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 September 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 [ ]
Common Stock, $0.001 par value per share:
10,412,900 shares issued and outstanding at November 14, 2001
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of September 30, 2001
(Unaudited) and December 31, 2000 1-2
Consolidated statements of operations for the three months and
nine months ended September 30, 2001 and 2000 (Unaudited) 3
Consolidated statements of cash flows for the nine months
ended September 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 19
Part II - Other Information
Item 6. - Exhibits and Reports on Form 8-K 19
Signature
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,838,100 $ 4,874,200
Restricted cash 175,000 --
Accounts receivable, net of allowance for
doubtful accounts of $250,000 in 2001
and $175,000 in 2000 5,768,300 5,629,200
Inventories 3,987,200 3,917,900
Prepaid expenses and other current assets 595,100 446,500
Income taxes receivable 450,300 215,700
Notes receivable from shareholders 80,000 171,400
Deferred income taxes 80,300 80,300
----------- -----------
TOTAL CURRENT ASSETS 13,974,300 15,335,200
PROPERTY, PLANT AND EQUIPMENT, net 4,627,600 4,752,300
INVESTMENT IN RISING EDGE 453,400 468,000
INVESTMENT IN TARGETFIRST -- 250,000
DEPOSITS AND OTHER ASSETS 63,200 55,600
----------- -----------
$19,118,500 $20,861,100
=========== ===========
See accompanying notes to consolidated financial statements.
1
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 53,600 $ 51,400
Floor plan inventory loans 1,655,900 1,329,500
Accounts payable 5,892,900 5,788,600
Accrued expenses 271,400 541,300
------------ ------------
TOTAL CURRENT LIABILITIES 7,873,800 7,710,800
NOTES PAYABLE, less current portion 3,245,700 3,286,200
DEFERRED INCOME TAXES 6,300 6,300
------------ ------------
TOTAL LIABILITIES 11,125,800 11,003,300
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST - PMI-GA 5,000 --
------------ ------------
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; 10,412,900 and 10,100,000 shares
issued and outstanding at September 30, 2001
and December 31, 2000 respectively 10,400 10,100
Additional paid-in capital 1,662,800 1,463,100
Retained earnings 6,329,200 8,384,600
------------ ------------
8,002,400 9,857,800
Less: Treasury stock, at cost, 20,400 and
0 shares at September 30, 2001 and
December 31, 2000 respectively (14,700) --
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 7,987,700 9,857,800
------------ ------------
$ 19,118,500 $ 20,861,100
============ ============
See accompanying notes to consolidated financial statements.
2
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SALES $ 20,840,200 $ 24,125,300 $ 55,758,100 $ 68,924,800
COST OF SALES 19,375,000 22,369,700 51,933,200 63,616,400
------------ ------------ ------------ ------------
GROSS MARGIN 1,465,200 1,755,600 3,824,900 5,308,400
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 1,737,700 1,568,100 5,857,200 4,786,700
Research and development 46,800 100,000 68,500 100,000
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,784,500 1,668,100 5,925,700 4,886,700
------------ ------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (319,300) 87,500 (2,100,800) 421,700
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME:
Interest income on shareholder notes -- 2,300 -- 6,800
Interest income 20,000 56,400 107,900 167,000
Interest expense (60,200) (73,700) (201,900) (218,300)
Litigation settlement -- 300,000 -- 300,000
Equity loss on investment (4,600) (6,300) (14,500) (6,300)
Impairment loss on investment -- -- (250,000) --
Other (expense) income (14,100) -- 8,400 --
------------ ------------ ------------ ------------
TOTAL OTHER (EXPENSE) INCOME (58,900) 278,700 (350,100) 249,200
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (378,200) 366,200 (2,450,900) 670,900
INCOME TAX BENEFIT (EXPENSE) -- (161,800) 365,500 (283,700)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST (378,200) 204,400 (2,085,400) 387,200
MINORITY INTEREST IN FNC AND PMI-GA LOSSES 8,200 50,300 30,000 50,300
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (370,000) $ 254,700 $ (2,055,400) $ 437,500
============ ============ ============ ============
Basic and diluted (loss) earnings per share $ (0.04) $ 0.03 $ (0.20) $ 0.04
============ ============ ============ ============
Basic weighted average common shares outstanding 10,420,700 10,100,000 10,228,800 10,100,000
Stock options -- 59,700 -- 52,200
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 10,420,700 10,159,700 10,228,800 10,152,200
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(2,055,400) $ 437,500
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Equity in loss in investment 14,500 6,300
Impairment loss on investment - TargetFirst 250,000 --
Depreciation and amortization 203,600 153,800
Provision for doubtful accounts 75,000 --
Loss on disposal of fixed assets 1,400 --
Minority interest losses (30,000) --
Changes in operating assets and liabilities:
Accounts receivable (214,100) (809,700)
Inventories (69,300) (223,900)
Prepaid expenses and other current assets 51,400 (418,700)
Income tax receivable (234,600) --
Accounts payable 104,300 1,447,300
Accrued expenses (269,900) 12,100
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,173,100) 604,700
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes and interest receivable from shareholders 91,400 (6,800)
Investments in Rising Edge and TargetFirst -- (750,000)
