UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-17521
PACIFIC MAGTRON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0353141
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1600 California Circle, Milpitas, California 95035
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 956-8888
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
n/a n/a
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
1
At June 30, 2004 the aggregate market value of common stock held by
non-affiliates of the registrant was approximately $419,400.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |_| N/A
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
At February 23, 2005 the number of shares of common stock outstanding was
10,485,062
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
The following statement is made pursuant to the safe harbor provisions for
forward-looking statements described in the Private Securities Litigation Reform
Act of 1995. Pacific Magtron International Corp. and subsidiaries (the
"Company") may make certain statements in this Annual Report on Form 10-K,
including, without limitation, statements that contain the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, constitute
"forward-looking statements." Forward-looking statements may relate to, among
other items, our future growth and profitability; the anticipated trends in our
industry; our competitive strengths and business strategies; and our new
business initiatives. Further, forward-looking statements are based on our
current expectations and are subject to a number of risks, uncertainties and
assumptions relating to our operations, financial condition and results of
operations. For a discussion of factors that may affect the outcome projected in
such statements, see "Cautionary Factors that May Affect Future Results," in
this Report. If any of these risks or uncertainties materialize, or if any of
the underlying assumptions prove incorrect, actual results could differ
materially from results expressed or implied in any of our forward-looking
statements. We do not undertake any obligation to revise these forward-looking
statements to reflect events or circumstances arising after the date of this
Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
SUMMARY OF OUR BUSINESS
As used in this document and unless otherwise indicated, the terms "Company,"
"PMIC," "we," "our" or "us" refer to Pacific Magtron International Corp., a
Nevada corporation and its subsidiaries. Our executive offices are at 1600
California Circle, Milpitas, California 95035 and our telephone number is
408-956-8888. Our website address is www.PacificMagtron.com.
Our primary business has been to distribute computer peripheral products through
our wholly-owned subsidiaries, Pacific Magtron, Inc. (PMI), Pacific Magtron
(GA), Inc. (PMIGA), and LiveWarehouse, Inc. (LW). Our business is organized into
three divisions: PMI, PMIGA and LW.
Recent Developments
The Company has historically relied on credit terms from its suppliers to fund
inventory purchases. Our vendors have been progressively imposing more
restrictive credit terms, such that, during the first quarter of 2005, we were
unable to fund purchases. Our business as of the date of this filing is limited
to selling existing inventory with no ability to replenish or purchase other
items our customer may need. As of April 15, 2005, our inventory was
approximately $170,000, compared to $2,760,000 at December 31, 2004. We do not
have the ability to draw on lines of credit to fund the shortfall caused by the
elimination of terms by our vendors. We have reduced our staff from 58 employees
at the end of 2004 to 28 employees on April 14, 2005. Because of the reduced
sales caused by the lack of new inventory, we have not been able to pay our
obligations on a timely basis. We have been sued by one supplier for
approximately $680,000 in unpaid invoices and by another for approximately
$80,000. Other creditors have threatened suit. If we are unable to obtain credit
or find another method of operating, we will be forced to cease operations.
1
The text below describes our development and the business as traditionally
operated. At the time of this filing, however, we were not engaging in business
as described below. Our activities were limited to disposing of existing
inventory.
DESRIPTION OF BUSINESS
Founded in 1989, PMI fulfills the multimedia hardware needs of system
integrators, value added resellers, retailers, original equipment manufacturers,
software vendors, and internet resellers through the wholesale distribution of
computer related multimedia hardware components and software. In August 2000, we
formed PMIGA for the distribution of PMI's products in the eastern United
States. 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. As part of the overall strategy on re-focusing on our core business in
wholesale distribution, we have reduced our resources allocated to our LW
business segment beginning the third quarter 2004.
As part of the Company's continued efforts to cut cost and refocus on its core
business, during the second quarter 2003, the Company disposed of Frontline
Network Consulting, Inc. (FNC) and Lea Publishing, Inc. (Lea) which were
unprofitable in 2003, 2002 and 2001. The Company sold substantially all the
assets of FNC in exchange for a note in the amount of $15,000 and Lea for $5,000
in cash and certain electronic commerce support services to LW valued at
$48,000. The results of operations of FNC and Lea have been reclassified in our
financial statements as discontinued operations. FNC served as a corporate
information services group catering to the networking and internet
infrastructure requirements of corporate clients. Lea was engaged in the
development and distribution of software and e-business products and services,
as well as integration and hosting services.
On October 15, 2001, we formed an investment holding company, PMI Capital
Corporation (PMICC) as a wholly-owned subsidiary of PMIC, for the purpose of
acquiring companies or assets deemed suitable for PMIC's organization. PMICC,
which was dissolved in 2003, had had no operating activities since 2002 and no
assets or liabilities at the time of dissolution.
On December 10, 2004, Theodore S. Li and Hui "Cynthia" Lee, the holders of a
collective majority interest in PMI, entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") with Advanced Communications Technologies,
Inc., a Florida corporation ("ACT"), pursuant to which ACT agreed to purchase
from Mr. Li and Ms. Lee an aggregate of 6,454,300 shares of the common stock of
PMIC (the "PMIC Shares") for the aggregate purchase price of $500,000. The
closing on the sale of the PMI Shares occurred on December 30, 2004. The PMIC
Shares represent 61.56% of the currently issued and outstanding common stock of
PMI. ACT is a public holding company based in New York City with operating
subsidiaries in the technology services industries. ACT files periodic reports
with the Securities and Exchange Commission (the "SEC") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Effective as of the
closing on December 30, 2004, the financial results of PMIC will be consolidated
with those of ACT and its other consolidated subsidiaries. PMIC will continue to
be operated as separate entity and its common stock will continue to be traded
on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol: PMIC.OB.
2
Financial information for each group or segment in each of the last three fiscal
years is presented in Note 16 to the Company's accompanying Consolidated
Financial Statements.
INDUSTRY OVERVIEW
WHOLESALE MICRO COMPUTER PRODUCTS DISTRIBUTION
The microcomputer products distribution industry generally consists of
wholesalers, suppliers, resellers, and end-users. Wholesale distributors
typically sell only to resellers and purchase a wide range of products in bulk
directly from manufacturers. Different types of resellers are defined and
distinguished by the end-user market they serve, such as large corporate
accounts, small and medium-sized businesses or home users, and by the level of
value that they add to the basic products they sell.
INCREASED RELIANCE ON WHOLESALE MICRO COMPUTER PRODUCTS DISTRIBUTION
We believe that the growth of the microcomputer products wholesale distribution
industry exceeds that of the microcomputer industry as a whole. In our view,
suppliers and resellers are relying to a greater extent on wholesale
distributors for their distribution needs. Suppliers are faced with the
pressures of declining product prices and the increasing costs of selling
directly to a large and diverse group of resellers, and they therefore are
increasingly relying upon wholesale distribution channels for a greater
proportion of their sales. Many suppliers outsource a growing portion of certain
functions, such as distribution, service, technical support, and final assembly,
to the wholesale distribution channel in order to minimize costs and focus on
their core capabilities in manufacturing, product development, and marketing.
Likewise, vendors are finding it more cost efficient to rely on wholesale
distributors that can leverage distribution costs across multiple vendors, each
of whom out sources a portion of their distribution, credit, marketing, and
support services.
On the reseller side, factors such as growing product complexity, shorter
product life cycles, an increasing number of microcomputer products, the
emergence of open systems architectures, and the recognition of certain industry
standards have led resellers to depend upon wholesale distributors for more of
their product, marketing, and technical support needs. Due to the large number
of vendors and products, resellers often cannot or choose not to establish
direct purchasing relationships with suppliers. Instead, they rely on wholesale
distributors that can leverage purchasing costs across multiple resellers to
satisfy a significant portion of their product procurement and delivery,
financing, marketing, and technical support needs. Rather than stocking large
inventories themselves and maintaining credit lines to finance working capital
needs, resellers are also increasingly relying on wholesale distributors for
product availability and flexible financing alternatives.
3
OPEN SOURCING
Another apparent reason for the growth of the wholesale distribution industry is
the evolution of open sourcing, a phenomenon specific to the United States
microcomputer products wholesale distribution market. Historically, branded
computer systems from large suppliers were sold in the United States only
through authorized master resellers. Under this single sourcing model, resellers
were required to purchase these products exclusively from one master reseller.
Competitive pressures led some of the major computer suppliers to authorize
second sourcing, in which resellers could purchase a supplier's product from a
source other than their primary master reseller, subject to certain restrictive
terms and conditions. All major manufacturers have authorized open sourcing,
under which resellers can purchase the supplier's product from any source on
equal terms and conditions. Open sourcing has thus blurred the distinction
between wholesale distributors and master resellers, which are increasingly able
to serve the same reseller base. We believe that open sourcing enables those
distributors of microcomputer products which provide the highest value through
superior service and pricing to be in the best position to compete for reseller
customers.
FINANCIAL INFORMATION ABOUT SEGMENTS
The Company has three reportable segments: PMI, PMIGA and LW. Financial
information as to the revenue from external customers, a measure of profit or
loss and total assets for each such segment is set forth in Note 16 in the Notes
to Consolidated Financial Statements included in Item 8 - Financial Statements
and Supplementary Data in this Report on Form 10-K for the year ended December
31, 2004.
INTERNET SERVICES
The internet provides wholesale distributors with an additional means to serve
both supplier and reseller customers through the development and use of
effective electronic commerce tools. The increasing utilization of electronic
ordering, including the ability to transact business over the World Wide Web,
has had, and is expected to continue to have, a significant impact on the cost
efficiency of the wholesale distribution industry. Distributors with the
financial and technical resources to develop, implement and operate state of the
art management information systems have been able to reduce both their
customers' and their own transaction costs through more efficient purchasing and
lower selling costs. The growing presence and importance of such electronic
commerce capabilities also provide distributors with new business opportunities
as new categories of products, customers, and suppliers develop.
PACIFIC MAGTRON, INC. AND PACIFIC MAGTRON (GA), INC. - COMPUTER PRODUCTS
Through PMI and PMIGA, we distribute a wide range of computer products,
including components and multimedia and systems networking products. We also
provide vertical solutions for systems integrators and internet resellers by
combining or bundling the products we offer to our customers. Our computer
products group offers a broad inventory of more than 1,800 products purchased
from approximately 30 manufacturers. This wide assortment of vendors and
products meets our customers' needs for a cost effective link to multiple
vendors' products through a single source. Among the products that we distribute
are systems and networking peripherals, and components such as high capacity
storage devices, a full range of optical storage devices such as CD-ROMS, DVDs
and CDR, CDRW, sound cards, video cards, small computer systems interface
components, video phone solutions, floppy and hard disk drives, and other
miscellaneous items such as audio cabling devices, keyboards, computer mice, and
zip drives for desktop and notebook computers.
4
INVENTORY LEVELS AND ASSET MANAGEMENT
Based on historical order levels and our knowledge of the market, we maintain
sufficient product inventories to achieve high order fill rates, and believe
that price protection and stock return privileges provided by suppliers
substantially mitigate the risks associated with slow moving and obsolete
inventory. We also operate a computerized inventory system that allows us to
continually assess slow moving inventory. If a supplier reduces its prices on
certain products, we generally receive a credit for such products in our
inventory. In addition, we have the right to return a certain percentage of
purchases, subject to certain limitations. Historically, price protection, stock
return privileges, and inventory management procedures have helped to reduce the
risk of a significant decline in the value of our inventory.
However, we have recognized losses due to obsolete inventory in the normal
course of business. Historically, we have not experienced any material losses.
Inventory levels may vary from period to period due in part to the addition of
new suppliers or large purchases of inventory due to favorable terms offered by
suppliers.
CREDIT TERMS
We offer various credit terms including open account, flooring arrangements,
company and personal checks and credit card payment to qualifying customers. We
closely monitor our customers' creditworthiness, and in most markets, utilize
various levels of credit insurance to control credit risks and enable us to
extend higher levels of credit. We also establish reserves for estimated credit
losses incurred in the normal course of business.
LIVEWAREHOUSE - BUSINESS TO CONSUMER E-COMMERCE STORE
In December 2001 we formed LiveWarehouse, Inc., an e-commerce site aimed at
increased sales to consumers. LiveWarehouse.com's main products consist of
consumer computer electronics for the computer after-market segment as well as
storage and related products for general consumer electronic devices. LW also
distributes certain computer products to resellers. As part of the overall
strategy on re-focusing on our core business in wholesale distribution, we have
reduced our resources allocated to this business segment beginning in the third
quarter 2004.
LiveWarehouse generate sales primarily through its e-store (livewarehouse.com)
and operates a Yahoo store. Supplemental sales are generated through internet
auction sites for liquidation electronic products.
SALES AND MARKETING
Sales for our computer products divisions are generated by a telemarketing sales
force, which consists of 9 people as of December 31, 2004 in our offices located
in Milpitas, California, and 4 people in our Georgia location.
5
The sales force is organized in teams generally consisting of a minimum of three
people. We believe that teams provide superior customer service because
customers can contact one of several people. Moreover, we believe that the
long-term nature of our customer relationships is better served by teams that
increase the depth of the relationship and improve the consistency of service.
We provide compensation incentives to our salespeople, thus encouraging them to
increase their product knowledge and to establish long-term relationships with
existing and new customers. Customers can contact their sales team using a
toll-free number. Salespeople initiate calls to introduce our existing customers
to new products and to solicit orders. In addition, salespeople seek to develop
new customer relationships by using targeted mailing lists and vendor leads.
The telemarketing salespeople are supported by a variety of marketing programs.
For example, we regularly sponsor promotions for our resellers where we have new
product offerings and discuss industry developments, as well as regular training
sessions hosted by manufacturers. In addition, our in-house marketing staff
prepares catalogs that list available products and routinely produces marketing
materials and advertisements.
Our salespeople are able to analyze our available inventory through a
sophisticated management information system and recommend the most appropriate
cost-effective systems and hardware for each customer, whether a full-line
retailer or an industry-specific reseller.
We continually evaluate our product mix and the needs of our customers in order
to minimize inventory obsolescence and carrying costs. Our rapid delivery terms
are available to all of our customers, and we seek to pass through our cost
effective shipping and handling expenses to our customers.
SUPPLIERS
SOURCES OF SUPPLY
Our industry relationship has enabled us to obtain contracts with many leading
manufacturers, including Creative Labs, Logitech and Sony. We purchase our
products directly from such manufacturers, generally on a non-exclusive basis.
We believe that our agreements with the manufacturers are in line with terms and
conditions customarily offered by each manufacturer. The agreements typically
contain provisions allowing termination by either party without prior notice,
and generally do not require us to meet minimum purchase commitments or restrict
us from selling products manufactured by competitors. As a result, we generally
have the flexibility to terminate or curtail sales of one product line in favor
of another product line if we consider it appropriate to do so because of
technological change, pricing considerations, product availability, customer
demand or vendor distribution policies. For the years ended December 31, 2004,
2003 and 2002, one vendor, Sunnyview/Real Wisdom, accounted for approximately
15%, 18% and 11%, respectively, of our total purchases. Another vendor accounted
for 17% of our purchases for the year ended December 31, 2003. We do not have a
supply contract with Sunnyview nor the other vendor, but rather purchase
products from them 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 we purchase from Sunnyview and the other vendor 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.
6
DISTRIBUTION
From our central warehouse facilities in Milpitas, California and Atlanta,
Georgia, we distribute microcomputer products principally throughout the United
States. No individual customer accounts for more than 10% of our sales. A
minority of our distribution agreements are limited by territory. In those
cases, however, North America is usually the territory granted to us. We will
continue to seek to expand the geographical scope of our distributor
arrangements.
We do not have offices or operations in foreign countries. Sales to customers
located in foreign countries amounted to approximately $12 million in 2004. The
majority of the foreign sales were to Canada, Russia and Finland.
COMPETITION
All aspects of our business are highly competitive. Competition within the
computer products distribution industry is based on product availability, credit
availability, price, speed and accuracy of delivery, effectiveness of sales and
marketing programs and quality and breadth of product lines. We also compete
with some manufacturers that sell directly to resellers and end-users. Principal
regional competitors in the wholesale distribution industry include Asia Source
and Synnex Information Technology, Inc., both of which are privately held
companies. Ingram Micro Inc. and Tech Data Corporation are among our principal
regional and multi-regional publicly held competitors. We also compete with
manufacturers that sell directly to resellers and end-users. Nearly all of our
competitors are larger and have greater financial and other resources.
Competition within the e-commerce space is primarily based on having the product
available and shipping products ordered expediently and correctly at competitive
pricing. Although there are many competitive e-store websites on the internet,
most are relatively small, and the market is highly fragmented. Of the larger
e-store competitors, we face competition from companies such as Buy.com,
Amazon.com, Tigerdirect.com and other major e-retailers such as Newegg.com,
Yahoo.com, MSN.com and AOL.com.
A number of our competitors in the computer distribution industry are
substantially larger and have greater financial and other resources than we do.
7
EMPLOYEES
As of December 31, 2004, we had 51 full-time employees and 2 part-time
employees, all of whom are non-union, and 5 executive officers. We believe that
our employee relations are good.
8
ITEM 2. PROPERTIES
We own property located at 1600 California Circle, Milpitas, California 95035,
which was subject to mortgages in the amount of $3,103,400 at December 31, 2004.
Of this amount, $2,331,700 is subject to a bank financing which bears interest
at the bank's 90-day LIBOR rate (2.25% as of December 31, 2004) plus 2.5% and is
secured by a deed of trust on the property. The remaining balance of $771,700 is
subject to a Small Business Administration loan which bears interest at a 7.569%
rate and is secured by the underlying property. As discussed in note 6 to the
Company's consolidated financial statements, the Company was in violation of
certain of the financial covenants in its bank financing agreement, which
violations have been waived by the bank through December 31, 2005. See item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources for additional discussion of this
matter. This property consists of 3.31 acres and a 44,820 square foot building.
The building contains our executive office and California warehouse and we
believe it is suitable for the current volume and the nature of our operations.
