UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 000-25277
PACIFIC MAGTRON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0353141
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1600 California Circle, Milpitas, California 95035
(Address of Principal Executive Offices)
(408) 956-8888
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Common Stock, $0.001 par value per share:
10,485,100 shares issued and outstanding at November 6, 2002
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of September 30, 2002
(Unaudited) and December 31, 2001 1-2
Consolidated statements of operations for the three
and nine months ended September 30, 2002 (Unaudited)
and 2001 (Unaudited) 3
Consolidated statement of preferred stock and
shareholders' equity for the nine months ended
September 30, 2002 (Unaudited) 4
Consolidated statements of cash flows for the nine months
ended September 30, 2002 (Unaudited) and 2001 (Unaudited) 5
Notes to consolidated financial statements 6-14
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-28
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. - Controls and Procedures 28
Part II - Other Information
Item 1. - Legal Proceedings 29
Item 2. - Changes in Securities and Use of Proceeds 29
Item 5. - Other Information 29
Item 6. - Exhibits and Reports on Form 8-K 29-30
Signature 31
Certifications 32
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,667,400 $ 3,110,000
Restricted cash 250,000 250,000
Accounts receivable, net of allowance for
doubtful accounts of $400,000 as of
September 30, 2002 and December 31, 2001 4,133,500 4,590,100
Inventories 3,843,900 2,952,000
Prepaid expenses and other current assets 338,300 387,300
Deferred income taxes 1,283,900 1,212,200
------------ ------------
Total Current Assets 12,517,000 12,501,600
Property and Equipment, net 4,584,200 4,711,500
Deposits and Other Assets 122,900 110,200
------------ ------------
$ 17,224,100 $ 17,323,300
============ ============
See accompanying notes to consolidated financial statements.
1
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 60,000 $ 55,900
Floor plan inventory loans 1,002,400 1,545,000
Accounts payable 7,218,600 4,786,600
Accrued expenses 275,000 379,200
------------ ------------
Total Current Liabilities 8,556,000 6,766,700
Notes Payable, less current portion 3,184,600 3,230,300
Deferred Tax Liabilities 26,400 34,200
Commitments and Contingencies
Minority Interest - PMIGA -- 2,200
Preferred Stock, $0.001 par value; 5,000,000
Shares authorized;
4% Series A Redeemable Convertible Preferred Stock;
1,000 shares designated; 600 shares issued and
outstanding (Liquidation value of $608,100 as
of September 30, 2002) 436,200 --
------------ ------------
Shareholders' Equity:
Common stock, $0.001 par value; 25,000,000 shares
authorized; 10,485,100 shares issued and outstanding 10,500 10,500
Additional paid-in capital 2,246,200 1,745,500
Retained earnings 2,764,200 5,533,900
------------ ------------
Total Shareholders' Equity 5,020,900 7,289,900
------------ ------------
$ 17,224,100 $ 17,323,300
=========== ============
See accompanying notes to consolidated financial statements.
2
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales:
Products $ 18,036,500 $ 20,804,600 $ 50,462,400 $ 55,644,000
Services 194,600 35,600 778,800 114,100
------------ ------------ ------------ ------------
Total Sales 18,231,100 20,840,200 51,241,200 55,758,100
------------ ------------ ------------ ------------
Cost of Sales:
Products 17,094,600 19,360,800 47,351,100 51,901,600
Services 84,400 14,200 382,500 31,600
------------ ------------ ------------ ------------
Total Cost of Sales 17,179,000 19,375,000 47,733,600 51,933,200
------------ ------------ ------------ ------------
Gross Margin 1,052,100 1,465,200 3,507,600 3,824,900
Research and development -- 46,800 -- 68,500
Selling, General and
Administrative Expenses 2,086,300 1,737,700 6,763,100 5,857,200
------------ ------------ ------------ ------------
(Loss) from Operations (1,034,200) (319,300) (3,255,500) (2,100,800)
------------ ------------ ------------ ------------
Other (Expense) Income:
Interest income 4,300 20,000 14,600 107,900
Interest expense (45,800) (60,200) (138,900) (201,900)
Equity loss on investment -- (4,600) -- (14,500)
Impairment loss on investment -- -- -- (250,000)
Other income (expense) (7,600) (14,100) (39,700) 8,400
------------ ------------ ------------ ------------
Total Other (Expense) (49,100) (58,900) (164,000) (350,100)
------------ ------------ ------------ ------------
(Loss) Before Income Tax Benefit
and Minority Interest (1,083,300) (378,200) (3,419,500) (2,450,900)
Income Tax Benefit (341,400) -- (1,107,000) (365,500)
------------ ------------ ------------ ------------
(Loss) Before Minority Interest (741,900) (378,200) (2,312,500) (2,085,400)
Minority Interest -- 8,200 2,200 30,000
------------ ------------ ------------ ------------
Net (Loss) (741,900) (370,000) (2,310,300) (2,055,400)
Accretion and deemed dividend
related to beneficial
conversion of 4% Series A
Convertible Preferred Stock
and value of warrant (6,100) -- (459,400) --
------------ ------------ ------------ ------------
Net (Loss) applicable to Common
Shareholders $ (748,000) $ (370,000) $ (2,769,700) $ (2,055,400)
============ ============ ============ ============
Basic and diluted (loss) per share $ (0.07) $ (0.04) $ (0.26) $ (0.20)
------------ ------------ ------------ ------------
Basic and diluted weighted average
common shares outstanding 10,485,100 10,420,700 10,485,100 10,228,800
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENT OF PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(Unaudited)
Shareholders' Equity
-------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------- ------------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2001 -- -- 10,485,100 $ 10,500 $ 1,745,500 $ 5,533,900 $ 7,289,900
Issuance of 600 shares of
Series A Convertible
Preferred Stock and
300,000 common stock
warrants (net of cash
issuance costs of
$80,500) (unaudited) 600 $ 477,500 -- -- -- -- --
Proceeds allocated to
300,000 common stock
warrants issued to
preferred stock investor
(unaudited) -- (148,300) -- -- 148,300 -- 148,300
Deemed dividend
associated with
beneficial conversion
feature of convertible
preferred stock
(unaudited) -- -- -- -- 303,000 (303,000) --
Deemed dividend
associated with
300,000 stock
warrants issued in
connection with the
issuance of convertible
preferred stock
(unaudited) -- 148,300 -- -- -- (148,300) (148,300)
Issuance of 100,000
common stock warrants as
payment of stock issuance
costs (unaudited) -- (49,400) -- -- 49,400 -- 49,400
Preferred stock accretion
(unaudited) -- 8,100 -- -- -- (8,100) (8,100)
Net Loss (unaudited) -- -- -- -- -- (2,310,300) (2,310,300)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, September 30, 2002
(unaudited) 600 $ 436,200 10,485,100 $ 10,500 $ 2,246,200 $ 2,764,200 $ 5,020,900
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(2,310,300) $(2,055,400)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Equity in loss in investment -- 14,500
Impairment loss on investment - TargetFirst -- 250,000
Depreciation and amortization 225,500 203,600
Provision for doubtful accounts -- 75,000
(Gain) or Loss on disposal of fixed assets (8,600) 1,400
Minority interest losses (2,200) (30,000)
Changes in operating assets and liabilities:
Accounts receivable 456,600 (214,100)
Inventories (891,900) (69,300)
Prepaid expenses and other current assets 49,000 51,400
Deferred income taxes (79,500) (234,600)
Accounts payable 2,432,000 104,300
Accrued expenses (104,200) (269,900)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (233,600) (2,173,100)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes and interest receivable from shareholders -- 91,400
Acquisition of property and equipment (128,000) (80,200)
Increase in deposits and other assets (22,700) (7,600)
Proceeds from sale of property and equipment 48,400 --
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (102,300) 3,600
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in floor plan inventory loans (542,600) 326,400
Principal payments on notes payable (41,600) (38,300)
Restricted cash -- (175,000)
Treasury stock purchases -- (14,700)
Proceeds from sale of FNC and PMIGA stock
to minority shareholders -- 35,000
Net proceeds from issuance of redeemable
convertible preferred stock 477,500 --
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (106,700) 133,400
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (442,600) (2,036,100)
CASH AND CASH EQUIVALENTS, beginning of period 3,110,000 4,874,200
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,667,400 $ 2,838,100
=========== ===========
See accompanying notes to consolidated financial statements.
5
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
The consolidated financial statements of Pacific Magtron International Corp.
(the Company or PMIC) include its subsidiaries, Pacific Magtron, Inc. (PMI),
Pacific Magtron (GA) Inc. (PMIGA), Frontline Network Consulting, Inc. (FNC), Lea
Publishing, Inc. (Lea), PMI Capital Corporation (PMICC), and LiveWarehouse, Inc.
(LW).
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, PMI 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., 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 and in
March 2002, FNC repurchased and retired a total of 2,000,000 of its shares from
former employees at $0.01 per share, resulting in an increase in the Company's
ownership of FNC from 87% to 96%.