Deposits and other assets (7,600) 502,200
Acquisition of property and equipment (80,200) (41,500)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,600 (296,100)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in floor plan inventory loans 326,400 297,700
Principal payments on notes payable (38,300) (35,200)
Restricted cash (175,000) --
Treasury stock purchases (14,700) --
Proceeds from sale of FNC and PMI-GA stock
to minority shareholders 35,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 133,400 262,500
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,036,100) 571,100
CASH AND CASH EQUIVALENTS, beginning of period 4,874,200 4,416,300
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,838,100 $ 4,987,400
=========== ===========
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 August 2001, one of the key employees resigned, and FNC repurchased
and retired one million of its shares from the ex-employee at $0.01 per share.
Consequently, the Company's ownership interest in FNC was increased to 91%.
On September 30, 2001, FNC acquired certain assets of a computer technical
support company in exchange for $20,000 to be paid in PMIC common stock. The
number of shares of PMIC stock that will be required to be issued was determined
by dividing $20,000 by the average share price for the ten days preceding the
acquisition date. The purchase price also includes a contingent payment and an
earn-out payment. Upon completion and full settlement of a sale transaction
specified in the purchase agreement, FNC shall pay $140,000 to the seller. The
seller will also be entitled to an earn-out payment, calculated as a percentage
of the adjusted gross profits, as defined in the agreement.
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. During the nine months ended September 30, 2001,
PMI-GA sold 15,000 shares of its common stock to an employee for $15,000. As a
result of this transaction, PMI's ownership interest in PMI-GA was reduced to
98%.
2. CONSOLIDATION AND UNCONSOLIDATED INVESTEES
The accompany consolidated financial statements include the accounts of Pacific
5
Magtron International Corp. and its wholly-owned subsidiary, PMI, and majority-
owned subsidiaries, FNC, Pacific Magtron (GA), Inc. 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 September 30, 2001 and for
the three and nine month periods ended September 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 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 presented in the Company's Form 10-K for the
year ended December 31, 2000.
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.
6
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.
5. STOCK OPTIONS AND EQUITY AWARDS
During the nine months ended September 30, 2001, 570,000 options to purchase the
Company's common stock at $0.88 to $0.97 per share were granted to certain
officers, shareholders and directors of the Company. No issued options were
exercised during the nine months ended September 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 1,655,000 FNC options were cancelled due to employee
terminations during the nine months ended September 30, 2001.
During the three and nine month periods ended September 30, 2001, options to
purchase 835,222 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 nine months ended September 30, 2001 and 2000 for:
NINE MONTHS ENDING SEPTEMBER 30, 2001 2000
-------- --------
Income taxes $ 1,500 $203,700
======== ========
Interest $201,900 $218,300
======== ========
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
7
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. The Company's share of Rising Edge's loss during the
nine months ended September 30, 2001 was $14,500.
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 would
be applied to services performed in 1999 and $500,000 would be applied to
services to be performed in 2000, and the Company and Rising Edge are each
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 nine months ended September 30, 2001:
PMI Frontline PMI-GA LEA Totals
------------ -------------- ------------ ------------ ------------
Revenues from external customers $ 44,993,700 $ 2,184,300(1) $ 8,580,100 $ -- $ 55,758,100
Segment (loss) before income taxes
and minority interest (943,100) (664,200) (509,200) (71,500) (2,188,000)
8
The following table presents information about reported segment profit or loss
for the nine months ended September 30, 2000:
PMI Frontline LEA Totals
----------- ------------- ----------- -----------
Revenues from external customers $63,235,300 $ 5,689,500(1) $ -- $68,924,800
Segment income or (loss) before
income taxes 793,600 (15,600) (100,800) 677,200
The following table presents information about reported segment profit or loss
for the three months ended September 30, 2001:
PMI Frontline PMI-GA LEA Totals
------------ ------------ ------------ ------------ ------------
Revenues from external customers $ 16,993,600 $ 638,400(2) $ 3,208,200 $ -- $ 20,840,200
Segment (loss) before income taxes
and minority interest (72,900) (155,500) (86,400) (41,400) (356,200)
The following table presents information about reported segment profit or loss
for the three months ended September 30, 2000:
PMI Frontline LEA Totals
----------- ------------- ----------- -----------
Revenues from external customers $22,243,700 $ 1,881,600(2) $ -- $24,125,300
Segment income or (loss) before
income taxes 519,100 (45,800) (100,800) 372,500
----------
(1) Includes service revenues of $114,100 and $218,800 in 2001 and 2000,
respectively.