We lease a building in Georgia to house our branch office and a regional
warehouse pursuant to an operating lease which expires April 30, 2005. We are
currently negotiating the lease renewal for our Georgia facility. Future minimum
lease payments under this non-cancelable operating lease agreement for 2005 are
estimated to be $22,400.
ITEM 3. LEGAL PROCEEDINGS
Subsequent to the end of 2004, in April 2005, PMI was sued by a supplier, Micro
Technology Concepts, Inc. in the Superior Court of California, Los Angeles
County, # BC331483. The suit alleges that approximately $680,000 in unpaid and
overdue invoices are due and owing by PMIC. Micro Technology has a security
interest in some of PMI's assets, subordinate to the interest of our lender,
Textron Financial Corporation. As of the date of this filing, Micro Technology
had made no attempts to enforce its security interest.
In March, 2005, Pacific Magtron was sued in the Superior Court of California,
Santa Clara County, #105cv037996, for $81,046 in unpaid invoices.
We are not otherwise involved as a party to any legal proceeding other than
various claims and lawsuits arising in the normal course of our business, none
of which, in our opinion, is individually or collectively material to our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is presently traded on
the Over the Counter Bulletin Board (OCTBB) under the symbol PMIC. Our stock
first traded on the OTC Bulletin Board on July 28, 1998. Beginning January 31,
2000, our stock was traded on the Nasdaq SmallCap Market. The Company's common
stock was delisted from the Nasdaq SmallCap Market effective April 30, 2003
because the Company was out of compliance with NASDAQ's minimum market value and
minimum common stock bid price requirements. The following table shows the high
and low sale prices in dollars per share for the first quarter of 2003 as
reported by the Nasdaq Small Cap Market and for the second quarter of 2003
through the fourth quarter of 2004 as reported by the OTC Bulletin Board. These
prices may not be the prices that you would sell or would pay to purchase a
share of our common stock during the periods shown.
High Low
Fiscal Year Ended December 31, 2004 ------ ------
First Quarter $ 0.15 $ 0.06
Second Quarter 0.07 0.04
Third Quarter 0.10 0.04
Fourth Quarter 0.15 0.04
Fiscal Year Ended December 31, 2003
First Quarter $ 0.45 $ 0.11
Second Quarter 0.56 0.10
Third Quarter 0.20 0.10
Fourth Quarter 0.15 0.03
We had approximately 800 stockholders of record of our common stock as of
February 23, 2005.
DIVIDEND POLICY
We have not paid dividends on our common stock. It is the present policy of our
Board of Directors to retain future earnings, if any, to finance the growth and
development of our business. Any future dividends will be at the discretion of
our Board of Directors and will depend upon our financial condition, capital
requirements, earnings, liquidity, and other factors that our Board of Directors
may deem relevant.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected financial data and we refer you to
the more detailed consolidated financial statements and the notes thereto
provided in Part II, Item 8 - Financial Statements and Supplementary Data of
this Form 10-K. The financial data regarding our continuing operations as of and
for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 presented
below, have been derived from our consolidated financial statements. The
financial information regarding the discontinued operations in 2004, 2003 and
2002 are presented in note 2 to the Company's Consolidated Financial Statements
included in this Form 10-K. Our consolidated financial statements for the year
ended December 31, 2004 were audited by Weinberg & Company, P.A. Our
consolidated financial statements for the years ended December 31, 2003 and 2002
were audited by KPMG LLP, and our consolidated financial statements for the
years ended December 31, 2001 and 2000 were audited by BDO Seidman, LLP.
Fiscal Year Ended December 31,
Statement of Operations Data 2004 2003 2002 2001 2000
- ---------------------------- ------------ ------------ ------------ ------------ ------------
Net sales $ 71,473,500 $ 74,985,300 $ 67,969,900 $72,251,000 $81,167,000
Income (loss) from continuing
operations before other income
(expenses), income taxes and
minority interest (1,834,400) (1,510,500) (2,252,700) (2,639,900) 54,700
Net income (loss) from continuing
operations (1,985,500) (1,694,500) (1,475,000) (2,044,700) 139,800
Net income (loss) applicable to
common shareholders (1,172,700) (2,896,600) (3,110,100) (2,850,700) 121,800
Basic and diluted income (loss) per share
applicable to common shareholders:
Income (loss) from continuing
operations (0.12) (0.24) (0.17) (0.20) 0.01
Net income (loss) (0.11) (0.28) (0.30) (0.28) 0.01
Fiscal Year Ended December 31,
Balance Sheet Data 2004 2003 2002 2001 2000
- ------------------ ------------ ------------ ------------ ------------ ----------
Current Assets $ 7,531,500 $ 10,278,300 $ 12,577,600 $ 12,501,600 $ 15,335,200
Current Liabilities 8,073,700 10,094,900(1) 9,464,900 6,766,700 7,710,800
Total Assets 11,740,700 14,772,400 17,267,000 17,323,300 20,861,100
Long-Term Debt 3,031,500 3,103,400 3,169,500 3,230,300 3,286,200
Redeemable Convertible Preferred Stock -- -- 190,400 -- --
Convertible Preferred Stock 234,100 -- -- -- --
Shareholders' Equity 635,500 1,574,100 4,442,200 7,289,900 9,857,800
(1) Includes Redeemable Convertible preferred stock of $958,600.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
The accompanying discussion and analysis of financial condition and results of
operations is based on our consolidated financial statements, which are included
elsewhere in this Form 10-K. The following discussion and analysis should be
read in conjunction with the accompanying consolidated financial statements and
related notes thereto. This discussion contains forward-looking statements
within the meaning of 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,
our ability to reverse our trend of negative earnings, the diminished
marketability of inventory, the need for additional capital, increased warranty
costs, competition, dependence on certain suppliers and dependence on key
personnel.
LINES OF BUSINESS
As used herein and unless otherwise indicated, the terms "Company," "we," and
"our" refer to Pacific Magtron International Corp. and each of our subsidiaries.
Our business is organized into three divisions: PMI, PMIGA 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 distributes PMI's products in the eastern United States market. 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. LW also distributes certain computer related products to resellers.
During the second quarter 2003, the Company sold substantially all the assets of
FNC to a third party. The Company also sold substantially all assets of Lea, to
certain of the Lea's employees. In the fourth quarter of 2004, the Company
dissolved Lea. The activities of FNC and Lea for all periods have been
reclassified for reporting purposes as discontinued operations. In the third
quarter of 2003, the Company dissolved its PMICC subsidiary. PMICC had no
activities since 2002 and had no assets or liabilities.
Recent Developments
The Company has historically relied on credit terms from its suppliers to fund
inventory purchases. Our vendors have been progressively imposing more
restrictive credit terms, such that, during the first quarter of 2005, we were
unable to fund purchases. Our business as of the date of this filing is limited
to selling existing inventory with no ability to replenish or purchase other
items our customer may need. As of April 15, 2005, our inventory was
approximately $170,000, compared to $2,760,000 at December 31, 2004. We do not
have the ability to draw on lines of credit to fund the shortfall caused by the
elimination of terms by our vendors. We have reduced our staff from 58 employees
at the end of 2004 to 28 employees on April 14, 2005. Because of the reduced
sales caused by the lack of new inventory, we have not been able to pay our
obligations on a timely basis. We have been sued by one supplier for
approximately $680,000 in unpaid invoices and by another for approximately
$80,000. Other creditors have threatened suit. The existing suits are further
described in Part I, Item 4 - Legal Proceedings If we are unable to obtain
credit or find another method of operating, we will be forced to cease
operations in the foreseeable future.
12
OVERVIEW
The Company incurred a consolidated net loss of $1,172,700, $2,896,600 and
$3,110,100 for the years ended December 31, 2004, 2003 and 2002, respectively.
Due to the continuing operations losses, the Company has been experiencing a
tightening of credits that are extended by our vendors beginning in the fourth
quarter 2004. Our ability to maintain certain desirable levels of inventories
has been impaired. The diminishment or loss of credit terms from vendors could
unfavorably affect our sales and cash flows. Currently we are seeking additional
capital to satisfy our financing needs for the next twelve months. If we fail to
achieve a profitable level of operations and raise additional working capital,
we will be unable to pursue our business plan. There is no assurance that we
will be able to obtain additional capital, if available, and that such capital
will be available at terms acceptable to us.
In December 2004, the Company entered into an agreement (the Series A Agreement)
with the Investor for restructuring certain terms of the Series A Preferred
Stock. In connection with the closing of the transactions under the Series A
Agreement, the Company amended and restated its Certificate of Designation of
Preferences, Rights and Limitations of the Series A Preferred Stock on December
31, 2004. Among the terms amended are (1) the number of shares designated as
Series A Preferred Stock were decreased from 1,000 to 600 shares; (2) the Stated
Value of each share of Series A Preferred Stock was reduced from $1,000 to
$666.67; (3) the holders of the Series A Preferred Stock no longer have the
right to require the Company to redeem each share of Series A Preferred Stock,
which rights were triggered upon the occurrence of certain events; (4) the
redemption amount payable by the Company upon exercise of its redemption right
was reduced from 115% of Stated Value to 100% of Stated Value; (5) there is a
181-day waiting period from the date of filing the Amended and Restated
Certificate of Designation before the holder may exercise conversion (unless the
Company initiates a redemption prior to the end of the 181-day period); (6) the
conversion price of the Series A Preferred Stock was changed to a fixed price of
$0.50 per share, subject to customary and anti-dilution adjustments; and (7) the
Company has five trading days, instead of three, to comply with conversion
procedures. As part of the Series A Agreement, the Investor forfeited a stock
purchase warrant, exercisable for 300,000 shares of the Company's common stock,
that was issued in connection with the original issuance of the Company's Series
A Preferred Stock. The Company accounted for these transactions in accordance
with SFAS 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. The restructuring of the Series A Preferred Stock resulted in a
gain of $758,600 for the year ended December 31, 2004. The fair value of the
restructured Series A Preferred Stock was $234,100 as of December 31, 2004 and
was classified as shareholders' equity in the balance sheet.
13
Consolidated sales decreased from $74,985,300 for the year ended December 31,
2003 to $71,473,500 for 2004. The decrease was mainly due to a decrease of LW's
sales from $7,251,100 for the year ended December 31, 2003 to $5,413,800 for
2004. As part of the overall strategy on re-focusing on our core business in
wholesale distribution, the resources allocated to LW business segment were
reduced beginning the third quarter 2004. The Company is continuing to
re-evaluate LW's business model and anticipates LW's sales will be expanded in
2005. There is no guarantee that the Company will be able to expand LW's sales
and that it will be profitable. The computer products distribution business is
highly competitive. Competition is based on product and credit availability,
speed and accuracy of delivery, effectiveness of sales and marketing programs
and breath of product lines. Beginning the fourth quarter of 2000, the computer
products distribution industry and the Company have been experiencing the effect
of the economic downturn. As the demand for computer products decreases, the
pricing pressure becomes intense. As a result, we experienced a decreasing sales
trend from 2001 to 2002 but a slight increase from 2002 to 2004. PMI sales for
the year ended December 31, 2004 increased by approximately 1.1% compared to
2003, which was partly attributable to the economic recovery. PMIGA experienced
a decreasing sales trend and was unable to penetrate into the east coast market,
which was dominated by a number of larger competitors. PMIGA experienced a
substantial decline in sales in 2004 and 2003. The lack of financial resources
and the inability to compete with the larger competitors resulted in a loss in
market share. Price competition remains intense for wholesale distribution
business. Gross profit for PMI decreased from 5.8% in 2002 to 5.4% in 2003 and
4.7% in 2004. Gross profit for PMIGA increased from 4.9% in 2002 to 7.8% in 2003
and to 9.1% in 2004 as management focused on assembling and marketing complete
computer systems and improving its product mix management. Gross profit for LW
remained stable and was 7.7% in 2004 compared to 8.0% in 2003.
As of December 31, 2004, we were in violation of certain loan covenants under
the inventory financing agreement with Textron. A waiver for such violation was
obtained from Textron through March 31, 2005. However, no subsequent waiver has
been received. It is probable that we will be out of compliance with certain of
those covenants in the future. If this was to occur and a waiver for the
violation could not be obtained, Textron could terminate the credit facility and
require acceleration in the loan payments. If such termination were to occur,
there is no assurance that the Company would have the funding necessary to
finance its future inventory purchases or would able to obtain alternative
financing. As of December 31, 2004, the Company was in violation of certain
covenants under the real estate mortgage loan agreement with Wells Fargo Bank
(Wells Fargo). A waiver of the default was obtained from Wells Fargo through
December 31, 2005. It is uncertain that we will be able to meet all those
covenants in the future. If this were to occur in the future and a waiver for
the violation could not be obtained, the Company would be required to classify
the bank loan as current, which could cause the Company to be out of compliance
with financial covenants included in its inventory financing facility with
Textron. It is uncertain as to the Company's ability to obtain alternative
financing in the event Textron terminates the loan facility or Wells Fargo
elects to call the loan.
14
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 to the consolidated
financial statements included as Part II, Item 8 - Financial Statements and
Supplementary Data in this Form 10-K. 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) and the customer takes ownership
and assumes risk of loss, 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.
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. Our allowance for doubtful accounts includes receivables past
due over 90 days, returned checks and an estimated percentage of the receivables
currently due. 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. In addition, it is uncertain as to the continuing
availability of cost-efficient credit insurance. We are unable to project the
future trend of our bad debt expense.
INVENTORY VALUATION
Our inventories, consisting primarily of finished goods, are stated at the lower
of cost (moving weighted average method) or market. We regularly review
inventory turnover and quantities on hand for excess, slowing moving and
obsolete inventory based primarily on our estimated forecast of product demand.
Excess, obsolete and slow-moving inventory items, including items that have no
purchase and sales activities for more than one year, are written down to their
net realizable values. 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 protection 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.
15
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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.
RELATED PARTY TRANSACTIONS
During the first quarter of 2002, the Company made short-term non-interest
bearing salary advances to a shareholder/officer totaling $30,000, without
interest. These advances were recorded as salary paid to the shareholder/officer
during the second quarter ended June 30, 2002.
The Company sold computer products to a company owned by a member of the Board
of Directors of the Company. During 2003, 2002 and 2001, the Company recognized
$102,400, $527,400 and $476,200, respectively, in sales revenues from this
company. There were no sales to this customer for the year ended December 31,
2004 and there were no amounts due from this related party as of December 31,
2004 and 2003.
On June 30, 2003, the Company sold substantially all of Lea's intangible assets
and certain equipment to certain of the Lea's employees. The Company also
entered into a Proprietary Software License and Support Agreement with the
purchaser requiring the purchaser to provide certain electronic commerce support
services to LW for a term of two years beginning July 1, 2003. The Company
received $5,000 on the transaction closing date and the electronic commerce
support services contract valued at $48,000 which is based on the number of
service hours to be provided. The Company recorded a loss of $16,000 on the sale
of the Lea assets.
See Part III - Item 13 - Certain Relationships and Related Transactions for a
description of the sale of a majority of the Company's common stock by Theodore
S. Li and Hui Cynthia Lee to Advanced Communications Technologies, Inc., and
related transactions.
16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:
Year Ended December 31, 2004 2003 2002
------ ------ ------
Sales 100.0% 100.0% 100.0%
Cost of sales 94.9 94.1 94.0
------ ------ ------
Gross profit 5.1 5.9 6.0
Operating expenses 7.7 8.0 9.3
------ ------ ------
Loss from operations (2.6) (2.1) (3.3)
Other income (expense) (0.2) (0.2) 0.0
Income tax benefit 0.0 0.0 1.1
Minority interest 0.0 0.0 0.0
------ ------ ------
Loss from continuing operations (2.8) (2.3) (2.2)
Loss from discontinued operations 0.1 (0.6) (2.0)
Gain on restructuring of Series A
Preferred Stock 1.1 0.0 0.0
Accretion and deemed dividend relating to
beneficial conversion of 4% Series A
Convertible and Redeemable Preferred Stock (0.0) (1.0) (0.4)
------ ------ ------
Net loss applicable to Common shareholders (1.6)% (3.9)% (4.6)%
====== ====== ======
SALES
Consolidated sales decreased from $74,985,300 for the year ended December 31,
2003 to $71,473,500 for 2004. The decrease was mainly due to a decrease of LW's
sales from $7,251,100 for the year ended December 31, 2003 to $5,413,800 for
2004.
PMI
The computer products distribution industry and the Company have been
experiencing the effect of the economic downturn. We experienced a decreasing
sales trend from 2001 to 2002 but a slight increase from 2002 to 2004. PMI sales
for the year ended December 31, 2004 increased by approximately 1.1% compared to
2003, which was partly attributable to the economic recovery. PMI's sales were
$61,101,100, $60,410,600 and $56,814,300 for 2004, 2003 and 2002, respectively.
However, the pricing pressure remained intense. PMI's gross profit for the year
ended December 31, 2004 was 4.7% compared to 5.4% and 5.8% for the years ended
December 31, 2003 and 2002, respectively. We anticipate that PMI's sales will
follow the condition of the economy in 2005 and the pricing pressure will
continue in the computer products distribution industry.
PMIGA
PMIGA experienced intense competition on the U.S. east coast market and has not
been able to penetrate into the east coast market, which was dominated by a
number of larger competitors. The lack of financial resources and the inability
to compete with the larger competitors resulted in a loss in market share. Sales
declined from $9,471,400 in 2002 to $7,323,600 in 2003 and $4,958,600 in 2004.
Gross profit as a percent of sales for PMIGA declined from 5.5% in 2001 to 4.9%
in 2002. Gross profit for PMIGA increased from 4.9% in 2002 to 7.8% in 2003 and
to 9.1% in 2004 as management focused on assembling and marketing complete
computer systems and improving its product mix management. However, it is
uncertain that we can maintain the pricing on those higher profit products.
17
LW
LW competes with a vast number of e-store websites on the internet. Most of them
are relatively small, but a number of larger e-stores, such as Amazon.com and
Buy.com, dominate in the e-commerce space. Competition is based on having the
products available and shipping expediently and correctly at competitive prices.
