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 March 31, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Common Stock, $0.001 par value per share:
10,485,062 shares issued and outstanding at April 25, 2003
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of March 31, 2003
and December 31, 2002 (Unaudited) 1-2
Consolidated statements of operations for the three
months ended March 31, 2003 and 2002 (Unaudited) 3
Consolidated statements of cash flows for the three
months ended March 31, 2003 and 2002 (Unaudited) 4
Notes to consolidated financial statements 5-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-27
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 6. - Exhibits and Reports on Form 8-K 29
Signature 30
Certification 31
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,643,500 $ 1,901,100
Restricted cash 250,000 250,000
Accounts receivable, net of allowance for
doubtful accounts of $339,700 and
$305,000 in 2003 and 2002, respectively 4,186,700 5,124,100
Inventories 3,532,100 3,370,500
Prepaid expenses and other current
assets 435,700 459,100
Income tax refund receivable -- 1,472,800
------------ ------------
Total Current Assets 11,048,000 12,577,600
Property and equipment, net 4,431,300 4,495,400
Deposits and other Assets 136,400 194,000
------------ ------------
$ 15,615,700 $ 17,267,000
============ ============
See accompanying notes to consolidated financial statements.
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PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 62,000 $ 60,800
Floor plan inventory loans 1,373,800 901,600
Accounts payable 6,319,800 7,781,800
Accrued expenses 631,500 559,100
Warrants 46,700 161,600
------------ ------------
Total Current Liabilities 8,433,800 9,464,900
Notes Payable, less current portion 3,153,800 3,169,500
Commitments and Contingencies
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
$620,200 as of March 31, 2003) 930,300 190,400
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 2,013,700 2,007,900
Retained earnings 1,073,600 2,423,800
------------ ------------
Total Shareholders' Equity 3,097,800 4,442,200
------------ ------------
$ 15,615,700 $ 17,267,000
============ ============
See accompanying notes to consolidated financial statements.
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PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-----------------------------
2003 2002
------------ ------------
Sales:
Products $ 18,946,500 $ 17,416,900
Services 249,100 215,400
------------ ------------
Total Sales 19,195,600 17,632,300
------------ ------------
Cost of Sales:
Products 17,777,200 16,181,400
Services 97,800 139,200
------------ ------------
Total Cost of Sales 17,875,000 16,320,600
------------ ------------
Gross Margin 1,320,600 1,311,700
Selling, General and
Administrative Expenses 1,909,900 2,387,100
------------ ------------
Loss from Operations (589,300) (1,075,400)
------------ ------------
Other Income (Expense):
Interest income 800 6,600
Interest expense (43,300) (46,400)
Litigation settlement (95,000) --
Change in fair value of warrants issued 114,900 --
Other expense, net 1,600 (7,300)
------------ ------------
Total Other Income (Expense) (21,000) (47,100)
------------ ------------
Loss Before Income Tax Benefit
and Minority Interest (610,300) (1,122,500)
Income Tax Benefit -- 384,000
------------ ------------
Loss Before Minority Interest (610,300) (738,500)
Minority Interest in PMIGA Loss -- 2,200
------------ ------------
Net Loss (610,300) (736,300)
Accretion of discount related to
Series A Convertible Preferred Stock (6,000) --
Accretion of redemption value of
Series A Convertible Preferred Stock (733,900) --
------------ ------------
Net loss applicable to common
shareholders $ (1,350,200) $ (736,300)
============ ============
Basic and diluted loss per share $ (0.13) $ (0.07)
============ ============
Shares used in basic and diluted
per share calculation 10,485,100 10,485,100
============ ============
See accompanying notes to consolidated financial statements.
-3-
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net loss $ (610,300) $ (736,300)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Deferred income taxes -- (1,200)
Depreciation and amortization 90,400 75,300
Provision for doubtful accounts 34,700 --
Gain on disposal of fixed assets -- (6,300)
Change in fair value of warrants (114,900) --
Minority interest losses -- (2,200)
Changes in operating assets and liabilities:
Accounts receivable 902,700 176,600
Inventories (161,600) (134,800)
Prepaid expenses and other
current assets 23,400 43,800
Income taxes receivable 1,472,800 (388,500)
Accounts payable (1,462,000) 613,700
Accrued expenses 72,400 (3,700)
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 247,600 (363,600)
------------ ------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Acquisition of property and equipment (6,200) (1,500)
Reduction in deposits and other assets 43,300 20,700
Advances to shareholder/officer -- (30,000)
Proceeds from sale of property and equipment -- 20,500
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 37,100 9,700
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net increase (decrease) in floor plan
inventory loans 472,200 (630,000)
Principal payments on notes payable (14,500) (13,300)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 457,700 (643,300)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 742,400 (997,200)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,901,100 3,110,000
------------ ------------
End of period $ 2,643,500 $ 2,112,800
============ ============
See accompanying notes to consolidated financial statements.
-4-
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
The Company has incurred a net loss of $610,300 and a net loss applicable to
common shareholders of $1,350,200 for the three months ended March 31, 2003. The
Company has incurred a net loss of $2,835,900 and a net loss applicable to
common shareholders of $3,110,100 for the year ended December 31, 2002. These
conditions raise doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern is dependent upon
its ability to achieve profitability and generate sufficient cash flows to meet
its obligations as they come due. Management believes that the downsizing or
disposal of its subsidiaries, FNC and Lea and continued cost-cutting measures to
reduce overhead at all of its subsidiaries will enable it to achieve
profitability. Management is also pursuing additional capital and debt
financing. However, there is no assurance that these efforts will be successful.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of PMIC
and its wholly-owned subsidiaries, PMI, PMIGA, Lea, PMICC and LW and its
majority-owned subsidiary, FNC. All inter-company accounts and transactions have
been eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
While the financial information is unaudited, the interim consolidated financial
statements 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 accounting principles generally
accepted in the United States of America 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, 2002. Interim operating results are not
necessarily indicative of operating results expected for the entire year.
-5-
STOCK-BASED COMPENSATION
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plan had been
determined in accordance with the fair value based method prescribed in SFAS No.
