SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Check One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to _____________
Commission file number 000-25277
PACIFIC MAGTRON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0353141
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1600 California Circle, Milpitas, California 95035
(Address of Principal Executive Offices) (Zip Code)
(408) 956-8888
(Registrant's Telephone Number, Including Area Code)
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check [X] whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common Stock, $.001 par value per share:
10,100,000 shares issued and outstanding at September 30, 1999
<PAGE>
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of December 31, 1998
and September 30, 1999 (Unaudited) 1-2
Consolidated statements of income for the three months and
nine months ended September 30, 1998 and 1999 (Unaudited) 3
Consolidated statements of cash flows for the nine months
ended September 30, 1998 and 1999 (Unaudited) 4
Notes to consolidated financial statements 5-8
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Part II - Other Information
Item 6. - Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Pacific Magtron International Corp.
Consolidated Balance Sheets
December 31, September 30,
1998 1999
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,197,100 $ 4,308,700
Accounts receivable, net of allowance for
doubtful accounts of $150,000 and $150,000 6,321,800 7,430,500
Inventories 6,390,300 3,234,000
Prepaid expenses and other current assets 548,000 283,800
Notes and interest receivable from shareholders 268,100 276,000
Deferred income taxes 161,300 161,300
----------- -----------
TOTAL CURRENT ASSETS 16,886,600 15,694,300
PROPERTY, PLANT AND EQUIPMENT, NET 4,038,000 4,602,200
DEPOSITS AND OTHER ASSETS 183,800 219,800
----------- -----------
$21,108,400 $20,516,300
=========== ===========
See accompanying notes to consolidated financial statements.
1
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Pacific Magtron International Corp.
Consolidated Balance Sheets
December 31, September 30,
1998 1999
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 51,200 $ 46,300
Floor plan inventory loans 2,305,000 1,528,200
Accounts payable 6,460,300 5,975,000
Accrued expenses 138,600 176,400
----------- -----------
TOTAL CURRENT LIABILITIES 8,955,100 7,725,900
NOTES PAYABLE, less current portion 3,377,100 3,349,700
DEFERRED INCOME TAXES 31,500 31,500
----------- -----------
TOTAL LIABILITIES 12,363,700 11,107,100
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
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 shares
issued and outstanding at December 31,
1998 and September 30, 1999 10,100 10,100
Additional paid-in capital 1,299,100 1,531,900
Retained earnings 7,435,500 7,867,200
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 8,744,700 9,409,200
----------- -----------
$21,108,400 $20,516,300
=========== ===========
See accompanying notes to consolidated financial statements.
2
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Pacific Magtron International Corp.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ 29,106,600 $ 28,505,700 $ 77,922,000 $ 79,128,400
COST OF SALES 27,006,900 26,314,800 72,697,300 73,119,800
------------ ------------ ------------ ------------
GROSS MARGIN 2,099,700 2,190,900 5,224,700 6,008,600
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 945,800 1,446,700 2,611,000 4,598,600
AMORTIZATION OF PREPAID CONSULTING FEE 52,100 276,600 52,100 626,700
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,101,800 467,600 2,561,600 783,300
------------ ------------ ------------ ------------
OTHER EXPENSE (INCOME):
Interest income on shareholder notes (2,500) (2,700) (8,100) (10,000)
Interest income (47,000) (40,700) (130,700) (126,600)
Interest expense 70,300 66,600 210,300 200,400
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE 20,800 23,200 71,500 63,800
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,081,000 444,400 2,490,100 719,500
INCOME TAXES 449,800 177,800 1,013,400 287,800
------------ ------------ ------------ ------------
NET INCOME $ 631,200 $ 266,600 $ 1,476,700 $ 431,700
------------ ------------ ------------ ------------
BASIC AND DILUTED EARNINGS PER SHARE $ 0.06 $ 0.03 $ 0.16 $ 0.04
------------ ------------ ------------ ------------
BASIC WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,908,700 10,100,000 9,306,200 10,100,000
STOCK OPTIONS 40,900 106,700 28,500 112,100
------------ ------------ ------------ ------------
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 9,949,600 10,206,700 9,334,700 10,212,100
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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Pacific Magtron International Corp.
