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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL REPORT AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 0-17521
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) (Zip Code)
Registrant's telephone number, including area code (408) 956-8888
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
n/a n/a
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $. .001 par value
(Title of Class)
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 tfil such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 15, 2001 the aggregate market value of common stock held by
non-affiliates of the registrant was approximately $1,358,500.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
At March 15, 2001 the number of shares of common stock outstanding was
10,100,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III, Items 10,
11, 12 and 13.
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TABLE OF CONTENTS
PAGE
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PART I .................................................................... 1
Item 1. BUSINESS.......................................................... 1
Item 2. PROPERTIES........................................................ 11
Item 3. LEGAL PROCEEDINGS................................................. 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 11
PART II .................................................................... 12
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS............................................... 12
Item 6. SELECTED FINANCIAL DATA........................................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 13
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 18
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................... 18
PART III .................................................................... 18
PART IV .................................................................... 19
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8.... 19
SIGNATURES................................................................... 20
PART I
ITEM 1. BUSINESS
SUMMARY OF OUR BUSINESS
We are a Nevada corporation and our primary business is to provide computer
and information technology solutions through our operating subsidiaries, Pacific
Magtron, Inc. ("PMI"), Pacific Magtron (GA), Inc. ("PMIGA") and FrontLine
Network Consulting, Inc. ("FrontLine"). Founded in 1989, PMI fulfills the
multimedia hardware needs of system integrators, value added resellers,
retailers, original equipment manufacturers, software vendors, and Internet
resellers through the wholesale distribution of computer related multimedia
hardware components and software. In August 2000, we formed PMIGA for the
distribution of PMI's products in the eastern United States. FrontLine serves as
a corporate information services group catering to the networking and Internet
infrastructure requirements of corporate clients. In January 1999 we formed Lea
Publishing, L.LC, a California limited liability company ("Lea"), to develop,
sell and license software designed to provide Internet users, resellers and
providers advanced solutions and applications. We own a 62.5% combined indirect
and direct interest in Lea, which is a development stage company.
As used in this document and unless otherwise indicated, the terms "Company,"
"we," and "our" refer to Pacific Magtron International Corp. and its
subsidiaries.
INDUSTRY OVERVIEW
WHOLESALE MICRO COMPUTER PRODUCTS DISTRIBUTION
The microcomputer products distribution industry generally consists of
suppliers, wholesalers, resellers, and end-users. Wholesale distributors
typically sell only to resellers and purchase a wide range of products in bulk
directly from manufacturers. Different types of resellers are defined and
distinguished by the end-user market they serve, such as large corporate
accounts, small and medium-sized businesses or home users, and by the level of
value that they add to the basic products they sell.
INCREASED RELIANCE ON WHOLESALE MICRO COMPUTER PRODUCTS DISTRIBUTION
We believe that the growth of the microcomputer products wholesale
distribution industry exceeds that of the microcomputer industry as a whole. In
our view, suppliers, vendors, and resellers are relying to a greater extent on
wholesale distributors for their distribution needs. Suppliers are faced with
the pressures of declining product prices and the increasing costs of selling
directly to a large and diverse group of resellers, and they therefore are
increasingly relying upon wholesale distribution channels for a greater
proportion of their sales. Many suppliers outsource a growing portion of certain
functions, such as distribution, service, technical support, and final assembly,
to the wholesale distribution channel in order to minimize costs and focus on
their core capabilities in manufacturing, product development, and marketing.
Likewise, vendors are finding it more cost efficient to rely on wholesale
distributors that can leverage distribution costs across multiple vendors, each
of whom outsources a portion of their distribution, credit, marketing, and
support services.
On the reseller side, growing product complexity, shorter product life
cycles, an increasing number of microcomputer products, the emergence of open
systems architectures, and the recognition of certain industry standards have
led resellers to depend upon wholesale distributors for more of their product,
marketing, and technical support needs. Due to the large number of vendors and
products, resellers often cannot or choose not to establish direct purchasing
relationships with suppliers. Instead, they rely on wholesale distributors that
can leverage purchasing costs across multiple resellers to satisfy a significant
portion of their product procurement and delivery, financing, marketing, and
technical support needs. Rather than stocking large inventories themselves and
maintaining credit lines to finance working capital needs, resellers are also
increasingly relying on wholesale distributors for product availability and
flexible financing alternatives.
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OPEN SOURCING
Another apparent reason for the growth of the wholesale distribution
industry is the evolution of open sourcing during the past several years, a
phenomenon specific to the United States microcomputer products wholesale
distribution market. Historically, branded computer systems from large suppliers
were sold in the United States only through authorized master resellers. Under
this single sourcing model, resellers were required to purchase these products
exclusively from one master reseller. Competitive pressures led some of the
major computer suppliers to authorize second sourcing, in which resellers could
purchase a supplier's product from a source other than their primary master
reseller, subject to certain restrictive terms and conditions. More recently,
all major manufacturers have authorized open sourcing, under which resellers can
purchase the supplier's product from any source on equal terms and conditions.
Open sourcing has thus blurred the distinction between wholesale distributors
and master resellers, which are increasingly able to serve the same reseller
base. We believe that open sourcing enables those distributors of microcomputer
products which provide the highest value through superior service and pricing to
be in the best position to compete for reseller customers.
INTERNET SERVICES
The emergence of the Internet, provides wholesale distributors with an
additional means to serve both suppliers and reseller customers through the
development and use of effective electronic commerce tools. The increasing
utilization of electronic ordering , including the ability to transact business
over the World Wide Web, has had, and is expected to continue to have, a
significant impact on the cost efficiency of the wholesale distribution
industry. Distributors with the financial and technical resources to develop,
implement and operate state of the art management information systems have been
able to reduce both their customers and their own transaction costs through more
efficient purchasing and lower selling costs. The growing presence and
importance of such electronic commerce capabilities also provide distributors
with new business opportunities as new categories of products, customers, and
suppliers develop.
CORPORATE INFORMATION SYSTEMS CONSULTING
Because of factors similar to those encouraging the increased reliance by
target clients on wholesale distributors, corporations are increasingly looking
to specialist service organizations, such as FrontLine, to support the
development and maintenance of their information technology systems or networks.
Accelerating technological advancement, migration of organizations toward
multi-vendor distributed networks, and increased globalization of corporate
activity have contributed to an increase in the sophistication of information
delivery systems and interdependency of corporate computing systems. The desire
by corporations to focus upon their core activities while enjoying the benefits
of such multi-vendor distributed networks, together with increasing skill
shortages within the information technology industry, have led businesses to
increasingly outsource the development and maintenance of their computing
systems to network consulting professionals.
OUR HISTORY
We were incorporated as Wildfire Capital Corporation ("Wildfire") in Nevada
on January 8, 1996 in order to engage in the business of providing a national
retail market for premium wines on the Internet. The Internet site was intended
to provide advertising for wine retailers and boutique wineries. Wildfire was
initially capitalized with a $5,000 investment by its founder, for which 500,000
shares of common stock were issued. On August 27, 1996, Wildfire commenced an
offering of 1,000,000 shares of its common stock at a price of $.05 per share
under Rule 504 under the Securities Act of 1933. Gross proceeds from the
offering were $50,000 in cash.
Due primarily to regulatory issues, the business of Wildfire did not
develop as expected, and as a result, Wildfire closed its marketing operations
in the fall of 1997. At that time, Wildfire began searching for new business
opportunities, and on July 16, 1998, the Board of Directors of Wildfire
recommended the acquisition of Pacific Magtron, Inc. ("PMI") to Wildfire's
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shareholders. PMI, a California corporation incorporated on August 11, 1989, had
established itself in the computer products wholesale distribution industry as a
privately held company. The shareholders of Wildfire and PMI approved the
transaction, and Wildfire issued 9,000,000 shares of its common stock in
consideration for all of the outstanding shares of PMI. As a result, the former
shareholders of PMI became the controlling shareholders of Wildfire. No
securities were registered in connection with the transaction. Immediately prior
to the transaction, Wildfire effected a two-for-three reverse stock split of its
1,500,000 outstanding shares of common stock. Upon consummation of the
acquisition, Wildfire changed its name to Pacific Magtron International Corp.,
and PMI continued its business operations as our wholly-owned subsidiary.
PRODUCTS AND SERVICES
We operate in three business divisions. Our computer products group
operates through two wholly-owned subsidiaries under the names Pacific Magtron,
Inc. and Pacific Magtron (GA), Inc., our corporate information systems group
operates as a majority-owned subsidiary known as FrontLine Network Consulting,
Inc. and our software development and publishing group, Lea Publishing, L.L.C.,
operates as a majority-owned subsidiary.
PACIFIC MAGTRON, INC. AND PACIFIC MAGTRON (GA), INC. - COMPUTER PRODUCTS
Through PMI and PMGIA we distribute a wide range of computer products,
including components and multimedia and systems networking products. We also
provide vertical solutions for systems integrators and Internet resellers by
combining or "kitting" our products. Our computer products group offers our
customers a broad inventory of more than 1,800 products from approximately 30
manufacturers. This wide assortment of vendors and products meets our customers'
needs for a cost effective link to multiple vendors' products through a single
source. Among the products that we distribute are systems and networking
peripherals, and components such as high capacity storage devices, a full range
of optical storage devices such as CM-ROMS, DVDs and CD recorders, sound cards,
video cards, small computer systems interface components, video phone solutions,
floppy and hard disk drives, and other miscellaneous items such as audio cabling
devices and zip drives for desktop and notebook computers.
INVENTORY LEVELS AND ASSET MANAGEMENT: We maintain sufficient quantities of
product inventories to achieve high order fill rates, and believe that price
protection and stock return privileges provided by suppliers substantially
mitigate the risks associated with slow moving and obsolete inventory. We also
operate a computerized inventory system that allows us to look at and deal with
slow moving inventory. If a supplier reduces its prices on certain products, we
generally receive a credit for such products in our inventory. In addition, we
have the right to return a certain percentage of purchases, subject to certain
limitations. Historically, price protection, stock return privileges, and
inventory management procedures have helped to reduce the risk of a significant
decline in the value of inventory.