123 as amended by SFAS No. 148. The Company estimates the fair value of stock
options at the grant date by using the Black-Scholes option pricing-model. There
were no options granted for the three months ended March 31, 2003 and 2002. Had
the Company adopted the provisions of FASB Statement No. 123, the Company's net
loss would have increased to the pro forma amounts indicated below:
THREE MONTHS ENDED MARCH 31, 2003 2002
------------ ------------
Net loss:
As reported $ (1,350,200) $ (736,300)
Add: total stock based employee
compensation expense determined
under fair value based method for
all awards, net of tax $ (11,300) $ (9,400)
Pro forma $ (1,361,500) $ (745,700)
------------ ------------
Basic and diluted loss per share:
As reported $ (0.13) $ (0.07)
Pro forma $ (0.13) $ (0.07)
2. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities. Under current practice,
enterprises generally have been included in the consolidated financial
statements of another enterprise because one enterprise controls the others
through voting interests. FIN 46 defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to be consolidated
into the financial statements of their primary beneficiaries if the variable
interest entities do not effectively disperse risks among the parties involved.
This interpretation applies immediately to variable interest entities created
after January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
If it is reasonably possible that an enterprise will consolidate or disclose
information about a variable interest entity when FIN 46 becomes effective, the
enterprise must disclose information about those entities in all financial
statements issued after January 31, 2003. The interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years, with a cumulative-effect adjustment as of the beginning of the first
year restated. The adoption of FIN 46 did not have a material effect on the
Company's consolidated financial statements.
In November 2002, the EITF issued Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." This issue addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how arrangement consideration should be measured and
allocated to the separate units of accounting. EITF Issue No. 00-21 will be
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effective for revenue arrangements entered into in fiscal quarters beginning
after June 15, 2003, or the Company may elect to report the change in accounting
as a cumulative-effect adjustment. The Company has reviewed EITF Issue No. 00-21
and has determined it will not have a material impact on its consolidated
financial statements.
3. STATEMENTS OF CASH FLOWS
Cash was paid during the three months ended March 31, 2003 and 2002 for:
THREE MONTHS ENDING MARCH 31,
-----------------------------
2003 2002
---------- ----------
Income taxes $ 5,200 $ 4,100
========== ==========
Interest $ 43,300 $ 47,200
========== ==========
The following are the noncash financing
activities for the three months ended
March 31, 2003 and 2002:
Accretion of discount related to
Series A Convertible Preferred Stock $ 6,000 $ --
========== ==========
Accretion of redemption value of
Series A Convertible Preferred Stock $ 733,900 $ --
========== ==========
4. RELATED PARTY TRANSACTIONS
During the first quarter of 2002, the Company made short-term salary advances to
a shareholder/officer totaling $30,000, without interest. These advances were
recorded as a salary 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 the Board
of Directors and Audit Committee of the Company. Management believes that the
terms of these sales transactions are no more favorable than those given to
unrelated customers. For the three months ended March 31, 2003, and 2002, the
Company recognized $59,200 and $136,700, respectively, in sales revenues from
this customer. Included in accounts receivable as of March 31, 2003 and 2002 is
$32,200 and $96,300, respectively, due from this related customer.
5. INCOME TAXES
In March 2002, the Job Creation and Worker Assistance Act of 2002 ("the Act")
was enacted. The Act extended the general federal net operating loss carryback
period from 2 years to 5 years for net operating losses incurred for any taxable
year ending in 2001 and 2002. As a result, the Company did not record a
valuation allowance on the portion of the deferred tax assets relating to
unutilized federal net operating loss of $1,906,800 for the year ended December
31, 2001. On June 12, 2002, the Company received a federal income tax refund of
$1,034,700 attributable to 2001 net operating losses carried back. The income
tax benefits of $384,200 recorded for the three months ended March 31, 2002
primarily reflects the federal income tax refund attributable to the net
operating loss incurred for the three months ended March 31, 2002. The Company
does not expect to receive a tax benefit for losses incurred in 2003 which are
not covered by the Act. As a result, no tax benefits were recorded for the three
months ended March 31, 2003. On March 20, 2003, the Company received a federal
income tax refund of $1,427,400 attributable to 2002 net operating loss
carryback.
-7-
6. 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 had a term of two years and was subject to
automatic renewal from year to year thereafter. The credit facility could be
terminated by Transamerica. Under certain conditions, the termination was
subject to a fee of 1% of the credit limit. The facility included 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 included
a sub-limit of $600,000 for working capital and a $1 million letter of credit
facility used as security for inventory purchased on terms from vendors in
Taiwan. Borrowings under the inventory loans were subject to 30 to 45 days
repayment, at which time interest accrued at the prime rate, which was 4.25% at
March 31, 2003. Draws on the working capital line also accrued interest at the
prime rate. The credit facility was guaranteed by both PMIC and FNC.
Under the accounts receivable and inventory financing facility from
Transamerica, the Companies were 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 required the
Companies to maintain certain financial ratios and to achieve certain levels of
profitability. As of March 31, 2002, the Companies were in compliance with these
covenants. As of June 30, 2002, the Companies did not meet the revised minimum
tangible net worth and profitability covenants.
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 $3 million in aggregate for inventory loans and the letter of
credit facility. The letter of credit facility was limited to $1 million. The
credit limits for PMI and FNC were $1,750,000 and $250,000, respectively. At
December 31, 2002 and September 30, 2002, the Companies did not meet the
covenants as revised on October 23, 2002 relating to profitability and tangible
net worth. This constituted a technical default and gave Transamerica, among
other things, the right to call the loan and immediately terminate the credit
facility.
On January 7, 2003, Transamerica elected to terminate the credit facility
effective April 7, 2003. However, Transamerica continues its guarantee of the
Letter of Credit Facility through July 25, 2003 and continues to accept payments
according to the terms of the agreement. As of March 31, 2003, the Companies had
an outstanding balance of $1,373,800 due under this credit facility. The entire
outstanding balance is scheduled for repayment by May 20, 2003.
On April 9, 2003, PMI received a conditional approval letter from Textron
Financial Corporation (Textron) for an inventory financing facility of
$3,500,000 and a $1 million letter of credit facility used as security for
inventory purchased on terms from vendors in Taiwan. The credit facility is
guaranteed by PMIC, PMIGA, FNC, Lea, LW and two shareholders/officers of the
Company. The Company is required to maintain collateral coverage equal to 120%
-8-
of the outstanding balance. A prepayment is required when the outstanding
balance exceeds the sum of 70% of the eligible accounts receivables and 90% of
the Textron-financed inventory and 100% of any cash assigned or pledged to
Textron. PMI and PMIC are required to meet certain financial ratio covenants and
levels of profitability. The Company is required to maintain $250,000 in a
restricted account as a pledge to Textron.
7. 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 (1.375% as of March 31, 2003)
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 2002,
the Company was in violation of two of these covenants which is an event of
default under the loan agreement that gives the bank the right to call the loan.
