SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2001
OR
[ ] 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 000-25277
PACIFIC MAGTRON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0353141
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1600 California Circle, Milpitas, California 95035
(Address of Principal Executive Offices)
(408) 956-8888
(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 the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 [X] No [ ]
Applicable Only to Corporate Issuers
Common Stock, $0.001 par value per share:
10,428,300 shares issued and outstanding at August 14, 2001
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2001
(Unaudited) and December 31, 2000 1-2
Consolidated statements of operations for the three months
and six months ended June 30, 2001 and 2000 (Unaudited) 3
Consolidated statements of cash flows for the six months
ended June 30, 2001 and 2000 (Unaudited) 4
Notes to consolidated financial statements 5-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 18
Part II - Other Information
Item 2. - Changes in Securities and Use of Proceeds 19
Item 4. - Submission of Matters to a Vote of Security Holders 19
Item 6. - Exhibits and Reports on Form 8-K 19-20
Signature
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,531,000 $ 4,874,200
Accounts receivable, net of allowance for
doubtful accounts of $225,000 in 2001
and $175,000 in 2000 4,236,600 5,629,200
Inventories 4,192,200 3,917,900
Prepaid expenses and other current assets 532,700 446,500
Income taxes receivable 450,300 215,700
Notes receivable from shareholders 128,600 171,400
Deferred income taxes 80,300 80,300
----------- -----------
TOTAL CURRENT ASSETS 12,151,700 15,335,200
PROPERTY, PLANT AND EQUIPMENT, NET 4,677,700 4,752,300
INVESTMENT IN RISING EDGE 458,100 468,000
INVESTMENT IN TARGETFIRST -- 250,000
DEPOSITS AND OTHER ASSETS 78,100 55,600
----------- -----------
$17,365,600 $20,861,100
=========== ===========
See accompanying notes to consolidated financial statements.
1
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 53,100 $ 51,400
Floor plan inventory loans 3,500 1,329,500
Accounts payable 5,345,100 5,788,600
Accrued expenses 326,800 541,300
------------ ------------
TOTAL CURRENT LIABILITIES 5,728,500 7,710,800
NOTES PAYABLE, LESS CURRENT PORTION 3,259,400 3,286,200
DEFERRED INCOME TAXES 6,300 6,300
------------ ------------
TOTAL LIABILITIES 8,994,200 11,003,300
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000,000
shares authorized; no shares issued and
outstanding -- --
Common stock, $0.001 par value; 25,000,000 shares
authorized; 10,431,500 and 10,100,000 shares
issued and outstanding at June 30, 2001 and
December 31, 2000 respectively 10,400 10,100
Additional paid-in capital 1,662,800 1,463,100
Retained earnings 6,699,300 8,384,600
------------ ------------
8,372,500 9,857,800
Less: Treasury stock, at cost, 1,800 and
0 shares at June 30, 2001 and
December 31, 2000 respectively (1,100) --
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 8,371,400 9,857,800
------------ ------------
$ 17,365,600 $ 20,861,100
============ ============
See accompanying notes to consolidated financial statements.
2
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SALES $ 14,961,400 $ 21,984,300 $ 34,917,900 $ 44,799,500
COST OF SALES 13,981,700 20,213,300 32,558,200 41,246,700
------------ ------------ ------------ ------------
GROSS MARGIN 979,700 1,771,000 2,359,700 3,552,800
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,051,100 1,557,100 4,141,200 3,218,600
------------ ------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (1,071,400) 213,900 (1,781,500) 334,200
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME:
Interest income on shareholder notes -- 2,200 -- 4,500
Interest income 34,300 59,700 88,000 110,600
Interest expense (67,800) (72,500) (141,700) (144,600)
Equity loss on investment (3,900) -- (9,900) --
Impairment loss on investment (250,000) -- (250,000) --
Other income 7,000 -- 14,200 --
------------ ------------ ------------ ------------
TOTAL OTHER (EXPENSE) (280,400) (10,600) (299,400) (29,500)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (1,351,800) 203,300 (2,080,900) 304,700
INCOME TAX BENEFIT (EXPENSE) 140,000 (81,300) 365,500 (121,900)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST (1,211,800) 122,000 (1,715,400) 182,800
MINORITY INTEREST IN FRONTLINE LOSS -- -- 30,000 --
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (1,211,800) $ 122,000 $ (1,685,400) $ 182,800
============ ============ ============ ============
Basic and diluted (loss) earnings per share $ (0.12) $ 0.01 $ (0.17) $ 0.02
============ ============ ============ ============
Basic weighted average common shares outstanding 10,162,200 10,100,000 10,131,300 10,100,000
Stock options -- 49,800 -- 67,300
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 10,162,200 10,149,800 10,131,300 10,167,300
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 2000
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,685,400) $ 182,800
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Equity in loss in investment 9,900 --
Impairment loss on investment - TargetFirst 250,000 --
Depreciation and amortization 135,100 102,300
Provision for doubtful accounts 50,000 --
Loss on disposal of fixed assets 1,400 --
Changes in operating assets and liabilities:
Accounts receivable 1,342,600 (346,100)
Inventories (274,300) (390,600)
Prepaid expenses and other current assets 113,800 28,600
Income tax receivable (234,600) (215,700)
Accounts payable (443,500) (201,100)
Accrued expenses (214,500) (100,000)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (949,500) (939,800)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes and interest receivable from shareholders 42,800 (4,500)
Investments in Rising Edge and TargetFirst -- (750,000)
Deposits and other assets (22,500) 501,400
Acquisition of property and equipment (61,800) (22,800)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (41,500) (275,900)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in floor plan inventory loans (1,326,000) 1,090,200
Principal payments on notes payable (25,100) (23,200)
Treasury stock purchases (1,100) --
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,352,200) 1,067,000
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,343,200) (148,700)
CASH AND CASH EQUIVALENTS, beginning of period 4,874,200 4,416,300
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,531,000 $ 4,267,600
=========== ===========
See accompanying notes to consolidated financial statements.
