As filed with the Securities and Exchange Commission on March 31, 1999
Registration No. 000-25277
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
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PACIFIC MAGTRON INTERNATIONAL CORP.
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(Exact name of Registrant as specified in its charter)
Nevada 88-0353141
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1600 California Circle
Milpitas, California 95035
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(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code) (408) 956-8888
Securities to be registered pursuant to 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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n/a n/a
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock; $.001 per share
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(Title of Class)
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(Title of Class)
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TABLE OF CONTENTS
ITEM 1. BUSINESS............................................................. 1
ITEM 2. FINANCIAL INFORMATION................................................ 13
ITEM 3. DESCRIPTION OF PROPERTY.............................................. 18
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................................ 18
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS..................................... 19
ITEM 6. EXECUTIVE COMPENSATION............................................... 20
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 22
ITEM 8. LEGAL PROCEEDINGS.................................................... 22
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........... 22
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES............................. 22
ITEM 11. DESCRIPTION OF SECURITIES........................................... 23
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS........................... 23
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 24
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 24
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS................................... 24
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ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE COMPANY'S BUSINESS.
Pacific Magtron International Corp., a Nevada corporation, is an
integrated solutions provider of computer related equipment and services. The
Company's primary business is the wholesale distribution of computer and related
hardware components and software for personal computers to value added
resellers, retailers, systems integrators, original equipment manufacturers,
independent hardware and software vendors, consultants, and contractors. In May
1998, the Company formed its FrontLine Network Consulting ("FrontLine")
division, a corporate information systems group, with the goal of serving the
networking and personal computer requirements of corporate customers. As used in
this document and unless otherwise indicated, the terms "Company," "we," and
"our" refer to Pacific Magtron International Corp. and its operating divisions
and subsidiaries.
The Company was incorporated as Wildfire Capital Corporation
("Wildfire") in Nevada on January 8, 1996 with the stated purpose of engaging in
the business of providing a national retail market for premium wines on the
Internet. The Internet site was intended to provide advertising for wine
retailers and boutique wineries. Wildfire was initially capitalized with a
$5,000 investment by its founder, for which 500,000 shares of common stock were
issued. On August 27, 1996, Wildfire commenced a Rule 504 offering of 1,000,000
shares of its common stock at a price of $.05 per share. Gross proceeds from the
offering were $50,000 in cash.
Due primarily to regulatory issues, the business of Wildfire did not
develop as expected, and as a result, Wildfire closed its marketing operations
in the fall of 1997. At that time, Wildfire began searching for new business
opportunities, and on July 16, 1998, the Board of Directors of Wildfire
recommended the acquisition of Pacific Magtron, Inc. ("PMI") to Wildfire's
shareholders. PMI, a California corporation incorporated on August 11, 1989, had
established itself in the computer products wholesale distribution industry as a
privately held company. The shareholders of Wildfire and PMI approved the
transaction, and Wildfire issued 9,000,000 shares of its common stock in
consideration for all of the outstanding shares of PMI. As a result, the former
shareholders of PMI became the controlling shareholders of Wildfire. No
securities were registered in connection with the transaction. Immediately prior
to the transaction, Wildfire effected a two-for-three reverse stock split of its
1,500,000 outstanding shares of common stock. Upon consummation of the
acquisition, Wildfire changed its name to Pacific Magtron International Corp.,
and PMI continued its business operations as a wholly owned subsidiary of the
Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
We operate in only one business segment.
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NARRATIVE DESCRIPTION OF OUR BUSINESS.
OVERVIEW OF THE INDUSTRY
WHOLESALE DISTRIBUTION
The microcomputer products distribution industry generally consists of
suppliers, wholesalers, resellers, and end-users. Wholesale distributors
typically sell only to resellers and purchase a wide range of products in bulk
directly from manufacturers. Different types of resellers are defined and
distinguished by the end-user market they serve, such as large corporate
accounts, small and medium-sized businesses or home users, and by the level of
value that they add to the basic products they sell.
INCREASED RELIANCE ON WHOLESALE DISTRIBUTION
We believe that the growth of the microcomputer products wholesale distribution
industry exceeds that of the microcomputer industry as a whole. In our view,
suppliers, vendors, and resellers are relying to a greater extent on wholesale
distributors for their distribution needs.
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 outsources a portion of their distribution,
credit, marketing, and support services.
On the reseller side, 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.
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- - OPEN SOURCING
Another apparent reason for the growth of the wholesale distribution industry is
the evolution of open sourcing during the past several years, a phenomenon
specific to the U.S. 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. More recently, all major
manufacturers have authorized open sourcing, under which resellers can purchase
the supplier's product from any source on equal terms and conditions. Open
sourcing has thus blurred the distinction between wholesale distributors and
master resellers, which are increasingly able to serve the same reseller base.
The Company believes that open sourcing enables those distributors of
microcomputer products which provide the highest value through superior service
and pricing in the best position to compete for reseller customers.
- - INTERNET SERVICES
One final industry trend, the emergence of the Internet, provides wholesale
distributors with an additional means to serve both suppliers and reseller
customers through the development and use of effective electronic commerce
tools. The increasing utilization of electronic ordering and information
delivery systems, including the ability to transact business over the World Wide
Web, has had, and is expected to continue to have, a significant impact on the
cost efficiency of the wholesale distribution industry. Distributors with the
financial and technical resources to develop, implement and operate state of the
art management information systems have been able to reduce both their customers
and their own transaction costs through more efficient purchasing and lower
selling costs. The growing presence and importance of such electronic commerce
capabilities also provide distributors with new business opportunities as new
categories of products, customers, and suppliers develop.
CORPORATE INFORMATION SYSTEMS CONSULTING
Because of factors similar to those encouraging the increased reliance by target
clients on wholesale distributors, corporations are increasingly looking to
specialist service organizations such as our FrontLine division to support the
development and maintenance of their information technology systems.
Accelerating technological advancement, migration of organizations toward
multi-vendor distributed networks, and increased globalization of corporate
activity have contributed to an increase in the sophistication and
interdependency of corporate computing systems. The desire by corporations to
focus upon their core activities while enjoying the benefits of such
multi-vendor distributed networks, together with increasing skill shortages
within the information technology industry, have led businesses to increasingly
outsource the development and maintenance of their computing systems to network
consulting professionals.
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PRODUCTS AND SERVICES
We currently operate in two business divisions. Our computer products
group operates under the name Pacific Magtron, Inc., our wholly owned
subsidiary, and our corporate information systems group operates as a corporate
division known as FrontLine Network Consulting ("FrontLine") within our PMI
subsidiary.
PACIFIC MAGTRON, INC.
PMI distributes a wide range of computer products, including components and
multimedia and systems networking products. Through PMI we also provide vertical
solutions for systems integrators and Internet resellers by combining or
"kitting" our products.
Our computer products group offers our customers a broad inventory of more than
1,800 products from approximately 30 manufacturers. This wide assortment of
vendors and products meets our customers' needs for a cost effective link to
multiple vendors' products through a single source. Among the products that we
distribute are systems and networking peripherals, and components such as high
capacity storage devices, CD-ROMs and CD recorders, sound cards, small computer
systems interface components, video phone solutions, floppy and hard disk
drives, and other miscellaneous items such as audio cabling devices and zip
drives for desktop and notebook computers.
FRONTLINE NETWORK CONSULTING
Our FrontLine division was formed in May 1998 to serve the growing needs of our
corporate customers with respect to their computer systems and networking needs.
We provide a wide range of products and services to our customers through this
division including advanced enterprise consulting, LAN/WAN design, hardware and
software troubleshooting and testing, and complete Internet business solutions.
Our corporate customers engage us to provide them with network and computing
solutions through the following types of services:
INTEGRATION SERVICES:
Our integration center provides a static free environment where customized
hardware testing and peripheral installations are performed. The expertise of
our integration team, along with the flexibility of the monorail system used in
the integration center, gives us the capability to create completely integrated
networking schemes on any available topology.
INTERNET/ENTHRONED SERVICES:
Our Internet business consultants help our customers solve business problems
with Internet based solutions. Among the services provided in this area are web
site content selection and design, development of Internet usage polices,
browser customization, software support, development of risk management
processes with respect to security concerns, Internet training, and return on
investment studies.
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IT CONSULTING:
In order to assist our clients in making the most of their technology
investments, we help develop and implement strategic technology plans that allow
clients to maximize the use of their technology dollars. Among the areas
addressed in such plans are life cycle management, network analysis, and
business continuity planning in the event of an information flow interruption.
PROCUREMENT:
By taking advantage of the relationships established between manufacturers and
our wholesale distribution business, our FrontLine division is able to provide
specialty procurement services to our corporate customers. FrontLine
professionals manage the details of receiving, configuring, testing, and
shipping integrated systems for our customers, and assist them in dealing with
issues such as product availability forecasting, redeployment and disposal of
technology assets, warehousing, and packaging, tracking, and confirmation of
shipments. Our procurement services afford an additional benefit to our
customers by providing a single source for software and hardware orders, and by
making available volume discounts which might otherwise be unavailable to them.
TECHNICAL SERVICES:
Many of our customers technical service needs go beyond merely fixing hardware.
Our technicians provide a range of technical support from on-site service to
carry in depot service. Among the technical services we provide are: asset
management with inventory tracking and virus check services; on site desktop
support; warranty verification and tracking; and desktop deployment and
installation.