While a waiver of the loan covenant violations was obtained from the bank
through December 31, 2003, the Company is required to maintain $250,000 in a
restricted account as a reserve for debt servicing. This amount has been
reflected as restricted cash in the accompanying consolidated financial
statements.
8. 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. PMIGA imports and distributes similar products focusing on customers
located in the east coast of the United States. LW sells similar products as PMI
to 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 separate strategic business units. They are managed
separately because each business requires different technology and/or marketing
strategies. PMI and PMIGA are comparable businesses with different locations of
operations and customers. Sales to foreign countries have been insignificant for
the Company.
The following table presents information about reported segment profit or loss
for the three months ended March 31, 2003:
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Segment loss
Revenues before income
External taxes and
Customers Minority Interest
----------- -----------------
PMI $14,744,000 $ (416,800)
PMIGA 2,002,500 (113,000)
FNC 970,600(1) (94,900)
LEA 99,500(2) (46,200)
LW 1,379,000 (46,300)
----------- -----------
TOTAL $19,195,600 $ (717,200)
=========== ===========
The following table presents information about reported segment profit or loss
for the three months ended March 31, 2002:
Segment loss
Revenues before income
External taxes and
Customers Minority Interest
----------- -----------------
PMI $13,430,700 $ (305,500)
PMIGA 3,445,000 (142,000)
FNC 599,600(1) (338,400)
LEA 135,600(2) (266,300)
LW 21,400 (70,300)
----------- -----------
TOTAL $17,632,300 $(1,122,500)
=========== ===========
(1) Includes service revenues of $149,600 and $79,800 in 2003 and 2002,
respectively.
(2) Includes service revenues of $99,600 and $135,600 in 2003 and 2002,
respectively.
The following is a reconciliation of reportable segment loss before income taxes
to the Company's consolidated total:
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
Total loss before income taxes and minority
interest for reportable segments $ (717,200) $ (1,122,500)
Change in fair value of warrants issued 114,900 --
Amortization of warrant issuance costs (8,000) --
------------ ------------
Consolidated loss before income taxes
and minority interest $ (610,300) $ (1,122,500)
------------ ------------
9. ACCOUNTS RECEIVABLE FACTORING AGREEMENT
Pursuant to a non-notification accounts receivable factoring agreement, the
Company factored certain of its accounts receivable with GE Capital Commercial
Services, Inc. (GE) on a pre-approved nonrecourse basis. The factoring
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commission charge was 0.375% and 2.375% of specific approved domestic and
foreign receivables, respectively. The agreement, which expired February 28,
2003 and was renewed through March 31, 2003, provided for the Company to pay a
minimum of $200,000 (pro-rated for March 2003) in annual commission to GE. The
Company's obligations to GE were collateralized by the related accounts
receivable sold and assigned to GE and the underlying inventory. However, any
collateral assigned to GE was subordinated to the collateral rights held by
Transamerica, the Company's floor plan inventory lender. GE agreed to remit to
Transamerica, on behalf of the Company, any collections on assigned accounts to
repay amounts due Transamerica under the Company's inventory floor line of
credit.
In April 2003, the Company entered into a financing agreement with ENX, Inc. for
its accounts receivables for one year beginning April 7, 2003. Under the
agreement, the Company factors its accounts receivable on pre-approved customers
with pre-approved credit limits. The factoring commission is 0.5% of the invoice
amounts with a minimum annual commission of $50,000. The Company also has a
credit insurance policy covering certain accounts receivable up to $2,000,000 of
losses.
10. LITIGATION SETTLEMENT
In April 2003, the Company settled a lawsuit relating to a counterfeit products
claim for $95,000 which is included in other expense in the first quarter 2003.
11. SUBSEQUENT EVENTS
On February 28, 2003, Nasdaq notified the Company that its common stock had
failed to comply with the minimum market value of publicly held shares
requirement of Nasdaq Marketplace Rule. On March 6, 2003 the Company requested a
hearing before a Listing Qualifications Panel, at which it would seek continued
listing. The hearing was held on April 24, 2003. The Company was also notified
by Nasdaq that the Company did not comply with the Marketplace Rule that
requires a minimum bid price of $1.00 per share of common stock. Subsequent to
the hearing on April 24, 2003, Nasdaq notified the Company that its common stock
would be delisted from the Nasdaq SmallCap Market effective and such delisting
took place on April 30, 2003. The Company's common stock is eligible to be
traded on the Over the Counter Bulletin Board (OCTBB). The delisting of the
Company's common stock enables the holder of the Company's Series A Redeemable
Convertible Preferred Shares to request the repurchase of such shares 60 days
after the delisting date. As of March 31, 2003, 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 $930,300. The Company has
increased the carrying value of the Series A Redeemable Convertible Preferred
Stock to its redemption value and has recorded an increase in loss applicable to
common shareholders of $733,900 in the accompanying consolidated statement of
operations.
In March and April 2003, the Company entered into letters of intent with a third
party to sell substantially all of the assets of FNC and with certain employees
to sell substantially all of the assets of Lea. The Company is engaged in
on-going preliminary discussions with the prospective buyers and is unable to
conclude that a sale is probable at this time.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The accompanying discussion and analysis of financial condition and results of
operations is based on the consolidated financial statements, which are included
elsewhere in this Quarterly Report. The following discussion and analysis should
be read in conjunction with the accompanying financial statements and related
notes thereto. This discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Our actual results could
differ materially from those set forth in the forward-looking statements.
Forward-looking statements, by their very nature, include risks and
uncertainties. Accordingly, our actual results could differ materially from
those discussed in this Report. A wide variety of factors could adversely impact
revenues, profitability, cash flows and capital needs. Such factors, many of
which are beyond our control, include, but are not limited to, those identified
in the Company's Form 10-K for the fiscal year ended December 31, 2002 under the
heading "Cautionary Factors That May Affect Future Results", such as our ability
to reverse our trend of negative earnings, respond to technological changes,
obtain insurance and potential excess liability, the diminished marketability of
inventory, the need for additional capital, the delisting of our common stock
from the Nasdaq SmallCap Market, increased warranty costs, competition,
recruitment and retention of technical personnel, dependence on continued
manufacturer certification, dependence on certain suppliers, risks associated
with the projects in which we are engaged to complete, and dependence on key
personnel.
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 segments of the computer industry.
Our business is organized into five divisions: PMI, PMIGA, FNC, Lea and LW. Our
subsidiaries, PMI and PMIGA, provide for 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. 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.
(Technical Insights"), 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. We signed a letter of intent to sell
substantially all of the assets of FNC to a third party. However, there is no
assurance that the sale will be consummated.
