net  earnings (loss)                                                                                                            |   | $                                 | (375,616 | )                               | $      | 82,635 |   | $ | (729,635 | ) | $ | 86,160 |   |
|                                                                                                                                      |   |                              |     |                            |   |   |   |   |   |
| Earnings (loss)  per share:                                                                                                               |   |                              |     |                            |   |   |   |   |   |
| Basic and  diluted – as reported                                                                                                     |   | $                                 | (0.12    | )                               | $      | 0.03 |   | $ | (0.24 | ) | $ | 0.03 |   |
| Basic and  diluted – pro forma                                                                                                       |   | (0.12                             | )        | 0.03                            |   | (0.24 | ) | 0.03 |   |
|                                                                                                                                      |   |                              |     |                            |   |   |   |   |   |

 

8

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**Item2:****          Management’sDiscussion a****nd Analysis of Financial Condition and Results ofOperations**

 

**Forward-LookingStatements**

 

*All statements in this report thatare not statements 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 the following:the adverse effect of reduced discretionary consumer spending; competitivefactors; dependence on a significant customer; potential fluctuations inquarterly results and seasonality; fixed operating expenses relative torevenues; the need to introduce 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.*

 

**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 effect on amounts reported in the financial statements and relatednotes.  Since future events and theireffect cannot be determined with certainty, the actual results will inevitablydiffer from the estimates.  Suchdifferences could be material to the financial statements.

 

The Company’s accounting policies are disclosed in its2002 Annual Report on Form 10-K. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)No. 142, *Goodwilland Other Intangible Assets*. SFAS No. 142 changed the accounting for goodwill and certain intangiblesfrom an amortization method to an impairment-only approach.  Thus, amortization of goodwill and certainintangibles, including goodwill and certain intangibles recorded in pastbusiness combinations, cease upon adoption of SFAS No. 142.  Instead, goodwill and certain intangiblesare now 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 becameeffective for the Company’s fiscal year beginning October 1, 2002.

 

The Company completed the transitional goodwillimpairment test and recorded an impairment loss of $68,000, net of tax of$45,000, or $0.02 per share, during the six months ended March 31, 2003.  In accordance with SFAS No. 142, thegoodwill impairment loss is recognized as the effect of a change in accountingprinciple as of October 1, 2002. Goodwill amortization expense for the three and six months ended March31, 2002 was $12,000 and $25,000.

 

9

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In November 2002, the FASB issued Interpretation No.45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees Including IndirectGuarantees of Indebtedness of Others*.  Included in other accrued expenses at March 31, 2003 is anaccrual of approximately $265,000 for estimated warranty liabilities.  A majority of the products sold by theCompany are covered by a warranty.  Theestimated warranty liability is based on historical experience and expectationof future conditions.  The Company’shistorical experience indicates that substantially all warranty services areprovided within one year of product sale. Warranty services incurred for products sold more than one year ago havenot been significant.  Warranty expenseswere approximately $140,000 during the six months ended March 31, 2003.

 

Except as described above, there have been no materialchanges to the Company’s accounting policies during the six months ended March31, 2003.  The more significant of theCompany’s accounting policies include revenue recognition and the use ofestimates (which inherently involve judgment and uncertainties) in establishingcustomer rebate and warranty accrued liabilities, valuing accounts receivable,inventory, long-lived and deferred tax assets.

 

Revenue Recognition

 

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

 

The Company also provides for certain sales allowanceswhich include sales rebates, 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 issues

 

10

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that have been identified.  TheCompany values accounts receivable net of an allowance for doubtfulaccounts.  The allowance is calculatedbased upon the Company’s evaluation of specific customer accounts where theCompany has information that the customer may have an inability to meet itsfinancial obligations (bankruptcy, etc.). In these cases, the Company uses its judgment, based on the best availablefacts and circumstances, and records a specific reserve for that customeragainst amounts due to reduce the receivable to the amount that is expected tobe collected.  These specific reservesare re-evaluated and adjusted as additional information is received thataffects the amount reserved.  The sametechnique used to compute the allowance at September 30, 2002 was used atMarch 31, 2003.  However, theultimate collectibility of a receivable is dependent upon the financialcondition of an individual customer, which could change rapidly and withoutadvance warning.