STRATEGIC PARTNERSHIPS
One of the factors that permits us to provide our FrontLine corporate customers
with a high level of service is the development of strategic partnerships with
leading manufacturers such as Intel, CISCO Systems, Cabletron, BayNetworks,
Microsoft, Wyse Technology, Compaq, Hewlitt-Packard, IBM, Novell, and 3Com.
Certification from these manufacturers is based on their recognition of our
expertise at implementing their client computing solutions, and allows us to
offer our customers the products that they are currently using, along with
continuous education regarding each product and the applications for which it is
used.
We believe that forming relationships with suppliers is important in providing
us with credibility in contacting large corporate clients. These relationships
also provide us with access to the resources and support of these suppliers in
FrontLine's initial sales and marketing efforts, and in the post-sale and
installation stages.
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PLANS FOR EXPANSION
Our plans to expand our wholesale distribution business include:
+ enhancing existing relationships and establishing additional strategic
relationships with master distributors and manufacturers, both
domestically and abroad;
+ adding additional branded product lines and offering a wider range of
products, such as networking and high end 3-D graphics products; and
+ actively focusing on building our international sales through
advertising in international markets.
Our strategy for developing our FrontLine division includes:
+ applying monetary and human resources to increase the division's
economic contribution over the next several years;
+ continuing to seek certification from additional suppliers, and
actively contacting potential corporate customers that need to
implement, enhance, or replace their management information systems;
and
+ increasing our partnering relationships with independent technology
consultants, which will expose us to a new customer base and provide
us with additional consulting talent.
In addition to expanding our computer products and FrontLine groups, we also
intend to utilize our management's extensive network of industry contacts to
explore possible acquisition candidates and opportunities. There can be no
assurance that we will identify any acquisition opportunities, or if such
opportunities are presented, that they can be acquired on acceptable terms and
conditions.
VENDORS
DIRECT PURCHASING
Our strong financial and industry positions have enabled us to obtain contracts
with many leading manufacturers, including Creative Labs, Logitech, Toshiba,
Sony, TEAC, and Labtech. We purchase our products directly from such
manufacturers, generally on a non-exclusive basis. We believe that our
agreements with the manufacturers are in forms customarily used by each
manufacturer. The agreements typically contain provisions allowing termination
by either party without prior notice, and generally do not require us to sell a
specific quantity of products or restrict us from selling products manufactured
by competitors. As a result, we generally have the flexibility to terminate or
curtail sales of one product line in favor of another product line if we
consider it appropriate to do so because of technological change, pricing
considerations, product availability, customer demand, or vendor distribution
policies.
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DISTRIBUTION
From our central warehouse facility in Milpitas, California, we distribute
microcomputer products throughout the United States and foreign countries,
including Canada, the United Kingdom, France, Russia and Israel. 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.
CUSTOMERS
WHOLESALE DISTRIBUTION CUSTOMERS
Approximately 80% of our wholesale distribution customer base consists of
customers that integrate systems or subsystems or upgrade kits. Approximately 5%
are wholesalers, and the rest are value added resellers ("VARs"). The VAR market
segment is attractive because VARs generally rely on distributors as their
principal source of computer products and financing as they typically do not
have the resources to establish a large number of direct purchasing
relationships or stock significant product inventories. Corporate resellers,
retailers and direct marketers may establish direct relationships with
manufacturers for their more popular products, but like VARs, rely on
distributors as the primary source for other product requirements and as an
alternative source for directly acquired products.
We target customers by addressing their specific needs relative to product
knowledge and technology, including the special needs of resellers doing
business over the Internet or the electronic commerce market. These customers
have Internet websites where orders, order acknowledgments, invoices, customized
pricing information and other industry standard and electronic commerce
transactions are consummated. We provide inventory and product support for such
customers, and also provide resellers with a high level of service through our
pre and post sale technical support, electronic commerce tools, customized
shipping documents, product configuration services, and financing programs.
FRONTLINE CUSTOMERS
Our corporate information system group targets a very wide range of customers,
including almost any entity that uses network system services. Since the
formation of the division, we have completed projects for clients in industries
ranging from manufacturing to financial services to government agencies.
SALES AND MARKETING
Our sales are generated by a telemarketing sales force, which consisted
of approximately 30 persons as of March 1, 1999 in sales offices located in
Milpitas, California.
Members of the sales staff are trained through intensive in-house sales
training programs, along with vendor-sponsored product seminars. This training
allows sales personnel to provide our customers with product information and use
their marketing expertise to answer our customers' questions about important new
product considerations, such as compatibility and capability, while offering
advice on which products meet specific performance and price criteria. Our
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salespeople are able to analyze quickly our extensive 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.
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, 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. It has been our
experience that the team approach results in superior customer service and
better employee morale.
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 telephone their
salespersons using a toll-free number. Salespeople initiate calls to introduce
our existing customers to new products and to solicit orders. In addition,
salespeople seek to develop new customer relationships by using targeted mailing
lists, vendor leads and telephone directories of various cities.
The telemarketing salespersons are supported by a variety of marketing
programs. For example, we regularly sponsor shows for our resellers where we
demonstrate new product offerings and discusses industry developments. Also, our
in-house marketing staff prepares catalogs that list available products and
routinely produces marketing materials and advertisements.
We pride ourselves on being service oriented and have a number of
on-going value-added services intended to benefit both our vendors and its
resellers. For example, we are committed to training our salespeople to be
technically knowledgeable about the products they sell. This core competency
supplements the sophisticated technical support and configuration services also
provided. Salespeople who are knowledgeable about the products they sell often
can assist in the configuration of microcomputer systems according to
specifications given by the resellers. We believe that our salespersons' ability
to listen to a reseller's needs and recommend a cost-efficient solution
strengthens the relationship between the salesperson and his or her reseller and
promotes customer loyalty to a vendor's products. In addition, we provide such
other value-added services as new product descriptions and technical education
programs for resellers.
Our management continually evaluates 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.
COMPETITION
WHOLESALE DISTRIBUTION
We operate in a market characterized by intense competition, both in the United
States and internationally. Competition within the wholesale distribution
industry is based on product availability, credit availability, price, speed and
accuracy of delivery, effectiveness of sales and marketing programs, ability to
tailor specific solutions to customer needs, quality and breadth of product
lines and services, and the availability of product and technical support
information. We believe that we are equipped to compete effectively with other
distributors in these areas. Principal regional competitors in the wholesale
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distribution industry include Greenleaf Distribution, Asia Source and Cynnex
Information Technology, Inc., all of which are privately held companies. Among
our principal regional and multi-regional publicly held competitors are Ingram
Micro Inc., and Tech Data Corporation. We also compete with manufacturers that
sell directly to resellers and end-users.
FRONTLINE
Competition within the corporate information systems industry is based primarily
on flexibility in providing customized network solutions, resources and
contracts to provide products for integrated systems and consultant and employee
expertise needed to optimize network performance and stability. Our principal
competitors in the corporate information systems industry include MicroAge and
SARCOM. We believe that we are equipped to compete effectively with our
competitors in this industry; however, most of our competitors have far greater
resources of capital, marketing and personnel than we have.
ASSET MANAGEMENT
INVENTORY LEVELS
We maintain sufficient quantities of product inventories to achieve high order
fill rates, and believe that price protection and stock return privileges
provided by suppliers substantially mitigate the risks associated with slow
moving and obsolete inventory. We also operate a computerized inventory system
that allows us to look at and deal with slow moving inventory. If a supplier
reduces its prices on certain products, we generally receive a credit for such
products in our inventory. In addition, we have the right to return a certain
percentage of purchases, subject to certain limitations. Historically, price
protection, stock return privileges, and inventory management procedures have
helped to reduce the risk of a significant decline in the value of inventory.
We have established reserves for estimated losses due to obsolete inventory in
the normal course of business, and historically, we have not experienced losses
materially in excess of our established reserves. 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, and
credit card payment to qualifying customers. We closely monitor our customers'
creditworthiness, and in most markets, utilize various levels of credit
insurance to control credit risks and enable us to extend higher levels of
credit. We also established reserves for estimated credit losses in the normal
course of business.
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RISK FACTORS
ABILITY TO RESPOND TO TECHNOLOGY CHANGES
The market for computer systems and products is characterized by constant
technological change, frequent new product introductions and evolving industry
standards. Our future success is dependent upon the continuation of a number of
trends in the computer industry, including the migration by end-users to
multi-vendor and multi-system computing environments, the overall increase in
the sophistication and interdependency of computing technology, and a focus by
managers on cost-efficient information technology management. We believe these
trends have resulted in a movement toward outsourcing and an increased demand
for product and support service providers that have the ability to provide a
broad range of multi-vendor product and support services. There can be no
assurance these trends will continue into the future. Any failure to anticipate
or respond adequately to technological developments and customer requirements
could have a material adverse effect on our business, operating results and
financial condition.
INVENTORY VALUE
As a distributor, we incur the risk that the value of our inventory will be
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. Accordingly,
we seek provisions in our vendor agreements common to industry practice which
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.
WARRANTIES
Our suppliers generally warrant the products we distribute and allow us to
return defective products, including those that have been returned to us by our
customers. We do not independently warrant the products which we distribute,
except that we do warrant our services with regard to the products which we
configure for our customers, and products that we build to order from components
purchased from other sources. Historically, our warranty costs have been
insignificant.
