SECURITIES AND EXHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _____________ to ______________
Commission file number 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)
(408) 956-8888
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark 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 [ ]
Applicable Only to Corporate Issuers:
Common Stock, $0.001 par value per share:
10,100,000 shares issued and outstanding at November 12, 2000
<PAGE>
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of September 30, 2000
(Unaudited) and December 31, 1999 1-2
Consolidated statements of income for the three months
and nine months ended September 30, 2000 and 1999
(Unaudited) 3
Consolidated statements of cash flows for the nine months
ended September 30, 2000 and 1999 (Unaudited) 4
Notes to consolidated financial statements 5-9
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 15
Part II - Other Information
Item 6. - Exhibits and Reports on Form 8-K 15
Signature
2
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,987,400 $ 4,416,300
Accounts receivable, net of allowance for doubtful
accounts of $150,000 at each date 7,418,300 6,608,600
Inventories 4,035,100 3,811,200
Prepaid expenses and other current assets 733,500 64,800
Notes and interest receivable from shareholders 230,400 223,600
Deferred income taxes 96,600 96,600
----------- -----------
Total Current Assets 17,501,300 15,221,100
Property, Plant and Equipment, net 4,513,600 4,625,900
Investment in Rising Edge 493,700 --
Investment in ClickRebates.com 250,000 --
Investment in Lea Publishing -- 250,000
Deposits and Other Assets 89,800 592,000
----------- -----------
$22,848,400 $20,689,000
=========== ===========
See accompanying notes to consolidated financial statements.
1
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
---- ----
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 50,300 $ 47,300
Floor plan inventory loans 1,780,600 1,482,900
Accounts payable 7,258,900 5,811,600
Accrued expenses payable 284,700 272,600
----------- -----------
Total Current Liabilities 9,374,500 7,614,400
Notes Payable, less current portion 3,299,400 3,337,600
Deferred Income Taxes 1,000 1,000
----------- -----------
Total Liabilities 12,674,900 10,953,000
----------- -----------
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 September 30, 2000 and
December 31, 1999 10,100 10,100
Additional paid-in capital 1,463,100 1,463,100
Retained earnings 8,700,300 8,262,800
----------- -----------
Total Shareholders' Equity 10,173,500 9,736,000
----------- -----------
$22,848,400 $20,689,000
=========== ===========
See accompanying notes to consolidated financial statements.
2
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales $ 24,125,300 $ 28,505,700 $ 68,924,800 $ 79,128,400
Cost of Sales 22,369,700 26,314,800 63,616,400 73,119,800
------------ ------------ ------------ ------------
Gross Margin 1,755,600 2,190,900 5,308,400 6,008,600
------------ ------------ ------------ ------------
Selling, General and Administrative Expenses:
Non-cash amortization of prepaid consulting fee -- 276,600 -- 626,700
Other selling, general and administrative expenses 1,568,100 1,446,700 4,786,700 4,598,600
------------ ------------ ------------ ------------
Total Selling, General and Administrative Expenses 1,568,100 1,723,300 4,786,700 5,225,300
Research and Development 100,000 -- 100,000 --
------------ ------------ ------------ ------------
Total Operating Expenses 1,668,100 1,723,300 4,886,700 5,225,300
------------ ------------ ------------ ------------
Income From Operations 87,500 467,600 421,700 783,300
------------ ------------ ------------ ------------
Other Expense (Income):
Litigation settlement (300,000) -- (300,000) --
Equity in loss in investment in Rising Edge 6,300 -- 6,300 --
Interest income on shareholder notes (2,300) (2,700) (6,800) (10,000)
Interest income (56,400) (40,700) (167,000) (126,600)
Interest expense 73,700 66,600 218,300 200,400
------------ ------------ ------------ ------------
Total Other Expense (Income) (278,700) 23,200 (249,200) 63,800
------------ ------------ ------------ ------------
Income Before Income Taxes and Minority Interest 366,200 444,400 670,900 719,500
Income Taxes 161,800 177,800 283,700 287,800
------------ ------------ ------------ ------------
Income Before Minority Interest 204,400 266,600 387,200 431,700
Minority Interest in Lea Publishing Loss 50,300 -- 50,300 --
------------ ------------ ------------ ------------
Net Income $ 254,700 $ 266,600 $ 437,500 $ 431,700
============ ============ ============ ============
Basic and diluted earnings per share $ 0.03 $ 0.03 $ 0.04 $ 0.04
============ ============ ============ ============
Basic weighted average common shares outstanding 10,100,000 10,100,000 10,100,000 10,100,000