 

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

 

Inventory

 

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

 

Long-Lived Assets

 

The Company evaluates the fair value and future benefitsof long-lived assets by estimating undiscounted future cash flows of therelated assets and reduces the carrying value of the long-lived assets by theexcess, if any, of the result of such calculation.  The Company believes that the carrying values and estimateduseful lives continue to be appropriate at this time.  Future adverse changes in market conditions or poor operatingresults of the underlying long-lived assets could result in an inability torecover the carrying value of the long-lived assets that may not be reflectedin the current carrying value, thereby possibly requiring an impairment chargein 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.  Shouldthe Company not be able to realize all or part of the deferred tax assets inthe future, an adjustment to the deferred tax asset would be recorded toearnings in the period such determination was made by increasing the valuationallowance to reduce the deferred tax assets to the amount that is more likelythan not to be realized.  The effect ofsuch adjustment would be

 

11

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to reduce earnings.  The Companydetermined that a valuation allowance was not necessary at March 31, 2003.

 

**Resultsof Operations**

 

Net sales decreased $2.6 million, or 32.2%, to $5.4million for the three months ended March 31, 2003 from $8.0 million for thethree months ended March 31, 2002. Domestic sales decreased $2.4 million, or 36.5%, to $4.1 million for thethree months ended March 31, 2003 compared to $6.5 million for the three monthsended March 31, 2002.  Sales ofelectronics, speakers and accessories decreased 38.1%, 15.3% and 42.3%,respectively, for the three months ended March 31, 2003 compared to the correspondingquarter in fiscal 2002.  Sales ofelectronics decreased primarily due to decreased sales to a significantcustomer and Phoenix Gold car audio products. Sales to the significant customer decreased $999,000, or 73.3%, to$400,000 for the three months ended March 31, 2003 compared to $1.4 million forthe three months ended March 31, 2002. Sales of speakers decreased primarily due to decreased sales ofAudioSource products offset in part by increased sales of Phoenix Gold car andhome products.  International salesdecreased $207,000, or 13.8%, to $1.3 million from $1.5 million in thecomparable 2002 period.  The decreaseresulted primarily from a 39.3% decrease in sales to Asia and a 22.4% decreasein sales to Europe, offset in part by a 13.6% increase in sales to otherinternational markets.  Internationalsales represented 23.9% and 18.8% of net sales for the three months ended March31, 2003 and 2002, respectively.

 

Net sales for the six months ended March 31, 2003decreased $4.2 million, or 28.3%, to $10,643,000 from $14,854,000 for the sixmonths ended March 31, 2002.  Domesticsales decreased $3.6 million, or 28.3%, to $8.5 million for the six monthsended March 31, 2003 compared to $12.1 million for the six months ended March31, 2002.  Sales of electronics to asignificant customer decreased $1.3 million, or 55.0%, to $1.0 million for thesix months ended March 31, 2003 compared to $2.3 million for the comparableperiod in fiscal 2002.  For the sixmonths ended March 31, 2003, international sales decreased 21.3% to $2.2million from $2.8 million in the comparable 2002 period.  The decrease resulted from a 38.8% decreasein sales to Asia, a 18.1% decrease in sales to Europe and a 12.1% decrease insales to other international markets. International sales represented 20.5% and 18.7% of net sales for the sixmonths ended March 31, 2003 and 2002, 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.  No customer accounted for 10% or more of theCompany’s net sales during the six months ended March 31, 2003.  The Company had one customer during the sixmonths ended March 31, 2002 that accounted for more than 10% of net sales.  The timing and volume of customer activitycan vary significantly from period to period. Management expects decreased sales for the Company in the third quarterof fiscal 2003 as compared to the third quarter of fiscal 2002 due to the continuedreduced spending by consumers on discretionary items.  The loss of business from one or more principal customers or achange in the sales volume from a particular customer could have a materialadverse effect on the Company’s sales volume and profitability.