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
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purchase of 25% of the outstanding common stock of Rising Edge Technologies,
Ltd. ("Rising Edge"), 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. We signed
a letter of intent to sell substantially all the assets of Lea to certain of
Lea's employees. However, there is no assurance that the sale will be
consummated.
In December 2001, LW was incorporated as a wholly-owned subsidiary of PMIC, to
provide consumers a convenient way to purchase computer products via the
internet.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the consolidated
financial statements included as Part II Item 8 to the Form 10-K for the year
ended December 31, 2002. The following are our critical accounting policies:
REVENUE RECOGNITION
The Company recognizes sales of computer and related products upon delivery of
goods to the customer (generally upon shipment) provided no significant
obligations remain and collectibility is probable. A provision for estimated
product returns is established at the time of sale based upon historical return
rates, which have typically been insignificant, adjusted for current economic
conditions. The Company generally does not provide volume discounts or rebates
to its customers. Revenues relating to services performed by FNC are recognized
upon completion of the contracts. Software and service revenues relating to
software design and installation performed by FNC and Lea, are recognized upon
completion of the installation and customer acceptance.
LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets for impairment. When
events or changes in circumstances indicate that the carrying amount of an asset
group may not be recoverable, the Company adjusts the asset group to its
estimated fair value. The fair value of an asset group is determined by the
Company as the amount at which that asset group could be bought or sold in a
current transaction between willing parties or the present value of the
estimated future cash flows from the asset. The asset value recoverability test
is performed by the Company on an on-going basis.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company grants credit to its customers after undertaking an investigation of
credit risk for all significant amounts. An allowance for doubtful accounts is
provided for estimated credit losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such amounts. The allowance is
based on reviews of loss, adjustment history, current economic conditions, level
of credit insurance and other factors that deserve recognition in estimating
potential losses. While management uses the best information available in making
its determination, the ultimate recovery of recorded accounts receivable is also
dependent upon future economic and other conditions that may be beyond
management's control.
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INVENTORY
Our inventories, consisting primarily of finished goods, are stated at the lower
of cost (moving weighted average method) or market. We regularly review
inventory quantities on hand and record a provision, if necessary, for excess
and obsolete inventory based primarily on our estimated forecast of product
demand. Due to a relatively high inventory turnover rate and the inclusion of
provisions in the vendor agreements common to industry practice that provide us
price protections or credits for declines in inventory value and the right to
return certain unsold inventory, we believe that our risk for a decrease in
inventory value is minimized. No assurance can be given, however, that we can
continue to turn over our inventory as quickly in the future or that we can
negotiate such provisions in each of our vendor contracts or that such industry
practice will continue.
INCOME TAXES
The Company reports income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, which requires
an asset and liability approach. This approach results in the recognition of
deferred tax assets (future tax benefits) and liabilities for the expected
future tax consequences of temporary differences between the book carrying
amounts and the tax basis of assets and liabilities. The deferred tax assets and
liabilities represent the future tax consequences of those differences, which
will either be deductible or taxable when the assets and liabilities are
recovered or settled. Future tax benefits are subject to a valuation allowance
when management believes it is more likely than not that the deferred tax assets
will not be realized.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:
Three Months Ended
March 31,
-------------------
2003 2002
------ ------
Sales 100.0% 100.0%
Cost of sales 93.1 92.6
------ ------
Gross margin 6.9 7.4
Operating expenses 10.0 13.6
------ ------
Loss from operations (3.1) (6.2)
Other income (expense), net (0.1) (0.2)
Income taxes (benefit) expense 0.0 (2.2)
Minority interest 0.0 0.0
------ ------
Net loss (3.2%) (4.2%)
====== ======
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Sales for the three months ended March 31, 2003 were $19,195,600, an increase of
$1,563,300, or approximately 8.9%, compared to $17,632,300 for the three months
ended March 31, 2002. The combined sales of PMI and PMIGA were $16,746,500 for
the three months ended March 31, 2003, a decrease of $129,200 or approximately
0.8%, compared to $16,875,700 for the three months ended March 31, 2002. Sales
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for PMI increased by $1,313,300 or 9.8% from $13,430,700 for the three months
ended March 31, 2002 to $14,744,000 for the three months ended March 31, 2003.
PMIGA's sales decreased by $1,442,500 or 41.9% from $3,445,000 for the three
months ended March 31, 2002 to $2,002,500 for the three months ended March 31,
2003. The increase in PMI sales was due to an improved computer component market
condition in the first quarter of 2003 compared to the same period last year.
The decrease in PMIGA's sales was due to the intense competition and a decrease
in market share on the U.S. east coast.
Sales recognized by FNC for the three months ended March 31, 2003 were $970,600,
an increase of $371,000 or 61.9%, compared to $599,600 for the three month ended
March 31, 2002. The increase in FNC sales is due to the increase in capital
expenditures by its customers.
Lea generated $99,500 in revenues for the three months ended March 31, 2003, a
decrease of $36,100 or 26.5%, compared to $135,600 for the three months ended
march 31, 2002. The decrease in revenues was due to the pricing pressure on our
services.
Sales generated by LW were $21,400 for the three months ended March 31, 2002,
compared to $1,379,000 for the three months ended March 31, 2003, an increase of
$1,357,600. LW was an operating entity during the three months ended March 31,
2003, whereas it was in a development stage during the three months ended March
31, 2002.
Consolidated gross margin for the three months ended March 31, 2003 was
$1,320,600, or 6.9% of sales, compared to $1,311,700, or 7.4% of sales for the
three months ended March 31, 2002. The combined gross margin for PMI and PMIGA
was $940,000, or 5.6% of sales for the three months ended March 31, 2003,
compared to $1,197,300 or 7.1% of sales for the three months ended March 31,
2002. PMI's gross margin was $815,800 or 5.5% of sales for the three months
ended March 31, 2003, compared to $1,024,900 or 7.6% for the three months ended
March 31, 2002. PMIGA's gross margin was $124,200 or 6.2% of sales for the three
months ended March 31, 2003, compared to $172,400 or 5.0% of sales for the three
months ended March 31, 2002. The decrease in gross margin for PMI was due to the
intense price competition in the market for several major products sold by PMI.
We anticipate the intense price competition will continue in the computer
component products market in the next 12 months. The increase in gross margin as
a percentage of sales for PMIGA was due to more products with higher margins
were being sold during the three months ended March 31, 2003 compared to the
three months ended March 31, 2002.