Stock options 59,700 106,700 52,200 112,100
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 10,159,700 10,206,700 10,152,200 10,212,100
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 437,500 $ 431,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in loss in investment in Rising Edge 6,300 --
Depreciation and amortization 153,800 137,200
Amortization of prepaid consulting fee -- 626,700
Changes in operating assets and liabilities:
Accounts receivable (809,700) (1,108,700)
Inventories (223,900) 3,156,300
Prepaid expenses and other current assets (418,700) (129,700)
Accounts and accrued expenses payable 1,459,400 (447,500)
----------- -----------
Net Cash Provided By Operating Activities 604,700 2,666,000
----------- -----------
Cash Flows From Investing Activities:
Notes and interest receivable from shareholders (6,800) (7,900)
Investments in Rising Edge and ClickRebates.com (750,000) --
Deposits and other assets 502,200 (36,000)
Acquisition of property and equipment (41,500) (701,400)
----------- -----------
Net Cash Used In Investing Activities (296,100) (745,300)
----------- -----------
Cash Flows From Financing Activities:
Net increase (decrease) in floor plan inventory loans 297,700 (776,800)
Principal payments on SBA loan (20,300) (18,800)
Principal payments on bank loan (14,900) (13,500)
----------- -----------
Net Cash Provided By (Used In) Financing Activities 262,500 (809,100)
----------- -----------
Net Increase In Cash And Cash Equivalents 571,100 1,111,600
Cash And Cash Equivalents, beginning of period 4,416,300 3,197,100
----------- -----------
Cash And Cash Equivalents, end of period $ 4,987,400 $ 4,308,700
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED 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 $.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 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. In July 2000, the Company
formed Frontline Network Consulting, Inc. (FNC), a California corporation.
Effective October 1, 2000, PMI transferred the assets and liabilities of the
Frontline division to FNC.
In May 1999, the Company entered into a Management Operating Agreement which
provided for a 50% ownership interest in Lea Publishing, LLC, a California
limited liability company ("Lea") formed in January 1999 to develop, sell and
license software designed to provide Internet users, resellers and providers
advanced solutions and applications. On June 13, 2000, the Company increased its
direct and indirect interest in Lea to 62.5% by completing its investment in 25%
of the outstanding common stock of Rising Edge Technologies, the other 50% owner
of Lea, which is a development stage company.
In August 2000, PMI formed Pacific Magtron (GA), Inc., a Georgia corporation
whose principal activity is the wholesale distribution of PMI's products in the
eastern United States market.
5
<PAGE>
2. FINANCIAL STATEMENT PRESENTATION AND NEW ACCOUNTING STANDARD
The accompanying consolidated financial statements at September 30, 2000 and for
the three and nine-month periods ended September 30, 2000 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, 1999 presented
in the Company's Form 10-K.
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 (o 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 ancome 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 this standard to affect its financial statements.
3. STOCK OPTIONS
On March 6, 2000, an option to purchase 65,000 shares of the Company's common
stock at $6.50 per share was granted to an unrelated party to assist the Company
in services rendered in connection with raising capital for future expansion
under the terms of a consulting agreement. Under the agreement, if the services
were provided, the options were to vest ratably over a seven-month period
beginning June 6, 2000. On May 22, 2000, the agreement was terminated, and the
options were forfeited.
During the nine months ended September 30, 2000, 130,000 options of the
Company's common stock were granted to employees. No issued options were
exercised during the nine months ended September 30, 2000.
6
<PAGE>
4. STATEMENTS OF CASH FLOWS
Cash was paid during the nine months ended September 30, 2000 and 1999 for:
NINE MONTHS ENDING SEPTEMBER 30, 2000 1999
-------- --------
Income taxes $203,700 $386,000
======== ========
Interest $218,300 $200,400
======== ========
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. The
shares were to vest 50% on July 17, 1999 and 50% on July 17, 2000. If the
services were not provided as required by the agreement, the consultant was to
forfeit all unvested shares. 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 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 $675,000.
