UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
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: 0-27653
PACIFIC CMA, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-1435073
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
c/o Airgate International Corp., 153-04, Rockaway Blvd., Jamaica, New York 11434
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(212) 247-0049
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
2
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock: Outstanding as of: May 13, 2005: 25,492,713 shares
3
PACIFIC CMA, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited)
and December 31, 2004 (Audited)................................................4
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2005 and 2004 (unaudited)......................................5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (unaudited)......................................6
Notes to Condensed Consolidated Financial Statements (unaudited).................7
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations..................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............29
Item 4. Controls and Procedures...............................................30
PART II. OTHER INFORMATION.....................................................31
Item 1. Legal Proceedings.....................................................31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........31
Item 3. Defaults Upon Senior Securities.......................................31
Item 4. Submission of Matters to a Vote of Security Holders...................31
Item 5. Other Information.....................................................31
Item 6. Exhibits..............................................................31
SIGNATURES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Pacific CMA, Inc.
Condensed Consolidated Balance Sheets
March 31, 2005 and December 31, 2004
Assets
(Unaudited)
2005 2004
------------ ------------
Current Assets
Cash and cash equivalents $ 1,737,418 $ 1,538,146
Restricted cash 6,291,002 5,088,088
Accounts and notes receivable, net of allowance for
doubtful accounts; 2005 - $304,031; 2004 -
$295,144 13,406,477 13,480,831
Other receivables 2,765,056 2,876,398
Deposits and prepaid expenses 550,672 447,809
Current portion of loan receivable 17,600 17,600
Deferred income taxes 57,476 57,476
------------ ------------
Total current assets 24,825,701 23,506,348
------------ ------------
Property and Equipment, net of accumulated
depreciation; 2005 - $790,217; 2004 - $735,309 657,843 619,753
------------ ------------
Other Assets
Goodwill 2,740,508 2,740,508
Intangible assets, net of accumulated amortization;
2005 - $1,673,229; 2004 - $1,528,894 1,213,479 1,357,814
Deferred tax asset 1,161,996 952,319
Deferred financing costs on Series A preferred stock 727,592 786,693
Investment deposit 150,000 1,037,001
Equity investment in affiliates 1,093,959 258,912
Other 30,354 30,994
------------ ------------
7,117,888 7,164,241
$ 32,601,432 $ 31,290,342
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable - bank $ 8,476,514 $ 6,679,406
Current maturities of capital lease obligations 56,060 62,537
Accounts payable 8,636,686 9,357,362
Accrued expenses and other 725,404 908,930
Payable-minority shareholder 151,423 79,409
Income taxes payable 219,750 157,741
------------ ------------
Total current liabilities 18,265,837 17,245,385
------------ ------------
Capital Lease Obligations 54,097 64,373
------------ ------------
Series A Preferred Stock, net of discount; 2005 -
$712,669; 2004 - $771,401) 4,287,331 4,228,599
------------ ------------
Minority Interest 97,959 92,248
------------ ------------
Stockholders' Equity
Common stock 5,233,978 5,113,412
Warrants outstanding 1,073,653 1,073,653
Additional paid-in capital 1,953,384 1,953,384
Retained earnings 2,823,375 2,760,947
Accumulated other comprehensive income 22,114 24,174
Unearned compensation cost (1,210,296) (1,265,833)
------------ ------------
Total stockholders' equity 9,896,208 9,659,737
------------ ------------
$ 32,601,432 $ 31,290,342
============ ============
See Notes to Condensed Consolidated Financial Statements
4
Pacific CMA, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Freight Forwarding Income $ 25,604,545 $ 16,454,513
------------ ------------
Operating Expenses
Cost of forwarding (21,508,127) (13,791,615)
General and administrative (3,561,895) (2,584,653)
Depreciation and amortization (222,526) (179,700)
Stock-based compensation cost (101,102) (166,423)
------------ ------------
(25,393,650) (16,722,391)
Operating Income (Loss) 210,895 (267,878)
------------ ------------
Other Income (Expense)
Interest and other income 35,141 95,778
Interest expense (114,352) (89,527)
Preferred stock dividend and amortization of
deferred financing costs (137,155) --
Amortization of preferred stock discount (58,732) --
Equity in income (loss) of affiliates (11,801) --
------------ ------------
(286,899) 6,251
------------ ------------
Loss Before Income Taxes (76,004) (261,627)
Benefit for Income Taxes (144,143) (138,834)
------------ ------------
Income (Loss) Before Minority Interest 68,139 (122,793)
Minority Interest (5,711) --
------------ ------------
Net Income (Loss) $ 62,428 $ (122,793)
============ ============
Basic Earnings Per Share $ 0.00 $ (0.01)
============ ============
Diluted Earnings Per Share $ 0.00 $ (0.01)
============ ============
See Notes to Condensed Consolidated Financial Statements
5
Pacific CMA, Inc.
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Operating Activities
Net income (loss) $ 62,428 $ (122,793)
Items not requiring (providing) cash
Amortization of preferred stock discount 58,732 --
Preferred stock dividend and amortization of
deferred financing costs 137,155 --
Depreciation and amortization 78,191 179,700
Amortization of intangibles 144,335 --
(Gain) loss on sale of property and equipment 3,196 (4,406)
Minority interest in income of subsidiaries 5,711 --
Common stock issued for services and employee
compensation 101,102 166,423
Undistributed earnings of affiliates 11,801 --
Provision for doubtful accounts 10,000 --
Deferred income taxes (209,677) --
Changes in
Accounts receivable 64,354 (42,126)
Accounts payable (720,676) (90,019)
Accrued expenses (186,580) (193,695)
Income taxes refundable/payable 62,009 (192,203)
Other assets and liabilities 8,479 (950,500)
------------ ------------
Net cash used in operating activities (369,440) (1,249,619)
------------ ------------
Investing Activities
Collection of loans receivable 640 --
Purchase of property and equipment (124,998) (116,366)
Proceeds from sale of property and equipment 5,256 7,915
Deposit refund (paid) for potential equity investment 40,000 (195,154)
------------ ------------
Net cash used in investing activities (79,102) (303,605)
------------ ------------
Financing Activities
Net change in restricted cash (1,202,914) (4,264)
Net change in notes payable - bank 1,797,108 1,636,225
Principal payments under capital lease obligation (16,753) (6,713)
Proceeds from short-term debt 72,683 --
Principal payments on short-term debt -- (231,722)
------------ ------------
Net cash provided by financing activities 650,124 1,393,526
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 201,582 (159,698)
Foreign Currency Exchange Difference (2,310) --
Cash and Cash Equivalents, Beginning of Period 1,538,146 912,240
------------ ------------
Cash and Cash Equivalents, End of Period $ 1,737,418 $ 752,542
============ ============
Supplemental Cash Flow Information
Cash paid for interest $ 114,352 $ 89,527
Cash paid for income taxes 4,000 69,408
Capital lease obligation incurred for equipment -- 32,558
See Notes to Condensed Consolidated Financial Statements
6
Pacific CMA, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Unaudited)
Note 1: Basis of Presentation
The accompanying condensed consolidated financial statements of Pacific
CMA, Inc. (the "Company") and its subsidiaries (the "Group") as of March
31, 2005 and for the three months ended March 31, 2005 and 2004 have been
prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities Exchange Act of 1934. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. The accompanying unaudited condensed consolidated financial
statements reflect all adjustments that are, in the opinion of the
Company's management, necessary to fairly present the financial position,
results of operations and cash flows of the Company. Those adjustments
consist only of normal recurring adjustments.
