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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 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
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n/a n/a
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 19, 2002 the aggregate market value of common stock held by
non-affiliates of the registrant was approximately $12,058,000.
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 19, 2002 the number of shares of common stock outstanding was
10,485,062.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 2002 Annual Meeting
of Stockholders are incorporated by reference into Part III, Items 10, 11, 12
and 13.
The following statement is made pursuant to the safe harbor provisions for
forward-looking statements described in the Private Securities Litigation Reform
Act of 1995. Pacific Magtron International Corp. and subsidiaries (the
"Company") may make certain statements in this Annual Report on Form 10-K,
including, without limitation, statements that contain the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, constitute
"forward-looking statements." Forward-looking statements may relate to, among
other items, our future growth and profitability; the anticipated trends in our
industry; our competitive strengths and business strategies; and our new
business initiatives. Further, forward-looking statements are based on our
current expectations and are subject to a number of risks, uncertainties and
assumptions relating to our operations, financial condition and results of
operations. For a discussion of factors that may affect the outcome projected in
such statements, see "Cautionary Factors that May Affect Future Results," in
this Report. If any of these risks or uncertainties materialize, or if any of
the underlying assumptions prove incorrect, actual results could differ
materially from results expressed or implied in any of our forward-looking
statements. We do not undertake any obligation to revise these forward-looking
statements to reflect events or circumstances arising after the date of this
Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
SUMMARY OF OUR BUSINESS
As used in this document and unless otherwise indicated, the terms the
"Company," "PMIC," "we," "our" or "us" refer to Pacific Magtron International
Corp., a Nevada corporation, and its subsidiaries.
Our primary business is to provide computer and information technology solutions
through our wholly-owned subsidiaries, Pacific Magtron, Inc. (PMI), PMI Capital
Corporation (PMICC), Lea Publishing, LLC (Lea), LiveWarehouse, Inc. and
majority-owned subsidiaries, Pacific Magtron (GA), Inc. (PMIGA) and FrontLine
Network Consulting, Inc. (FNC).
Our business is organized into four divisions: PMI, PMIGA, FNC and
Lea/LiveMarket. 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. FNC serves as a corporate information services group
catering to the networking and Internet infrastructure requirements of corporate
clients. Lea/LiveMarket is engaged in the development and distribution of
software and e-business products and services, as well as integration and
hosting services.
In January 1999, we formed Lea, a California limited liability company, to
develop, sell and license software designed to provide Internet users, resellers
and providers advanced solutions and applications. Prior to the ownership
exchange discussed below, we owned a 62.5% combined direct and indirect (through
our 25% ownership interest in Rising Edge Technology (Rising Edge)) interest in
Lea, which is a development stage company. Michael Lee, the brother of Hui
Cynthia Lee, one of our officers and directors, is the president and director
and a majority shareholder of Rising Edge. In December 2001, we entered into an
agreement with Rising Edge and its principal owners to exchange Rising Edge's
50% ownership interest in Lea for our 25% interest in Rising Edge. As a
consequence, we own 100% of Lea and no longer have an ownership interest in
Rising Edge.
On October 15, 2001, we formed PMICC as a wholly-owned subsidiary of PMIC, for
the purpose of acquiring companies or assets deemed suitable for PMIC's
organization.
In the fourth quarter of 2001, certain assets of LiveMarket were purchased
through PMICC and subsequently transferred to Lea. These assets consisting
primarily of computer equipment, furniture and fixtures, certain Web-hosting
contracts, rights to certain intellectual properties, including LiveSell and
LiveExchange, and non-tangible assets such as domain names and trademarks, were
acquired for $85,000, plus $59,100 in acquisition costs, and the assumption of
$20,000 in accrued vacation obligations (investment of $164,100 in total) and
recorded under the purchase method of accounting as prescribed by FASB
Statements No. 141, Business Combinations. LiveMarket is an internet software
development company which designs and develops online stores (LiveSell) to allow
consumers to purchase products directly via a secured transaction network. It
also designs and develops enterprise document exchange solutions (LiveExchange)
for its client's integration of disparate systems.
In December, 2001 LiveWarehouse, Inc. was incorporated as a wholly-owned
subsidiary of PMIC, to provide consumers a convenient way to purchase computer
products via the internet.
Financial information for each group or segment for each of the last three
fiscal years is included in the Audited Consolidated Financial Statements.
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INDUSTRY OVERVIEW
WHOLESALE MICRO COMPUTER PRODUCTS DISTRIBUTION
The microcomputer products distribution industry generally consists of
manufacturers/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. Traditionally, manufacturers rely on
two major channels for the sale of their products - original equipment
manufacturers (OEMS) and wholesale distributors. Today, 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. On the reseller side, growing product complexity,
shorter product life cycles, lower inventory stock level and tighter cash flow
have led resellers to depend upon wholesale for a majority of their purchases.
Resellers often cannot, or choose not to, establish a direct relationship with
manufacturers due to minimum quantity requirements, insufficient credit
facilities and other issues. 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.
OPEN SOURCING
Historically, resellers were restricted, or limited, to a small number of
manufacturer authorized distribution sources such as master distributors for
their product needs. In recent years, competitive pressures led some of the
major manufacturers to authorize multiple sourcing, in which resellers could
purchase products 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, we believe that corporations are increasingly
looking to specialist service organizations, such as FNC, 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
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shortages within the information technology industry, have led businesses to
increasingly outsource the development and maintenance of their computing
systems to network consulting professionals.
SOFTWARE SOLUTIONS AND PUBLISHING
With the increased demand for transacting business over the internet and
businesses' growing reliance on their network infrastructure to process data
timely and accurately, the software requirements to accomplish these tasks has
created growth in the software solution provider and consulting segments.
Businesses are increasingly looking for Application Service Providers (ASP) and
custom software solution providers such as Lea/LiveMarket to solve and improve
their needs, such as interface legacy systems with more advanced applications,
control of data flow and communications between disparate systems. The other
area of growth for software providers is the increased need for B2B or B2C to
communicate effectively to other systems on the internet through a hybrid of
communication means.
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. 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 PMI to
Wildfire's shareholders. 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. PMI was the
accounting acquiror in the reverse acquisition. 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 four main business divisions. Our computer products group operates
through a wholly-owned subsidiary under the name Pacific Magtron, Inc. and a
majority-owned subsidiary, PMIGA. Our corporate information systems group
operates through FNC, a majority-owned subsidiary. Our software development and
publishing group, Lea/LiveMarket, operates through Lea, a wholly-owned
subsidiary.
In addition to the four primary divisions, PMICC and LiveWarehouse, Inc. were
formed in the last quarter of 2001 as wholly owned subsidiaries of PMIC. PMICC
was formed for the purpose of acquiring companies or assets deemed suitable for
PMIC's organization. LiveWarehouse, Inc. was formed to develop a consumer-based
computer products distribution business, designed to provide consumers a
convenient way to purchase computer products via the internet.
PACIFIC MAGTRON, INC. AND PACIFIC MAGTRON (GA), INC. - COMPUTER PRODUCTS
Through PMI and PMIGA we distribute a wide range of computer products, including
components and multimedia and systems networking products to other resellers,
distributors and integrators. We also provide vertical solutions for systems
integrators and Internet resellers by combining or bundling 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
CD-ROMS, DVDs and CDR, CDRW, 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 identify 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
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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 recognized losses due to obsolete inventory in the normal course of
business, and historically, we have not experienced any material losses.
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, company and personal checks 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 credit. We also established reserves for
estimated credit losses in the normal course of business.
FRONTLINE NETWORK CONSULTING - CORPORATE INFORMATION SYSTEMS
INFORMATION TECHNOLOGY (IT) CONSULTING SERVICES: We assist our end-user
corporate clients in identifying solutions for their businesses that match
available technology, the client's existing IT infrastructure, and management's
IT philosophy and preferences to their business needs and initiatives. We
endeavor to understand the client's business and how it relies on the
availability and flow of information from its technology solutions as well as
assessing the value of that information. We baseline the current IT
infrastructure through network, systems, security and business-continuity
assessments. Subsequently, we assist in quantifying solution benefits in terms
of competitive advantage, better e-commerce transaction efficiency, increased
productivity of personnel and processes, reduced cost of ownership and
return-on-investment.
IT DESIGN, PLANNING, AND PROJECT MANAGEMENT SERVICES: As part of providing
specific solution sets, we provide the design, planning, and project management
services within the specializations of Enterprise high-availability services,
enterprise and network management, advanced internetworking, LAN engineering,
telephony/video/data convergence, systems engineering, storage & data
management, and Internetwork/Network/Systems Security.
IT IMPLEMENTATION AND CONFIGURATION SERVICES: For specific project engagements,
we provide configuration, testing, troubleshooting, education and training.
IT PROCUREMENT SERVICES: 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.
IT TRAINING SERVICES: We enhance our client's efficiency and productivity
through training and knowledge-transfer. We have the capability to deliver using
either custom-designed or pre-established courseware.
FRONTLINE STRATEGIC PARTNERSHIPS: One of the factors that permits us to provide
our corporate customers with a high level of service is the development of
strategic supply partnerships with leading manufacturers such as CISCO Systems,
Hewlett-Packard, Compaq, AT&T, Checkpoint, Microsoft, Nortel, Novell and others.
Certification from these manufacturers is based on their recognition of our
expertise at implementing their client solutions, and allows us to offer our
clients the products that they are currently using, along with continuous
education regarding each technology 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
LEA/LIVEMARKET - 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, a Taiwanese software development company formed
in 1996, each owned 50% of Lea. Michael Lee, the brother of Hui Cynthia Lee, one
of our officers and directors, is the president, a director and a majority
shareholder of Rising Edge. On June 13, 2000, we purchased a 25% ownership
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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 terminated this software developing
agreement and Rising Edge refunded $200,000 of our fee payment in January 2001.
Subsequently, Lea continued its software development efforts by use of in-house
programming resources and outsourced the work when appropriate. Lea completed
final testing of WEBChat, its first product, and a second product, InfoBar, but
determined in the fall of 2001 to delay introduction of these products
indefinitely due to market conditions. In December 2001, we entered into an
agreement with Rising Edge Technology (Rising Edge) and its principal owners to
exchange Rising Edge's 50% ownership interest in Lea for our 25% interest in
Rising Edge. As a consequence, we now own 100% of Lea and no longer have an
ownership interest in Rising Edge.
In the fourth quarter of 2001, certain assets of LiveMarket were purchased
through PMICC and subsequently transferred to Lea. These assets, consisting
primarily of computer equipment, furniture and fixtures, certain Web-hosting
contracts, rights to certain intellectual properties including, LiveSell and
Live Exchange, and non-tangible assets such as domain names and trademarks, were
acquired for $85,000, plus $59,100 in acquisition costs, and the assumption of
$20,000 in accrued vacation obligations (investment of $164,100 in total) and
recorded under the purchase method of accounting as prescribed by FASB
Statements No. 141, Business Combinations. LiveMarket is an internet software
development company which designs and develops online stores (LiveSell) to allow
consumers to purchase products directly via a secured transaction network. It
also designs and develops enterprise document exchange solutions (LiveExchange)
for its client's integration of disparate systems.
Lea/LiveMarket provides product and services solutions that connect and manage
consumers, distributors, manufacturers and suppliers by providing a
fully-managed trading network enabled by proven business processes,
state-of-the-art internet technologies, and a network of established partners.