6. INVESTMENTS
In May 1999, the Company and Rising Edge Technologies, Ltd., a corporation based
in Taiwan ("Rising Edge"), entered into an Operating Agreement with 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 developing various
software products. Prior to June 13, 2000, the Company and Rising Edge each
owned a 50% interest in Lea. The brother of a director, officer and principal
shareholder of the Company is also a director, officer and the majority
shareholder of Rising Edge. The Company has no commitment to fund future losses
of Lea beyond its investment or guarantee any debt that Lea may incur. On June
13, 2000, the Company purchased a 25% ownership interest in Rising Edge common
stock for $500,000 from the majority shareholder of Rising Edge. As such, the
Company has a 62.5% combined direct and indirect ownership interest in Lea,
which requires the consolidation of Lea with the Company. The Company is
accounting for its investment in Rising Edge by the equity method whereby 25% of
the equity interest in the net income or loss of Rising Edge (excluding Rising
Edge's portion of the results of Lea and all inter-company transactions) flows
through to the Company. During the nine months ended September 30, 2000, Lea
incurred a $100,800 net loss and the equity in the loss in the investment in
Rising Edge was $6,300.
In November 1999, Lea entered into a software development contract with Rising
Edge which calls for the development of certain internet software by Rising Edge
for a $940,000 fee. Of this amount, the contract specifies that $440,000 shall
be applied to services performed in 1999 and $500,000 shall be applied to
services to be performed in 2000. During 1999, the Company paid $470,000 for its
portion of the total fee payable under the contract. During the nine months
ended September 30, 2000, Rising Edge performed $100,000 worth of services as
specified under the contract. Included in prepaid expenses and other current
assets at September 30, 2000 is $200,000 advanced directly to Rising Edge by the
Company, representing the Company's remaining portion of the software
development fees due under the contract.
7
<PAGE>
In January 2000, the Company acquired in a private placement 485,900 shares of
convertible preferred stock of an unrelated nonpublic company, ClickRebates.com,
for approximately $250,000 under the terms of a Series A Preferred Stock
Purchase Agreement. The Company's investment in ClickRebates.com, which
represents approximately 8% of the $3 million preferred stock offering, is being
accounted for using the cost method.
7. SEGMENT INFORMATION
The Company has three reportable segments: PMI, Frontline and Lea. PMI imports
and distributes electronic products, computer components, and computer
peripheral equipment to various customers throughout the United States.
Frontline serves the networking and personal computer requirements of corporate
customers. Lea is developing advanced solutions and applications for internet
users, resellers and providers. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies
presented in the Company's Form 10-K. The Company evaluates performance based on
income or loss before income taxes, not including nonrecurring gains or losses.
Inter-segment transfers between reportable segments have been insignificant. The
Company's reportable segments are strategic business units that offer different
products and services. They are managed separately because each business
requires different technology and marketing strategies.
The following table presents information about reported segment profit or loss
for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
PMI Frontline Lea Totals
--- --------- --- ------
<S> <C> <C> <C> <C>
Revenues from external
customers $63,235,300 $5,689,500(1) $ -- $68,924,800
Segment income or (loss)
before income taxes
and minority interest 793,600 (15,600) (100,800) 677,200
The following table presents information about reported segment profit or loss
for the nine months ended September 30, 1999:
PMI Frontline Lea Totals
--- --------- --- ------
Revenues from external
customers $76,187,500 $2,940,900(1) $ -- $79,128,400
Segment income
before income taxes
and minority interest 702,200 17,300 -- 719,500
The following table presents information about reported segment profit or loss
for the three months ended September 30, 2000:
PMI Frontline Lea Totals
--- --------- --- ------
Revenues from external
customers $22,243,700 $1,881,600(2) $ -- $24,125,300
Segment income or (loss)
before income taxes
and minority interest 519,100 (45,800) (100,800) 372,500
</TABLE>
8
<PAGE>
The following table presents information about reported segment profit or loss
for the three months ended September 30, 1999:
<TABLE>
<CAPTION>
PMI Frontline Lea Totals
--- --------- --- ------
<S> <C> <C> <C> <C>
Revenues from external
customers $27,351,800 $1,153,900(2) $ -- $28,505,700
Segment income
before income taxes
and minority interest 381,100 63,300 -- 444,400
</TABLE>
(1) Includes service revenues of $218,800 and $177,400 in 2000 and 1999,
respectively.