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 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 was 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 its 25% ownership interest in Rising Edge. As a consequence, PMIC owns 100%
of Lea and no longer has an ownership interest in Rising Edge. No amounts were
recorded for the 50% Rising Edge ownership interest in Lea received in this
exchange because of the write-down of the Rising Edge investment to zero in the
fourth quarter of 2001. On May 28, 2002, the Company formed Lea Publishing, Inc,
a California corporation. Effective June 1, 2002, Lea Publishing, LLC
transferred all of its assets and liabilities to Lea Publishing, Inc.
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. On June 19, 2002, PMIGA repurchased
15,000 shares of its common stock for $15,000. As a result, PMIGA is 100% owned
by PMI.
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. (LW), a
wholly-owned subsidiary of the Company, to provide consumers a convenient way to
purchase computer products via the internet.
2. CONSOLIDATION AND UNCONSOLIDATED INVESTEES
The accompanying consolidated financial statements include the accounts of
Pacific Magtron International Corp. and its wholly-owned subsidiaries, PMI,
PMIGA, Lea, PMICC and LW and majority-owned subsidiary, FNC. 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.
6
3. FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements at September 30, 2002 and for
the three and nine month periods ended September 30, 2002 and 2001 are
unaudited. However, they have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary for a fair
presentation of consolidated financial position and results of operations for
the periods presented. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been omitted. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes presented in the Company's Form 10-K for the
year ended December 31, 2001. Interim operating results are not necessarily
indicative of operating results expected for the entire year.
Certain reclassifications have been made to prior period balances in order to
conform to the current period presentation. In the current quarter, $148,300 has
been reclassified from Additional Paid-in Capital to Preferred Stock on the
balance sheet.
4. 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 is 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." The adoption of Issue 01-09 during the first quarter of
2002 did not have a material impact on the Company's financial position or
results of operations.
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 of 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 in deposits and other assets.
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 adoption of
SFAS No. 142 did not have a material effect on the Company's financial position,
results of operations or cash flows since the value of intangibles recorded is
relatively insignificant and no goodwill has been recognized.
7
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 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 did not have a material effect
on the Company's financial position, results of operations, or cash flows.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections" ("SFAS 145"), updates, clarifies and simplifies existing accounting
pronouncements. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." SFAS 145 amends SFAS No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for
fiscal years beginning and transactions occurring after May 15, 2002,
respectively. The Company does not expect the adoption of SFAS No. 145 to have a
material effect on its financial position, results of operations, or cash flows.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 replaces Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of SFAS 146 are to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
SFAS No. 146 to have a material effect on its financial position, results of
operations, or cash flows.
5. STATEMENTS OF CASH FLOWS
Cash was paid during the nine months ended September 30, 2002 and 2001 for:
NINE MONTHS ENDING SEPTEMBER 30,
--------------------------------
2002 2001
-------- --------
Income taxes $ 7,400 $ 1,500
======== ========
Interest $138,900 $201,900
======== ========
6. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2002, the Company made short-term salary
advances to a shareholder/officer totaling $30,000, without interest. These
advances were recorded as a bonus paid to the shareholder/officer during the
second quarter ended June 30, 2002.
The Company sells 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. For the three and nine
months ended September 30, 2002, and 2001, the Company recognized the following
sales revenues from this customer:
8
NINE MONTHS THREE MONTHS
ENDING ENDING
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
Year 2002 $494,400 $123,000
======== ========
Year 2001 $476,200 $ --
======== ========
Included in accounts receivable as of September 30, 2002 is $96,300 due from
this related customer.
7. INCOME TAXES
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 of Management's analysis of
estimated future operating results and other tax planning strategies, the
Company did not record a valuation allowance on the portion of the deferred tax
assets of $1,107,000 and $1,034,700 relating to Federal net operating loss
carryforward at September 30, 2002 and December 31, 2001, respectively, as the
Company believed that it was more likely than not that this deferred tax asset
would be realized. On June 12, 2002, the Company received a Federal income tax
refund of $1,034,700.
8. FLOOR PLAN INVENTORY LOANS AND LETTER OF CREDIT
On July 13, 2001, PMI and PMIGA (the Companies) obtained a $4 million (subject
to credit and borrowing base limitations) accounts receivable and inventory
financing facility from Transamerica Commercial Finance Corporation
(Transamerica). This credit facility has a term of two years, subject to
automatic renewal from year to year thereafter. The credit facility can be
terminated by Transamerica under certain conditions and the termination is
subject to a fee of 1% of the credit limit. The facility includes up to a $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 September 30, 2002. Draws on the working capital line also accrue
interest at the prime rate. The credit facility is guaranteed by both PMIC and
FNC. As of September 30, 2002, the Companies had an outstanding balance of
$990,800 due under this credit facility.
Under the accounts receivable and inventory financing facility from
Transamerica, the Companies are required to maintain certain financial
covenants. As of December 31, 2001, the Companies were in violation of the
minimum tangible net worth covenant. On March 6, 2002, Transamerica issued a
waiver of the default and revised the covenants under the credit agreement
retroactively to September 30, 2001. The revised covenants require the Companies
to maintain certain financial ratios and to achieve certain levels of
profitability. As of December 31, 2001 and March 31, 2002, the Companies were in
compliance with these revised covenants. As of June 30, 2002, the Companies did
not meet the revised minimum tangible net worth and profitability covenants,
giving Transamerica, among other things, the right to call the loan and
immediately terminate the credit facility.
On October 23, 2002, Transamerica issued a waiver of the default occurring on
June 30, 2002 and revised the terms and covenants under the credit agreement.
Under the revised terms, the credit facility includes FNC as an additional
borrower and PMIC continues as a guarantor. Effective October 2002, the new
credit limit is $3 million in aggregate for inventory loans and the letter of
credit facility. The letter of credit facility is limited to $1 million. The
credit limits for PMI and FNC are $1,750,000 and $250,000, respectively. As of
September 30, 2002, the Companies did not meet the covenants as revised on
October 23, 2002 relating to profitability and tangible net worth. This
constitutes a technical default and gives Transamerica, among other things, the
right to call the loan and immediately terminate the credit facility.
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 matured in 30 days. Thereafter, interest
accrued at the lesser of 16% per annum or at the maximum lawful contract rate of
interest permitted under applicable law (16% as of September 30, 2002).
9
FNC was required to maintain certain financial covenants to qualify for the
Deutsche bank credit line, and was not in compliance with certain of these
covenants as of June 30, 2002 and December 31, 2001, which constituted a
technical default under the credit line. This gave Deutsche the right to call
the loan and terminate the credit line. The credit facility was guaranteed by
PMIC and could be terminated by Deutsche immediately given the default. On April
30, 2002, Deutsche elected to terminate the credit facility effective July 1,
2002. As of September 30, 2002, FNC had a remaining outstanding balance of
$11,600 under the normal terms of this credit facility. On October 9, 2002, the
balance was repaid in full.
9. 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 (1.81% as of September 30, 2002)
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 for the purchase of the Company's office and warehouse
facility, 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 and gives the bank the right to call the loan.
A waiver of these loan covenant violations was obtained from the bank in March
2002, retroactive to September 30, 2001, and through December 31, 2002. As a
condition for this waiver, we transferred $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.
10. SEGMENT INFORMATION
The Company has five reportable segments: PMI, PMIGA, FNC, Lea and LW. PMI
imports and distributes electronic products, computer components, and computer
peripheral equipment to various distributors and retailers throughout the United
States, with PMIGA focusing on the east coast area. LW sells similar products as
PMI to the end-users through a website. FNC serves the networking and personal
computer requirements of corporate customers. Lea designs and installs advanced
solutions and applications for internet users, resellers and providers. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies presented in the Company's Form 10-K.
The Company evaluates performance based on income or loss before income taxes
and minority interest, not including nonrecurring gains or losses. Inter-segment
transfers between reportable segments have been insignificant. The Company's
reportable segments are strategic business units that offer different products
and services. They are managed separately because each business requires
different technology and marketing strategies. PMI and PMIGA are comparable
businesses with different locations of operations and customers.