(2) Includes service revenues of $35,600 and $113,100 in 2001 and 2000,
respectively.
The following is a reconciliation of reportable segment income or (loss) before
income taxes to the Company's consolidated total:
Three months Nine months
Ended Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Total loss before income taxes and minority
interest for reportable segments $ (356,200) $(2,188,000)
Inter-company transactions (17,400) 1,600
Equity in loss in investment in Rising Edge (4,600) (14,500)
Impairment loss on investment -- (250,000)
----------- -----------
Consolidated loss before income taxes
and minority interest $ (378,200) $(2,450,900)
----------- -----------
9
Three months Nine months
Ended Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Total income before income taxes and minority
interest for reportable segments $ 372,500 $ 677,200
Equity in loss in investment in Rising Edge (6,300) (6,300)
--------- ---------
Consolidated income before income taxes
and minority interest $ 366,200 $ 670,900
--------- ---------
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
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, PMI and PMI-GA (the Companies) 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, 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
terms 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% at September 30, 2001. Draws on the working capital line also
accrue interest at the prime rate. The credit facility is guaranteed by both
PMIC and FNC. As of September 30, 2001, there were draws of $1,470,600 on the
credit line.
Under the agreement, PMI and PMI-GA granted the Bank a 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 September 30, 2001, the Companies were in compliance with these
covenants.
In March, 2001, FNC 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 FNC's inventory,
equipment, fixtures, accounts, reserves, documents, general intangible assets
and all judgements, claims, insurance policies, and payments owed or made to
FNC. 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 September 30, 2001, FNC had an
outstanding balance of $185,300 due under this credit facility.
10
FNC is required to maintain certain financial covenants to qualify for the
credit line, and was not in compliance with certain of these covenants as of
September 30, 2001, which constitutes a technical default under the credit line.
This gives the financial institution, among other things, the right to call the
loan and terminate the credit line. The credit facility is guaranteed by PMIC
and can be terminated by Deutsche with 30 days prior notice or immediately upon
a default.
10. NOTES RECEIVABLES FROM SHAREHOLDERS
As of September 30, 2001 and December 31, 2000, notes receivable from two
officer shareholders aggregated $80,000 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
repurchased at a maximum price of $1.25 per share and held in treasury. As of
September 30, 2001, the Company acquired 20,400 shares of its common stock at a
cost of $14,700.
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 at
September 30, 2001 is $200,000 which will be recorded as an expense in the
statement of operations as the services are provided. Through September 30,
2001, no radio advertising services have been received by the Company under this
arrangement.
13. NOTES PAYABLE
Pursuant to one of the Company's bank mortgage loans with a $2,417,300 balance
at September, 30, 2001, the Company is required to maintain certain financial
covenants. At September 30, 2001, the Company was in violation of one of these
covenants which is an event of default under the loan agreement that gives the
bank the right to call the loan. While a waiver of this loan covenant was
subsequently obtained from the bank for quarterly losses incurred through
December 31, 2001, the Company was required to transfer $175,000 to a restricted
account as a reserve for debt servicing. This amount has been reflected as
restricted cash in the accompanying financial statements.
14. SUBSEQUENT EVENTS
On October 15, 2001, the Company formed an investment holding company, PMI
Capital Corporation (PMICC), for the purpose of acquiring companies or assets
deemed suitable for PMIC's organization. PMICC was authorized by its board of
directors to issue 10,000,000 shares of common stock to PMIC.
On October 17, 2001, PMICC purchased certain assets of a company and assumed
certain liabilities for a cash payment of $85,000.