We have established reserves for estimated losses due to obsolete inventory
in the normal course of business, and historically, we have not experienced
losses materially in excess of our established reserves. Inventory levels may
vary from period to period due in part to the addition of new suppliers or large
purchases of inventory due to favorable terms offered by suppliers.
CREDIT TERMS: We offer various credit terms including open account,
flooring arrangements, and credit card payment to qualifying customers. We
closely monitor our customers' creditworthiness, and in most markets, utilize
various levels of credit insurance to control credit risks and enable us to
extend higher levels of cWe also established reserves for estimated credit
losses in the normal course of business.
FRONTLINE NETWORK CONSULTING - CORPORATE INFORMATION SYSTEMS
We formed FrontLine in May 1998 to serve the growing needs of our corporate
customers with respect to their computer systems and networking needs. We
provide a broad range of products and services to our customers through this
majority-owned subsidiary, including advanced enterprise consulting, local area
and wide area network design, hardware and software troubleshooting and testing,
and complete Internet business solutions. Our capabilities include the capacity
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to provide our customers with fully integrated solutions to computing and
networking needs from initial consulting to network design, procurement, testing
and installation to continuing technical support services. Our corporate
customers engage us to provide them with network and computing solutions through
the following types of services:
INTEGRATION SERVICES: Our integration center provides a static free
environment where customized hardware testing and peripheral installations are
performed. The expertise of our integration team, along with the flexibility of
the monorail system used in the integration center, gives us the capability to
create completely integrated networking schemes on any available topology.
NETWORK CONSULTING: We provide network planning, design and
implementation focused on multi- service, Virtual Private Networks (VPN),
e-commerce and wireless applications. We also offer network security consulting
that includes policy planning, security system design, implementation, testing
and certification.
OPERATIONS MANAGEMENT: We provide administration, optimization and
appropriate outsourcing services.
INTERNET/ENTHRONED SERVICES: Our Internet business consultants help
our customers solve business problems with Internet based solutions. Among the
services provided in this area are web site content selection and design,
development of Internet usage polices, browser customization, software support,
development of risk management processes with respect to security concerns,
Internet training, and return on investment studies.
IT CONSULTING: In order to assist our clients in making the most of
their technology investments, we help develop and implement strategic technology
plans that allow clients to maximize the use of their technology dollars. Among
the areas these plans address are life cycle management, network analysis, and
business continuity planning in the event of an information flow interruption.
PROCUREMENT: By taking advantage of the relationships established
between manufacturers and our wholesale distribution business, we are able to
provide specialty procurement services to our corporate customers. Our
professionals manage the details of receiving, configuring, testing, and
shipping integrated systems for our customers, and assist them in dealing with
issues such as product availability forecasting, redeployment and disposal of
technology assets, warehousing, and packaging, tracking, and confirmation of
shipments. Our procurement services afford an additional benefit to our
customers by providing a single source for software and hardware orders, and by
making available volume discounts that might otherwise be unavailable to them.
TECHNICAL SERVICES: Many of our customers technical service needs go
beyond merely fixing hardware. Our technicians provide a range of technical
support from on-site service to carry in depot service. Among the technical
services we provide are: asset management with inventory tracking and virus
check services; on site desktop support; warranty verification and tracking; and
desktop deployment and installation. We also provide end user support services
providing remote monitoring, staff augmentation and help desk functions.
FRONTLINE STRATEGIC PARTNERSHIPS: One of the factors that permits us
to provide our FrontLine corporate customers with a high level of service is the
development of strategic supply partnerships with leading manufacturers such as
CISCO Systems, Hewlett-Packard, AT&T, Nokia, Microsoft, IBM, Novell, 3Com and
others. Certification from these manufacturers is based on their recognition of
our expertise at implementing their client computing solutions, and allows us to
offer our customers the products that they are currently using, along with
continuous education regarding each product and the applications for which it is
used. We believe that forming relationships with suppliers is important in
providing us with credibility in contacting large corporate clients. These
relationships also provide us with access to the resources and support of these
suppliers in FrontLine's initial sales and marketing efforts, and in the
post-sale and installation stages.
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LEA PUBLISHING, L.L.C. - SOFTWARE DEVELOPMENT AND PUBLISHING
In January 1999 we formed Lea to develop, sell and license software
designed to provide advanced solutions and applications for Internet users,
resellers and providers. We and Rising Edge Technology, Inc., a Taiwanese
software development company formed in 1996 ("Rising Edge"), each owned 50% of
Lea. Michael Lee, the brother of Hui "Cynthia" Lee, is the president, a director
and the other majority shareholder of Rising Edge. On June 13, 2000, we
purchased a 25% ownership interest in Rising Edge from Mr. Lee for $500,000. Our
combined direct and indirect holdings in Lea therefore increased to 62.5%.
Theodore Li and Hui Lee, both of whom are our directors, officers and principal
shareholders, are the managers of Lea.
During fiscal 1999 we invested approximately $470,000 in Lea, which was
paid to Rising Edge pursuant to a software development agreement for its
services in developing Lea's first software product. We have terminated this
software developing agreement and Rising Edge refunded $200,000 of our fee
payment in January 2001. We expect that additional resources will be necessary
to continue to finance this development, which will continue this year. We plan
on developing this product on our own. We may elect or be required to raise
funds, through a credit facility from banks or other financial institutions, or
through sale of our equity or debt securities to fund Lea's activities this
year.
Lea Publishing plans to release its WEBChat Internet based application to
beta testers. It has completed final internal testing on WEBChat. This product
is designed to provide users instant, realtime, point-to-point communication
while browsing a company's web pages. WEBChat is targeted for final commercial
release in the summer after successfully completing the beta testing.
WEBChat is an application that allows any company providing products or
services via the Internet to provide a direct, realtime link between the
company's staff and its customers while the user is still "captured" oit
website. The possible uses for WEBChat range from customer sales to service,
technical or helpdesk support functions. WEBChat allows this to be accomplished
while the user is viewing the company's products or services on its website.
WEBChat emulates a telephone system and therefore can perform "least busy"
routing, call forwarding, call waiting, messaging and many other functions via
the Internet in a realtime chat mode. This will allow the responding staff to
handle multiple calls or chat sessions simultaneously, thus shortening the wait
time for their customers. In addition, WEBChat will eliminate the need for a
user to send e-mail to the company and having to wait for a reply, by which time
the user is no longer accessing the site and may have already lost interest in
buying from the site.
PLANS FOR EXPANSION
Our plans to expand our wholesale distribution business include:
* enhancing existing relationships and establishing additional strategic
relationships with master distributors and manufacturers, both
domestically and abroad;
* adding additional branded product lines and offering a wider range of
products, such as networking and high end 3-D graphics products;
* actively focusing on building our international sales through
advertising in international markets; and
* implementing an e-commerce strategy.
Our strategy for developing FrontLine's business includes:
* continuing to seek certification from additional suppliers, and
actively contacting potential corporate customers that need to
implement, enhance, or replace their management information systems;
and
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* increasing our partnering relationships with independent technology
consultants, which will provide us with access to a new customer base
and provide us with additional consulting talent.
Our strategy for Lea to enter in the software publishing field includes:
* continuing to develop, test and test market one or more proprietary
software products designed to provide advanced solutions and
applications for Internet users, resellers and providers; and
* given acceptable test market results, we intend to release, market and
distribute such products on a regional and then national basis.
In addition to expanding our computer products, corporate information
systems and software development and publishing groups, we also intend to
utilize our management's extensive network of industry contacts to explore
possible acquisition candidates and opportunities. There can be no assurance
that we will identify any acquisition opportunities, or if such opportunities
are presented, that they can be acquired on acceptable terms and conditions.
SALES AND MARKETING
Our sales are generated by a telemarketing sales force, which consisted of
approximately 23 persons as of March 1, 2001 in our offices located in Milpitas,
California and 11 persons in our Georgia branch.
The sales force is organized in teams generally consisting of a minimum of
three people. We believe that teams provide superior customer service because
customers can contact one of several people. Moreover, the long- term nature of
our customer relationships is better served by teams that increase the depth of
the relationship and improve the consistency of service.
We provide compensation incentives to our salespeople, thus encouraging
them to increase their product knowledge and to establish long-term
relationships with existing and new customers. Customers can contact their
salespersons using a toll-free number. Salespeople initiate calls to introduce
our existing customers to new products and to solicit orders. In addition,
salespeople seek to develop new customer relationships by using targeted mailing
lists and vendor leads.
The telemarketing salespeople are supported by a variety of marketing
programs. For example, we regularly sponsor promotions for our resellers where
we have new product offerings and discuss industry developments as well as
regular training sessions hosted by manufacturers. Also, our in-house marketing
staff prepares catalogs that list available products and routinely produces
marketing materials and advertisements.
Our salespeople are able to analyze our available inventory through a
sophisticated management information system and recommend the most appropriate
cost-effective systems and hardware for each customer, whether a full-line
retailer or an industry-specific reseller.
We pride ourselves on being service oriented and have a number of on-going
value-added services intended to benefit both our vendors and their resellers.
We train members of the sales staff through intensive i house sales training
programs, along with vendor-sponsored product seminars. This training helps our
sales people provide our customers with product information, answer our
customers' questions about important new product considerations, such as
compatibility and capability, and to advise which products meet specific
performance and price criteria. The core competency our sales people develop
about the products they sell supplements the sophisticated technical support and
configuration services we provide. Salespeople who are knowledgeable about the
products they sell often can assist in the configuration of microcomputer
systems according to specifications given by the resellers. We believe that our
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salespeople's ability to listen to a reseller's needs and recommend a
cost-efficient solution strengthens the relationship between the salesperson and
his or her reseller and promotes customer loyalty to a vendor's products. In
addition, we provide such other value-added services as new product descriptions
and technical education programs for resellers.
We continually evaluate our product mix and the needs of our customers in
order to minimize inventory obsolescence and carrying costs. Our rapid delivery
terms are available to all of our customers, and we seek to pass through our
cost effective shipping and handling expenses to our customers.