(2) Includes service revenues of $113,100 and $51,100 in 2000 and 1999,
respectively.
The following is a reconciliation of reportable segment income before income
taxes to the Company's consolidated total:
Three months Nine months
Ended Ended
September 30, September 30,
2000 2000
---- ----
Total income before income taxes and minority
interest for reportable segments $372,500 $677,200
Equity in loss in investment in Rising Edge (6,300) (6,300)
-------- --------
Consolidated income before income taxes
and minority interest $366,200 $670,900
-------- --------
The total of reportable segment revenues equals the Company's consolidated
revenues for the three and nine-month periods ended September 30, 1999.
8. LITIGATION SETTLEMENT
The Company had been involved as a plaintiff in a lawsuit involving a number of
claims against a competitor. On September 27, 2000, this dispute was settled for
$300,000, which is included in other income.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The accompanying discussion and analysis of financial condition and results of
operations is based on the consolidated financial statements of Pacific Magtron
International Corp., a Nevada corporation (the "Company" or "Pacific Magtron"),
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 Securities 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 our control, include, but are not limited
to, those identified in the Company's Form 10-K for the fiscal year ended
December 31, 1999 under the heading "Cautionary Factors" that may affect future
results, technological changes, diminished marketability of inventory, increased
warranty costs, competition, recruitment and retention of technical personnel,
dependence on continued manufacturer certification, dependence on certain
suppliers, risks associated with the projects the Company is engaged to
complete, risks associated with Lea, risks associated with our investments in
Rising Edge and ClickRebates.com, and dependence on key personnel.
GENERAL
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")
which serves the networking and personal computer requirements of corporate
customers. In May 1999, the Company entered into a Management Operating
Agreement which provided for a 50% ownership interest in Lea Publishing, LLC, a
California limited liability company ("Lea"), formed in January 1999 to develop,
sell and license software designed to provide Internet users, resellers and
providers advanced solutions and applications. On June 13, 2000, the Company
increased its direct and indirect interest in Lea to 62.5% by completing its
investment in 25% of the outstanding common stock of Rising Edge Technologies,
the other 50% owner of Lea, which is a development stage company. In July 2000,
the Company formed Frontline Network Consulting, Inc. (FNC), a California
corporation. Effective October 1, 2000, PMI transferred the assets and
liabilities of the Frontline division to FNC. In August 2000, PMI formed Pacific
Magtron (GA), Inc., a Georgia corporation whose principal activity is the
wholesale distribution of PMI's products in the eastern United States market.
10
<PAGE>
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,
----------------- -----------------
2000 1999 2000 1999
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.7 92.3 92.3 92.4
----- ----- ----- -----
Gross margin 7.3 7.7 7.7 7.6
Operating expenses 6.9 6.1 7.1 6.6
----- ----- ----- -----
Income from operations 0.4 1.6 0.6 1.0
Other (income) expense, net (1.4) 0.1 (0.4) 0.1
Income taxes 0.7 0.6 0.4 0.4
----- ----- ----- -----
Net income 1.1% 0.9% 0.6% 0.5%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Sales for the three months ended September 30, 2000 were $24,125,300, a decrease
of $4,380,400, or approximately 15%, compared to $28,505,700 for the three
months ended September 30, 1999. Approximately $1,881,600 of the sales
recognized by the Company during the third quarter of 2000 was attributable to
the FrontLine division, an increase of $727,700, or approximately 63%, compared
to $1,153,900 for the three months ended September 30, 1999 as the Company
continued to focus on the development of this division's business during the
period. Accordingly, there was a decrease in sales attributable to the Company's
computer products group for the three months ended September 30, 2000 of
$5,108,100, or approximately 19%, compared to the corresponding period of 1999.
This decrease was due to the overall decline in the computer component market
and the lack of any new and innovative high-demand products in the multimedia
arena. Additionally, management focused on the ramp-up and expansion of its
Georgia branch and other divisions during the period, which have not yet
resulted in significant revenues.
Gross margin for the three months ended September 30, 2000 was $1,755,600, a
decrease of $435,300 or 20%, compared to $2,190,900 for the three months ended
September 30, 1999. The gross margin as a percentage of sales decreased from
7.7% for the three months ended September 30, 1999 to 7.3% for the three months
ended September 30, 2000. Because our major manufacturers focused on lower
margin products, our computer products division sold more lower margin products
during the current period as a result of a lack of higher margin products coming
onto the market from major manufactures during the third quarter of 2000.