The condensed consolidated balance sheet of the Company as of December 31,
2004 has been derived from the audited consolidated balance sheet of the
Company as of that date.
The condensed consolidated statements of operations for the three months
ended March 31, 2005 and 2004, and cash flows for the three months ended
March 31, 2005 and 2004 are not necessarily indicative of the results that
may be expected for the entire year. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the related notes thereto for the year ended
December 31, 2004 included in the Company's Form 10-K filed on March 31,
2005.
Principles of Consolidation
The condensed consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
7
Pacific CMA, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Unaudited)
Note 2: Earnings Per Share
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:
(Unaudited)
Three Months Ended March 31
2005 2004
Per-Share Per-Share
Income Shares Amount Loss Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 62,428 $(122,793)
Basic EPS
Income (loss) available to
common stockholders 62,428 25,207,654 $ 0.00 (122,793) 25,682,733 $ (0.01)
============ =======
Stock options and warrants 179,097 --
------------- ----------
Diluted EPS
Income (loss) available to
common stockholders and
assumed conversions $ 62,428 25,386,751 $ 0.00 $(122,793) 25,682,733 $ (0.01)
=========== ============= ============ ========= ========== =======
Common stock equivalents related to warrants and convertible preferred
stock of 2,835,788 and 3,472,222, respectively, are not included in the
calculation of dilutive earnings per share for the three months ended
March 31, 2005 because they have an anti-dilutive effect.
Common stock equivalents related to stock options and warrants of 200,000
and 1,007,455, respectively, are not included in the calculation of
dilutive earnings per share for the three months ended March 31, 2004
because they have an anti-dilutive effect.
Note 3: Common Stock and Preferred Stock
As of March 31, 2005, the Company's authorized capital stock comprised of
100,000,000 shares of common stock, $0.001 par value and 10,000 shares of
preferred stock, $1,000 par value. As of the same date, the Company's
issued and outstanding capital stock comprised of 25,292,713 shares of
common stock and 5,000 shares of preferred stock.
8
Pacific CMA, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Unaudited)
Preferred Stock
On April 14, 2004, the Company sold to two institutional investors
$3,000,000 of its Series A Preferred Stock and issued warrants to purchase
937,500 shares of common stock, at per share exercise prices of $1.76 for
468,750 shares and $2.00 for 468,750 shares. These warrants expire seven
years from date of issuance.
On May 6, 2004, the Company sold to an institutional investor $2,000,000
of its Series A Preferred Stock and issued warrants to purchase an
additional 625,000 shares of common stock at per share exercise prices of
$1.76 for 312,500 shares and $2.00 for 312,500 shares. These warrants
expire seven years from issuance.
The Series A Preferred Stock has 10,000 shares authorized and 5,000 shares
issued with a stated value of $1,000 per share. The Series A Preferred
Stock is convertible into shares of Common Stock at a conversion price of
$1.44 per share and pays a cumulative annual dividend equal to six (6%)
percent of the stated value, which at the option of the Company, subject
to certain conditions, may be paid in shares of Common Stock. The Series A
Preferred Stock is mandatorily redeemable four years from issuance. This
preferred stock is non-voting.
As the Series A Preferred Stock is mandatorily redeemable, it was recorded
in accordance with Statement 150, Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity. The
relative fair value of the Series A Preferred Stock was recorded as a
long-term liability and the dividends paid and accrued are included in
interest expense. Additionally, the Series A Preferred Stock was issued
with a beneficial conversion feature. In accordance with EITF 98-5, the
intrinsic value of the beneficial conversion option of $166,666 was
recorded as additional finance charges under the caption "Preferred Stock
dividend and amortization of deferred financing costs" and credited to
additional paid-in capital for the year ended December 31, 2004. Lastly,
in accordance with Opinion 14, Accounting for Convertible Debt and Debt
Issued With Stock Purchase Warrants, the Series A Preferred Stock and
detachable stock warrants were recorded at their relative fair values with
the value of the warrants recorded as additional equity. The fair value of
the warrants was determined based on an independent valuation.
Effectively, the Series A Preferred Stock was recorded at a discount of
$939,713. This discount will be amortized ratably over the term of the
Series A Preferred Stock. For the quarter and the three months ended March
31, 2005, the Company recognized $58,732 related to the amortization of
the Series A Preferred Stock discount.
2000 Stock Plan
In January 2005, the Company has issued stock grants for 67,008 shares of
common stock to its employees. For the quarter ended March 31, 2005, the
Company recognized the compensation cost of $45,565 which is the estimated
fair value of the stock on the grant date.
9
Pacific CMA, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Unaudited)
Note 4: Pledge of Assets
As of March 31, 2005, the Group had pledged restricted cash deposits of
$6,291,002.
Note 5: Notes Payable - Bank
The Company has a $2,500,000 line of credit that accrues interest at the
bank's prime rate plus 0.75% (6.5% at March 31, 2005) and matures in
November 2005. The line is collateralized by a $1,000,000 certificate of
deposit held by the Bank, substantially all the assets of Airgate and
personal guarantee of two directors of the Company. This certificate of
deposit is recorded as restricted cash. The note requires the Company meet
certain debt to equity ratios and other financial covenants. As of March
31, 2005 and December 31, 2004, there was $2,500,000 borrowed against this
facility.
The Company has certain other banking facilities to finance its working
capital. The facilities available totaled approximately $9,010,000. The
facilities accrue interest at rates varying with the prime rate in Hong
Kong, Hong Kong Interbank Offered Rate (HIBOR), or the cost of funds rate.
As of March 31, 2005, these rates ranged between 1.56% - 6.75%. The
facilities require annual renewals and are collateralized by personal
guarantees of two directors and restricted cash of approximately
$4,950,000. As of March 31, 2005 and December 31, 2004, amounts
outstanding against these facilities were $5,976,514 and $4,179,406,
respectively.
Note 6: Related Party Transactions
As of March 31, 2005 and December 31, 2004, the Company had a payable to a
minority shareholder of a subsidiary of $151,423 and $79,109,
respectively. The payable does not accrue interest at 3% per annum, is
unsecured and has no fixed payment terms.
Note 7: Segment of the Business
Business Segments
The Company operates mainly in two business segments. Those segments are
air forwarding and sea forwarding services. The accounting policies
adopted by the Company for segment reporting are described in the summary
of significant accounting policies in the Company's Form 10-K filed for
the year ended December 31, 2004.