4
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Pacific Magtron International Corp. (formerly Wildfire Capital Corporation, a
publicly traded shell corporation) (the Company or PMIC), a Nevada corporation,
was incorporated on January 8, 1996.
On July 17, 1998 the Company completed the acquisition of 100% of the
outstanding common stock of Pacific Magtron, Inc. (PMI), in exchange for
9,000,000 shares of the Company's $.001 par value common stock. For accounting
purposes, the acquisition has been treated as the acquisition of the Company by
PMI with PMI as the acquirer (reverse acquisition).
PMI, a California corporation, was incorporated on August 11, 1989. PMI's
principal activity consists of the importation and wholesale distribution of
electronics products, computer components, and computer peripheral equipment
throughout the United States.
In May 1998, the Company formed its Frontline Network Consulting (Frontline)
division, a corporate information systems group that serves the networking and
personal computer requirements of corporate customers. In July 2000, the Company
formed Frontline Network Consulting, Inc. (FNC), a California corporation.
Effective October 1, 2000, PMI transferred the assets and liabilities of the
Frontline division to FNC. Concurrently, FNC issued 20,000,000 shares to the
Company and became a wholly-owned subsidiary. On January 1, 2001, FNC issued
3,000,000 shares of its common stock to three key FNC employees for past
services rendered pursuant to certain Employee Stock Purchase Agreements. As a
result of this transaction, the Company's ownership interest in FNC was reduced
to 87%.
In May 1999, the Company entered into a Management Operating Agreement which
provided for a 50% ownership interest in Lea Publishing, LLC, a California
limited liability company ("Lea") formed in January 1999 to develop, sell and
license software designed to provide Internet users, resellers and providers
advanced solutions and applications. On June 13, 2000, the Company increased its
direct and indirect interest in Lea to 62.5% by completing its investment in 25%
of the outstanding common stock of Rising Edge Technologies, the other 50% owner
of Lea. Lea is a development stage company.
In August 2000, PMI formed Pacific Magtron (GA), Inc., a Georgia corporation
whose principal activity is the wholesale distribution of PMI's products in the
eastern United States market.
2. CONSOLIDATION AND UNCONSOLIDATED INVESTEES
The accompany consolidated financial statements include the accounts of Pacific
Magtron International Corp. and its wholly-owned subsidiaries, PMI and Pacific
Magtron (GA), Inc., and majority-owned subsidiaries, FNC and Lea. All
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Investments in companies in which financial ownership is
at least 20%, but less than a majority of the voting stock, are accounted for
using the equity method. Investments with ownership of less than 20% are
accounted for on the cost method.
3. FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements at June 30, 2001 and for the
three and six month periods ended June 30, 2001 and 2000 are unaudited. However,
they have been prepared on the same basis as the annual financial statements
and, in the opinion of management, reflect all adjustments, which include only
5
normal recurring adjustments, necessary for a fair presentation of consolidated
financial position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes for the year ended December 31, 2000 presented in the Company's Form 10-K.
4. NEW ACCOUNTING PRONOUNCEMENTS
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." This issue
addresses the income statement classification for shipping and handling fees and
costs by companies. The Company believes that its current accounting policies
are in conformity with this issue and does not believe that Issue 00-10 will
have a material effect on the Company's financial statements.
In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement,
and income statement classification for sales incentives offered voluntarily by
a vendor without charge to customers that can be used in, or are exercisable by
a customer as a result of, a single exchange transaction. The Company is
currently analyzing Issue 00-14. However, based on management's current
understanding and interpretation, Issue 00-14 is not expected to have a material
impact on the Company's financial position or results of operations, except that
certain reclassifications may occur.
In April 2001, the EITF reached a consensus on Issue 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services." This issue addresses the recognition, measurement and
income statement classification of consideration, other than that directly
addressed by Issue 00-14, from a vendor to a retailer or wholesaler. The Company
is currently analyzing Issue 00-25. However, based on management's current
understanding and interpretation, Issue 00-25 is not expected to have a material
impact on the Company's financial position or results of operations, except that
certain reclassifications may occur. The consensus's reached in Issue 00-25 and
Issue 00-14 (amended by Issue 00-25) are effective for fiscal quarters beginning
after December 15, 2001.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
6
5. STOCK OPTIONS AND EQUITY AWARDS
During the six months ended June 30, 2001, 570,000 options to purchase the
Company's common stock at $0.88 to $0.97 per share were granted to certain
officer shareholders and directors of the Company. No issued options were
exercised during the six months ended June 30, 2001.
On January 1, 2001, under the terms of the 2000 FNC Stock Option Plan, FNC
granted 3,905,000 options to purchase its common stock at $0.01 per share (fair
market value based upon an independent appraisal) to employees. Also in order to
preserve FNC's election to file consolidated tax returns, which require at least
an 80% ownership interest by the Company, FNC granted to the Company 20,000,000
options to purchase its common stock at $0.01 per share. No FNC options were
exercised and 655,000 FNC options were cancelled due to employee terminations
during the six months ended June 30, 2001.