 

Gross profit decreased to 21.3% of net sales for thethree months ended March 31, 2003 from 23.4% for the three months ended March31, 2002.  Gross profit decreased to21.3% of net sales for the six months ended March 31, 2003 from 22.3% of net salesfor the comparable prior period.  Due to the range of products that the Companysells, the product sales mix can produce a range of profit margins.  Some markets in which the Company operatesalso yield lower profit margins than others. Gross margins on sales of AudioSource products are less than grossmargins on sales of other Company products.  The decrease in sales volume caused fixed labor

 

12

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and manufacturing overhead to increase as a percentage of sales, whichwas offset in part by a change in sales mix.

 

Historically, the Company has built infrastructure andadded personnel on an as-needed basis, resulting in occasional changes inoperating expenses that are disproportionate to changes in net sales.  This policy has resulted in and may continueto result in variations in operating expenses as a percentage of sales fromperiod to period.  On February 25, 2003,the Company reorganized its workforce, including the reassignment of certainproduction personnel. These actions reduced the Company’s workforce byapproximately 22%.  Further, in March2003, the Company implemented a 5% company-wide pay reduction.

 

Operating expenses consist of selling, general andadministrative expenses.  Totaloperating expenses increased $25,000, or 1.5%, to $1,753,000 for the threemonths ended March 31, 2003 compared to $1,728,000 for the three months endedMarch 31, 2002.  Operating expenses were32.4% and 21.6% of net sales in the respective three-month periods.  Operating expenses increased $169,000, or5.4%, to $3,321,000 for the six months ended March 31, 2003 compared to$3,151,000 for the comparable period in fiscal 2002.  Operating expenses were 31.2% and 21.2% of net sales in therespective six-month periods.

 

Selling expenses decreased $46,000, or 4.5%, to$986,000 for the three months ended March 31, 2003 compared to $1,032,000 forthe comparable 2002 period.  Sellingexpenses were 18.2% and 12.9% of net sales in the respective three-monthperiods.  Selling expenses increased$44,000, or 2.4%, to $1,854,000 for the first half of fiscal 2003 from$1,810,000 for the first half of fiscal 2002. Selling expenses were 17.4% and 12.2% of net sales in the respectivesix-month periods.  The decreasedselling expenses for the three months ended March 31, 2003 was due to decreasedcommissions paid to independent representatives selling the Company’s productsand decreased consulting expenses, offset in part by increased personnel andpayroll expenses.  The increased sellingexpenses for the six months ended March 31, 2003 was due to increased personneland payroll expenses offset in part by decreased commissions paid toindependent representatives and decreased consulting expenses.

 

General and administrative expenses increased $71,000,or 10.3%, to $767,000 for the three months ended March 31, 2003 compared to$696,000 for the comparable 2002 period. General and administrative expenses were 14.2% and 8.7% of net sales inthe respective three-month periods. General and administrative expenses increased $125,000, or 9.4%, in thefirst half of fiscal 2003 to $1,467,000, compared to $1,341,000 for the firsthalf of fiscal 2002.  General andadministrative expenses were 13.8% and 9.0% of net sales in the respectivesix-month periods.  The increasedgeneral and administrative expenses were primarily due to increased engineeringexpenses as a result of additional engineering personnel and new productdevelopment activities.

 

Other income (expense) was unchanged at $1,000 ofother income for the three months ended March 31, 2003 and 2002.  Other income (expense) increased by $14,000to $1,000 of other income for the first half of fiscal 2003 compared to $13,000of other expense for the first half of fiscal 2002.  The increase in other income for the six months ended March 31,2003 was due to the reduction of interest expense due to reduced averageamounts outstanding under the line of credit.

 

The tax benefit was $222,000 and $389,000 for thethree- and six-month periods ended March 31, 2003 due to a loss before incometaxes in the respective three- and six-month periods.  For the three- and six-month periods ended March 31, 2002, taxexpense was $56,000 and $60,000 due to earnings before income taxes in therespective periods.  Deferred taxes of

 

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$999,000 and $536,000 are recorded as current and long-term assets atMarch 31, 2003 due to the tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial and tax reportingpurposes and a net operating loss carryforward resulting from the net loss forthe three and six months ended March 31, 2003.