10
Pacific CMA, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Unaudited)
The following table summarized the Company's operations for the three
months ended March 31, 2005 and 2004 analyzed into air and sea forwarding
services:
Air Forwarding Sea Forwarding Total
(Unaudited) (Unaudited) (Unaudited)
----------------------------------------------------------------------------------------------------
2005 2004 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------
Revenues $ 15,718,901 $ 10,562,831 $ 9,885,644 $ 5,891,682 $ 25,604,545 $ 16,454,513
Cost of forwarding (12,864,037) (8,648,218) (8,644,090) (5,143,397) (21,508,127) (13,791,615)
Depreciation and
amortization (136,119) (121,360) (49,039) (43,291) (185,158) (164,651)
Interest expense (48,181) (37,640) (8,434) (6,763) (56,615) (44,403)
Other segment expenses
attributable to segment (960,341) (692,099) (535,393) (357,290) (1,495,734) (1,049,389)
----------- ----------- ----------- ----------- ----------- -----------
Segment income $ 1,710,223 $ 1,063,514 $ 648,688 $ 340,941 2,358,911 1,404,455
=========== =========== =========== ===========
Net other unallocated
expenses (2,290,772) (1,527,248)
Minority interest (5,711) --
----------- -----------
Net income (loss) $ 62,428 $ (122,793)
=========== ===========
Goodwill $ 1,687,471 $ 2,012,826 $ 1,053,037 $ 670,942 $ 2,740,508 $ 2,683,768
Intangible assets 744,967 1,322,750 468,512 440,917 1,213,479 1,763,667
Other assets 21,389,065 14,359,191 7,258,380 4,734,171 28,647,445 19,093,362
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 23,821,503 $ 17,694,767 $ 8,779,929 $ 5,846,030 $ 32,601,432 $ 23,540,797
=========== =========== =========== =========== =========== ===========
Geographical Segments
The table below summarized the Company's revenues during the three months
ended March 31, 2005 and 2004 analyzed into geographical locations:
(Unaudited) (Unaudited)
2005 2004
-------------------------------
Revenues
* IATA Area 1 $ 4,089,253 $ 1,748,707
* IATA Area 2 6,157,664 3,939,955
* IATA Area 3 15,357,628 10,765,851
------------ ------------
Total $ 25,604,545 $ 16,454,513
============ ============
11
Pacific CMA, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Unaudited)
The table below summarized the Company's assets as of March 31, 2005 and
2004 analyzed into geographical locations:
(Unaudited) (Unaudited)
As of March 31, 2005 As of March 31, 2004
Other Assets Other Assets
Trade (Including Total Trade (Including Total
Receivables Goodwill) Assets Receivables Goodwill) Assets
---------------------------------------------------------------------------------
Assets
*IATA Area 1 $ 7,101,504 $ 8,879,902 $15,981,406 $ 5,559,496 $ 6,151,574 $11,711,070
*IATA Area 2 2,566,209 -- 2,566,209 290,235 -- 290,235
*IATA Area 3 3,738,764 10,315,053 14,053,817 1,553,254 9,986,238 11,539,492
----------- ----------- ----------- ----------- ----------- -----------
Total $13,406,477 $19,194,955 $32,601,432 $ 7,402,985 $16,137,812 $23,540,797
=========== =========== =========== =========== =========== ===========
* IATA Area 1 comprises all of the North and South American Continent
and adjacent islands, Greenland, Bermuda, West Indies and the
islands of the Caribbean Sea, the Hawaiian Islands (including Midway
and Palamyra).
* IATA Area 2 comprises all of Europe (including the European part of
the Russian Federation) and the adjacent islands, Iceland, the
Azores, all of Africa and the adjacent islands, Ascension Island,
that part of Asia lying west of and including Iran.
* IATA Area 3 comprises all of Asia and the adjacent islands, except
that portion included in IATA Area 2, all of the East Indies,
Australia, New Zealand and the adjacent islands, the islands of the
Pacific Ocean, except those included in IATA Area 1.
Note 8: Concentrations
The Company had sales to a major customer (deferred as major customer who
sales represent 10% or more of total sales). Sales to this customer as a
percentage of total sales are as follows:
(Unaudited)
Three Months Ended March 31
Major Customer 2005 2004
------------------------------------------------------------------
A --% 13%
12
Pacific CMA, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Unaudited)
Note 9: Equity Investment in Affiliates
Equity investment in affiliates relates to ownership of Shanghai Air Cargo
Ground Handling Services Ltd. ("Shanghai Air Cargo"), Vantage Point
Services Limited ("Vantage Point") and Careship International
Transportation Ltd. ("Careship International") for 35%, 40% and 46.92%,
respectively. Shanghai Air Cargo began operations in April 2004 and the
interest in Vantage Point and Careship International was acquired by the
Company in October 2004 and January 2005, respectively. Financial results
of operations of the affiliates during the three months ended March 31,
2005 are summarized below:
Three Months Ended
March 31, 2005
Shanghai Air Careship
Cargo Vantage Point International
----------------------------------------------
$ 302,038 $ 267,127 $ 212,698
Net Sales
Cost of Sales 225,770 250,051 11,253
Gross Profit 76,268 17,076 201,445
Net Income/(Loss) 16,585 (22,404) 16,039
Equity in Income/(Loss) of
Affiliate 5,805 (8,962) 7,526
The Company invested $846,847 in its 46.92% interest in Careship
International which amount was $792,453 in excess of the underlying equity
in net assets of the investee. This excess was allocated to an intangible
asset of $662,991 and the balance of $129,462 to goodwill. The intangible
asset related to an exclusive right to do business granted to Careship
International by the government of the Peoples Republic of China for a
term of ten years. The intangible is being amortized over the term of the
exclusive right. The amortization expense is reflected in the equity in
income (loss) of affiliates and amounted to $16,170 for the quarter ended
March 31, 2005. The goodwill is not amortized under Statement No. 142 but
rather the investment is analyzed for impairment under the requirements of
Opinion No. 18.
13
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Special Note of Caution Regarding Forward-Looking Statements
Certain statements in this report, including statements in the following
discussion, which are not statements of historical fact, are what are known as
"forward-looking statements," which are basically statements about the future.
For that reason, these statements involve risk and uncertainty since no one can
accurately predict the future. Words such as "plans," "intends," "hopes,"
"seeks," "anticipates," "expects," and the like, often identify such
forward-looking statements, but are not the only indication that a statement is
a forward-looking statement. Such forward-looking statements include statements
concerning our plans and objectives with respect to the present and future
operations of the Company, and statements, which express or imply that such
present and future operations will, or may, produce revenues, income or profits.
Numerous factors and future events could cause the Company to change such plans
and objectives, or fail to successfully implement such plans or achieve such
objectives, or cause such present and future operations to fail to produce
revenues, income or profits. Therefore, the reader is advised that the following
discussion should be considered in light of the discussion of risks and other
factors contained in this report on Form 10-Q and in the Company's other filings
with the SEC. No statements contained in the following discussion should be
construed as a guarantee or assurance of future performance or future results.
These forward-looking statements are based largely on our current expectations,
assumptions, plans, estimates, judgments and projections about our business and
our industry, and they involve inherent risks and uncertainties. Although we
believe that these forward-looking statements are based upon reasonable
estimates, judgments and assumptions, we can give no assurance that our
expectations will in fact occur or that our estimates, judgments or assumptions
will be correct, and we caution that actual results may differ materially and
adversely from those in the forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties, contingencies and
other factors that could cause our or our industry's actual results, level of
activity, performance or achievement to differ materially from those discussed
in or implied by any forward-looking statements made by or on behalf of us and
could cause our financial condition, results of operations or cash flows to be
materially adversely affected. Accordingly, investors and all others are
cautioned not to place undue reliance on such forward-looking statements.