Lea/LiveMarket provides the following products and services.
SYSTEM INTEGRATION & SUPPLY CHAIN CONSULTING SERVICE: Lea/LiveMarket provides
business case and recommendations on business-to-business (B2B) build-out,
return on investment analysis, direct and indirect material spending analysis,
inventory reduction analysis and product cycle time reduction analysis.
INTERNET SOFTWARE DEVELOPMENT AND DEPLOYMENT: Using LiveSell and LiveExchange,
Lea/LiveMarket can design and implement B2B and business-to-customer (B2C) sites
expeditiously and bring EAI capabilities to its client's current environment.
APPLICATIONS SERVICE PROVIDER AND MANAGED SERVICES: Lea/LiveMarket provides
managed hosting services, application monitoring, application support and help
desk support.
CUSTOM PROGRAMMING: Lea/LiveMarket also provides Microsoft Biztalk programming
through the use of LiveExchange, enabling legacy systems to interface with other
systems effectively, automation of communication between disparate systems.
All offerings are based on Microsoft.NET architecture and are marketed under
four specific point solutions, as well as general consulting. Prior to the
transfer of LiveMarket's assets to Lea, Lea's only significant activity
consisted of the software development noted above.
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;
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* actively focusing on building our eastern United States and international
sales through advertising in international markets; and
* implementation of an e-commerce strategy.
The execution of these plans is highly dependent upon the strength of the
overall computer products industry.
Our strategy for developing FNC'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;
* increasing our partnering relationships with independent technology
consultants in order to provide us with access to a new customer base and
provide us with additional consulting talent; and
* continuing to add expertise in newly identified market segments to broaden
our menu of services.
Our strategy for developing Lea/LiveMarket business includes:
* Leverage LiveMarket's intellectual property and knowledge to enter into the
various software development, solution consulting and custom programming,
as well as hosting, markets;
* Continue to develop our current suite of software to integrate enhanced
features based on the future market needs; and
* Identify additional vertical markets where Lea/LiveMarket's skill set can
promote a captured market segment.
In addition to expanding our computer products, corporate information systems
and software development and publishing groups, we also intend to utilize our
management's 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 or that we will have the
capital required to complete such acquisitions.
SALES AND MARKETING
Our sales for our computer products divisions are generated by a telemarketing
sales force, which consisted of approximately 14 people as of February 15, 2002
in our offices located in Milpitas, California and six people 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, we believe that 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. In addition, 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.
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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 our sales staff through intensive in-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 that they sell supplements the sophisticated technical
support and configuration services we provide. Salespeople who are knowledgeable
about the products that they sell often can assist in the configuration of
microcomputer systems according to specifications given by the resellers. We
believe that our 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.
FNC sales are generated primarily through its employees and through referrals
from manufacturers and customers. FNC's sales force currently consists of seven
persons.
Lea/LiveMarket currently generates its sales primarily from customer and direct
and online vendor referrals.
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 facilities in Milpitas, California and
Atlanta, Georgia, we distribute microcomputer products principally throughout
the United States as well as some foreign countries, including Canada, the
United Kingdom, France, Russia and Israel. No individual customer or customers
in any foreign country account for more than 10% of our sales. 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
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 some
manufacturers that sell directly to resellers and end-users. Principal regional
competitors in the wholesale distribution industry include 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.
Competition within the corporate information systems industry is based on
technical know-how, breadth of engineering services available to the client,
flexibility and resources in providing customized network solutions, the ability
to provide the right hardware products for integration. Our principal
competitors in the corporate information systems industry varies, depending on
the project size, from KPMG and other major consulting groups to local VARs and
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Network Integrators. In some cases we compete with those that have greater
financial and other resources.
Competition within the software solution and publishing industry is based on the
ability to identify, program and deliver efficient and cost-effective solutions
within the scope of the projects, as well as the breadth of knowledge available
through its programmers and consultants necessary to bring any project to
conclusion successfully. Lea/LiveMarket faces competition from such companies as
Menugistics, I2, Compuware, and occasionally local independent consulting firms.
A number of our competitors in the computer distribution industry, and most of
our competitors in the information technology consulting industry as well as the
software solution provider industry, are substantially larger and have greater
financial and other resources than we do.
EMPLOYEES
As of February 15, 2002, we had approximately 111 full time employees, all of
whom are non-union, and three executive officers. We believe that our employee
relations are good.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
OPERATING LOSSES
We incurred a net loss for the most recent fiscal year of $2,850,700, and we may
continue to incur losses. In addition, our revenues have decreased 15.6% during
the year ended December 31, 2001 compared to the corresponding period in 2000.
Our future ability to execute our business plan will depend on our efforts to
increase revenues and return to profitability. We have implemented plans to
reduce overhead and operating costs, to build upon our existing business and
capture new business and reposition our business into higher margin product and
service offerings through LiveMarket and LiveWarehouse. No assurance can be
given, however, that our new business initiatives will be successful or that our
other actions will result in increased revenues and profitable operations, which
may have an adverse impact on our ability to execute our business plan.
PURSUIT OF NEW BUSINESS THROUGH LEA/LIVEMARKET
We plan to enter the proprietary software and related internet applications and
service business through Lea/LiveMarket. We have limited experience in this
area. We have conducted no independent, formal market studies regarding the
demand for these products and services. We have not, 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 proprietary software products or related
services. This market is very competitive and nearly all of our competitors with
whom we will compete have greater financial and other resources than us. There
can be no assurance that we will be successful in marketing these products and
services. Finally, there can be no assurance that Lea/LiveMarket will generate a
profit.
ESTABLISHMENT OF OUR NEW BUSINESS-TO-CONSUMER WEBSITE, LIVEWAREHOUSE.COM, MAY
NOT BE SUCCESSFUL
We have established a new B2C website, LiveWarehouse.com. We cannot assure you
that we will achieve market acceptance for this project and achieve a profit,
that we will be able to hire and retain personnel with experience in online
retail marketing and management, that we will be able to execute our business
plan with respect to this market segment or that we will be able to adapt to
technological changes once operational. Further, while we have experience in the
wholesale marketing of computer-related products, we have no experience in
retail marketing. This market is very competitive and some of our competitors
have substantially greater resources than we have.
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. In September of 2001, FNC successfully
acquired certain assets of Technical Insights which has expertise to provide
-8-
computer technical training to corporate clients. Lea, through our newly
incorporated subsidiary PMICC, acquired certain assets of LiveMarket in October
of 2001. LiveMarket is an internet software development company which designs
and develops online stores to allow consumers to purchase products directly via
secured transaction network. It also designs and develops e-store site
management tools to administer customer inquiry and support payment processing
service. 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 ensure 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.
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 either
internally or through acquisitions. We must obtain additional financing to
complete the marketing of Lea/LiveMarket's software products and expand that
business, to continue to expand our distribution business, and to develop our
FNC 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.
-9-
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 FNC 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 FNC and thus to our business, operating results and financial
condition.
DEPENDENCE UPON SUPPLIERS
One supplier accounted for approximately 10%, 16% and 20% of our total purchases
for the years ended December 31, 2001, 2000 and 1999, respectively. During the
year ended December 31, 1999, one additional supplier located in Taiwan
accounted for approximately 11% of our total purchases. Although we have not
experienced significant problems with suppliers, there can be no assurance that
such relationships will continue or, 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.
-10-
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.
ITEM 2. PROPERTIES
We own property located at 1600 California Circle, Milpitas, California 95035,
which was subject to mortgages in the amount of $3,286,200 at December 31, 2001.
Of this amount, $2,411,700 is subject to bank financing which bears interest at
the bank's 90-day LIBOR rate (1.883% as of December 31, 2001) plus 2.5% and is
secured by a deed of trust on the property. The remaining $874,500 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 minimum
lease payments under this non-cancelable operating lease agreement for 2002 and
2003 are estimated to be $103,600 and $88,500, respectively.
LiveMarket, a division of Lea Publishing leases an office in Orange County. The
term of the lease is for three months starting from November 2001 to January
2002 with total rent of $20,000.00. LiveMarket is currently extending the lease
on a month to month basis at a cost to the company of $12,250 per month and is
actively seeking an alternative office location.
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, 2001 ------ ------
First Quarter $ 2.88 $ 1.00
Second Quarter 1.15 0.47
Third Quarter 2.00 0.45
Fourth Quarter 2.95 1.00
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
We had 99 stockholders of record of our common stock as of December 31, 2001.
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, and 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, 2001, 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, has been derived
from our consolidated financial statements, which were audited by Meredith,
Cardozo, Lanz and Chiu LLP.
Fiscal Year Ended December 31
-------------------------------------------------------------------------
Statement of Operations Data 2001 2000 1999 1998 1997
- ---------------------------- ------------ ------------ ------------ ------------ ------------
Net Sales $ 75,011,700 $ 88,872,700 $104,938,700 $105,431,200 $ 96,388,500
(Loss) Income from Operations (3,829,500) 10,200 1,682,100 3,080,000 2,172,200
Net (Loss) Income (2,850,700) 121,800 827,300 1,775,700 1,246,900
Net (Loss) Income per share to Common
Shareholders - Basic and Diluted (0.28) 0.01 0.08 0.19 0.14
-12-
Fiscal Year Ended December 31
-------------------------------------------------------------------------
Balance Sheet Data 2001 2000 1999 1998 1997
- ------------------ ------------ ------------ ------------ ------------ ------------
Current Assets $ 12,501,600 $ 15,335,200 $ 15,221,100 $ 16,886,600 $ 10,847,800
Current Liabilities 6,766,700 7,710,800 7,614,400 8,955,100 5,116,900
Total Assets 17,323,300 20,861,100 20,689,000 21,108,400 15,019,500
Long-Term Debt 3,230,300 3,286,200 3,337,600 3,377,100 3,428,400
Total Liabilities 10,031,200 11,003,300 10,953,000 12,363,700 8,576,300
Shareholders' Equity 7,289,900 9,857,800 9,736,000 8,744,700 6,443,200
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 Form 10-K. 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, and dependence on key personnel.
GENERAL
We provide solutions to customers in several synergetic and rapidly growing
segments of the computer industry. Our business is organized into four
divisions: PMI, PMIGA, FNC and Lea/LiveMarket. Our subsidiaries, PMI and 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, OEMs and systems integrators. PMIGA commenced operations in
October 2000 and distributes PMI's products in the southeastern United States
market. To capture the expanding corporate IT infrastructure market, we
established the FrontLine Network Consulting division in 1998 to provide
professional services to mid-market companies focused on consulting,
implementation and support services of Internet technology solutions. During
2000, this division was incorporated as FNC. On September 30, 2001, FNC acquired
certain assets of Technical Insights, Inc., a computer technical support
company, in exchange for $20,000 worth of PMIC common stock (16,142 shares). The
newly acquired business unit, Technical Insights enables FNC to provide computer
technical training services to corporate clients.
We also invested in a 50%-owned joint software venture, 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. In December 2001, we entered into an agreement with Rising Edge
and its principal owners to exchange the 50% Rising Edge ownership in Lea for
our 25% interest in Rising Edge. As a consequence, PMIC owns 100% of Lea and no
longer has an interest in Rising Edge. Certain LiveMarket assets, which were
initially purchased through PMICC, were transferred to Lea Publishing in the
fourth quarter of 2001 to further assist in the development of internet
software.