 

On October 1, 2002, the Company adopted SFAS No. 142and recorded a goodwill impairment loss of $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 in accounting principle.  Goodwill amortization expense for the three and six months endedMarch 31, 2002 was $12,000 and $25,000.

 

The net loss was $376,000, or $0.12 per share - basicand diluted (based on 3.0 million shares outstanding), for the three monthsended March 31, 2003, compared to net earnings of $85,000, or $0.03 per share -basic and diluted (based on 3.0 million shares outstanding), for the threemonths ended March 31, 2002.  The netloss was $730,000, or $0.24 per share - basic and diluted (based on 3.0 millionshares outstanding), for the six months ended March 31, 2003, compared to netearnings of $91,000, or $0.03 per share - basic and diluted (based on 3.0million shares outstanding), for the comparable 2002 period.  Decreased sales and increased operatingexpenses resulted in the net loss.

 

**Liquidityand Capital Resources**

 

The Company’s primary needs for funds are for workingcapital and, to a lesser extent, for capital expenditures.  The Company financed its operations duringthe six months ended March 31, 2003 from borrowings under its revolving line ofcredit.  Net cash used in operatingactivities was $485,000 for the six months ended March 31, 2003.  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 may result in low reported cash balances.

 

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

 

•                  the ability ofthe Company to attract new and retain existing customers,

•                  the volume ofsales for these customers, the loss of business of one or more primarycustomer,

•                  changes in salesmix,

•                  changes ingeneral economic conditions,

•                  management’seffectiveness in managing the manufacturing process, and

•                  the ability tocollect in full and in a timely manner amounts due to the Company.

 

Cash and cash equivalents decreased by $214,000 duringthe six months ended March 31, 2003 due principally to the net loss.  Accounts receivable decreased by $629,000due to decreased sales during the first half of fiscal 2003.  Inventories decreased by $280,000 due todecreased purchases of raw materials and finished goods.  Prepaid expenses increased $61,000 primarilydue to trade show deposits and insurance costs incurred in the beginning of theCompany’s fiscal year.  Accounts payabledecreased $427,000 due to the decrease in inventories and timing of payment duedates.  Accrued expenses decreased$107,000 due to decreased accrued payroll and benefits and accrued customerrebates at March 31, 2003.  Overall, networking capital decreased $599,000 during the first half of fiscal 2003 due tothe net loss.

 

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The Company invested $227,000 in capital expendituresduring the six months ended March 31, 2003. Management anticipates that discretionary capital expenditures for theremainder of fiscal 2003 will be approximately $300,000.  These anticipated expenditures will befinanced from available cash, cash provided from operations and, if necessary,proceeds from the line of credit.

 

During January 2003, the Companyextended its revolving operating line of credit through January 31, 2004.  The line of credit provides for borrowingsup to $3.5 million at the bank’s prime lending rate plus 1%.  As of March 31, 2003, the Company waseligible to borrow $3.5 million under the line of credit.  As of March 31, 2003, borrowings of $497,914were outstanding under the line of credit.

 

Information pertaining to the Company’s obligationsand commitments to make future cash payments is described more fully in Note 8to the financial statements included in the Company’s Annual Report on Form10-K for the year ended September 30, 2002 filed with the Securities andExchange Commission.  Minimum future rentals under operating leaseshaving initial or remaining terms of one year or more for the years endingSeptember 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 cashavailable through its credit facility and cash generated from operations, ifany, should be sufficient to meet working capital and capital expenditurerequirements for the next twelve months.

 

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**Item 3.       Quantitative and Qualitative****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 March 31, 2003, the Company had cash and cash equivalents of$1,000 compared to $215,000 as of September 30, 2002.  When the Company has repaid any borrowings outstanding under itsline of credit and has excess cash, then the Company has historically investedits excess cash in highly liquid marketable securities with maturities of threemonths or less at date of purchase.  TheCompany’s cash equivalents are generally commercial paper and money marketaccounts.  The Company does not investin derivative securities.

 

The Company sells its products and purchases itsinventories primarily in United States dollars, therefore its exposure tocurrency exchange rate fluctuations is not material.  The Company does not engage in foreign currency hedgingactivities.