Potential risks, uncertainties, and other factors which could cause the
Company's financial performance or results of operations to differ materially
from current expectations or such forward-looking statements include, but are
not limited to:
o International economic and political risks, over which we have
little or no control;
o Political uncertainty in Hong Kong and China making it difficult to
develop any long range planning;
o Relations between the United States and China remaining stable;
o The Chinese government could change its policies toward private
enterprises or expropriate private enterprises;
14
o The lack of adequate remedies and impartiality under China's legal
system may adversely impact our ability to do business and enforce
our agreements with third parties;
o Fluctuations in exchange rates;
o Our dependence on third parties for equipment and services;
o Competition from our own cargo agents;
o Having seasonal business that causes fluctuations in our results of
operations and financial condition;
o A lack of ongoing contractual relationships with our customers;
o Taking on significant credit risks in the operation of our business
as East Coast U.S. freight forwarders expect us to offer thirty days
credit from the time of cargo delivery;
o Our inventory of shipping space is subject to the significant risk
that we may not be able to "fill" the space while having contracted
for that space, and
o Our insurance may not be sufficient to cover losses or damages to
the freight we ship or for consequential damages for a shipment of
hazardous materials.
Many of these factors are beyond our control, and you should read carefully the
factors described in "Risk Factors" in our filings (including its our Forms 10-K
and registration statements) with the Securities and Exchange Commission for a
description of some, but not all, risks, uncertainties and contingencies. These
forward-looking statements speak only as of the date of this document. We do not
undertake any obligation to update or revise any of these forward-looking
statements to reflect events or circumstances occurring after the date of this
document or to reflect the occurrence of unanticipated events. Any
forward-looking statements are not guarantees of future performance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require management to
make certain estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, based on historical experience, and various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
The following critical accounting policies rely upon assumptions, judgments and
estimates and were used in the preparation of our consolidated financial
statements:
RECOGNITION OF COST OF FORWARDING
The billing of cost of forwarding is usually delayed. As a result, we must
estimate the cost of purchased transportation and services, and accrue an amount
on a load-by-load basis in a manner that is consistent with revenue recognition.
Such estimate is based on past trends, and on the judgment of management.
Historically, upon completion of the payment cycle (receipt and payment of
transportation bills), the actual aggregate transportation costs are not
materially different than the accrual. However, in any case in which the actual
cost varies significantly from the accrual, a revision to the accrual would be
required.
15
ACCOUNTING FOR INCOME TAXES
In preparing our consolidated financial statements, we are required to estimate
our income taxes in each of the jurisdictions where we operate. This process
involves estimating actual current tax exposure, together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be recovered from future
taxable income, and to the extent that we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance, we must include an expense within the tax provision of the
consolidated statement of income in each period in which the allowance is
increased.
Significant judgment is required in determining the provision for income taxes,
deferred tax assets and liabilities, and any valuation allowance, against our
deferred tax assets. In the event that actual results differ from these
estimates or the estimates are adjusted in future periods, then we may need to
establish an additional valuation allowance, which could materially impact our
financial position and results of operations. Based on our current financial
projections, we currently believe that we will realize 100% of our deferred tax
assets.
VALUING LONG-LIVED ASSETS, INTANGIBLES AND GOODWILL
We assess the impairment of identifiable long-lived assets, purchased intangible
assets and goodwill whenever events or changes in circumstances indicate that
the carrying amount may be impaired. Factors that we consider when evaluating
for possible impairment include the following:
o Significant under-performance relative to expected historical or
projected future operating results;
o Significant changes in the manner of our use of the acquired assets
or the strategy for our overall business; and
o Significant negative economic trends.
When determining whether the carrying value of long-lived assets and goodwill is
impaired based upon the existence of one or more of the above factors, we
determine the existence of impairment by comparison of the carrying amount of
the asset to expected future cash flows to be generated by the asset. If such
assets are considered impaired, the impairment is measured as the amount by
which the carrying value of the assets exceeds their fair values. As of March
31, 2005, goodwill totaled approximately $2.74 million, other intangible assets
amounted to approximately $1.21 million and our long-lived assets, consisting
primarily of net property, plant and equipment, totaled $657,843.
16
As required by SFAS No. 142, Goodwill and other Intangible Assets, goodwill and
other intangible assets with indefinite lives are no longer amortized, but
rather are to be tested at least annually for impairment. This pronouncement
also requires that intangible assets with definite lives be amortized over their
respective lives to their estimated residual value and reviewed for impairment
in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. During the period from 2002 to 2005, we acquired the below
companies and recorded goodwill and intangibles associated with these
acquisitions. It is summarized as follows:
Date of Name of Company Goodwill Intangible Intangible
Acquisition Acquired (recorded at assets assets
the time of (customer (business
acquisition) relationships) license)
- -------------------------------------------------------------------------------------------
April 30, 2002 Airgate Int'l $2.68 million $2.86 million $-
Corp.
April 30, 2004 Paradigm Int'l $20,248 $26,708 $-
Inc.
April 1, 2004 Shanghai Air $36,493 $- $-
Cargo Ground
Handling
Services Ltd.
January 1, 2005 Careship $129,533 $- $662,991
International
Transportation
Ltd.
The acquisitions of Airgate International Corp. ("Airgate") and Paradigm
International Inc. were recorded using the purchase method of accounting in
accordance with SFAS No. 141. We allocated the purchase price to the assets,
liabilities, intangibles and goodwill acquired, based on the fair value at the
date of acquisition. The results of operations of each company since the date of
acquisition, and its financial condition as of each balance sheet date are
reflected in our condensed consolidated financial statements. All significant
inter-company balances and transactions have been eliminated in consolidation.
The acquisition of Shanghai Air Cargo Ground Handling Services Ltd. and Careship
International Transportation Ltd. were recorded under the equity method of
accounting in accordance with APB Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. As such the financial statements
will show one line item on the balance sheet, Equity investment in affiliates
and one line item on the income statement, Equity income in affiliates. Again,
the purchase price was allocated to the assets, liabilities, intangibles and
goodwill acquired, based on the fair value at the date of acquisition.
The intangible customer relationship assets and business license are amortized
over a period of 5 years and 10.25 years respectively. Goodwill acquired in
business combinations is not amortized, but rather is tested annually for
impairment in accordance with SFAS No. 142. An equity investment in an investee
including any goodwill therein is tested for impairment under APB Opinion No.
18.
OVERVIEW
The Company does not carry on any business activities by itself. Instead,
through its subsidiaries it provides supply chain management solutions, contract
logistics services and international freight forwarding services.
17
The Company's wholly owned subsidiary, AGI Logistics (HK) Ltd. ("AGI"), operates
an integrated logistics and freight forwarding business which is based in Hong
Kong. The principal services provided by AGI are air freight forwarding, ocean
freight forwarding, and warehousing which primarily handles the delivery of
goods from South China and Hong Kong to overseas countries, mainly the Far East
region and the United States. In the Far East region, Mainland China is the
target market for AGI to expand.
The business of AGI was first established in August 1998 and now consists of its
own operations, as well as those of its subsidiaries. On January 1, 2001, its
Hong Kong incorporated subsidiaries included Sparkle Shipping, Godown, Wharf &
Transp. Co., Ltd. ("Sparkle"), Shenzhen Careship International Transportation
Ltd. ("SZ Careship"), formerly known as Guangzhou Huasheng Int'l Forwarding
Ltd., and AGI Logistics (Shenzhen) Ltd. ("AGI (Shenzhen)") which was
incorporated in The People's Republic of China ("the PRC"). AGI (Shenzhen) and
Sparkle were disposed of by AGI Group on May 11, 2001 and April 2, 2002,
respectively, in conjunction with the decision by AGI to concentrate on the
international freight forwarding business. The business activities of Sparkle
were concentrated on local feeder voyages and trucking operations in the Jujiang
Delta Area of Mainland China. In order to maintain its competitive position,
management determined it would need to purchase its own boats and trucks. As a
result, Sparkle's business operations diverged from the AGI's non-asset based
strategic plan and AGI decided to dispose of it, in order to concentrate AGI's
resources as well as investments on the operations of AGI and SZ Careship
intending to improve the tonnage performance in Hong Kong, South China, U.S. and
Europe.