As part of the overall strategy on re-focusing on our core business in wholesale
distribution, the resources allocated to LW business segment were reduced
beginning the third quarter 2004. For the year ended December 31, 2004, LW
generated $5,413,800 in sale compared to $7,251,100 in 2003 and $1,684,200 in
2002. LW was in a development stage in 2002. LW sells its products to end-users
and certain of its products to resellers. Gross profit for the year ended
December 31, 2004 was 7.7% compared to 8.0% in 2003. For the year ended December
31, 2002, LW sold its products primarily to end-users and realized a gross
profit of 16.9%. During the first quarter 2005, the Company is re-evaluating
LW's business model and anticipating LW's sales will be expanded in 2005. There
is no guarantee that the Company will be able to expand LW's sales and that it
will be successful or profitable.
EXPENSES
The Company has been reducing its operating expenses in all areas. Consolidated
selling, general and administrative expenses decreased from $6,303,000 in 2002
to $5,939,900 in 2003 and $5,027,500 in 2004 (excluding a write-off of other
receivables of $487,200). Consolidated payroll expense decreased by $571,300 in
2004 compared to 2003 and by $34,300 in 2003 compared to 2002. Employee count
for the Company was reduced from 81 as of December 31, 2002 to 75 and 56 as of
December 31, 2003 and 2004, respectively. Consolidated bad debt expense, except
for the write-off of other receivables, decreased by $46,600 in 2004 compared to
2003 and by $188,200 in 2003 compared to 2002, excluding the impact of bad debt
expense in discontinued operations of $45,000 and $26,900 in 2002 and 2003,
respectively. Our bad debt expense arises out of the fact that we offer various
credit terms to qualifying customers, closely monitor their credit worthiness
and utilize various levels of credit insurance to control credit risks. We
provide allowances for bad debts based on reviews of loss, adjustment history,
current economic conditions, level of credit insurance and other factors which
deserve recognition in estimating potential losses. While management uses the
best information available in making its determination, the ultimate recovery of
the receivables is also dependent upon future economic and other conditions that
may be beyond management's control. In addition, it is uncertain as to the
continuing availability of cost-efficient credit insurance. We are unable to
project the future trend of our bad debt expense.
In December 2003, the Company settled a claim against a customer and its
principal owner for a past due account receivable in the amount of $734,500.
Under the settlement agreement, the customer agreed to pay the entire balance in
12 equal monthly installments of $61,200, beginning December 2003. In addition,
the customer entered into a UCC-Financing Statement with the Company under which
the customer secured its payments due to the Company with all its assets,
including inventory, accounts receivable and equipment. The customer is
presently in default of its obligations under the settlement agreement. Thus,
the Company is in the process of foreclosing on all the assets, including cash,
accounts receivable, inventories and real estate of the customer and its
principal owner. During the fourth quarter 2004, the Company wrote off $487,200,
the entire unpaid balance of this receivable, as a result of its on-going
evaluation of the recoverability of this asset.
18
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 carry-back
period from 2 years to 5 years for net operating losses incurred for taxable
years ending in 2001 and 2002. The tax benefit recorded in 2002 reflects the
federal income tax refund attributable to the net operating loss incurred for
the year ended December 31, 2002. The Company does not receive a tax benefit for
losses incurred in 2004 and 2003 as they are not covered by the Act. As a
result, no tax benefits were recorded for the year ended December 31, 2004 and
2003 as management does not believe it is more likely than not that the benefit
from such assets will be realized.
DISCONTINUED OPERATIONS
On June 2, 2003, the Company entered into an agreement to sell substantially all
of FNC's assets to a third party for $15,000. The Company recorded a loss of
$13,700 on the sale of these assets. On June 30, 2003, the Company entered into
an agreement to sell substantially all of Lea's assets to certain of Lea's
employees. The Company also received a Proprietary Software License and Support
Agreement from the purchasers to provide certain electronic commerce support
services to LW for a term of two years. The Company received $5,000 on the
closing date. The electronic commerce support services contract was valued at
$48,000. The Company recorded a loss of $16,000 on the sale of Lea assets.
The operations of FNC and Lea were discontinued after the sales of their assets.
For financial statement reporting purposes, the operating results of FNC and Lea
are reclassified as discontinued operations. The operating results of FNC and
Lea for the years ended December 31, 2004, 2003 and 2002 were as follows:
Year Ending December 31,
2004 2003 2002
----------- ----------- -----------
FNC:
Net sales $323,200 $1,313,500 $2,378,300
Loss before income tax benefit 93,300 (311,600) (1,195,900)
Income tax benefit -- -- (360,600)
----------- ----------- -----------
Net income (loss) $ 93,300 $ (311,600) $ (835,300)
----------- ----------- -----------
Lea:
Net sales $ -- $ 179,700 $ 496,600
Loss before income tax benefit -- (122,300) (751,000)
Income tax benefit -- -- (225,400)
----------- ----------- -----------
Net loss $ -- $ (122,300) $ (525,600)
----------- ----------- -----------
19
RESTRUCTURING OF PREFERRED STOCK
In April 2003 we were 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 and that our common stock would be delisted from the Nasdaq
SmallCap Market 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 enabled the holder of the
Company's Series A Redeemable Convertible Preferred Shares to request the
redemption of such shares. As of December 31, 2003, the redemption value of the
Series A Preferred Stock was $958,600. The Company increased the carrying value
of the Series A Redeemable Convertible Preferred Stock to its redemption value
and recorded an increase in loss applicable to common shareholders of $743,300
for the year ended December 31, 2003.
In December 2004, the Company entered into an agreement (the Series A Agreement)
with the Investor for restructuring certain terms of the Series A Preferred
Stock. In connection with the closing of the transactions under the Series A
Agreement, the Company amended and restated its Certificate of Designation of
Preferences, Rights and Limitations of the Series A Preferred Stock on December
31, 2004. Among the terms amended are (1) the number of shares designated as
Series A Preferred Stock were decreased from 1,000 to 600 shares; (2) the Stated
Value of each share of Series A Preferred Stock was reduced from $1,000 to
$666.67; (3) the holders of the Series A Preferred Stock no longer have the
right to required the Company to redeem each share of Series A Preferred Stock,
which rights were triggered upon the occurrence of certain events; (4) the
redemption amount payable by the Company upon exercise of its redemption right
was reduced from 150% of Stated Value to 100% of Stated Value; (5) there is a
181-day waiting period from the date of filing the Amended and Restated
Certificate of Designation before the holder may exercise conversion (unless the
Company initiates a redemption prior to the end of the 181-day period); (6) the
conversion price of the Series A Preferred Stock was changed to a fixed price of
$0.50 per share, subject to customary and anti-dilution adjustments; and (7) the
Company has five trading days, instead of three, to comply with conversion
procedures. As part of the Series A Agreement, the Investor forfeited a stock
purchase warrant, exercisable for 300,000 shares of the Company's common stock,
that was issued in connection with the original issuance of the Company's Series
A Preferred Stock. The Company accounted for these transactions in accordance
with SFAS 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. The restructuring of the Series A Preferred Stock resulted in a
gain of $758,600 for the year ended December 31, 2004. The fair value of the
restructured Series A Preferred Stock was $234,100 as of December 31, 2004 and
was classified as shareholders' equity in the balance sheet.
20
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss applicable to common shareholders of $1,172,700,
$2,896,600 and $3,110,100 for the years ended December 31, 2004, 2003 and 2002,
respectively. Due to the continuing operating losses, the Company has over time
experienced progressively more restrictive credit terms from our vendors, such
that, by the first quarter of 2005 and continuing through the date of this
filing, Our ability to purchase inventory has been eliminated. The loss of
credit terms from vendors has severely and unfavorably affected our sales.
Consequently, we have recently had difficulty paying our obligations on a timely
basis. Currently we are seeking additional capital and pursuing alternative
methods of operations which will eliminate our need for the credit terms. If we
fail to achieve a profitable level of operations or find other methods of
operations, we will be unable to pursue our business plan and may be forced to
cease doing business. There is no assurance that we will be able to obtain
additional capital, or find methods of operation that reduce our need for
credit.
As described in our results of operations above, in December 2004 the Company
entered into an agreement (the Series A Agreement) with the Investor for
restructuring certain terms of the Series A Preferred Stock. The restructuring
of the Series A Preferred Stock resulted in a gain of $758,600 for the year
ended December 31, 2004. The fair value of the restructured Series A Preferred
Stock was $234,100 as of December 31, 2004 and was classified as shareholders'
equity in the balance sheet.
As of December 31, 2004 and 2003, we were in violation of certain loan covenants
under the inventory financing facility with Textron Financial Corporation
(Textron) and our mortgage loan agreement with Wells Fargo Bank (Wells Fargo).
Even though waivers for such violations were obtained from Textron and Wells
Fargo, it is probable that we will be out of compliance with certain of those
covenants in the future. If this was to occur and waivers for the violations
cannot be obtained, Textron and Wells Fargo might terminate the credit facility
and accelerate the loan payments. The Wells Fargo loan would be required to be
classified as current liability causing another out of compliance condition on
the Textron loan. If such termination were to occur, the Company would have the
funding necessary to finance its future inventory or operations. 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.
At December 31, 2004, we had consolidated cash and cash equivalents of $543,800
and a working capital deficit of $542,200. At December 31, 2003, we had
consolidated cash and cash equivalents totaling $1,491,700 and working capital
of $183,400. The decrease in working capital was mainly due to the loss from
continuing operations in 2004.
Net cash used in operating activities for the year ended December 31, 2004, 2003
and 2002 was $1,896,900, $470,400 and $898,000, respectively. In June 2003, we
discontinued the operations of FNC and Lea. Included in the total net cash used
in operating activities was $34,700 cash provided by FNC's operating activities
in 2004. Included in the total net cash used in operating activities was
$146,800 and $956,600 cash used in FNC and Lea's operating activities for 2003
and 2002, respectively. We do not expect to have future operating activities for
FNC and Lea. The cash used in operating activities was primarily from the loss
in operations, which was partially offset by the federal income tax refunds of
$1,034,700 in June 2002 and $1,427,400 in March 2003. However, we do not have an
income tax refund in 2004 and we do not expect an income tax refund in 2005.
21
In December 2003, the Company settled a claim against a customer and its
principal owner for a past due account receivable in the amount of $734,500.
Under the settlement agreement, the customer agreed to pay the entire balance in
12 equal monthly installments of $61,200, beginning December 2003. In addition,
the customer entered into a UCC-Financing Statement with the Company under which
the customer secured its payments due to the Company with all its assets,
including inventory, accounts receivable and equipment. The customer is
presently in default of its obligations under the settlement agreement. Thus,
the Company is in the process of foreclosing on all the assets, including cash,
accounts receivable, inventories and real estate of the customer and its
principal owner. During the fourth quarter 2004, the Company wrote off $487,200,
the entire unpaid balance of this receivable, as a result of its on-going
evaluation of the recoverability of this asset.
In April 2003, the Company settled a lawsuit relating to a counterfeit products
claim for $95,000, which was paid in the second quarter of 2003.
In May 2003, PMI obtained a $3,500,000 inventory financing facility, which
includes a $1 million letter of credit facility used as security for inventory
purchased on terms from vendors in Taiwan, from Textron Financial Corporation
(Textron). The credit facility is guaranteed by PMIC, PMIGA, FNC, Lea, LW and
two officers of the Company and may be discontinued by Textron at any time at
its sole discretion. Under the agreement, the Company granted Textron a first
priority lien on all of its corporate assets. Borrowings under the inventory
line are subject to 30 days repayment, at which time interest accrues at the
prime rate plus 6% (11.25% at December 31, 2004). 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, including a minimum current ratio, a
maximum leverage ratio, a minimum tangible capital funds and required levels of
profitability. Beginning on September 30, 2003 through December 31, 2004, the
Company was out of compliance with the maximum leverage ratio covenant and the
minimum tangible capital funds covenant and other covenants for which waivers
have been obtained through March 31, 2005. Based on anticipated future results,
it is probable that the Company will be out of compliance with these and/or
other covenants in 2005. If this was to occur and a waiver for the violation
cannot be obtained, Textron might terminate the credit facility and accelerate
the loan payments. Upon termination, there is no assurance that the Company
would have the funding necessary to finance its future inventory or operations.
We cannot assure you that we will be able to comply with these financial
requirements in the future or to maintain the Textron flooring line if we
continue our losses. We are required to maintain $250,000 in a restricted
account as a pledge to Textron. This amount has been reflected as restricted
cash in the accompanying consolidated financial statements. As of December 31,
2004, the outstanding balance of this loan was $2,243,100.
22
Pursuant to one of our Wells Fargo Bank (Wells Fargo) mortgage loans, with a
$2,331,700 balance at December 31, 2004, we are required to maintain minimum
debt service coverage, a maximum debt to tangible net worth ratio, no
consecutive quarterly losses, and achieve net income on an annual basis. During
2004 and 2003 the Company was in violation of two of these covenants. This
constituted an event of default under the loan agreement and gave Wells Fargo
the right to call the loan. However, a waiver of the defaults was obtained from
the bank through December 31, 2005. As a condition for this waiver, the Company
transferred $250,000 to a restricted account as a reserve for debt servicing. It
is uncertain that we will be able to meet all these covenants in the future. If
this were to occur in the future and a waiver for the violation cannot be
obtained, the Company would be required to classify the bank loan as current,
which could cause the Company to be out of compliance with an additional
financial covenant included in its inventory flooring facility with Textron. It
is uncertain as to the Company's ability to obtain alternative financing in the
event Textron terminates the loan facility or Wells Fargo elects to call the
loan.
The Company purchased a credit insurance policy through March 31, 2005 from
American Credit Indemnity covering certain accounts receivable up to $2,000,000
of losses. The Company also entered into an insurance agreement with ENX, Inc.
for its accounts receivable through April 30, 2005. Under the agreement, the
Company sells its past-due accounts receivables from pre-approved customers with
pre-approved credit limits under certain conditions. The commission is 0.5% of
the approved invoice amounts with a minimum quarterly commission of $12,500. As
of December 31, 2004, approximately $1,059,000 of the outstanding receivables
was approved by ENX. We are seeking renewal of this policy and agreement. There
is no assurance that we can renew the policy and agreement at amounts that are
cost-effective. In the event that we could not renew the policy and agreement
with our existing or other insurance carriers, our future loss on uncollectible
receivables would probably be higher compared to 2004, 2003 and 2002.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors, and the Company does not have any non-consolidated special purpose
entities.
AGGREGATE CONTRACTUAL OBLIGATIONS
The Company leases office space, equipment and vehicles under various operating
leases. The following summarizes the effect on the Company's liquidity and cash
flows from contractual obligations of debt arrangements and non-cancelable
operating leases as of December 31, 2004:
23
(Amounts in thousands)
Year Ending December 31,
2005 2006 2007 2008 2009 Thereafter
------ ------ ------ ------ ------ ------
Debt maturities $ 72 $ 77 $2,312 $ 50 $ 54 $ 539
Non-cancelable operating leases 49 2 -- -- -- --
------ ------ ------ ------ ------ ------
Total $ 121 $ 79 $2,312 $ 50 $ 54 $ 539
====== ====== ====== ====== ====== ======
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
OUR INDEPENDENT AUDITORS' REPORT CONTAINS A GOING CONCERN OPINION
We have received a going concern opinion from our auditors. The opinion raises
substantial doubts our ability to continue as a going concern.
We incurred net losses for the year ended December 31, 2004 and 2003 and 2002 of
$1,172,700, $2,896,600 and $3,110,100, respectively, and we most likely will
continue to incur losses. Our future ability to execute our business plan will
depend on our efforts to increase revenues, control our overhead and return to
profitability. We have implemented plans to reduce overhead and operating costs,
and capture new business. No assurance can be given, however, that these actions
will result in increased revenues and profitable operations.
WE HAVE EXPERIENCED SEVERE CREDIT RESTRICTIONS FROM OUR VENDORS, AND ARE NO
CONDUCTING BUSINESS CONSISTENT WITH HISTORICAL PRACTICE
Our vendors have severely reduced the credit they extend to the Company. The
loss of credit terms from vendors has eliminated our ability to purchase
inventory and therefore our sales. Consequently, we have recently had difficulty
paying our obligations on a timely basis. If we are unable to correct this
situation, find alternative financing or alternative methods of operation which
do not require credit, we will be required to cease operations.
WE CAN PROVIDE NO ASSURANCE THAT WE WILL BE ABLE TO SECURE ADDITIONAL CAPITAL
REQUIRED BY OUR BUSINESS
Currently we are seeking additional capital to satisfy our financing needs for
the next twelve months. If we fail to achieve a profitable level of operations
and raise additional working capital, we will be unable to pursue our business
plan. There is no assurance that we will be able to obtain additional capital,
if available, and that such capital will be available at terms acceptable to us.
24
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 December
31, 2004 we had 600 shares of Series A Preferred outstanding. The Series A
Preferred are convertible into 800,000 shares of common stock. 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.
WE HAVE VIOLATED CERTAIN FINANCIAL COVENANTS CONTAINED IN OUR LOANS AND MAY DO
SO AGAIN IN THE FUTURE
Pacific Magtron, Inc. (PMI) has a mortgage on our offices with Wells Fargo Bank,
under which PMI must maintain the following financial covenants:
1) Total liabilities must not be more than twice our tangible net
worth;
2) Net income after taxes must not be less than one dollar on an annual
basis and for no more than two consecutive quarters; and
3) Annual EBITDA of one and one half times the debt must be maintained.
We were in violation of covenants (2) and (3) as of December 31, 2004 and 2003.
We received a waiver for such violation through December 31, 2005. We cannot
assure you that we will be able to meet all these financial covenants in the
future. Based on anticipated future results, it is probable that we will be out
of compliance with certain of those covenants. If this was to occur and a waiver
for the violation cannot be obtained, Wells Fargo may declare us in default and
accelerate the loan payments. As a result, the Company would be required to
classify the bank loan as current, which would cause the Company to be out of
compliance with an additional financial covenant included in its inventory
flooring facility with Textron Financial Corporation as discussed below.