SUPPLIERS
SOURCES OF SUPPLY: Our strong financial and industry positions have enabled
us to obtain contracts with many leading manufacturers, including Creative Labs,
Logitech, Matrox, Toshiba, Sony, Yamaha and TEAC. We purchase our products
directly from such manufacturers, generally on a non-exclusive basis. We believe
that our agreements with the manufacturers are in forms customarily used by each
manufacturer. The agreements typically contain provisions allowing termination
by either party without prior notice, and generally do not require us to sell a
specific quantity of products or restrict us from selling products manufactured
by competitors. As a result, we generally have the flexibility to terminate or
curtail sales of one product line in favor of another product line if we
consider it appropriate to do so because of technological change, pricing
considerations, product availability, customer demand or vendor distribution
policies.
DISTRIBUTION: From our central warehouse facility in Milpitas, California,
we distribute microcomputer products throughout the United States and foreign
countries, including Canada, the United Kingdom, France, Russia and Israel. A
minority of our distribution agreements are limited by territory. In those
cases, however, North America is usually the territory granted to us. We will
continue to seek to expand the geographical scope of our distributor
arrangements.
COMPETITION
WHOLESALE DISTRIBUTION
We operate in a market characterized by intense competition, both in the
United States and internationally. Competition within the wholesale distribution
industry is based on product availability, credit availability, price, speed and
accuracy of delivery, effectiveness of sales and marketing programs, ability to
tailor specific sto customer needs, quality and breadth of product lines and
services, and the availability of product and technical support information. We
believe that we are equipped to compete effectively with other distributors in
these areas. Principal regional competitors in the wholesale distribution
industry include Greenleaf Distribution, Asia Source and Synnex Information
Technology, Inc., all of which are privately held companies. Ingram Micro Inc.
and Tech Data Corporation are among our principal regional and multi-regional
publicly held competitors. We also compete with manufacturers that sell directly
to resellers and end-users. Nearly all of our competitors are larger and have
greater financial and other resources.
FRONTLINE
Competition within the corporate information systems industry is based
primarily on flexibility in providing customized network solutions, resources
and contracts to provide products for integrated systems and consultant and
employee expertise needed to optimize network performance and stability. Our
principal competitors in the corporate information systems industry include
MicroAge and SARCOM. Most of our competitors have greater financial and other
resources.
EMPLOYEES
At March 1, 2001, we had approximately 106 full time employees, all of whom
are non-union, and three executive officers. We believe that our employee
relations are good.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGES
The market for computer systems and products is characterized by constant
technological change, frequent new product introductions and evolving industry
standards. Our future success is dependent upon the continuation of a number of
trends in the computer industry, including the migration by end-users to
multi-vendor and multi- system computing environments, the overall increase in
the sophistication and interdependency of computing technology, and a focus by
managers on cost-efficient information technology management. These trends have
resulted in a movement toward outsourcing and an increased demand for product
and support service providers that have the ability to provide a broad range of
multi-vendor product and support services. There can be no assurance these
trends will continue into the future. Our failure to anticipate or respond
adequately to technological developments and customer requirements could have a
material adverse effect on our business, operating results and financial
condition.
INVENTORY VALUE
As a distributor, we incur the risk that the value of our inventory will be
adversely affected by industry wide forces. Rapid technology change is
commonplace in the industry and can quickly diminish the marketability of
certain items, whose functionality and demand decline with the appearance of new
products. These changes and price reductions by vendors may cause rapid
obsolescence of inventory and corresponding valuation reductions in that
inventory. We currently seek provisions in the vendor agreements common to
industry practice that provide price protections or credits for declines in
inventory value and the right to return unsold inventory. No assurance can be
given, however, that we can negotiate such provisions in each of our contracts
or that such industry practice will continue.
RISKS OF OUR ACQUISITION STRATEGY
A key element of our strategy for the future is to expand through
acquisition of companies that have complimentary businesses, that can utilize or
enhance our existing capabilities and resources, that expand our geographic
presence or that expand our range of services or products. As a result, we have
started to evaluate potential acquisition opportunities. Some of these may be
large in size or scope when compared to our size. Moreover, we are always
evaluating potential acquisition prospects.
Acquisitions involve a number of special risks, some of which include:
* the time associated with identifying and evaluating acquisition
candidates;
* the diversion of management's attention by the need to integrate the
operations and personnel of the acquired businesses into our own
business and corporate culture;
* the incorporation of the acquired products or services into our
products and services;
* possible adverse short-term effects on our operating results;
* the realization of acquired intangible assets; and
* the loss of key employees of the acquired companies.
In addition to the foregoing risks, we believe that we will see increased
competition for acquisition candidates in the future. Increased competition for
candidates could raise the cost of acquisitions and reduce the number of
attractive candidates. We cannot assure you that we will be able to identify
additional suitable acquisition candidates, consummate or finance any such
acquisitions, or integrate any such acquisition successfully into our
operations.
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NEED FOR ADDITIONAL CAPITAL
We presently have insufficient working capital to pursue our business plan
involving acquisitions and expansion of our service and product offerings. We
must obtain additional financing to complete the development, testing, and
marketing of Lea Publishing's software products, to continue to expand our
distribution business, and to develop our FrontLine business. We also intend to
pursue new markets and the growth of our business through acquisitions. We can
give no assurance that we will be able to obtain additional capital or, if
available, that such capital will be available at terms acceptable to us.
WARRANTIES
Our suppliers generally warrant the products that we distribute and allow
us to return defective products, including those that have been returned to us
by customers. We do not independently warrant the products that we distribute,
except that we do warrant services provided in connection with the products that
we configure for customers and that we build to order from components purchased
from other sources.
COMPETITION
All aspects of our business are highly competitive. Competition within the
computer products distribution industry is based on product availability, credit
availability, price, speed and accuracy of delivery, effectiveness of sales and
marketing programs, ability to tailor specific solutions to customer needs,
quality and breadth of product lines and services, and the availability of
product and technical support information. We also compete with manufacturers
that sell directly to resellers and end-users.
Competition within the corporate information systems industry is based
primarily on flexibility in providing customized network solutions, resources
and contracts to provide products for integrated systems and consultant and
employee expertise needed to optimize network performance and stability.
A number of our competitors in the computer distribution industry, and most
of our competitors in the information technology consulting industry, are
substantially larger and have greater financial and other resources than we do.
RECRUITMENT AND RETENTION OF TECHNICAL PERSONNEL
Our success depends upon our ability to attract, hire and retain technical
personnel who possess the skills and experience necessary to meet our personnel
needs and staffing requirements of our clients. Competition for individuals with
proven technical skills is intense, and the computer industry in general
experiences a high rate of attrition of such personnel. We compete for such
individuals with other systems integrators and providers of outsourcing
services, as well as temporary personnel agencies, computer systems consultants,
clients and potential clients. Failure to attract and retain sufficient
technical personnel would have a material adverse effect on our business,
operating results and financial condition.
DEPENDENCE UPON CONTINUED MANUFACTURER CERTIFICATION
The future success of FrontLine depends in part on our continued
certification from leading manufacturers. Without such authorizations, we would
be unable to provide the range of services currently offered. There can be no
assurance that such manufacturers will continue to certify us as an approved
service provider, and the loss of one or more of such authorizations could have
a material adverse effect on FrontLine and thus to our business, operating
results and financial condition.
DEPENDENCE UPON SUPPLIERS
One supplier accounted for approximately 16%, 20% and 18% of our total
purchases for the years ended December 31, 2000, 1999 and 1998, respectively.
During the years ended December 31, 1999 and 1998, one additional supplier
located in Taiwan accounted for approximately 11% and 13%, respectively, of our
total purchases. Although we have not experienced significant problems with
suppliers, there can be no assurance that such relationships will continue or,
-9-
in the event of a termination of our relationship with any given supplier, that
we would be able to obtain alternative sources of supply on comparable terms
without a material disruption in our ability to provide products and services to
our clients. This may cause a possible loss of sales that could adversely affect
our business, financial condition and operating results.
INSURANCE AND POTENTIAL EXCESS LIABILITY
The nature of our corporate information systems engagements expose us to a
variety of risks. Many of our engagements involve projects that are critical to
the operations of a client's business. Our failure or inability to meet a
client's expectations in the performance of services or to do so in the time
frame required by such client could result in a claim for substantial damages,
regardless of whether we were responsible for such failure. We are in the
business of employing people and placing them in the workplace of other
businesses. Therefore, we are also exposed to liability with respect to actions
taken by our employees while on assignment, such as damages caused by employee
errors and omissions, misuse of client proprietary information, misappropriation
of funds, discrimination and harassment, theft of client property, other
criminal activity or torts and other claims. Although we maintain general
liability insurance coverage, there can be no assurance that such coverage will
continue to be available on reasonable terms or in sufficient amounts to cover
one or more large claims, or that the insurer will not disclaim coverage as to
any future claim. The successful assertion of one or more large claims against
us that exceed available insurance coverage or changes in our insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on our business,
operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
Our continued success will depend to a significant extent upon our senior
management, including Theodore Li, President and Hui "Cynthia" Lee, Executive
Vice President and head of sales operations, and Steve Flynn, general manager of
FrontLine. The loss of the services of Messrs. Li or Flynn or Ms. Lee, or one or
more other key employees, could have a material adverse effect on our business,
financial condition or operating results. We do not have key man insurance on
the lives of any of members of our senior management.
PURSUIT OF NEW BUSINESS THROUGH LEA PUBLISHING
We plan to enter the proprietary software development business through Lea
Publishing. We have limited experience in developing commercial software
products. We have conducted no independent, formal market studies regarding the
demand for the software currently in development and planned to be developed. We
have, however, conducted informal surveys of our customers and have relied on
business experience in evaluating this market. Further, while we have experience
in marketing computer related products, we have not marketed software or a
proprietary line of our own products. This market is very competitive and nearly
all of the software publishers or distributors with whom Lea Publishing will
compete have greater financial and other resources than Lea Publishing. There
can be no assurance Lea Publishing will be successful in developing commercial
software products, or even if Lea Publishing develops such products, that it
will find market acceptance for them. Finally, there can be no assurance that
Lea Publishing will generate a profit for us.
ECONOMIC AND GENERAL RISKS OF OUR BUSINESS
Our success will depend upon factors that may be beyond our control and
cannot clearly be predicted at this time. Such factors include general economic
conditions, both nationally and internationally, changes in tax laws,
fluctuating operating expenses, changes in governmental regulations, including
regulations imposed under federal, state or local environmental laws, labor
laws, and trade laws and other trade barriers.