The following table presents information about reported segment profit or loss
for the nine months ended September 30, 2002:
Segment (loss)
Revenues before income
External taxes and
Customers Minority Interest (4)
----------- ---------------------
PMI $40,674,600 $(1,214,700)
PMIGA 7,563,400 (520,500)
FNC 2,131,200(1) (890,000)
LEA 412,000(3) (611,900)
LW 460,000 (182,400)
----------- -----------
TOTAL $51,241,200 $(3,419,500)
=========== ===========
10
The following table presents information about reported segment profit or loss
for the nine months ended September 30, 2001:
Segment (loss)
Revenues before income
External taxes and
Customers Minority Interest
----------- -----------------
PMI $44,993,700 $ (943,100)
PMIGA 8,580,100 (509,200)
FNC 2,184,300(1) (664,200)
LEA -- (71,500)
LW -- --
----------- -----------
TOTAL $55,758,100 (2,188,000)
=========== ===========
The following table presents information about reported segment profit or loss
for the three months ended September 30, 2002:
Segment (loss)
Revenues before income
External taxes and
Customers Minority Interest (5)
----------- ---------------------
PMI $15,283,900 $ (492,800)
PMIGA 1,895,800 (149,200)
FNC 650,100(2) (252,700)
LEA 79,000(3) (161,900)
LW 322,300 (26,700)
----------- -----------
TOTAL $18,231,100 $(1,083,300)
=========== ===========
The following table presents information about reported segment profit or loss
for the three months ended September 30, 2001:
Segment (loss)
Revenues before income
External taxes and
Customers Minority Interest
----------- -----------------
PMI $16,993,600 $ (72,900)
PMIGA 3,208,200 (86,400)
FNC 638,400(2) (155,500)
LEA -- (41,400)
LW -- --
----------- -----------
TOTAL $20,840,200 $ (356,200)
=========== ===========
(1) Includes service revenues of $366,800 and $114,100 in 2002 and 2001,
respectively.
(2) Includes service revenues of $115,600 and $35,600 in 2002 and 2001,
respectively.
(3) Total amount was derived from service revenues.
(4) Includes $1,591,500, $252,600, $141,200, $69,900, and $151,700, of PMIC
corporate expenses allocated to PMI, PMIGA, FNC, Lea and LW, respectively.
(5) Includes $505,800, $54,200, $38,000, $14,200, and $39,700, of PMIC
corporate expenses allocated to PMI, PMIGA, FNC, Lea and LW, respectively.
11
The following is a reconciliation of reportable segment (loss) before income tax
benefit and minority interest to the Company's consolidated total:
Three months Ended Nine months Ended
September 30, September 30,
2001 2001
------------ ------------
Total loss before income taxes and minority
interest for reportable segments $ (356,200) $ (2,188,000)
Inter-company transactions (17,400) 1,600
Equity in loss in investment in Rising Edge (4,600) (14,500)
Impairment loss on investment -- (250,000)
------------ ------------
Consolidated loss before income taxes and
Minority interest $ (378,200) $ (2,450,900)
------------ ------------
The reportable segment loss before income tax benefit and minority interest for
the three months and nine months ended September 30, 2002 was equal to the
Company's consolidated amounts presented in the consolidated statements of
operations.
11. ACCOUNTS RECEIVABLE FACTORING AGREEMENT
Pursuant to a non-notification accounts receivable factoring agreement, the
Company factors certain of its accounts receivable with a financial institution
(the Factor) on a pre-approved non-recourse basis. The factoring commission
charge is 0.375% and 2.375% of specific approved domestic and foreign
receivables (Approved Accounts), respectively. The agreement, which expires
February 28, 2003, is subject to automatic annual renewal provisions, and
provides for the Company to pay a minimum of $200,000 in annual commission to
the Factor. The Company is required to maintain the receivable records and to
make reasonable collection efforts on the Approved Accounts. Approved Accounts
are transferred to the Factor as assigned accounts (Assigned Accounts) when the
receivables are not collected within 120 days from the due date or the customers
become insolvent. The title of the receivable is transferred to the Factor when
it becomes an Assigned Account. As a purchaser of the Assigned Accounts, the
Factor has the title to the Assigned Accounts and has the unilateral right, such
as to demand and collect payments from customers on the Assigned Accounts,
compromise, sue for, and foreclose. The Company has no further obligations and
control over the receivable when it becomes an Assigned Account. The Factor is
obligated to pay the Company for the Assigned Accounts within 15 days after the
receivable becomes an Assigned Account. Security interests in those Assigned
Accounts are granted to the Factor upon the accounts become Assigned Accounts.
In accordance with SFAS 140 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," the Company accounts for the
factored receivables as sales of financial assets when they become Assigned
Accounts. The total amount of receivables approved by the Factor as Approved
Accounts was $16,535,500 and $8,359,700 for the nine months and three months
ended September 30, 2002, respectively. The amount of receivables assigned to
the Factor during the year and the quarter ended September 30, 2002 was $101,800
and $77,800, respectively There were no receivables assigned to the Factor prior
to the quarter ended June 30, 2002. As of September 30, 2002, Assigned Accounts
of $11,800 were included in accounts receivable.
12. DEPOSITS AND OTHER ASSETS
Included in deposits and other assets at September 30, 2002 are intangible
assets relating to intellectual property and reseller agreements acquired during
the fourth quarter of 2001 with a cost basis of $59,400 and accumulated
amortization of $19,500. The Company is amortizing the intangible assets over a
three-year period. Amortization expense for the nine months ended September 30,
2002 was approximately $19,000.
13. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of its $0.001 par
value preferred stock that may be issued in one or more series and with such
stated value and terms as may be determined by the Board of Directors. The
Company has designated 1,000 shares as 4% Series A Redeemable Convertible
Preferred Stock (the "Series A Preferred Stock") with a stated value per share
of $1,000 plus all accrued and unpaid dividends.
On May 31, 2002 the Company entered into a Preferred Stock Purchase Agreement
with an investor (Investor). Under the agreement, the Company agreed to issue
1,000 shares of its Series A Preferred Stock at $1,000 per share. On May 31,
2002, the Company issued 600 shares of the Series A Preferred Stock to the
Investor, and the remaining 400 shares will be issued when the registration
12
statement that registers the common stock underlying the Series A Preferred
Stock becomes effective. As part of the Preferred Stock Purchase Agreement, the
Company issued a common stock purchase warrant to the Investor. The warrant may
be exercised at any time within 3 years from the date of issuance and entitles
the Investor to purchase 300,000 shares of the Company's common stock at $1.20
per share and includes a cashless exercise provision. The Company also issued a
common stock purchase warrant with the same terms and conditions for the
purchase of 100,000 shares of the Company's common stock to a broker who
facilitated the transaction as a commission.
The holder of the Series A Preferred Stock is entitled to cumulative dividends
at the rate of 4% per annum, payable on each Conversion Date, as defined, in
cash or by accretion of the stated value. Dividends must be paid in cash, if
among other circumstances, the number of the Company's authorized common shares
is insufficient for the conversion in full of the Series A Preferred Stock, or
the Company's common stock is not listed or quoted on Nasdaq, NYSE or AMEX. Each
share of Series A Preferred Stock is non-voting and entitled to a liquidation
preference of the stated value plus accrued and unpaid dividends. A sale or
disposition of 50% or more of the assets of the Company, or effectuation of
transactions in which more than 33% of the voting power of the Company is
disposed of, would constitute liquidation. At any time and at the option of the
holder, each share of Series A Preferred Stock is convertible into shares of
common stock at the Conversion Ratio, which is defined as the stated value
divided by the Conversion Price. The Conversion Price is the lesser of (a) 120%
of the average of the 5 Closing Prices immediately prior to the Closing Date on
which the preferred stock was issued (the Set Price), and (b) 85% of the average
of the 5 lowest VWAPs (the daily volume weighted average price as reported by
Bloomberg Financial L.P. using the VAP function) during the 30 trading days
immediately prior to the Conversion Date but not less than $0.75 (Floor Price).
The Set Price and Floor Price are subject to certain adjustments, such as stock
dividends.
The Company has the right to redeem the Series A Preferred Stock for cash at a
price equal to 115% of the Stated Value plus accrued and unpaid dividends if (a)
the Conversion Price is less than $1 during the 5 trading days prior to the
redemption, or (b) the Conversion price is greater than 175% of the Set Price
during the 20 trading days prior to the redemption. Upon the occurrence of a
Triggering Event, such as failure to register the underlying common shares among
other events as defined, the holder of the Series A Preferred Stock has the
right to require the Company to redeem the Series A Preferred Stock in cash at a
price equal to the sum of (a) the redemption amount (the greater of (i) 150% of
the Stated Value or (ii) the product of the Per Share Market Value and the
Conversion Ratio) plus other costs, and (b) the product of the number of
converted common shares and Per Market Share Value. As of September 30, 2002,
the liquidation value of the Series A Preferred Stock was $608,100. As the
Series A Preferred Stock has conditions for redemption that are not solely
within the control of the Company, such Series A Preferred Stock has been
excluded from shareholders' equity. As of September 30, 2002, the redemption
value of the Series A Preferred Stock, if the holder had required the Company to
redeem the Series A Preferred Stock as of that date, was $912,200.
The Company has accounted for the sale of preferred stock in accordance with
Emerging Issues Task Force (EITF) 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments." Proceeds of $329,200 (net of $80,500 cash
issuance costs) were allocated to the Series A Preferred Stock and $148,300 was
allocated to the detachable warrant based upon its fair value as computed using
the Black-Scholes option pricing model. The $303,000 value of the beneficial
conversion option on the 600 shares of Series A Preferred Stock and the $148,300
value of the warrant issued to the investor were recorded as a deemed dividend
on the date of issuance. The allocated $49,400 value of the warrant issued to
the broker who facilitated the transaction was recorded as a stock issuance cost
relating to the sale of preferred stock. As of September 30, 2002, 810,800
shares of common stock could have been issued if the Series A Preferred Stock
were converted into common stock.