During the three and six month periods ended June 30, 2001, options to purchase
843,222 shares of the Company's common stock were excluded from the calculation
of diluted weighted average common shares outstanding because their effect would
be antidilutive.
6. STATEMENTS OF CASH FLOWS
Cash was paid during the six months ended June 30, 2001 and 2000 for:
SIX MONTHS ENDING JUNE 30, 2001 2000
-------- --------
Income taxes $1,500 $157,000
======== ========
Interest $141,700 $144,600
======== ========
As further discussed in Note 12, the Company issued 333,333 shares of its common
stock (valued at $200,000) in June 2001 in exchange for prepaid advertising
services.
7. INVESTMENTS
In May 1999, the Company and Rising Edge Technologies, Ltd., a corporation based
in Taiwan (Rising Edge), entered into an Operating Agreement with Lea
Publishing, LLC, a California limited liability company (Lea) formed in January
1999. The objective of Lea is to provide internet users, resellers and providers
advanced solutions and applications. Lea is developing various software
products. Prior to June 13, 2000, the Company and Rising Edge each owned a 50%
interest in Lea. The brother of a director, officer and principal shareholder of
the Company is also a director, officer and the majority shareholder of Rising
Edge (Rising Edge Majority Shareholder). The Company has no commitment to fund
future losses of Lea beyond its investment or guarantee any debt that Lea may
incur. On June 13, 2000, the Company purchased a 25% ownership interest in
Rising Edge common stock for $500,000 from the Rising Edge Majority Shareholder.
As such, the Company has a 62.5% combined direct and indirect ownership interest
in Lea, which requires the consolidation of Lea with the Company. The Company is
accounting for its investment in Rising Edge by the equity method whereby 25% of
the equity interest in the net income or loss of Rising Edge (excluding Rising
Edge's portion of the results of Lea and all inter-company transactions) flows
through to the Company. During the six months ended June 30, 2001, Lea incurred
$21,800 of software consulting expenses. The Company's share of Rising Edge's
loss during the six months ended June 30, 2001 was $9,900.
In November 1999, Lea entered into a software development contract with Rising
Edge which calls for the development of certain internet software by Rising Edge
for a $940,000 fee. Of this amount, the contract specifies that $440,000 shall
be applied to services performed in 1999 and $500,000 shall be applied to
services to be performed in 2000, and the Company and Rising Edge are each
7
responsible for $470,000 of the fee. During 1999, the Company paid $470,000 for
its portion of the total fee payable under the contract. During 2000, Rising
Edge performed $100,000 worth of services as specified under the contract. In
January 2001, the contract was terminated by mutual agreement of the parties and
the Company's remaining portion of the software development fees paid under the
contract, totaling $200,000, was refunded.
In January 2000, the Company acquired, in a private placement, 485,900 shares of
convertible preferred stock of an unrelated nonpublic company, TargetFirst, Inc.
(formerly ClickRebates.com), for approximately $250,000 under the terms of a
Series A Preferred Stock Purchase Agreement. The Company's investment in
TargetFirst Inc., which represents approximately 8% of the $3 million preferred
stock offering, was being accounted for using the cost method. In connection
with the Company's ongoing evaluation of the net realizable value of this
investment, the Company elected to reserve the investment 100% during the second
quarter of 2001.
8. SEGMENT INFORMATION
The Company has four reportable segments: PMI, PMIGA, Frontline and Lea. PMI
imports and distributes electronic products, computer components, and computer
peripheral equipment to various customers throughout the United States, with
PMIGA focusing on the east coast area. Frontline serves the networking and
personal computer requirements of corporate customers. Lea is developing
advanced solutions and applications for internet users, resellers and providers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies presented in the Company's Form 10-K.
The Company evaluates performance based on income or loss before income taxes,
not including nonrecurring gains or losses. Inter-segment transfers between
reportable segments have been insignificant. The Company's reportable segments
are strategic business units that offer different products and services. They
are managed separately because each business requires different technology and
marketing strategies.
The following table presents information about reported segment profit or loss
for the six months ended June 30, 2001:
PMI Frontline PMI-GA LEA Totals
------------ -------------- ------------ ------------ ------------
Revenues from
external customers $ 28,000,100 $ 1,545,900(1) $ 5,371,900 $ -- $ 34,917,900
Segment (loss) before income
taxes and minority interest (870,100) (508,700) (422,800) (30,100) (1,831,700)
The following table presents information about reported segment profit or loss
for the six months ended June 30, 2000:
PMI Frontline LEA Totals
----------- ------------- ----------- -----------
Revenues from
external customers $40,991,600 $ 3,807,900(1) $ -- $44,799,500
Segment income
before income taxes 274,500 30,200 -- 304,700
8
The following table presents information about reported segment profit or loss
for the three months ended June 30, 2001:
PMI Frontline PMI-GA LEA Totals
------------ -------------- ------------ ------------ ------------
Revenues from
external customers $ 11,788,400 $ 802,100(2) $ 2,370,900 $ -- $ 14,961,400
Segment (loss) before income
taxes and minority interest (650,900) (232,400) (193,900) (30,100) (1,107,300)
The following table presents information about reported segment profit or loss
for the three months ended June 30, 2000:
PMI Frontline LEA Totals
----------- ------------- ----------- -----------
Revenues from
external customers $19,390,800 $ 2,593,500(2) $ -- $21,984,300
Segment income before
income taxes 154,900 48,400 -- 203,300
----------
(1) Includes service revenues of $78,500 and $105,700 in 2001 and 2000,
respectively.