FNC's gross margin was $180,800, or 18.6% of sales for the three months ended
March 31, 2003, compared to $81,500 or 13.4% of sales for the three months ended
March 31, 2002. The higher gross margin percentage in the three months ended
March 31, 2003 was due to an increase in service revenues earned as a percent of
total sales for the three months ended March 31, 2003, compared to the three
months ended March 31, 2002. Service revenues were $149,600 for the three months
ended March 31, 2003, compared to $79,800 for the three months ended March 31,
2002. In general, FNC has a higher gross margin on consulting and implementation
service revenues than product sales revenues.
Lea`s gross margin was $66,500, or 66.8% of sales for the three months ended
March 31, 2003, compared to $28,400, or 21.0% of sales for the three months
ended March 31, 2002. The increase in gross margin was due to more billable
development work for the three months ended March 31, 2003, compared to the same
period in 2002.
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Gross margin for LW was $133,300 or 9.7% of sales for the three months ended
March 31, 2003, compared to $4,500, or 21% of sales for the three months ended
March 31, 2002. LW was in a development stage during the three months ended
March 31, 2002.
Consolidated operating expenses, which consist of selling, general and
administrative expenses, were $1,909,900 for the three months ended March 31,
2003, a decrease of $477,200, or 20.0%, compared to $2,387,100 for the three
months ended March 31, 2002. The Company continued its effort in cost cutting
during the three months ended March 31, 2003. Substantially all of the expenses
were reduced for the three months ended March 31, 2003, compared to the same
period in 2002. Employee count was reduced from 103 at March 31, 2002 to 96 at
March 31, 2003. Through a combination of reducing the number of employees and
salary reductions, payroll expense declined by $234,500 for the three months
ended March 31, 2003, compared to the same period in 2002. The Company has also
experienced a lower level of bad debt write-offs. The consolidated bad debt
expense decreased by $98,800 for the three months ended March 31, 2003 compared
to the same period in 2002. Consolidated promotional expenses for our Company's
stock, products and services decreased by $64,700 for the three months ended
March 31, 2003, compared to the same period in 2002.
PMI's operating expenses were $1,067,500 for the three months ended March 31,
2003, compared to $1,357,600 for the three months ended March 31, 2002. The
decrease of $253,100 or 21.4%, was mainly due to the decrease in payroll
expenses of approximately $53,300 and the decrease in bad debt expense of
$113,000 and promotional expenses of $51,800.
PMIGA's operating expenses were $235,900 for the three months ended March 31,
2003, a decrease of $78,800, or 25.0%, compared to $314,700 for the three months
ended March 31, 2002. The decrease was primarily due to a decrease in expenses
for accounts receivable collection of approximately $21,300 and the decrease in
promotional expense of $10,700.
FNC's operating expenses were $310,900 for the three months ended March 31,
2003, a decrease of $84,500, or 21.4%, compared to $395,400 for the three months
ended March 31, 2002. The decrease was mainly due to the decrease in payroll
expenses of approximately $76,700.
Lea's operating expenses were $112,700 for the three months ended March 31,
2003, a decrease of $182,100, or 61.8%, compared to $294,800 for the three
months ended March 31, 2002. The decrease was mainly due to a decrease in
payroll expense of approximately $92,200 and a decrease in professional service
expenses of approximately $50,100. Rent expense was reduced by $26,600 for the
three months ended March 31, 2003, compared to the same period in 2002 primarily
as a result of the elimination of Lea's office in Utah in the fourth quarter of
2002.
LW's operating expenses were $174,900 for the three months ended March 31, 2003,
an increase of $100,400, or 134.8%, compared to $74,500 for the three months
ended March 31, 2002. LW was in a development stage during the three months
ended March 31, 2002. The increase was mainly due to the increase in payroll
expenses, bad debt expense, bank charges, and e-commerce service fees of
approximately $44,100, $14,700, $13,600, and $18,600, respectively.
Consolidated loss from operations for the three months ended March 31, 2003 was
$589,300, compared to $1,075,400 for the three months ended March 31, 2002, a
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decrease of $486,100 or 45.2%. As a percent of sales, consolidated loss from
operations was 3.1% for the three months ended March 31, 2003, compared to 6.2%
for the three months ended March 31, 2002. The decrease in consolidated loss
from operations was primarily due to a 20.0% decrease in consolidated operating
expenses. Loss from operations for the three months ended March 31, 2003,
including allocations of PMIC corporate expenses, for PMI, PMIGA, FNC, Lea and
LW was $390,800, $56,000, $40,300, $23,700, and $72,600, respectively. Loss from
operations for the three months ended March 31, 2002, including allocations of
PMIC corporate expenses, for PMI, PMIGA, FNC, Lea and LW was $332,700, $142,400,
$264,000, $266,300, and $70,000, respectively.
Consolidated interest expense was $43,300 for the three months ended March 31,
2003, compared to $46,400 for the three months ended March 31, 2002. The
decrease in interest expense was largely due to a rate decrease on the floating
interest rate charged on one of our mortgages for our office building facility
located in Milpitas, California.
Other income for the three months ended March 31, 2003 included $114,900 related
to the change in fair value of the warrants issued to a preferred stock investor
and a broker on May 31, 2002.
Other expenses for the three months ended March 31, 2003 included $95,000 for
the settlement of a lawsuit relating to a counterfeit products claim.
In March 2002, the Job Creation and Worker Assistance Act of 2002 ("the Act")
was enacted. The Act extended the general federal net operating loss carryback
period from 2 years to 5 years for net operating losses incurred for any taxable
year ending in 2001 and 2002. As a result, the Company did not record a
valuation allowance on the portion of the deferred tax assets relating to
unutilized federal net operating loss of $1,906,800 for the year ended December
31, 2001. On June 12, 2002, the Company received a federal income tax refund of
$1,034,700 attributable to 2001 net operating losses carried back. The income
tax benefits of $384,200 recorded for the three months ended March 31, 2002
primarily reflects the federal income tax refund attributable to the net
operating loss incurred for the three months ended March 31, 2002. The Company
does not expect to receive a tax benefit for losses incurred in 2003 which are
not covered by the Act. As a result, no tax benefits were recorded for the three
months ended March 31, 2003. On March 20, 2003, the Company received a federal
income tax refund of $1,427,400 attributable to the 2002 net operating loss
carryback.