14. STOCK OPTIONS
For the nine months ended September 30, 2002, the Company granted options to
purchase 30,000 shares of the Company's common stock to certain members of the
board of directors at exercise prices of $0.76 to $1.05 per share. During the
nine months ended September 30, 2002, no outstanding options were exercised and
options to purchase 271,560 shares of the Company's common stock were cancelled
due to employee terminations or expiration of options. On July 24, 2002, the
Company entered into a service agreement with a consultant for a term of 180
days. The consultant was paid by granting options to purchase an aggregate of
200,000 shares of the Company's common stock. On August 26, 2002 the Company
terminated the agreement and cancelled the two stock options.
13
15. LOSS PER SHARE
Basic loss per share is computed by dividing loss applicable to common shares by
the weighted-average number of common shares outstanding for the period. During
the three and nine month periods ended September 30, 2002, options and warrants
to purchase 1,153,100 shares of the Company's common stock and 810,800 shares of
common stock issuable upon conversion of Series A Preferred Stock were excluded
from the calculation of diluted weighted average common shares outstanding
because their effect would be antidilutive. During the three and nine month
periods ended September 30, 2001, options to purchase 835,222 shares of the
Company's common stock were excluded from the calculation of diluted weighted
average common shares outstanding because their effect would be antidilutive.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The accompanying discussion and analysis of financial condition and results of
operations is based on the consolidated financial statements, which are included
elsewhere in this Quarterly Report. The following discussion and analysis should
be read in conjunction with the accompanying financial statements and related
notes thereto. This discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Our actual results could
differ materially from those set forth in the forward-looking statements.
Forward-looking statements, by their very nature, include risks and
uncertainties. Accordingly, our actual results could differ materially from
those discussed in this Report. A wide variety of factors could adversely impact
revenues, profitability, cash flows and capital needs. Such factors, many of
which are beyond our control, include, but are not limited to, those identified
below under the heading "Cautionary Factors That May Affect Future Results."
GENERAL
As used herein and unless otherwise indicated, the terms "Company," "we," and
"our" refer to Pacific Magtron International Corp. and each of our subsidiaries.
We provide solutions to customers in several synergetic and growing segments of
the computer industry. Our business is organized into five divisions: PMI,
PMIGA, FNC, Lea/LiveMarket and LiveWarehouse. 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 16,142 shares of our common stock then valued at
$20,000. The acquired business unit, Technical Insights, enables FNC to provide
computer technical training services to corporate clients.
In 1999 we invested in a 50%-owned joint software venture, Lea Publishing, LLC,
to focus on Internet-based software application technologies to enhance
corporate IT services. Lea was 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, we own
100% of Lea and no longer have an interest in Rising Edge. Certain LiveMarket
assets, which were initially purchased through PMICC, were transferred to Lea in
the fourth quarter of 2001. On May 28, 2002, Lea Publishing, Inc. was
incorporated in California. Effective June 1, 2002, Lea Publishing, LLC
transferred all of its assets and liabilities to Lea Publishing, Inc.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 94.2 93.0 93.2 93.1
-------- -------- -------- --------
Gross margin 5.8 7.0 6.8 6.9
Operating expenses 11.5 8.6 13.2 10.6
-------- -------- -------- --------
(Loss)from operations (5.7) (1.6) (6.4) (3.7)
Other income (expense), net (0.3) (0.3) (0.3) (0.6)
Income tax benefit 1.9 0.0 2.2 0.6
Minority interest 0.0 0.0 0.0 0.0
-------- -------- -------- --------
Net (loss) (4.1)% (1.9)% (4.5)% (3.7)%
======== ======== ======== ========
15
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Sales for the three months ended September 30, 2002 were $18,231,100, a decrease
of $2,609,100, or approximately 12.5%, compared to $20,840,200 for the three
months ended June 30, 2001. The decrease was primarily attributable to decreased
revenues at PMI and PMIGA partially offset by the revenues of newly formed
LiveWarehouse and newly acquired Lea.
The combined sales of PMI and PMIGA were $17,179,700 for the three months ended
September 30, 2002, a decrease of $3,022,100, or approximately 15.0%, compared
to $20,201,800 for the three months ended September 30, 2001. Sales for PMI
decreased by $1,709,700, or 10.1%, from $16,993,600 for the three months ended
September 30, 2001 to $15,283,900 for the three months ended September 30, 2002.
PMIGA's sales decreased by $1,312,400, or 40.9%, from $3,208,200 for the three
months ended September 30, 2001 to $1,895,800 for the three months ended
September 30, 2002. The decrease in PMI and PMIGA sales was primarily due to a
continuing decline in the computer component market and the intense competition
in pricing in the computer component market during the quarter ending September
30, 2002 compared to the comparable quarter in 2001.
Sales generated by FNC for the three months ended September 30, 2002 were
$650,100, an increase of $11,700 or 1.8%, compared to $638,400 for the three
months ended September 30, 2001. FNC sales were essentially flat due to a slow
and stagnant economy. Our customers have not increased their purchases from us
in computer networking.
In the fourth quarter of 2001, PMICC acquired certain assets of LiveMarket.
These assets were subsequently transferred to Lea. Prior to the LiveMarket
acquisition, Lea did not generate any revenues as it was in the development
stage. Revenues, primarily from services performed, generated by Lea were
$79,000 for the three months ended September 30, 2002.
In December 2001, LiveWarehouse, Inc. (LW) was incorporated as a wholly-owned
subsidiary of PMIC, to provide consumers a convenient way to purchase computer
products via the internet. Sales generated by LW were $322,300 for the three
months ended September 30, 2002.
Consolidated gross margin for the three months ended September 30, 2002 was
$1,052,100, or 5.8% of sales, compared to $1,465,200, or 7.0% of sales, for the
three months ended September 30, 2001. The decrease in gross margin was
primarily attributable to the intense competition on pricing in the computer
component market experienced by PMI and PMIGA.
The combined gross margin for PMI and PMIGA was $794,200, or 4.6% of sales for
the three months ended September 30, 2002, compared to $1,343,500 or 6.7% of
sales for the three months ended September 30, 2001. PMI's gross margin was
$687,800, or 4.5%, of sales for the three months ended September 30, 2002
compared to $1,141,700, or 6.7%, for the three months ended September 30, 2001.
PMIGA's gross margin was $106,400, or 5.6%, of sales for the three months ended
September 30, 2002 compared to $201,800, or 6.3%, of sales for the three months
ended September 30, 2001. The decrease in gross margin was primarily due to an
intense competition in market pricing of computer component products during the
three months ending September 30, 2002 compared to the comparable three months
in 2001. We expect the pricing competition in the market will continue in a slow
economy. This would have an adverse impact on our gross margin.
FNC's gross margin was $143,100, or 22.0% of sales, for the three months ended
September 30, 2002 compared to $121,700, or 19.1% of sales, for the three months
ended September 30, 2001. The higher gross margin percentage in 2002 was due to
an increase in service revenues earned as a percent of total sales for the three
months ended September 30, 2002 compared to the three months ended September 30,
2001. Service revenues were $115,600 for the three months ended September 30,
2002 compared to $35,600 for the three months ended September 30, 2001. In
general, FNC has a higher gross margin on consulting and implementation service
revenues than product sales revenues. We expect to maintain the similar mix of
service/equipment revenues as the economy continues to stagnate.
16
Lea experienced an overall gross margin of $49,600, or 62.8% of sales, for the
three months ended September 30, 2002. Lea's gross margin was generated
primarily from services performed.
Gross margin for LW was $65,000, or 20.1% of sales, for the three months ended
September 30, 2002. The gross margin realized in retail sales is generally
higher than wholesale distribution.
Consolidated operating expenses, which consist of research and development and
selling, general and administrative expenses, were $2,086,300 for the three
months ended September 30, 2002, an increase of $301,800, or 16.9%, compared to
$1,784,500 for the three months ended September 30, 2001.
The increase in consolidated operating expenses was partially due to the
inclusion of the operating and development support expenses of $211,500 for Lea
for the three months ended September 30, 2002 which were not incurred during the
same period in 2001.
LW began its operations in the first quarter of 2002. The increase in
consolidated operating expenses was partially due to the inclusion of the
operating expenses of $91,800 for LW for the three months ended September 30,
2002 which were not incurred during the same period in 2001.
Consolidated expense for the Company's investor relations and other expenses for
maintaining the status of PMIC as a publicly-held company increased from $17,600
for the three months ended September 30, 2001 to $84,900 for the three months
ended September 30, 2002. These expenses were partially offset by, among other
cost-cutting measures, reducing our employee count from 97 as of September 30,
2001 to 93 as of September 30, 2002 for PMI, PMIGA, and FNC and decreasing our
labor cost by $146,500 for the three months ended September 30, 2002 compared to
the same period in 2001.