Overall, the Company's computer products division has experienced pricing
pressures in selling its products. Management believes there was an excess
supply of computer products during the third quarter which reduced demand and
increased pressure on gross margins. Gross margin relating to the FrontLine
division for the three months ended September 30, 2000 was $319,700, or 17.0% of
FrontLine's sales during the same period. 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 that of the Company's
computer products group, the higher gross margin percentage earned by FrontLine
had only a minor effect on the Company's gross margin during the three months
ended September 30, 2000.
11
<PAGE>
Operating expenses, including selling, general, administrative, research and
development and amortization of prepaid consulting fee, for the three months
ended September 30, 2000 were $1,668,100, a decrease of $55,200, or 3%, compared
to $1,723,300 for the three months ended September 30, 1999. The decrease is
primarily due to a non-cash charge of $276,600 for the amortization of a prepaid
consulting fee during the three months ended September 30, 1999 which was not
incurred during the same period in 2000. However, this decrease was partially
offset by a $100,000 increase in research and development expenses incurred
relating to the Company's majority-owned Lea subsidiary during the third quarter
of 2000. Additionally, the Company incurred higher legal expenses during the
three months ended September 30, 2000 in connection with successfully settling a
dispute with a competitor during the period. As a percentage of sales, operating
expenses increased to 6.9% for the three months ended September 30, 2000
compared to 6.1% for the three months ended September 30, 1999, which resulted
from a lower coverage of the Company's fixed cost component of operating
expenses during a period of decreased sales.
Income from operations for the three months ended September 30, 2000 was
$87,500, a decrease of $380,100, or 81%, compared to $467,600 for the three
months ended September 30, 1999. As a percentage of sales, income from
operations decreased to 0.4% for the three months ended September 30, 2000
compared to 1.6% for the three months ended September 30, 1999. This decrease
was primarily due to the decrease in sales and gross margin percentage during
the period.
During the three months ended September 30, 2000, the Company settled a lawsuit
against a competitor for $300,000 that did not occur during the three months
ended September 30, 1999. Interest expense for the three months ended September
30, 2000 was $73,700, an increase of $7,100, or 11%, compared to $66,600 for the
three months ended September 30, 1999. This increase was due to an increase in
the floating interest rate charged on one of the Company's mortgages on its
office building facility. Interest income increased from $43,400 for the three
months ended September 30, 1999 to $58,700 for the three months ended September
30, 2000, an increase of $15,300, or 35%, which was principally due to higher
market interest rates available for short-term investments of cash and cash
equivalents.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Sales for the nine months ended September 30, 2000 were $68,924,800, a decrease
of $10,203,600, or approximately 13%, compared to $79,128,400 for the nine
months ended September 30, 1999. Approximately $5,689,500 of the sales earned by
the Company during the nine months ended September 30, 2000 was attributable to
the FrontLine division, an increase of $2,748,600, or approximately 93%,
compared to $2,940,900 for the nine months ended September 30, 1999 as the
Company continued to focus on the development of this division's business during
the period. Accordingly, there was a decrease in sales attributable to the
Company's computer products group for the nine months ended September 30, 2000
of $12,952,200, or approximately 17%, compared to the corresponding period of
1999. This decrease was due to the overall decline in the computer component
market and the lack of any new and innovative high-demand products in the
multimedia arena.
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Additionally, management focused on the ramp-up and expansion of its Georgia
branch and other divisions during the period, which have not yet resulted in
significant revenues.
Gross margin for the nine months ended September 30, 2000 was $5,308,400, a
decrease of $700,200, or 12%, compared to $6,008,600 for the nine months ended
September 30, 1999. The gross margin as a percentage of sales increased from
7.6% for the nine months ended September 30, 1999 to 7.7% for the nine months
ended September 30, 2000. This increase in gross margin percentage arose
primarily as a result of better cost controls, including participation in more
vendor rebate programs. Gross margin relating to the FrontLine division for the
nine months ended September 30, 2000 was $822,900, or 14.5% of FrontLine's sales
during the same period. 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 that of the Company's computer products group, the
higher gross margin percentage earned by FrontLine had only a minor effect on
the Company's gross margin during the nine months ended September 30, 2000.