 

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

 

**Item 4.       Controls and Pr****ocedures**

 

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

 

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**PARTII.    OTHER INFORMATION**

 

**Item 4.       Submission of Ma****tters to a Vote of Security Holders**

 

The Company held its annual meeting of shareholders on February 11,2003.  Voting common shareholders tookthe following actions at the meeting:

 

1.       The shareholders electedthe following nominees to the Company’s Board of Directors to serve until thenext annual meeting of shareholders or until their successors are elected andqualified:

 
| **Name**           |   | **Shares  Voted for** |   | **Shares  Withheld** |   | **Shares  Abstaining** |   | **Broker  Non-votes** |   |
|--------------------|--------|-----------------------|--------|----------------------|--------|------------------------|--------|-----------------------|--------|
| Keith A. Peterson  |   | 2,431,761             |   | 488,050              |   | 0                      |   | 0                     |   |
| Timothy G. Johnson |   | 2,431,761             |   | 488,050              |   | 0                      |   | 0                     |   |
| Robert A. Brown    |   | 2,431,761             |   | 488,050              |   | 0                      |   | 0                     |   |
| Edward A. Foehl    |   | 2,431,061             |   | 488,750              |   | 0                      |   | 0                     |   |
| Frank G. Magdlen   |   | 2,431,661             |   | 488,150              |   | 0                      |   | 0                     |   |

 

2.       The shareholders voted toratify management’s selection of auditors for fiscal 2003 by the affirmativevote of 2,908,382 shares, with 7,825 shares voting against ratification and3,604 shares abstaining.  There were nobroker non-votes with respect to this proposition.

 

3.       Theshareholders did not approve a shareholder proposal related to cumulativevoting with 2,101,176 shares voting against the proposal, 551,149 shares votingin favor of the proposal, 2,764 shares abstaining and 264,722 shares not voted.

 

**Item6. Exhibits and Repo****rtson Form 8-K**

 
| (a) Exhibits            |   |                                                                   |
|-------------------------|--------|------------------------------------------------------------------------|
|                    |   |                                                                   |
| 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 |
|                    |   |                                                                   |
|                    |   | A current report on Form 8-K dated February 25,  2003, was filed on    |
|                    |   | February 28, 2003 to report the public disclosure of  a reorganization |
|                    |   | of the Company’s workforce.                                       |
|                    |   |                                                                   |
|                    |   | A current report on Form 8-K dated March 27, 2003,  was filed on       |
|                    |   | March 31, 2003 to report the public disclosure of a  notification      |
|                    |   | received from The Nasdaq Stock Market, Inc. advising  that the         |
|                    |   | Company’s common stock had not maintained a minimum  market       |
|                    |   | value of publicly held shares of $1 million as  required for continued |
|                    |   | inclusion in the Nasdaq SmallCap Market in  accordance with            |
|                    |   | Marketplace Rule 4310(c)(7).                                           |

 

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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:  May  14, 2003 |   |                                                  |

 

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**CERTIFICATION**

 

I, Keith A. Peterson, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Phoenix Gold International, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial 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.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                    designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

(c)                    presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)                    all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                   any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| May 14, 2003 |   |                                 |
|--------------|--------|--------------------------------------|
|         |   |                                 |
|         |   | /s/  Keith A.  Peterson         |   |
|         |   | Chairman and Chief Executive Officer |
|         |   | (Principal Executive Officer)        |

 

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**CERTIFICATION**

 

I, Joseph K. O’Brien, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Phoenix Gold International, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial 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.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(d)                   designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

(f)                      presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of the registrant’sboard of directors (or persons performing the equivalent functions):

 

(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)                   any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| May 14, 2003 |   |                                                   |
|--------------|--------|--------------------------------------------------------|
|         |   |                                                   |
|         |   | /s/  Joseph  K. O’Brien                      |   |
|         |   | Vice President, Chief Financial Officer and  Secretary |
|         |   | (Principal Financial and Accounting Officer)           |

 

20

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**INDEX TOEXHIBITS**

 
| **Exhibit** |   |                                                                |
|-------------|--------|---------------------------------------------------------------------|
|        |   |                                                                |
| 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                                          |

 

21

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