On April 30, 2002, the Company completed the acquisition of Airgate, a privately
held New York based freight forwarder that was established in 1995. Airgate is a
non-asset based logistics services company which primarily handles the air and
ocean import shipments from the Far East and Southwest Asia to the U.S. Pacific
CMA International, LLC, a Colorado limited liability company that is wholly
owned by the Company, acquired 81% of the issued and outstanding common stock of
Airgate.
On April 30, 2004, the Company completed the acquisition of Paradigm
International Inc. ("Paradigm"). Paradigm is a non-asset based logistics
services company based in Miami, Florida. It primarily handles air and ocean
shipments in Latin America.
In April 2004, Shanghai Air Cargo Ground Handling Services Ltd. ("Shanghai Air
Cargo"), that is 35% owned by the Company, commenced its operation. Shanghai Air
Cargo is located in Pudong International Airport, Shanghai, PRC, and is
responsible for the ground handling of air cargo in the airport.
At July 1, 2004, the Company acquired 60% of the outstanding stock of AGI
Freight Singapore Pte Ltd. ("AGI Singapore"). AGI Singapore is a non-asset based
logistics services company based in Singapore, which handles both air and ocean
shipments all over the world.
18
In October 2004, the Company acquired 40% of the outstanding stock of Vantage
Point Services Limited ("Vantage Point"). Vantage Point is also a non-asset
based logistics services company based in Hong Kong, which handles both air and
ocean shipments all over the world.
At January 1, 2005, the Company acquired 46.92% of the outstanding stock of
Careship International Transportation Ltd. ("Careship International"). Careship
International is located in Shenzhen PRC and is approved to operate
international freight forwarding business by the Ministry of Foreign Trade and
Economic Cooperation of the People's Republic of China..
The following discussion, concerning the results of operations, liquidity and
capital resources of Pacific CMA, is based solely upon the business operations
that are carried on by the Company's subsidiaries from January 1 to March 31,
2005 and the same period of 2004.
The following is a list of significant new developments occurring during the
three months ended March 31, 2005:
o Appointment of Mr. Kenneth Chik as an independent member of the
Board of Directors;
o Our operation team for the European Market is strengthened by hiring
new staff in Hong Kong; and
o Acquisition of 46.92% of the outstanding common stock of Careship
International Transportation Ltd to hasten our entry into the
Mainland China Market.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
OVERALL RESULTS
Freight forwarders are compensated on a transactional basis for the movement of
goods and provision of related services to their customers. Therefore, our
revenue is derived from our freight forwarding services based upon the rates
that we charge our customers for the movement of their freight from origin to
destination. The carrier's contract is with us, not with our customers. We are
responsible for the payment of the carrier's charges and we are legally
responsible for the shipment of the goods. We are responsible for any claims for
damage to the goods while in transit. In most cases, we receive reimbursement
from the carriers for any claims. Since many shippers do not carry insurance
sufficient to cover all losses, we also carry insurance to cover any
unreimbursed claims for goods lost or destroyed in the event of a total loss.
Gross revenue represents the total dollar value of services we sell to our
customers. Our costs of transportation, products and handling include the direct
cost of transportation, including tracking, rail, ocean, air and other costs. We
commit to pay for space with shippers prior to receiving committed orders from
our customers. We act principally as a service provider to add value and
expertise in the procurement and execution of these services for our customers.
Therefore, our gross profits (gross revenues less the direct costs of
transportation, products, and handling) are indicative of our ability to source,
add value and resell services and products that are provided by third parties.
19
Total revenue for the period ended March 31, 2005 increased approximately 56%
compared with the period ended March 31, 2004, from $16,454,513 in 2004 to
$25,604,545 in 2005. The increase in revenue was primarily the result of the
organic growth of AGI and Airgate, in addition to the inclusion of the results
of the acquisition in Singapore (AGI Singapore) and Miami (Paradigm), as well as
our new operation in Los Angeles during 2004.
Revenue derived from the operations of AGI increased approximately 90% during
the first quarter of 2005 as compared with the same period of 2004. The
significant organic growth of AGI was the result of the following factors:
o An increase in the routed freight traffic from the existing agency
partners;
o Improvements in the agency network which enabled AGI to secure new
freight business; and
o The establishment of three additional branch offices in Chongqing,
Tianjin and Futian, PRC in the Mainland China by Shenzhen Careship
Transportation Limited, a subsidiary of AGI, during 2004. All of the
operations of our former Yantian office were combined with the
nearby Futian office. Their close proximity within the Shenzhen
province made that combination warranted.
The revenue of Airgate represented approximately 62% of our total revenue for
the first quarter of 2005. Airgate focuses its operations on the import of goods
from the Far East and deconsolidation of cargo. In order to enter new markets in
the Midwest, Airgate established a subsidiary in Chicago, Illinois in June 2002.
Revenue derived from the operation of Airgate increased approximately 21% during
the first quarter of 2005 when compared with the same period of 2004. The
increase is the result of the effort of Airgate staff and its Chicago operation
maturing.
Total revenue derived from Paradigm International Inc. and AGI Freight Singapore
Pte Ltd. for the first quarter of 2005 amounted to approximately $2.21 million,
which represents approximately 8.6% of total revenue of the Company.
When compared with 2004, the cost of forwarding during the first quarter of 2005
increased approximately 56%, from $13,791,615 in 2004 to $21,508,127 in 2005.
The increase in costs was primarily the result of the organic growth, as well as
the acquisition in Singapore Miami as well as our new operations in Los Angeles
during 2004.
Gross profit margin for the three months ended March 31, 2005 and 2004 was quite
constant, at approximately 16.18% in 2004 and 16.00% in 2005 and gross profit
(revenue minus cost of forwarding) for the first quarter of 2005 increased
53.83%, from $2,662,898 in 2004, to $4,096,418 in 2005.
Net income for the first quarter of 2005 increased approximately 147%, from net
loss of $122,793 in 2004, to net income of $62,428 in 2005. The increase in net
income was due to an organic growth of the Company. Details of expense
fluctuations will be discussed in the sections "Operating expenses" and
"Non-operating expenses" respectively.
20
BUSINESS SEGMENT OPERATING RESULTS
The results of operations for each segment are as follows:
AIRFREIGHT OPERATIONS: Revenue from airfreight operations increased
approximately 49%, from $10,562,831 in the first quarter of 2004 to $15,718,901
in the same period of 2005. Airfreight revenue for foreign operations (that
includes AGI Group and AGI Singapore) was $6,479,760, while airfreight revenue
for domestic operations (that includes Airgate and Paradigm) was $11,049,754,
and offsetting inter-company transactions totaled $1,810,613. The volumes of
airfreight were improved in 2005 compared with 2004. The increase was primarily
due to (i) an increase in routing orders from Asia to Europe as a result of new
customers and agents in The Netherlands, Germany, United Kingdom and France who
joined the Group during the fourth quarter of 2004, (ii) The operation of
Airgate International Corp. (Chicago), which was established in September 2002,
is becoming more and more mature; (iii) the acquisition of Paradigm on April 30,
2004 and its additional operations in Los Angeles, California that commenced, in
July 2004; and (iv) AGI Singapore joined the Group in the third quarter of 2004.