On February 28, 2003, Nasdaq notified the Company that its common stock had
failed to comply with the minimum market value of publicly held shares
requirement of Nasdaq Marketplace Rule. On March 6, 2003 the Company requested a
hearing before a Listing Qualifications Panel, at which it would seek continued
listing. The hearing was held on April 24, 2003. The Company was also notified
by Nasdaq that the Company did not comply with the Marketplace Rule that
requires a minimum bid price of $1.00 per share of common stock. Subsequent to
the hearing on April 24, 2003, Nasdaq notified the Company that its common stock
would be delisted from the Nasdaq SmallCap Market effective and such delisting
took place on April 30, 2003. The Company's common stock is eligible to be
traded on the Over the Counter Bulletin Board (OCTBB). The delisting of the
Company's common stock enables the holder of the Company's Series A Redeemable
Convertible Preferred Shares to request the repurchase of such shares 60 days
after the delisting date. As of March 31, 2003, 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 $930,300. The Company has
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increased the carrying value of the Series A Redeemable Convertible Preferred
Stock to its redemption value and has recorded an increase in loss applicable to
common shareholders of $733,900 in the accompanying consolidated statement of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred a net loss of $610,300 and a net loss applicable to
common shareholders of $1,350,200 for the three months ended March 31, 2003. The
Company has incurred a net loss of $2,835,900 and a net loss applicable to
common shareholders of $3,110,100 for the year ended December 31, 2002. These
conditions raise doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern is dependent upon
its ability to achieve profitability and generate sufficient cash flows to meet
its obligations as they come due. Management believes that the downsizing or
disposal of its subsidiaries, FNC and Lea and continued cost-cutting measures to
reduce overhead at all of its subsidiaries will enable it to achieve
profitability. Management is also pursuing additional capital and debt
financing. However, there is no assurance that these efforts will be successful.
At March 31, 2003, we had consolidated cash and cash equivalents totaling
$2,643,500 (excluding $250,000 in restricted cash) and working capital of
$2,614,200. At December 31, 2002, we had consolidated cash and cash equivalents
of $1,901,100 (excluding $250,000 in restricted cash) and working capital of
$3,112,700.
Net cash provided by operating activities for the three months ended March 31,
2003 was $247,600, which principally reflected the receipt of a federal income
tax refund of $1,427,400 and a decrease in accounts receivable of $902,700 which
was partially offset by a decrease in accounts payable of $1,462,000, an
increase in inventories of $161,600 and a net loss of $610,300 incurred in the
three months ended March 31, 2003. Net cash used in operating activities during
the three months ended March 31, 2002 was $363,600, which principally reflected
the net loss incurred during the period, and an increase in income taxes
receivable and inventories, which was partially offset by an increase in
accounts payable and a decrease in accounts receivable.
Net cash provided by investing activities was $37,100 for the three months ended
March 31, 2003, primarily resulting from decrease in deposits and other assets
of $43,300. Net cash provided by investing activities during the three months
ended March 31, 2002 was $9,700, primarily resulting from the proceeds of sales
of property and equipment and decrease in deposits and other assets, which was
partially offset by the $30,000 advanced to a shareholder/officer.
Net cash provided by financing activities was $457,700 for the three months
ended March 31, 2003, primarily resulting from an increase in floor plan
inventory loans of $472,200. Net cash used in financing activities was $643,300
for the three months ended March 31, 2002, primarily from a $630,000 decrease in
the floor plan inventory loans.
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 had a term of two years and was subject to
automatic renewal from year to year thereafter. The credit facility could be
terminated by Transamerica. Under certain conditions the termination was subject
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to a fee of 1% of the credit limit. The facility included 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 included a
sub-limit of $600,000 for working capital and a $1 million letter of credit
facility used as security for inventory purchased on terms from vendors in
Taiwan. Borrowings under the inventory loans were subject to 30 to 45 days
repayment, at which time interest accrued at the prime rate, which was 4.25% at
March 31, 2003. Draws on the working capital line also accrued interest at the
prime rate. The credit facility was guaranteed by both PMIC and FNC.
Under the accounts receivable and inventory financing facility from
Transamerica, the Companies were 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 required the
Companies to maintain certain financial ratios and to achieve certain levels of
profitability. As of March 31, 2002, the Companies were in compliance with these
covenants. As of June 30, 2002, the Companies did not meet the revised minimum
tangible net worth and profitability covenants.
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 $3 million in aggregate for inventory loans and the letter of
credit facility. The letter of credit facility was limited to $1 million. The
credit limits for PMI and FNC were $1,750,000 and $250,000, respectively. At
December 31, 2002 and September 30, 2002, the Companies did not meet the
covenants as revised on October 23, 2002 relating to profitability and tangible
net worth. This constituted a technical default and gave Transamerica, among
other things, the right to call the loan and immediately terminate the credit
facility.
On January 7, 2003, Transamerica elected to terminate the credit facility
effective April 7, 2003. However, Transamerica continues its guarantee of the
Letter of Credit Facility through July 25, 2003 and continues to accept payments
according to the terms of the agreement. As of March 31, 2003, the Companies had
an outstanding balance of $1,373,800 due under this credit facility. The entire
outstanding balance is scheduled for repayment by May 20, 2003.
On April 9, 2003, PMI received a conditional approval letter from Textron
Financial Corporation (Textron) for an inventory financing facility of
$3,500,000 and a $1 million letter of credit facility used as security for
inventory purchased on terms from vendors in Taiwan. The credit facility is
guaranteed by PMIC, PMIGA, FNC, Lea, LW and two shareholders/officers of the
Company. The Company is required to maintain collateral coverage equal to 120%
of the outstanding balance. A prepayment is required when the outstanding
balance exceeds the sum of 70% of the eligible accounts receivables and 90% of
the Textron-financed inventory and 100% of any cash assigned or pledged to
Textron. PMI and PMIC are required to meet certain financial ratio covenants and
levels of profitability. The Company will be required to maintain $250,000 in a
restricted account as a pledge to Textron.
Pursuant to one of our bank mortgage loans, with a $2,381,300 balance at March
31, 2003, we are required to maintain a minimum debt service coverage, a maximum
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debt to tangible net worth ratio, no consecutive quarterly losses, and achieve
net income on an annual basis. During 2002 and 2001, the Company was in
violation of two of these covenants which constituted an event of default under
the loan agreement and gave the bank the right to call the loan. A waiver of the
loan covenant violations was obtained from the bank in March 2002, retroactive
to September 30, 2001, and through December 31, 2002. In March 2003, the bank
extended the waiver through December 31, 2003. As a condition for this waiver,
the Company 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.