COMPETITION
The computer services industry is intensely competitive and many of our
competitors have capital, marketing expertise and personnel resources far
superior to that of ours. There can be no assurance that we will be able to
compete successfully in the future or that competitive pressures will not result
in price reductions or other developments in our market which could have a
material adverse effect on our business.
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RECRUITMENT AND RETENTION OF TECHNICAL PERSONNEL
We depend upon an ability to attract, hire and retain technical personnel who
possess the skills and experience necessary to meet our personnel needs and the
staffing requirements of our clients. Competition for individuals with proven
technical skills is intense, and the computer industry in general experiences a
high rate of attrition of such personnel. We compete for such individuals with
other systems integrators and providers of outsourcing services as well as
temporary personnel agencies, computer systems consultants, clients and
potential clients. Failure to attract and retain sufficient technical personnel
would have a material adverse effect on our business, operating results and
financial condition
YEAR 2000 RISKS
The Year 2000 problem concerns the inability of certain computer systems to
appropriately recognize the year 2000 when the last two digits of the year are
entered in the date field. We have assessed our Year 2000 requirements and
believe that expenditures necessary to make our major computer systems and some
non-critical programs Year 2000 compliant will be immaterial. There can be no
assurance at this point, however, that the Year 2000 problem will not have a
material adverse effect upon our operating results and financial condition. For
more information on our assessment of the Year 2000 risk, please see "Year 2000"
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operation" in this Registration Statement.
DEPENDENCE ON CONTINUED MANUFACTURER CERTIFICATION
The future success of our FrontLine business depends in part on our continued
certification from leading manufacturers. Without such authorizations, we would
be unable to provide the range of services currently offered. There can be no
assurance that such manufacturers will continue to certify us as an approved
service provider, and the loss of one or more of such authorizations could have
a material adverse effect on our FrontLine business, operating results or
financial condition
DEPENDENCE ON SUPPLIERS
One supplier accounted for approximately 18%, 20% and 30% of our total purchases
for the years ended December 31, 1998, 1997 and 1996, respectively. During the
year ended December 31, 1998, one additional supplier accounted for
approximately 13% of our total purchases. Although we have not experienced
significant problems with suppliers, there can be no assurance that such
relationships will continue or, in the event of a termination of our
relationship with any given supplier, that we would be able to obtain
alternative sources of supply on comparable terms without a material disruption
in our ability to provide products and services to our clients. This may cause a
possible loss of sales that could adversely affect our operating results.
PROJECT RISKS
The nature of our engagements exposes us to a variety of risks. Many of our
engagements involve projects that are critical to the operations of our clients'
businesses. Our failure or inability to meet a client's expectations in the
performance of our services or to do so in the time frame required by such
client could result in a claim for substantial damages, regardless of whether we
were responsible for such failure. We are in the business of employing people
and placing them in the workplace of other businesses. Therefore, we are also
exposed to liability with respect to actions taken by our employees while on
assignment, such as damages caused by employee errors and omissions, misuse of
client proprietary information, misappropriation of funds, discrimination and
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harassment, theft of client property, other criminal activity or torts and other
claims. Although we maintain general liability insurance coverage in the
aggregate amount of $4,000,000, there can be no assurance that such coverage
will continue to be available on reasonable terms or in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against us that exceed available insurance coverage or changes in our insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on our business,
operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
Our continued success will depend to a significant extent upon our senior
management, including Theodore Li, our President. The loss of the services of
Mr. Li, or one or more other key employees could have a material adverse effect
on our business, financial condition or operating results. We do not have key
man insurance on the lives of any of our senior management.
EMPLOYEES
At March 1, 1999, we had approximately 90 full time employees, all of
whom are non-union, and three executive officers.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
The Company has no foreign operations. While we distribute computer
products abroad, we do not segregate export sales from domestic sales.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA.
The following table contains certain selected financial data of the
Company and is qualified by the more detailed consolidated financial statements
and the notes thereto provided in this Registration Statement. The financial
data as of and for the years ended December 31, 1996 and 1997, have been derived
from the Company's consolidated financial statements, which statements were
audited by Meredith, Cardozo, Lanz and Chiu LLP. The financial data as of and
for the year ended December 31, 1998, has been derived from the Company's
consolidated financial statements, which were audited by BDO Seidman, LLP. The
consolidated financial statements are included elsewhere in this Registration
Statement. The financial data as of and for the years ended December 31, 1995
and 1994 have been derived from the Company's unaudited financial statements.
<TABLE>
<CAPTION>
Statement of
Operations Data Fiscal Year Ended December 31
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales $105,431,200 $96,388,500 $94,256,600 $58,714,600 $30,427,300
Net Income 1,813,000 1,246,900 2,363,400 1,497,800 780,200
Net Income per share
to Common Shareholders -
Basic and Diluted 0.19 0.14 0.26 0.17 0.09
Balance Sheet Data December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (unaudited)
Current Assets $16,731,800 $10,847,800 $9,951,600 $8,692,500 $4,701,800
Current Liabilities 8,955,100 5,116,900 5,652,900 8,063,300 2,897,900
Total Assets 20,874,700 15,019,500 10,929,100 8,820,800 4,807,500
Long-Term Debt 3,377,100 3,428,400 -- -- 803,000
Total Liabilities 12,363,700 8,576,300 5,842,600 6,216,400 3,700,900
Shareholders' Equity 8,511,000 6,443,200 5,086,500 2,604,400 1,106,600
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
COMPANY OVERVIEW
Pacific Magtron International Corp., a Nevada corporation (the
"Company" or "Pacific Magtron") is an integrated solutions provider of computer
related equipment and services. The Company's primary business is the wholesale
distribution of computer and related hardware components and software for
personal computers to value added resellers, retailers, systems integrators,
original equipment manufacturers, independent hardware and software vendors,
consultants, and contractors. In May 1998, the Company formed a corporate
information systems group called FrontLine Network Consulting ("FrontLine") with
the goal of serving the networking and personal computer requirements of
corporate customers. As used herein and unless otherwise indicated, the terms
"Company" "we" and "our" refer to Pacific Magtron International Corp. and each
of its operating divisions and subsidiaries.
13
<PAGE>
OPERATING RESULTS
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997
Sales for the year ended December 31, 1998 were $105,431,200, an
increase of $9,042,700, or approximately 9%, compared to $96,388,500 for the
year ended December 31, 1997. Sales increased primarily due to increased market
share achieved through expanded marketing efforts by the Company's computer
products group. In addition, approximately $1,524,000 of the sales earned by the
Company in 1998 were attributable to the new FrontLine division that was formed
in May 1998 to serve the networking and personal computer requirements of
corporate customers.
Gross margin for the year ended December 31, 1998 was $7,128,200, an
increase of $1,104,400, or 18%, compared to $6,023,800 for the year ended
December 31, 1997. The gross margin as a percentage of sales increased from 6.2%
for the year ended December 31, 1997 to 6.8% for the year ended December 31,
1998. This increase in the gross margin percentage arose primarily as a result
of better cost controls and the focus on marketing product lines with a higher
gross margin. The results of the FrontLine division had a minimal effect on the
gross margin in 1998 because FrontLine was formed in May 1998 and was in the
early stages of developing its customer base during the remainder of that year.
Selling, general and administrative expenses for the year ended
December 31, 1998 were $3,986,100, an increase of $134,500, or 3%, compared to
$3,851,600 for the year ended December 31, 1997. The noted increase is primarily
a result of the expansion of the Company's business, including the ramp-up of
the Company's FrontLine division during 1998. In addition, the Company incurred
additional expenses in 1998 in connection with the transition to an active
publicly traded company. The noted increase is somewhat offset by a decrease in
compensation expense to officers as no bonuses were paid to the officers of the
Company in 1998 while $500,000 of bonuses were paid to the officers of the
Company in 1997. As a percentage of sales, selling, general and administrative
expenses decreased to 3.78% in the year ended December 31, 1998 as compared to
4.00% in the year ended December 31, 1997 reflecting a better absorption of the
fixed cost component of selling, general and administrative expenses.
Income from operations for the year ended December 31, 1998 was
$3,142,100, an increase of $969,900, or 45%, as compared to $2,172,200 for the
year ended December 31, 1997. As a percentage of sales, income from operations
increased to 2.98% for the year ended December 31, 1998 as compared to 2.25% for
the year ended December 31, 1997. This increase was primarily due to normal
business growth and the addition of higher margin product lines which resulted
in higher gross margin (as a percentage of sales and in absolute dollars) and a
better absorption of the fixed cost component of selling, general and
administrative expenses.
Interest expense for the year ended December 31, 1998 was $278,600, an
increase of $40,000 or 17%, compared to $238,600 for the year ended December 31,
1997. This increase was due to an entire year of mortgage interest paid in 1998
for the Company's new office building which was purchased during 1997. Interest
income increased from $158,800 for the year ended December 31, 1997 to $177,400
for the year ended December 31, 1998, an increase of $18,600, or 12%, which was
principally due to better cash management.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996
Revenue for fiscal 1997 was $96,388,500, an increase of $2,131,900, or
approximately 2.3%, compared to $94,256,600 for fiscal 1996. Revenues increased
chiefly as a result of expanded marketing efforts.