(2) Includes service revenues of $29,200 and $72,800 in 2001 and 2000,
respectively.
The following is a reconciliation of reportable segment loss before income taxes
to the Company's consolidated total:
Three months Six months
Ended Ended
June 30, 2001 June 30,2001
------------- ------------
Total loss before income taxes and minority
interest for reportable segments $(1,107,300) $(1,831,700)
Inter-company transactions 9,400 10,700
Equity in loss in investment in Rising Edge (3,900) (9,900)
Impairment loss on investment (250,000) (250,000)
----------- -----------
Consolidated loss before income taxes
and minority interest $(1,351,800) $(2,080,900)
----------- -----------
The total of reportable segment revenues equals the Company's consolidated
revenues for the three and six-month periods ended June 30, 2001.
9. FLOOR PLAN INVENTORY LOANS AND LINE OF CREDIT
As of December 31, 2000, the Company had $7 million (including a $1 million
letter of credit sub-limit) automatically renewing floor plan inventory loan
available from a financial institution which was collateralized by the purchased
inventory and any proceeds from its sale or disposition. The $1 million letter
of credit was being maintained as security for inventory purchased on terms from
vendors in Taiwan and required an annual commitment fee of $15,000. Borrowings
9
under the floor plan inventory loan totaled $1,329,500 as of December 31, 2000
and were subject to 30 to 60 days repayment terms, at which time interest began
to accrue at the prime rate. In March 2001, the financial institution that
provided this floor plan inventory loan filed bankruptcy.
On July 13, 2001, Pacific Magtron Inc. (PMI) and Pacific Magtron (GA) Inc.
(PMI-GA) obtained a new $4 million (subject to credit and borrowing base
limitations) accounts receivable and inventory financing facility from
Transamerica Commercial Finance Corporation (the "Bank"). This new credit
facility has a term of two years and subject to automatic renewal from year to
year thereafter. The credit facility can be terminated by either party upon 60
days' prior written notice and immediately if the Companies lose the right to
sell or deal in any product line of inventory. The Companies are subject to an
early termination fee equal to 1% of their then established credit limit.
The facility includes a $2.4 million inventory line (subject to a borrowing base
of up to 85% of eligible accounts receivable plus up to $1,500,000 of eligible
inventories), a $600,000 working capital line and a $1 million letter of credit
facility used as security for inventory purchased on term from vendors in
Taiwan. Borrowing under the inventory loans are subject to 30 to 60 days
repayment, at which time interest begins to accrue at the prime rate, which was
6.75% at June 30, 2001. Draws on the working capital line also accrue interest
at the prime rate.
Under the agreement, PMI and PMI-GA granted security interest in all of their
accounts, chattel paper, cash, documents, equipment, fixtures, general
intangibles, instruments, inventories, leases, supplier benefits and proceeds of
the foregoing. The Companies are also required to maintain certain financial
covenants. As of June 30, 2001, the Companies were in compliance with these
covenants.
The credit facility provided by the Bank is guaranteed by both PMIC and
Frontline. As of June 30, 2001, there were no draws on the credit line.
In March, 2001, Frontline obtained a $2 million discretionary credit facility
from Deutsche Financial Services Corporation ("Deutsche") to purchase inventory.
To secure payment, Deutsche obtained a security interest in all of Frontline's
inventory, equipment, fixtures, accounts, reserves, documents, general
intangible assets and all judgements, claims, insurance policies, and payments
owed or made to Frontline. Under the loan agreement, all draws mature in 30
days. Thereafter, interest accrues at the lesser of 16% per annum or at the
maximum lawful contract rate of interest permitted under applicable law. As of
June 30, 2001, Frontline had an outstanding balance of $3,500 under this credit
facility.
Frontline is required to maintain certain financial covenants to qualify for the
credit line, and the company was in compliance with the requirements as of June
30, 2001. The credit facility provided to Frontline by the financial institution
is guaranteed by PMIC. The credit facility can be terminated by Deutsche with 30
days prior notice or immediately upon a default.
10. NOTES RECEIVABLES FROM SHAREHOLDERS
As of June 30, 2001 and December 31, 2000, notes receivable from two officer
shareholders aggregated $128,600 and $171,400, respectively. In December 2000,
the repayment terms of these notes were renegotiated to require monthly
principal payments, without interest, to pay off the loan by December 31, 2001.
Also, based upon the renegotiated terms, periodic bonuses are paid to the
officer shareholders, and the proceeds are used to repay the notes.
11. TREASURY STOCK
On May 7, 2001, the Company's Board of Directors authorized a share repurchase
program whereby, up to $100,000 worth of the Company's common stock may be
10
repurchased at a maximum price of $1.25 per share and held in treasury. As of
June 30, 2001, the Company acquired 1,800 shares of its common stock at a cost
of $1,100. Subsequent to June 30, 2001, an additional 3,200 shares were acquired
for treasury at a cost of $2,000.