Costs for the airfreight forwarding operations increased approximately 49%, from
$8,648,218 in the first quarter of 2004 to $12,864,037 in the same period of
2005. Airfreight cost attributable to foreign operations was $5,246,456, while
airfreight cost attributable to domestic operations was $9,429,545, and
offsetting inter-company costs were $1,811,963. Airfreight cost increase in 2005
was due to the organic growth of the Company. Gross profit margin for the first
quarter of 2005 and 2004 was quite constant, approximately 18.16% in 2005 and
18.13 % in 2004. As a result of increased revenues, overall gross profits
increased approximately 49% to $2,854,864.
Total segment overhead attributable to the airfreight operation increased by
approximately 34%, from $851,099 in the first quarter of 2004 to $1,144,641 in
the same period of 2005, as a result of more resources being allocated to
airfreight operations. Details regarding the increase in overhead expenses are
discussed below under the section "Non Operating Income and Expenses".
Overall net segment income for the airfreight operation for the first quarter of
2005 increased by approximately 61% from $1,063,514 in 2004 to $1,710,223 in
2005. The increase in net income was mainly the result of the organic growth as
well as the inclusion of operating results of new subsidiaries during 2004.
SEA FREIGHT OPERATION: Revenue from sea freight operations increased
approximately 68% to $9,885,644 in the first quarter of 2005 from $5,891,682 in
the same period of 2004. Sea freight revenue for foreign operations was
$3,549,294, while sea freight revenue for domestic operations was $6,490,786,
and offsetting inter-company transactions were $154,436. The increase in revenue
for the first quarter of 2005, when compared with the same period of 2004, was
due to (i) the contribution from the new branch offices of Shenzhen Careship in
China; (ii) the increase in quantity of freight consolidation by Airgate
Chicago; and (iii) our new agent in Europe introduced more customers into our
network, which led to more revenue from the European market since the fourth
quarter of 2004.
21
Costs for the sea freight forwarding operation increased approximately 68%, from
$5,143,397 in the first quarter of 2004 to $8,644,090 in the same period of
2005. Sea freight costs attributable to foreign operations were $2,927,814,
while costs attributable to domestic operations were $5,869,361, and
inter-company costs were $153,085. The gross profit margin was quite constant,
approximately 12.70% in 2004 and approximately 12.56% in 2005. As a result of
increased revenues, overall gross profits increased approximately 66%, to
$1,241,554.
Total segment overhead attributable to the sea freight operation increased
approximately 46%, from $407,344 in the first quarter of 2004 to $592,866 in the
same period of 2005. Overall net income for the sea freight operation for the
first quarter of 2005 increased approximately 89%, from $340,941 in 2004 to
$648,688 in 2005. The increase in net income was mainly the result of the
organic growth of AGI and Airgate.
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately 38%, to $3,561,895
in the first quarter of 2005 from $2,584,653 in the same period of 2004. There
was a significant incremental increase in sales commissions and salaries and
allowance in this quarter:.
Sales commission: Sales commission increased approximately 62% from $435,262 in
2004 to $706,690 in 2005. The increase is a result of increase in freight
forwarding income in the first quarter of 2005, when compared with the same
period of 2004.
Salaries and allowance: Salaries and allowance increased approximately 50% from
$1,101,611 in 2004 to $1,656,593 in 2005. This increase was the result of the
addition of approximately 75 staff persons during the twelve months ended March
31, 2005 which were needed to keep pace with our growth.
STOCK-BASED COMPENSATION COST
Stock-based compensation cost decreased approximately 39% from $166,423 in the
first quarter of 2004 to $101,102 in the same period of 2005. The decrease in
compensation cost was primarily due to the cancellation of 850,000 and 200,000
restricted shares that were previously granted to a key employee and an
independent sales representative respectively in the fourth quarter of 2004.
Details of the stock grant and cancellation are as follows:
22
On or about November 7, 2003, we entered into four service agreements with three
employees and an independent sales representative. Under the terms of the
agreements, as amended in March 2004, we granted these employees and the sales
representative an aggregate of 1,950,000 shares of our common stock.
Compensation cost is measured at the grant date based on the estimated fair
value of the securities. It is recognized as an expense over the service period
required under the service agreements with those parties. The unearned portion
of the compensation cost related to employees is recorded in equity as unearned
compensation cost, while the unearned portion of compensation cost related to
the independent sales representative is recorded as a prepaid asset. The shares
are restricted as they have not been registered with the Securities and Exchange
Commission (the "SEC" or the "Commission"). The agreements with the employees,
as amended, require two of them to continue to provide services to us from
January 1, 2004 through December 31, 2013 and one of them to provide services to
us from January 1, 2004 through December 31, 2008. The agreement with the sales
representative requires him to provide services to us from January 1, 2004
through December 31, 2005. However, in December 2004, one of the employees
resigned and, by mutual agreement, she surrendered her 850,000 shares. The
independent sales representative agreed to surrender his 200,000 shares in
exchange for $50,000 in cash, payable during his two year service agreement
expiring at December 2005. The surrenders occurred in 2004 and the 200,000
shares are to be physically cancelled, while the 850,000 shares were physically
cancelled in early 2005. All calculations of the issued and outstanding shares
of our common stock contained in this Form 10-Q do not give effect to the
cancellation of the 200,000 shares. The service agreement related compensation
costs were reversed during the fourth quarter of Fiscal 2004.
In March 2004, we granted an employee 100,000 shares of common stock. The shares
were registered with the SEC by filing a Form S-8 Registration Statement on
March 29, 2004. The employee continued to provide services to the Company from
January 1, 2004 through December 31, 2005. On September 11, 2004, this employee
resigned as a director but agreed to continue to act as an independent
consultant for British market development. Compensation cost is measured at the
grant date based on the estimated fair value on the date of grant. The
compensation cost is recognized as expense over the service period required
under the agreement. The unearned portion of the compensation cost is recorded
in equity as unearned compensation. Accordingly, $20,625 was recorded as expense
in the first quarter of 2005.
Also in January 2005, we issued a total of 67,008 shares of common stock to two
employees, one independent director and one consultant under the 2000 Stock
Plan. The Company recorded an expense of $45,565 which is the estimated fair
value of the stock on the grant date.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately 32% from $179,700 in the
first quarter of 2004 to $222,526 in the same period of 2005. The increase was
mainly due to additional computer hardware and software purchased for the
implementation of new a logistics system and office renovation at Airgate.
Amortization arises from an intangible customer relationship asset recorded in
conjunction with the acquisition of Airgate on April 30, 2002. The Company
recorded this asset at the cost of $2,860,000 and is amortizing it on a
straight-line basis over a period of five years. During the periods ended March
31, 2005 and 2004, the amortization expense attributable to this asset was
$143,000.
23
With the acquisition of Paradigm on April 30, 2004, we recorded an intangible
customer relationship asset of $26,708. As with Airgate, the cost of the
intangible customer relationship asset is being amortized on a straight-line
basis over a period of five years. In the first quarter of 2005, $1,335 was
expensed as amortization.