14
<PAGE>
Gross profit for fiscal 1997 was $6,023,800, a decrease of $371,500, or
5.8%, compared to $6,395,300 for fiscal 1996. This decrease in gross margin to
6.2% for fiscal 1997 from 6.8% for fiscal 1996 was primarily the result of
pressures on sales prices due to increased competition.
Selling, general and administrative expenses for fiscal 1997 were
$3,851,600, an increase of $1,339,900, or 53.3%, compared to $2,511,700 for
fiscal 1996. As a percentage of revenue, selling, general and administrative
expenses increased to 4% in fiscal 1997 from 2.7% in fiscal 1996. The increase
was primarily due to the expansion of the Company's business, the hiring of
twenty additional employees which increased the Company's workforce by 30%, and
payment of bonuses to the Company's officers in the sum of $500,000.
Income from operations for fiscal 1997 was $2,172,200, a decrease of
$1,711,400, compared to $3,883,600 for fiscal 1996. As a percentage of revenue,
income from operations decreased to 2.3% in fiscal 1997 as compared to 4.1% for
fiscal 1996. The decrease resulted primarily from a narrowing of profit margins
due to competition and an increase of selling, general and administrative
expenses resulting from the expansion of the Company's business.
Interest expense for fiscal 1997 was $238,600, an increase of $200,700,
or 530%, compared to $37,900 for fiscal 1996. This increase resulted primarily
from mortgage interest paid for the new office building. Interest income
increased from $129,800 for fiscal 1996 to $158,800 for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the year ended December
31, 1998 was $2,191,300, which reflected the net effect of increases in accounts
receivable and inventories and was partially offset by the net income for the
period and an increase in accounts payable. The increase in the Company's
accounts receivable, inventory and accounts payable is attributable to the
Company's expansion of its product lines and growth in sales. The Company does
not believe that these increases represent a long-term trend which will
adversely affect liquidity. Net cash provided by operating activities during
fiscal 1997 was $412,100, a decrease of $1,896,900, compared to $2,309,000 in
fiscal 1996. The net cash provided by operating activities in fiscal 1997
reflects net income for the year and a decrease in inventories that was mostly
offset by the decrease in accounts payable and income tax payable and increase
in accounts receivable.
Net cash used in investing activities was $91,000 for the year ended
December 31, 1998, primarily reflecting cash used for the acquisition of
property and equipment and advances made on a note receivable. Net cash provided
by investing activities in fiscal 1997 was $13,600, primarily resulting from a
decrease in other assets compared to a use of net cash for investing activities
in fiscal 1996 of $699,400, which was due mainly to a deposit made on the new
office building.
Net cash provided by financing activities was $2,216,500 for the year
ended December 31, 1998, primarily from the increase in floor plan inventory
loans, which was partially offset by payment of the mortgage loans for the
office building. The Company was able to obtain favorable financing terms on its
floor plan inventory loan during the second half of 1998, which allowed the
Company to increase the amount and number of lines of its inventory as part of
its plan to increase sales in 1998. The $7.0 million inventory loan is
collateralized by the inventory purchased, proceeds from the sale of the
inventory and a personal guarantee by one of the Company's principal
shareholders. The outstanding balance of the inventory loan at December 31, 1998
was $2,305,000 and the loan is subject to 45-day repayment terms, at which time
interest begins to accrue at the prime rate, which was 7.75% as of December 31,
1998. Net cash used in
15
<PAGE>
financing activities was $117,700 for fiscal 1997 as compared to net cash
provided by financing of $75,500 in fiscal 1996, a change of approximately
$193,200. The fluctuation is due primarily to the 1997 decrease in the floor
plan inventory loans, payment of a loan fee and principal payments on the loan
received from a bank for the office building.
As of December 31, 1998 the Company's material commitments for capital
expenditures consisted of approximately $350,000 for improvements to the
building owned and occupied by the Company. The Company believes that the cash
flow from operations and borrowing available under its $7.0 million inventory
floor plan loan will satisfy the Company's anticipated requirements for working
capital through at least the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
affect its financial statements.
INFLATION
Inflation has not had a material effect upon the Company's results of
operations to date. In the event the rate of inflation should accelerate in the
future, it is expected that costs in connection with the provision by the
Company of its services and products will increase, and, to the extent such
increased costs are not offset by increased revenues, the operations of the
Company may be adversely affected.
YEAR 2000
The Year 2000 problem concerns the inability of certain computer
systems to appropriately recognize the Year 2000 when the last two digits of the
year are entered in the date field. The Company's date critical functions
related to the Year 2000 and beyond, such as sales, distribution, purchasing,
inventory control, merchandise, planning and replenishment, facilities, and
financial systems, may be adversely affected unless these computer systems are
or become Year 2000 compliant.
The Company's management is in the process of assessing the Company's
Year 2000 requirements and believes that expenditures necessary to make the
Company's major computer systems and some non-critical programs Year 2000
compliant will be immaterial. The Company estimates that a complete assessment
of all of its information technology and non-information technology systems will
have been evaluated for Year 2000 problems on or before July 31, 1999. The
Company estimates that the total cost of identifying and addressing Year 2000
problems will be $75,000, of which $10,000 has been spent or incurred to date.
16
<PAGE>
The Company has not yet developed a contingency plan for dealing with
the worst case scenario, and such scenario has not yet been clearly identified.
The Company plans to complete such an analysis by July 31, 1999 in order to
minimize the risks associated with potential Year 2000 disruptions, including
assessing the need to locate alternate vendors or service providers.
The Company's Year 2000 compliance is partially dependent upon key
third parties also being Year 2000 compliant on a timely basis. The Company
could be adversely affected by the Year 2000 problem if computer systems of
third parties such as banks, suppliers and others with whom the Company does
business fail to address the Year 2000 problem successfully. For example, the
Company may be adversely affected by, among other things, warranty and other
claims made by the Company's suppliers related to product failures caused by the
Year 2000 problem, the disruption or inaccuracy of data provided to the Company
by non-Year 2000 compliant third parties, and the failure of the Company's
service providers to become Year 2000 compliant.
In an effort to evaluate and reduce its exposure in this area, the
Company intends to make an inquiry of its vendors and other business partners
about their progress in identifying and addressing problems that their computer
systems may face in correctly processing date information related to the Year
2000. In particular, the Company will seek to obtain statements from a
substantial majority of its suppliers that certain of their products are Year
2000 compliant, can be upgraded to meet Year 2000 demands, or do not affect
"date sensitive" information. The Company estimates that this process, including
analysis of responses and follow up interviews will be complete on or before
June 30, 1999.
The Company's management believes that the purchasing patterns of
customers and prospective customers might be affected by Year 2000 issues. Many
companies may need to modify or upgrade their information systems to address the
Year 2000 problem. The effects of this issue and of the efforts by other
companies to address it are unclear. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures might result in reduced funds available to purchase services
and products such as those that the Company offers.
The Company has no reason to believe that its exposure to the risks of
lack of supplier and customer Year 2000 readiness is any greater than the
exposure to such risks that affect its competitors generally. However, if a
significant number of the Company's key suppliers, customers and other business
partners experience business disruptions as a result of their lack of Year 2000
readiness, their problems could have a material adverse effect on the financial
position and operations of the Company. In addition, if all Year 2000 issues
within the Company's business are not properly identified, there can be no
assurance that the Year 2000 issue will not have a material adverse effect on
the Company's results of operations or financial position.
The Company's cost estimates and time frames will be influenced by its
ability to identify Year 2000 problems, the nature of programming required to
fix any problems, and the compliance success of third parties. For those
reasons, no assurance can be given at this point that the Company's computer
system will be Year 2000 compliant in a timely manner or that the Company will
not incur significant additional expenses pursuing Year 2000 compliance.
17
<PAGE>
FORWARD LOOKING INFORMATION
This Registration Statement contains certain forward-looking statements
and information. The cautionary statements made herein should be read as being
applicable to all related forward- looking statements wherever they appear.
Forward-looking statements, by their very nature, include risks and
uncertainties. Accordingly, our actual results could differ materially from
those discussed herein. A wide variety of factors could cause or contribute to
such differences and could adversely impact revenues, profitability, cash flows
and capital needs. Such factors, many of which are beyond our control, include
the following: our success in obtaining new contracts; the volume and type of
work orders that are received under such contracts; the accuracy of the cost
estimates for the projects; our ability to complete the project on time and
within budget; levels of, and ability to collect accounts receivable;
availability of trained personnel and utilization of our capacity to complete
work; competition and competitive pressures on pricing; and economic conditions
in the United States and in the regions served.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material risk based on interest rate
fluctuation, exchange rate fluctuation, or commodity price fluctuation.
ITEM 3. DESCRIPTION OF PROPERTY
The Company owns property located at 1600 California Circle, Milpitas,
California 95035, subject to mortgages in the amount of $3,428,300 at December
31, 1998. This property is the location of our executive office and warehouse
and is suitable for the current size and nature of the Company's operations.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, as of March 1, 1999, with
respect to the number of shares of Common Stock of the Company beneficially
owned by individual directors, by all directors and officers of the Company as a
group, and by persons known to own more than 5% of the Company's Common Stock.
The Company has no other class of voting stock outstanding.