In May 2003 we obtained a $3,500,000 inventory financing facility of which a $1
million letter of credit facility is used as security for inventory purchased on
terms from vendors in Taiwan from Textron Financial Corporation (Textron). Under
this financing facility, we are required to meet the following financial
covenants:
1) Minimum current ratio of 1.0 to 1.0;
2) Maximum leverage of 5.0 for PMI and 6.0 for PMIC;
3) Positive EBITDA on a year-to-date basis for PMI; and
4) Minimum tangible capital funds of $2,500,000.
As of December 31, 2004, we were in violation of the above covenants and a
waiver for such violations was obtained through March 31, 2005. However, no
subsequent waiver has been received. It is uncertain that we will be able to
meet all those covenants in the future. If this was to occur in the future and a
waiver for the violation cannot be obtained, Textron might terminate the credit
facility and accelerate the loan payments. Upon termination, there is no
assurance that the Company would have the funding necessary to finance its
future inventory or would be able to obtained additional financing. We cannot
assume that we will be able to comply with these financial requirements in the
future or to maintain the Textron flooring line if we continue our losses. It is
uncertain as to the Company's ability to obtain alternative financing in the
event Textron terminated the loan facility and accelerated payments or Wells
Fargo elected to call the loan.
25
WE DEPEND ON CREDIT TERMS FROM OUR SUPPLIERS
We depend on the credit and payment terms extended by our suppliers. A reduction
of those credits and shortening those payment terms by our suppliers would
unfavorably affect our cash flows and our ability to maintain certain inventory
levels and sales.
WE DEPEND ON KEY SUPPLIERS FOR A LARGE PORTION OF OUR INVENTORY. LOSS OF THOSE
SUPPLIERS COULD HARM OUR BUSINESS
One supplier, Sunnyview/Real Wisdom ("Sunnyview"), accounted for approximately
15%, 18% and 11% of our total purchases for the years ended December 31, 2004,
2003 and 2002, respectively. One other vendor accounted for 17% of purchases for
the year ended December 31, 2003. We do not have a supply contract with
Sunnyview nor the other vendor, but rather purchase products from them 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
and the other vendor's 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 adversely effect on our business, financial condition and operating
results.
OUR COMMON STOCK IS NOT ACTIVELY TRADED
Our common stock was delisted from the Nasdaq SmallCap Market effective April
30, 2003 due to our inability to maintain a minimum bid price of $1.00 per
share. The Company's common stock is eligible to be traded on the Over the
Counter Bulletin Board (OCTBB). Our stock has not been actively traded since
such delisting.
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.
26
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. 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, quality and breadth of product lines. We also compete with
manufacturers that sell directly to resellers and end users. Most of our
competitors are substantially larger and have greater financial and other
resources than we do.
FAILURE TO RECRUIT AND RETAIN QUALIFIED PERSONNEL WILL HARM OUR BUSINESS
Our success depends upon our ability to attract, hire and retain highly
qualified personnel who possess the skills and experience necessary to meet our
personnel needs. Competition for individuals with proven highly qualifying
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
companies as well as temporary personnel agencies. Failure to attract and retain
sufficient qualifying personnel would 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, Chief Financial Officer and Hui "Cynthia"
Lee, head of sales operations. The loss of the services of Mr. Li 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 Mr. Li and Ms. Lee.
ESTABLISHMENT OF OUR BUSINESS-TO-CONSUMER WEBSITE LIVEWAREHOUSE.COM MAY NOT BE
SUCCESSFUL
We have established a business-to-consumer website, LiveWarehouse.com. LW
incurred a net loss of $248,800, $258,100 and $166,600 for the year ended
December 31, 2004, 2003 and 2002, respectively. As part of the overall strategy
on re-focusing in our core business in wholesale distribution, the resources
allocated to LW business segment were reduced beginning the third quarter 2004.
During the first quarter 2005, the Company is re-evaluating LW's business model
and anticipating LW's sales will be expanded in 2005. There is no assurance that
the Company will be able to expand LW's sales and that it will be successful or
profitable. We cannot assume that we will 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. Further, while we have experience in the
wholesale marketing of computer-related products, we have limited experience in
retail marketing. This market is very competitive and many of our competitors
have substantially greater resources and experience than we have.
27
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
one of our bank loans with a $2,331,700 balance at December 31, 2004 which bears
fluctuating interest based on the bank's 90-day LIBOR rate. We believe that
fluctuations in interest rates in the near term would not materially affect our
consolidated operating results, financial position or cash flow. We are not
exposed to material risk based on exchange rate fluctuation or commodity price
fluctuation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following Part IV.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On June 18, 2004 KPMG LLP ("KPMG"), the Registrant's independent auditor,
tendered its resignation to the Registrant. On July 21, 2004, the Registrant's
board of directors appointed and engaged Weinberg & Company, P.A. as the
Registrant's independent auditor for the fiscal year ended December 31, 2004.
The report of KPMG for the fiscal years ended December 31, 2002 and 2003
contained no adverse opinions, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles, except for
a modification as to uncertainty about the Registrant's ability to continue as a
going concern as described in the reports of KPMG in the Registrant's Form 10-K
for the fiscal years ended December 31, 2002 and 2003.
The Registrant did not consult with Weinberg & Company, P.A. during the fiscal
years ended December 31, 2002 and 2003, and the interim period from January 1,
2004 through July 21, 2004, on the application of accounting principles to a
specific transaction, either completed or proposed; or the type of audit opinion
that might be rendered on the Registrant's financial statements; or any matter
that was either the subject of a disagreement or a reportable event.
28
There were no disagreements with Weinberg & Company, P.A. or KPMG on accounting
or financial disclosure matters during 2004.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our Chief Financial Officer and our Chief Executive
Officer, has reviewed and evaluated the effectiveness of our disclosure controls
and procedures as of the end of the fiscal period covered by this Form 10-K,
which included inquiries made to certain other employees. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective and sufficient to ensure that we record, process,
summarize, and report information required to be disclosed in the reports we
file under the Securities Exchange Act of 1934 within the time periods specified
by the Securities and Exchange Commission's rules and forms. During the fiscal
quarter ended December 31, 2004, there have been no changes in our internal
control over financial reporting, or to our knowledge, in other factors, that
have materially affected or are reasonable likely to materially affect the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our directors and
executive officers are as follows:
NAME AGE POSITION
- ---------------------- --- ----------------------------------
Martin Nielson 53 President, Chief Executive Officer
and Director
Theodore S. Li 48 Chief Financial Officer and Director
John E. Donahue 55 Director
Eric Martin 52 Executive Vice President
Hui "Cynthia" Lee 42 Senior Vice President
Anthony Lee 56 Secretary and Treasurer
Jey Hsin Yao, PH.D. 42 Director (Resigned on December 31, 2004)
Hank C. Ta 42 Director (Resigned on December 31, 2004)
Raymond Crouse 45 Director (Resigned on December 31, 2004)
MARTIN NIELSON - Mr. Nielson was appointed President and Chief Executive Officer
of the Company on December 31, 2004. He is also the Senior Vice
President-Acquisitions of Advanced Communications Technologies, Inc. ("ACT").
Mr. Nielson also serves as Chief Executive Officer of Encompass, ACT's
wholly-owned subsidiary and principal operating unit. From 2003 to 2004, he was
Chairman of Innova Holdings, Inc. (formerly known as Hy-Tech Technology Group,
Inc.). He also served as Chairman of Inclusion Technologies, Inc. from 2000 to
2002. Since 1994, he has been the Chairman and Chief Executive Officer of Altos
Bancorp, Inc., a privately-held mergers and acquisition company. In 1991, Mr.
Nielson was founder and Chief Executive Officer of The Business Superstore, an
office supply and computer superstore/telesales company in London that merged
with Office World in 1993. In 1982, Mr. Nielson was part of the founding team
and served until 1991 as Vice President of Businessland, Inc., a New York Stock
Exchanged listed computer and networking reseller. From 1972 until 1981, Mr.
Nielson was employed as an executive of The Gap Stores. Mr. Nielson graduated
from San Jose State University with a BS in business management with a
concentration in mathematics and engineering, and attended San Francisco State
University's Graduate School of Business with a concentration in operations
research.
THEODORE S. LI - Mr. Li has served as Chief Financial Officer and director for
our Company since 1998. He had served as our President and Treasurer to December
2004. He has also served as the President and a Director of Pacific Magtron,
Inc., a California corporation that is our principal operating subsidiary
("PMI"), since 1995. He is responsible for our operations, technical functions
and finance.
30
JOHN E. DONAHUE - John E. Donahue is Vice President and Chief Financial Officer
of Online Benefits, Inc. a privately held HR solutions company that provides
internet based applications for administering, communicating and presenting HR
related information and data. Mr. Donahue has served in this position since
August 1999. Prior to that he served as Executive Vice President and Chief
Financial Officer of Lead America, a marketer of insurance products to customers
of financial institutions, Managing Director of Oxbridge Incorporated, a
boutique investment banking firm, Chief Financial Officer at Mast Resources
Inc., a merchant bank, and Chief Financial Officer at Catalyst Energy Corp, a
NYSE-listed independent power producer. Mr. Donahue was with Price Waterhouse
from September 1972 until March 1985, including serving as a Senior Audit
Manager. Mr. Donahue holds a B.A. in Economics from Holy Cross College and an
MBA from Rutgers University.
ERIC MARTIN - Mr. Martin joined the Company in November of 2004, and serves as
the company's Chief Commercial Officer, with responsibility for both supplier
and client business relationships. Prior to joining the Company, he served as
Chairman and CEO of Positive Communications, a nationwide wireless messaging
company marketing through national consumer electronics retailers and on-line
consumer channels. His experience in growing businesses includes Compaq Computer
Corporation, where he was responsible for the development of the Presario brand
of computer products. At BusinessLand, Inc, a national distributor of personal
computer and related products, he was responsible for all aspects of product
management, from the company's early stages through over $1B in annual sales.
Mr. Martin also has extensive retail merchandising experience, having managed
both field and corporate merchandising programs for Sears and The Gap Stores. He
holds a Bachelor of Arts degree in Business Administration from Hanover College.
HUI "CYNTHIA" LEE - Ms. Lee serves as our Senior Vice President and had served
as our Secretary and a Director from 1998 to 2004 and as a Director and Vice
President, Sales and Purchasing of PMI since 1995. She is responsible for our
sales and purchasing functions. She received her bachelor of language and
literature from Chang Chi University in Taiwan. Ms. Lee is married to Dr. Jey
Hsin Yao, a former director of our Company.
ANTHONY LEE - Anthony Lee was appointed Secretary and Treasurer on December 31,
2004. He has been serving the Company in the capacity of a financial controller
since 2002. Mr. Lee practiced as a certified public accountant in California and
was a partner in Alger & Lee, Certified Public Accountants, for more than eight
years before joining the Company. From 1987 to 1988, he was a senior accounting
research staff in Bank of America in San Francisco, California. Before he joined
Bank of America, he was a senior audit manager in Arthur Young & Company, an
international accounting firm, for more than 10 years. Mr. Lee is a certified
public accountant in California. He graduated from Golden Gate University in San
Francisco, California with a BS degree in accounting and from the University of
California at Berkeley with an MBA in finance.
31
JEY HSIN YAO, PH.D. - Until December 31, 2004, Dr. Yao had served as a Director
since 1998 and as a Director and Secretary of PMI since 1995. He has been
employed at Fujitsu as a senior researcher since 1992. He received his bachelor
of science in electrical engineering from National Taiwan University, and his
masters and PhD degrees from the Department of Electrical Computer Engineering
of the University of California at Santa Barbara. Dr. Yao is married to Ms. Hui
"Cynthia" Lee.
HANK C. TA - Mr. Ta has served as a Director from 1999 to December 31, 2004. Mr.
Ta has been the President and Chief Executive Officer of CC Integration/Micro
Age since 1992. This company is an authorized reseller from Compaq, Cisco and
Hewlett Packard. He received his bachelor of science in electrical engineering
from San Jose State University.
RAYMOND CROUSE - Mr. Crouse served as a Director of the Board and the Chairman
of the Audit Committee from June 17, 2002 to December 31, 2004. He has served as
a Director of Litigation & Recovery of De Lage Landen Financial Services since
2002. Mr. Crouse was the Vice President and National Portfolio Director for
Finova Capital Corporation in 2001 and 2000. He was a founder and President of
AMC Capital Services, Inc. from 1996 to 1999. AMC Capital Services provides
financial and commercial lending services to various companies.
All executive officers are appointed by and serve at the discretion of the Board
for continuous terms.
AUDIT COMMITTEE
Mr. Raymond Crouse (Chair) and Mr. Hank C. Ta each served on the Company's Audit
Committee during 2003 until their resignation on December 31, 2004. The board of
directors has determined that Mr. Crouse qualifies as an audit committee
financial expert as defined by applicable regulations of the SEC and that he is
independent as defined by the applicable rules under the Nasdaq Listing
standards. Mr. Raymond Crouse and Mr. Hank Ta resigned as of December 31, 2004.
The Directors also serve as members of the Audit Committee and are seeking a
financial expert to join the Audit Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not have a Compensation Committee, and the entire Board of Directors made
executive officer compensation decisions. During 2004 both Mr. Theodore Li and
Ms. Hui "Cynthia" Lee were executive officers and participated in the
deliberations of our Board of Directors concerning executive officer
compensation.
SECTION 16(a) REPORTS OF BENEFICIAL OWNERSHIP
Based solely on its review of copies of reports filed by reporting persons of
the Company pursuant to Section 16(a) of the Exchange Act, or written
representations from reporting persons that no Form 5 filing was required for
such person, the Company believes that all filings required to be made by
reporting persons of the Company were timely made in accordance with
requirements of the Exchange Act.
32
CODE OF ETHICS
The Company adopted a Code of Business Conduct that applies to all of our
employees and has particular sections that apply to our principal executive
officer and senior financial officers. We posted the text of our code of conduct
on our website, www.pacificmagtron.com. In addition, we will promptly disclose
on our website (1) the nature of any amendment to our code of conduct that
applies to our principal executive officer and senior financial officers, and
(2) the nature of any waiver, including an implicit waiver, from a provision of
our code of ethics that is granted to one of these specified officers, the name
of such officer who is granted the waiver and the date of the waiver.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by us to the chief
executive officer and the most highly compensated executive officers and key
employees (the "Named Executive Officers") whose total remuneration exceeded
$100,000 for services rendered in all capacities to us during the last three
completed fiscal years.
Annual Compensation(1)
Name and Year Salary Bonus Long-Term All Other
Principal Position Compensation Compensation
Securities
Underlying
Options(#)
Theodore Li (2) 2004 $108,000 $ -- -- $ --
Chief Financial 2003 108,000 -- -- --
Officer and Director 2002 120,000 -- -- --
Hui "Cynthia" Lee(3) 2004 54,000 -- -- --
Secretary and Director 2003 55,625 -- -- --
2002 120,000 33,333 -- --
(1) No executive officer named in the Compensation Table received personal
benefits or perquisites in excess of the lesser of $50,000 or 10% of his
or her aggregate salary and bonus.
(2) A company's leased auto has been assigned to Mr. Li in 2004 and 2003. The
Company paid a total of $12,028 in 2004 and $12,028 in 2003 for the auto
lease. Mr. Li was not required to reimburse the Company for his personal
use of the auto.
(3) A company's leased auto has been assigned to Ms. Lee in 2004 and 2003. The
Company paid a total of $11,908 in 2004 and $11,908 in 2003 for the auto
lease. Ms. Lee was not required to reimburse the Company for his personal
use of the auto.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options to purchase shares of our common stock granted during 2004
to the Named Executive Officers.
33
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
The following table shows the numbers of shares of common stock represented by
outstanding stock options held by each of the Named Executive Officers at
December 31, 2004.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at December 31, In-The-Money Options
2004 at December 31, 2004(1)
------------------------ --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ----------- -------------
Theodore Li 250,000(2) -- $ -- --
Hui "Cynthia" Lee 250,000(2) -- $ -- --
(1) Options are in-the-money if the fair market value of the shares of common
stock exceeds the exercise price.
(2) These options were granted on May 4, 2001 and all of these options were
immediately exercisable. Of the options granted, 103,092 are incentive
stock options granted under the 1998 Incentive Stock Option Plan and have
an exercise price per share of $0.97. The remaining 146,908 options are
non-qualified options not granted under any plan. The exercise price per
share is $0.88.
DIRECTOR COMPENSATION
Directors currently receive no cash compensation for their services in that
capacity. Reasonable out-of-pocket expenses may be reimbursed to directors in
connection with attendance at meetings. During 2002, Mr. Hank C. Ta was granted
10,000 options at a price of $1.05 per share and Mr. Raymond Crouse was granted
10,000 options at a price of $.76 per share. The options are exercisable in five
years. Mr. Ta and Mr. Crouse are non-employee directors. There were no options
granted to the directors in 2004 and 2003.
COMPENSATION COMMITTEE INTERLOCKS
We do not have a Compensation Committee. Instead the entire Board of Directors
makes executive officer compensation decisions. Both Mr. Theodore Li and Ms. Hui
"Cynthia" Lee are executive officers and participate in the deliberations of our
Board of Directors concerning executive officer compensation. The Board of
Directors has no formal compensation criteria it uses in determining the
executive officers compensation. For 2003, the Board of Directors considered the
Company's fiscal status and the Company's overhead reduction plan in setting
compensation.
EMPLOYMENT AGREEMENTS WITH MR. THEODORE S. LI AND HUI "CYNTHIA" LEE
On December 10, 2004, Theodore S. Li and Hui Cynthia Lee (collectively, the
"Stockholders"), the holders of a collective majority interest in Pacific
Magtron International Corp. (the "Company") entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with Advanced Communications
Technologies, Inc., a Florida corporation ("ACT"), pursuant to which ACT agreed
to purchase from the Stockholders, and the Stockholders agreed to sell to ACT,
an aggregate of 6,454,300 shares of the common stock of the Company (the "PMIC
Shares") for the aggregate purchase price of $500,000. On December 30, 2004, the
Stockholders and ACT closed on the sale of the PMIC Shares (the "Closing"). In
connection with the sale, Mr. Li and Ms. Lee entered into employments agreements
with PMIC, ACT and ACT's wholly-owned subsidiary, Encompass Group Affiliates,
Inc.