Consolidated Statements of Cash Flows
Nine months ended
September 30,
--------------------------
1998 1999
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,476,700 $ 431,700
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 103,100 137,200
Amortization of prepaid consulting fee 52,100 626,700
Deferred income taxes (38,300) --
Changes in operating assets and liabilities:
Accounts receivable (2,689,800) (1,108,700)
Inventories (2,425,300) 3,156,300
Prepaid expenses and other current assets (63,800) (129,700)
Accounts payable 1,195,900 (485,300)
Accrued expenses 24,800 37,800
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (2,364,600) 2,666,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes and interest receivable from shareholders (55,700) (7,900)
Deposits and other assets 7,800 (36,000)
Acquisition of property and equipment (28,700) (701,400)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (76,600) (745,300)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in floor
plan inventory loans 1,096,100 (776,800)
Principal payments on SBA loan (17,400) (18,800)
Principal payments on bank loan (12,400) (13,500)
----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES 1,066,300 (809,100)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,374,900) 1,111,600
CASH AND CASH EQUIVALENTS, beginning of period 3,262,900 3,197,100
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,888,000 $ 4,308,700
=========== ===========
See accompanying notes to consolidated financial statements.
4
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Pacific Magtron International Corp.
Notes to Consolidated Financial Statements
1. ORGANIZATION
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 common stock. For accounting purposes, the
acquisition has been treated as the acquisition of the Company by PMI with PMI
as the acquirer (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 three for two 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 the importation and wholesale distribution of
electronics products, computer components, and computer peripheral equipment
throughout the United States.
In May 1998, the Company formed its Frontline Network Consulting (Frontline)
division, a corporate information systems group that serves the networking and
personal computer requirements of corporate customers. Revenues and net income
earned by Frontline during the nine months ended September 30, 1999 were
$2,940,900 (including service revenues of $177,400) and $10,400, respectively,
and Frontline's total assets were $1,357,300 at September 30, 1999. Revenues
earned and net loss incurred by Frontline during the nine months ended September
30, 1998 were $570,000 (including service revenues of $11,900) and $11,700,
respectively.
5
<PAGE>
Pacific Magtron International Corp.
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT PRESENTATION AND NEW ACCOUNTING STANDARD
The accompanying consolidated financial statements at September 30, 1999 and for
the three and nine-month periods ended September 30, 1998 and 1999 are
unaudited. However, they have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary for a fair
presentation of consolidated financial position and results of operations for
the periods presented. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been omitted. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes for the year ended December 31, 1998 presented
in the Company's Form 10, as amended.
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, 2000.
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 standard to affect its financial statements.
6
<PAGE>
Pacific Magtron International Corp.
Notes to Consolidated Financial Statements
3. STOCK OPTIONS
During the nine months ended September 30, 1999, no additional options of the
Company's common stock were granted and no issued options were exercised.
4. STATEMENTS OF CASH FLOWS
Cash was paid during the nine months ended September 30, 1998 and 1999 for:
Nine Months Ending
September 30,
------------------------
1998 1999
--------- ---------
Income taxes $ 992,500 $ 386,000
--------- ---------
Interest $ 210,300 $ 200,400
========= =========
As discussed in Note 5, non-cash financing activities during the nine months
ending September 30, 1998 resulted from the issuance of 100,000 shares of the
Company's common stock to an unrelated party under the terms of a consulting
agreement.
5. CONSULTING AGREEMENT
On July 17, 1998, the Company issued 100,000 restricted shares of its common
stock to an unrelated party under the terms of a consulting agreement. Under the
agreement, if the services were provided, the shares were to vest 50% on July
17, 1999 and 50% on July 17, 2000. If the services were not provided as
required, the consultant was to forfeit those shares not vested. The Company is
accounting for this transaction in accordance with Emerging Issues Task Force
(EITF) No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES.
During the first half of 1999, the Company and the consultant periodically
discussed the level and type of services required in order for the shares to
vest under the consulting agreement. This discussion led to a postponement of
the scheduled July 17, 1999 vesting date. After further discussions, the Board
of Directors of the Company determined that no further performance was required
by the consultant under the agreement and deemed the entire 100,000 shares
vested on September 17, 1999, resulting in a measurement date and final
valuation of these shares of $743,000.
7
<PAGE>
Pacific Magtron International Corp.
Notes to Consolidated Financial Statements
6. EQUITY INVESTMENT
In May 1999, the Company and Rising Edge Technologies, Ltd., a corporation based
in Taiwan ("Rising Edge"), entered into an Operating Agreement respecting LEA
Publishing, LLC, a California limited liability company ("LEA") formed in
January 1999. The objective of LEA is to provide Internet users, resellers and
providers advanced solutions and applications. LEA is in the post-technological
feasibility phase of developing various software products. The Company and
Rising Edge each own a 50% interest in LEA. The brother of a director, officer
and principal shareholder of the Company is also a director, officer and the
sole shareholder of Rising Edge. The Company is accounting for its investment in
LEA by the equity method whereby 50% of the equity interest in the net income or
loss of LEA flows through to the Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The accompanying discussion and analysis of financial condition and results of
operations is based on the consolidated financial statements of the Company,
which are included elsewhere in this Quarterly Report. The following discussion
and analysis should be read in conjunction with the accompanying financial
statements and related notes thereto. This discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securties Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those set forth in the
forward-looking statements. Forward-looking statements, by their very nature,
include risks and uncertainties. Accordingly, the Company's actual results could
differ materially from those discussed in this Report. A wide variety of factors
could adversely impact revenues, profitability, cash flows and capital needs.