-10-
ITEM 2. PROPERTIES
We own property located at 1600 California Circle, Milpitas, California
95035, which was subject to mortgages in the amount of $3,337,600 at December
31, 2000. Of this amount, $2,433,700 is subject to bank financing which bears
interest at the bank's 90-day LIBOR rate (6.875% as of December 31, 2000) plus
2.5% and is secured by a deed of trust on the property. The remaining $903,900
is subject to a Small Business Administration loan which bears interest at a
7.569% rate and is secured by the underlying property. This property of 3.31
acres includes a 44,820 square foot building. The building contains our
executive office and warehouse and we believe it is suitable for the current
size and the nature of our operations. We lease a building in Georgia to house
our branch office pursuant to a three year operating lease which expires October
31, 2003. We have an option to renew this lease for an additional three-year
term. Future lease minimum payments for 2001, 2002 and 2003 are estimated to be
$100,700, $103,600 and $88,500, respectively.
ITEM 3. LEGAL PROCEEDINGS
We are not involved as a party to any legal proceeding other than various
claims and lawsuits arising in the normal course of our business, none of which,
in our opinion, is individually or collectively material to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our security holders during the
fourth quarter of the fiscal year covered by this report.
-11-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq SmallCap Market. It first traded
on the Nasdaq SmallCap Market on January 31, 2000, and prior to such date our
common stock was traded on the OTC Bulletin Board. Our stock first traded on the
OTC Bulletin Board on July 28, 1998. The following table shows the high and low
sale prices in dollars per share for the last two years as reported by the
Nasdaq Small Cap Market and the OTC Bulletin Board. These prices may not be the
prices that you would pay to purchase a share of our common stock during the
periods shown.
High Low
Fiscal Year Ended December 31, 2000 ------ ------
First Quarter $ 8.25 $ 4.88
Second Quarter 6.56 3.31
Third Quarter 4.50 1.50
Fourth Quarter 4.25 0.88
Fiscal Year Ended December 31, 1999
First Quarter $11.25 $ 4.63
Second Quarter 12.38 8.25
Third Quarter 10.00 6.75
Fourth Quarter 7.75 5.00
We had 139 stockholders of record of our common stock as of December 31,
2000.
DIVIDEND POLICY
We have not paid dividends on our common stock. It is the present policy of
our Board of Directors to retain future earnings to finance the growth and
development of our business. Any future dividends will be at the discretion of
our Board of Directors and will depend upon our financial condition, capital
requirements, earnings, liquidity, other factors that our Board of Directors may
deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected financial data and we refer
you to the more detailed consolidated financial statements and the notes thereto
provided in Part IV of this Form 10-K. The financial data as of and for the
years ended December 31, 2000, 1999 and 1998, has been derived from our
consolidated financial statements, which were audited by BDO Seidman LLP. The
financial data as of and for the years ended December 31, 1997 and 1996, has
been derived from our consolidated financial statements, which were audited by
Meredith, Cardozo, Lanz and Chiu LLP.
Fiscal Year Ended December 31
------------------------------------------------------------------------
2000 1999 1998 1997 1996
Statement of Operations Data ------------ ------------ ------------ ------------ ------------
Net Sales $ 88,872,700 $104,938,700 $105,431,200 $ 96,388,500 $ 94,256,600
Net Income 121,800 827,300 1,775,700 1,246,900 2,363,400
Net Income per share to Common
Shareholders - Basic and Diluted 0.01 0.08 0.19 0.14 0.26
Fiscal Year Ended December 31
------------------------------------------------------------------------
2000 1999 1998 1997 1996
Balance Sheet Data ------------ ------------ ------------ ------------ ------------
Current Assets $15,335,200 $15,221,100 $16,886,600 $10,847,800 $ 9,951,600
Current Liabilities 7,710,800 7,614,400 8,955,100 5,116,900 5,652,900
Total Assets 20,861,100 20,689,000 21,108,400 15,019,500 10,929,100
Long-Term Debt 3,286,200 3,337,600 3,377,100 3,428,400 --
Total Liabilities 11,003,300 10,953,000 12,363,700 8,576,300 5,842,600
Shareholders' Equity 9,857,800 9,736,000 8,744,700 6,443,200 5,086,500
-12-
ITEM 7. 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 our consolidated financial statements, which are
included elsewhere in this Annual 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, technological
changes, our acquisition strategy, our need for additional capital, insurance
and potential excess liability, diminished marketability of inventory, 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 Lea, risks associated with our investments
in Rising Edge and Target First 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 the FrontLine Network Consulting
("FrontLine") 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. We also invested in a 50%-owned joint software venture, Lea
Publishing, L.L.C. ("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, Ltd., the other 50% owner of Lea. Finally, our
other subsidiaries, Pacific Magtron, Inc. (PMI) and Pacific Magtron (GA), Inc.
(PMIGA), 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. PMIGA commenced operations
in October 2000 and distributes PMI's products in the southeastern United States
market. As used herein and unless otherwise indicated, the terms "Company" "we"
and "our" refer to Pacific Magtron International Corp. and each of our
subsidiaries.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:
Year Ended December 31,
-------------------------
2000 1999 1998
----- ----- -----
Sales 100.0% 100.0% 100.0%
Cost of sales 92.1 91.9 93.3
----- ----- -----
Gross margin 7.9 8.1 6.8
Operating expenses 7.9 6.5 3.8
----- ----- -----
Income from operations 0.0 1.6 2.9
Other income (expense) and minority interest, net 0.2 (0.3) (0.1)
Income taxes 0.1 0.5 1.1
----- ----- -----
Net income 0.1% 0.8% 1.7%
===== ===== =====
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YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Sales for the year ended December 31, 2000 were $88,872,700, a decrease of
$16,066,000, or approximately 15%, compared to $104,938,700 for the year ended
December 31, 1999. Approximately $8,105,500 of the sales recognized by us for
the year ended December 31, 2000 were attributable to the FrontLine
division/subsidiary, an increase of $3,404,800, or approximately 72%, compared
to $4,700,700 for the year ended December 31, 1999 as we continued to focus on
the development of FrontLine's business during the year. The FrontLine division
was spun off as a separate entity effective October 1, 2000 to better serve the
networking and personal computer requirements of corporate customers. There was
a decrease in sales attributable to our computer products subsidiaries,
including PMI and PMIGA, for the year ended December 31, 2000 of $19,470,800, or
approximately 19%, compared to the previous year. Sales recognized by PMIGA were
approximately $1,156,900 since its commencement of operations in October 2000
through December 31, 2000. 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 economic slowdown. In
addition, we believe that the uncertainty regarding the economy in 2001
depressed sales during the fourth quarter of 2000 as customers were delaying
their buying decisions.
Gross margin for the year ended December 31, 2000 was $7,052,000, a
decrease of $1,431,900 or 17%, compared to $8,483,800 for the year ended
December 31, 1999. The gross margin as a percentage of sales decreased from 8.1%
for the year ended December 31, 1999 to 7.9% for the year ended December 31,
2000. Because our major manufacturers focused on lower margin products, our
computer products division sold more lower margin products during the last half
of 2000. 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 last half
of 2000 which reduced demand and increased pressure on gross margins. Gross
margin relating to FrontLine for the year ended December 31, 2000 was $962,700,
or 12% of FrontLine's sales during the same period as compared to $665,800, or
14% of FrontLine's sales during the year ended December 31, 1999. This decrease
in gross margin was primarily a result of pricing pressures. Since FrontLine's
sales levels accounted for only 9% and 4% of our consolidated sales in 2000 and
1999, respectively, the gross margin percentage earned by FrontLine had only a
minor effect on our overall gross margin in both years. Gross margin relating to
PMIGA in 2000 was $58,900, or 5.1% of PMIGA's sales.
Operating expenses, including selling, general, administrative and research
and development expense, for the year ended December 31, 2000 were $7,041,800,
an increase of $240,000, or 4%, compared to $6,801,800 for the year ended
December 31, 1999. Although we implemented cost cutting measures in anticipation
of the economic slowdown, expenses increased primarily due to the continued
growth of our FrontLine operations and the commencement of the new PMIGA
operations during the fourth quarter of 2000 which resulted in the recognition
of an additional $197,000 in startup expenses. For the year ended December 31,
2000, we also increased spending for professional services to assist in the
formation of an acquisition strategy for the upcoming year and to successfully
settle a dispute with a competitor in September 2000. In addition, there was a
$100,000 increase in research and development expenses incurred relating to our
majority-owned Lea subsidiary during 2000. These increases were partially offset
by a $557,900 decrease resulting from a non-cash charge in 1999 for the
amortization of a prepaid consulting fee which did not occur in 2000. As a
percentage of sales, operating expenses increased to 7.9% for the year ended
December 31, 2000 as compared to 6.5% for the year ended December 31, 1999
resulting from an increase in our fixed operating expenses during a period of
decreased sales.
Income from operations for the year ended December 31, 2000 was $10,200, a
decrease of $1,671,900 or 99%, as compared to $1,682,100 for the year ended
December 31, 1999. As a percentage of sales, income from operations decreased to
0.00% for the year ended December 31, 2000 as compared to 1.6% for the year
ended December 31, 1999. This decrease was mainly due to the 4% increase in
operating expenses and the 15% decrease in sales experienced during the year
ended December 31, 2000.
-14-
During the year ended December 31, 2000, we settled a lawsuit against a
competitor and recognized a gain of $300,000. Interest expense for the year
ended December 31, 2000 was $296,000, an increase of $26,200 or 10%, compared to
$269,800 for the year ended December 31, 1999. This increase was due to an
increase in the floating interest rate charges on one of our mortgages on our
office building facility. Interest income increased from $194,900 for the year
ended December 31, 1999 to $227,300 for the year ended December 31, 2000, an
increase of $32,400 or 17%, which was principally due to better cash management
and higher market interest rates available for short-term investments in cash
and cash equivalents. During the year ended December 31, 2000, our equity in
loss in our newly acquired investment in Rising Edge was $32,000. During the
year ended December 31, 1999, our equity in loss in our investment in Lea was
$222,400.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Sales for the year ended December 31, 1999 were $104,938,700, a decrease of
$492,500, or approximately 0.5%, compared to $105,431,200 for the year ended
December 31, 1998. Approximately $4,700,700 of the sales recognized by us for
the year ended December 31, 1999 were attributable to the FrontLine division
that was formed in May 1998 to serve the networking and personal computer
requirements of corporate customers. Sales recognized by our FrontLine division
were $1,524,000 for the year ended December 31, 1998. Thus, there was a decrease
in sales attributable to our computer products division for the year ended
December 31, 1999 of $3,669,200, or approximately 4%, compared to the
corresponding period of the previous year as we focus our efforts on improving
gross margin. In addition, the uncertainty regarding the impact of the Year 2000
issue slightly depressed sales during the fourth quarter of 1999 as customers
were delaying their buying decisions.