11
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 rapidly growing segments of the
computer industry. To take advantage of 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%. In August 2001, one of the key employees resigned, and FNC bought back
1,000,000 of its shares from the ex-employee at $0.01 per share. As a result,
our ownership interest in FNC was increased to 91%.
On September 30, 2001, in order to provide an expanded base of professional
services, FNC acquired certain assets of a computer technical support company
for an initial consideration of $20,000, payable by issuance of PMIC common
stock. The number of shares of PMIC stock that we will be required to issue was
determined by dividing $20,000 by the average share price for the ten days
preceding the acquisition date. The purchase price also includes a contingent
payment and an earn-out payment. Upon completion and full settlement of a sale
transaction specified in the purchase agreement, FNC shall pay $140,000 to the
seller. The seller will also be entitled to an earn-out payment, calculated as a
percentage of the adjusted gross profits, as defined in the agreement.
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.
Our subsidiaries, Pacific Magtron, Inc. (PMI) and Pacific Magtron (GA), Inc.
(PMI-GA), provide the wholesale distribution of computer multimedia and storage
12
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.
On October 15, 2001, the Company formed an investment holding company, PMI
Capital Corporation (PMICC), for the purpose of acquiring companies or assets
deemed suitable for PMIC's organization. PMICC was authorized by its board of
directors to issue 10,000,000 shares of common stock to PMIC. On October 17,
2001, PMICC purchased certain assets of a company and assumed certain
liabilities for a cash payment of $85,000. 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 were given 90
calendar days, or until October 1, 2001 to regain compliance by maintaining a
minimum market value of public float of $1 million and bid price of at least
$1.00 for a minimum of 10 consecutive trading days. As of September 5, 2001, we
believe we have complied with this notice by achieving the public float and bid
price targets. Subsequently, on September 27, 2001, Nasdaq implemented a
moratorium on the minimum bid price and market value of public floatation
requirements to all companies that were previously subject to these
requirements. The moratorium suspended such requirements until January 2, 2002.
Despite the suspension of the listing requirements, the Company share price has
been maintained above the $1.00 minimum bid price since August 22, 2001.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.0 92.7 93.1 92.3
----- ----- ----- -----
Gross margin 7.0 7.3 6.9 7.7
Operating expenses 8.6 6.9 10.6 7.1
----- ----- ----- -----
(Loss) income from operations (1.6) 0.4 (3.7) 0.6
Other (expense) income (0.3) 1.4 (0.6) 0.4
Income tax benefit (expense) 0.0 (0.7) 0.6 (0.4)
Minority interest in FNC, LEA
and PMI-GA 0.0 0.0 0.0 0.0
----- ----- ----- -----
Net (loss) income (1.9)% 1.1% (3.7)% 0.6%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Sales for the three months ended September 30, 2001 were $20,840,200, a decrease
of $3,285,100, or approximately 13.6%, compared to $24,125,300 for the three
months ended September 30, 2000. This decrease was primarily attributable to our
computer products subsidiaries (PMI and PMI-GA) which reported a decline in
sales for the three months ended September 30, 2001 of $2,041,900 or
approximately 9.2%,
13
compared to the corresponding period in 2000. Sales recognized by the PMI-GA
were approximately $3,208,200 during the three months ended September 30, 2001.
We believe that the decrease was due to a continuing 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 overall economy depressed sales
during the first three quarters of 2001 as customers were postponing their
buying decisions. Approximately $638,400 of our sales recognized during the
third quarter of 2001 was attributable to FNC, a decrease of $1,243,200, or
approximately 66.1%, compared to $1,881,600 for the three months ended September
30, 2000. 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 September 30, 2001 was $1,465,200, a
decrease of $290,400 or 16.5%, compared to $1,755,600 for the three months ended
September 30, 2000. The gross margin as a percentage of sales decreased slightly
from 7.3% for the three months ended September 30, 2000 to 7.0% for the three
months ended September 30, 2001. This decrease in gross margin is primarily a
result of reduction in vendor rebates and advertising funding programs.
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 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 three months ended September 30,
2001 was $1,343,500, a decrease of $106,300 or approximately 7.3% over the same
period of last year. Gross margin relating to PMI-GA for the three months ended
September 30, 2001 was $201,800. Gross margin relating to FNC for the three
months ended September 30, 2001 was $121,700, or 19.1% of FNC's sales during the
same period as compared to $305,800, or 16.4% of FNC's sales during three months
ended September 30, 2000. Since FNC's sales levels accounted for only 3.1% and
7.7% of our consolidated sales during the three months ended September 30, 2001
and 2000 respectively, the gross margin percentage earned by FNC had only a
minor effect on our overall gross margin in both periods.