NAME OF BENEFICIAL PERCENT OF COMMON
OWNER AND ADDRESS NUMBER OF SHARES STOCK OWNED
- ----------------- ---------------- -----------
Theodore S. Li 4,500,000 45%
1600 California Circle
Milpitas, California 95035
Hui "Cynthia" Lee 4,500,000 45%
1600 California Circle
Milpitas, California 95035
Betty Li (1) -0- -0-
1600 California Circle
Milpitas, California 95035
Jey Hsin Yao (2) -0- -0-
1600 California Circle
Milpitas, California 95035
All Directors and Officers as a 9,000,000 90%
Group (four persons)
- ----------
(1) Betty Li is the wife of Theodore S. Li.
(2) Jey Hsin Yao is the husband of Cynthia Lee.
18
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to directors
and executive officers of the Company with the year in which each director's
term expires in parentheses.
NAME AGE POSITION WITH THE COMPANY AND TENURE
---- --- ------------------------------------
Theodore S. Li 41 Director, President and Treasurer since 1998.
(1999)
Hui "Cynthia" Lee 36 Director and Secretary since 1998. (1999)
Betty Li (1) 37 Director since 1998. (1999)
Jey Hsin Yao (2) 36 Director since 1998. (1999)
- ----------
(1) Betty Li is the wife of Theodore S. Li.
(2) Jey Hsin Yao is the husband of Cynthia Lee.
THEODORE S. LI has served as the President, Treasurer and a Director of
the Company since 1998 and as the President and a Director of PMI since 1995. He
is responsible for the Company's operations, technical functions and finance.
HUI "CYNTHIA" LEE has served as the Secretary and a Director of the
Company since 1998, and as a Director and Vice President, Sales and Purchasing
of PMI since 1994. She is responsible for the Company's sales and purchasing
functions.
BETTY LI has served as a Director of the Company since 1998, and as a
Director of PMI since 1995. She has been an engineer with Motorola since 1988.
JEY HSIN YAO has served as a Director of the Company since 1998, and as
the Secretary and a Director of PMI since 1995. He has been employed at Fujitsu
as a senior researcher since 1992.
19
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the
Company to the chief executive officer and the most highly compensated executive
officers and key employees whose total remuneration exceeded $100,000 for
services rendered in all capacities to the Company during the last three
completed fiscal years.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------- ---------------------------------------
Awards Payouts
-------------------- -----------------
Other All
Name and Annual Restricted Other
Principal Compen- Stock Options/ LTIP Compen-
Positions Year(1) Salary Bonus sation Award(s) SARs Payouts sation(2)
- --------- ------- ------ ----- ------ -------- ---- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Theodore S. Li 1998 $120,000 -- -- -- -- -- $19,000
President, 1997 120,000 $250,000 -- -- -- -- 19,000
Treasurer and 1996 120,000 -- -- -- -- -- 19,000
Director
Hui "Cynthia" 1998 97,500 -- -- -- -- -- 19,000
Lee, Secretary 1997 75,540 250,000 -- -- -- -- 19,000
and Director 1996 -- -- -- -- -- -- 19,000
</TABLE>
- ----------
(1) The amounts set forth for the fiscal years 1997 and 1996 reflect
compensation as executive officers of PMI. The amounts set forth for 1998
represent compensation paid by PMI from January 1, 1998 to July 17, 1998,
and compensation paid by the Company from July 18, 1998 through December
31, 1998.
(2) The amounts set forth in this column are the estimated automobile
allowances received by the persons in the table.
STOCK OPTION PLAN STOCK OPTION PLAN
The Company adopted the 1998 Stock Option Plan (the "1998 Plan") on
July 16, 1998. Under the 1998 Plan, 1,000,000 shares of the Company's Common
Stock are reserved for issuance. The 1998 Plan authorizes the Company to grant
to key employees and directors of the Company incentive stock options and
non-qualified stock options to purchase shares of Common Stock.
The objectives of the 1998 Plan are to provide incentives to key
employees and to directors to achieve financial results aimed at increasing
shareholder value and attracting talented individuals to the Company. The Board
of Directors, or a Compensation Committee that may be formed by the Board and
comprised of non-employee directors, will administer the 1998 Plan and make the
initial determinations and recommendations to the Board as to the persons to
whom options will be granted and the amount, terms, conditions, and restrictions
of such awards. Although the 1998 Plan does not specify what portion of the
shares may be awarded in the form of incentive stock options or non-statutory
options, it is anticipated that a substantially greater number of incentive
stock options will be awarded under the 1998 Plan. Incentive stock options
awarded to employees of the Company are qualified stock options under the
Internal Revenue Code. Further, the 1998 Plan is a stock option plan meeting the
requirements of Rule 16b-3 ("Rule 16b-3") promulgated under the Securities and
Exchange Act of 1934, as amended ("Exchange Act"). Persons eligible to be
granted incentive stock options under the 1998 Plan will be those employees of
the Company whose performance, in the judgment of the Board or Compensation
Committee, can have significant effect on the success of the Company.
20
<PAGE>
The 1998 Plan will be administered by the Board of Directors or by a
Compensation Committee established by the Board. The Board or the Committee will
have authority to interpret the Plan's provisions, to establish and amend rules
for its administration and to make decisions or recommendations to the Board, in
the case of the Committee, as to the types and amounts of awards to be made
pursuant to the Plan, subject to the Plan's limitations.
Incentive stock options may be granted under the Plan for terms of up
to ten years and at exercise prices at least equal to 100% of the fair market
value of the Common Stock as of the date of grant, except that incentive stock
options granted to any person who owns, immediately after such grant, stock
possessing more than 10% of the combined voting power of all classes of the
Company's stock or of any parent or subsidiary corporation must have an exercise
price at least equal to 110% of the fair market value of the Common Stock on the
date of grant. Non-Statutory stock options will have exercise prices as
determined by the Compensation Committee or the Board. The aggregate fair market
value, determined as of the time an incentive stock option is granted, of the
Common Stock with respect to which incentive stock options are exercisable by an
employee for the first time during any calendar year, shall not exceed $100,000.
There is no aggregate dollar limitation on the amount of non-statutory stock
options which may be exercisable for the first time by an optionee during any
calendar year. Payment of the exercise price for any option may be in cash, by
withheld shares which upon exercise of an option having a fair market value at
the time the option is exercised equal to the option price (plus applicable
withholding tax) or in the form of shares of the Company's Common Stock. Any
option granted under the Plan will expire at the time fixed by the Board or the
Committee, which will not be more than ten years after the date it is granted
or, in the case of any person who owns more than 10% of the combined voting
power of all classes of the Company's stock or of any subsidiary corporation,
not more than five years after the date of grant. The Board or the Compensation
Committee may also specify when all or part of an option becomes exercisable,
but in the absence of such specification, the option will ordinarily be
exercisable in whole or part at any time during its term. Subject to the
foregoing, the Board or the Compensation Committee may accelerate the
exercisability of any option in its discretion.
Options granted under the Plan are not assignable. Incentive Stock
Options may be exercised only while the optionee is employed by the Company or
within twelve months after termination by reason of death, within twelve months
after the date of disability, or within three months after termination for any
other reason.
As of the date of this Registration Statement, 176,780 options to
purchase shares have been granted by the Company under the Plan to employees,
none of whom are officers or directors. Of the options granted, 31,200 are
exercisable at $2.42 per share for a term of three years commencing March 1998,
44,200 are exercisable at $2.42 per share for a term of four years commencing
March 1998, 41,948 are exercisable at $4.00 per share for a term of three years
commencing November 1998, and 59,432 are exercisable at $4.00 per share for a
term of four years commencing November 1998.
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.
21
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has two notes receivable outstanding, each in the original
principal amount of $90,000, payable by Theodore Li and Cynthia Lee. The notes
bear interest at an annual rate of five percent (5%) and had an original term of
three years, which has been extended to a term of four years maturing on October
9, 1999. The principal and interest balance on the two notes combined as of
December 31, 1998 was $268,100.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock was not traded until July 10, 1998. From such date to
the present our Common Stock has been trading on the Nasdaq OTC Bulletin Board.
MARKET INFORMATION
YEAR ENDED DECEMBER 31, 1998 LOW HIGH
- ---------------------------- --- ----
Third Quarter (commencing July 10, 1998) $3.00 $7.875
Fourth Quarter 4.00 6.00
NUMBER OF SHAREHOLDERS
The number of beneficial holders of the Common Stock of the Company as
of the close of business on March 1, 1999 was approximately 290.
DIVIDEND POLICY
To date, the Company has declared no cash dividends on its Common
Stock, and does not expect to pay cash dividends in the next term. The Company
intends to retain future earnings, if any, to provide funds for operation of its
business.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On July 16, 1998, the Company issued 9,000,000 restricted shares of its
Common Stock in exchange for 100% of the issued and outstanding capital stock of
PMI. Theodore S. Li and Hui "Cynthia" Lee were the sole shareholders of PMI, and
were each issued 4,500,000 shares of the Company's Common Stock in exchange for
their interest in PMI. The transaction was structured as a tax-free
reorganization.
22
<PAGE>
ITEM 11. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 25,000,000 shares of Common Stock,
$.001 par value per share, of which 10,100,000 are outstanding as of the date of
this Registration Statement.