As used herein and unless otherwise indicated, the terms Company we and our
refer to Pacific Magtron International Corp. and each of our subsidiaries.
-13-
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants list their three to
five most "critical accounting policies" in their MD&A. The SEC indicated a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are described in Note 1 to the consolidated
financial statements included as Part IV to this Form 10-K. We believe that the
following accounting policies fit the definition of "critical accounting
policies":
REVENUE RECOGNITION
We recognize sales of computer and network products upon delivery of the
goods 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, which have typically been insignificant, adjusted
for current economic conditions. The Company generally does not provide
volume discounts or rebates to its customers, and customer credits for
price protection are generally not granted unless recoverable from the
vendor under the provisions of our vendor agreements. Revenues relating to
services performed by FNC are recognized as earned based upon contract
terms, which is generally upon customer acceptance. Software and service
revenues relating to software design and installation for Lea's customers
are recognized upon completion of the installation and customer acceptance.
LONG-LIVED ASSETS
The Company recognizes impairment losses when the carrying amount of a
long-lived asset, including assets acquired through investments, is not
recoverable and exceeds its fair value. The fair value of an asset is
determined by the Company as the amount at which that asset could be bought
or sold in a current transaction between willing parties or the present
value of the estimated future cash flows from the asset. The asset value
recoverability test is performed by the Company on an on-going basis. The
impairment loss of $718,000 recognized on the investments in Rising Edge
and Target First in 2001 is due to the current period operating loss
combined with a projection of the future continuing losses on those
investments.
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, level of credit insurance 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. During 2001, we increased our allowance for doubtful accounts from
$175,000 to $400,000 to cover our exposure for possible losses resulting
principally from customer checks returned due to insufficient funds and the
overall weakness of the computer products industry and economy as a whole.
While we believe that our reserves are adequate, if our information turns
out to be incomplete or inaccurate, our allowance for doubtful accounts
could be insufficient, and our operating results could suffer.
INVENTORY
Our inventories, consisting primarily of finished goods, are stated at the
lower of cost (moving weighted average method) or market. We regularly
review inventory quantities on hand and record a provision, if necessary,
for excess and obsolete inventory based primarily on our estimated forecast
of product demand. Due to a relatively high inventory turnover rate and the
inclusion of 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, we believe that
our risk for a decrease in inventory value is minimized. No assurance can
be given, however, that we can continue to turn over our inventory as
quickly in the future or that we can negotiate such provisions in each of
our vendor contracts or that such industry practice will continue.
-14-
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 materially from
those estimates.
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,
-------------------------
2001 2000 1999
----- ----- -----
Sales 100.0% 100.0% 100.0%
Cost of sales 92.9 92.1 91.9
----- ----- -----
Gross margin 7.1 7.9 8.1
Operating expenses 12.2 7.9 6.5
----- ----- -----
(Loss) income from operations (5.1) 0.0 1.6
Other income (expense) (0.2) 0.2 (0.3)
Income tax benefit (expense) 1.5 (0.1) (0.5)
Minority interest in FNC and PMIGA 0.0 0.0 0.0
----- ----- -----
Net (loss) income (3.8)% 0.1% 0.8%
===== ===== =====
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Consolidated sales for the year ended December 31, 2001 were $75,011,700, a
decrease of $13,861,000, or approximately 15.6%, compared to $88,872,700 for the
year ended December 31, 2000.
Approximately $3,022,200 of the sales recognized by us for the year ended
December 31, 2001 was attributable to the FNC subsidiary, a decrease of
$5,083,300, or approximately 62.7%, compared to $8,105,500 for the year
ended December 31, 2000. The decrease in FNC sales is due to a weak U.S.
economy combined with a reduction of capital expenditures by our existing
and potential future customers. The Frontline division was spun off as a
separate subsidiary effective October 1, 2000 to better serve the
networking and personal computer requirements of corporate customers.
The combined sales of PMI and PMIGA, our computer products segments, were
$71,738,800 for the year ended December 31, 2001, a decrease of $9,028,400
or approximately 11.2%, compared to $80,767,200 for the year ended December
31, 2000. Sales recognized by PMIGA, which commenced operations in October
2000, were approximately $11,445,300 in 2001 as compared to $1,156,900 in
2000. Sales for PMI decreased by $19,316,800, or 24.3% from $79,610,300 for
the year ended December 31, 2000 to $60,293,500 for the year ended December
31, 2001. The decrease in PMI sales 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 continuous uncertainty regarding
the economy depressed sales during 2001 as customers were delaying their
buying decisions.
-15-
In the fourth quarter of 2001, PMICC acquired certain assets of an internet
software development company, LiveMarket. Subsequently, these assets were
transferred to Lea Publishing (Lea). During the last quarter of 2001,
Lea/LiveMarket generated $250,700 in revenue which related entirely to the
newly-acquired LiveMarket operations.
Consolidated gross margin for the year ended December 31, 2001 was $5,302,100, a
decrease of $1,749,900 or 24.8%, compared to $7,052,000 for the year ended
December 31, 2000. The consolidated gross margin as a percentage of consolidated
sales decreased from 7.9% for the year ended December 31, 2000 to 7.1% for the
year ended December 31, 2001.
Gross margin relating to FNC for the year ended December 31, 2001 was
$391,800, or 13% of FNC's sales during the same period as compared to
$962,700, or 12% of FNC's sales during the year ended December 31, 2000.
The slightly higher gross margin percentage experienced by FNC in 2001 was
attributed to more service revenues earned as a percent of total sales in
2001 compared to 2000. FNC's service revenues were $115,000, or 3.8% of
FNC's total revenues in 2001 as compared to $275,400, or 3.4% of FNC's
total revenues in 2000. In general, FNC has a higher gross margin on
service revenues than products sales as part of the consulting and
implementation services. Since FNC's sales levels accounted for only 4% and
9% of our consolidated sales in 2001 and 2000, respectively, the gross
margin percentage earned by FNC had only a minor effect on our overall
consolidated gross margin in both years.
The combined gross margin for PMI and PMIGA, our computer products
segments, was $4,687,000, or 6.5% for the year ended December 31, 2001
compared to $5,917,800, or 7.3% of the combined sales of PMI and PMIGA, for
the year ended December 31, 2000. PMI's gross margin for the year ended in
December 31, 2001 was $4,066,400, or 6.7% of PMI's sales compared to
$5,858,900 or 7.4% of PMI's sales, for the year ended December 31, 2000.
Because our major manufacturers focused on lower margin products, PMI sold
more lower margin products during 2001. Additionally, PMI experienced
pricing pressures in selling its products. We believe that because of the
economic slowdown, there was an excess supply of computer products
throughout 2001 which reduced demand and increased pressure on gross
margins. Thirdly, vendors also reduced rebates and product advertising
funding to minimize their costs. Finally the lower gross margin is further
compounded by an increase in freight costs. Gross margin relating to PMIGA
in 2001 was $620,600, or 5.4% of PMIGA's sales as compared to year 2000
gross margin percentage in the amount of $58,900 or 5.1% of PMIGA's sales.
The increase in PMIGA 2001 gross margin was due to more products with
higher margin being sold in 2001.
Lea experienced a gross margin of $214,900, or 85.7% of Lea's sales in
2001.
Consolidated operating expenses, including selling, general, administrative, and
research and development expense, for the year ended December 31, 2001 were
$9,063,100, an increase of $2,021,300, or 28.7%, compared to $7,041,800 for the
year ended December 31, 2000. Although we implemented cost cutting measures in
anticipation of the economic slowdown, such as reducing our employee count from
114 as of December 31, 2000 to 104 as of December 31, 2001, expenses increased
primarily due to the continued establishment of our FNC and PMIGA operations,
including among other things, additional expenses associated with our new
distribution facility in Georgia. During 2001, we also increased spending for
consulting and accounting services to assist in the formation of an acquisition
strategy. Consolidated consulting and accounting expenses were $217,000 and
$115,400, in 2001 and 2000, respectively. During 2001, we had a higher level of
bad debt write-offs and increased the allowance for doubtful accounts. As such,
the consolidated bad debt expense increased from $182,200 in 2000 to $450,500 in
2001. During the year ended December 31, 2001, as a result of our ongoing
evaluation of the net realized value of our investments in TargetFirst Inc. and
Rising Edge Technologies, Ltd, we wrote off these investments resulting in an
impairment loss of $250,000 and $468,000, respectively. We also increased our
advertising spending for promoting our Company, products and services.
Consolidated advertising expense was $178,000 in 2001 compared to $3,600 in
2000. Additionally, $171,400 in officer bonuses were paid in 2001. Proceeds
received by the officers for these bonuses were used to repay the officer notes
receivable during 2001. There were no officer bonuses in 2000. As a percentage
of consolidated sales, consolidated operating expenses increased to 12.2% for
the year ended December 31, 2001 as compared to 7.9% for the year ended December
31, 2000 resulting from an increase in our consolidated fixed operating expenses
during a period of decreased sales.
PMI's operating expenses were $5,448,800 for the year ended December 31,
2001, compared to $5,608,700 for the year ended December 31, 2000, a
decrease of $159,900, or 2.9%. The decrease in PMI's operating expenses was
-16-
primarily due to the reduction in payroll expense of $368,900, a cost
reduction of $129,900 in professional services, and was partially offset by
an increase in bad debt expense of $206,800 and repair and maintenance and
internet service expense of $132,100. PMIGA's operating expenses were
$1,285,300 for the year ended December 31, 2001. PMIGA began business in
October 2000 and its operating expenses for the three months in 2000 were
$197,000.
FNC's operating expenses for the year ended December 31, 2001 were
$1,386,400 compared to $1,105,200 for the year ended December 31, 2000. The
increase in FNC's operating expenses was primarily due to an increase in
payroll expense, from our Technical Insights acquisition, of $108,600,
professional services expense of $73,500, and insurance expense of $24,200.
Although FNC had 14 employees as of December 31, 2001 compared to 15 as of
December 31, 2000, FNC recruited and retained employees with higher
qualifications in 2001. The increase in FNC's professional services expense
in 2001 was due to the increase in the search for acquisition
opportunities.
Lea's newly-acquired LiveMarket operations began in October 2001. Operating
expenses were $424,500, including research and development expense of
$68,500, for the three months in 2001. Lea's research and development
expense for the year ended December 31, 2000 was $100,000.
As a result of an ongoing evaluation of the net realizable value of its
investments, PMIC recognized an impairment loss totaling $718,000 during
2001, of which $250,000 related to the cost investment in Target First and
was recorded in the second quarter and $468,000 (including the equity in
the loss in the investment of $14,500 during 2001) related to the equity
investment in Rising Edge and was recorded in the fourth quarter. These
impairment losses were due to a change in the focus of the investees'
business and current period operating losses combined with a projection of
the future continuing losses on those investments.