Operating expenses for the three months ended September 30, 2001 were
$1,784,500, an increase of $216,800, or 13.8%, compared to $1,567,700 for the
three months ended September 30, 2000. Although we implemented cost cutting
measures, such as reducing our employee count from 103 in the first quarter of
2001 to 95 by third quarter of 2001, in anticipation of the economic slowdown,
expenses increased primarily due to the addition of PMI-GA operations. During
the three months ended September 30, 2001, we also increased spending for
professional services to assist in the formation of an acquisition strategy. As
a percentage of sales, operating expenses increased to 8.6% for the three months
ended September 30, 2001 compared to 6.5% for the three months ended September
30, 2000. This increase was the result of the combined effects of an increase in
our operating expenses and a reduction in our revenues.
For the three months ended September 30, 2001, we incurred a loss from
operations of $319,300 compared to income from operations of $87,500 for the
three months ended September 30, 2000. As a percentage of sales, loss from
operations was 1.5% for the three months ended September 30, 2001 compared to
income from operations of 0.4% for the three months ended September 30, 2000.
Interest expense for the three months ended September 30, 2001 was $60,200, a
decrease of $13,500, or 18.3%, compared to $73,700 for the three months ended
September 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 $56,400 for the three months ended September 30,
2000 to $20,000 for the three months ended September 30, 2001, a reduction of
$36,400, or 64.7%, 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.
14
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Sales for the nine months ended September 30, 2001 were $55,758,100, a decrease
of $13,166,700, or approximately 19.1%, compared to $68,924,800 for the nine
months ended September 30, 2000. This decrease was primarily attributable to our
computer products subsidiaries (PMI and PMI-GA) which reported a decline in
sales for the nine months ended September 30, 2001 of $9,661,500 or
approximately 15.3% compared to the corresponding period of September 30, 2000.
Sales recognized by PMI-GA were approximately $8,580,100 during the nine months
ended September 30, 2001. The decrease was due primarily 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 postponing their purchase decisions. Approximately $2,184,300 of
the sales earned by us during the nine months ended September 30, 2001 was
attributable to FNC, a decrease of $3,505,600 or approximately 61.6% compared to
$5,689,900 for the nine months ended September 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 nine months ended September 30, 2001 was $3,824,900, a
decrease of $1,483,500, or 28.0%, compared to $5,308,400 for the nine months
ended September 30, 2000. The gross margin as a percentage of sales decreased
from 7.7% for the nine months ended September 30, 2000 to 6.9% for the nine
months ended September 30, 2001. This decrease in gross margin percentage was
primarily a result of reduction in vendor rebates, advertising funding programs
and an increase in freight costs. 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 three quarters 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 nine months ended September 30, 2001 was $3,521,800, a
decrease of $977,600 or 21.7% compared to $4,499,400 for the nine months ended
September 30, 2000. The gross margin relating to PMI-GA for the nine months
ended September 30, 2001 was $430,100. Gross margin relating to FNC for the nine
months ended September 30,2001 was $303,100, or 13.9% of FNC's sales during the
same period as compared to $809,000, or 14.3% of FNC's sales during the nine
months ended September 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 8.2% of
our consolidated sales during the nine months ended September 30, 2001 and 2000,
respectively, the gross margin percentage earned by FNC had only a minor effect
on our overall gross margin in both periods.
Operating expenses for the nine months ended September 30, 2001 were $5,925,700,
an increase of $1,039,000, or 21.3%, compared to $4,886,700 for the nine months
ended September 30, 2000. Although we implemented cost cutting measures in
anticipation of the economic slowdown, such as reducing our employee count from
103 in the first quarter of 2001 to 95 in the third quarter of 2001, 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. During the nine months ended September
30, 2001, we also increased spending for professional services to assist in the
formation of an acquisition strategy. As a percentage of sales, operating
expenses increased to 10.6% for the nine months ended September 30, 2001
compared to 7.1% for the nine months ended September 30, 2000 resulting from an
increase in our operating expenses during a period of decreased sales.
For the nine months ended September 30, 2001 we incurred a loss from operations
of $2,100,800 compared to income from operations of $421,700 for the nine months
ended September 30, 2000. As a percentage of sales, loss from operations was
3.8% for the nine months ended September 30, 2001 compared to income from
operations of 0.6% for the nine months ended September 30, 2000. This change was
primarily due to the decrease in sales and gross margin percentage and increase
in operating expenses during the period.