Gross margin for the year ended December 31, 1999 was $8,483,900, an
increase of $1,355,700, or 19%, compared to $7,128,200 for the year ended
December 31, 1998. The gross margin as a percentage of sales increased from 6.8%
for the year ended December 31, 1998 to 8.1% for the year ended December 31,
1999. This increase is primarily due to better cost controls, including
participation in more vendor rebate programs, and an increased focus on
marketing products with a higher gross margin. Gross margin relating to the
FrontLine division for the year ended December 31, 1999 was $665,800, or 14%, of
FrontLine's sales during the same period as compared to $163,000, or 11%, of
FrontLine's sales during the year ended December 31, 1998. However, since
FrontLine's sales levels were relatively insignificant in relation to that of
our computer products group, the higher gross margin percentage earned by
FrontLine had only a minor effect on the overall increase in our gross margin
for the year ended December 31, 1999.
Operating expenses, including selling, general, administrative and
amortization of prepaid consulting fee, for the year ended December 31, 1999
were $6,801,800, an increase of $2,753,600, or 68%, compared to $4,048,200 for
the year ended December 31, 1998. The noted increase is primarily a result of
the hiring of additional personnel to support the expansion of our FrontLine
business segment and establishment of the management infrastructure. In
addition, we incurred additional expenses in 1999 in connection with the
transition to a publicly traded company and a non-cash charge of $557,900 (as
compared to $117,100 during the corresponding period in 1998) for the
amortization of a prepaid consulting fee. As a percentage of sales, operating
expenses increased to 6.5% for the year ended December 31, 1999 as compared to
3.8% for the year ended December 31, 1998 resulting from an increase in our
fixed cost component of operating expenses.
Income from operations for the year ended December 31, 1999 was $1,682,100,
a decrease of $1,397,900, or 45%, as compared to $3,080,000 for the year ended
December 31, 1998. As a percentage of sales, income from operations decreased to
1.6% for the year ended December 31, 1999 as compared to 2.9% for the year ended
December 31, 1998. This decrease was primarily due to the 68% increase in
operating expenses which was marginally offset by the improved gross margin
experienced for the year ended December 31, 1999.
-15-
Interest expense for the year ended December 31, 1999 was $269,800, a
decrease of $8,800, or 3%, compared to $278,600 for the year ended December 31,
1998. This decrease was due to a decrease in the balance of our mortgage on our
office building facility as a result of scheduled principal payments. Interest
income increased from $177,400 for the year ended December 31, 1998 to $194,900
for the year ended December 31, 1999, an increase of $17,500, or 10%, which was
principally due to higher market interest rates available for short-term
investments in cash and cash equivalents.
During 1999, our new equity investment, Lea Publishing, L.L.C. , incurred a
$444,800 net loss, of which 50%, or $222,400, flowed through to us.
UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for 2000 and 1999 is as follows:
Quarter
--------------------------------------------------------
2000 First Second Third Fourth
- ---- ----------- ----------- ----------- -----------
Sales $22,815,200 $21,984,300 $24,125,300 $19,947,900
Gross profit 1,781,800 1,771,000 1,755,600 1,743,600
Net income (loss) 60,800 122,000 254,700 (315,700)
Basic and diluted earnings (loss) per common share (1) $ 0.01 $ 0.01 $ 0.03 $ (0.03)
Quarter
--------------------------------------------------------
1999 First Second Third Fourth
- ---- ----------- ----------- ----------- -----------
Sales $26,580,300 $24,042,400 $28,505,700 $25,810,300
Gross profit 1,901,500 1,916,200 2,190,900 2,475,300
Net income 92,900 72,200 266,600 395,600
Basic and diluted earnings per common share (1) $ 0.01 $ 0.01 $ 0.03 $ 0.04
(1) Earnings (loss) per share are computed independently for each of the
quarters presented. The sum of the quarterly earnings per share in 2000 and
1999 does not equal the total computed for the year due to rounding.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through cash
generated by operations and borrowings under our floor plan inventory loans.
At December 31, 2000, we had consolidated cash and cash equivalents
totaling $4,874,200 and working capital of $7,624,400. At December 31, 1999, we
had consolidated cash and cash equivalents totaling $4,416,300 and working
capital of $7,606,700.
Net cash provided by operating activities for the year ended December 31,
2000 was $1,161,500, which principally reflected the decrease in accounts
receivable, increase in accrued expenses, depreciation and amortization, and net
income during the year, which was partially offset by the increases in
inventories and prepaid expenses and other current assets. Net cash provided by
operating activities for the year ended December 31, 1999 was $3,582,800, which
principally reflected the decrease in inventories, the non-cash consulting fee
expense, and the net income for the year, which was partially offset by an
increase in accounts receivable and a decrease in accounts payable.
Net cash used in investing activities was $502,900 for the year ended
December 31, 2000, primarily resulting from the new investments in Rising Edge
and TargetFirst, Inc. as well as acquisitions of computer equipment and various
assets for PMIGA. Net cash used in investing activities for the year ended
December 31, 1999 was $1,498,900, primarily resulting from improvements made to
our building.
-16-
Net cash used in financing activities was $200,700 for the year ended
December 31, 2000, primarily from the decrease in the floor plan inventory loan
as well as payment of the mortgage loans for our facility. As of December 31,
2000, we had available financing in the form of a $7.0 million floor plan
inventory loan (including a fully used sub-limit of $1.0 million standby letter
of credit) which was collateralized by the inventory purchased and any proceeds
from the sale of the inventory the ("Original Loan"). The outstanding balance of
the Original Loan at December 31, 2000 was $1,329,500 and it was subject to
45-day repayment terms, at which time interest began to accrue at the prime rate
(9.5% at December 31, 2000). The Original Loan was held by Finova Capital
Corporation, which has filed for bankruptcy. We are in the process of obtaining
a commitment for similar financing from a new lender, and anticipate this new
financing to be subject to similar terms as our Original Loan, except borrowings
are expected to be subject to 30-day repayment terms. There can be no assurance,
however, that we will be able to obtain new financing on acceptable terms, or
that we will be able to obtain new financing at all. Net cash used in financing
activities was $865,500 for the year ended December 31, 1999, primarily from the
decrease in the floor plan inventory loans and payment of the mortgage loans for
the office facility.
We presently have insufficient working capital to pursue our long-term
growth plans, including with respect to acquisitions and expansion of our
service and product offerings. Moreover, we expect that additional resources are
needed to fund the development of Lea Publishing's software. We believe,
however, that the cash flow from operations and trade credit from suppliers will
satisfy our anticipated requirements for working capital to support our present
operations through the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged assets or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain and loss is
recognized in income in the period of change. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, we have not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, we do not expect
adoption of the new standard to materially affect our financial statements.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition in Financial Statements", which provides
interpretive guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB No. 101 must be applied to financial
statements no later than the quarter ended September 30, 2000. There was no
material impact from the application of SAB No. 101 on our financial position,
results of operations, or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN44), "Accounting
for Certain Transactions Involving Stock Compensation", an interpretation of APB
Opinion No. 25. FIN44 clarifies the application of Opinion No. 25 for (a) the
definition of an employee for purposes of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN44 became effective
July 2, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998, or January 12, 2000. FIN44 did not have a material
impact on our financial position, results of operations, or cash flows.
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.
-17-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to one of our bank loans with a $2,433,700 balance at December 31, 2000 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, financial position or cash flow. We are not
exposed to material risk based on exchange rate fluctuation or commodity price
fluctuation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following
Part IV.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required to be presented in Part III is, in accordance with
General Instruction G(3) to Form 10-K, incorporated herein by reference to the
information contained in our definitive Proxy Statement for our 2001 Annual
Meeting which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2000.
-18-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
(a) (1) Report of BDO Seidman, LLP
(2) Consolidated Financial Statements and Notes thereto of the
Company including Consolidated Balance Sheets as of December 31,
2000 and 1999 and related Consolidated Statements of Income,
Shareholders' Equity, and Cash Flows for each of the years in the
three year period ended December 31, 2000.
(b) Reports on Form 8-K
None
(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Stock Purchase Agreement, dated July 17, 1998, by and between Pacific
Magtron, Inc., the Shareholders of Pacific Magtron, Inc., and Wildfire
Capital Corporation (filed as an exhibit to our Form 10-12G, File No.
000-25277).
3.1 Articles of Incorporation, as Amended and Restated (filed as an
exhibit to our Form 10-12G, File No. 000-25277).
3.2 Bylaws, as Amended and Restated (filed as an exhibit to our Form
10-12G, File No. 000-25277).
10.1 1998 Stock Option Plan (filed as an exhibit to our Form 10-12G, File
No. 000-25277).
10.2 Sony Electronics Inc. Value Added Reseller Agreement, dated May 1,
1996 (filed as an exhibit to our Form 10-12G, File No. 000-25277).
10.3 Logitech, Inc. Distribution and Installation Agreement, dated March
26, 1997 (filed as an et our Form 10-12G, File No. 000-25277).
10.4 Wells Fargo Term Note, dated February 4, 1997 (filed as an exhibit to
our Form 10-12G, File No. 000-25277).
10.5 Limited Liability Company Operating Agreement for Lea Publishing
L.L.C. dated February 1, 1999 between Pacific Magtron International
Corp. and Rising Edge Technology (filed herewith).