Consolidated loss from operations for the year ended December 31, 2001 was
$3,829,500 as compared to consolidated income from operations of $10,200 for the
year ended December 31, 2000. As a percentage of sales, loss from consolidated
operations increased to 5.1% for the year ended December 31, 2001 as compared to
0.0% of consolidated income from operations for the year ended December 31,
2000. This consolidated operating loss was mainly due to the 28.7% increase in
consolidated operating expenses and the 15.6% decrease in consolidated sales
experienced during the year ended December 31, 2001. Loss from operations for
the year ended December 31, 2001, including allocations of PMIC corporate
expenses, for PMI, PMIGA, FNC, and Lea was $1,563,500, $619,800, $868,800, and
$191,700, respectively. For the year ended December 31, 2000, PMI and FNC had an
income from operations of $390,400 and $56,300, respectively, and PMIGA and Lea
had an operating loss of $137,800 and $100,800, respectively.
Consolidated interest income was $125,100 for the year ended December 31, 2001
compared to $227,300 for the year ended December 31, 2000. Interest income for
the year ended December 31, 2001 for PMI, PMIGA, and FNC was $100,000, $5,500,
and $34,100, respectively. For the year ended December 31, 2000, PMI, PMIGA and
FNC had interest income of $226,800, $500 and $0, respectively. The decrease in
PMI's interest income was principally due to a decline in funds available to
earn interest and lower interest rates available for short-term investments in
cash and cash equivalents.
Consolidated interest expense for the year ended December 31, 2001 was $255,800,
a decrease of $40,200 or 13.6%, compared to $296,000 for the year ended December
31, 2000. Interest expense for the year ended December 31, 2001 for PMI, PMIGA,
and FNC was $230,700, $600, and $24,500, respectively. For the year ended
December 31, 2000, interest expense for PMI, PMIGA and FNC was $295,000, $200
and $0, respectively. This decrease in PMI's interest expense was due to a
decrease in the floating interest rate charged on our mortgages on our office
building facility located in Milpitas, California and the allocation of $24,500
of interest expense to FNC for the year ended December 31, 2001.
In March 2002, legislation was enacted to extend the general Federal net
operating loss carryback period from 2 years to 5 years for net operating losses
incurred in 2001 and 2002. As a result, we have not recorded a valuation
allowance on the portion of the deferred tax assets relating to Federal net
operating loss carryforward of $1,906,800 as we believe that it is more likely
than not that this deferred tax asset will be realized as of December 31, 2001.
During the first quarter of 2002, this deferred tax asset, totaling
approximately $648,300, will be reclassified to income taxes receivable.
-17-
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.
-18-
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.
UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for 2001 and 2000 is as follows:
Quarter
---------------------------------------------------------
2001 First Second Third Fourth
- ---- ------------ ------------ ------------ ------------
Sales $ 19,956,500 $ 14,961,400 $ 20,840,200 $ 19,253,600
Gross profit 1,259,600 979,700 1,465,200 1,597,600
Net loss (473,600) (1,211,800) (370,000) (795,300)
Basic and diluted (loss) per common share (1) $ (0.05) $ (0.12) $ (0.04) $ (0.08)
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)
- ----------
(1) Earnings (loss) per share are computed independently for each of the
quarters presented. The sum of the quarterly earnings per share in 2001 and
2000 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, 2001, we had consolidated cash and cash equivalents totaling
$3,110,000 (excluding $250,000 in restricted cash) and working capital of
$5,734,900. At December 31, 2000, we had consolidated cash and cash equivalents
totaling $4,874,200 and working capital of $7,624,400.
Net cash used in operating activities for the year ended December 31, 2001 was
$1,634,100, which principally reflected the net loss incurred during the year, a
decrease in accounts payable and an increase in deferred income taxes, which was
partially offset by a decrease in inventories and accounts receivable and a
non-cash impairment loss on investments.
Net cash used in investing activities was $100,000 for the year ended December
31, 2001, primarily resulting from the payment for business acquisitions and
related costs, and acquisition of computer equipment, which was partially offset
by the collection of notes receivable from shareholders of $171,400. Net cash
used in investing activities for the year ended December 31, 2000 was $502,900,
primarily resulting from investments in Rising Edge and TargetFirst Inc, which
were ultimately written off entirely in 2001 due to impairment.
Net cash used in financing activities was $30,200 for the year ended December
31, 2001, primarily from the increase in restricted cash and principal payments
on notes payable, which was mostly offset by the increase in the floor plan
inventory loan and issuance of common stock under the stock option plan. 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.
-19-
On July 13, 2001, PMI and PMIGA (the Companies) obtained a new $4 million
(subject to credit and borrowing base limitations) accounts receivable and
inventory financing facility from Transamerica Commercial Finance Corporation
(the Bank). This new credit facility has a term of two years, subject to
automatic renewal from year to year thereafter. The credit facility can be
terminated under certain conditions and the termination is subject to a fee of
1% of the credit limit. The facility includes an up to $3 million inventory line
(subject to a borrowing base of up to 85% of eligible accounts receivable plus
up to $1,500,000 of eligible inventories), that includes a sub-limit of $600,000
working capital line, and a $1 million letter of credit facility used as
security for inventory purchased on terms from vendors in Taiwan. Borrowing
under the inventory loans are subject to 30 to 45 days repayment, at which time
interest begins to accrue at the prime rate, which was 4.75% at December 31,
2001. Draws on the working capital line also accrue interest at the prime rate.
The credit facility is guaranteed by both PMIC and FNC. As of December 31, 2001,
the Companies had an outstanding balance of $1,422,100 due on this credit
facility.
Under the agreement, PMI and PMIGA granted the Bank a security interest in all
of their accounts, chattel paper, cash, documents, equipment, fixtures, general
intangibles, instruments, inventories, leases, supplier benefits and proceeds of
the foregoing. The Companies are also required to maintain certain financial
covenants. As of September 30 and December 31, 2001, the Companies were in
violation of the minimum tangible net worth covenant. On March 6, 2002, the Bank
issued a waiver for the default and revised the covenants under the credit
agreement retroactively to September 30, 2001. As of December 31, 2001, the
Companies were in compliance with these new covenants.
In March 2001, FNC obtained a $2 million discretionary credit facility from
Deutsche Financial Services Corporation (Deutsche) to purchase inventory. To
secure payment, Deutsche obtained a security interest in all of FNC's inventory,
equipment, fixtures, accounts, reserves, documents, general intangible assets
and all judgments, claims, insurance policies, and payments owed or made to FNC.
Under the loan agreement, all draws mature in 30 days. Thereafter, interest
accrues at the lesser of 16% per annum or at the maximum lawful contract rate of
interest permitted under applicable law.
FNC is required to maintain certain financial covenants to qualify for the
Deutsche credit line, and was not in compliance with certain of these covenants
as of December 31, 2001, which constitutes a technical default under the credit
line. This gives the financial institution, among other things, the right to
call the loan and terminate the credit line. The credit facility is guaranteed
by PMIC and can be terminated by Deutsche immediately given the default. As of
December 31, 2001 and February 28, 2002, FNC had an outstanding balance of
$122,900 and $37,700, respectively, due under this credit facility. As of March
14, 2002, this line of credit had not been terminated by Deutsche, and we
continued to borrow and repay funds in accordance with the terms of the credit
facility.
Pursuant to one of our bank mortgage loans with a $2,411,700 balance at
December, 31, 2001, we are required to maintain certain financial covenants.
During 2001, we were in violation of a consecutive quarterly loss covenant and
an EBITDA coverage ratio covenant, which is an event of default under the loan
agreement that gives the bank the right to call the loan. While a waiver of
these loan covenant violations was obtained from the bank in March 2002,
retroactive to December 31, 2001, and through December 31, 2002, we were
required to transfer $250,000 to a restricted account as a reserve for debt
servicing. This amount has been reflected as restricted cash in the consolidated
financial statements.
On May 7, 2001, our Board of Directors authorized a share repurchase program
whereby up to $100,000 worth of our common stock may be repurchased and held as
treasury stock. During 2001, we purchased and retired 20,400 shares of treasury
at a cost of $14,600.
We presently have insufficient working capital to pursue our long-term growth
plans with respect to expansion of our service and product offerings, either
internally or through acquisitions. Moreover, we expect that additional
resources are needed to fund the development and marketing of Lea's software and
related services. We believe, however, that our existing cash available,
borrowings under our Transamerica credit facility and trade credit from
suppliers will satisfy our anticipated requirements for working capital to
support our present operations through the next 12 months.
Presently we do not have sufficient funds to pursue our business plan involving
acquisitions to pursue new markets and the growth of our business. Although we
are actively seeking and evaluating potential acquisition prospects, there is no
assurance that we will be able to obtain additional capital for these potential
acquisitions.
-20-
Our stock is currently traded on The Nasdaq SmallCap Market. However, we
received notice in July 2001 from Nasdaq that we failed to maintain a minimum
market value of public float of $1 million and a minimum bid price of $1.00 over
30 consecutive trading days as required by Nasdaq's rules. We were given 90
calendar days, or until October 1, 2001 to regain compliance by maintaining a
minimum market value of public float of $1 million and bid price of at least
$1.00 for a minimum of 10 consecutive trading days. As of September 5, 2001, we
believe we have complied with this notice and maintain the necessary minimums,
including trading at or above $1.00 for the minimum 10 trading days.
Subsequently, on September 27, 2001, Nasdaq implemented a moratorium on the
minimum bid price and market value of public floatation requirements to all
companies that were previously subject to these requirements. The moratorium
suspended such requirements until January 2, 2002. Despite the suspension of the
listing requirements, our share price had been maintained above the $1.00
minimum bid price since August 22, 2001.
RELATED PARTY TRANSACTIONS
At December 31, 1999, we had notes receivable from two officer/shareholders
which bore interest at 6% and were unsecured. 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. Additionally, 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. As
of December 31, 2000, notes receivable from these two officer shareholders
aggregated $171,400 and were repaid in full during 2001 using proceeds from
officer bonuses declared and paid by us during the period.
We sell computer products to a company owned by a member of our Board of
Directors. Management believes that the terms of these sales transactions are no
more favorable than given to unrelated customers. During 2001, 2000 and 1999,
the Company recognized $476,200, $1,476,100 and $724,000 in sales revenues from
this company. Included in accounts receivable as of December 31, 2001 and 2000
is $200 and $209,400, respectively, due from this related customer.
In 2001, FNC acquired certain assets of Technical Insights in exchange for
16,100 shares of PMIC common stock. Under the purchase agreement, among other
terms, FNC was required to pay $126,000 to the sellers upon completion and full
settlement of a sale transaction as specified in the agreement. On October 2001
the sellers became employees of FNC. As a result of this profit sharing
arrangement, the $126,000 payment to the seller was recorded as compensation
expense by the Company. As of December 31, 2001, $126,000 was owed to these
employees and is included in accounts payable. In January 2002, this amount was
paid to the sellers/employees under the terms of the purchase agreement.
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). 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 had a 62.5% combined direct and indirect
ownership interest in Lea, which required the consolidation of Lea with the
Company. We accounted for our investment in Rising Edge by the equity method
whereby 25% of the equity interest in the net income or loss of Rising Edge
(excluding Rising Edge's portion of the results of Lea and all inter-company
transactions) flows through to the Company. During the year ended December 31,
2001, Lea incurred a $191,700 net loss and the equity in the loss for the
investment in Rising Edge was $14,500. 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 year ended December 31, 2001, Rising Edge
had $9,800 in revenues and incurred a net loss of $58,100. 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. During 2001, we recognized a $468,000 impairment loss on
our investment in Rising Edge, which includes the equity in the loss in the
investment of $14,500 during 2001.