PMI's operating expenses were $1,133,600 for the three months ended September
30, 2002 compared to $1,148,000 for the three months ended September 30, 2001.
The decrease of $14,400, or 1.3%, was mainly due to a reduction in our employee
count from 66 as of September 30, 2001 to 62 as of September 30, 2002 resulting
in a decrease in payroll expenses of approximately $177,000 and was mostly
offset by an increase in allocated corporate expenses from PMIC to PMI. These
allocated expenses primarily relate to maintaining the status of PMIC as a
publicly-held company, and include among others, investor relations expenses and
professional service expenses. Investor relations and professional service
expense increased by $58,200 and $67,200, respectively, for the three months
ended September 30, 2002 compared to the same period in 2001.
PMIGA's operating expenses were $257,500 for the three months ended September
30, 2002, a decrease of $31,600, or 10.9%, compared to $289,100 for the three
months ended September 30, 2001. The decrease was primarily due to a reduction
in our employee count from 19 as of September 30, 2001 to 15 as of September 30,
2002 resulting in a decrease in payroll expense of approximately $52,800.
FNC's operating expenses were $392,100 for the three months ended September 30,
2002, an increase of $94,300 or 31.7%, compared to $297,800 for the three months
ended September 30, 2001. The increase was primarily the result of the operating
expenses of Technical Insight (TI), whose assets were acquired in September 20,
2001, which were not incurred in the comparative prior year period. This
increase was partially offset by a decrease in professional service expenses of
approximately $21,900.
Consolidated loss from operations for the three months ended September 30, 2002
was $1,034,200 compared to $319,300 for the three months ended September 30,
2001, an increase of 223.9%. As a percent of sales, consolidated loss from
operations was 5.7% for the three months ended September 30, 2002 compared to
1.6% for the three months ended September 30, 2001. The increase in consolidated
loss from operations was primarily due to a 16.9% increase in consolidated
operating expenses and a decrease in gross margin experienced during the current
period. Loss from operations for the three months ended September 30, 2002,
including allocations of PMIC corporate expenses, for PMI, PMIGA, FNC, Lea and
LW were $505,800, $54,200, $38,000, $14,200, and $39,700, respectively.
Consolidated interest income was $4,300 for the three months ended September 30,
2002 compared to $20,000 for the three months ended September 30, 2001. The
decrease in interest income was mainly due to a decline in interest rates and
funds on deposit in interest bearing accounts.
17
Consolidated interest expense was $45,800 for the three months ended September
30, 2002 compared to $60,200 for the three months ended September 30, 2001. The
decrease in interest expense was mainly due to a decrease in the floating
interest rate charged on one of our mortgages on our office building facility
located in Milpitas, California.
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 computed the weighted average
effective tax rate which originated the net operating losses and recorded an
income tax benefit of $341,400 on the net operating tax loss incurred for the
three months ended September 30, 2002 using the weighted average effective tax
rate.
On May 31, 2002 the Company issued 600 shares of its 4% Series A Redeemable
Convertible Preferred Stock and a warrant for 300,000 shares of common stock to
an investor. The value of the beneficial conversion option of these 600 shares
of 4% Series A Redeemable Convertible Preferred Stock and the warrant was
$303,000 and $148,300, respectively. The accretion of the 4% Series A Preferred
Stock was $6,100 from the three months ended September 30, 2002. The value of
the accretion of the preferred stock was included in the loss applicable to the
common shareholders in the calculation of the loss per common share.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Sales for the nine months ended September 30, 2002 were $51,241,200, a decrease
of $4,516,900, or approximately 8.1%, compared to $55,758,100 for the nine
months ended September 30, 2001. The decrease was primarily attributable to
decreased revenues at PMI and PMIGA partially offset by the revenues of newly
formed LiveWarehouse and newly acquired Lea.
The combined sales of PMI and PMIGA were $48,238,000 for the nine months ended
September 30, 2002, a decrease of $5,335,800 or approximately 10.0%, compared to
$53,573,800 for the nine months ended September 30, 2001. Sales for PMI
decreased by $4,319,100, or 9.6%, from $44,993,700 for the nine months ended
September 30, 2001 to $40,674,600 for the nine months ended September 30, 2002.
PMIGA's sales decreased by $1,016,700, or 11.8%, from $8,580,100 for the nine
months ended September 30, 2001 to $7,563,400 for the nine months ended
September 30, 2002. The decrease in PMI and PMIGA sales was primarily due to a
continuing decline in the computer component market and the intense competition
in pricing in the computer component market during the nine months ending
September 30, 2002 compared to the comparable nine months in 2001.
Sales recognized by FNC for the nine months ended September 30, 2002 were
$2,131,200, a decrease of $53,100 or 2.4%, compared to $2,184,300 for the nine
month ended September 30, 2001. FNC sales were essentially flat due to a slow
and stagnant economy. Our customers had not increased their purchases from us in
computer networking.
In the fourth quarter of 2001, PMICC acquired certain assets of LiveMarket.
Subsequently, these assets were transferred to Lea. Prior to the LiveMarket
acquisition, Lea did not generate any revenues as it was in the development
stage. Revenues generated by Lea were $412,000 for the nine months ended
September 30, 2002.
In December 2001, LiveWarehouse, Inc. (LW) was incorporated as a wholly-owned
subsidiary of PMIC to provide consumers a convenient way to purchase computer
products via the internet. Sales generated by LW were $460,000 for the nine
months ended September 30, 2002.
Consolidated gross margin for the nine months ended September 30, 2002 was
$3,507,600, or 6.8% of sales, compared to $3,824,900, or 6.9% of sales, for the
nine months ended September 30, 2001. The decrease in gross margin was primarily
attributable to the intense competition on pricing of computer component
products in the market experienced by PMI and PMIGA.
The combined gross margin for PMI and PMIGA was $2,847,100, or 5.9% of sales,
for the nine months ended September 30, 2002, compared to $3,521,800 or 6.6% of
sales, for the nine months ended September 30, 2001. PMI's gross margin was
$2,476,600, or 6.1% of sales, for the nine months ended September 30, 2002
compared to $3,091,700, or 6.9% of sales, for the nine months ended September
30, 2001. PMIGA's gross margin was $370,500, or 4.9% of sales, for the nine
months ended September 30, 2002 compared to $430,100, or 5.0% of sales, for the
nine months ended September 30, 2001. The decrease in PMI and PMIGA gross margin
18
was primarily due to an intense competition on pricing of computer component
products in the market during the nine months ending September 30, 2002 compared
to the comparable nine months in 2001. We expect the pricing competition in the
market will continue in a slow economy. This would have an adverse impact on our
gross margin.
FNC's gross margin was $392,600, or 18.4% of sales, for the nine months ended
September 30, 2002 compared to $303,100, or 13.9% of sales, for the nine months
ended September 30, 2001. The higher gross margin percentage in 2002 was due to
an increase in service revenues earned as a percent of total sales for the nine
months ended September 30, 2002 compared to the nine months ended September 30,
2001. Service revenues were $366,800 for the nine months ended September 30,
2002 compared to $114,100 for the nine months ended September 30, 2001. In
general, FNC has a higher gross margin on consulting and implementation service
revenues than product sales revenues. We expect to maintain the similar mix of
service/equipment revenues as the economy continues to stagnate.
Lea experienced an overall gross margin of $175,600, or 42.6% of sales, for the
nine months ended September 30, 2002. Lea's gross margin was derived primarily
from service revenues.
Gross margin for LW was $92,300, or 20.1% of sales, for the nine months ended
September 30, 2002. The gross margin realized in retail sales is generally
higher than wholesale distribution.
Consolidated operating expenses, which consist of research and development and
selling, general and administrative expenses, were $6,763,100 for the nine
months ended September 30, 2002, an increase of $837,400, or 14.1% compared to
$5,925,700 for the nine months ended September 30, 2001.
The increase in consolidated operating expenses was partially due to the
inclusion of the operating and development support expenses of $787,000 for Lea
for the nine months ended September 30, 2002 which were not incurred during the
same period in 2001.
LW began its operations in the first quarter of 2002. The increase in
consolidated operating expenses was partially due to the inclusion of the
operating expenses of $274,000 for LW for the nine months ended September 30,
2002 which were not incurred during the same period in 2001.
The Company has also experienced a lower level of bad debt write-offs. The
consolidated bad debt expense decreased from $297,000 for the nine months ended
September 30, 2001 to $189,800 for the nine months ended September 30, 2002.
Consolidated expense for the Company's investor relations for maintaining the
status of PMIC as a publicly-held company was $335,300 for the nine months ended
September 30, 2002 compared to $116,400 for the nine months ended September 30,
2001. These expenses were partially offset by, among other cost-cutting
measures, reducing our employee count from 97 to 93 for PMI, PMIGA, and FNC and
decreasing our labor cost by $462,000 for the nine months ended September 30,
2002 compared to the same period in 2001.