On May 31, 2002 we received net proceeds of $477,500 from the sale of 600 shares
of 4% Series A Preferred Stock. An additional 400 shares were to be sold after
the completion of the registration of the underlying common stock. Even though
we completed the required registration of the underlying common stock in October
2002, there is no assurance that the remaining 400 shares will be sold or, even
if we do, that we will be able to obtain additional capital beyond the issuance
of the 1,000 shares of Preferred stock. Upon the occurrence of a Triggering
Event, such as if 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. On February 28, 2003, Nasdaq notified the Company that its common
stock had failed to comply with the minimum market value of publicly held shares
requirement of Nasdaq Marketplace Rule. On March 6, 2003 the Company requested a
hearing before a Listing Qualifications Panel, at which it would seek continued
listing. The hearing was held on April 24, 2003. The Company was also notified
by Nasdaq that the Company did not comply with the Marketplace Rule that
requires a minimum bid price of $1.00 per share of common stock. Subsequent to
the hearing on April 24, 2003, Nasdaq notified the Company that its common stock
would be delisted from the Nasdaq SmallCap Market effective and such delisting
took place on April 30, 2003. The Company's common stock is eligible to be
traded on the Over the Counter Bulletin Board (OCTBB). The delisting of the
Company's common stock enables the holder of the Company's Series A Redeemable
Convertible Preferred Shares to request the repurchase of such shares 60 days
after the delisting date. As of March 31, 2003, 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 $930,300. The Company has
increased the carrying value of the Series A Redeemable Convertible Preferred
Stock to its redemption value and has recorded an increase in loss applicable to
common shareholders of $733,900 in the accompanying consolidated statement of
operations. 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 its 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.
In March and April 2003, the Company entered into letters of intent with a third
party to sell substantially all of the assets of FNC and with certain employees
to sell substantially all of the assets of Lea. The Company is engaged in
on-going preliminary discussions with the prospective buyers and is unable to
conclude that a sale is probable at this time. There is no assurance that the
sales will be consummated.
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RELATED PARTY TRANSACTIONS
During the first quarter of 2002, the Company made short-term salary advances to
a shareholder/officer totaling $30,000, without interest. These advances were
recorded as a salary 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 the Board
of Directors and Audit Committee of the Company. Management believes that the
terms of these sales transactions are no more favorable than those given to
unrelated customers. For the three months ended March 31, 2003, and 2002, the
Company recognized $59,200 and $136,700, respectively, in sales revenues from
this customer. Included in accounts receivable as of March 31, 2003 and 2002 is
$32,200 and $96,300, respectively, due from this related customer.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities. Under current practice,
enterprises generally have been included in the consolidated financial
statements of another enterprise because one enterprise controls the others
through voting interests. FIN 46 defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to be consolidated
into the financial statements of their primary beneficiaries if the variable
interest entities do not effectively disperse risks among the parties involved.
This interpretation applies immediately to variable interest entities created
after January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
If it is reasonably possible that an enterprise will consolidate or disclose
information about a variable interest entity when FIN 46 becomes effective, the
enterprise must disclose information about those entities in all financial
statements issued after January 31, 2003. The interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years, with a cumulative-effect adjustment as of the beginning of the first
year restated. The adoption of FIN 46 did not have a material effect on the
Company's consolidated financial statements.
In November 2002, the EITF issued Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." This issue addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how arrangement consideration should be measured and
allocated to the separate units of accounting. EITF Issue No. 00-21 will be
effective for revenue arrangements entered into in fiscal quarters beginning
after June 15, 2003, or the Company may elect to report the change in accounting
as a cumulative-effect adjustment. The Company has reviewed EITF Issue No. 00-21
and has determined it will not have a material impact on its consolidated
financial statements.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR REPORT OF INDEPENDENT AUDITORS CONTAINS A GOING CONCERN QUALIFICATION
We received a going concern opinion from our auditors for the financial
statements for the year ended December 31, 2002. The opinion raises substantial
doubts our ability to continue as a going concern. If we fail to replace our
Transamerica floor plan line of credit or if we cannot reverse our trend of
negative earnings an investor could lose his/her entire investment.
WE HAVE INCURRED OPERATING LOSSES AND DECREASED REVENUES FOR THE LAST TWO FISCAL
YEARS AND WE CANNOT ASSURE YOU THAT THIS TREND WILL CHANGE
We have incurred a net loss of $610,300 and a net loss applicable to common
shareholders of $1,350,200 for the three months ended March 31, 2003. We also
have incurred a net loss of $2,835,900 and a net loss applicable to common
shareholders of $3,110,100 for the year ended December 31, 2002 and we may
continue to incur losses. In addition, our revenues decreased 6.2% during the
year ended December 31, 2002 as compared to 2001. Our future ability to execute
our business plan will depend on our efforts to increase revenues, reduce costs
and return to profitability. We have implemented plans to reduce overhead and
operating costs, and to build upon our core business. No assurance can be given,
however, that these actions will result in increased revenues and profitable
operations. If we are unable to return to profitable operations we may be unable
to continue as a going concern.
WE CAN PROVIDE NO ASSURANCE THAT WE WILL BE ABLE TO SECURE ADDITIONAL CAPITAL
REQUIRED BY OUR BUSINESS
In the second quarter of 2002, we completed a private placement of 600 shares of
our Series A Convertible Preferred Stock at a stated price of $1,000 per share
for gross proceeds of $600,000 and net proceeds of $477,500. We also issued
common stock purchase warrants to the same purchaser exercisable to purchase
400,000 shares of our common stock at $1.20 per share at any time within three
years from the date of issuance.
Based on our projected downsized operations we anticipate that our working
capital, including the $477,500 raised in our second quarter 2002 placement and
a recently received tax refund of $1,427,400, will satisfy our working capital
needs for the next twelve months. However, if we fail to raise additional
working capital prior to that time or if we are unable to replace our
Transamerica Flooring line in a timely fashion, we will be unable to pursue our
business plan. We may 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.
OUR COMMON STOCK IS NOT CURRENTLY LISTED ON THE NASDAQ SMALLCAP MARKET
On February 28, 2003, Nasdaq notified the Company that its common stock had
failed to comply with the minimum market value of publicly held shares
requirement of Nasdaq Marketplace Rule. The Company's common stock was,
therefore, subject to delisting from the SmallCap Market. On March 6, 2003 the
Company requested a hearing before a Listing Qualifications Panel, at which it
would seek continued listing. The hearing was scheduled on April 24, 2003. The
Company has also been notified by Nasdaq that the Company has not complied with
Marketplace Rule, which requires a minimum bid price of $1.00 per share of
common stock. Subsequent to the hearing on April 24, 2003, Nasdaq notified the
Company that its common stock had been delisted from the Nasdaq SmallCap Market
effective April 30, 2003. The Company's common stock is eligible to be traded on
the Over the Counter Bulletin Board (OCTBB). The market for our common stock is
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not as broad as if it were traded on the Nasdaq SmallCap Market and it is more
difficult to trade in our common stock.