With the acquisition of 46.92% of ownership of Careship International on January
1, 2005, the Company recorded an intangible asset of $662,991. The intangible
asset represents the value of the license to operate international freight
forwarding business in Mainland China. The Company obtained an independent
valuation of the license. The independent valuator reported a value of
approximately $1,400,000 for the license. The cost of the intangible asset of
the business license is being amortized on a straight-line basis over its useful
life of 10.25 years. In the first quarter of 2005, $16,170 was expensed as
amortization.
NON OPERATING INCOME AND EXPENSES
INTEREST AND OTHER INCOME
Interest and other income decreased from $95,778 in the first quarter of 2004 to
$35,141 in the same period of 2005. The decrease is mainly due to the
termination of management services provided to a business partner in Hong Kong.
INTEREST EXPENSE
Interest expense increased to $114,352 in the first quarter of 2005 from $89,527
in the same period of 2004. The increase in interest expense is primarily due to
an increase in short-term working capital financing and the rise in interest
rates during the first quarter of 2005 when compared with the same period of
2004.
PREFERRED STOCK DIVIDEND AND AMORTIZATION OF ISSUANCE COST
During April and May 2004, the Company sold to two institutional investors
$5,000,000 stated amount of its Series A Preferred Stock and issued warrants to
purchase 1,562,500 shares of common stock at an exercise price of $1.76 and
781,250 shares at $2.00 per share. Such Series A Preferred Stockhas mandatory
redemption requirements and was recorded in accordance with SFAS No. 150,
Accounting for Certain Financial Instruments With Characteristics of Both
Liabilities and Equity. The dividends paid and accrued are charged to expense in
the statements of operations. In accordance with EITF 98-5, the intrinsic value
of the beneficial conversion option of $166,666 was recorded as additional
expense and credited as additional equity in warrants outstanding in 2004. The
issuance cost related to the placement of the Series A Preferred Stock is
amortized over its term to maturity, which is four years. A total of $59,100 was
expensed during the first quarter of 2005.
Dividends amounting to $78,055 were paid in shares of common stock in the first
quarter of 2005.
24
AMORTIZATION OF PREFERRED STOCK DISCOUNT
In accordance with APB Opinion 14 Accounting for Convertible Debt and Debts
Issued with Stock Purchase Warrants, the Series A Preferred Stock and the
detachable stock warrants were recorded at their relative fair values with the
value of the warrants recorded as additional equity in warrants outstanding. The
fair value of the warrants was determined based on an independent valuation.
Effectively, the Series A Preferred Stock was recorded at a discount of
$939,713. This discount is amortized ratably over the term of the Series A
Preferred Stock. As a result, $58,732 was expensed during the first quarter of
2005.
RISK FACTORS AFFECTING COMPANY OPERATIONS
The Company's ability to provide service to its customers is highly dependent on
good working relationships with a variety of entities such as airlines,
steamship carriers and governmental agencies.
Unlike other U.S. logistics companies, the Company bears a significant amount of
inventory risk. We pay for the guarantees we put up to the carriers, even if we
do not have any customer cargo to fill the space. We are not able to ask our
clients to make these guarantees and, accordingly, we assume all of the risks.
The Company has freight forwarders liability insurance that covers it against
claims from clients. We take responsibility for the cargo, and we are
responsible for its safe delivery. Therefore, we can be held responsible and
incur losses if anything goes wrong.
Changes in governmental deregulation efforts, regulations governing the
Company's products, and/or the international trade and tariff environment could
all affect the Company's business in unpredictable ways.
Management believes the Company's business has not been significantly or
adversely affected by inflation in the past. Historically, the Company has
generally been successful in passing cost increases to its customers by means of
price increases. However, competitive market place conditions could impede the
Company's ability to pass on future cost increases to customers and could erode
the Company's operating margins.
The Company continues to assess and improve financial controls, and has
negotiated successfully with its banks to get credit facilities for future
financial needs.
Additional risks and uncertainties include:
o Governmental deregulation efforts, regulations governing the
Company's products and/or the international trade and tariff
environment adversely affecting our ability to provide services to
customers.
o Competitive marketplace conditions impeding the ability of the
Company to pass future cost increases to customers.
25
o Dependence of the Company on international trade resulting from
favorable worldwide economic conditions.
o Dependence of the Company on retention and addition of significant
customers.
o The ability to recruit and retain skilled employees in a tight labor
market.
o The ability of the Company to develop and implement information
systems to keep pace with the increasing complexity and growth of
the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
We used approximately $369,000 and $1,249,000 of cash from operating activities
for the three months ended March 31, 2005 and 2004, respectively. This increase
in the generation of cash was mainly attributable to (i) increase in the net
income for the first quarter of 2005, when compared with the same period of
2004, and (ii) decrease in amount used in accounts and other receivables and
payables.
Net cash used in investing activities was $79,102 and $303,605 for the three
months ended March 31, 2005 and 2004, respectively. We used $124,998 to acquire
plant and equipment to improve our office facilities. We received payment of a
loan receivable in the amount of $640, and $5,256 from the disposal of property
and equipment. We also received $40,000 from the refund of the deposits for a
potential equity investment.
Net cash provided by financing activities was $650,124 and $1,393,526 for the
three months ended March 31, 2005 and 2004, respectively. We made principal
payments under capital lease obligations of $16,573. In order to extend our
banking facilities, an additional $1,202,914 was pledged to the banks as
restricted cash deposits. Notes payable to the banks increased by $1,797,108
during the period ended March 31, 2005, and we received the proceeds from
short-term debt of $72,683.
Working capital was $6,559,864 (inclusive of restricted cash of $6.3 million)
and $6,260,963 (inclusive of restricted cash of $5.1 million) as of March 31,
2005 and December 31, 2004 respectively. We believe that we will be able to rely
on cash flow from operations for short-term liquidity, and also believe that we
have adequate liquidity to satisfy our material commitments for the twelve
months following March 31, 2005. We also believe that we can obtain additional
liquidity through further negotiation of short-term loans from banks to satisfy
our short-term funding needs, if any.
We intend to continue our expansion plans through a mixture of organic growth
and acquisitions. Future acquisitions will focus on companies that serve as
freight forwarders in key markets or offer services (such as customs brokerage)
that complement our existing services. We intend to achieve organic growth
through the establishment of new branch offices in Latin America, joint ventures
in the PRC and a major marketing campaign through the Indian subcontinent,
including India, Sri Lanka and Bangladesh. In order to achieve this goal, we
will be required to raise a certain amount of capital. To a certain extent,
these activities will have a significant impact on both liquidity and capital
resources.
26
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENT
We have entered into various contractual obligations, which may be summarized as
follows:
Payments Due by Period
--------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1-3 years 4 - 5 years Thereafter
$ $ $ $ $
Capital lease Obligations 110,157 56,060 54,097 -- --
Operating Leases 1,778,210 687,981 895,055 195,174 --
Cargo Space Commitments 3,301,460 3,301,460 -- -- --
Material Employment Agreements 374,250 374,250 -- -- --
Material Employment 374,250 374,250 - - - Agreements We have capital lease
obligations of $110,157 as of March 31, 2005, of which $56,060 is repayable
within one year, and $54,097 is repayable after one year.
We also entered into various lease commitments for office premises and
warehouses in the United States, Hong Kong and China. The total outstanding
lease commitments under non-cancelable operating leases are $1,778,210 as of
March 31, 2005. As of March 31, 2005, the current portion of these commitments
$687,981 is payable within one year.