Holders of the Common Stock are entitled to one vote for each share
owned for all matters to be voted on by the shareholders. Holders of the Common
Stock are entitled to receive dividends as may be declared from time to time by
the Board of Directors, and in the event of any liquidation, dissolution, or
winding up of the affairs of the Corporation, are entitled to receive a pro rata
share of any assets of the corporation legally available for distribution. There
are no redemption or sinking fund provisions applicable to the Common Stock. The
rights of the holders of the Common Stock are subject to any rights that may be
fixed for the holders of preferred stock, if and when any preferred stock is
issued. The Common Stock currently outstanding is validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock,
par value $.001 per share, of which no shares are currently outstanding. The
Preferred Stock may be issued from time to time as authorized by the Board of
Directors in one or more series for such consideration and with such relative
rights, privileges and preferences as the Board may determine. Accordingly, the
Board has the power to fix the dividend rate and to establish the provisions, if
any, relating to voting rights, redemption rate, sinking fund, liquidation,
preferences and conversion rights for any series of preferred stock issued in
the future. It is not possible to state the actual effect of the authorization
of additional preferred stock upon the rights of holders of the Common Stock
until the Board determines the specific rights of the holders of any additional
series of preferred stock. The Board's authority to issue preferred stock
provides a convenient vehicle in connection with possible acquisitions and other
corporate purposes.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company allow for the
indemnification of directors and officers to the fullest extent permitted by
Nevada law. Under a provision in the Articles of Incorporation, the Company will
indemnify and pay the expenses of any person who is or was made, or threatened
to be made, a party to an action or proceeding by reason of the fact that such
person is or was a director or officer of the Company or is or was serving at
the request or with the prior approval of the Company as a director or officer
of another corporation, against any liability asserted against such person and
incurred by such person in any capacity arising out of that person's status as
such.
Insofar as indemnification for liabilities arising out of the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provision, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
23
<PAGE>
or controlling person in connection with any securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements, together
with the notes thereto and the reports thereon of BDO Seidman, LLP and Meredith,
Cardozo, Lanz and Chiu LLP appearing on pages F-1 through F-22 of this Form 10.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(A) INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public
Accountants, BDO Seidman, LLP F-1
Report of Independent Certified Public
Accountants, Meredith, Cardozo, Lanz and Chiu LLP F-2
Consolidated Financial Statements:
Consolidated balance sheets as of December 31, 1998
and 1997 F-3
Consolidated statements of income for the years
ended December 31, 1998, 1997 and 1996 F-4
Consolidated statements of shareholders' equity
for the years ended December 31, 1998, 1997 and
1996 F-5
Consolidated statements of cash flows for the years
ended December 31, 1998, 1997 and 1996 F-6
Notes to consolidated financial statements F-7 - F-21
Schedule I - Valuation and qualifying accounts F-22
24
<PAGE>
(b) EXHIBITS
Exhibit
Number Description
------ -----------
2.1 Stock Purchase Agreement, dated July 17, 1998, by and between
Pacific Magtron, Inc., the Shareholders of Pacific Magtron,
Inc., and Wildfire Capital Corporation
3.1 Articles of Incorporation, as Amended and Restated
3.2 Bylaws, as Amended and Restated
10.1 1998 Stock Option Plan
10.2 Sony Electronics Inc. Value Added Reseller Agreement, dated May
1, 1996
10.3 Logitech, Inc. Distribution and Installation Agreement, dated
March 26, 1997
10.4 Wells Fargo Term Note, dated February 4, 1997
10.5 Colson Services Corp. Servicing Agent Agreement
10.6 Creative Labs, Inc. Mutual Confidentiality and Non-Disclosure
Agreement, dated September 10, 1997
21.1 Subsidiaries
27.1 Financial Data Schedule
25
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
Date: March 31, 1999 By: /s/ Theodore S. Li
---------------------------------
Theodore S. Li, President
Chief Executive Officer
26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 subsidiary (the Company) as of December 31, 1998, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the year then ended. We have also audited Schedule I - Valuation and
Qualifying Accounts as of and for the year ended December 31, 1998. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit. The
consolidated financial statements and schedule of Pacific Magtron International
Corp. and subsidiary as of December 31, 1997 and for the years ended December
31, 1997 and 1996, were audited by Meredith, Cardozo, Lanz & Chiu LLP, whose
practice has been combined with our Firm and whose report dated August 20, 1998
expressed an unqualified opinion on those statements and schedule.
We conducted our audit in accordance with generally accepted auditing
principles. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the consolidated financial statements and
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement and schedule presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pacific Magtron International Corp. and subsidiary as of December 31, 1998, and
the results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedule referred to above presents fairly, in all
material respects, the information set forth therein as of and for the year
ended December 31, 1998.
BDO Seidman, LLP
San Jose, California
February 19, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 subsidiary (the Company) as of December 31, 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the years ended December 31, 1997 and 1996. We have also audited
Schedule I - Valuation and Qualifying Accounts as of and for the years ended
December 31, 1997 and 1996. These consolidated statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the consolidated financial statements and
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement and schedule presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pacific
Magtron International Corp. and subsidiary as of December 31, 1997, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, schedule referred to above presents fairly, in all
material respects, the information set forth therein as of and for the years
ended December 31, 1997 and 1996.
Meredith, Cardozo, Lanz & Chiu LLP
Milpitas, California
August 20, 1998
F-2
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 10) $ 3,197,100 $ 3,262,900
Accounts receivable, net of allowance for
doubtful accounts of $150,000 and
$113,100 in 1998 and 1997 (Note 10) 6,321,800 5,102,900
Inventories 6,390,300 2,066,800
Prepaid expenses and other current assets 393,200 83,200
Notes and interest receivable from
shareholders (Note 2) 268,100 204,300
Deferred income taxes (Note 6) 161,300 127,700
----------- -----------
TOTAL CURRENT ASSETS 16,731,800 10,847,800
PROPERTY, PLANT AND EQUIPMENT, net (Notes 3 and 4) 4,038,000 4,114,800
DEPOSITS AND OTHER ASSETS 104,900 56,900
----------- -----------
$20,874,700 $15,019,500
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable (Note 4) $ 51,200 $ 40,000
Floor plan inventory loans (Note 5) 2,305,000 48,400
Accounts payable 6,460,300 4,938,100
Accrued expenses 138,600 90,400
----------- -----------
TOTAL CURRENT LIABILITIES 8,955,100 5,116,900
NOTES PAYABLE, less current portion (Note 4) 3,377,100 3,428,400
DEFERRED INCOME TAXES (Note 6) 31,500 31,000
----------- -----------
TOTAL LIABILITIES 12,363,700 8,576,300
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 7, 8 and 9)
SHAREHOLDERS' EQUITY (Note 11):
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.001 par value; 25,000,000 shares
authorized; 10,100,000 and 9,000,000 shares
issued and outstanding, respectively 10,100 9,000
Additional paid-in capital 1,028,100 774,400
Retained earnings 7,472,800 5,659,800
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 8,511,000 6,443,200
----------- -----------
$20,874,700 $15,019,500
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------
SALES $105,431,200 $96,388,500 $94,256,600
COST OF SALES (Note 8) 98,303,000 90,364,700 87,861,300
------------ ----------- -----------
GROSS MARGIN 7,128,200 6,023,800 6,395,300
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,986,100 3,851,600 2,511,700
------------ ----------- -----------
INCOME FROM OPERATIONS 3,142,100 2,172,200 3,883,600
------------ ----------- -----------
OTHER EXPENSE (INCOME):
Interest income on shareholder notes (8,100) (10,800) (13,500)
Interest income (169,300) (148,000) (116,300)
Interest expense 278,600 238,600 37,900
Other -- (1,600) (4,800)
------------ ----------- -----------
TOTAL OTHER EXPENSE (INCOME) 101,200 78,200 (96,700)
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 3,040,900 2,094,000 3,980,300
INCOME TAXES (Note 6) 1,227,900 847,100 1,616,900
------------ ----------- -----------
NET INCOME $ 1,813,000 $ 1,246,900 $ 2,363,400
============ =========== ===========
Basic and diluted earnings per share $ 0.19 $ 0.14 $ 0.26
============ =========== ===========
Basic weighted average common shares
outstanding 9,503,300 8,988,500 8,978,600
Stock options 33,200 -- --
------------ ----------- -----------
Diluted weighted average common shares
outstanding 9,536,500 8,988,500 8,978,600
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 8,936,373 $ 9,000 $ 621,300 $2,049,500 $2,679,800
NET INCOME -- -- -- 2,363,400 2,363,400
---------- ------- ---------- ---------- ----------
BALANCES, December 31, 1996 8,936,373 9,000 621,300 4,412,900 5,043,200
Issuance of common stock in debt
conversion (Note 11) 63,627 -- 153,100 -- 153,100
NET INCOME -- -- -- 1,246,900 1,246,900
---------- ------- ---------- ---------- ----------
BALANCES, December 31, 1997 9,000,000 9,000 774,400 5,659,800 6,443,200
Issuance of common stock in connection
with reverse merger (Note 1) 1,000,000 1,000 13,800 -- 14,800
Issuance of common stock for consulting
services (Note 11) 100,000 100 239,900 -- 240,000
NET INCOME -- -- -- 1,813,000 1,813,000
---------- ------- ---------- ---------- ----------
BALANCES, December 31, 1998 10,100,000 $10,100 $1,028,100 $7,472,800 $8,511,000
========== ======= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,813,000 $ 1,246,900 $ 2,363,400
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 131,900 128,000 37,300
Provision for doubtful accounts 46,300 299,000 99,500
Deferred income taxes (33,100) 23,300 (44,500)
Amortization of prepaid consulting fee 55,000 -- --
Changes in operating assets and liabilities, net
of assets acquired and liabilities assumed:
Accounts receivable (1,265,200) (1,283,600) 669,600
Inventories (4,323,500) 614,000 (325,500)
Prepaid expenses and other current assets (184,700) (85,600) (4,800)
Accounts payable 1,522,200 (100,400) (255,900)
Accrued expenses 46,800 36,000 9,900
Income taxes payable -- (465,500) (240,000)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,191,300) 412,100 2,309,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in purchase of business 15,900 -- --
Notes and interest receivable from shareholders (63,800) (10,800) (13,500)
Deposits and other assets 12,000 623,800 (621,300)
Acquisition of property and equipment (55,100) (599,400) (64,600)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (91,000) 13,600 (699,400)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in floor plan
inventory loans 2,256,600 (46,100) 94,500
Payment of loan fee -- (42,000) --
Principal payments on SBA loan (23,500) (18,100) --
Principal payments on bank loan (16,600) (11,500) --
Payment on equipment loan -- -- (19,000)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,216,500 (117,700) 75,500
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (65,800) 308,000 1,685,100
CASH AND CASH EQUIVALENTS, beginning of year 3,262,900 2,954,900 1,269,800
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,197,100 $ 3,262,900 $ 2,954,900
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
The Company
Pacific Magtron International Corp. (formerly Wildfire Capital Corporation, a
publicly traded shell corporation) (the Company), a Nevada Corporation, was
incorporated on January 8, 1996.