34
The Employment Agreements, dated December 30, 2004, with each of Mr. Li and Ms.
Lee, respectively, provide for a cash signing bonus of $225,000 each to be paid
within thirty days of the Closing and other bonus and earn-out provisions that
may be paid in cash or in shares of common stock of ACT. Through the date of
filing this Annual Report on 10-K, no part of the cash signing bonus has been
paid. The Employment Agreements also provide for an annual salary of not less
than $120,000 each. While any bonus paid in ACT's common stock will be in the
discretion of the Compensation Committee of ACT's Board of Directors, the
earn-out provisions are set forth in the Employment Agreements and are based on
achievement of certain financial milestones by certain operating subsidiaries of
the Company. Under the earn-out provisions in the Employment Agreements, Mr. Li
and Ms. Lee may earn the right to receive up to 66,666,666 shares and 33,333,333
shares of ACT's common stock, respectively, which share amounts are subject to
adjustments for any stock splits or other recapitalizations effected by ACT;
provided that, the percentage of the outstanding common stock that Mr. Li or Ms.
Lee would have had the right to receive prior to the adjustment shall not be
changed by any such adjustment. Upon earning the earn-out shares, such shares
will be placed in escrow, pursuant to the terms of an escrow agreement entered
into at the Closing among ACT, Mr. Li and Ms. Lee. If Mr. Li's or Ms. Lee's
employment is terminated for "cause" (as defined in the applicable Employment
Agreement) prior to the expiration of the initial term of the applicable
Employment Agreement, all of the earn-out shares, whether earned or not, of Mr.
Li or Ms. Lee, as applicable, will be forfeited. If, however, Mr. Li's or Ms.
Lee's employment is terminated for reasons other than "cause" prior to the
expiration of the initial term of the applicable Employment Agreement, Mr. Li
and Ms. Lee, as the case may be, will be entitled to receive any of the earn-out
shares earned and placed in escrow prior to such termination. Unless terminated
sooner, the initial term of Mr. Li's Employment Agreement expires on the third
anniversary of the Closing, and the initial term of Ms. Lee's Employment
Agreement expires on the second anniversary of the Closing. Either Employment
Agreement may be terminated without cause by the Company at any time upon thirty
days prior written notice. The Company may also terminate either Mr. Li or Ms.
Lee for "cause." In addition, Mr. Li or Ms. Lee may terminate his or her
employment agreement for "Good Reason" (as defined in each Employment
Agreement). In the event of termination without cause or for Good Reason, Mr. Li
or Ms. Lee, as the case may be, shall receive, in addition to accrued, but
unpaid compensation and other benefits, six months severance. The Employment
Agreements also contain non-compete provisions for a period of two years post
termination.
35
PERFORMANCE GRAPH
The following graph compares the cumulative shareholder return on our common
stock from January 1, 2000 through December 31, 2004, based on the market price
of the common stock, with the cumulative total return of the NASDAQ market Index
and a Peer Group Index comprised of the following companies engaged in the sale
or distribution of microcomputer products: Bridge Technology, Inc., CDW Corp.,
En Pointe Technology Inc., Focus Enhancements, Genesis Technology Group Inc.,
Ingram Micro Inc., Insight Enterprises Inc., Insignia Systems Inc., Jack Henry &
Assurantieconcern, Manchester Technologies Inc., McSi Inc., Merisel New, Nam Tai
Electronics Inc., Nova Communications Limited, Safeguard Scientifics Inc., SED
International Holdings Inc., Soyo Group Inc., Syscan Imaging Inc., Systemax
Inc., Tech Data Corp., Transnet Corp., United Stationers Inc., Vartech Systems
Inc., Wareforce One, Windsortech Inc., Zones Inc Commerce.
COMPARISION OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG PACIFIC MAGTRON INTERNATIONAL CORP.
THE NASDAQ STOCK MARKET (U.S) INDEX AND A PEER GROUP
[TABLE OMITTED]
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information, as of February 23, 2005, with
respect to the number of shares of our common stock beneficially owned by
individual directors, by all directors and officers as a group, and by persons
who we know own more than 5% of our common stock. We have no other class of
voting stock outstanding. The address of Theodore S. Li and Hui "Cynthia" Lee is
1600 California Circle, Milpitas, California 95035. Betty Lin's address is P.O.
Box 5267, Berkeley, California 94705. Advanced Communications Technologies,
Inc.'s address is 420 Lexington Avenue, New York, NY 10170 and Stonestreet,
L.P.'s address is 260 Town Centre Blvd., Suite 201, Markham, ON L3R 8H8, Canada.
Number of Shares Number of Shares
Owned Beneficially Owned(1)
------------------- ---------------------
Percent Percent
Number Of Number Of
of Common of Common
Shares Stock Shares Stock
---------- ------- ----------- -------
Name of Beneficial Owners:
Theodore S. Li(2) -- -- 250,000 2%
Hui "Cynthia" Lee(3) -- -- 250,000 2%
Betty Lin(4) 2,149,400 20% 2,149,400 18%
Advanced Communications
Technologies, Inc. 6,454,300 62% 6,454,300 54%
Stonestreet, L.P.(5) -- -- 800,000 7%
All officers and Directors as a group
(5 persons) -- -- 500,000 4%
- ----------
(1) Includes 550,000 shares issuable upon the exercise of options, 200,000
shares issuable upon the exercise of warrants and 800,000 shares issuable upon
the conversion of Series A Preferred Stock.
(2) Includes 250,000 shares Mr. Li has the right to acquire upon the exercise of
options.
(3) Includes 250,000 shares Ms. Lee has the right to acquire upon the exercise
of options.
(4) Ms. Lin is neither a director nor an officer of the Company.
(5) Includes 800,000 shares of common stock would be obtained if the conversion
rights of the 4% Series A Convertible Preferred Stock were exercised.
CHANGE OF CONTROL
On December 10, 2004, Theodore S. Li and Hui Cynthia Lee, the holders of a
collective majority interest in the Company, entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with Advanced Communications
Technologies, Inc., a Florida corporation ("ACT"), pursuant to which ACT agreed
to purchase from Mr. Li and Ms. Lee an aggregate of 6,454,300 shares of the
common stock of the Company for the aggregate purchase price of $500,000. These
shares represent 61.56% of the currently issued and outstanding common stock of
the Company. The sale of the shares closed on December 30, 2004. See Item 13 -
Certain Relationships and Related Transactions for more information about the
terms of the Stock Purchase Agreement and the transactions contemplated therein.
37
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following provides tabular disclosure of the number of securities to be
issued as of December 31, 2004 upon the exercise of outstanding options, the
weighted average exercise price of outstanding options, and the number of
securities remaining available for future issuance under equity compensation
plans, aggregated into two categories-plans that have been approved by
stockholders and plans that have not.
Plan Category Number of Weighted-average Number of
Securities to be Exercise Price of Securities
Issued Upon Outstanding Options Remaining Available
Exercise of and Warrants for Future Issuance
Outstanding Options Under Equity
and Warrants Compensation Plans
(Excluding
Securities
Reflected in 1st
Column)
- -------------------------------------------------------------------------------
Equity compensation
plans approved by
stockholders 550,000 $0.91 394,000
Equity compensation
plans not approved
by stockholders 200,000 $1.20 --
-----------------------------------------------------------
Total 750,000 $0.99 394,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 sold computer products to a company owned by a member of the Board
of Directors of the Company. During 2003 and 2002, the Company recognized
$102,400 and $527,400, respectively, in sales revenues from this company. There
were no sales to this customer for the year ended December 31, 2004 and there
were no amounts due from this customer as of December 31, 2004 and 2003.
On June 30, 2003, the Company sold substantially all of Lea's intangible assets
and certain equipment to certain of the Lea's employees (Purchaser). The Company
also entered into a Proprietary Software License and Support Agreement with the
Purchaser requiring the Purchaser to provide certain electronic commerce support
services to LiveWarehouse, Inc., a wholly-owned subsidiary of the Company, for a
term of two years beginning July 1, 2003. The Company received $5,000 on the
transaction closing date and the electronic commerce support services contract
valued at $48,000 which is based on the number of service hours to be provided.
The Company recorded a loss of $16,000 on the sale of the Lea assets.
38
On December 10, 2004, Theodore S. Li and Hui Cynthia Lee, the holders of a
collective majority interest in the Company and both of whom are executive
officers and directors of the Company (the "Stockholders"), entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") with Advanced Communications
Technologies, Inc., a Florida corporation ("ACT"), pursuant to which ACT agreed
to purchase from the Stockholders, and the Stockholders agreed to sell to ACT,
an aggregate of 6,454,300 shares of the common stock of her Company (the
"Company Shares") for the aggregate purchase price of $500,000. On December 30,
2004, the Stockholders and ACT closed on the sale of the Company Shares (the
"Closing"). The Company Shares represent 61.56% of the currently issued and
outstanding common stock of the Company.
In accordance with the terms of the Stock Purchase Agreement, ACT issued at the
Closing two convertible promissory notes (the "Notes") in the principal amounts
of $166,889 and $333,111 to Mr. Li and Ms. Lee, respectively, as payment of the
purchase price for the Company Shares. The Notes will mature on the first
anniversary of the Closing and no principal or interest payments will be
required prior to such date. The holders of the Notes, at their option, will be
able to convert, at any time and from time to time, until payment in full of all
amounts due and owing under the Notes, any unpaid principal amount of the Notes
into shares of common stock of ACT at a conversion price per share of $0.01. If
the Notes were converted based upon their original principal amounts, an
aggregate of 50,000,000 shares of ACT's common stock would be issued to the
Stockholders. The conversion ratio is subject to customary adjustments for any
stock splits, reverse stock splits and other recapitalizations effected by ACT.
ACT has informed PMIC that it intends to satisfy its payment obligations under
the Notes with funds from its working capital. ACT's payment obligations under
the Notes are secured by the Company Shares pursuant to a Custodial and Stock
Pledge Agreement entered into at the Closing by ACT and the Stockholders (the
"Pledge Agreement").
In addition, pursuant to the terms of the Stock Purchase Agreement, Mr. Li
resigned his positions as President, Chief Executive Officer and Treasurer of
the Company and all positions held by him as a director and/or officer of the
Company's subsidiaries at the Closing. He remains Chief Financial Officer and
was appointed Chief Operating Officer the Company pursuant to the terms of an
Employment Agreement. The terms of Mr. Li's Employment Agreement dated December
30, 2004 are described more fully under the caption Employment Agreements with
Mr. Theodore S. Li and Hui "Cynthia" Lee in Item 11 - Executive Compensation of
this Report on Form 10-K. Mr. Li remains a member of the Board of Directors of
the Company. Ms. Lee retains her current position of Senior Vice President
pursuant to the terms of an Employment Agreement dated December 30, 2004, but
resigned as a director of the Company and each position held by her with any
subsidiary of the Company at the Closing. The terms of Ms. Lee's Employment
Agreement are described more fully under the caption Employment Agreements with
Mr. Theodore S. Li and Hui "Cynthia" Lee in Item 11 - Executive Compensation of
this Report on Form 10-K.
39
In connection with the Closing, ACT and Encompass Group Affiliates, Inc., a
wholly-owned subsidiary of ACT ("Encompass"), entered into an Indemnity
Agreement with Mr. Li and Ms. Lee and their respective spouses pursuant to which
ACT and Encompass agreed to indemnify Mr. Li, Ms. Lee and their respective
spouses against certain liabilities that Mr. Li and Ms. Lee may incur in
connection with personal guaranties they have given relating to PMI's inventory
financing facility. Mr. Li and Ms. Lee also executed a release in connection
with the transactions contemplated by the Stock Purchase Agreement.
Additionally, in connection with the transaction, Jey Hsin Yao, Hank C. Ta and
Raymond Crouse, the remaining members of the Board of Directors of the Company
prior to the Closing, resigned as Directors of PMI and each other position any
of them held with he Company or any of its subsidiaries at the Closing.
At the Closing, Martin Nielson was appointed Chief Executive Officer of the
Company and Chairman of the Board. Currently, Mr. Nielson is a party to an
employment agreement with ACT, pursuant to which he agreed to serve as an
officer or director of any subsidiary of ACT in addition to the positions held
by him with ACT. ACT, the Company and Mr. Nielson contemplate that Mr. Nielson
will enter into a separate employment agreement with the Company pursuant to
which Mr. Nielson will be paid a nominal fee for his services. In addition, at
the Closing, Anthony Lee was appointed Treasurer and Secretary of the Company,
and John E. Donahue was appointed as a member of the Board.
In connection with the consummation of the transactions contemplated by the
Stock Purchase Agreement, the Company had entered into an agreement (the "Series
A Agreement") on December 10, 2004 with Stonestreet L.P. ("Stonestreet"), the
holder of all of the Company's issued and outstanding Series A Redeemable
Convertible Preferred Stock (the "Series A Preferred Stock"). The transactions
contemplated by the Series A Agreement closed on December 31, 2004. In
connection with the closing of the transaction contemplated by the Series A
Agreement, the Company filed on December 31, 2004 an Amended and Restated
Certificate of Designation of Preferences, Rights and Limitations of the
Company's Series A Preferred Stock, the terms of which are described more fully
under the caption Results of Operations - Restructuring of Preferred Stock in
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations. Additionally, as part of the Series A Agreement, Stonestreet
forfeited a Stock Purchase Warrant, exercisable for 300,000 shares of he
Company's common stock, that was issued to Stonestreet in connection with the
original issuance of the Company's Series A Preferred Stock.
40
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by our independent auditors, Weinberg & Company, P.A.
for the audit of our consolidated financial statements for the year ended
December 31, 2004 was $65,510. The aggregate fees billed by Weinberg & Company,
P.A. for the review of our consolidated financial statements included in the
Company's Form 10-Q for the quarters ended June 30, 2004 and September 30, 2004
was $13,000. Our prior auditor, KPMG LLP billed $15,000 for review of our Form
10-Q for the first quarter of 2004, $112,500 for the audit of our consolidated
financial statements for the year ended December 31, 2003 and $36,000 for review
of our Form 10-Qs for 2003.
AUDIT-RELATED FEES
There were no fees billed by Weinberg & Company, P.A. in fiscal 2004 for
assurance and related services except for the fees of $4,422 relating to certain
transactions related to the 2004 audit and the fees for services described under
"AUDIT FEES" in above. KPMG billed $3,500 for audit related fees in 2004 and
there were no fees billed in 2003 except for the fees and services described
under "AUDIT FEES" in above.
TAX FEES
There were no tax fees billed in fiscal 2004 by Weinberg & Company, P.A., or in
2003 by KPMG LLP, for tax compliance, tax advice and tax planning services.
ALL OTHER FEES
There were no other fees billed in fiscal 2004 by Weinberg & Company, P.A., or
in 2003 by KPMG LLP, for all other services.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITORS
The Audit Committee pre-approves all audit and non-audit services provided by
the independent auditors prior to the engagement of the independent auditors
with respect to such services.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements
(a) (1) Report of independent registered public accounting firm of
Weinberg & Company, P.A. and report of independent registered
public accounting firm of KPMG, LLP.
(2) Consolidated Financial Statements and Notes thereto of the
Company including Consolidated Balance Sheets as of December
31, 2004 and 2003 and related Consolidated Statements of
Operations, Shareholders' Equity, and Cash Flows for each of
the years in the three year period ended December 31, 2004.
(3) Supplemental Schedule II - Valuation and Qualifying Accounts
(B) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Articles of Incorporation, as Amended and Restated (filed as an
exhibit to our Form 10-12G, File No. 000-25277).
3.2 Bylaws, as Amended and Restated (filed as an exhibit to our Form
10-12G, File No. 000-25277).
3.3 Amended and Restated Certificate of Designation of Preferences,
Rights and Limitations of Series A Redeemable Convertible Preferred
Stock (filed as an exhibit to our Form 8-K on January 5, 2005).
10.1 1998 Stock Option Plan (filed as an exhibit to our Form 10-12G, File
No. 000-25277).
10.2 Sony Electronics Inc. Value Added Reseller Agreement, dated May 1,
1996 (filed as an exhibit to our Form 10-12G, File No. 000-25277).
10.3 Logitech, Inc. Distribution and Installation Agreement, dated March
26, 1997 (filed as an exhibit to our Form 10-12G, File No.
000-25277).
10.4 Wells Fargo Term Note, dated February 4, 1997 (filed as an exhibit
to our Form 10-12G, File No. 000-25277).
10.5 Credit Line for Inventory Financing with Textron Financial
Corporation (filed as an exhibit to our Report on Form 10-Q for
quarter ended June 30, 2003).
10.6 Agreement, dated as of December 11, 2004, between Pacific Magtron
International Corp. and Stonestreet L.P. (filed as an exhibit to our
Report on Form 8-K on December 16, 2004).
10.7 Employment Agreement, dated as of December 30, 2004, between Pacific
International Corp. and Theodore S. Li (filed as an exhibit to our
Report on Form 8-K on January 5, 2005).
42
10.8 Employment Agreement, dated as of December 30, 2004, between Pacific
International Corp. and Hui Cynthia Lee (filed as an exhibit to our
Report on Form 8-K on January 5, 2005).
21.1 Subsidiaries (filed herewith).
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certificate of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
99.1 Stock Purchase Agreement, dated as of December 10, 2004, among
Advanced Communications Technologies, Inc., Theodore S. Li and Hui
Cynthia Lee (filed as an exhibit to our Report on Form 8-K on
December 16, 2004).
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By /s/ Martin Nielson
-----------------------------------------
Martin Nielson
Chief Executive Officer
Date: April 20, 2005
44
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Martin Nielson Chief Executive Officer April 20, 2005
- ------------------------- and Director
Martin Nielson
/s/ Theodore S. Li Chief Financial April 20, 2005
- ------------------------- Officer and Director
Theodore S. Li
/s/ John E. Donahue Director April 20, 2005
- -------------------------
John E. Donahue
45
PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
SUPPLEMENTAL SCHEDULE
Schedule II - Valuation and Qualifying Accounts F-27
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Pacific Magtron International Corp.