Operating expenses, including selling, general, administrative, research and
development and amortization of prepaid consulting fee, for the nine months
ended September 30, 2000 were $4,886,700, a decrease of $338,600, or 6%,
compared to $5,225,300 for the nine months ended September 30, 1999. The
decrease is primarily due to a non-cash charge of $626,700 for the amortization
of a prepaid consulting fee during the nine months ended September 30, 1999
which was not incurred during the same period in 2000. However, this decrease
was partially offset by a $100,000 increase in research and development expenses
incurred relating to the Company's majority-owned Lea subsidiary during 2000.
Additionally, the Company incurred higher legal expenses during 2000 in
connection with successfully settling a dispute with a competitor during the
period. As a percentage of sales, operating expenses increased to 7.1% for the
nine months ended September 30, 2000 as compared to 6.6% for the nine months
ended September 30, 1999, which resulted from a lower coverage of the Company's
fixed cost component of operating expenses during a period of decreased sales.
Income from operations for the nine months ended September 30, 2000 was
$421,700, a decrease of $361,600 or 46%, as compared to $783,300 for the nine
months ended September 30, 1999. As a percentage of sales, income from
operations decreased to 0.6% for the nine months ended September 30, 2000 as
compared to 1.0% for the nine months ended September 30, 1999. This decrease was
primarily due to the 13% decrease in sales during the period.
During the nine months ended September 30, 2000, the Company settled a lawsuit
against a competitor for $300,000 that did not occur during the nine months
ended September 30, 1999. Interest expense for the nine months ended September
30, 2000 was $218,300, an increase of $17,900 or 9%, compared to $200,400 for
the nine months ended September 30, 1999. This increase was due to an increase
in the floating interest rate charged on one of the Company's mortgages on its
office building facility. Interest income increased from $136,600 for the nine
months ended September 30, 1999 to $173,800 for the nine months ended September
30, 2000, an increase of $37,200 or 27%, which was principally due to higher
market interest rates available for short-term investments of cash and cash
equivalents.
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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, 2000, the Company had consolidated cash and cash equivalents
totaling $4,987,400 and working capital of $8,126,800. At December 31, 1999, the
Company had consolidated cash and cash equivalents totaling $4,416,300 and
working capital of $7,606,700.
Net cash provided by operating activities during the nine months ended September
30, 2000 was $604,700, which reflected the net effect of an increase in accounts
and accrued expenses payable, the net income for the period and depreciation and
amortization that were partially offset by increases in accounts receivable,
inventories and prepaid expenses and other current assets. The increase in
accounts and accrued expenses payable was primarily a function of the timing of
payments to vendors. 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, which was partially offset by increases in accounts
receivable, and prepaid expenses and other current assets and a decrease in
accounts and accrued expenses 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 investing activities during the nine months ended September 30,
2000 was $296,100, primarily resulting from the new investments in Rising Edge
and ClickRebates.com, which was partially offset by a decrease in deposits and
other assets. 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 provided by financing activities was $262,500 for the nine months ended
September 30, 2000, primarily from the increase in floor plan inventory loans,
which was slightly offset by the payment of the mortgage loans for the Company's
facility. As of September 30, 2000, the Company had available financing in the
form of a $7.0 million floor plan inventory loan that is collateralized by the
inventory purchased and any proceeds from the sale of the inventory. The
outstanding balance of the floor plan inventory loan at September 30, 2000 was
$1,780,600 and the loan is subject to 45-day repayment terms, at which time
interest begins to accrue at the prime rate (9.5% at September 30, 2000). 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.
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. If product development and future expansion of the Company's existing
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business segments prove to be more capital intensive than planned, the Company
may require additional funding.
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 on 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 will increase. If these costs are not offset by increased
revenues, the operations of the Company may be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to one of its bank loans with a $2,438,800 balance at September 30,
2000 which bears fluctuating interest based on the bank's 90-day LIBOR rate. The
Company believes that fluctuations in interest rates in the near term would not
materially affect its consolidated operating results, financial position or cash
flow.
PART II
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Item No. Description
-------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements 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.
Date: November 14, 2000 PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
(Registrant)
/s/ Theodore S. Li
----------------------------------------
Theodore S. Li
President, Chief Executive Officer and
Treasurer (Duly authorized officer and
principal accounting and financial
officer)
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