PMI's operating expenses were $3,561,200 for the nine months ended September 30,
2002 compared to $3,868,300 for the nine months ended September 30, 2001. The
decrease of $307,100, or 7.9%, was mainly due to a reduction in our employee
count from 66 as of September 30, 2001 to 62 as of September 30, 2002 resulting
in a decrease in payroll expenses of approximately $462,600 and the decrease in
bad debt expense of $144,100 and was mostly offset by an increase in allocated
corporate expenses from PMIC to PMI. These allocated expenses primarily relate
to maintaining the status of PMIC as a publicly-held company, and include among
others, investor relations and professional service expenses. Investor relations
and professional service expense increased by $174,000 and $83,000,
respectively, for the nine months ended September 30, 2002 compared to the same
period in 2001.
PMIGA's operating expenses were $878,200 for the nine months ended September 30,
2002, a decrease of $65,500, or 6.9% compared to $943,700 for the nine months
ended June 30, 2001. The decrease was primarily due to a reduction in our
employee count from 19 as of September 30, 2001 to 15 as of September 30, 2002
resulting in a decrease in payroll expense of approximately $155,900 which was
partially offset by the increase in bad debt expense of $26,400 and allocated
corporate expenses from PMIC to PMIGA. These allocated expenses primarily relate
to maintaining the status of PMIC as a publicly-held company, and include, among
others, investor relations and professional service expenses. Investor relations
expense increased by $35,500 for the nine months ended September 30, 2002
compared to the same period in 2001.
19
FNC's operating expenses were $1,262,700 for the nine months ended September 30,
2002, an increase of $220,500, or 21.2%, compared to $1,042,200 for the nine
months ended September 30, 2001. FNC acquired certain assets of a computer
technical support company, Technical Insight (TI) on September 30, 2001. The
operating expenses for the nine months ended September 30, 2002 included the
expenses of operating TI. Payroll expense, including TI, was $999,300 for the
nine months ended September 30, 2002 compared to $838,900 for the nine months
ended September 30, 2001, an increase of $160,400. Rent expense for TI was
$27,400 for the nine months ended September 30, 2002. FNC also experienced an
increase in bad debt expense of $10,500 for the nine months ended September 30,
2002. The increases were partially offset by a decrease in professional service
expenses of approximately $63,100.
Consolidated loss from operations for the nine months ended September 30, 2002
was $3,255,500 compared to $2,100,800 for the nine months ended September 30,
2001, an increase of 55.0%. As a percent of sales, consolidated loss from
operations was 6.4% for the nine months ended September 30, 2002 compared to
3.8% for the nine months ended September 30, 2001. The increase in consolidated
loss from operations was primarily due to an 8.1% decrease in consolidated sales
and a 14.1% increase in consolidated operating expenses. Loss from operations
for the nine months ended September 30, 2002, includes allocations of PMIC
corporate expenses, for PMI, PMIGA, FNC, Lea and LW was $1,591,500, $252,600,
$141,200, $69,900, and $151,700, respectively.
Consolidated interest income was $14,600 for the nine months ended September 30,
2002 compared to $107,900 for the nine months ended September 30, 2001. The
decrease in interest income was mainly due to a decline in interest rates and
funds available to earn interest.
Consolidated interest expense was $138,900 for the nine months ended September
30, 2002 compared to $201,900 for the nine months ended September 30, 2001. The
decrease in interest expense was largely due to a decrease in the floating
interest rate charged on one of our mortgages on our office building facility
located in Milpitas, California.
In June 2001, the Company established a 100% reserve on the investment in
TargetFirst Inc. as a result of an evaluation of the net realizable value of
this investment. An impairment loss of $250,000 was recorded in June 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 computed the weighted average
effective tax rate which originated the net operating losses and recorded an
income tax benefit of $1,107,000 on the net operating tax loss incurred for the
nine months ended September 30, 2002 using the weighted average effective tax
rate.
On May 31, 2002 the Company issued 600 shares of its 4% Series A Redeemable
Convertible Preferred Stock and a warrant for 300,000 shares of common stock to
an investor. The value of the beneficial conversion option of these 600 shares
of 4% Series A Redeemable Convertible Preferred Stock and the warrant was
$303,000 and $148,300, respectively. The accretion of the 4% Series A Preferred
Stock was $8,100 from the issuance date (May 31, 2002) to September 30, 2002.
The value of the beneficial conversion option, the warrant, and the accretion of
the preferred stock, totaling $459,400 was included in the loss applicable to
the common shareholders in the calculation of the loss per common share for the
nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
It is our business plan that we finance our operations primarily through cash
generated by operations and borrowings under our floor plan inventory loans and
line of credit. The continued decline in sales, the continuation of operating
losses or the loss of credit facilities could have a material adverse effect on
the operating cash flows of the Company.
As of June 30, 2002, the Companies did not meet the revised minimum tangible net
worth and profitability covenants, giving Transamerica, among other things, the
right to call the loan and immediately terminate the credit facility. On October
23, 2002, Transamerica issued a waiver of the default occurring on June 30, 2002
and revised the terms and covenants under the credit agreement. Under the
revised terms, the credit facility includes FNC as an additional borrower and
PMIC continues as a guarantor. Effective October 2002, the new credit limit is
$3 million in aggregate for inventory loans and the letter of credit facility.
The letter of credit facility is limited to $1 million. The credit limits for
PMI and FNC are $1,750,000 and $250,000, respectively. As of September 30, 2002,
the Companies did not meet the revised covenants relating to profitability and
20
tangible net worth. This gives Transamerica, among other things, the right to
call the loan and immediately terminate the credit facility.
On May 31, 2002 the Company entered into a Preferred Stock Purchase Agreement
with an investor. Under the agreement, the Company agreed to issue 1,000 shares
of its preferred stock at $1,000 per share. The Company issued 600 shares of its
preferred stock and warrants for purchasing 400,000 shares of the Company's
common stock for a net proceeds of $477,500 on May 31, 2002. We expect to issue
the additional 400 shares for an estimated gross proceeds of $370,000 in the
fourth quarter 2002. Even though we have completed the required registration of
the underlying common stock in October 2002, there is no assurance these
remaining 400 shares will be sold.
At September 30, 2002, the Company had consolidated cash and cash equivalents
totaling $2,667,400 (excluding $250,000 in restricted cash) and working capital
of $3,960,400, a decrease of $1,774,500 compared to the working capital at
December 31, 2001. 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. The decrease in working capital is primarily due
to an increase in accounts payable.
Net cash used in operating activities during the nine months ended September 30,
2002 was $233,600, which principally reflected the net loss incurred during the
period, and an increase in inventories, which was partially offset by an
increase in accounts payable and a decrease in accounts receivable. On June 12,
2002, the Company received a Federal income tax refund of $1,034,700.
Net cash used by investing activities during the nine months ended September 30,
2002 was $102,300, resulting from the purchases of property and equipment of
$128,000 and an increase of $22,700 in deposits and other assets. These uses
were partially offset by the proceeds from the sale of property and equipment.
Net cash used in financing activities was $106,700 for the nine months ended
September 30, 2002, primarily due to net decreases in the floor plan inventory
loans and principal payments on the mortgages on our office facility. This was
partially offset by the net proceeds of $477,500 from the issuance of preferred
stock.
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
(Transamerica). This credit facility has a term of two years, subject to
automatic renewal from year to year thereafter. The credit facility can be
terminated by either party upon 60 days' prior written notice and immediately if
the Companies lose the right to sell or deal in any product line of inventory.
The Companies are subject to an early termination fee equal to 1% of the then
established credit limit. The facility includes a $2.4 million inventory line
(subject to a borrowing base of up to 85% of eligible accounts receivable plus
up to $1,500,000 of eligible inventories), a $600,000 working capital line and a
$1 million letter of credit facility used as security for inventory purchased on
terms from vendors in Taiwan. Borrowing under the inventory loans are subject to
30 to 60 days repayment, at which time interest begins to accrue at the prime
rate, which was 4.75% at September 30, 2002. Draws on the working capital line
also accrue interest at the prime rate.
Under the agreement, PMI and PMIGA granted Transamerica 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 December 31, 2001, the Companies were in violation of
the minimum tangible net worth covenant. On March 6, 2002, Transamerica issued a
waiver of the default and revised the covenants under the credit agreement
retroactively to September 30, 2001. The revised covenants require the Companies
to maintain certain financial ratios and to achieve certain levels of
profitability. As of December 31, 2001 and March 31, 2002, the Companies were in
compliance with these revised covenants. As of June 30, 2002, the Companies did
not meet the revised minimum tangible net worth and profitability covenants,
giving Transamerica, among other things, the right to call the loan and
immediately terminate the credit facility.
On October 23, 2002, Transamerica issued a waiver of the default occurring on
June 30, 2002 and revised the terms and covenants under the credit agreement.