Such factors, many of which are beyond the control of the Company and its
management, include, but are not limited to, technological changes, diminished
marketability of inventory, increased warranty costs, competition, recruitment
and retention of technical personnel, Year 2000 issues, dependence on continued
manufacturer certification, dependence on certain suppliers, risks associated
with the projects the Company is engaged to complete, and dependence on key
personnel.
GENERAL
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 division known as Frontline Network Consulting ("Frontline")
to serve 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1999 1998 1999
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.8 92.3 93.3 92.4
----- ----- ----- -----
Gross margin 7.2 7.7 6.7 7.6
Operating expenses 3.4 6.1 3.4 6.6
----- ----- ----- -----
Income from operations 3.8 1.6 3.3 1.0
Other expense, net 0.1 0.1 0.1 0.1
Income taxes 1.5 0.6 1.3 0.4
----- ----- ----- -----
Net income 2.2% 0.9% 1.9% 0.5%
===== ===== ===== =====
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<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Sales for the three months ended September 30, 1999 were $28,505,700, a decrease
of $600,900, or approximately 2%, compared to $29,106,600 for the three months
ended September 30, 1998. The decrease in sales attributable to the Company's
computer products division for the three months ended September 30, 1999 of
$1,256,700, or approximately 4%, compared to the corresponding period of the
previous year resulted from the Company's focus on improving its gross margin.
Approximately $1,153,900 of the sales during the three months ended September
30, 1999 were attributable to the FrontLine division that was formed in May 1998
to serve the networking and personal computer requirements of corporate
customers. Sales recognized by the Company's Frontline division were $498,100
during the three months ended September 30, 1998.
Gross margin for the three months ended September 30, 1999 was $2,190,900, an
increase of $91,200, or 4%, compared to $2,099,700 for the three months ended
September 30, 1998. The gross margin as a percentage of sales increased from
7.2% for the three months ended September 30, 1998 to 7.7% for the three months
ended September 30, 1999. This increase is primarily due to better cost
controls, participation in more vendor rebate programs, and an increased focus
on marketing products with a higher gross margin. Gross margin relating to the
FrontLine division for the three months ended September 30, 1999 was $194,400,
or 16.8%, of FrontLine's sales during the same period. However, since
FrontLine's sales levels were relatively insignificant in relation to the sales
of the Company's computer products group, the higher gross margin percentage
earned by FrontLine had only a minor effect on the Company's overall gross
margin during the period.
Operating expenses, including selling, general, administrative and amortization
of prepaid consulting fee, for the three months ended September 30, 1999 were
$1,723,300, an increase of $725,400, or 73%, compared to $997,900 for the three
months ended September 30, 1998. The increase is primarily a result of the
hiring of additional personnel to support the expansion of the Company's
business, establishment of the management infrastructure, including the ramp-up
of the Company's Frontline division, expenses in connection with its transition
to a publicly traded company, and a non-cash charge of $276,600 (as compared to
$52,100 during the corresponding period in 1998) for the amortization of a
prepaid consulting fee. As a percentage of sales, operating expenses increased
to 6.1% for the three months ended September 30, 1999 as compared to 3.4% for
the three months ended September 30, 1998 resulting from an increase in the
Company's fixed cost component of operating expenses.
Income from operations for the three months ended September 30, 1999 was
$467,600, a decrease of $634,200, or 58%, as compared to $1,101,800 for the
three months ended September 30, 1998. As a percentage of sales, income from
operations decreased to 1.6% for the three months ended September 30, 1999 as
compared to 3.8% for the three months ended September 30, 1998. This decrease
was primarily due to the 73% increase in operating expenses, including the
$276,600 non-cash charge related to the amortization of a prepaid consulting
fee. The impact of the increase in operating expenses was marginally offset by
the improved gross margin experienced during the three months ended September
30, 1999.