On July 17, 1998 the Company completed the acquisition of 100% of the
outstanding common stock of Pacific Magtron, Inc. (PMI), in exchange for
9,000,000 shares of the Company's $.001 par value common stock. For accounting
purposes, the acquisition has been treated as the acquisition of the Company by
PMI with PMI as the acquiror (reverse acquisition). The historical financial
statements prior to July 17, 1998 are those of PMI. Since the Company prior to
the reverse acquisition was a public shell corporation with no significant
operations, pro-forma information giving effect to the acquisition is not
presented. All shares and per share data prior to the acquisition have been
restated to reflect the stock issuance as a recapitalization of PMI. The shares
held by the shareholders of the Company prior to the acquisition (1,000,000
shares after reflecting a two for three reverse stock split effected by the
Company immediately prior to the acquisition) have been recognized as if they
were issued in connection with the acquisition of the Company by PMI.
PMI, a California corporation, was incorporated on August 11, 1989. PMI's
principal activity consists of importing and wholesale distribution of
electronics products, computer components, and computer peripheral equipment to
various companies throughout the United States.
In May 1998, the Company formed its Frontline Network Consulting (Frontline)
division, a corporate information systems group which serves the networking and
personal computer requirements of corporate customers. Revenues and net income
earned by Frontline during 1998 were $1,524,000 (including service revenues of
$115,600) and $12,600, respectively, and Frontline's total assets were $908,200
at December 31, 1998.
F-7
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No.
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged assets or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain and loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Pacific Magtron International Corp. and its wholly-owned subsidiary, Pacific
Magtron Incorporated. All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments having original maturities
of 90 days or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company grants credit to its customers after undertaking an investigation of
credit risk for all significant amounts. An allowance for doubtful accounts is
provided for estimated credit losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such amounts. The allowance is
based on reviews of loss, adjustments history, current economic conditions and
other factors that deserve recognition in estimating potential losses. While
management uses the best information available in making its determination, the
ultimate recovery of recorded accounts receivable is also dependent upon future
economic and other conditions that may be beyond management's control.
INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the lower of
cost (moving weighted average method) or market.
F-9
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided using
the straight-line method over the related estimated useful lives, as follows:
Building 39 years
Furniture and fixtures 7 years
Computers and equipment 5 years
Automobiles 5 years
OTHER ASSETS
Other assets include loan origination fees that are being amortized on a method
which approximates the interest method.
ADVERTISING
The Company's policy is to charge all advertising costs to expense as incurred.
Advertising costs were $3,300, $18,200 and $57,400 for the years ended December
31, 1998, 1997 and 1996, respectively.
REVENUE RECOGNITION
The Company recognizes sales upon shipment provided no significant obligations
remain and collectibility is probable. A provision for estimated product returns
is established at the time of sale based upon historical return rates adjusted
for current economic conditions. Service revenues relating to services performed
by the Company's Frontline division are recognized as earned based upon contract
terms, which is generally as the service is performed.
F-10
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
WARRANTY REPAIRS
The Company is principally a distributor of numerous electronics products, for
which the original equipment manufacturer is responsible and liable for product
repairs and service. However, the Company does warrant its services with regards
to products configured for its customers and products built to order from
purchased components, and provides for the estimated costs of fulfilling these
warranty obligations at the time the related revenue is recorded. Historically,
warranty costs have been insignificant.
INCOME TAXES
The Company reports income taxes in accordance with SFAS No. 109, ACCOUNTING FOR
INCOME TAXES, which requires an asset and liability approach. This approach
results in the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary differences
between the book carrying amounts and the tax basis of assets and liabilities.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be deductible or taxable
when the assets and liabilities are recovered or settled. Future tax benefits
are subject to a valuation allowance when management believes it is more likely
than not that the deferred tax assets will not be realized.
LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets for impairment. When
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, the Company writes the asset down to its net realizable
value.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
F-11
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
+ CASH AND CASH EQUIVALENTS:
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates fair value because of the short maturity of these
instruments.
+ LONG-TERM DEBT:
The fair value of long-term debt is estimated based on current interest
rates available to the Company for debt instruments with similar terms and
remaining maturities.
+ NOTES RECEIVABLES FROM SHAREHOLDERS:
The fair value of the notes receivable from shareholders is estimated based
on current interest rates available to the Company for investments with
similar terms and remaining maturities.
As of December 31, 1998 and 1997, the fair values of the Company's
financial instruments approximate their historical carrying amounts.
EARNINGS PER SHARE
During 1998, the Company adopted the provisions of SFAS No. 128, EARNINGS PER
SHARE. SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity.
RECLASSIFICATION
Certain 1997 and 1996 financial statement amounts have been reclassified to
conform to the 1998 presentation.
F-12
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. NOTES AND INTEREST RECEIVABLE FROM SHAREHOLDERS
As of December 31, 1998 and 1997, notes receivable from two shareholders
aggregated $235,700 and $180,000, respectively. These notes bear interest at 5%
and are unsecured. Principal and interest are due on October 9, 1999. The
accrued interest receivable pertaining to these notes was $32,400 and $24,300 as
of December 31, 1998, and 1997, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of December 31, 1998, and 1997
follows:
DECEMBER 31, 1998 1997
- ------------ ---- ----
Building and improvements (Note 4) $2,827,400 $2,826,600
Land 1,158,600 1,158,600
Furniture and fixtures 228,900 193,700
Computers and equipment 68,800 54,700
Automobiles 91,000 91,000
---------- ----------
4,374,700 4,324,600
Less accumulated depreciation 336,700 209,800
---------- ----------
$4,038,000 $4,114,800
========== ==========
4. NOTES PAYABLE
In 1997, the Company obtained financing of $3,498,000 for the purchase of its
office and warehouse facility. Of the amount financed, $2,500,000 was in the
form of a 10-year bank loan utilizing a 30-year amortization period. This loan
bears interest at the bank's 90-day LIBOR rate (5.22% as of December 31, 1998)
plus 2.5%, and is secured by a deed of trust on the property. The balance of the
financing was obtained through a $998,000 Small Business Administration (SBA)
loan due in monthly installments through April 2017.
The SBA loan bears interest at 7.569%, and is secured by the underlying
property.
Under the bank loan, the Company is required, among other things, to maintain a
minimum debt service coverage, a maximum debt to tangible net worth ratio and
net income on an annual basis. As of December 31, 1998, the Company was in
compliance with all debt covenants.
F-13
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The balances of the notes as of December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Bank loan $2,471,800 $2,488,400
SBA loan 956,500 980,000
---------- ----------
3,428,300 3,468,400
Less current portion 51,200 40,000
---------- ----------
$3,377,100 $3,428,400
========== ==========
The aggregate amount of future maturities for notes payable are as follows:
YEARS ENDING DECEMBER 31, Amount
- ------------------------- ------
1999 $ 51,200
2000 55,800
2001 60,800
2002 66,200
2003 72,100
Thereafter 3,122,200
----------
$3,428,300
==========
5. FLOOR PLAN INVENTORY LOANS
The Company has a $7 million (including a $2 million overlimit) auto-renewing
floor plan inventory loan available from a financial institution which is
collateralized by the purchased inventory, any proceeds from its sale or
disposition, and a personal guarantee by one of the Company's officers and
principal shareholders. Borrowings under the floor plan line total $2,305,000
and $48,400 as of December 31, 1998 and 1997 and are subject to 45 day repayment
terms, at which time interest begins to accrue at the prime rate (7.75% as of
December 31, 1998).