12. BARTER AGREEMENT
On June 14, 2001, the Company issued 333,333 shares of its common stock to an
unrelated party in exchange for radio advertising services to be received over a
three-year period. All of the shares vested upon issuance and are non
forfeitable, resulting in a measurement date and final valuation of these shares
of $200,000 based upon the market price of the Company's common stock on the
date of issuance. Included in prepaid expenses and other current assets is
$200,000 which will be recorded as an expense in the statement of operations as
the services are provided over the three year period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The accompanying discussion and analysis of financial condition and results of
operations is based on the consolidated financial statements, which are included
elsewhere in this Quarterly Report. The following discussion and analysis should
be read in conjunction with the accompanying financial statements and related
notes thereto. This discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Our actual results could
differ materially from those set forth in the forward-looking statements.
Forward-looking statements, by their very nature, include risks and
uncertainties. Accordingly, our actual results could differ materially from
those discussed in this Report. A wide variety of factors could adversely impact
revenues, profitability, cash flows and capital needs. Such factors, many of
which are beyond our control, include, but are not limited to, those identified
in the Company's Form 10-K for the fiscal year ended December 31, 2000 under the
heading "Cautionary Factors That May Affect Future Results", such as
technological changes, diminished marketability of inventory, need for
additional capital, increased warranty costs, competition, recruitment and
retention of technical personnel, dependence on continued manufacturer
certification, dependence on certain suppliers, risks associated with the
projects in which we are engaged to complete, the risks associated with our LEA
venture, risks associated with our investments in Rising Edge and TargetFirst,
and dependence on key personnel.
GENERAL
We provide solutions to customers in several synergetic and rapidly growing
segments of the computer industry. To capture the expanding corporate IT
infrastructure market, we established Frontline Network Consulting (FNC)
division in 1998 to provide professional services to mid-market companies
focused on consulting, implementation and support services of Internet
technology solutions. This division was incorporated as a separate subsidiary
during 2000. In January 2001, Frontline issued 3,000,000 of its shares to three
of its key employees resulting in a decrease in our ownership interest of FNC to
87%. We also invested in a 50%-owned joint software venture, Lea Publishing, LLC
(Lea), in 1999 to focus on Internet-based software application technologies to
enhance corporate IT services. Lea is a development stage company. In June 2000,
we increased our direct and indirect interest in LEA to 62.5% by completing our
purchase of 25% of the outstanding common stock of Rising Edge Technologies, the
other 50% owner of LEA. Finally, our other subsidiaries, Pacific Magtron, Inc.
(PMI) and Pacific Magtron (GA), Inc. (PMI-GA), provide the wholesale
distribution of computer multimedia and storage peripheral products and provide
value-added packaged solutions to a wide range of resellers, vendors, OEM's and
systems integrators. PMI-GA commenced operations in October 2000 and distributes
PMI's products in the eastern United States market. As used herein and unless
otherwise indicated, the terms "Company", "we" and "our" refer to Pacific
Magtron International Corp. and our subsidiaries.
Our stock is currently traded on The Nasdaq SmallCap Market. However, we
received notice in July 2001 from Nasdaq that we failed to maintain a minimum
market value of public float of $1 million and a minimum bid price of $1.00 over
30 consecutive trading days as required by Nasdaq's rules. We have until October
1, 2001 to regain compliance with these rules. If we fail to demonstrate
compliance with these rules by October 1, 2001, our stock will be delisted.
12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.5 91.9 93.2 92.1
----- ----- ----- -----
Gross margin 6.5 8.1 6.8 7.9
Operating expenses 13.7 7.1 11.8 7.2
----- ----- ----- -----
(Loss) income from operations (7.2) 1.0 (5.0) 0.7
Other (expense) (1.9) 0.0 (1.0) 0.0
Income tax benefit (expense) 1.0 (0.4) 1.1 (0.3)
Minority interest in FNC 0.0 0.0 0.1 0.0
----- ----- ----- -----
Net (loss) income (8.1)% 0.6% (4.8)% 0.4%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Sales for the three months ended June 30, 2001 were $14,961,400, a decrease of
$7,022,900, or approximately 32%, compared to $21,984,300 for the three months
ended June 30, 2000. There was a decrease in sales attributable to our computer
products subsidiaries (PMI and PMI-GA) for the three months ended June 30, 2001
of $5,225,600 or approximately 27%, compared to the corresponding period in
2000. Sales recognized by PMI-GA were approximately $2,370,900 during the three
months ended June 30, 2001. The decrease was due to the continuous decline in
the computer component market and the lack of any new and innovative high-demand
products in the multimedia arena during a period of economic slowdown. In
addition, we believe that the uncertainty regarding the economy depressed sales
during the first half of 2001 as customers were postponing their buying
decisions. Approximately $802,100 of the sales recognized by the Company during
the second quarter of 2001 was attributable to FNC, a decrease of $1,791,400, or
approximately 69%, compared to $2,593,500 for the three months ended June 30,
2000 as FNC has experienced an overall slowdown in the IT market, as well as
pricing pressures and increased competition.
Gross margin for the three months ended June 30, 2001 was $979,700, a decrease
of $791,300 or 44.7%, compared to $1,771,000 for the three months ended June 30,
2000. The gross margin as a percentage of sales decreased from 8.1% for the
three months ended June 30, 2000 to 6.6% for the three months ended June 30,
2001. This decrease in gross margin is a result of reduction of vendor rebate
and advertising funding programs. Additionally, our computer products division
experienced pricing pressures in selling its products due to the economic
slowdown, and because there was an excess supply of computer products during the
first half of 2001 which reduced demand and increased pressure on gross margin.
