As filed with the Securities and Exchange Commission on August 16, 1999
Registration No. 000-25277
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
---------------
PACIFIC MAGTRON INTERNATIONAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0353141
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1600 California Circle
Milpitas, California 95035
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (408) 956-8888
---------------
Securities to be registered pursuant to Section 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
- ------------------- ------------------------------
n/a n/a
- ------------------- ------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 per share
-----------------------------
(Title of Class)
The undersigned registrant hereby amends the following items, financial
statements and other portion of its Form 10 as set forth in the following pages.
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<PAGE>
Item 2. Financial Information is hereby amended and restated as follows:
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 Fiscal Year Ended
Operations Data December 31
--------------- --------------------------------------------------------------------
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 1,775,700 1,246,900 2,363,400 1,497,800 780,200
Net Income per share to Common 0.19 0.14 0.26 0.17 0.09
Shareholders - Basic and Diluted
Balance Sheet Data December 31
------------------ --------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(unaudited) (unaudited)
Current Assets $16,886,600 $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 21,108,400 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 8,744,700 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.
1
<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.
Operating expenses, including selling, general administrative and
amortization of prepaid consulting fee, for the year ended December 31, 1998
were $4,048,200, an increase of $196,600, or 5%, 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, including a non-cash charge of $117,100 for the amortization
of a prepaid consulting fee, 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, operating expenses decreased to 3.84%
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
operating expenses.
Income from operations for the year ended December 31, 1998 was $3,080,000,
an increase of $907,800, or 42%, as compared to $2,172,200 for the year ended
December 31, 1997. As a percentage of sales, income from operations increased to
2.92% 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 operating 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.
2
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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.
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, the amortization of the prepaid consulting fee 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
3
<PAGE>
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
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, 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.
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
4
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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.
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.
5
<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 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
6
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(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
* Filed herewith.
** Previously filed.
7
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
Date: August 16, 1999 By: /s/ Theodore S. Li
--------------------------------
Theodore S. Li, President
Chief Executive Officer
8
<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, the 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>
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 548,000 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 16,886,600 10,847,800
PROPERTY, PLANT AND EQUIPMENT, net (Notes 3 and 4) 4,038,000 4,114,800
DEPOSITS AND OTHER ASSETS 183,800 56,900
----------- -----------
$21,108,400 $15,019,500
=========== ===========
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997
- ------------ ----------- -----------
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 1,299,100 774,400
Retained earnings 7,435,500 5,659,800
----------- -----------
Total Shareholders' Equity 8,744,700 6,443,200
----------- -----------
$21,108,400 $15,019,500
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
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 3,931,100 3,851,600 2,511,700
Amortization of Prepaid Consulting
Fee (Note 11) 117,100 -- --
------------ ----------- -----------
Income from Operations 3,080,000 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 2,978,800 2,094,000 3,980,300
INCOME TAXES (Note 6) 1,203,100 847,100 1,616,900
------------ ----------- -----------
Net Income $ 1,775,700 $ 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>
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 63,627 -- 153,100 -- 153,100
conversion (Note 11)
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 1,000,000 1,000 13,800 -- 14,800
connection with reverse merger
(Note 1)
Issuance of common stock for 100,000 100 510,900 -- 511,000
consulting services (Note 11)
NET INCOME -- -- -- 1,775,700 1,775,700
---------- ------- ---------- ---------- ----------
BALANCES, December 31, 1998 10,100,000 $10,100 $1,299,100 $7,435,500 $8,744,700
========== ======= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
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 $ 1,775,700 $ 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 117,100 -- --
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 (209,500) (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>
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 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 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>
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>
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>
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>
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>
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>
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>
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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
For the years ended December 31, 1998, 1997 and 1996, income tax expense
comprises:
1998 CURRENT DEFERRED TOTAL
---------- ---------- ----------
Federal $ 964,900 $(31,300) $ 933,600
State 271,300 (1,800) 269,500
---------- -------- ----------
$1,236,200 $(33,100) $1,203,100
========== ======== ==========
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
========== ======== ==========
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,012,800 $ 712,000 $1,353,300
State income taxes, net of
federal benefit 190,300 135,100 263,600
---------- ---------- ----------
$1,203,100 $ 847,100 $1,616,900
========== ========== ==========
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 totaled $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>
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>
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 STOCK
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.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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. As the measurement date for determining the final value
of these shares has yet to occur, the Company is valuing the shares at each
reporting date at their then-current value. As of December 31, 1998, the
Company has recorded these shares at their estimated current fair value of
$511,000 as of December 31, 1998. Included in other current and long-term
assets as of December 31, 1998 is $393,900 representing the unamortized
portion of the prepaid consulting fees.
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.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Weighted Weighted- Average
Available Average Average Fair Remaining
for Options Exercise Value Contractual
Grant Outstanding Average Price 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-20
<PAGE>
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 $1,775,700
==========
Pro forma $1,694,800
==========
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-21
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
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.
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
<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> 16,886,600
<PP&E> 4,374,700
<DEPRECIATION> 336,700
<TOTAL-ASSETS> 20,108,400
<CURRENT-LIABILITIES> 8,955,100
<BONDS> 0
0
0
<COMMON> 10,100
<OTHER-SE> 8,734,600
<TOTAL-LIABILITY-AND-EQUITY> 21,108,400
<SALES> 105,431,200
<TOTAL-REVENUES> 105,431,200
<CGS> 98,303,000
<TOTAL-COSTS> 98,303,000
<OTHER-EXPENSES> 4,048,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,600
<INCOME-PRETAX> 2,978,800
<INCOME-TAX> 1,203,100
<INCOME-CONTINUING> 1,775,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,775,700
<EPS-BASIC> .19
<EPS-DILUTED> .19
</TABLE>