Under the revised terms, the credit facility includes FNC as an additional
borrower and PMIC continues as a guarantor. Effective October 2002, the new
credit limit was reduced to $3 million in aggregate for inventory loans and the
letter of credit facility. The letter of credit facility is limited to $1
million. The credit limits for PMI and FNC are $1,750,000 and $250,000,
21
respectively. As of September 30, 2002, there were outstanding draws of $990,800
on the credit facility. As of September 30, 2002, the Companies did not meet the
covenants as revised on October 23, 2002 relating to profitability and tangible
net worth, constituting a technical default. This gives Transamerica, among
other things, the right to call the loan and immediately terminate the credit
facility. We are currently in discussions with Transamerica to obtain a waiver
of the covenant default. There is no assurance that a waiver will be obtained
from Transamerica nor that the covenants will be revised with terms favorable to
us.
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 matured in 30 days. Thereafter, interest
accrued at the lesser of 16% per annum or at the maximum lawful contract rate of
interest permitted under applicable law.
FNC was required to maintain certain financial covenants to qualify for the
Deutsche bank credit line, and was not in compliance with certain of these
covenants as of June 30, 2002 and December 31, 2001, which constituted a
technical default under the credit line. This gave Deutsche the right to call
the loan and terminate the credit line. The credit facility was guaranteed by
PMIC and could be terminated by Deutsche immediately given the default. On April
30, 2002, Deutsche elected to terminate the credit facility effective July 1,
2002. Upon termination, the outstanding balance must be repaid in accordance
with normal terms and provisions of the financing agreement. As of September 30,
2002, there were outstanding draws of $11,600 on the credit line. The entire
outstanding balance was repaid on October 9, 2002.
Pursuant to one of our bank mortgage loans with a $2,393,700 balance at
September 30, 2002, 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. A waiver of these loan
covenant violations was obtained from the bank in March 2002, retroactive to
September 30, 2001, and through December 31, 2002. As a condition for this
waiver, we transferred $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.
We presently have insufficient working capital to pursue our long-term growth
plans with respect to expansion of our service and product offerings. We
believe, however, that our existing cash, trade credits from suppliers,
anticipated income tax refunds, and proceeds from issuance of additional
preferred stock will satisfy our anticipated requirements for working capital to
support our present operations through the next 12 months, provided we are able
to maintain our existing credit lines or obtain comparable replacement credit
facilities.
On May 31, 2002 we received net proceeds of $477,500 from the issuance of 600
shares of 4% Series A Preferred Stock. We expect an additional 400 shares will
be issued in the fourth quarter 2002. Even though we have completed the required
registration of the underlying common stock in October 2002, there is no
assurance these remaining 400 shares will be sold or that we will be able to
obtain additional capital beyond the issuance of these 1,000 shares of Preferred
stock. Upon the occurrence of a Triggering Event, such as the Company were a
party in a "Change of Control Transaction," among others, as defined, the holder
of the preferred stock has the rights to require us to redeem its preferred
stock in cash at a minimum of 1.5 times the Stated Value. As of September 30,
2002, the redemption value of the Series A Preferred Stock, if the holder had
required us to redeem the Series A Preferred Stock as of that date, was
$912,200. Even though we do not expect those Triggering Events will occur, there
is no assurance that those events will not occur. In the event we are required
to redeem our Series A Preferred Stock in cash, we might experience a reduction
in our ability to operate the business at the current level.
We are actively seeking additional capital to augment our working capital and to
finance our new business. However, there is no assurance that we can obtain such
capital, or if we can obtain capital that it will be on terms that are
acceptable to us.
Our stock is currently traded on the Nasdaq SmallCap Market. On August 19, 2002
we received a letter from the Nasdaq Stock Market informing us that we did not
meet the criteria for continued listing on the Nasdaq SmallCap Market. The
letter stated that Nasdaq will monitor our common stock and if it closes above
$1.00 for a minimum of ten consecutive trading days, Nasdaq will notify us of
our compliance with its continued listing standards. If we do not meet the
22
continued listing standards by February 18, 2003, Nasdaq will evaluate whether
we meet the initial listing criteria of the SmallCap Market. If we do not,
Nasdaq will inform us of its intent to delist our common stock. If we do, Nasdaq
will provide an additional 180 days to come into compliance with the continued
listing criteria. If we still do not meet the continued listing criteria at the
end of the additional period, Nasdaq will inform us of its intent to delist our
common stock. We cannot assure you that we will meet any of such deadlines or
criteria. If our common stock is delisted, the market for our common stock will
decline and it will be more difficult to trade in our common stock, which will
likely cause a decrease in the price of our common stock.
RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2002, the Company made short-term salary
advances to a shareholder/officer totaling $30,000, without interest. These
advances were recorded as a bonus to the shareholder/officer during the second
quarter ended June 30, 2002.
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. For the nine months ended
September 30, 2002, and 2001, the Company recognized $494,400 and $476,200,
respectively, in sales revenues from this customer. Included in accounts
receivable as of September 30, 2002 is $96,300 due from this related customer.
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 is 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." The adoption of Issue 01-09 during the first quarter of
2002 did not have a material impact on the Company's financial position or
results of operations.
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 of 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 in deposits and other assets.
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 adoption of
SFAS No. 142 did not have a material effect on the Company's financial position,
results of operations or cash flows since the value of intangibles recorded is
relatively insignificant and no goodwill has been recognized.
23
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 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 did not have a material effect
on the Company's financial position, results of operations, or cash flows.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections" ("SFAS 145"), updates, clarifies and simplifies existing accounting
pronouncements. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." SFAS 145 amends SFAS No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for
fiscal years beginning and transactions occurring after May 15, 2002,
respectively. The Company does not expect the adoption of SFAS No. 145 to have a
material effect on its financial position, results of operations, or cash flows.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 replaces Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of SFAS 146 are to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
SFAS No. 146 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 increased costs are not offset by increased
revenues, our operations may be adversely affected.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE INCURRED OPERATING LOSSES AND DECREASED REVENUES RECENTLY AND WE CANNOT
ASSURE YOU THAT THIS TREND WILL CHANGE. We incurred net losses for the year
ended December 31, 2001 and the nine months ended September 30, 2002 of
$2,850,700 and $2,310,300, respectively, and we may continue to incur losses. In
addition, our revenues decreased 15.6% during the year ended December 31, 2001
as compared to the corresponding period in 2000 and 8.1% for the nine months
ended September 30, 2002 as compared to the corresponding period in 2001. 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 (such as reducing our labor costs), and to
build upon our existing business and capture new business. No assurance can be
given, however, that these actions will result in increased revenues, decreased
expenses, and profitable operations, which may have an adverse impact on our
ability to execute our business plan.
WE CAN PROVIDE NO ASSURANCE THAT WE WILL BE ABLE TO SECURE ADDITIONAL CAPITAL
REQUIRED BY OUR BUSINESS. We recently completed a private placement of 600
shares of our Series A Convertible Preferred Stock with net proceeds of
$477,500. We expect to complete the sale of an additional 400 shares of Series A
24
Preferred Stock for gross proceeds of approximately $370,000 in the fourth
quarter 2002. Based on our present operations, we anticipate that our working
capital, including the $477,500 raised in our recent placement, the $370,000
expected to be raised in the fourth quarter 2002 and the income tax refunds to
be received in 2003, will satisfy our working capital needs for the next twelve
months, provided we are able to maintain our existing credit lines or obtain
comparable replacement credit facilities. If we fail to raise additional working
capital prior to the end of that time or if the sale of the additional 400
shares of Series A Preferred Stock is not completed in a timely manner, we will
be unable to pursue our business plan involving expansion of our service and
product offerings. We must obtain additional financing to continue to expand our
distribution business, and to develop our FNC business. We can give no assurance
that we will be able to obtain additional capital when needed or, if available,
that such capital will be available at terms acceptable to us.
WE HAVE VIOLATED CERTAIN FINANCIAL COVENANTS CONTAINED IN TWO OF OUR CURRENT
LOANS AND MAY DO SO AGAIN IN THE FUTURE. We have a mortgage on our offices with
Wells Fargo Bank under which we must maintain certain financial covenants. They
are:
1) Our total liabilities must not be more than twice our tangible net
worth;
2) Our net income after taxes must not be less than one dollar on an
annual basis and for net losses no more than two consecutive quarters;
and
3) We must maintain annual EBITDA of one and one half times our debt
service.
We are currently in violation of covenants number 2 and 3 above, but we have
received a waiver for such violation through the end of 2002.
Our subsidiaries, PMI, PMIGA and FNC also have a flooring line with Transamerica
Commercial Finance Corporation. We must also meet certain financial covenants
with respect to this line. These covenants are:
1) The combined total indebtedness of PMI and PMIGA and FNC may not
exceed 3.25 times their tangible net worth on a quarterly basis;
2) The combined tangible net worth of PMI and PMIGA and FNC may not be
less than $4,250,000;
3) The combined EBIT of PMI and PMIGA and FNC must be greater than $0 for
the quarter ended September 30, 2002 and $275,000 for the quarter
ended December 31, 2002.
We were in violation of our tangible net worth covenant (prior to revisions
discussed below) as of December 31, 2001. However, Transamerica waived the
violation and revised the credit agreement retroactively to September 30, 2001.