The gross margin generated by our computer products subsidiaries (PMI and
PMI-GA) for the three months ended June 30, 2001 was $879,700. In the same
period of last year, the gross margin was $1,435,900, a decrease of $556,200 or
approximately 38.7%. Gross margin relating to PMI-GA for the three months ended
June 30, 2001 was $115,400. Gross margin relating to the FNC for the three
months ended June 30, 2001 was $100,000, or 12.5% of FNC's sales during the same
period. Gross margin relating to the FNC division for the three months ended
June 30, 2000 was $335,200, or 12.9% of FNC's sales during the same period.
However, since FNC's sales levels were relatively insignificant in relation to
that of the Company's computer products group, the higher gross margin
percentage earned by FNC had only a minor effect on the overall gross margin
during the three months ended June 30, 2001.
13
Selling, general, and administrative for the three months ended June 30, 2001
were $2,051,100, an increase of $494,000, or 32%, compared to $1,557,100 for the
three months ended June 30, 2000. Although we implemented cost cutting measures,
such as reducing our head count from 103 people in the first quarter of 2001 to
98 people in second quarter of 2001, in anticipation of the economic slowdown,
expenses increased primarily due to the addition of PMI-GA operations. As a
percentage of sales, selling, general and administrative expenses increased to
13.7% for the three months ended June 30, 2001 compared to 7.1% for the three
months ended June 30, 2000 resulting from an increase in our operating expenses
during a period of decreased sales.
For the three months ended June 30, 2001, we incurred a loss from operations of
$1,071,400 compared to income from operations of $213,900 for the three months
ended June 30, 2000. As a percentage of sales, loss from operations was (7.2)%
for three months ended June 30, 2001 compared to income from operations of 1.0%
for the three months ended June 30, 2000.
Interest expense for the three months ended June 30, 2001 was $67,800, a
decrease of $4,700, or 6.5%, compared to $72,500 for the three months ended June
30, 2000. This decrease was due to a reduction in the floating interest rate
charged on one of the mortgages on our office building facility. Interest income
decreased from $61,900 for the three months ended June 30, 2000 to $34,300 for
the three months ended June 30, 2001, a reduction of $27,600, or 44.6%, which
was principally due to lower market interest rates available for short-term
investments of cash and cash equivalents and a reduction in cash balances.
During the three months ended June 30, 2001, we established a 100% reserve on
our TargetFirst Inc. investment as a result of our ongoing evaluation of the net
realizable value of this investment, resulting in an impairment loss of
$250,000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Sales for the six months ended June 30, 2001 were $34,917,900, a decrease of
$9,881,600, or approximately 22%, compared to $44,799,500 for the six months
ended June 30, 2000. There was a decrease in sales attributable to our computer
products subsidiaries (PMI and PMI-GA) for the six months ended June 30,2001 of
$7,619,600 or approximately 18.6% compared to the corresponding period of June
30, 2000. Sales recognized by PMI-GA were approximately $5,371,900 during the
six months ended June 30, 2001. The decrease was due to the overall decline in
the computer component market and the lack of any new and innovative high-demand
products in the multimedia arena during a period of continuous economic
slowdown. Because of the uncertainty regarding the economic down turn, customers
were delaying their purchase decisions. Approximately $1,545,900 of the sales
earned by us during the six months ended June 30, 2001 was attributable to FNC,
a decrease of $2,261,900 or approximately 59% compared to $3,807,800 for the six
months ended June 30, 2000 as FNC has experienced pricing pressures and
increased competition.
Gross margin for the six months ended June 30, 2001 was $2,359,700, a decrease
of $1,193,100, or 33.6%, compared to $3,552,800 for the six months ended June
30, 2000. The gross margin as a percentage of sales decreased from 7.9% for the
six months ended June 30, 2000 to 6.7% for the six months ended June 30, 2001.
This decrease in gross margin percentage arose primarily as a result of
reduction in vendor rebate, advertising funding programs and increase in freight
cost. Additionally, our computer products division experienced pricing pressures
in selling its products. We believe that because of the economic slowdown, there
was an excess supply of computer products during the first half of 2001 which
reduced demand and increased pressure on gross margins. The gross margin
generated by our computer products subsidiaries (PMI and PMI-GA) for the six
months ended June 30, 2001 was $2,178,300, a decrease of $871,300 or 28.5%
compared to $3,049,600 for the six months ended June 30, 2000. The gross margin
relating to PMI-GA for the six months ended June 30, 2001 was $228,300. Gross
margin relating to FNC for the six months ended June 30,2001 was $181,400, or
14
11.7% of FNC's sales during the same period as compared to $503,200, or 13.2% of
FNC's sales during the six months ended June 30, 2000. This decrease in gross
margin was primarily a result of pricing pressures and weaker demand for higher
margin corporate IT planning services. Since FNC's sales levels accounted for
only 4% and 8.5% of our consolidated sales during the first quarter of 2001 and
2000, respectively, the gross margin percentage earned by FNC had only a minor
effect on our overall gross margin in both periods. Gross margin relating to
PMI-GA for the six months ended June 30, 2001 was $228,300, or 4.2% of PMI-GA's
sales.