We have audited the accompanying consolidated balance sheet of Pacific Magtron
International Corp. and subsidiaries as of December 31, 2004 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. In connection with our audit of the consolidated financial
statements, we have also audited the related financial statement schedule. These
consolidated financial statements and the financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Magtron
International Corp. and subsidiaries as of December 31, 2004, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion the related financial statement schedule, when considered in
relation to the consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred a loss of $1,172,700 and
negative cash flows from operations of $1,896,900 for the year ended December
31, 2004 and had a working capital deficiency of $542,200 at December 31, 2004.
In addition, the Company was in violation of certain of its debt covenants,
which violations were waived. These matters raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Weinberg & Company, P.A.
Boca Raton, Florida
February 3, 2005, except as to Note 1 - Recent Developments, for which the date
is April 19, 2005.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Pacific Magtron International Corp.
We have audited the accompanying consolidated balance sheet of Pacific Magtron
International Corp. and subsidiaries as of December 31, 2003 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 2003 and 2002. In connection with our audits of the
consolidated financial statements, we have also audited the related financial
statement schedule. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the Standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Magtron
International Corp. and subsidiaries as of December 31, 2003, and the results of
their operations and their cash flows for the years ended December 31, 2003 and
2002 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion the related financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations. Further, during the year ended December 31, 2003, the Company
triggered a redemption provision in its Series A Redeemable Convertible
Preferred Stock agreement thereby creating a current liability. In addition, the
Company was in violation of certain of its debt covenants, which violations were
waived, and the Company's common stock has been delisted from the NASDAQ
SmallCap Market. These matters raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
Mountain View, California
March 12, 2004
F-3
PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2004 2003
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 543,800 $ 1,491,700
Restricted cash 255,000 395,000
Accounts receivable, net of allowance for
doubtful accounts of $314,100 and
$281,800 in 2004 and 2003 3,801,600 4,350,900
Other receivables -- 673,300
Inventories 2,760,400 2,853,100
Prepaid expenses and other current assets 154,500 280,800
Assets of discontinued operations 16,200 233,500
------------ ------------
Total Current Assets 7,531,500 10,278,300
Property and equipment, net 3,934,100 4,157,400
Restricted cash 250,000 250,000
Deposits and other assets 25,100 86,700
------------ ------------
$ 11,740,700 $ 14,772,400
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,608,700 $ 7,140,900
Floor plan inventory loans 2,243,100 1,369,200
Accrued expenses 147,700 228,500
Current portion of notes payable 71,900 66,100
Contingent settlement of Common Stock Warrants 2,300 55,700
Series A Mandatorily Redeemable Convertible
Preferred Stock -- 958,600
Liabilities of discontinued operations -- 275,900
------------ ------------
Total Current Liabilities 8,073,700 10,094,900
Notes Payable, less current portion 3,031,500 3,103,400
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock, $0.001 par value; 5,000,000
shares authorized;
4% Series A Convertible Preferred Stock;
600 shares designated, issued and outstanding
(liquidation value of $400,000) 234,100 --
Common stock, $0.001 par value; 25,000,000
shares authorized; 10,485,062 shares issued
and outstanding 10,500 10,500
Additional paid-in capital 2,036,400 2,036,400
Accumulated deficit (1,645,500) (472,800)
------------ ------------
Total Shareholders' Equity 635,500 1,574,100
------------ ------------
$ 11,740,700 $ 14,772,400
============ ============
See accompanying notes to consolidated financial statements.
F-4
PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Sales $ 71,473,500 $ 74,985,300 $ 67,969,900
Cost of sales 67,793,200 70,555,900 63,919,600
------------ ------------ ------------
Gross profit 3,680,300 4,429,400 4,050,300
Selling, general and
administrative expenses 5,027,500 5,939,900 6,303,000
Write-off of other receivable 487,200 -- --
------------ ------------ ------------
Loss from operations
before other income (expense),
income tax benefit,
and minority interest (1,834,400) (1,510,500) (2,252,700)
------------ ------------ ------------
Other income (expense):
Interest income 2,000 3,200 14,100
Interest expense (166,200) (170,500) (166,100)
Litigation settlement -- (95,000) --
Change in fair value of
warrants issued 46,400 105,800 235,700
Other expense, net (33,300) (27,500) (44,500)
------------ ------------ ------------
Total other income (expense) (151,100) (184,000) 39,200
------------ ------------ ------------
Loss from operations
before income tax benefit
and minority interest (1,985,500) (1,694,500) (2,213,500)
Income tax benefit -- -- (736,300)
------------ ------------ ------------
Loss from operations
before minority interest (1,985,500) (1,694,500) (1,477,200)
Minority interest -- -- 2,200
------------ ------------ ------------
Loss from operations (1,985,500) (1,694,500) (1,475,000)
------------ ------------ ------------
Discontinued operations:
Gain (loss) from discontinued
operations of:
Frontline Network Consulting,
Inc., net of tax benefit
in 2002 93,300 (297,900) (835,300)
Lea Publishing Inc., net of
tax benefit in 2002 -- (106,300) (525,600)
Loss from disposal of:
Frontline Network Consulting,
Inc -- (13,700) --
Lea Publishing Inc. -- (16,000) --
------------ ------------ ------------
Gain (loss) from discontinued
operations 93,300 (433,900) (1,360,900)
------------ ------------ ------------
Gain on restructuring of Series A Mandatorily
Redeemable Convertible Preferred Stock 758,600 -- --
Accretion of discount and deemed
dividend related to beneficial
conversion of Series A Mandatorily
Redeemable Convertible Preferred Stock (26,100) (24,900) (274,200)
Accretion of redemption value of
Series A Mandatorily Redeemable
Convertible Preferred Stock (13,000) (743,300) --
------------ ------------ ------------
Net loss applicable to
common shareholders $ (1,172,700) $ (2,896,600) $ (3,110,100)
============ ============ ============
Basic and diluted loss per share:
Loss from operations $ (0.12) $ (0.24) $ (0.17)
Gain (loss) from discontinued
operations applicable to
common shareholders 0.01 (0.04) (0.13)
------------ ------------ ------------
Net loss applicable to common
shareholders $ (0.11) $ (0.28) $ (0.30)
============ ============ ============
Shares used in basic and diluted
per share calculation 10,485,062 10,485,062 10,485,062
============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Shareholders' Equity
------------------------------------------------------------------------------------------------
Retained
Preferred Stock Common Stock Additional Earnings
------------------------- ------------------------ Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
2001 -- $ -- 10,485,062 $ 10,500 $ 1,745,500 $ 5,533,900 $ 7,289,900
Deemed dividend associated
with beneficial conversion
feature of convertible
preferred stock -- -- -- -- 260,000 (260,000) --
Vesting portion of 300,000
common stock warrants
issued as payment of
consulting services -- -- -- -- 2,400 -- 2,400
Preferred stock accretion -- -- -- -- -- (14,200) (14,200)
Loss from operations -- -- -- -- -- (1,475,000) (1,475,000)
Loss from discontinued
Operations -- -- -- -- -- (1,360,900) (1,360,900)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
2002 -- -- 10,485,062 10,500 2,007,900 2,423,800 4,442,200
Vesting portion of 300,000
common stock warrants
issued as payment of
consulting services -- -- -- -- 28,500 -- 28,500
Preferred stock accretion -- -- -- -- -- (768,200) (768,200)
Loss from operations -- -- -- -- -- (1,694,500) (1,694,500)
Loss from discontinued
Operations -- -- -- -- -- (433,900) (433,900)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
2003 -- -- 10,485,062 10,500 2,036,400 (472,800) 1,574,100
Preferred stock accretion -- -- -- -- -- (39,100) (39,100)
Restructuring of Series A
Preferred Stock 600 234,100 -- -- -- 758,600 992,700
Loss from operations -- -- -- -- -- (1,985,500) (1,985,500)
Income from discontinued
Operations -- -- -- -- -- 93,300 93,300
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
2004 600 $ 234,100 10,485,062 $ 10,500 $ 2,036,400 $(1,645,500) $ 635,500
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,172,700) $(2,896,600) $(3,110,100)
Less: Income (loss) from discontinued
operations 93,300 (433,900) (1,360,900)
Gain on restructuring of Series A
Mandatorily Redeemable Convertible
Preferred Stock 758,600 -- --
Accretion of discount and deferred
dividend related to Series A
Mandatorily Redeemable Convertible
Preferred Stock (26,100) (24,900) (274,200)
Accretion of redemption value of Series A
Mandatorily Redeemable Convertible
Preferred Stock (13,000) (743,300) --
----------- ----------- -----------
Loss from operations (1,985,500) (1,694,500) (1,475,000)
Adjustments to reconcile loss from operations to
net cash used in operating activities:
Depreciation and amortization 356,900 315,700 244,100
Gain on disposal of property and equipment (100) -- (8,100)
Provision (benefit) for doubtful accounts 51,500 (45,400) (140,000)
Deferred income taxes -- -- 778,800
Write-off of other receivable 487,200 -- --
Changes in fair value of warrants (46,400) (105,800) (235,700)
Minority interest in losses of subsidiary -- -- (2,200)
Changes in operating assets and liabilities:
Accounts receivable 497,800 266,300 (423,700)
Other receivables 186,100 (673,300) --
Inventories 92,700 485,500 (563,400)
Prepaid expenses and other current assets 41,200 (1,900) 122,700
Income tax refunds receivable -- 1,472,800 (1,073,600)
Accounts payable (1,532,200) (360,100) 2,886,200
Accrued expenses (80,800) 17,100 (51,500)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATIONS (1,931,600) (323,600) 58,600
NET CASH (USED IN) PROVIDED BY DISCONTINUED
OPERATIONS 34,700 (146,800) (956,600)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,896,900) (470,400) (898,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- -- (63,000)
Proceeds from sale of property and equipment 1,300 5,100 36,400
Deposits and other assets -- -- 24,300
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES OF OPERATIONS 1,300 5,100 (2,300)
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES OF DISCONTINUED OPERATIONS -- 44,100 (86,800)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,300 49,200 (89,100)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in floor plan
inventory loans 873,900 467,600 (520,500)
Principal payments on notes payable (66,100) (60,800) (55,900)
Restricted cash 139,900 (395,000) --
Net proceeds from issuance of mandatorily
redeemable convertible preferred stock
and warrants -- -- 477,500
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES OF OPERATIONS 947,700 11,800 (98,900)
NET CASH USED IN FINANCING ACTIVITIES OF
DISCONTINUED OPERATIONS -- -- (122,900)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 947,700 11,800 (221,800)
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (947,900) (409,400) (1,208,900)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,491,700 1,901,100 3,110,000
----------- ----------- -----------
End of year $ 543,800 $ 1,491,700 $ 1,901,100
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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) and LiveWarehouse, Inc. (LW).PMI and PMIGA's
principal activity consists of the importation and wholesale distribution of
electronics products, computer components, and computer peripheral equipment
throughout the United States. LW distributes certain computer and electronics
products and sells consumer computer products on the internet.
In August 2000, PMI formed PMIGA, a Georgia corporation whose principal activity
is the wholesale distribution of PMI's products in the eastern United States
market. PMIGA is 100% owned by PMI.
In December 2001, the Company incorporated LW, a wholly-owned subsidiary of the
Company, to provide consumers a convenient way to purchase computer products on
the internet. As part of the overall strategy on re-focusing on our core
business in wholesale distribution, the resources allocated to LW business
segment were reduced beginning the third quarter 2004.
In December 2004, certain stockholders (the "Stockholders") holding a collective
majority interest in the Company entered into a Stock Purchase Agreement with
Advanced Communications Technologies, Inc., a Florida corporation ("ACT"),
pursuant to which ACT agreed to purchase from the Stockholders, and the
Stockholders agreed to sell to ACT, an aggregate of 6,454,300 shares of the
common stock of the Company (the "PMIC Shares") for the aggregate purchase price
of $500,000. On December 30, 2004, the Stockholders and ACT closed on the sale
of the PMIC Shares (the "Closing"). The PMIC Shares represent 61.56% of the
currently issued and outstanding common stock of the Company (see Note 9).
Effective as of the Closing, the financial results of the Company will be
consolidated with those of ACT and its other consolidated subsidiaries in ACT's
financial statements that will be included in ACT's future SEC filings.
BASIS OF ACCOUNTING
Going Concern
The Company incurred a net loss applicable to common shareholders of $1,172,700,
$2,896,600, and $3,110,100 and a negative cash flow from operations of
$1,896,900, $470,400 and $898,000 for the years ended December 31, 2004, 2003,
and 2002, respectively, and had a working capital deficiency of $542,200 at
December 31, 2004. During 2004, the Company was in violation of certain of its
debt covenants which violations were subsequently waived. However, the waiver
obtained from Textron Financial Corporation expired on March 31, 2005. It is
uncertain that the Company will be able to meet all the covenants in the future.
If this was to occur in the future and waivers for the violations could not be
obtained, the Company's inventory flooring line might be terminated and loan
payments on its inventory flooring line and mortgage loan might be accelerated.
These conditions raise substantial 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 it achieving profitability and generating sufficient cash flows
to meet its obligations as they come due. Management believes that its plan to
diversify into other higher profit margin products and to continue controlling
its overhead 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. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Recent Developments
The Company relies on credit terms from its suppliers to fund inventory
purchases. Vendors have progressively imposed more restrictive credit terms,
such that, beginning in March 2005, the Company has been unable to find
purchases. As of April 15, 2005, the Company's business is limited to selling
existing inventory with no ability to obtain credit to replenish or purchase
other items our customers may need. As of April 15, 2005, inventories were
approximately $170,000, compared to $2,760,000 at December 31, 2004. The Company
doesn't have the ability to draw on lines of credit to fund the shortfall caused
by the elimination of terms by vendors. The Company's staff has decreased to 28
employees on April 15, 2005 from 58 employees on December 31, 2004. Because of
the reduced sales caused by the lack of new inventory, the Company has not been
able to pay its obligations on a timely basis. The Company has been sued by one
supplier for approximately $680,000 in unpaid invoices and by another for
approximately $80,000. Other creditors have threatened suit. Unless the Company
obtains credit or finds another method of operating, the Company will be forced
to cease operations.
F-8
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ materially from such estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of PMIC
and its wholly-owned subsidiaries, PMI, PMIGA and LW. Inter-company accounts and
transactions have been eliminated in consolidation. During the second quarter
2003, the Company sold substantially all the intangible assets of FNC and all of
the intangible assets and certain tangible assets of Lea. In addition, during
the third quarter 2003, PMICC was dissolved. The activities of FNC, Lea and
PMICC have been reclassified for reporting purposes as discontinued operations
for all periods presented in the accompanying statements of operations and cash
flows.
RECLASSIFICATIONS
Certain 2003 and 2002 financial statement amounts have been reclassified to
conform to the 2004 financial statement presentation.
CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of one
year or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company grants credit to its customers after undertaking an investigation of
credit risk for all significant amounts. An allowance for doubtful accounts is
provided for estimated credit losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such amounts. The allowance is
based on reviews of loss, adjustment history, current economic conditions,
credit insurance levels, and other factors that deserve recognition in
estimating potential losses. Generally our allowance for doubtful accounts
includes receivables past due over 90 days, returned checks and an estimated
percentage of the receivables currently due. While management uses the best
information available in making its determination, the ultimate recovery of
recorded accounts receivable is also dependent upon future economic and other
conditions that may be beyond management's control.
INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the lower of
cost (weighted average cost method) or market.
PROPERTY AND EQUIPMENT AND OTHER LONG-LIVED ASSETS
Property and equipment are stated at cost. Det 0 0 preciation is provided using
the straight-line method over the estimated useful lives of the assets, as
follows:
Building and improvements 39 years
Furniture and fixtures 5 to 7 years
Computers and equipment 3 to 5 years
Automobiles 5 years
Software 3 years
F-9
The Company periodically reviews its long-lived assets for impairment. When
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, the Company adjusts the asset to its estimated fair
value. The fair value of an asset is determined by the Company as the amount at
which that asset could be bought or sold in a current transaction between
willing parties or the present value of the estimated future cash flows from the
asset. The asset value recoverability test is performed by the Company on an
on-going basis.
REVENUE RECOGNITION
The Company recognizes sales of computer and related products upon delivery of
goods to the customer (generally upon shipment) and the customer takes ownership
and assumes risk of loss, 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 resale
customers.
WARRANTY REPAIRS
The Company is principally a distributor of numerous electronics products, for
which the original equipment manufacturer is responsible and liable for product
repairs and service. Amounts claimed in excess of manufacturers' warranties are
estimated and charged to expense based on historical amounts and the mixed of
products recently sold. The Company has experienced an insignificant amount of
claims in excess of the manufacturers' warranties.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. 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.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with FASB Statement No. 144, Accounting for Impairment or Disposal
of 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. As of
December 31, 2004, all long-lived assets were estimated to be recoverable.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of long-term debt and floor plan inventory loans is estimated
based on current interest rates available to the Company for debt instruments
with similar terms and remaining maturities. At December 31, 2004 and 2003, the
fair value of long-term debt, which consisted of a bank loan and an SBA loan
relating to the Company's facility in Milpitas, California, was approximately
$3,205,100 and $3,316,000, respectively. The bank loan had an outstanding
balance of $2,331,700 and $2,360,900 as of December 31, 2004 and 2003,
respectively. The carrying value of the bank loan, which contains an adjustable
interest rate provision based on the market interest rate, approximates its fair
value. The SBA loan had an outstanding amount of $771,700 and $808,600 at
December 31, 2004 and 2003, respectively. The estimated fair value of the SBA
loan was $873,400 and $955,100 as of December 31, 2004 and 2003, respectively.