We have entered into written agreements with various sea and airfreight carriers
committing to take up a guaranteed minimum amount of cargo space each year. As
of March 31, 2005, the amount outstanding for such commitments to be entered in
2005 was approximately $3.3 million.
In connection with the acquisition of Airgate, we also entered into three-year
employment agreements, dated April 30, 2002, with Mr. Turner and Mr. Zambuto,
respectively, as described in a Current Report on Form 8-K filed on May 14,
2002. Under these agreements, we agreed to pay each of them an annual base
salary of $249,500 per annum commencing January 1, 2003, and for each year
thereafter during the term of their employment agreements.
27
As of March 31, 2005, our commercial commitments may be summarized as follows:
Other Commercial Total Amounts Amount of Commitment Expiration Per Period
Commitments Committed
- --------------------------------------------------------------------------------
Less than 1 year 1-3 years
Line of credit $2,500,000 $2,500,000 $ --
Overdraft 4,452,551 4,452,551 --
Invoice Trust Receipt 1,523,964 1,523,964 --
Guarantees by bank 677,510 677,510 --
Payable - minority 151,423 151,423 --
sharesholder
As of March 31, 2005, to finance our working capital, our available banking
facilities were approximately $9,010,000 obtained from creditworthy commercial
banks in Hong Kong and $2,500,000 from a bank in the U.S. As of that date, the
total amount of bank credit facilities utilized was $8,476,515. This was made up
of (i) $4,452,551 of overdrafts; (ii) $1,523,964 of invoice trust receipts and
(iii) $2,500,000 line of credit. In addition, there is $677,510 of bank
guarantees for granting credit facilities to a subsidiary for airfreight
payment. While these banks are not obligated to advance any further funds to us,
we believe that absent any significant downtrend in business, these sources of
credit will continue to be available to us.
OUTLOOK
Despite a global economic downturn, we believe the following factors may have a
positive impact on our future results of operation and our financial conditions:
Closer Economic Partnership
The Closer Economic Partnership Arrangement ("CEPA") that was signed on June 29,
2003, originally focused on stimulating and enhancing Hong Kong's economic
recovery. In theory, CEPA significantly lowers the barriers for Hong Kong
enterprises to tap the Mainland China market.
28
Under the CEPA, Hong Kong companies are permitted to set up wholly owned
enterprises in Mainland China to provide logistics services and related
consultancy services for ordinary road freight, and to engage in the management
and operation of logistics services through electronic means. It permits freight
forwarding agents to operate in Mainland China on a wholly owned basis a full
two years ahead of China's WTO entrance timetable, and will permit such agents
to enjoy national treatment in respect of the minimum registered capital
requirement. In addition, it eliminates the import tariffs to Mainland China on
a host of goods made in Hong Kong, allowing most Hong Kong companies to sell
high value-added products across the border. In terms of economic benefits, the
CEPA has good potential to open up many new business opportunities in Mainland
China for Hong Kong. Although it is difficult to quantify the potential benefit
we may realize from CEPA, through our Hong Kong-based AGI Logistics (HK) Ltd,
Shenzhen Careship Transportation Limited, as well as AGI China Ltd, we believe
we can enjoy "first mover" advantage, that is, we believe that our Hong
Kong-based subsidiaries can benefit from CEPA because we have experience in
doing business in, and we believe that we are knowledgeable in the PRC
regulations and business practices. We believe that our existing offices in Hong
Kong and Mainland China can also respond quicker than other U.S. freight
forwarders to ongoing developments in China.
Outsourcing of non-core activities
Companies are increasingly outsourcing freight forwarding, warehousing and other
supply chain activities so that they may focus on their respective core
competencies. Companies are increasingly turning to freight forwarders, and
logistics and supply chain management providers, to manage their purchase orders
and assure timely delivery of products at a lower cost and at greater efficiency
than if the function was undertaken directly.
Globalization of trade
As barriers to international trade are gradually reduced, international trade
will similarly increase. In addition, companies are increasingly sourcing for
supplies and raw materials from the most competitive suppliers throughout the
world. This form of sourcing would generally also lead to increased volumes of
trade.
Increased need for time-definite delivery
The demand for just-in-time and other time definite delivery has increased as a
result of the globalization of manufacturing, greater implementation of
demand-driven supply chains, the shortening of product cycles and the increasing
value of individual shipments.
As the number of global supply chain management providers decreases, companies
also are decreasing the number of freight forwarders and supply chain management
providers with which they interact, for which these providers have the criteria
that are familiar with their requirements, processes and procedures, and which
can develop long term partnership relationship. As such, freight forwarders that
are globally integrated and are able to provide a full complement of services,
including pick-up and delivery, shipment via air, sea and land, warehousing and
distribution and customs brokerage, are well positioned to gain from this
decrease in providers.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk in the ordinary course of its
business. These risks are primarily related to foreign exchange risk and changes
in short-term interest rates. The potential impact of the Company's exposure to
these risks is presented below:
- FOREGIN EXCHANGE RISK
The Company conducts business in many different countries and currencies.
The Company's business often results in revenue billings issued in a country and
currency, which differs from that where the expenses related to the service are
incurred. This brings a market risk to the Company's earnings. Foreign exchange
rates sensitivity analysis can be quantified by estimating the impact on the
Company's earnings as a result of hypothetical change in the value of the U.S.
Dollar, the Company's functional currency, relative to the other currencies in
which the Company transacts business. As one of the major subsidiaries uses the
Hong Kong Dollar (HKD), which has been linked to the U.S. Dollar at a rate of
HKD7.80 to USD1.00, as its functional currency, there has been no material
change in the Company's foreign exchange risk exposure. However, if HKD was
unlinked to the US Dollar, an average 10% weakening of the U.S. Dollar,
throughout the period ended March 31, 2005, would have had the effect of raising
operating income approximately $46,000. An average 10% strengthening of the U.S.
Dollar, for the same period would have had the effect of reducing operating
income by approximately $37,000. The Company currently does not utilize any
derivate financial instruments or hedging transactions to manage foreign
currency risk.
- INTEREST RATE RISK
The Company does not currently utilize derivative financial instruments to
hedge against changes in interest rates. At March 31, 2005, the Company had cash
and cash equivalents and restricted cash of $8.0 million and short-term
borrowings of $8.5 million, all subject to variable short-term interest rates. A
hypothetical change in the interest rate of 10% would have an insignificant
impact on the Company's earnings. In management's view, there has been no
material change in Company's market risk exposure between March 31, 2004 and
March 31, 2005.
Item 4. Controls and Procedures
The Registrant's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of the Registrant's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of March 31, 2005, have concluded that, as
of March 31, 2005 (the "Evaluation Date"), the Registrant's disclosure controls
and procedures were effective to ensure the timely collection, evaluation, and
disclosure of information relating to the Registrant that would potentially be
subject to disclosure under the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated under that Act. There were no significant
changes in the Registrant's internal controls or in other factors that could
significantly affect the internal controls subsequent to the Evaluation Date.
30
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
[Add schedules/statements that may be required]
(a) Exhibits (filed herewith)
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)).
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PACIFIC CMA, INC.
Date: May 13, 2005 By: /S/ Alfred Lam
--------------
Name: Alfred Lam
Title: Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 13, 2005 By: /S/ Bill Stangland
------------------
Name: Bill Stangland
Title: Chief Financial Officer
(Principal Financial and Accounting
Officer)
32