In November 1999, Lea entered into a software development contract with Rising
Edge which called 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 (of which $220,000 represented the
Company's portion) and $500,000 was to be applied to services to be performed in
2000. The Company and Rising Edge were each responsible for $470,000 of the fee.
-21-
During 1999, we paid $470,000 for our 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 our remaining
portion of the software development fees prepaid under the contract, totaling
$200,000, was refunded. For the year ended December 31, 1999, our equity loss in
its investment in Lea was $222,400.
In December 2001, we entered into an agreement with Rising Edge Technology
(Rising Edge) and its principal owners to exchange the 50% Rising Edge ownership
interest in Lea for our 25% ownership interest in Rising Edge. As a consequence,
PMIC owns 100% of Lea and no longer has an ownership interest in Rising Edge.
Because of the write-down of the Rising Edge Investment to zero in the fourth
quarter of 2001, no amounts were recorded for the 50% Rising Edge ownership
interest in Lea received in this exchange.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement and
income statement classification for sales incentives offered voluntarily by a
vendor without charge to customers that can be used in, or are exercisable by a
customer as a result of, a single exchange transaction. In April 2001, the EITF
reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of
Consideration to a Purchaser of the Vendor's Products or Services." This issue
addresses the recognition, measurement and income statement classification of
consideration, other than that directly addressed by Issue 00-14, from a vendor
to a retailer or wholesaler. Issue 00-25 will be effective for the Company's
2002 fiscal year. Both Issue 00-14 and 00-25 have been codified under Issue
01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." We are currently analyzing Issue 01-09.
Issue 01-09 is not expected to have a material impact on the Company's financial
position or results of operations, except that certain reclassifications may
occur. The consensus reached in Issue 00-25 and Issue 00-14 (codified by Issue
01-09) are effective for fiscal quarters beginning after December 15, 2001.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141. .
The Company recorded its acquisition so Technical Insights and LiveMarket in
September and October 2001 in accordance with SFAS 141 and did not recognize any
goodwill relating to these transactions. However, certain intangibles, including
intellectual property and vendor reseller agreements, totaling $59,400 were
identified and recorded in the consolidated financial statements.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company does not expect
the adoption of SFAS No. 142 to have a material effect on its financial
position, results of operations or cash flows since the value of intangibles
recorded is relatively insignificant and no goodwill has been recognized.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) Accounting for
Obligations Associated with the Retirement of Long-Lived Assets. SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost asset and classify the accrued
amount as a liability in the balance sheet. The asset retirement liability is
then accreted to the ultimate payout as interest expense. The initial
measurement of the ability would be subsequently updated for revised estimates
of the discounted cash outflows. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. The Company does not expect the adoption of SFAS
143 to have a material effect its financial position, results of operations, or
cash flows.
-22-
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes the SFAS No.
121 by requiring that one accounting model to be used for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired, and
by broadening the presentation of discontinued operation to include more
disposal transactions. SFAS No. 144 will be effective for fiscal years beginning
after December 15, 2001. The Company does not expect the adoption of SFAS No.
144 to have a material effect on its 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.
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 $2,411,700 balance at December 31, 2001 which bears
fluctuating interest based on the bank's 90-day LIBOR rate. We believe that
fluctuations in interest rates in the near term would not materially affect our
consolidated operating results, 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.
-23-
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 2002 Annual
Meeting which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2001.
-24-
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,
2001 and 2000 and related Consolidated Statements of Operations,
Shareholders' Equity, and Cash Flows for each of the years in the
three year period ended December 31, 2001.
(b) Reports on Form 8-K
Form 8-K filed on June 24, 2001 to report that a footnote in our
Consolidated Financial Statements, included in our Annual Report,
inadvertently included a discussion regarding an acquisition by the
Company's FrontLine subsidiary. The acquisition was never consummated
and an asset purchase agreement was not signed.
(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 as an exhibit to our Report on
Form 10-K for fiscal year ended December 31, 2000).
10.6 Accounts Receivable and Inventory Financing Agreement between
Transamerica Commercial Finance Corporation, Pacific Magtron, Inc. and
Pacific Magtron (GA), Inc. dated July 13, 2001 (filed as an exhibit to
our Report on Form 10-Q for quarter ended June 30, 2001).
10.7 Amendment No. 2 to Accounts Receivable and Inventory Financing
Agreement by and between Transamerica Commercial Finance Corporation
and Pacific Magtron, Inc. and Pacific Magtron (GA), Inc. (filed
herewith).
10.8 Amendment No. 1 to Accounts Receivable and Inventory Financing
Agreement by and between Transamerica Commercial Finance Corporation
and Pacific Magtron, Inc. and Pacific Magtron (GA), Inc. (filed
herewith).
21.1 Subsidiaries (filed herewith).
23.1 Consent of BDO Seidman, LLP (filed herewith).
-25-
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 29th
day of March, 2002.
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 MARCH 29, 2002
- ------------------------- OFFICER, TREASURER AND DIRECTOR
THEODORE S. LI
/s/ HUI CYNTHIA LEE DIRECTOR AND SECRETARY MARCH 29, 2002
- -------------------------
HUI CYNTHIA LEE
/s/ JEY HSIN YAO DIRECTOR MARCH 29, 2002
- -------------------------
JEY HSIN YAO
/s/ BETTY LIN DIRECTOR MARCH 29, 2002
- -------------------------
BETTY LIN
/s/ HANK C. TA DIRECTOR MARCH 29, 2002
- -------------------------
HANK C. TA
/s/ LIMIN HU, PHD DIRECTOR MARCH 29, 2002
- -------------------------
LIMIN HU, PHD
/s/ JOHN REED DIRECTOR MARCH 29, 2002
- -------------------------
JOHN REED
-27-
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of shareholders' equity F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7
SUPPLEMENTAL SCHEDULE
Schedule II - Valuation and Qualifying Accounts F-22
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, 2001 and
2000, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2001. We have also audited Schedule II - Valuation and Qualifying
Accounts as of and for the years ended December 31, 2001, 2000 and 1999. 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, 2001 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001, in conformity with accounting
principles 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, 2001, 2000 and 1999.
/s/ BDO SEIDMAN, LLP
San Francisco, California
March 6, 2002, Except for Note 17
which is as of March 14, 2002
F-2
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2001 2000
----------- -----------
ASSETS (Note 5)
CURRENT ASSETS:
Cash and cash equivalents (Note 10) $ 3,110,000 $ 4,874,200
Restricted cash (Note 4) 250,000 --
Accounts receivable, net of allowance for doubtful
accounts of $400,000 and $175,000 (Notes 2 and 10) 4,590,100 5,629,200
Inventories (Note 5) 2,952,000 3,917,900
Prepaid expenses and other current assets (Note 11) 387,300 446,500
Income taxes receivable (Notes 6 and 17) 399,200 215,700
Notes receivable from shareholders (Note 2) -- 171,400
Deferred tax assets (Note 6) 813,000 80,300
----------- -----------
TOTAL CURRENT ASSETS 12,501,600 15,335,200
PROPERTY, PLANT AND EQUIPMENT, net (Notes 3 and 4) 4,761,500 4,752,300
INVESTMENT IN RISING EDGE (Note 13) -- 468,000
INVESTMENT IN TARGETFIRST (Note 13) -- 250,000
DEPOSITS AND OTHER ASSETS 60,200 55,600
----------- -----------
$17,323,300 $20,861,100
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable (Note 4) $ 55,900 $ 51,400
Floor plan inventory loans (Note 5) 1,545,000 1,329,500
Accounts payable (Note 2) 4,786,600 5,788,600
Accrued expenses 379,200 541,300
----------- -----------
TOTAL CURRENT LIABILITIES 6,766,700 7,710,800
NOTES PAYABLE, less current portion (Note 4) 3,230,300 3,286,200
DEFERRED TAX LIABILITIES (Note 6) 34,200 6,300
----------- -----------
TOTAL LIABILITIES 10,031,200 11,003,300
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 8, 9 and 10)
MINORITY INTEREST - PMIGA 2,200 --
----------- -----------
SHAREHOLDERS' EQUITY (Notes 1 and 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; 10,485,100 and 10,100,000 shares issued
and outstanding 10,500 10,100
Additional paid-in capital 1,745,500 1,463,100
Retained earnings 5,533,900 8,384,600
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 7,289,900 9,857,800
----------- -----------
$17,323,300 $20,861,100
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-3
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
SALES (Notes 2 and 10):
Products $ 74,853,100 $ 88,597,300 $ 104,696,900
Services 158,600 275,400 241,800
------------- ------------- -------------
TOTAL SALES 75,011,700 88,872,700 104,938,700
------------- ------------- -------------
COST OF SALES (Note 8):
Products 69,660,600 81,691,100 96,407,300
Services 49,000 129,600 47,500
------------- ------------- -------------
TOTAL COST OF SALES 69,709,600 81,820,700 96,454,800
------------- ------------- -------------
GROSS MARGIN 5,302,100 7,052,000 8,483,900
------------- ------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Non-cash amortization of pre-paid consulting fee (Note 11) -- -- 557,900
Other selling, general and administrative expenses 8,345,100 6,941,800 6,243,900
Impairment loss on investments (Note 13) 718,000 -- --
------------- ------------- -------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,063,100 6,941,800 6,801,800
RESEARCH AND DEVELOPMENT 68,500 100,000 --
------------- ------------- -------------
TOTAL OPERATING EXPENSES 9,131,600 7,041,800 6,801,800
------------- ------------- -------------
(LOSS) INCOME FROM OPERATIONS (3,829,500) 10,200 1,682,100
------------- ------------- -------------
OTHER (EXPENSE) INCOME:
Interest income 125,100 227,300 183,700
Litigation settlement (Note 16) -- 300,000 --
Interest expense (255,800) (296,000) (269,800)
Equity in loss on investment (Note 13) -- (32,000) (222,400)
Interest income on shareholder notes (Note 2) -- -- 11,200
Other expense (1,600) (33,400) --
------------- ------------- -------------
TOTAL OTHER (EXPENSE) INCOME (132,300) 165,900 (297,300)
------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (3,961,800) 176,100 1,384,800
INCOME TAX BENEFIT (EXPENSE) (Notes 6 and 17) 1,078,200 (104,600) (557,500)
------------- ------------- -------------
(LOSS) INCOME BEFORE MINORITY INTEREST (2,883,600) 71,500 827,300
MINORITY INTEREST IN FNC AND PMI-GA LOSS (Note 13) 32,900 50,300 --
------------- ------------- -------------
NET (LOSS) INCOME $ (2,850,700) $ 121,800 $ 827,300
============= ============= =============
Basic and diluted (loss) earnings per share $ (0.28) $ 0.01 $ 0.08
============= ============= =============
Basic weighted average common shares outstanding 10,280,100 10,100,000 10,100,000
Stock options -- 54,700 108,700
------------- ------------- -------------
Diluted weighted average common shares outstanding 10,280,100 10,154,700 10,208,700
============= ============= =============
See Accompanying Notes to Consolidated Financial Statements.