The fair value of the SBA loan was estimated based on the present value of the
future payments discounted by the market interest rate for similar loans at
December 31, 2004 and 2003. The fair values of cash and cash equivalents,
accounts receivable, other receivable, accounts payable floor plan inventory
loans and accrued liabilities approximates their carrying values because of the
short maturity of these instruments.
F-10
LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities,
using the treasury stock method that could share in the earnings of an entity.
During the year ended December 31, 2004, options and warrants to purchase
750,000 shares of the Company's common stock and 800,000 shares of common stock
issuable upon conversion of Series A Preferred Stock were excluded from the
calculation of diluted loss per share as their effect would be anti-dilutive.
During the year ended December 31, 2003, options and warrants to purchase
1,094,000 shares of the Company's common stock and 852,200 shares of common
stock issuable upon conversion of Series A Preferred Stock were excluded from
the calculation of diluted loss per share as their effect would be
anti-dilutive. During the year ended December 31, 2002, options and warrants to
purchase 1,302,800 shares of the Company's common stock and 818,900 shares of
common stock issuable upon conversion of Series A Preferred Stock were excluded
from the calculation of diluted loss per share as their effect would be
anti-dilutive.
STOCK OPTION PLAN
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation
and FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure and FASB Statement No. 123R, amendments of FASB Statement No.
123, established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. The
requirements of FASB Statement No 123, as amended, are effective for fiscal
periods beginning after June 15, 2005.
The following table illustrates the effect on net loss if the fair-valued-based
method had been applied to all outstanding and unvested awards in each period.
The Company estimates the fair value and stock options at the grant date by
using the Black-Scholes option pricing model with the following weighted average
assumptions use for grants in 2002: no yield; expected volatility of 311%,
risk-free interest rates of 4% and expected lives of four years for the plan
options.
Had the Company adopted the provisions of SFAS No. 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
Year Ended December 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Net loss applicable to common shareholders:
As reported $(1,172,700) $(2,896,600) $(3,110,100)
Add: total stock based employee
compensation expense determined
using the fair value method for
all awards, net of tax (11,200) (17,600) (71,200)
----------- ----------- -----------
Pro forma $(1,183,900) $(2,914,200) $(3,181,300)
----------- ----------- -----------
Basic and diluted loss per share:
As reported $ (0.11) $ (0.28) $ (0.30)
Pro forma $ (0.11) $ (0.28) $ (0.30)
F-11
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (VIE), which was issued in January
2003. The Company will be required to apply FIN 46R to variable interests in
VIEs created after December 31, 2003. For variable interests in VIEs created
before January 1, 2004, the assets, liabilities and non-controlling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and non-controlling interest of the VIE. The adoption of FIN 46R did not have an
impact on the Company's consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Restatement of financial statements for earlier years presented is not
permitted. FASB Staff Position No. FAS 150-3 deferred certain provisions of SFAS
No. 150 for certain mandatory redeemable non-controlling interests. The Company
adopted SFAS No. 150 beginning the third quarter 2003. The Company's adoption of
SFAS No. 150 did not impact its consolidated financial position or results of
operations.
In December 2003, FASB Statement No. 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement Benefits, was issued. Statement 132 (revised)
prescribes employers' disclosures about pension plans and other postretirement
benefit plans; it does not change the measurement or recognition of those plans.
The Statement retains and revises the disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. The Statement generally is effective for
fiscal years ending after December 15, 2003. The Company's adoption of SFAS No.
132 did not impact its consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment
of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management believes the adoption of this Statement will have no impact on the
financial statements of the Company.
F-12
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary Assets.
This Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetrary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges incurred
during fiscal years beginning after the date of this statement is issued.
Management believes the adoption of this Statement will have no impact on the
financial statements of the Company.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R requires employee stock options and rights to purchase shares under stock
participation plans to be accounted for under the fair value method, and
eliminates the ability to account for these instruments under the intrinsic
value method prescribed by APB Opinion No. 25, and allowed under the original
provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing
model for estimating fair value, which is amortized to expense over the service
periods. The requirements of SFAS No. 123R are effective for fiscal periods
beginning after June 15, 2005. SFAS No. 123R allows for either prospective
recognition of compensation expense or retrospective recognition, which may be
back to the original issuance of SFAS No. 123 or only to interim periods in the
year of adoption. The company is currently evaluating these transition methods.
2. DISCONTINUED OPERATIONS
In May 1998, PMI formed its Frontline Network Consulting (Frontline) division, a
corporate information systems group that served the networking and personal
computer requirements of corporate customers. In July 2000, the Company formed
Frontline Network Consulting, Inc. (FNC), a California corporation. On June 2,
2003, the Company entered into an agreement to sell substantially all of FNC's
intangible assets to an unrelated party for a note in the amount of $15,000. The
Company recorded a loss of $13,700 on the sale of the FNC assets.In May 1999,
the Company became a 50% owner in Lea Publishing, LLC (Lea), 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. In December 2001, the Company entered into
an agreement whereby it obtained 100% of Lea. On June 30, 2003, the Company sold
substantially all of Lea's intangible assets and certain equipment to certain of
the Lea's employees. The Company also entered into a Proprietary Software
License and Support Agreement requiring the purchaser to provide certain
electronic commerce support services to LW for a term of two years beginning
July 1, 2003. The Company received $5,000 on the transaction closing date and
the electronic commerce support services contract valued at $48,000 which is
based on the number of service hours to be provided. The Company recorded a loss
of $16,000 on the sale of the Lea assets. Lea was dissolved in the fourth
quarter 2004.
The operating results, including the loss from disposal of assets, of FNC and
Lea for the years ended December 31, 2004, 2003 and 2002 were as follows:
Year Ended December 31,
----------------------------------------
2004 2003 2002
----------- ----------- -----------
FNC:
Net sales $ 323,200 $ 1,313,500 $ 2,378,300
Income (loss) before income taxes
(benefit) 93,300 (311,600) (1,195,900)
Income tax benefit -- -- (360,600)
----------- ----------- -----------
Net income (loss) $ 93,300 $ (311,600) $ (835,300)
----------- ----------- -----------
Lea:
Net sales $ -- $ 179,700 $ 496,600
Loss before income tax benefit -- (122,300) (751,000)
Income tax benefit -- -- (225,400)
----------- ----------- -----------
Net loss $ -- $ (122,300) $ (525,600)
----------- ----------- -----------
F-13
3. 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 sold computer products to a company owned by a
member of the Board of Directors of the Company. During 2003 and 2002, the
Company recognized $102,400 and $527,400, respectively, in sales revenues from
this company. There were no sales to this customer for the year ended December
31, 2004 and there were no amounts due from this customer as of December 31,
2004 and 2003.
On June 30, 2003, the Company sold substantially all of Lea's intangible assets
and certain equipment to certain of the Lea's employees (see note 2 to the
consolidated financial statements).
4. ACCOUNTS RECEIVABLE AGREEMENTS
On April 1, 2003, the Company purchased a credit insurance policy from American
Credit Indemnity (ACI) covering certain accounts receivable up to $2,000,000 of
losses. The Company also has an agreement with ENX, Inc. (ENX) to sell its
past-due accounts receivables from pre-approved customers with pre-approved
credit limits under certain conditions. The commission is 0.5% of the approved
invoice amounts with a minimum quarterly commission of $12,500. As of December
31, 2004, approximately $1,059,000 of the outstanding receivables was approved
by ENX. The ACI policy expires on March 31, 2005 and the ENX policy expires on
April 30, 2005.
5. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31, 2004 and
2003:
DECEMBER 31, 2004 2003
------------ ---------- ----------
Building and improvements $3,274,400 $3,274,400
Land 1,158,600 1,158,600
Furniture and fixtures 369,800 374,800
Computers and equipment 691,500 693,100
Automobiles 116,500 116,500
---------- ----------
5,610,800 5,617,400
Less accumulated depreciation 1,676,700 1,460,000
---------- ----------
$3,934,100 $4,157,400
========== ==========
F-14
Depreciation expense was $227,700, $233,000 and $213,800, for the years ended
December 31, 2004, 2003 and 2002, respectively.
6. NOTES PAYABLE
The Company's wholly-owned subsidiary, PMI, has 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
(2.25% as of December 31, 2004) 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, PMI is required, among other things, to maintain a minimum
debt service coverage, a maximum debt to tangible net worth ratio, and to have
no consecutive quarterly losses. In addition, PMI is required to achieve net
income on an annual basis. PMI was in violation of the annual income covenant
and the minimum EBIDTA coverage ratio as of December 31, 2004 and was in
violation of the annual income, minimum EBITA coverage ratio and quarterly loss
covenants as of December 31, 2003. These covenant violations constituted an
event of default under the loan agreement and gave the bank the right to call
the loan. Waivers of the loan covenant violations were obtained from the bank
that extended through December 31, 2005. As a condition for these waivers, the
Company maintained $250,000 in a restricted account as a reserve for debt
service as of December 31, 2004 and 2003. This amount has been reflected as
long-term restricted cash in the accompanying consolidated balance sheet. It is
uncertain that the Company be able to meet all these covenants in the future. If
this was to occur in the future and a waiver for the violation cannot be
obtained, the Company would be required to classify the bank loan as current,
which would cause the Company to be out of compliance with another financial
covenant included in its inventory flooring facility with Textron Financial
Corporation as discussed in note 7 to the consolidated financial statements.
The outstanding balances of the notes payable as of December 31, 2004 and 2003
are as follows:
2004 2003
---------- ----------
Bank loan $2,331,700 $2,360,900
SBA loan 771,700 808,600
---------- ----------
3,103,400 3,169,500
Less current portion 71,900 66,100
---------- ----------
$3,031,500 $3,103,400
========== ==========
The aggregate amounts of future maturities for notes payable are as follows:
YEARS ENDING DECEMBER 31, Amount
------------------------- ----------
2005 71,900
2006 76,600
2007 2,312,200
2008 49,900
2009 53,800
Thereafter 539,000
----------
$3,103,400
==========
F-15
7. FLOOR PLAN INVENTORY LOANS AND LETTER OF CREDIT
In May 2003, PMI obtained a $3,500,000 inventory financing facility, which
includes a $1 million letter of credit facility used as security for inventory
purchased on terms from vendors in Taiwan, from Textron Financial Corporation
(Textron). The credit facility is guaranteed by PMIC, PMIGA, FNC, Lea, LW and
two officers of the Company and may be discontinued by Textron at any time at
its sole discretion. Under the agreement, the Company granted Textron a first
priority lien on all of its corporate assets. Borrowings under the inventory
line are subject to 30 days repayment, at which time interest accrues at the
prime rate plus 6% (11.25% at December 31, 2004). 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, including a minimum current ratio, a
maximum leverage ratio, a minimum tangible capital funds and required levels of
profitability. Beginning on September 30, 2003 through December 31, 2004, the
Company was out of compliance with the maximum leverage ratio covenant and the
minimum tangible capital funds for which waivers have been obtained through
December 31, 2004. Based on the anticipated future results, it is probable that
the Company will be out of compliance with certain of these covenants. If this
was to occur and a waiver for the violation cannot be obtained, Textron might
terminate the credit facility and accelerate the loan payments. Upon
termination, there is no assurance that the Company would have the funding
necessary to finance its future inventory purchases at levels necessary to
achieve profitability. The Company is also required to maintain $250,000 in a
restricted account as a pledge to Textron. This amount has been reflected as
restricted cash in the accompanying consolidated financial statements. As of
December 31, 2004, the outstanding balance of this loan was $2,243,100 which is
classified as a current liability on the accompanying consolidated balance
sheet.
8. INCOME TAXES
There was no income tax benefit (expense) recorded for the year ended December
31, 2004 and 2003. For the year ended December 31, 2002, income tax benefit
(expense) comprises:
2002 2002 2002
Current Deferred TOTAL
------------ ------------ ------------
Federal $ 873,000 (131,000) $ 742,000
State (5,700) -- (5,700)
------------ ------------ ------------
$ 867,300 (131,000) $ 736,300
============ ============ ============
The following summarizes the differences between the income tax (benefit)
expense and the amount computed by applying the Federal income tax rate of 34%
in 2004, 2003 and 2002 to income before income taxes:
YEAR ENDING DECEMBER 31, 2004 2003 2002
- ------------------------------------- ----------- ----------- -----------
Federal income tax benefit
at statutory rate $ 643,300 $ 723,700 $ 1,414,300
State income taxes benefit (expense),
net of federal benefit -- -- (5,700)
Other non-taxable income and
non-deductible expenses (17,400) (33,000 55,100
Change in deferred tax assets 194,200 94,800 (432,500)
Change in valuation allowance (797,800) (784,100) (380,500)
Benefits recognized due to changes
in tax laws -- -- 648,000
Other (22,300) (1,400) 23,600
Federal income tax benefit allocated
to discontinued operations -- -- (586,000)
----------- ----------- -----------
Income tax benefit $ -- $ -- $ 736,300
=========== =========== ===========
F-16
The Company reported income tax benefits of $1,322,300 for the year ended
December 31, 2002 arising from the losses incurred in 2002. 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. On March 20, 2003, the Company received a federal income tax refund of
$1,427,400 attributable to 2002 net operating loss carried back. The Company
recorded a valuation allowance for its net deferred tax assets, including its
federal and state net operating loss for the year ended December 31, 2004 and
2003. There was no tax benefit recorded relating to the increase in deferred tax
assets. As of December 31, 2004, the Company had a total net operating loss
carry forwards of approximately $3,802,600 of which $1,775,600 and $2,027,000
will expire in 2024 and 2023, respectively, available to offset future federal
taxable income.
California limits the amount that could be carried forward to 60% of the losses
incurred in 2002 and 2003. As of December 31, 2004, the Company had a total
California state net operating loss carry forwards of approximately $6,318,800
to offset future taxable income. California net operating loss carry forwards of
$5,260,500 and $1,058,300 expire, if not utilized, in 2014 and 2015,
respectively.
Deferred tax assets and liabilities as of December 31, 2004 and 2003 were
comprised of the following:
2004 2003
----------- -----------
Deferred tax assets:
Reserves (primarily the allowance for
doubtful accounts) not currently
deductible $ 165,300 $ 130,300
Accrued compensation and benefits 16,900 19,000
Capital loss carryover 334,300 333,800
NOL carryover 1,851,500 1,106,800
Others 7,300 6,900
Accumulated depreciation (10,000) (29,300)
----------- -----------
2,365,300 1,567,500
Valuation allowance (2,365,300) (1,567,500)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
Realization of the Company's deferred tax assets is dependent upon future
earnings in specific tax jurisdictions. The Company has evaluated all
significant available positive and negative evidence, the existence of losses in
the recent years and forecast of future taxable income (loss) in determining the
need for a valuation allowance. At December 31, 2004 and 2003, the Company has
recorded a valuation allowance, relating principally to the capital loss
carryover, Federal and California net operating loss carryover and reserves not
currently deductible, against the net deferred tax assets to reduce them to
amounts that are more likely than not to be realized. The net increase in the
total valuation allowance for the year ended December 31, 2004 and 2003 was
$797,800 and $784,100, respectively.
F-17
9. COMMITMENTS
The Company leases office space, equipment, and vehicles under various operating
leases. The leases for office space provide for the payment of common area
maintenance fees and the Company's share of any increases in insurance and
property taxes over the lease term.
Future minimum obligations under these non-cancelable operating leases are as
follows:
YEAR ENDING DECEMBER 31, Amount
- ------------------------ -------
2005 $48,600
2006 2,000
-------
$50,600
=======
Total rent expense associated with all operating leases for the years ended
December 31, 2004, 2003 and 2002 was $101,600, $133,800 and $164,700,
respectively.
In December 2004, two stockholders/executives (the "Stockholders") holding a
collective majority interest in the Company entered into a Stock Purchase
Agreement with Advanced Communications Technologies, Inc., a Florida corporation
("ACT"), pursuant to which ACT agreed to purchase from the Stockholders, and the
Stockholders agreed to sell to ACT, an aggregate of 6,454,300 shares of the
common stock of the Company (the "PMIC Shares") for the aggregate purchase price
of $500,000. On December 30, 2004, the Stockholders and ACT closed on the sale
of the PMIC Shares (the "Closing"). In connection with the sale, the
Stockholders entered into employment agreements with the Company and ACT. The
Employment Agreements, dated December 30, 2004 provide for a cash bonus of
$225,000 each to be paid within 30 days of the Closing and other bonus and
earn-out provisions that may be paid in cash or in shares of common stock of
ACT. Under the earn-out provisions, the Stockholders may earn the right to
receive in aggregate up to 99,999,999 shares of ACT's common stock. In the event
the Company terminates the Employment Agreements without cause upon 30 days
prior written notice, the Stockholders are entitled to 6 months severance pay.
10. MAJOR VENDORS
One vendor accounted for approximately 15%, 18% and 11% of total purchases by
the Company for the years ended December 31, 2004, 2003 and 2002, respectively.
One other vendor accounted for 17% of purchases for the year ended December 31,
2003. Management believes other vendors could supply similar products on
comparable terms as those provided by the major vendors. A change in suppliers,
however, could cause a delay in availability of products and a possible loss of
sales, which could adversely affect operating results.
11. EMPLOYEE BENEFIT PROGRAM-401(k) PLAN
The Company has a 401(k) plan (the Plan) for its employees. The Plan is
available to all employees who have reached the age of twenty-one and who have
completed three months of service with the Company. Under the Plan, eligible
employees may defer a portion of their salaries as their contributions to the
Plan. Company contributions are discretionary, subject to statutory maximum
levels. There were no contributions by the Company in 2004, 2003 and 2002.
12. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with what it
believes are reputable financial institutions. As of December 31, 2004 and 2003,
the Company had deposits, including restricted cash, at one financial
institution which aggregated $562,200 and $1,191,700, respectively. As of
December 31, 2004 and 2003, the Company had deposits amounting to $234,600 and
$692,300, respectively, at two other financial institutions. Such funds are
insured by the Federal Deposit Insurance Company up to $100,000 for each bank
account. The Company has another $250,000 deposited into a reserve account with
Textron.