21.1 Subsidiaries (filed herewith).
23.1 Consent of BDO Seidman, LLP (filed herewith).
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 2nd
day of April, 2001.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By /s/ THEODORE S. LI
-------------------------------------
Theodore S. Li
President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Theodore S. Li President, Chief Executive April 2, 2001
- ------------------------- Officer, Treasurer and Director
Theodore S. Li
/s/ Hui "Cynthia" Lee Director and Secretary April 2, 2001
- -------------------------
Hui "Cynthia" Lee
/s/ Betty Li Director April 2, 2001
- -------------------------
Betty Li
/s/ Jey Hsin Yao Director April 2, 2001
- -------------------------
Jey Hsin Yao
/s/ Hank C. Ta Director April 2, 2001
- -------------------------
Hank C. Ta
Director April 2, 2001
/s/ Limin Hu, PhD
- -------------------------
Limin Hu, PhD
-20-
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of income F-5
Consolidated statements of shareholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8
SUPPLEMENTAL SCHEDULE
Schedule II - Valuation and Qualifying Accounts F-28
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders
Pacific Magtron International Corp.
We have audited the accompanying consolidated balance sheets of Pacific Magtron
International Corp. and subsidiaries (the Company) as of December 31, 2000 and
1999, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2000. We have also audited Schedule II - Valuation and Qualifying Accounts as of
and for the years ended December 31, 2000, 1999 and 1998. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform our audits to obtain reasonable assurance about whether the consolidated
financial statements and schedule are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement and schedule
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pacific
Magtron International Corp. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2000, in conformity with auditing
standards generally accepted in the United States of America.
Also, in our opinion, the schedule referred to above presents fairly, in all
material respects, the information set forth therein as of and for the years
ended December 31, 2000, 1999 and 1998.
/s/ BDO Seidman, LLP
San Francisco, California
February 23, 2001
F-2
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2000 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 10) $ 4,874,200 $ 4,416,300
Accounts receivable, net of allowance for doubtful accounts
of $175,000 and $150,000 in 2000 and 1999 (Notes 2 and 10) 5,629,200 6,608,600
Inventories (Note 5) 3,917,900 3,811,200
Prepaid expenses and other current assets 662,200 64,800
Notes and interest receivable from shareholders (Note 2) 171,400 223,600
Deferred income taxes (Note 6) 80,300 96,600
----------- -----------
TOTAL CURRENT ASSETS 15,335,200 15,221,100
PROPERTY, PLANT AND EQUIPMENT, net (Notes 3 and 4) 4,752,300 4,625,900
INVESTMENT IN RISING EDGE (Note 13) 468,000 --
INVESTMENT IN TARGETFIRST (Note 13) 250,000 --
INVESTMENT IN LEA PUBLISHING (Note 13) -- 250,000
DEPOSITS AND OTHER ASSETS 55,600 592,000
----------- -----------
$20,861,100 $20,689,000
=========== ===========
F-3
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
2000 1999
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable (Note 4) $ 51,400 $ 47,300
Floor plan inventory loans (Note 5) 1,329,500 1,482,900
Accounts payable 5,788,600 5,811,600
Accrued expenses 541,300 272,600
----------- -----------
TOTAL CURRENT LIABILITIES 7,710,800 7,614,400
NOTES PAYABLE, less current portion (Note 4) 3,286,200 3,337,600
DEFERRED INCOME TAXES (Note 6) 6,300 1,000
----------- -----------
TOTAL LIABILITIES 11,003,300 10,953,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 7, 8, 9 and 10)
SHAREHOLDERS' EQUITY (Note 11):
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; 10,100,000 shares issued and
outstanding at December 31, 2000 and 1999 10,100 10,100
Additional paid-in capital 1,463,100 1,463,100
Retained earnings 8,384,600 8,262,800
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 9,857,800 9,736,000
----------- -----------
$20,861,100 $20,689,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-4
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
------------ ------------- -------------
SALES (Notes 2 and 10) $ 88,872,700 $ 104,938,700 $ 105,431,200
COST OF SALES (Note 8) 81,820,700 96,454,800 98,303,000
------------ ------------- -------------
GROSS MARGIN 7,052,000 8,483,900 7,128,200
------------ ------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Non-cash amortization of pre-paid consulting fee (Note 11) -- 557,900 117,100
Other selling, general and administrative expenses 6,941,800 6,243,900 3,931,100
------------ ------------- -------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,941,800 6,801,800 4,048,200
RESEARCH AND DEVELOPMENT 100,000 -- --
------------ ------------- -------------
TOTAL OPERATING EXPENSES 7,041,800 6,801,800 4,048,200
------------ ------------- -------------
INCOME FROM OPERATIONS 10,200 1,682,100 3,080,000
------------ ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 227,300 183,700 169,300
Litigation settlement (Note 15) 300,000 -- --
Interest expense (296,000) (269,800) (278,600)
Equity in loss in investment (Note 13) (32,000) (222,400) --
Interest income on shareholder notes (Note 2) -- 11,200 8,100
Other expense (33,400) -- --
------------ ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 165,900 (297,300) (101,200)
------------ ------------- -------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 176,100 1,384,800 2,978,800
INCOME TAXES (Note 6) 104,600 557,500 1,203,100
------------ ------------- -------------
INCOME BEFORE MINORITY INTEREST 71,500 827,300 1,775,700
MINORITY INTEREST IN LEA PUBLISHING LOSS (Note 13) 50,300 -- --
------------ ------------- -------------
NET INCOME $ 121,800 $ 827,300 $ 1,775,700
============ ============= =============
Basic and diluted earnings per share $ 0.01 $ 0.08 $ 0.19
============ ============= =============
Basic weighted average common shares outstanding 10,100,000 10,100,000 9,503,300
Stock options 54,700 108,700 33,200
------------ ------------- -------------
Diluted weighted average common shares outstanding 10,154,700 10,208,700 9,536,500
============ ============= =============
See Accompanying Notes to Consolidated Financial Statements.
F-5
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional
------------------------ Paid-in Retained
Shares Amount Capital Earnings Total
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1997 9,000,000 $ 9,000 $ 774,400 $5,659,800 $6,443,200
Issuance of common stock in connection with
reverse merger (Note 1) 1,000,000 1,000 13,800 -- 14,800
Issuance of common stock for consulting
services (Note 11) 100,000 100 510,900 -- 511,000
NET INCOME -- -- -- 1,775,700 1,775,700
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1998 10,100,000 10,100 1,299,100 7,435,500 8,744,700
Final valuation of common stock issued for
consulting services (Note 11) -- -- 164,000 -- 164,000
NET INCOME -- -- -- 827,300 827,300
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1999 10,100,000 10,100 1,463,100 8,262,800 9,736,000
NET INCOME -- -- -- 121,800 121,800
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 2000 10,100,000 $ 10,100 $1,463,100 $8,384,600 $9,857,800
========== ========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
F-6
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 121,800 $ 827,300 $ 1,775,700
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 215,100 187,400 131,900
Gain on sale of property and equipment -- (2,200) --
Provision for doubtful accounts 182,200 457,500 46,300
Equity in loss in investments 32,000 222,400 --
Deferred income taxes 21,600 34,200 (33,100)
Amortization of prepaid consulting fee -- 557,900 117,100
Changes in operating assets and liabilities,
net of assets acquired and liabilities assumed:
Accounts receivable 797,200 (744,300) (1,265,200)
Inventories (106,700) 2,579,100 (4,323,500)
Prepaid expenses and other current assets (347,400) (21,800) (209,500)
Accounts payable (23,000) (648,700) 1,522,200
Accrued expenses 268,700 134,000 46,800
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,161,500 3,582,800 (2,191,300)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in purchase of business -- -- 15,900
Cash received on sale of property and equipment -- 2,800 --
Notes and interest receivable from shareholders 52,200 44,500 (63,800)
Investment in Lea Publishing -- (222,400) --
Investments in Rising Edge and TargetFirst (750,000) -- --
Deposits and other assets 536,400 (547,100) 12,000
Acquisition of property and equipment (341,500) (775,900) (55,100)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (502,900) (1,498,100) (91,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in floor plan inventory loans (153,400) (822,100) 2,256,600
Principal payments on notes payable (47,300) (43,400) (40,100)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (200,700) (865,500) 2,216,500
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 457,900 1,219,200 (65,800)
CASH AND CASH EQUIVALENTS, beginning of year 4,416,300 3,197,100 3,262,900
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 4,874,200 $ 4,416,300 $ 3,197,100
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-7
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Pacific Magtron International Corp. (formerly Wildfire Capital Corporation, a
publicly traded shell corporation) (the Company), 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 common stock. For accounting purposes, the
acquisition has been treated as the acquisition of the Company by PMI with PMI
as the acquiror (reverse acquisition). The historical financial statements prior
to July 17, 1998 are those of PMI. Since the Company prior to the reverse
acquisition was a public shell corporation with no significant operations,
pro-forma information giving effect to the acquisition is not presented. All
shares and per share data prior to the acquisition have been restated to reflect
the stock issuance as a recapitalization of PMI. The shares held by the
shareholders of the Company prior to the acquisition (1,000,000 shares after
reflecting a three for two reverse stock split effected by the Company
immediately prior to the acquisition) have been recognized as if they were
issued in connection with the acquisition of the Company by PMI.
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.
F-8
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
with 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,
Ltd., the other 50% owner of Lea, which 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No.
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged assets or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain and loss is
recognized in income in the period of change. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2001 to materially affect
its financial statements.
F-9
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No.
101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS", which provides interpretive
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. SAB No. 101 must be applied to financial statements no
later than the quarter ended September 30, 2000. There was no material impact
from the application of SAB No. 101 on the Company's financial position, results
of operations, or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN44), "ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION", an interpretation of APB
Opinion No. 25. FIN44 clarifies the application of Opinion No. 25 for (a) the
definition of an employee for purposes of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN44 became effective
July 2, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998, or January 12, 2000. FIN44 did not have a material
impact on the Company's financial position, results of operations, or cash
flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-10
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATION AND UNCONSOLIDATED INVESTEES
The accompanying 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. Equity investments with ownership of less than 20% are
accounted for on the cost method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original maturities
of 90 days or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company grants credit to its customers after undertaking an investigation of
credit risk for all significant amounts. An allowance for doubtful accounts is
provided for estimated credit losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such amounts. The allowance is
based on reviews of loss, adjustments history, current economic conditions and
other factors that deserve recognition in estimating potential losses. While
management uses the best information available in making its determination, the
ultimate recovery of recorded accounts receivable is also dependent upon future
economic and other conditions that may be beyond management's control.
INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the lower of
cost (moving weighted average method) or market.
F-11
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided using
the straight-line method over the related estimated useful lives, as follows:
Building and improvements 39 years
Furniture and fixtures 7 years
Computers and equipment 5 years
Automobiles 5 years
REVENUE RECOGNITION
The Company recognizes sales when title to the goods has passed to the customer
(generally upon shipment) provided no significant obligations remain and
collectibility is probable. A provision for estimated product returns is
established at the time of sale based upon historical return rates adjusted for
current economic conditions. Service revenues relating to services performed by
the Company's Frontline division are recognized as earned based upon contract
terms, which is generally upon customer acceptance.
WARRANTY REPAIRS
The Company is principally a distributor of numerous electronics products, for
which the original equipment manufacturer is responsible and liable for product
repairs and service. However, the Company does warrant its services with regards
to products configured for its customers and products built to order from
purchased components, and provides for the estimated costs of fulfilling these
warranty obligations at the time the related revenue is recorded. Historically,
warranty costs have been insignificant.
F-12
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company reports income taxes in accordance with SFAS No. 109, ACCOUNTING FOR
INCOME TAXES, which requires an asset and liability approach. This approach
results in the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary differences
between the book carrying amounts and the tax basis of assets and liabilities.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be deductible or taxable
when the assets and liabilities are recovered or settled. Future tax benefits
are subject to a valuation allowance when management believes it is more likely
than not that the deferred tax assets will not be realized.
LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets for impairment. When
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, the Company adjusts the asset down to its estimated fair
value.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE:
The carrying amount reported in the balance sheet for these items approximates
fair value because of the short maturity of these instruments.
LONG-TERM DEBT:
The fair value of long-term debt is estimated based on current interest rates
available to the Company for debt instruments with similar terms and remaining
maturities.
F-13
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES RECEIVABLES FROM SHAREHOLDERS:
The fair value of the notes receivable from shareholders is estimated based on
current interest rates available to the Company for investments with similar
terms and remaining maturities.
As of December 31, 2000 and 1999, the fair values of the Company's financial
instruments approximate their historical carrying amounts.
EARNINGS PER SHARE
During 1998, the Company adopted the provisions of SFAS No. 128, "EARNINGS PER
SHARE". SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity.
2. RELATED PARTY RECEIVABLES
As of December 31, 2000 and 1999, notes receivable from two officer shareholders
aggregated $171,400 and $180,000, respectively. At December 31, 1999, these
notes bore interest at 6% and were unsecured. Principal and interest were due on
April 19, 2000. 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. The accrued interest receivable pertaining to
these notes was $43,600 as of December 31, 1999, and was forgiven by the Company
and charged to expense during 2000.
During 2000, 1999 and 1998, the Company recognized $1,476,100, $724,000 and
$471,000 in sales revenues from a company owned by a member of the Board of
Directors of the Company. Included in accounts receivable as December 31, 2000
and 1999 is $209,400 and $494,200 due from this related customer.
F-14
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of December 31, 2000 and 1999
follows:
DECEMBER 31, 2000 1999
---------- ----------
Building and improvements (Note 4) $3,263,000 $3,240,300
Land 1,158,600 1,158,600
Furniture and fixtures 360,900 337,500
Computers and equipment 513,500 243,600
Automobiles 190,400 164,900
---------- ----------
5,486,400 5,144,900
Less accumulated depreciation 734,100 519,000
---------- ----------
$4,752,300 $4,625,900
========== ==========
4. NOTES PAYABLE
In 1997, the Company obtained financing of $3,498,000 for the purchase of its
office and warehouse facility. Of the amount financed, $2,500,000 was in the
form of a 10-year bank loan utilizing a 30-year amortization period. This loan
bears interest at the bank's 90-day LIBOR rate (6.875% as of December 31, 2000)
plus 2.5%, and is secured by a deed of trust on the property. The balance of the
financing was obtained through a $998,000 Small Business Administration (SBA)
loan due in monthly installments through April 2017. The SBA loan bears interest
at 7.569%, and is secured by the underlying property.
Under the bank loan, the Company is required, among other things, to maintain a
minimum debt service coverage, a maximum debt to tangible net worth ratio and
net income on an annual basis. As of December 31, 2000, the Company was in
compliance with all debt covenants.
F-15
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The balances of the notes as of December 31, 2000 and 1999 are as follows:
2000 1999
---------- ----------
Bank loan $2,433,700 $2,453,700
SBA loan 903,900 931,200
---------- ----------
3,337,600 3,384,900
Less current portion 51,400 47,300
---------- ----------
$3,286,200 $3,337,600
========== ==========
The aggregate amount of future maturities for notes payable are as follows:
YEARS ENDING DECEMBER 31, Amount
----------
2001 $ 51,400
2002 55,900
2003 60,700
2004 66,100
2005 71,500
Thereafter 3,032,000
----------
$3,337,600
==========
5. FLOOR PLAN INVENTORY LOANS AND LETTER OF CREDIT
The Company has a $7 million (including a $1 million letter of credit sub-limit)
auto-renewing floor plan inventory loan available from a financial institution
which is collateralized by the purchased inventory and any proceeds from its
sale or disposition. The $1 million letter of credit is being maintained as
security for inventory purchased on terms from vendors in Taiwan and requires an
annual commitment fee of $15,000. Borrowings under the floor plan line total
$1,329,500 and $1,482,900 as of December 31, 2000 and 1999 and are subject to 45
day repayment terms, at which time interest begins to accrue at the prime rate
(9.5% as of December 31, 2000).
(Unaudited) In March 2001, the financial institution that provided this floor
plan inventory loan filed bankruptcy. The Company is currently negotiating a new
floor plan inventory loan with a different financial institution under
substantially the same terms, except borrowings will be subject to 30 day
repayment.
F-16
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
For the years ended December 31, 2000, 1999 and 1998, income tax expense
(benefit) comprises:
2000 Current Deferred TOTAL
------- -------- -----
Federal $ 56,000 $ 22,500 $ 78,500
State 27,000 (900) 26,100
---------- -------- ----------
$ 83,000 $ 21,600 $ 104,600
========== ======== ==========
1999 Current Deferred TOTAL
---------- -------- ----------
Federal $ 409,800 $ 32,600 $ 442,400
State 113,500 1,600 115,100
---------- -------- ----------
$ 523,300 $ 34,200 $ 557,500
========== ======== ==========
1998 Current Deferred TOTAL
---------- -------- ----------
Federal $ 964,900 $(31,300) $ 933,600
State 271,300 (1,800) 269,500
---------- -------- ----------
$1,236,200 $(33,100) $1,203,100
========== ======== ==========
The following summarizes the differences between the income tax expense and the
amount computed by applying the Federal income tax rate of 34% in 2000, 1999 and
1998 to income before income taxes:
YEAR ENDING DECEMBER 31, 2000 1999 1998
-------- -------- ----------
Federal income tax at statutory rate $ 59,900 $470,800 $1,012,800
State income taxes, net of federal benefit 10,600 86,700 190,300
Other non-deductible expenses 34,100 -- --
-------- -------- ----------
$104,600 $557,500 $1,203,100
======== ======== ==========
F-17
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities as of December 31, 2000 and 1999 were
comprised of the following:
2000 1999
------- -------
Deferred tax assets:
Reserves not currently deductible $68,900 $56,500
State income taxes 9,200 38,400
Accrued compensation and benefits 2,200 1,700
------- -------
80,300 96,600
------- -------
Deferred tax liabilities:
Accumulated depreciation $ 6,300 $ 1,000
======= =======
7. LEASE COMMITMENTS
The Company leases a building in Georgia under a three-year operating lease,
which expires October 31, 2003. The lease provides for the payment of common
area maintenance fees and the Company's share of any increases in insurance and
property taxes over the 2000 base year. Also, the Company has an option to renew
the lease for an additional three-year term.
Future minimum obligations under this non-cancelable operating lease are as
follows:
YEAR ENDING DECEMBER 31, Amount
--------
2001 $100,700
2002 103,600
2003 88,500
--------
$292,800
========
Total rent expense for the years ended December 31, 2000, 1999 and 1998 was
$16,700, $5,500 and $29,700, respectively.
F-18
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. MAJOR VENDORS
One vendor accounted for approximately 16%, 20% and 18% of the total purchases
for the years ended December 31, 2000, 1999 and 1998, respectively. During the
years ended December 31, 1999 and 1998, one additional vendor located in Taiwan
accounted for approximately 11% and 13% of total purchases. No other vendors
account for more than 10% of purchases for any period presented. Management
believes other vendors could supply similar products on comparable terms. A
change in suppliers, however, could cause a delay in availability of products
and a possible loss of sales, which could affect operating results adversely.
9. EMPLOYEE BENEFIT PROGRAM-401(k) PLAN
The Company has a 401(k) plan (the Plan) for its employees. The Plan is
available to all employees who have reached the age of twenty-one and who have
completed three months of service with the Company. Under the Plan, eligible
employees may defer a portion of their salaries as their contributions to the
Plan. Company contributions are discretionary, subject to statutory maximum
levels. Company contributions to the Plan totaled $24,100, $27,300 and $12,800,
for the years ended December 31, 2000, 1999 and 1998, respectively.
10. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with what it
believes are reputable financial institutions. As of December 31, 2000 and 1999,
the Company had deposits at one financial institution which aggregated
$4,067,900 and $4,094,600, respectively. As of December 31, 2000 and 1999, the
Company had deposits amounting to $740,600 and $257,400, respectively, at an
additional financial institution. Such funds are insured by the Federal Deposit
Insurance Company up to $100,000.
A significant portion of the Company's revenues and accounts receivable are
derived from sales made primarily to unrelated companies in the computer
industry and related fields principally throughout the United States and as well
as some foreign countries, including Canada, the United Kingdom, France, Russia
and Israel. For the years ended December 31, 2000, 1999 and 1998, no individual
customer or customers in any one foreign country accounted for more than 10% of
F-19
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sales. The Company believes any risk of accounting loss is significantly reduced
due to the use of various levels of credit insurance, diversity in customers,
geographic sales areas and extending credit based on established limits or
terms. The Company performs credit evaluations of its customers' financial
condition whenever necessary, and generally does not require cash collateral.