Selling, general, administrative expenses for the six months ended June 30, 2001
were $4,141,200, an increase of $922,600, or 29%, compared to $3,218,600 for the
six months ended June 30, 2000. Although we implemented cost cutting measures in
anticipation of the economic slowdown, expenses increased primarily due to the
continued establishment of our FNC and PMI-GA operations, including among other
things, additional expenses associated with our new distribution facility in
Georgia. We reduced our headcount by 4 people during the first quarter of 2001
and again by 5 people during the second quarter of 2001. During the first half
of 2001, we also increased spending for professional services to assist in the
formation of an acquisition strategy. As a percentage of sales, selling, general
and administrative expenses increased to 11.8% for the six months ended June 30,
2001 compared to 7.2% for the six months ended June 30, 2000 resulting from an
increase in our operating expenses during a period of decreased sales.
For the six months ended June 30, 2001 we incurred a loss from operations of
($1,781,500) compared to income from operations of $334,200 for the six months
ended June 30, 2000. As a percentage of sales, loss from operations was (5.0%)
for the six months ended June 30, 2001 compared to income from operations of
0.7% for the six months ended June 30, 2000. This change was primarily due to
the decrease in sales and gross margin percentage and increase in operating
expenses during the period.
Interest expense for the six months ended June 30, 2001 was $141,700, a decrease
of $2,800, or 2%, compared to $144,600 for the six months ended June 30, 2000.
Interest income decreased from $115,100 for the six months ended June 30, 2000
to $88,000 for the six months ended June 30, 2001, a decrease of $27,100, or
24%, which was principally caused by lower market interest rates available for
short term investments of cash and cash equivalents and a reduction in cash
balances.
During the six months ended June 30, 2001, we established a 100% reserve on our
TargetFirst Inc. investment as a result of our ongoing evaluation of the net
realizable value of this investment, resulting in an impairment loss of
$250,000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through cash
generated by operations and borrowings under our floor plan inventory loan.
At June 30, 2001, we had consolidated cash and cash equivalents totaling
$2,531,000 and working capital of $6,423,200. At December 31, 2000, we had
consolidated cash and cash equivalents totaling $4,874,200 and working capital
of $7,624,400.
Net cash used in operating activities during the six months ended June 30, 2001
was $949,500, which principally reflected the net loss incurred during the
period, which was partially offset by a decrease in accounts receivable.
Net cash used in investing activities during the six months ended June 30, 2001
was $41,500, primarily resulting from the acquisition of property and equipment,
which was partially offset by the repayment of the notes receivable owed by
certain shareholders.
Net cash used by financing activities was $1,352,200 for the six months ended
June 30, 2001, primarily from the decrease in the floor plan inventory loan as
well as payment of the mortgage loans for our facility. The floor plan inventory
loan was terminated during the three months ended March 31, 2001 as the creditor
filed for bankruptcy.
15
On July 13, 2001, Pacific Magtron Inc. (PMI) and Pacific Magtron (GA) Inc.
(PMI-GA) obtained a new $4 million (subject to credit and borrowing base
limitations) accounts receivable and inventory financing facility from
Transamerica Commercial Finance Corporation (the "Bank"). This new credit
facility has a term of two years and subject to automatic renewal from year to
year thereafter. The credit facility can be terminated by either party upon 60
days' prior written notice and immediately if the Companies lose the right to
sell or deal in any product line of inventory. The Companies are subject to an
early termination fee equal to 1% of their then established credit limit.
The facility includes a $2.4 million inventory line (subject to a borrowing base
of up to 85% of eligible accounts receivable plus up to $1,500,000 of eligible
inventories), a $600,000 working capital line and a $1 million letter of credit
facility used as security for inventory purchased on term from vendors in
Taiwan. Borrowing under the inventory loans are subject to 30 to 60 days
repayment, at which time interest begins to accrue at the prime rate, which was
6.75% at June 30, 2001. Draws on the working capital line also accrue interest
at the prime rate.
Under the agreement, PMI and PMI-GA granted security interest in all of their
accounts, chattel paper, cash, documents, equipment, fixtures, general
intangibles, instruments, inventories, leases, supplier benefits and proceeds of
the foregoing. The Companies are also required to maintain certain financial
covenants. As of June 30, 2001, the Companies were in compliance with these
covenants.
The credit facility provided by the Bank is guaranteed by both PMIC and
Frontline. As of June 30, 2001, there were no draws on the credit line.
In March, 2001, Frontline obtained a $2 million discretionary credit facility
from Deutsche Financial Services Corporation ("Deutsche") to purchase inventory.
To secure payment, Deutsche obtained a security interest in all of Frontline's
inventory, equipment, fixtures, accounts, reserves, documents, general
intangible assets and all judgements, claims, insurance policies, and payments
owed or made to Frontline. Under the loan agreement, all draws mature in 30
days. Thereafter, interest accrues at the lesser of 16% per annum or at the
maximum lawful contract rate of interest permitted under applicable law. As of
June 30, 2001, Frontline had an outstanding balance of $3,500 under this credit
facility.
Frontline is required to maintain certain financial covenants to qualify for the
credit line, and the company was in compliance with the requirements as of June
30, 2001. The credit facility provided to Frontline by the financial institution
is guaranteed by PMIC. The credit facility can be terminated by Deutsche with 30
days prior notice or immediately upon a default.
On May 7, 2001, our Board of Directors authorized a share repurchase program
whereby up to $100,000 worth of our common stock may be repurchased and held as
treasury stock. Through June 30, 2001, we purchased 1,800 shares for treasury at
a cost of $1,100 and an additional 3,200 shares at a cost of $2,000 subsequent
to June 30, 2001. We estimate that approximately $96,900 will be required to
repurchase these shares on the open market under this program during the
remainder of 2001 using available cash from operations.