F-18
A significant portion of the Company's revenues and accounts receivable are
derived from sales made primarily to unrelated companies in the computer
industry and related fields located throughout the United States. For the years
ended December 31, 2004, 2003 and 2002, no individual customer accounted for
more than 10% of sales. The Company believes any risk of credit loss is
significantly reduced due to the use of various levels of credit insurance,
diversity in customers, geographic sales areas and extending credit based on
established limits or terms. The Company performs credit evaluations of its
customers' financial condition whenever necessary, and generally does not
require collateral for sales on credit.
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 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 would be issued when the registration
statement that registers the common stock underlying the Series A Preferred
Stock became 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. 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 was 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. The amount recorded as accretion of
the stated value for the years ended December 31, 2004, 2003 and 2002 was
$26,100, $24,900 and $14,200, respectively. Dividends were required to 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 was not listed or quoted on
Nasdaq, NYSE or AMEX. Each share of Series A Preferred Stock was 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
completion of a transaction 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 was convertible
into shares of common stock at the Conversion Price, as defined, but not less
than $0.75. The Conversion Price was subject to certain adjustments, such as
stock dividends.
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 had the right to require the Company to redeem the Series A
Preferred Stock in cash at 150% of the Stated Value. As the Series A Preferred
Stock had conditions for redemption that were not solely within the control of
the Company, such Series A Preferred Stock was excluded from shareholders'
equity as of December 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 December 31, 2003, was $958,600.
F-19
The Company accounted for the sale of preferred stock and related warrants in
accordance with Emerging Issues Task Force (EITF) 00-27 "Application of Issue
No. 98-5 to Certain Convertible Instruments" and EITF 00-19 "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Owned Stock." Proceeds of $477,500 (net of $80,500 cash issuance
costs) were received of which $222,500 (net of allocated issuance costs of
$37,500) was allocated to the Series A Preferred Stock and $255,000 (net of
allocated issuance costs of $43,000) was allocated to the detachable warrant
based upon its fair value as computed using the Black-Scholes option pricing
model. The $260,000 value of the beneficial conversion option on the 600 shares
of Series A Preferred Stock was recorded as a deemed dividend on the date of
issuance. The allocated $46,300 value (net of $53,000 allocated issuance costs)
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 a result, a
total amount of $397,300 was allocated to the warrants and was included in the
current liabilities. The related issuance costs of $96,000 allocated to the
warrants were included in deposits and other assets and were being amortized
over a 3-year period using a straight-line method. As of December 31, 2004 and
2003, the carrying amount of the warrants was adjusted to the fair value. The
change in fair value of the warrants from the issuance date (May 31, 2002) to
December 31, 2002 and for the year ended December 31, 2003 and 2004 was
$235,700, $105,800 and $46,400, respectively. The change in fair value of the
warrants is included as other income.
Effective April 30, 2003, our Company stock was delisted from the Nasdaq
SmallCap Market. 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
enabled the holder of the Company's Series A Preferred Stock to request the
redemption of such shares. As of December 31, 2003, the Company increased the
carrying value of the Series A Redeemable Convertible Preferred Stock to its
redemption value of $958,600 and recorded an increase in loss applicable to
common shareholders of $743,300 for the year ended December 31, 2003 in the
accompanying consolidated statement of operations. The Company included its 4%
Series A Redeemable Convertible Preferred Stock in current liabilities as of
December 31, 2003.
In December 2004, the Company entered into an agreement (the Series A Agreement)
with the Investor for restructuring certain terms of the Series A Preferred
Stock. In connection with the closing of the transactions under the Series A
Agreement, the Company amended and restated its Certificate of Designation of
Preferences, Rights and Limitations of the Series A Preferred Stock on December
31, 2004. Among the terms amended are (1) the number of shares designated as
Series A Preferred Stock were decreased from 1,000 to 600 shares; (2) the Stated
Value of each share of Series A Preferred Stock was reduced from $1,000 to
$666.67; (3) the holders of the Series A Preferred Stock no longer have the
right to required the Company to redeem each share of Series A Preferred Stock,
which rights were triggered upon the occurrence of certain events; (4) the
redemption amount payable by the Company upon exercise of its redemption right
was reduced from 150% of Stated Value to 100% of Stated Value; (5) there is a
181-day waiting period from the date of filing the Amended and Restated
Certificate of Designation before the holder may exercise conversion (unless the
Company initiates a redemption prior to the end of the 181-day period); (6) the
conversion price of the Series A Preferred Stock was changed to a fixed price of
$0.50 per share, subject to customary and anti-dilution adjustments; and (7) the
Company has five trading days, instead of three, to comply with conversion
procedures. As part of the Series A Agreement, the Investor forfeited a stock
purchase warrant, exercisable for 300,000 shares of the Company's common stock,
that was issued in connection with the original issuance of the Company's Series
A Preferred Stock. The Company accounted for these transactions in accordance
with SFAS 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. The restructuring of the Series A Preferred Stock resulted in a
gain of $758,600 (or $0.07 per share) for the year ended December 31, 2004. The
fair value of the restructured Series A Preferred Stock was $234,100 as of
December 31, 2004 and was classified as shareholders' equity in the balance
sheet.
F-20
14. CAPITAL STOCK INVESTMENT BANKING SERVICES
On December 16, 2002, the Company issued warrants for the purchase of up to
300,000 shares of its common stock under terms of an agreement for investment
banking services. Warrants to purchase 100,000 shares of the Company's common
stock were to vest immediately and warrants to purchase 200,000 shares were to
vest 50% on June 16, 2003 and 50% on December 16, 2003. The Company accounted
for this transaction in accordance with EITF No. 96-18, Accounting for Equity
Instruments that are issued to Employees for Acquiring, or in Conjunction with
Selling Goods or Services. On June 16, 2003, the Company terminated this
agreement and the warrants to purchase 200,000 shares were cancelled. For the
years ended December 31, 2003 and 2002, the Company recorded $28,500 and $2,400,
respectively, in expense related to this transaction.
STOCK ISSUED FOR SERVICES
On June 14, 2001, the Company issued 333,400 shares of its common stock to an
unrelated party in exchange for radio advertising services to be received over a
three-year period. The shares vested upon issuance and were non-forfeitable,
resulting in a measurement date and final valuation of shares in the amount of
$200,000 based upon the market price of the Company's common stock on the date
of issuance. Under the terms of the agreement, one-third of the radio
advertising service credits expired in two years. Radio advertising service
credits were expensed when utilized and are included in other selling, general
and administrative expenses in the accompanying consolidated statements of
operations. Included in prepaid expenses and other current assets as of December
31, 2003 are radio advertising credits in the amount of $61,100.
STOCK OPTION PLAN
On July 16, 1998 the Company adopted the 1998 Stock Option Plan and reserved
1,000,000 shares of Common Stock for issuance under the Plan. Activity under the
Plan is as follows:
Weighted
Weighted Weighted Average
Shares Average Average Remaining
Available Options Exercise Fair Contractual
for Grant Outstanding Price Value Life
--------- ----------- -------- -------- ---------
DECEMBER 31, 2001 149,400 794,600 $1.40 $1.08 3.8 Years
Options granted (30,000) 30,000 0.95 0.85 --
Options forfeited 172,600 (172,600) 2.41 2.24 --
--------- ----------- -------- --------
DECEMBER 31, 2002 292,000 652,000 1.11 0.76 3.1 Years
Options forfeited 58,000 (58,000) 2.63 2.33 --
--------- ----------- -------- --------
DECEMBER 31, 2003 350,000 594,000 0.96 0.82 2.3 Years
Options forfeited 2,000 (2,000) 1.50 1.30 --
Options expired 42,000 (42,000) 1.50 1.33 --
--------- ----------- -------- --------
DECEMBER 31, 2004 394,000 550,000 $0.91 $0.78 1.4 Years
======= =========== ======== ========
F-21
The following table summarizes information about stock options outstanding as of
December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Price 12/31/2004 Life Price 12/31/2004 Price
- ----- ---------- ---------- ----- ---------- -----
$0.76 10,000 2.5 Years $0.76 10,000 $0.76
$0.88 323,800 1.3 Years $0.88 323,800 $0.88
$0.97 206,200 1.3 Years $0.97 206,200 $0.97
$1.05 10,000 2.4 Years $1.05 10,000 $1.05
-------- -------
550,000 1.7 Years $0.91 550,000 $0.91
======== =======
Under the terms of the Plan, options are generally exercisable on the date of
grant and expire from four to five years from the date of grant as determined by
the Board of Directors. The Company applies Accounting Principles Board (APB)
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for the plan. Under APB Opinion No. 25, because the exercise price of
the Company stock options equals or exceeds the estimated fair value of the
underlying stock on the measurement date, no compensation cost is recognized.
In January 2002, the Securities and Exchange Commission adopted new rules for
the disclosure of equity compensation plans. The purpose of the new rues is to
summarize the potential dilution that could occur from past and future equity
grants under all equity compensation plans. The following provides tabular
disclosure of the number of securities to be issued as of December 31, 2004 upon
the exercise of outstanding options, the weighted average exercise price of
outstanding options, and the number of securities remaining available for future
issuance under equity compensation plans, aggregated into two categories - plans
that have been approved by stockholders and plans that have not.
Number of
Number of Securities Remaining
Securities to be Available for Future
Issued Upon Weighted-average Issuance Under
Exercise of Exercise Price of Equity Compensation
Outstanding Outstanding Plans (Excluding
Options and Options and Securities Reflected
Plan Category Warrants Warrants in 1st Column)
- -------------------------------------------------------------------------------
Equity compensation
plans approved by
stockholders 550,000 $0.91 394,000
Equity compensation
plans not approved
by stockholders 200,000 $1.20 --
----------------------------------------------------------
Total 750,000 $0.99 394,000
======= =======
F-22
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash was paid during the years ended December 31, 2004, 2003 and 2002 for:
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
-------- -------- --------
Income taxes $ 3,600 $ 3,600 $ 5,700
======== ======== ========
Interest $166,200 $170,500 $183,700
======== ======== ========
Non-cash investing and financing activities for the years ended December 31,
2004, 2003 and 2002 were as follows:
On May 31, 2002, the Company issued warrants to purchase 400,000 shares of the
Company's common stock to the preferred stock investor and the broker in
connection with the issuance of preferred stock. In connection with the issuance
of the preferred stock, the Company recorded a non-cash deemed dividend of
relating to the beneficial conversion feature of the preferred stock of $260,000
for the year ended December 31, 2002. Accretion of the stated value of the
preferred stock, including the recording of increases in redemption value, of
$39,100, $768,200 and $14,200 was recorded for the years ended December 31,
2004, 2003 and 2002, respectively.
In December 2002, the Company issued warrants to purchase up to 300,000 shares
of the Company's common stock at $1.20 per share for consulting services. On
June 16, 2003, the Company terminated this agreement and warrants to purchase
200,000 shares of the Company's common stock were cancelled. For the years ended
December 31, 2003 and 2002, the Company recorded $28,500 and $2,400,
respectively, in non-cash expense related to this transaction and increased
additional paid-in capital for the same amount.
As a consideration for the sale of Lea's assets to certain of Lea's employees on
June 30, 2003, the Company received an electronic commerce support services
contract for a term of 2 years valued at $48,000. The value of the electronic
commerce support services is being amortized over the 2-year term using a
straight-line method.
On December 31, 2004, the certain terms of the Series A Redeemable Convertible
Preferred Stock were restructured with the holder of the preferred stock. The
restructuring of the preferred stock resulted in a non-cash gain of $758,600.
16. SEGMENT INFORMATION
The Company has three reportable segments: PMI, PMIGA, 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 retailers and to end-users through a website.
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. 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. The Company does not have offices or operation in foreign
countries. Sales to foreign countries have been insignificant for the year ended
December 31, 2002. Sales to customers located in foreign countries for the year
ended December 31, 2004 and 2003 are as follows:
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2004 2003
----------- -----------
North America
(excluding U.S.) $ 5,188,200 $ 1,272,900
Europe 6,406,300 1,969,700
Asia 134,600 150,900
Others 222,200 7,100
----------- -----------
Total $11,951,300 $ 3,400,600
----------- -----------
The following table presents information about reported segment profit or loss
and segment assets for the years ended December 31, 2004, 2003 and 2002:
Year Ended December 31, 2004:
PMI PMIGA LW Totals
------------ ------------ ------------ ------------
Revenues from external customers $ 61,101,100 $ 4,958,600 $ 5,413,800 $ 71,473,500
Interest income 2,000 -- -- 2,000
Interest expense 166,200 -- -- 166,200
Depreciation and
amortization (1) 206,500 21,000 300 227,800
Segment loss before taxes
and minority interest (1,523,100) (228,000) (248,800) (1,999,900)
Segment assets (2) 20,615,400 1,130,800 724,800 22,471,000
Expenditures for segment
assets -- -- -- --
Year Ended December 31, 2003:
PMI PMIGA LW Totals
------------ ------------ ------------ ------------
Revenues from external customers $ 60,410,600 $ 7,323,600 $ 7,251,100 $ 74,985,300
Interest income 3,200 -- -- 3,200
Interest expense 153,000 3,800 13,700 170,500
Depreciation and
amortization (1) 202,500 28,600 7,600 238,700
Segment loss before taxes
and minority interest (1,143,300) (366,900) (258,100) (1,768,300)
Segment assets (2) 22,707,300 1,087,100 1,687,600 25,482,000
Expenditures for segment
assets -- -- -- --
Year Ended December 31, 2002:
PMI PMIGA LW Totals
------------ ------------ ------------ ------------
Revenues from external customers $ 56,814,300 $ 9,471,400 $ 1,684,200 $ 67,969,900
Interest income 13,500 600 -- 14,100
Interest expense 164,400 700 1,000 166,100
Depreciation and
amortization (1) 190,800 28,000 800 219,600
Segment loss before taxes
and minority interest (1,470,400) (796,200) (166,600) (2,433,200)
Segment assets (2) 21,442,300 842,200 412,300 22,696,800
Expenditures for segment
assets 58,900 800 1,500 61,200
(1) The total of reportable segment depreciation and amortization does not
include $32,000, $32,000 and $16,000 of amortization expense related to the
warrant issuance costs for the years ended December 31, 2004, 2003 and 2002,
respectively.
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(2) Segment assets before Intercompany eliminations.
The following is a reconciliation of reportable segment loss before income taxes
and total assets to the Company's consolidated totals:
2004 2003 2002
------------ ------------ ------------
LOSS BEFORE INCOME TAXES:
Loss before income taxes and
minority interest for reportable
segments $ (1,999,900) $ (1,768,300) $ (2,433,200)
Change in fair value of warrants 46,400 105,800 235,700
Amortization of warrants issuance costs (32,000) (32,000) (16,000)
------------ ------------ ------------
Consolidated loss before income taxes
and minority interest $ (1,985,500) $ (1,694,500) $ (2,213,500)
============ ============ ============
ASSETS:
Total assets for reportable segments $ 11,699,100 $ 14,416,900 $ 14,985,600
Assets of FNC and Lea 16,200 223,700 1,363,100
Other assets 25,400 131,800 918,300
------------ ------------ ------------
Consolidated total assets $ 11,740,700 $ 14,772,400 $ 17,267,000
============ ============ ============
17. LITIGATION SETTLEMENT AND CONTINGENCIES
In December 2003, the Company settled a claim against a customer and its
principal owner for a past due account receivable in the amount of $734,500.
Under the settlement agreement, the customer agreed to pay the entire balance in
12 equal monthly installments of $61,200, beginning December 2003. In addition,
the customer entered into a UCC-Financing Statement with the Company under which
the customer secured its payments due to the Company with all its assets,
including inventory, accounts receivable and equipment. The customer is
presently in default of its obligations under the settlement agreement. Thus,
the Company is in the process of foreclosing on all the assets, including cash,
accounts receivable, inventories and real estate of the customer and its
principal owner. During the fourth quarter 2004, the Company reserved $487,200,
the entire unpaid balance of this receivable, based on the length of time it has
been defaulted. The Company continues to seek recovery.
In April 2003, the Company settled a lawsuit relating to a counterfeit products
claim for $95,000 which was included in other expenses in the accompanying
consolidated statement of operations. There are various claims, lawsuits, and
pending actions against the Company involving matters incidental to the
Company's operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
18. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
Summarized quarterly financial data for 2004 and 2003 is as follows:
Quarter
First Second Third Fourth
------------ ------------ ------------ ------------
2004:
Sales $ 21,964,800 $ 17,105,000 $ 17,083,500 $ 15,320,200
Gross profit 1,177,400 788,700 850,600 863,600
Loss from Operations (309,600) (549,100) (259,900) (866,900)
Net loss applicable to
common shareholders (319,200) (558,900) (176,400) (118,200)
Basic and diluted loss
per share (1):
Loss from Operations (0.03) (0.05) (0.03) (0.12)
Net loss applicable
To common shareholders (0.03) (0.05) (0.02) (0.11)
2003:
Sales $ 18,288,000 $ 17,467,700 $ 19,514,100 $ 19,715,500
Gross profit 1,086,100 1,086,000 1,040,200 1,217,100
Loss from Operations (429,100) (480,100) (494,700) (290,600)
Net loss applicable to
common shareholders (1,350,200) (723,300) (523,300) (299,800)
Basic and diluted loss
per share (1):
Loss from Operations (0.11) (0.05) (0.05) (0.03)
Net loss applicable
To common shareholders (0.13) (0.07) (0.05) (0.03)
F-25
(1) Loss per share are computed independently for each of the quarters
presented. The sum of the quarterly loss per share in 2004 and 2003 does not
equal the total computed for the year due to rounding.
F-26
SUPPLEMENTAL SCHEDULE
PACIFIC MAGTRON INTERNATIONAL CORP. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Charged to
Beginning Costs Write-offs Ending
Allowance for Doubtful Accounts Balance and Expense of Accounts Balance
- ------------------------------- --------- ----------- ----------- ---------
Year ended December 31, 2002 $400,000 $331,300 $(426,300) $305,000
Year ended December 31, 2003 $305,000 $125,000 $(148,200) $281,800
Year ended December 31, 2004 $281,800 $ 538,700 $(506,400) $314,100
F-27