F-4
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional
-------------------------- Paid-in Retained
(Notes 1 and 11) Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
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 -- -- 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
Issuance of Common Stock in
exchange for advertising
services 333,400 300 199,700 -- 200,000
Purchase of assets in exchange
for stock 16,100 -- 20,000 -- 20,000
Exercise of stock options 56,000 100 55,200 -- 55,300
Tax benefit of stock options
Exercised -- -- 22,100 -- 22,100
Repurchase and retirement of
Treasury Stock (20,400) -- (14,600) -- (14,600)
Net Loss -- -- -- (2,850,700) (2,850,700)
----------- ----------- ----------- ----------- -----------
Balances, December 31, 2001 10,485,100 $ 10,500 $ 1,745,500 $ 5,533,900 $ 7,289,900
=========== =========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-5
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)income $(2,850,700) $ 121,800 $ 827,300
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Impairment loss on investments 718,000 -- --
Depreciation and amortization 279,000 215,100 187,400
Loss on disposal of property and equipment (1,400) -- (2,200)
Provision for doubtful accounts 450,500 182,200 457,500
Equity in loss on investments -- 32,000 222,400
Deferred income taxes (682,700) 21,600 34,200
Amortization of prepaid consulting fee -- -- 557,900
Minority interest losses (32,900) -- --
Changes in operating assets and liabilities,
net of assets acquired and liabilities assumed:
Accounts receivable 588,600 797,200 (744,300)
Inventories 965,900 (106,700) 2,579,100
Prepaid expenses and other current assets 259,200 (347,400) (21,800)
Income taxes receivable (183,500) -- --
Accounts payable (1,002,000) (23,000) (648,700)
Accrued expenses (142,000) 268,700 134,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,634,000) 1,161,500 3,582,800
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received on disposal of property and equipment -- -- 2,800
Notes receivable from shareholders 171,400 52,200 44,500
Investment in Lea Publishing -- -- (222,400)
Investments in Rising Edge and TargetFirst -- (750,000) --
Deposits and other assets (4,600) 536,400 (547,100)
Payment for business acquisitions and related costs (170,700) -- --
Acquisition of property and equipment (96,100) (341,500) (775,900)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (100,000) (502,900) (1,498,100)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in floor plan inventory loans 215,500 (153,400) (822,100)
Principal payments on notes payable (51,400) (47,300) (43,400)
Restricted cash (250,000) -- --
Issuance of Common Stock under stock option plan 55,300 -- --
Repurchase of common stock (14,600) -- --
Proceeds from sale of PMIGA stock
to minority shareholder 15,000 -- --
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (30,200) (200,700) (865,500)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,764,200) 457,900 1,219,200
CASH AND CASH EQUIVALENTS, beginning of year 4,874,200 4,416,300 3,197,100
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,110,000 $ 4,874,200 $ 4,416,300
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F-6
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 $0.001 par value common stock. For accounting
purposes, the acquisition has been treated as the acquisition of the Company by
PMI with PMI as the acquirer (reverse acquisition).
PMI, a California corporation, was incorporated on August 11, 1989. PMI's
principal activity consists of the importation and wholesale distribution of
electronics products, computer components, and computer peripheral equipment
throughout the United States.
In May 1998, the Company formed its Frontline Network Consulting (Frontline)
division, a corporate information systems group that serves the networking and
personal computer requirements of corporate customers. In July 2000, the Company
formed Frontline Network Consulting, Inc. (FNC), a California corporation.
Effective October 1, 2000, PMI transferred the assets and liabilities of the
Frontline division to FNC.
Concurrently, FNC issued 20,000,000 shares to the Company and became a
wholly-owned subsidiary. On January 1, 2001, FNC issued 3,000,000 shares of its
common stock to three key FNC employees for past services rendered pursuant to
certain Employee Stock Purchase Agreements. As a result of this transaction, the
Company's ownership interest in FNC was reduced to 87%. In August 2001, FNC
repurchased and retired one million of its shares from a former employee at
$0.01 per share, resulting in an increase in the Company's ownership of FNC from
87% to 91%.
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
December 2001, the Company entered into an agreement with Rising Edge Technology
(Rising Edge) and its principal owners to exchange the 50% Rising Edge ownership
interest in Lea for our 25% ownership interest in Rising Edge. As a consequence,
PMIC owns 100% of Lea and no longer has an ownership interest in Rising Edge.
In August 2000, PMI formed Pacific Magtron (GA), Inc., a Georgia corporation
whose principal activity is the wholesale distribution of PMI's products in the
eastern United States market. During 2001, PMIGA sold 15,000 shares of its
common stock to an employee for $15,000. As a result of this transaction, PMI's
ownership interest in PMIGA was reduced to 98%.
On October 15, 2001, the Company formed an investment holding company, PMI
Capital Corporation (PMICC), a wholly-owned subsidiary of the Company, for the
purpose of acquiring companies or assets deemed suitable for PMIC's
organization. In October 2001, the Company acquired through PMICC certain assets
and assumed the accrued vacation of certain employees of Live Market, Inc. in
exchange for a cash payment of $85,000. These LiveMarket assets were then
transferred to Lea.
In December 2001, the Company incorporated LiveWarehouse, Inc., a wholly-owned
subsidiary of the Company, to provide consumers a convenient way to purchase
computer products via the internet.
F-7
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 materially from those estimates.
CONSOLIDATION AND UNCONSOLIDATED INVESTEES
The accompanying consolidated financial statements include the accounts of
Pacific Magtron International Corp. and its wholly-owned subsidiaries, PMI, LEA,
PMICC and LiveWarehouse and majority-owned subsidiaries, FNC and PMIGA. All
inter-company 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.
RECLASSIFICATIONS
Certain of the 2000 and 1999 financial statement amounts have been reclassified
to conform to the 2001 presentation.
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,
level of credit insurance 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.
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
Software 3 years
F-8
REVENUE RECOGNITION
The Company recognizes sales of computer and network products upon delivery of
the goods 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, which have typically been insignificant, adjusted for current economic
conditions. The Company generally does not provide volume discounts or rebates
to its customers, and customer credits for price protection are generally not
granted unless recoverable from the vendor under the provisions of the Company's
vendor agreements. Revenues relating to services performed by FNC are recognized
as earned based upon contract terms, which is generally upon delivery and
customer acceptance. Software and service revenues relating to software design
and installation for Lea's customers are recognized upon completion of the
installation and customer acceptance.
ADVERTISING COSTS
Advertising costs, except for certain radio advertising credits which are
capitalized and expensed as these credits are utilized, are expensed as incurred
and are included in other selling, general and administrative expenses in the
accompanying consolidated statements of operations. Included in prepaid expenses
and other current assets as of December 31, 2001 is $200,000, representing the
outstanding balance of the radio advertising credits. Advertising expense was
$178,000, $3,600, and $5,500 in 2001, 2000, and 1999, respectively.
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.
INCOME TAXES
The Company reports income taxes in accordance with Statement of Financial
Accounting Standards (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 to its estimated fair
value. The fair value of an asset is determined by the Company as the amount at
which that asset could be bought or sold in a current transaction between
willing parties or the present value of the estimated future cash flows from the
asset. The asset value recoverability test is performed by the Company on an
on-going basis. As further discussed in Note 13, the Company recorded an
impairment loss in 2001 due to the write-down of the investments in Rising Edge
and TargetFirst to zero. The impairment loss recognized for the Rising Edge
investment was based on operations history, projections and a change in focus of
the investee's business. The impairment loss recognized for the Target First
investment resulted from an analysis of the investee's recurring operating
losses and cash used in operations.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
F-9
LONG-TERM DEBT AND FLOOR PLAN INVENTORY LOANS
The fair value of long-term debt and floor plan inventory loans is estimated
based on current interest rates available to the Company for debt instruments
with similar terms and remaining maturities. The fair value of long-term debt at
December 31, 2001 was approximately $3,487,700. The fair value of floor plan
inventory loans approximates their carrying value because of the short maturity
of this instrument.
EARNINGS PER SHARE
The Company applies the provisions of SFAS No. 128, EARNINGS PER SHARE, which
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. During the
year ended December 31, 2001, options to purchase 794,600 shares of the
Company's common stock were excluded from the calculation of diluted earnings
per share as their effect would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement and
income statement classification for sales incentives offered voluntarily by a
vendor without charge to customers that can be used in, or are exercisable by a
customer as a result of, a single exchange transaction. In April 2001, the EITF
reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of
Consideration to a Purchaser of the Vendor's Products or Services." This issue
addresses the recognition, measurement and income statement classification of
consideration, other than that directly addressed by Issue 00-14, from a vendor
to a retailer or wholesaler. Issue 00-25 will be effective for the Company's
2002 fiscal year. Both Issue 00-14 and 00-25 have been codified under Issue
01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." We are currently analyzing Issue 01-09.
Issue 01-09 is not expected to have a material impact on the Company's financial
position or results of operations, except that certain reclassifications may
occur. The consensus reached in Issue 00-25 and Issue 00-14 (codified by Issue
01-09) are effective for fiscal quarters beginning after December 15, 2001.
In June 2001, the Financial Accounting Standards Board finalized SFAS No. 141,
BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS
No. 141 requires the use of the purchase method of accounting and prohibits the
use of the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS No. 142 that the Company reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS No. 141. The Company recorded
its acquisition so Technical Insights and LiveMarket in September and October
2001 in accordance with SFAS No. 141 and did not recognize any goodwill relating
to these transactions. However, certain intangibles totaling $59,400, including
intellectual property and vendor reseller agreements, were identified and
recorded in the consolidated financial statements.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS No. 142. The Company
does not expect the adoption of SFAS No. 142 to have a material effect on its
financial position, results of operations or cash flows since the value of
intangibles recorded is relatively insignificant and no goodwill has been
recognized.
F-10
In August 2001, the FASB issued SFAS No. 143 Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
SFAS No. 143 states that companies should recognize the asset retirement cost,
at its fair value, as part of the cost asset and classify the accrued amount as
a liability in the balance sheet. The asset retirement liability is then
accreted to the ultimate payout as interest expense. The initial measurement of
the ability would be subsequently updated for revised estimates of the
discounted cash outflows. SFAS No. 143 will be effective for fiscal years
beginning after June 15, 2002. The Company does not expect the adoption of SFAS
No. 143 to have a material effect on its financial position, results of
operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes the SFAS No. 121 by
requiring that one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operation to include more disposal
transactions. SFAS No. 144 will be effective for fiscal years beginning after
December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to
have a material effect on its financial position, results of operations, or cash
flows.
2. RELATED PARTY TRANSACTIONS
At December 31, 1999, the Company had notes receivable from two
officer/shareholders which bore interest at 6% and were unsecured. 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.
Additionally, accrued interest receivable of $43,600 pertaining to these notes
as of December 31, 1999, was forgiven by the Company and charged to expense
during 2000. As of December 31, 2000, notes receivable from these two officer
shareholders aggregated $171,400 and were repaid in full during 2001 using
proceeds from officer bonuses declared and paid by the Company during the
period.
The Company sold computer products to a company owned by a member of the Board
of Directors of the Company. Management believes that the terms of these sales
transactions are no more favorable than given to unrelated customers. During
2001, 2000 and 1999, the Company recognized $476,200, $1,476,100 and $724,000 in
sales revenues from this company. Included in accounts receivable as of December
31, 2001 and 2000 is $200 and $209,400 respectively, due from this related
customer.