11. CAPITAL STOCK
CONSULTING AGREEMENT
On July 17, 1998 the Company issued 100,000 restricted shares of its common
stock to an unrelated party under terms of a consulting agreement. The shares
were to vest 50% on July 17, 1999 and 50% on July 17, 2000. If the services were
not provided as required by the agreement, the consultant was to forfeit all
unvested shares. The Company accounted for this transaction in accordance with
Emerging Issues Task Force (EITF) No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS
THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES". During 1999, the Company and the consultant
periodically discussed the level and type of services required in order for the
shares to vest under the consulting agreement. This discussion led to a
postponement of the scheduled July 17, 1999 vesting date. After further
discussions, the Board of Directors of the Company determined that no further
performance was required by the consultant under the agreement and deemed the
entire 100,000 shares vested on September 17, 1999, resulting in a measurement
date and final valuation of these shares of $675,000.
STOCK OPTION PLAN
On July 16, 1998 the Company adopted the 1998 Stock Option Plan and reserved
1,000,000 shares of Common Stock for issuance under the Plan.
F-20
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity under the Plan is as follows:
Weighted
Weighted Weighted Average
Shares Average Average Remaining
Available Options Exercise Fair Contractual
for Grant Outstanding Price Value Life
---------- ----------- -------- -------- ---------
JULY 16, 1998 1,000,000 -- $ -- $ -- --
Conversion of PMI options (granted in
March 1998) to Plan options (75,400) 75,400 2.42 4.43
Options granted in November 1998 (101,400) 101,400 4.00 1.67
---------- -------- -------- -------- ---------
BALANCES, DECEMBER 31, 1998 823,200 176,800 3.33 2.85 4.7 Years
Options granted (40,000) 40,000 5.00 2.27 --
Options forfeited 19,500 (19,500) 3.33 2.85 --
---------- -------- -------- -------- ---------
BALANCES, DECEMBER 31, 1999 802,700 197,300 3.67 2.73 3.9 Years
Options granted (136,000) 136,000 1.50 1.15 --
Options forfeited 40,000 (40,000) 2.78 2.34 --
---------- -------- -------- -------- ---------
BALANCES, DECEMBER 31, 2000 706,700 293,300 $ 2.78 $ 2.05 3.6 Years
========== ======== ======== ======== =========
The following table summarizes information about stock options outstanding as of
December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Price 12/31/2000 Life Price 12/31/2000 Price
- ----- ---------- ---- ----- ---------- -----
$1.50 124,000 4.6 Years $1.50 8,700 $1.50
$2.42 55,200 2.5 Years $2.42 27,300 $2.42
$4.00 74,100 3.1 Years $4.00 36,600 $4.00
$5.00 40,000 2.9 Years $5.00 8,000 $5.00
-------- ---------- ----- ------- -----
293,300 3.6 Years $2.78 80,600 $3.29
======== ========== ===== ======= =====
F-21
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the Plan, options are exercisable on the date of grant and
expire from four to five years from the date of grant as determined by the Board
of Directors. The Company applies Accounting Principles Board (APB) No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for the plan. Under APB Opinion No. 25, because the exercise price of
the Company stock options equals or exceeds the estimated fair value of the
underlying stock on the date of grant, no compensation cost is recognized.
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plan had been
determined in accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of stock options at the grant date by
using the Black-Scholes option pricing-model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: no dividend yield; expected
volatility of 112%, 61% and 54%; risk-free interest rates of 6.2%, 5.9% and
5.7%; and expected lives of four years for all plan options.
Under the accounting provisions of FASB Statement No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
YEAR ENDING DECEMBER 31, 2000 1999 1998
-------- -------- ----------
Net income:
As reported $121,800 $827,300 $1,775,700
Pro forma $ 3,200 $719,000 $1,694,800
-------- -------- ----------
Basic and diluted earnings per share:
As reported $ 0.01 $ 0.08 $ 0.19
Pro forma $ 0.00 $ 0.07 $ 0.18
======== ======== ==========
F-22
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STATEMENTS OF CASH FLOWS
Cash was paid during the years ended December 31, 2000, 1999 and 1998 for:
YEARS ENDING DECEMBER31, 2000 1999 1998
---------- ---------- ----------
Income taxes $ 203,700 $ 447,000 $1,242,500
Interest $ 296,000 $ 269,800 $ 278,600
========== ========== ==========
As discussed in Note 11, non cash financing activities in 1999 and 1998 resulted
from the issuance of 100,000 shares of its common stock to an unrelated party
under the terms of a consulting agreement.
13. 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 a director, officer and the majority shareholder of Rising Edge
(Rising Edge Majority Holder). 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 Holder. 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 intercompany transactions) flows
through to the Company. During the year ended December 31, 2000, Lea incurred a
$100,800 net loss and the equity in the loss in the investment in Rising Edge
was $32,000. During the period from June 13, 2000 to December 31, 2000, Rising
Edge had $101,100 in revenues and incurred a net loss of $78,200. At December
31, 2000, Rising Edge had total assets of $1,092,200.
F-23
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1999, Lea entered into a software development contract with Rising
Edge which calls for the development of certain internet software 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 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 the year ended December 31,
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. For the year ended
December 31, 1999, the Company's equity loss in its investment in Lea was
$222,400.
On January 20, 2000, the Company acquired, in a private placement, 485,900
shares of convertible preferred stock of a 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 three million
preferred stock offering, is being accounted for using the cost method.
14. SEGMENT INFORMATION
The Company has four reportable segments: PMI, PMI(GA), Frontline and Lea. PMI
imports and distributes electronic products, computer components, and computer
peripheral equipment to various customers throughout the United States, with
PMI(GA) 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. The Company evaluates performance
based on income or loss before income taxes, not including nonrecurring gains or
losses. Intersegment transfers between PMI and Frontline 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.
F-24
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about reported segment profit or loss
and segment assets for the year ended December 31, 2000:
PMI PMI(GA) Frontline Lea Totals
----------- ---------- ----------- --------- -----------
Revenues from external customers $79,610,300 $1,156,900 $8,105,500* $ -- $88,872,700
Interest income 226,800 500 -- -- 227,300
Interest expense 295,800 200 -- -- 296,000
Depreciation and amortization 192,800 4,200 18,100 -- 215,100
Segment income or (loss) before income
taxes and minority interest 390,400 (137,800) 56,300 (100,800) 208,100
Segment assets 18,528,700 1,573,600 2,575,000 -- 22,677,300
Expenditures for segment assets 205,500 102,800 33,200 -- 341,500
=========== ========== ========== ========= ===========
The following table presents information about reported segment profit or loss
and segment assets for the year ended December 31, 1999:
PMI Frontline Lea Totals
------------ ----------- --------- ------------
Revenues from external customers $100,238,000 $4,700,700* $ $104,938,700
Interest income 194,900 -- -- 194,900
Interest expense 269,800 -- -- 269,800
Depreciation and amortization 180,100 7,300 -- 187,400
Segment income or (loss) before income
taxes and minority interest 1,572,400 49,800 (444,800) 1,177,400
Equity in loss in investment in Lea -- -- (222,400) (222,400)
Segment assets 18,865,000 2,046,400 -- 20,911,400
Expenditures for segment assets 706,600 69,300 -- 775,900
============ ========== ========= ============
* Includes service revenues of $275,400, $241,800 and $115,600 in 2000, 1999
and 1998, respectively.
F-25
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about reported segment profit or loss
and segment assets for the year ended December 31, 1998:
PMI Frontline Totals
------------ ------------ ------------
Revenues from external customers $103,907,200 $ 1,524,000* $105,431,200
Interest income 177,400 -- 177,400
Interest expense 278,600 -- 278,600
Depreciation and amortization 131,400 500 131,900
Segment income before income taxes 2,957,700 21,100 2,978,800
Segment assets 20,200,200 908,200 21,108,400
Expenditures for segment assets 48,100 7,000 55,100
============ ============ ============
* Includes service revenues of $275,400, $241,800 and $115,600 in 2000, 1999
and 1998, respectively.
The following is a reconciliation of reportable segment income before income
taxes and total assets to the Company's consolidated totals:
2000 1999 1998
------------ ------------ ------------
INCOME BEFORE INCOME TAXES
Total income before income taxes and
minority interest for reportable segments $ 208,100 $ 1,177,400 $ 2,978,800
Equity in loss in investment in Rising Edge (32,000) -- --
Rising Edge equity in loss in investment in Lea -- 222,400 --
Other losses -- (15,000) --
------------ ------------ ------------
Consolidated income before income taxes
and minority interest 176,100 1,384,800 2,978,800
------------ ------------ ------------
Assets:
Total assets for reportable segments 22,677,300 20,911,400 21,108,400
Other assets 720,400 502,400 --
Elimination of intercompany receivables (2,536,600) (724,800) --
------------ ------------ ------------
Consolidated total assets $ 20,861,100 20,689,000 $ 21,108,400
============ ============ ============
The total of reportable segment revenues equals the Company's consolidated
revenues in 2000, 1999 and 1998.
F-26
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. LITIGATION SETTLEMENT
The Company was a plaintiff in a lawsuit involving a number of claims against a
competitor. On September 27, 2000, this dispute was settled for $300,000, which
is included in other income.
16. SUBSEQUENT EVENT
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. Since FNC did not require payment for these shares by the
employees, the $30,000 estimated fair value of these shares ($0.01 per share)
based upon an independent appraisal of FNC has been recorded as compensation
expense during the fourth quarter of 2000. As a result of this transaction, the
Company has an 87% ownership interest in FNC. In addition, 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 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.
F-27
SUPPLEMENTAL SCHEDULE
PACIFIC MAGTRON INTERNATIONAL CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Beginning Charged to Write-offs ENDING
Allowance for Doubtful Accounts Balance Costs and Expense of Accounts BALANCE
------- ----------------- ----------- -------
Year ended December 31, 1998 $ 113,100 $ 46,300 $ (9,400) $ 150,000
Year ended December 31, 1999 150,000 457,500 (457,500) 150,000
Year ended December 31, 2000 150,000 182,200 (157,200) 175,000
F-28