15
Interest expense for the nine months ended September 30, 2001 was $201,900, a
decrease of $16,400, or 7.5%, compared to $218,300 for the nine months ended
September 30, 2000. Interest income decreased from $173,800 for the nine months
ended September 30, 2000 to $107,900 for the nine months ended September 30,
2001, a decrease of $65,800, or 37.9%, 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 nine months ended September 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.
The income tax benefit recorded during the nine months ended September 30, 2001
represents the estimated tax benefit from the carry back of Federal net
operating losses to the 2000 and 1999 tax years, adjusted for the interim period
based upon the estimated loss for 2001 tax.
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 and
line of credit.
At September 30, 2001, we had consolidated cash and cash equivalents totaling
$2,838,100 (excluding $175,000 in restricted cash) and working capital of
$6,100,500. 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 nine months ended September 30,
2001 was $2,173,100, which principally reflected the net loss incurred during
the period, an increase in receivables and a decrease in accrued expenses.
Net cash provided by investing activities during the nine months ended September
30, 2001 was $3,600, primarily resulting from repayment of the notes receivable
owed by certain shareholders which was partially offset by the acquisition of
property and equipment.
Net cash provided by financing activities was $133,400 for the nine months ended
September 30, 2001, primarily from the increase in the floor plan inventory
loans.
On July 13, 2001, PMI and PMI-GA (the Companies) 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, 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
terms 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 6.0% at September 30, 2001. Draws on the working capital line
also accrue interest at the prime rate. The credit facility is guaranteed by
both PMIC and FNC. As of September 30, 2001, there were draws of $1,470,600 on
the credit line.
Under the agreement, PMI and PMI-GA granted the Bank a 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 September 30, 2001, the Companies were in compliance with these
covenants.
16
In March, 2001, FNC 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 FNC's inventory,
equipment, fixtures, accounts, reserves, documents, general intangible assets
and all judgements, claims, insurance policies, and payments owed or made to
FNC. 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 September 30, 2001, FNC had an
outstanding balance of $185,300 due under this credit facility.
FNC is required to maintain certain financial covenants to qualify for the
credit line, and was not in compliance with certain of these covenants as of
September 30, 2001, which constitutes a technical default under the credit line.
This gives the financial institution, among other things, the right to call the
loan and terminate the credit line. The credit facility is guaranteed by PMIC
and can be terminated by Deutsche with 30 days prior notice or immediately upon
a default.
Pursuant to one of our bank mortgage loans with a $2,417,300 balance at
September, 30, 2001, we are required to maintain certain financial covenants. At
September 30, 2001, we were in violation of one of these covenants which is an
event of default under the loan agreement that gives the bank the right to call
the loan. While a waiver of this loan covenant was subsequently obtained from
the bank for quarterly losses incurred through December 31, 2001, we were
required to transfer $175,000 to a restricted account as a reserve for debt
servicing. This amount has been reflected as restricted cash in the accompanying
financial statements.
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 September 30, 2001, we purchased 20,400 shares for
treasury at a cost of $14,700. We estimate that approximately $85,300 will be
required to repurchase these shares on the open market under this program during
the remainder of 2001 using available cash from operations, if we elect to
repurchase such shares.
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
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 were given 90
calendar days, or until October 1, 2001 to regain compliance by maintaining a
minimum market value of public float of $1 million and bid price of at least
$1.00 for a minimum of 10 consecutive trading days. As of September 5, 2001, we
believe we have complied with this notice and maintain the necessary minimums,
including trading at or above $1.00 for the minimum 10 trading days.
Subsequently, on September 27, 2001, Nasdaq implemented a moratorium on the
minimum bid price and market value of public floatation requirements to all
companies that were previously subject to these requirements. The moratorium
suspended such requirements until January 2, 2002. Despite the suspension of the
listing requirements, our share price had been maintained above the $1.00
minimum bid price since August 22, 2001.
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
17
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.
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.
18
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 $2,417,300 balance at September 30, 2001
which bears fluctuating interest based on the bank's 90-day LIBOR rate. In
addition, one of our flooring and working capital lines bears interest at the
bank's prime rate. However, interest expenses incurred in connection with this
financing agreement have historically been insignificant. 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.
PART II
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
19
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 November, 2001.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By /s/ Theodore S. Li
---------------------------------------
Theodore S. Li
President and Chief Financial Officer
20