F-14
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the years ended December 31, 1998, 1997 and 1996, income tax expense
comprises:
1998 CURRENT DEFERRED TOTAL
------- -------- -----
FEDERAL $ 986,000 $(31,300) $ 954,700
STATE 275,000 (1,800) 273,200
---------- -------- ----------
$1,261,000 $(33,100) $1,227,900
========== ======== ==========
1997 CURRENT DEFERRED TOTAL
------- -------- -----
Federal $ 627,900 $ 30,800 $ 658,700
State 195,900 (7,500) 188,400
---------- -------- ----------
$ 823,800 $ 23,300 $ 847,100
========== ======== ==========
1996 CURRENT DEFERRED TOTAL
------- -------- -----
Federal $1,285,700 $(43,700) $1,242,000
State 375,700 (800) 374,900
---------- -------- ----------
$1,661,400 $(44,500) $1,616,900
========== ======== ==========
The following summarizes the differences between the income tax expense and the
amount computed by applying the Federal income tax rate of 34% in 1998, 1997 and
1996 to income before income taxes:
YEAR ENDING DECEMBER 31, 1998 1997 1996
- ------------------------ ---- ---- ----
Federal income tax at statutory rate $1,033,900 $712,000 $1,353,300
State income taxes, net of federal benefit 194,000 135,100 263,600
---------- -------- ----------
$1,227,900 $847,100 $1,616,900
========== ======== ==========
F-15
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities as of December 31, 1998 and 1997 were
comprised of the following:
1998 1997
---- ----
Deferred tax assets:
State income taxes $ 93,500 $ 66,600
Reserves not currently deductible 61,800 50,700
Accrued compensation and benefit 6,000 10,400
-------- --------
$161,300 $127,700
======== ========
Deferred tax liabilities:
Deferred interest income -- 10,500
Accumulated depreciation 31,500 20,500
-------- --------
$ 31,500 $ 31,000
======== ========
7. LEASE COMMITMENTS
During 1998, 1997 and 1996, the Company leased two automobiles under operating
leases due to terminate in March 1999. As of December 31, 1998, remaining
payments due under these leases totalled $7,500.
During 1996, the Company leased its facilities under a non-cancelable operating
lease that terminated in December 1996. The Company extended the lease on a
month-to-month basis through February 1997. In addition to the stated lease
payments, the lease terms required the Company to pay common area maintenance,
property taxes, insurance, and certain other costs.
Total rent expense for the years ended December 31, 1998, 1997 and 1996 was
$29,700, $47,900 and $113,900, respectively.
F-16
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. MAJOR VENDORS
One vendor accounted for approximately 18%, 20% and 30% of the total purchases
for the years ended December 31, 1998, 1997 and 1996, respectively. During the
year ended December 31, 1998, one additional vendor accounted for approximately
13% of total purchases. No other vendors accounts for more than 10% of purchases
for any period presented. Management believes other vendors could supply similar
products on comparable terms. A change in suppliers, however, could cause a
delay in availability of products and a possible loss of sales, which could
affect operating results adversely.
9. EMPLOYEE BENEFIT PROGRAM - 401(k) PLAN
The Company has a 401(k) plan (the Plan) for its employees. The Plan is
available to all employees who have reached the age of twenty-one and who have
completed three months of service with the Company. Under the Plan, eligible
employees may defer a portion of their salaries as their contributions to the
Plan. The Company may make contributions equal to 25% of each participant's
contribution up to the lesser of $9,500 or 6% of employee's salary.
Contributions to the Plan totaled $12,800, $14,300 and $12,900, for the years
ended December 31, 1998, 1997 and 1996, respectively.
10. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high quality
financial institutions. As of December 31, 1998 and 1997, the Company had
deposits at one financial institution which aggregated $3,029,400 and
$2,828,300, respectively. Such funds are insured by the Federal Deposit
Insurance Company up to $100,000.
F-17
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A significant portion of the Company's revenues and accounts receivable are
derived from sales made primarily to unrelated companies in the computer
industry and related fields principally throughout the United States and as well
as some foreign countries, including Canada, the United Kingdom, France, Russia
and Israel. For the years ended December 31, 1998, 1997 and 1996, no individual
customer or foreign country comprised more than 10% of sales. The Company
believes any risk of accounting loss is significantly reduced due to the use of
various levels of credit insurance, diversity in end customers, geographic sales
areas and the Company extending credit based on established limits or terms. The
Company performs credit evaluations of its customers' financial condition
whenever necessary, and generally does not require cash collateral.
11. CAPITAL RISK
DEBT CONVERSION
In 1997, the two shareholders/officers of PMI converted their loans in the
amount of $153,100 into 21,360 shares of PMI's common stock (equivalent to
63,627 shares of the Company's common stock after giving effect to the
recapitalization described in Note 1), based on the fair value of PMI, as
determined by PMI's board of directors, at the time of conversion.
CONSULTING AGREEMENT
On July 17, 1998 the Company issued 100,000 restricted shares of its common
stock to an unrelated party under terms of a consulting agreement. The agreement
requires the consultant to provide introductions to a predetermined number of
investment banking contacts and provide certain financial advice to the Company
over a two year period. If the services are provided, the shares will vest 50%
on July 17, 1999 and 50% on July 17, 2000. If the services are not provided as
required, the consultant will forfeit those shares not vested. If the Company
makes an underwritten offering prior to either of the vesting dates and the
consultant has provided services in connection with such offering, all of the
shares not previously forfeited will vest on the close of the offering. The
Company recorded this transaction at $240,000, representing the estimated fair
value of the services to be provided. Included in other assets as of December
31, 1998 is $185,000 representing the unamortized portion of the prepaid
consulting fees.
F-18
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Shares Average Weighted- Remaining
Available Options Exercise Average Contractual
for Grant Outstanding Price Fair Value Life
--------- ----------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C>
July 16, 1998 1,000,000 -- $ -- $ -- --
Conversion of PMI options
(granted in March 1998) to
Plan options (75,400) 75,400 2.42 2.42
Options granted in November 1998 (101,400) 101,400 4.00 4.00
--------- ------- ----- ----- ---------
Balances, December 31, 1998 823,200 176,800 $3.33 $3.33 4.5 Years
========= ======= ===== ===== =========
Options exercisable at December
31, 1998 None
======
</TABLE>
Under the terms of the Plan, options are exercisable as determined by the Board
of Directors on the date of grant and expire five years from the date of grant.
The Company applies Accounting Principles Board (APB) No. 25, ACCOUNTING FOR
STOCK ISSUED TO Employees, and related Interpretations in accounting for the
plan. Under APB Opinion No. 25, because the exercise price of the Company stock
options equals or exceeds the estimated fair value of the underlying stock on
the date of grant, no compensation cost is recognized.
F-19
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plan had been
determined in accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of stock options at the grant date by
using the Black-Scholes option pricing-model with the following weighted-average
assumptions used for grants in 1998: no dividend yield; expected volatility of
54%; risk-free interest rate of 5.7%; and expected lives of 3 years for all plan
options.
Under the accounting provisions of FASB Statement No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
YEAR ENDING DECEMBER 31, 1998
Net income:
As reported $1,813,000
==========
Pro forma $1,732,100
==========
Basic earnings per share:
As reported $ 0.19
==========
Pro forma $ 0.18
==========
12. STATEMENTS OF CASH FLOWS
Cash was paid during the years ended December 31, 1998, 1997 and 1996 for:
YEARS ENDING DECEMBER 31, 1998 1997 1996
- ------------------------- ---- ---- ----
Income taxes $1,242,500 $1,345,400 $1,823,500
========== ========== ==========
Interest $ 278,600 $ 238,600 $ 37,900
========== ========== ==========
F-20
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As discussed in Note 11, non cash financing activities in 1998 resulted from the
issuance of 100,000 shares of its common stock to an unrelated party under the
terms of a consulting agreement.
As discussed in Note 11, non-cash financing activities in 1997 resulted from the
conversion of shareholder notes in the amount of $153,100.
As discussed in Note 4, non-cash investing and financing activities in 1997
resulted from obtaining financing of $3,498,000 for the purchase of the
Company's office facility and applying a deposit made in 1996 to the purchase
price.
F-21
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Writeoffs Charged to
Beginning Costs and of Ending
Balance Expense Accounts Balance
------- ------- -------- -------
Allowance for Doubtful Accounts:
- - Year ended December 31, 1996 $ 23,100 $ 99,500 $ (65,700) $ 56,900
- - Year ended December 31, 1997 56,900 299,000 (242,800) 113,100
- - Year ended December 31, 1998 $113,100 $ 46,300 $ (9,400) $150,000
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,197,100
<SECURITIES> 0
<RECEIVABLES> 6,321,800
<ALLOWANCES> 150,000
<INVENTORY> 6,390,300
<CURRENT-ASSETS> 16,731,800
<PP&E> 4,374,700
<DEPRECIATION> 336,700
<TOTAL-ASSETS> 20,874,700
<CURRENT-LIABILITIES> 8,955,100
<BONDS> 0
0
0
<COMMON> 10,100
<OTHER-SE> 8,500,900
<TOTAL-LIABILITY-AND-EQUITY> 20,874,700
<SALES> 105,431,200
<TOTAL-REVENUES> 105,431,200
<CGS> 98,303,000
<TOTAL-COSTS> 98,303,000
<OTHER-EXPENSES> 101,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,600
<INCOME-PRETAX> 3,040,900
<INCOME-TAX> 1,227,900
<INCOME-CONTINUING> 1,813,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,813,000
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