In 2001 FNC acquired certain assets of Technical Insights in exchange for 16,100
shares of PMIC common stock. Under the purchase agreement, among other terms,
FNC was required to pay $126,000 to the sellers upon completion and full
settlement of a sale transaction as specified in the agreement. On October 2001
the sellers became employees of FNC. As a result of this profit sharing
arrangement, the $126,000 payment to the sellers was recorded as compensation
expense by the Company. As of December 31, 2001, $126,000 was owed to these
employees and is included in accounts payable. In January 2002, this amount was
paid to the sellers/employees under the terms of the purchase agreement.
Prior to June 13, 2000, the Company and Rising Edge each owned a 50% interest in
Lea Publishing, LLC. The brother of a director, officer, and principal
shareholder of the Company is a director, officer and the majority shareholder
of Rising Edge. See note 13 for the related party transactions between the
Company and Rising Edge.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of December 31, 2001 and 2000
follows:
DECEMBER 31, 2001 2000
------------ ---------- ----------
Building and improvements (Note 4) $3,266,900 $3,263,000
Land (Note 4) 1,158,600 1,158,600
Furniture and fixtures 394,500 360,900
Computers and equipment 703,900 513,500
Automobiles 190,400 190,400
Software 59,400 --
---------- ----------
5,773,700 5,486,400
Less accumulated depreciation 1,012,200 734,100
---------- ----------
$4,761,500 $4,752,300
========== ==========
F-11
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 (1.883% as of December 31, 2001)
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, no
consecutive quarterly losses, and net income on an annual basis. During 2001,
the Company was in violation of two of these covenants which is an event of
default under the loan agreement that gives the bank the right to call the loan.
While a waiver of these loan covenant violations was obtained from the bank in
March 2002, retroactive to December 31, 2001 and through December 31, 2002, the
Company was required to transfer $250,000 to a restricted account as a reserve
for debt servicing. This amount has been reflected as restricted cash in the
accompanying consolidated financial statements.
The balances of the notes as of December 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
Bank loan $2,411,700 $2,433,700
SBA loan 874,500 903,900
---------- ----------
3,286,200 3,337,600
Less current portion 55,900 51,400
---------- ----------
$3,230,300 $3,286,200
========== ==========
The aggregate amount of future maturities for notes payable are as follows:
YEARS ENDING DECEMBER 31, Amount
------------------------- ----------
2002 $ 55,900
2003 60,800
2004 66,100
2005 71,900
2006 78,200
Thereafter 2,953,300
----------
$3,286,200
==========
F-12
5. FLOOR PLAN INVENTORY LOANS AND LETTER OF CREDIT
The Company had a $7 million (including a $1 million letter of credit sub-limit)
auto-renewing floor plan inventory loan available from a financial institution
which was collateralized by the purchased inventory and any proceeds from its
sale or disposition. The $1 million letter of credit was maintained as security
for inventory purchased on terms from vendors in Taiwan and required an annual
commitment fee of $15,000. Borrowings under the floor plan line totaled
$1,329,500 as of December 31, 2000 and were subject to 45 day repayment terms,
at which time interest began to accrue at the prime rate (9.5% as of December
31, 2000). In March 2001, the financial institution that provided this floor
plan inventory loan filed bankruptcy and the Company paid off its remaining
obligation.
On July 13, 2001, PMI and PMIGA (the Companies) obtained a new $4 million
(subject to credit and borrowing base limitations) accounts receivable and
inventory financing facility from Transamerica Commercial Finance Corporation
(the Bank). This new credit facility has a term of two years, subject to
automatic renewal from year to year thereafter. The credit facility can be
terminated under certain conditions and the termination is subject to a fee of
1% of the credit limit. The facility includes up to a $3.0 million inventory
line (subject to a borrowing base of up to 85% of eligible accounts receivable
plus up to $1,500,000 of eligible inventories), that includes a sub-limit of
$600,000 working capital line and a $1 million letter of credit facility used as
security for inventory purchased on terms from vendors in Taiwan. Borrowing
under the inventory loans are subject to 30 to 45 days repayment, at which time
interest begins to accrue at the prime rate, which was 4.75% at December 31,
2001. Draws on the working capital line also accrue interest at the prime rate.
The credit facility is guaranteed by both PMIC and FNC. As of December 31, 2001,
the Company had an outstanding balance of $1,422,100 due under this credit
facility.
Under the agreement, PMI and PMIGA granted the Bank a security interest in all
of their accounts, chattel paper, cash, documents, equipment, fixtures, general
intangibles, instruments, inventories, leases, supplier benefits and proceeds of
the foregoing. The Companies are also required to maintain certain financial
covenants. As of September 30, 2001 and December 31, 2001, the Companies were in
violation of the minimum tangible net worth covenant. On March 6, 2002, the Bank
issued a waiver of the default and revised the covenants under the credit
agreement retroactively to September 30, 2001. As of December 31, 2001, the
Company was in compliance with these new covenants.
In March, 2001, FNC obtained a $2 million discretionary credit facility from
Deutsche Financial Services Corporation (Deutsche) to purchase inventory. To
secure payment, Deutsche obtained a security interest in all of FNC's inventory,
equipment, fixtures, accounts, reserves, documents, general intangible assets
and all judgments, claims, insurance policies, and payments owed or made to FNC.
Under the loan agreement, all draws mature in 30 days. Thereafter, interest
accrues at the lesser of 16% per annum or at the maximum lawful contract rate of
interest permitted under applicable law. As of December 31, 2001 and February
28, 2002, FNC had an outstanding balance of $122,900 and $37,700, respectively,
under this credit facility.
FNC is required to maintain certain financial covenants to qualify for the
Deutsche credit line, and was not in compliance with certain of these covenants
as of December 31, 2001, which constitutes a technical default under the credit
line. This gives the financial institution, among other things, the right to
call the loan and terminate the credit line. The credit facility is guaranteed
by PMIC and can be terminated by Deutsche immediately given the default.
6. INCOME TAXES
For the years ended December 31, 2001, 2000 and 1999, income tax benefit
(expense) comprises:
2001 Current Deferred TOTAL
---- ----------- ----------- -----------
Federal $ 378,700 $ 698,500 $ 1,077,200
State (5,300) 6,300 1,000
----------- ----------- -----------
$ 373,400 $ 704,800 $ 1,078,200
=========== =========== ===========
F-13
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)
=========== =========== ===========
The following summarizes the differences between the income tax (benefit)
expense and the amount computed by applying the Federal income tax rate of 34%
in 2001, 2000 and 1999 to income before income taxes:
YEAR ENDING DECEMBER 31, 2001 2000 1999
- ------------------------ ---------- --------- ---------
Federal income tax benefit (expense)
at statutory rate $1,347,000 $ (59,900) $(470,800)
State income taxes benefit (expense),
net of federal benefit 230,100 (10,600) (86,700)
Other non-deductible expenses (96,000) (34,100) --
Change in valuation allowance (402,900) -- --
---------- --------- ---------
Income tax benefit (expense) $1,078,200 $(104,600) $(557,500)
========== ========= =========
As of December 31, 2001, the Company had Federal and State net operating loss
(NOL) carry forwards of approximately $1,906,800 and $1,684,000, respectively,
to offset future taxable income. The net operating loss carry forwards expire in
2021, and are limited for future use should significant changes in the Company's
ownership occur.
Deferred tax assets and liabilities as of December 31, 2001 and 2000 were
comprised of the following:
2001 2000
----------- -----------
Deferred tax assets:
Reserves (primarily the allowance for
doubtful accounts) not currently
deductible $ 272,800 $ 68,900
State income taxes 1,800 9,200
Accrued compensation and benefits 8,400 2,200
Capital loss carryover 186,400 --
NOL carryover 746,500 --
----------- -----------
1,215,900 80,300
Valuation allowance (402,900) --
----------- -----------
Net deferred tax assets $ 813,000 $ 80,300
=========== ===========
Deferred tax liabilities - accumulated
depreciation $ 34,200 $ 6,300
=========== ===========
F-14
At December 31, 2001, the Company has recorded a valuation allowance, relating
principally to the capital loss carryover and State NOL carryover against the
net deferred tax assets to reduce them to amounts that are more likely than not
to be realized. The net increase in the total valuation allowance for the year
ended December 31, 2001 was $402,900.
During 2001, the Company recorded a $22,100 tax benefit of stock options
exercised as a credit to additional paid-in-capital.
7. LEASE COMMITMENTS
The Company leases office space, equipment, and vehicles under various operating
leases. The leases for office space provide for the payment of common area
maintenance fees and the Company's share of any increases in insurance and
property taxes over the lease term.
Future minimum obligations under these non-cancelable operating leases are as
follows:
YEAR ENDING DECEMBER 31, Amount
- ------------------------ --------
2002 $292,400
2003 281,900
2004 31,800
2005 26,100
2006 2,000
--------
$634,200
========
Total rent expense associated with all operating leases for the years ended
December 31, 2001, 2000 and 1999 was $136,000, $16,700 and $5,500, respectively.
8. MAJOR VENDORS
One vendor accounted for approximately 10%, 16% and 20% of the total purchases
for the years ended December 31, 2001, 2000 and 1999, respectively. During the
year ended December 31, 1999, one additional vendor located in Taiwan accounted
for approximately 11% 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 $3,400, $24,100 and $27,300,
for the years ended December 31, 2001, 2000 and 1999, 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, 2001 and 2000,
the Company had deposits at one financial institution which aggregated
$3,083,900 (including restricted cash of $250,000) and $4,067,900, respectively.
As of December 31, 2001 and 2000, the Company had deposits amounting to $274,200
and $740,600, respectively, at an additional financial institution. Such funds
are insured by the Federal Deposit Insurance Company up to $100,000.
F-15
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, 2001, 2000 and 1999, no individual
customer or customers in any one foreign country accounted for more than 10% of
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
TREASURY STOCK
On May 7, 2001, the Company's Board of Directors authorized a share repurchase
program whereby, up to $100,000 worth of the Company's common stock may be
repurchased at a maximum price of $1.25 per share and held in treasury or
retired. During 2001, the Company acquired 20,400 shares of its common stock at
a cost of $14,600. On November 8, 2001, this treasury stock was retired.
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
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
of which $557,900, and $117,100 was amortized to expense in 1999 and 1998
respectively.
STOCK ISSUED FOR SERVICES
On June 14, 2001, the Company issued 333,400 shares of its common stock to an
unrelated party in exchange for radio advertising services to be received over a
three-year period. All of the shares vested upon issuance and are non
forfeitable, resulting in a measurement date and final valuation of these shares
in the amount of $200,000 based upon the market price of the Company's common
stock on the date of issuance. This $200,000 is included in prepaid expenses and
other current assets as of December 31, 2001 and will be expensed in the
statement of operations as the services are received. Through December 31, 2001,
no radio advertising services have been received by the Company under this
arrangement.