POTENTIAL SALES OF ADDITIONAL COMMON STOCK AND SECURITIES CONVERTIBLE INTO OUR
COMMON STOCK MAY DILUTE THE VOTING POWER OF CURRENT HOLDERS
We may issue equity securities in the future whose terms and rights are superior
to those of our common stock. Our Articles of Incorporation authorize the
issuance of up to 5,000,000 shares of preferred stock. These are "blank check"
preferred shares, meaning our board of directors is authorized to designate and
issue the shares from time to time without shareholder consent. As of March 31,
2003 we had 600 shares of Series A Preferred outstanding. The Series A Preferred
are convertible based on a sliding scale conversion price referenced to the
market price of our common stock. As of March 31, 2003, the Series A Preferred
was convertible into 826,900 shares of common stock based on the floor
conversion price of $.75. Any additional shares of preferred stock that may be
issued in the future could be given voting and conversion rights that could
dilute the voting power and equity of existing holders of shares of common stock
and have preferences over shares of common stock with respect to dividends and
liquidation rights. At the time of issuance of the Series A Preferred Stock, it
was intended that an additional 400 shares be issued to the same investor;
however, the purchaser has not fulfilled its obligations to close this
transaction as of the date of this filing, and we do not anticipate that such
sale will occur.
WE HAVE VIOLATED CERTAIN FINANCIAL COVENANTS CONTAINED IN OUR 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 the following financial covenants:
i) Total liabilities must not be more than twice our tangible net worth;
ii) Net income after taxes must not be less than one dollar on an annual
basis and for no more than two consecutive quarters; and
iii) We must maintain annual EBITDA of one and one half times our debt.
We are currently in violation of covenants (ii) and (iii), but we have received
a waiver for such violation through December 31, 2003. 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, Wells Fargo may declare us in default and accelerate
the loan.
On January 7, 2003, Transamerica terminated its credit facility with us
effective April 7, 2003. However, Transamerica will continue its guarantee of
the Letter of Credit Facility through July 25, 2003. Unless we did not perform
our obligations in accordance with the agreement and certain covenants were not
materially worse than the condition at the level on January 7, 2003,
Transamerica would continue to accept payments according to the terms of the
agreement prior to April 7, 2003. The remaining outstanding balance is due and
payable in accordance with the terms of the agreement. As of March 31, 2003, we
had an outstanding balance of $1,373,800 due under this credit facility. We
would be unable to continue our operations without replacement loans or other
alternative financing. We are in the process of replacing Transamerica Flooring
line with a similar line from Textron Financial. However, we cannot assure you
-23-
that we will be able to maintain the Textron flooring line if we continue our
losses.
OUR FAILURE TO ANTICIPATE OR RESPOND TO TECHNOLOGICAL CHANGES COULD HAVE A
MATERIAL 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 in 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 ARE 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 EFFECT 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 were 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.
-24-
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 the staffing requirements of our clients. Competition for individuals
with proven technical skills is intense, and the computer industry in general
experiences a high rate of attrition of such personnel. We compete for such
individuals with other systems integrators and providers of outsourcing
services, as well as temporary personnel agencies, computer systems consultants,
clients and potential clients. Failure to attract and retain sufficient
technical personnel would have a material adverse effect on our business,
operating results and financial condition.
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 ("Sunnyview"), accounted for approximately
21.2% and 9.0% of our total purchases for the three months ended March 31, 2003
and 2002, respectively. We do not have a supply contract with Sunnyview, but
rather purchase products from it through individual purchase orders, none of
which has been large enough to be material to us. Although we have not
experienced significant problems with Sunnyview or our other suppliers, and we
believe we could obtain the products that Sunnyview supplies from other sources,
there can be no assurance that our relationship with Sunnyview and with our
other suppliers, 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
loss of sales that could have a material adverse effect on 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 exposes 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,
-25-
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 plan to enter the proprietary software development business through Lea. We
have limited experience in developing commercial software products. We have
conducted no independent, formal market studies regarding the demand for the
software currently in development and planned to be developed. We have, however,
conducted informal surveys of our customers and have relied on business
experience in evaluating this market. Further, while we have experience in
marketing computer related products, we have not marketed software or a
proprietary line of our own products. This market is very competitive and nearly
all of the software publishers or distributors with whom Lea will compete have
greater financial and other resources than Lea. There can be no assurance Lea
will be successful in developing commercial software products, or even if Lea
develops such products, that it will find market acceptance for them. There can
be no assurance that Lea will generate a profit. We have signed a letter of
intent to sell substantially all the assets of Lea to certain of Lea's
employees. There is no assurance that the sale will be consummated.
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. We
cannot assure you that we will achieve market acceptance for this project and
achieve a profitable level of operations, 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
-26-
products, we have virtually no experience in retail marketing. This market is
very competitive and many of our competitors have substantially greater
resources and experience than we have.
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.
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.
-27-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our bank mortgage loan with a $2,381,300 balance at March 31, 2003 which bears
fluctuating interest based on the bank's 90-day LIBOR rate. We believe that
fluctuations in interest rates in the near term would not materially affect our
consolidated operating results. We are not exposed to material risk based on
exchange rate fluctuation or commodity price fluctuation.
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, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities
Exchange Act of 1934. Based on that evaluation, our management, including the
Chief Executive Officer and Chief Financial 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.
-28-
PART II
ITEM 1. - LEGAL PROCEEDINGS
Adaptec, Inc. filed a lawsuit against Pacific Magtron, Inc. and thirteen other
defendants, claiming amongst other things, copyright and trademark infringement,
and unfair business practices. The Company has denied these allegations. On
April 4, 2003 Pacific Magtron, Inc. agreed to a out-of-court settlement of this
claim with Adaptec, Inc. for $95,000 after giving consideration to the on-going
legal costs.
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)
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.
* Filed herewith
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on April 30, 2003 under Item 5
reporting the delisting of the Company's common stock from the Nasdaq SmallCap
Market.
The Company filed a current report on Form 8-K on March 7, 2003 under Item 5
reporting that the Company had been informed that its shares of common stock
would be subject to delisting from the Nasdaq SmallCap Market. The Company
requested a hearing on this matter.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
Date: May 15, 2003 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. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and I 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 me
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 my conclusion about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. 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. 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
my most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Theodore S. Li
------------------------------
Theodore S. Li
Chief Executive Officer/Chief
Financial Officer
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