We received a letter from Transamerica stating that PMI and PMIGA were in
compliance with all of the above covenants as of March 31, 2002. We were also in
violation of our tangible net worth covenant and the EBIT covenant as of June
30, 2002 which gave Transamerica, among other things, the right to call the loan
and immediately terminate the credit facility. On October 23, 2002, Transamerica
issued a waiver of the default as of June 30, 2002 and revised the terms and
covenants under the credit agreement. Under the revised terms, PMIC continues as
a guarantor of the loans and the credit facility and includes FNC as a borrower.
The new credit limit was reduced to $3 million in aggregate for inventory loans
and the letter of credit facility. The letter of credit facility is limited to
$1 million. The credit limits for PMI and FNC are $1,750,000 and $250,000,
respectively. As of September 30, 2002, the Companies did not meet the covenants
as revised on October 23, 2002 relating to profitability and tangible net worth.
This constitutes a technical default and gives Transamerica, among other things,
the right to call the loan and immediately terminate the credit facility.
We cannot assure you that we will be able to meet all of these financial
covenants in the future. If we fail to meet the covenants, the respective
lenders may declare us in default and accelerate the loans. If that was to
occur, we would be unable to continue our operations without replacement loans
or other alternate financing.
OUR COMMON STOCK DOES NOT MEET THE REQUIREMENTS FOR CONTINUED LISTING ON THE
NASDAQ SAMLLCAP MARKET. Our stock is currently traded on the Nasdaq SmallCap
Market. On August 19, 2002 we received a letter from the Nasdaq Stock Market
informing us that we did not meet the criteria for continued listing on the
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Nasdaq SmallCap Market. The letter stated that Nasdaq will monitor our common
stock and if it closes above $1.00 for a minimum of ten consecutive trading
days, Nasdaq will notify us of our compliance with its continued listing
standards. If we do not meet the continued listing standards by February 18,
2003, Nasdaq will evaluate whether we meet the initial listing criteria of the
SmallCap Market. If we do not, Nasdaq will inform us of its intent to delist our
common stock. If we do, Nasdaq will provide an additional 180 days to come into
compliance with the continued listing criteria. If we still do not meet the
continued listing criteria at the end of the additional period, Nasdaq will
inform us of its intent to delist our common stock. We cannot assure you that we
will meet any of such deadlines or criteria. If our common stock is delisted,
the market for our common stock will decline and it will be more difficult to
trade in our common stock, which will likely cause a decrease in the price of
our common stock.
OUR FAILURE TO ANTICIPATE OR RESPOND TO TECHNOLOGICAL CHANGES COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS. 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.
IF WE WERE UNABLE TO SECURE PRICE PROTECTION PROVISIONS IN OUR VENDOR
AGREEMENTS, THE VALUE OF OUR INVENTORY WOULD QUICKLY DIMINISH. 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.
EXCESSIVE CLAIMS AGAINST WARRANTIES THAT WE PROVIDE COULD ADVERSELY AFFECT OUR
BUSINESS. 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. If excessive claims are made against
these warranties our results of operations would suffer.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH SOME OF OUR COMPETITORS. 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.
FAILURE TO RECRUIT AND RETAIN TECHNICAL PERSONNEL WILL HARM OUR BUSINESS. 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
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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.
WE DEPEND UPON CONTINUED CERTIFICATION FROM CERTAIN OF OUR SUPPLIERS. 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.
WE DEPEND ON KEY SUPPLIERS FOR A LARGE PORTION OF OUR INVENTORY, LOSS OF THOSE
SUPPLIERS COULD HARM OUR BUSINESS. One supplier, Sunnyview/CompTronic, accounted
for approximately 9%, 10%, 16% and 20% of our total purchases for the nine
months ended September 30, 2002 and 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.
IF A CLAIM IS MADE AGAINST US IN EXCESS OF OUR INSURANCE LIMITS WE WOULD BE
SUBJECT TO 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.
WE ARE DEPENDENT 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.
WE CANNOT ASSURE YOU THAT OUR PURSUIT OF NEW BUSINESS THROUGH LIVEMARKET WILL BE
SUCCESSFUL. We have limited experience in developing commercial software
products. While we have experience in marketing computer related products, we
have not marketed software or a proprietary line of our own products. This
market is very competitive and nearly all of the software publishers or
distributors with whom Lea/LiveMarket will compete have greater financial and
other resources than Lea/LiveMarket. Presently we are exploring the
opportunities to sell this line of business. There can be no assurance that
Lea/LiveMarket will generate a profit.
WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL SUCH AS 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.
27
ESTABLISHMENT OF OUR NEW BUSINESS-TO-CONSUMER WEBSITE LIVEWAREHOUSE.COM MAY NOT
BE SUCCESSFUL. We have established a new business-to-consumer website,
LiveWarehouse.com. While sales from this segment have been increasing, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
one of our bank mortgage loans with a $2,393,700 balance at September 30, 2002
which bears fluctuating interest based on the bank's 90-day LIBOR rate. In
addition, our flooring and working capital line bears interest at the bank's
prime rate. However, interest expenses incurred in connection with this
financing agreement have historically been insignificant. We believe that
fluctuations in interest rates in the near term would not materially affect our
consolidated operating results. We are not exposed to material risk based on
exchange rate fluctuation or commodity price fluctuation.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Form 10-Q, we carried out an
evaluation under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer and other
accounting officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as defined in Rule 13a-14 of the Securities
Exchange Act of 1934. Based on that evaluation, our management, including the
Chief Executive Officer and Chief Financial Officer and other accounting
officer, concluded that our disclosure controls and procedures were effective in
timely alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in this quarterly report Form
10-Q. There have been no significant changes in our internal controls and
procedures or in other factors that could significantly affect internal controls
subsequent to the date we carried out this evaluation.
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PART II
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 31, 2002 the Company entered into a Preferred Stock Purchase Agreement
with an investor (Investor). Under the agreement, the Company agreed to issue
1,000 shares of its Series Preferred Stock at $1,000 per share. On May 31, 2002,
the Company issued 600 shares of the Series A Preferred Stock to the Investor.
the Company expects the remaining 400 shares to be issued in the fourth quarter
2002 as the last condition precedent to the sale, the effectivity of a
registration statement that registers the common stock underlying the Series A
Preferred Stock, has been completed. As part of the Preferred Stock Purchase
Agreement, the Company issued a common stock purchase warrant to the Investor.
The warrant may be exercised at any time within 3 years from the date of
issuance and entitles the Investor to purchase of 300,000 shares of the
Company's common stock at $1.20 per share and includes a cashless exercise
provision. The Company also issued a common stock purchase warrant with the same
terms and condition for the purchase of 100,000 shares of the Company's common
stock to a broker who facilitated the transaction as a commission. The Series A
Preferred Stock and the related warrants were issued under the exemption
provided by Section 4(2) of the Securities Act of 1933.
ITEM 5. OTHER INFORMATION
Effective June 17, 2002, the Board of Directors appointed Raymond M. Crouse to
the Board and as the chairman of the Audit Committee. Mr. Crouse, age 43, is a
Director of Litigation & Recovery of De Lage Landen Financial Services.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description Reference
- ------- ----------- ---------
3.1 Articles of Incorporation (1)
3.2 Bylaws, as amended and restated (1)
4.1 Certificate of Designations for theSeries A Preferred Stock (2)
10.1 Securities Purchase Agreement dated May 31, 2002, between
the Company and Stonestreet L.P. (2)
10.2 Registration Rights Agreement dated May 31, 2002, between
the Company and Stonestreet, L.P. (2)
10.3 Escrow Agreement dated May 31, 2002, between the Company,
Feldman Weinstein LLP and Stonestreet L.P. (2)
10.4 Stock Purchase Warrant dated May 31, 2002 issued to
Stonestreet L.P. (2)
10.5 Stock Purchase Warrant dated May 31, 2002 issued to
M.H. Meyerson (2)
10.6 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. (3)
10.6 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. (3)
29
10.6 Amendment No. 3 to Accounts Receivable and Inventory
Financing Agreement by and between Transamerica
Commercial Finance Corporation and Pacific Magtron,
Inc. and Pacific Magtron (GA), Inc. *
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *
(1) Incorporated by reference from the Company's registration statement on Form
10SB-12G filed January 20, 1999.
(2) Incorporated by reference from the Company's current report on Form 8-K
filed June 13, 2000.
(3) Filed with Form 10-K, dated December 31, 2001, and incorporated herein by
reference.
* Filed herewith
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on June 30, 2002 under Item 5
reporting the sale of its Series A Preferred Stock in a private placement.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized, this 14th day of November 2002.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By /s/ Theodore S. Li
-------------------------------------
Theodore S. Li
President and Chief Financial Officer
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CERTIFICATION
I, Theodore Li, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Magtron
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ Theodore S. Li
------------------------------
Theodore S. Li
Chief Executive Officer/Chief
Financial Officer
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