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. Activity under the
Plan is as follows:
F-16
Weighted
Weighted Weighted Average
Shares Average Average Remaining
Available Options Exercise Fair Contractual
for Grant Outstanding Price Value Life
--------- ----------- -------- -------- ---------
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
Options granted (660,000) 660,000 0.94 0.80 --
Options forfeited 102,700 (102,700) 2.65 2.22 --
Options exercised -- (56,000) 0.99 0.87 --
--------- -------- -------- -------- ---------
BALANCES, DECEMBER 31, 2001 149,400 794,600 $ 1.40 $ 1.08 3.8 Years
========= ======== ======== ======== =========
The following table summarizes information about stock options outstanding as of
December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Price 12/31/2001 Life Price 12/31/2001 Price
- ----- ---------- ---------- ----- ---------- -----
$0.88 333,800 4.3 Years $0.88 333,800 $0.88
$0.97 206,200 4.3 Years $0.97 206,200 $0.97
$1.11 64,000 4.8 Years $1.11 64,000 $1.11
$1.50 86,000 2.7 Years $1.50 17,200 $1.50
$2.42 27,600 0.2 Years $2.42 20,900 $2.42
$4.00 37,000 0.9 Years $4.00 28,000 $4.00
$5.00 40,000 1.9 Years $5.00 16,000 $5.00
-------- ---------- ----- ------- -----
794,600 3.8 Years $1.40 686,100 $1.21
======== ========== ===== ======= =====
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 use for grants in 2001, 2000 and 1999: no yield; expected volatility
of 152%, 112% and 61%, risk-free interest rates of 5.0%, 6.2% and 5.9% and
expected lives of four years for all plan options.
Under the accounting provisions of FASB Statement No. 123, the Company's net
income (loss) and earnings (loss) per share would have been reduced (increased)
to the pro forma amounts indicated below:
YEAR ENDING DECEMBER 31, 2001 2000 1999
- ------------------------ ----------- --------- ---------
Net (loss) income:
As reported $(2,850,700) $ 121,800 $ 827,300
Pro forma $(3,478,100) $ 3,200 $ 719,000
----------- --------- ---------
Basic and diluted (loss) earnings per share:
As reported $ (0.28) $ 0.01 $ 0.08
Pro forma $ (0.34) $ 0.00 $ 0.07
=========== ========= =========
F-17
12. STATEMENTS OF CASH FLOWS
Cash was paid during the years ended December 31, 2001, 2000 and 1999 for:
YEARS ENDING DECEMBER 31, 2001 2000 1999
- ------------------------- -------- -------- --------
Income taxes $ 1,500 $203,700 $447,000
Interest $255,800 $296,000 $269,800
======== ======== ========
Supplemental disclosures of non-cash investing and financing activities:
During 2001, the Company issued 333,400 shares of its common stock to an
unrelated party in exchange for radio advertising services to be received over
three-year period. All of the shares vested upon issuance and are non
forfeitable, resulting in a non cash transaction of $200,000 based upon the
market price of the Company's common stock on the date of issuance.
FNC acquired certain assets of a computer technical support company in September
2001 in exchange for 16,100 PMIC shares, resulting in a non cash investing
transaction of $20,000 based upon the average market price of the Company's
common stock.
As discussed in Note 11, non cash financing activities in 1999 resulted from the
final valuation of the issuance of 100,000 shares of the Company's common stock
to an unrelated party under the terms of a consulting agreement.
13. INVESTMENTS
Investment in Rising Edge and Lea
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). 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 had a 62.5% combined direct and indirect
ownership interest in Lea, which required the consolidation of Lea with the
Company. The Company is accounting for its investment in Rising Edge by the
equity method whereby 25% of the equity interest in the net income or loss of
Rising Edge (excluding Rising Edge's portion of the results of Lea and all
inter-company transactions) flows through to the Company. During the year ended
December 31, 2001, Lea incurred a $191,700 net loss and the equity in the loss
in the investment in Rising Edge was $14,500. 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 year ended December 31, 2001,
Rising Edge had $9,800 in revenues and incurred a net loss of $58,100. 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.
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 specified that $440,000 shall be applied to
services performed in 1999 (of which $220,000 represented the Company's portion)
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, (of which $50,000 represented the Company's portion). During the
year ended December 31, 2000, Rising Edge performed $100,000 worth of services
as specified under the contract (of which $50,000 represented the Company's
portion). In January 2001, the contract was terminated by mutual agreement of
F-18
the parties, and the Company's remaining portion of the software development
fees prepaid 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.
In December 2001, the Company entered into an agreement with Rising Edge
Technology (Rising Edge) and its principal owners to exchange the 50% Rising
Edge ownership interest in Lea for the Company's 25% ownership interest in
Rising Edge. As a consequence, PMIC owns 100% of Lea and no longer has an
ownership interest in Rising Edge.
In connection with the Company's on-going evaluation of the net realizable value
of this investment during the fourth quarter of 2001, based on operations
history, projections and a change in focus of the investee's business, the
Company believed the value of the investment was impaired and wrote off the
investment in Rising Edge prior to the exchange of the Rising Edge shares for
Lea ownership resulting in an impairment loss of $468,000 (including the equity
in the loss in the investment of $14,500 during 2001). Because of the write-down
of the Rising Edge investment to zero in the fourth quarter of 2001, no amounts
were recorded for the 50% Rising Edge ownership interest in Lea received in this
exchange.
Investment in TargetFirst
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. In
connection with the Company's ongoing evaluation of the net realizable value of
this investment based on operations history and projections, the Company
believed the value of the investment was impaired and wrote off the investment
during the second quarter of 2001 resulting in an impairment loss of $250,000.
14. ACQUISITIONS
On September 30, 2001, FNC acquired certain assets, consisting principally of
furniture and fixtures, computers and certain vendor reseller agreements, of a
computer technical support company, Technical Insights (TI), in exchange for
$20,000 worth of PMIC common stock (16,100 shares). TI has expertise in computer
technical training which enables FNC to better serve its corporate customers in
the field of technical training. This acquisition was accounted for under the
purchase method of accounting. The total purchase cost of the TI acquisition of
$46,600, including acquisition costs of $26,600, has been allocated pro rata to
the assets acquired based upon estimates of their fair values. Under the
purchase agreement, among other terms, FNC was required to pay $126,000 to the
sellers upon completion and full settlement of a sale transaction as specified
in the agreement. On October 2001 the sellers became employees of FNC. As a
result of this profit sharing arrangement, the $126,000 payment to the sellers
was recorded as compensation expense by the Company. As of December 31, 2001,
$126,000 was owed to these employees and is included in accounts payable. In
January 2002, this amount was paid to the sellers/employees under the terms of
the purchase agreement.
In October 2001, PMICC paid $85,000 cash to acquire certain assets, including
fixed assets and intellectual property, and assumed a $20,000 accrued vacation
liability of LiveMarket, Inc. These LiveMarket assets were then transferred to
Lea. The total investment of $164,100, including acquisition costs of $59,100,
relating to the LiveMarket acquisition has been allocated pro rata to the assets
acquired based upon estimates of their fair values.
The acquisitions of certain assets of TI and LiveMarket were accounted for under
the purchase method of accounting as prescribed by SFAS No. 141 and not material
individually and in the aggregate to the Company's consolidated results of
operations. As such, pro forma consolidated results of operations of the Company
assuming the acquisitions took place on January 1, 2001 are not presented. The
Company's consolidated financial statements include the operations of TI and
LiveMarket since their respective dates of acquisition.
15. SEGMENT INFORMATION
The Company has four reportable segments: PMI, PMIGA, FNC and LEA. PMI imports
and distributes electronic products, computer components, and computer
peripheral equipment to various customers throughout the United States, with
PMIGA focusing on the east coast area. Frontline serves the networking and
personal computer requirements of corporate customers. Lea is developing
advanced solutions and applications for internet users, resellers and providers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on income or loss before income taxes and minority interest, not including
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nonrecurring gains or losses. Inter-segment transfers between segments have been
insignificant. The Company's reportable segments are strategic business units
that offer different products and services. They are managed separately because
each business requires different technology and marketing strategies. PMI and
PMIGA are comparable businesses with different locations of operations and
customers.
The following table presents information about reported segment profit or loss
and segment assets for the years ended December 31, 2001, 2000, and 1999:
Year Ended December 31, 2001:
PMI PMIGA FNC LEA Totals
----------- ----------- ----------- ----------- -----------
Revenues from external customers $60,293,500 $11,445,300 $ 3,022,200(1) $ 250,700(2) $75,011,700
Interest income 85,500 5,500 34,100 -- 125,100
Interest expense 230,700 600 24,500 -- 255,800
Depreciation and amortization 222,600 27,500 25,400 3,500 279,000
Segment loss before income
taxes and minority interest (1,563,500) (619,800) (868,800) (191,700) (3,243,800)
Segment assets 19,102,200 1,549,800 1,500,600 256,400 22,409,000
Expenditures for segment assets 126,200 32,600 23,000 85,000 266,800
=========== =========== =========== =========== ===========
Year Ended December 31, 2000:
PMI PMIGA FNC LEA Totals
----------- ----------- ----------- ----------- -----------
Revenues from external customers $79,610,300 $ 1,156,900 $ 8,105,500(1) $ -- $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
=========== =========== =========== =========== ===========
Year ended December 31, 1999:
PMI FNC Lea Totals
------------- ------------- ------------- -------------
Revenues from external customers $ 100,238,000 $ 4,700,700(1) $ $ 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
============= ============= ============= =============
- ----------
(1) Includes service revenues of $115,000, $275,400 and $241,800 in 2001, 2000
and 1999, respectively.
(2) Includes service revenues of $43,600 in 2001.
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The following is a reconciliation of reportable segment income before income
taxes and total assets to the Company's consolidated totals:
2001 2000 1999
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES
Total (loss) income before income taxes and
minority interest for reportable segments $ (3,243,800) $ 208,100 $ 1,177,400
Equity in loss in investment in Rising Edge -- (32,000) --
Rising Edge equity in loss in investment in Lea -- -- 222,400
Impairment loss on investments (718,000)(1) -- (15,000)
------------ ------------ ------------
Consolidated (loss) income before income taxes
and minority interest $ (3,961,800) $ 176,100 $ 1,384,800
============ ============ ============
Assets:
Total assets for reportable segments $ 22,409,000 $ 22,677,300 $ 20,911,400
Other assets 714,100 720,400 502,400
Elimination of inter-company receivables (5,799,800) (2,536,600) (724,800)
------------ ------------ ------------
Consolidated total assets $ 17,323,300 $ 20,861,100 $ 20,689,000
============ ============ ============
- ----------
(1) Amount includes the equity in the loss in the investment in Rising Edge of
$14,500 during 2001.
The total of reportable segment revenues equals the Company's consolidated
revenues in 2001, 2000 and 1999.
16. 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 in 2000.
17. SUBSEQUENT EVENTS
On March 9, 2002, legislation was enacted to extend the general Federal net
operating loss carryback period from two years to five years for net operating
losses incurred in 2001 and 2002. As a result, the Company has not recorded a
valuation allowance on the portion of the deferred tax assets relating to
Federal net operating loss carryforward of $1,906,800 as the Company believes
that it is more likely than not that this deferred tax asset will be realized as
of December 31, 2001. During the first quarter of 2002, this deferred tax asset,
totaling approximately $648,300, will be reclassified to income taxes
receivable.
On March 14, 2002, FNC repurchased and retired an additional 1,000,000 of its
outstanding shares from a former employee at $0.10 per share, resulting in an
increase in the Company's ownership of FNC from 91% to 96%.
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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, 1999 $ 150,000 $ 457,500 $(457,500) $ 150,000
Year ended December 31, 2000 150,000 182,200 (157,200) 175,000
Year ended December 31, 2001 175,000 450,500 (225,500) 400,000
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