10
<PAGE>
Interest expense for the three months ended September 30, 1999 was $66,600, a
decrease of $3,700, or 5%, compared to $70,300 for the three months ended
September 30, 1998. This decrease was due to a reduction in the balance of the
Company's mortgage on its office building facility as a result of scheduled
principal payments. Interest income decreased from $49,500 for the three months
ended September 30, 1998 to $43,400 for the three months ended September 30,
1999, a decrease of $6,100, or 12%, which was principally due to lower market
interest rates available for short-term investments of cash and cash
equivalents.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Sales for the nine months ended September 30, 1999 were $79,128,400, an increase
of $1,206,400, or approximately 2%, compared to $77,922,000 for the nine months
ended September 30, 1998. The Company experienced a decrease in sales
attributable to its computer products division for the nine months ended
September 30, 1999 of $1,215,800, or approximately 2%, compared to the
corresponding period of the previous year as the Company focused its efforts on
improving gross margin. Approximately $2,940,900 of the sales recognized by the
Company during the nine months ended September 30, 1999 were attributable to the
FrontLine division that was formed in May 1998 to serve the networking and
personal computer requirements of corporate customers. Sales recognized by the
Company's Frontline division were $518,700 during the nine months ended
September 30, 1998.
Gross margin for the nine months ended September 30, 1999 was $6,008,600, an
increase of $783,900, or 15%, compared to $5,224,700 for the nine months ended
September 30, 1998. The gross margin as a percentage of sales increased from
6.7% for the nine months ended September 30, 1998 to 7.6% for the nine months
ended September 30, 1999. This increase is primarily due to better cost
controls, participation in more vendor rebate programs, and an increased focus
on marketing products with a higher gross margin. Gross margin relating to the
FrontLine division for the nine months ended September 30, 1999 was $440,300, or
15.0% of FrontLine's sales during the same period. However, since FrontLine's
sales levels were relatively insignificant in relation to the sales of the
Company's computer products group, the higher gross margin percentage earned by
FrontLine had only a minor effect on the overall increase in the Company's gross
margin during the period.
Operating expenses, including selling, general, administrative and amortization
of prepaid consulting fee, for the nine months ended September 30, 1999 were
$5,225,300, an increase of $2,562,200, or 96%, compared to $2,663,100 for the
nine months ended September 30, 1998. The noted increase is primarily a result
of the hiring of additional personnel to support the expansion of the Company's
business and establishment of the management infrastructure, including the
ramp-up of the Company's Frontline division, additional expenses in 1999 in
connection with the transition to a publicly traded company, and a non-cash
charge of $626,700 (as compared to $52,100 during the corresponding period in
1998) for the amortization of a prepaid consulting fee. As a percentage of
sales, operating expenses increased to 6.6% for the nine months ended September
30, 1999 as compared to 3.4% for the nine months ended September 30, 1998
resulting from an increase in the Company's fixed cost component of operating
expenses.
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<PAGE>
Income from operations for the nine months ended September 30, 1999 was
$783,300, a decrease of $1,778,300, or 69%, as compared to $2,561,600 for the
nine months ended September 30, 1998. As a percentage of sales, income from
operations decreased to 1.0% for the nine months ended September 30, 1999 as
compared to 3.3% for the nine months ended September 30, 1998. This decrease was
primarily due to the 96% increase in operating expenses, including the $626,700
non-cash charge related to the amortization of a prepaid consulting fee. The
impact of the increase in operating expenses was marginally offset by the
improved gross margin experienced during the nine months ended September 30,
1999.
Interest expense for the nine months ended September 30, 1999 was $200,400, a
decrease of $9,900. or 5%, compared to $210,300 for the nine months ended
September 30, 1998. This decrease was due to a decrease in the balance of the
Company's mortgage on its office building facility as a result of scheduled
principal payments. Interest income decreased from $138,800 for the nine months
ended September 30, 1998 to $136,600 for the nine months ended September 30,
1999, a decrease of $2,200, or 2%, which was principally due to lower market
interest rates available for short-term investments of cash and cash
equivalents.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through cash
generated by operations and borrowings under its floor plan inventory loans.
At September 30, 1999, the Company had consolidated cash and cash equivalents
totaling $4,308,700 and working capital of $7,968,400. At December 31, 1998, the
Company had consolidated cash and cash equivalents totaling $3,197,100 and
working capital of $7,931,500.
Net cash provided by operating activities during the nine months ended September
30, 1999 was $2,666,000, which principally reflected the decrease in
inventories, the amortization of the prepaid consulting fee and the net income
for the period, all of which were partially offset by an increase in accounts
receivable and a decrease in accounts payable. The decrease in inventories was
due primarily to the Company's focus on improving its inventory turnover by
balancing the inventory product mix and levels in relation to customer orders
with favorable vendor terms and programs. Net cash used in operating activities
during the nine months ended September 30, 1998 was $2,364,600, which reflected
the net effect of increases in accounts receivable and inventories that were
partially offset by an increase in accounts payable and the net income for the
period.