We presently have insufficient working capital to pursue our long-term growth
plans with respect to expansion of our service and product offerings. Moreover,
we expect that additional resources are needed to fund the development and
marketing of Lea's software. We believe, however, that the cash flow from
operations, borrowings under our credit facility and trade credit from suppliers
will satisfy our anticipated requirements for working capital to support our
present operations through the next 12 months.
Our stock is currently traded on The Nasdaq SmallCap Market. However, we
received notice in July 2001 from Nasdaq that we failed to maintain a minimum
16
market value of public float of $1 million and a minimum bid price of $1.00 over
30 consecutive trading days as required by Nasdaq's rules. We have until October
1, 2001 to regain compliance with these rules. If we fail to demonstrate
compliance with these rules by October 1, 2001, our stock will be delisted. We
are striving to comply with Nasdaq's rules before October 1, 2001. However, to
the extent that we fail in our endeavors, our stock will be quoted on the Over
the Counter Bulletin Board ("OTCBB"). It is important to understand that there
are significant consequences associated with our common stock trading on the
OTCBB rather than a national exchange. The effects of not being able to list our
stock on a national exchange include limited release of the market prices of our
securities, limited coverage of us by analysts, and volatility of our stock
prices due to low trading volume. These factors may limit our ability to issue
additional securities or to secure additional financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." This issue
addresses
the income statement classification for shipping and handling fees and costs by
companies. The Company believes that its current accounting policies are in
conformity with this issue and does not believe that Issue 00-10 will have a
material effect on the Company's financial statements.
In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement,
and income statement classification for sales incentives offered voluntarily by
a vendor without charge to customers that can be used in, or are exercisable by
a customer as a result of, a single exchange transaction. The Company is
currently analyzing Issue 00-14. However, based on management's current
understanding and interpretation, Issue 00-14 is not expected to have a material
impact on the Company's financial position or results of operations, except that
certain reclassifications may occur.
In April 2001, the EITF reached a consensus on Issue 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services." This issue addresses the recognition, measurement and
income statement classification of consideration, other than that directly
addressed by Issue 00-14, from a vendor to a retailer or wholesaler. The Company
is currently analyzing Issue 00-25. However, based on management's current
understanding and interpretation, Issue 00-25 is not expected to have a material
impact on the
Company's financial position or results of operations, except that certain
reclassifications may occur. The consensus's reached in Issue 00-25 and Issue
00-14 (amended by Issue 00-25) are effective for fiscal quarters beginning after
December 15, 2001.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
17
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
INFLATION
Inflation has not had a material effect upon our results of operations to date.
In the event the rate of inflation should accelerate in the future, it is
expected that to the extent resulting increased costs are not offset by
increased revenues, our operations may be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
one of our bank mortgage loans with a $2,422,900 balance at June 30, 2001 which
bears fluctuating interest based on the bank's 90-day LIBOR rate. We believe
that fluctuations in interest rates in the near term would not materially affect
our consolidated operating results. We are not exposed to material risk based on
exchange rate fluctuation or commodity price fluctuation.
18
PART II
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 14, 2001, the Company issued 333,333 shares of its common stock to
Business Talkradio Net, Inc. in exchange for radio advertising services to be
received over a three-year period. All of the shares vested upon issuance. The
Company believes that this issuance is exempt under Section 4(2) of the
Securities Act of 1933 as a transaction not involving any public offering. No
underwriter was involved in connection with the sale of securities.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of stockholders at its headquarters on
June 8, 2001. A total of 10,100,000 outstanding shares of common stock were
entitled to be voted at the meeting. 89.2% percent or 9,009,600 shares of the
outstanding shares were represented in person or by proxy.
(b) The following seven directors were each elected to a one-year term expiring
in 2002:
Theodore S. Li
9,009,600 shares of common stock for election
0 shares of common stock withheld
Hui Lee
9,009,600 shares of common stock for election
0 shares of common stock withheld
Jey Hsin Yao
9,009,600 shares of common stock for election
0 shares of common stock withheld
Betty Lin
9,009,600 shares of common stock for election
0 shares of common stock withheld
Hank C. Ta
9,009,600 shares of common stock for election
0 shares of common stock withheld
Limin Hu
9,009,600 shares of common stock for election
0 shares of common stock withheld
John C. Reed
9,009,600 shares of common stock for election
0 shares of common stock withheld
(c) Our stockholders approved the selection of BDO Seidman, LLP as auditors for
our 2001 fiscal year as follows: 9,009,500 shares voted in favor; 100 shares
voted against; and 0 shares abstained (including broker non-votes).
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Accounts Receivable and Inventory Financing Agreement
between Transamerica Commercial Finance Corporation, Pacific
Magtron, Inc. and Pacific Magtron (GA), Inc. dated July 13,
2001.
19
(b) Reports on Form 8-K
Form 8-K filed on June 24, 2001 to report that a footnote in our
Consolidated Financial Statements, included in our Annual Report,
inadvertently included a discussion regarding an acquisition by the
Company's Frontline subsidiary. The acquisition was never consummated
and an asset purchase agreement was not signed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized, this 14th day of August, 2001.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By /s/ Theodore S. Li
-----------------------------------------
Theodore S. Li
President and Chief Financial Officer
20