Net cash used in investing activities was $745,300 during the nine months ended
September 30, 1999, primarily reflecting cash used for improvements to the
building owned and occupied by the Company to support the Company's expanding
workforce. Net cash used in investing activities during the nine months ended
September 30, 1998 was $76,600, primarily resulting from the issuance of an
additional note receivable to a shareholder.
Net cash used in financing activities was $809,100 for the nine months ended
September 30, 1999, primarily from the decrease in floor plan inventory loans,
as well as payment of the mortgage loans for the Company's facility. As of
September 30, 1999, the Company had available financing in the form of a $7.0
million floor plan inventory loan which is collateralized by the inventory
12
<PAGE>
purchased and any proceeds from the sale of the inventory. The outstanding
balance of the floor plan inventory loan at September 30, 1999 was $1,528,200
and the loan is subject to 45-day repayment terms, at which time interest begins
to accrue at the prime rate (8.25% at September 30, 1999). Net cash provided by
financing activities was $1,066,300 for the nine months ended September 30,
1998, primarily from the increase in the floor plan inventory loans, which was
partially offset by payment of the mortgage loans for the office facility.
As of September 30, 1999, the Company's material commitments for capital
expenditures consisted of an estimated $470,000 investment in its 50% equity
interest in LEA.
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 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, 2000.
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 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 to the extent resulting 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 Year 2000
compliant.
13
<PAGE>
The Company's management has performed a complete assessment of the Company's
Year 2000 requirements, including all of its information technology and
non-information technology systems. The Company budgeted $75,000 to ensure the
Company's major computer systems and some non-critical software were Year 2000
compliant. The total cost of identifying and addressing Year 2000 problems was
$75,000.
The Company has also developed a contingency plan for dealing with the worst
case scenario 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 has
made 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 has obtained statements from nearly all 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. Due to the general
uncertainty inherent in the Year 2000 issue, there can be no assurance that the
Year 2000 issues of other entities will not have a material adverse impact on
the Company's system or results of operations.
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. However, 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 and remedied in a
timely manner, 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.
14
<PAGE>
ITEM 5. OTHER INFORMATION
Limin Hu, Ph.D. and Hank C. Ta were appointed to the Board of Directors
effective April 5, 1999.
Dr. Hu, age 37, has been President at Hugo Technologies, Inc. since February
1996. Hugo is a company based in Union City, California that designs and builds
systems integration and architecture software and client/server and data base
management systems. From March 1994 to January 1996 he was vice president and
general manager of Teknekron Systems, LLC. where he managed the pharmaceutical
systems division and developed complete integrated system infrastructure for
various clients. Dr. Hu received his B.S. in electrical engineering from
National Taiwan University, ROC and his Ph.D. in electrical engineering and
computer science from the University of California, Berkeley.
Hank C. Ta, age 40, has been the president, chief executive officer and owner of
CC Integration/MicroAge since 1992. CC Integration, based in Mountainview,
California, is a reseller for leading personal computer vendors such as Hewlett
Packard, Compaq, and IBM. Mr. Ta received his B.S. from San Jose State
University.
Neither Dr. Hu or Mr. Ta owns any equity securities or holds any options to
purchase any equity securities of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
15
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated November 15, 1999
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
(Registrant)
/s/ Theodore S. Li
----------------------------------------
Theodore S. Li
President and Chief Executive Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q AT SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 4,308,700
<SECURITIES> 0
<RECEIVABLES> 7,580,500
<ALLOWANCES> 150,000
<INVENTORY> 3,324,000
<CURRENT-ASSETS> 15,694,300
<PP&E> 5,074,100
<DEPRECIATION> 471,900
<TOTAL-ASSETS> 20,516,300
<CURRENT-LIABILITIES> 7,725,900
<BONDS> 0
0
0
<COMMON> 10,100
<OTHER-SE> 9,399,100
<TOTAL-LIABILITY-AND-EQUITY> 20,516,300
<SALES> 79,128,400
<TOTAL-REVENUES> 79,128,400
<CGS> 73,119,800
<TOTAL-COSTS> 73,119,800
<OTHER-EXPENSES> 5,225,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200,400
<INCOME-PRETAX> 719,500
<INCOME-TAX> 287,800
<INCOME-CONTINUING> 431,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 431,700
<EPS-BASIC> .04
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