SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 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 has 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 August 14, 2000
<PAGE>
Part I. - Financial Information
Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2000
(Unaudited) and December 31, 1999 1-2
Consolidated statements of income for the three months and
six months ended June 30, 2000 and 1999 (Unaudited) 3
Consolidated statements of cash flows for the six months
ended June 30, 2000 and 1999 (Unaudited) 4
Notes to consolidated financial statements 5-10
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 16
Part II - Other Information
Item 2. - Changes in Securities and Use of Proceeds 17
Item 4. - Submission of Matters to a Vote of Security Holders 17
Item 6. - Exhibits and Reports on Form 8-K 17
Signature
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,267,600 $ 4,416,300
Accounts receivable, net of allowance for
doubtful accounts of $150,000 at each date 6,954,700 6,608,600
Inventories 4,201,800 3,811,200
Prepaid expenses and other current assets 501,900 64,800
Notes and interest receivable from shareholders 228,100 223,600
Deferred income taxes 96,600 96,600
----------- -----------
TOTAL CURRENT ASSETS 16,250,700 15,221,100
PROPERTY, PLANT AND EQUIPMENT, net 4,546,400 4,625,900
INVESTMENT IN RISING EDGE 500,000 --
INVESTMENT IN CLICKREBATES 250,000 --
INVESTMENT IN LEA PUBLISHING -- 250,000
DEPOSITS AND OTHER ASSETS 90,600 592,000
----------- -----------
$21,637,700 $20,689,000
=========== ===========
See accompanying notes to consolidated financial statements.
1
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 49,300 $ 47,300
Floor plan inventory loans 2,573,100 1,482,900
Accounts payable 5,582,900 5,811,600
Accrued expenses payable 200,200 272,600
----------- -----------
TOTAL CURRENT LIABILITIES 8,405,500 7,614,400
NOTES PAYABLE, less current portion 3,312,400 3,337,600
DEFERRED INCOME TAXES 1,000 1,000
----------- -----------
TOTAL LIABILITIES 11,718,900 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 June 30, 2000 and
December 31, 1999 10,100 10,100
Additional paid-in capital 1,463,100 1,463,100
Retained earnings 8,445,600 8,262,800
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 9,918,800 9,736,000
----------- -----------
$21,637,700 $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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ 21,984,300 $ 24,042,400 $ 44,799,500 $ 50,622,700
COST OF SALES 20,213,300 22,126,200 41,246,700 46,805,000
------------ ------------ ------------ ------------
GROSS MARGIN 1,771,000 1,916,200 3,552,800 3,817,700
------------ ------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Non-cash amortization of prepaid consulting fee -- 130,700 -- 350,100
Other selling, general and administrative expenses 1,557,100 1,636,900 3,218,600 3,151,900
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,557,100 1,767,600 3,218,600 3,502,000
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 213,900 148,600 334,200 315,700
------------ ------------ ------------ ------------
OTHER EXPENSE (INCOME):
Interest income on shareholder notes (2,200) (2,800) (4,500) (6,800)
Interest income (59,700) (36,900) (110,600) (86,400)
Interest expense 72,500 68,200 144,600 133,800
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE 10,600 28,500 29,500 40,600
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 203,300 120,100 304,700 275,100
INCOME TAXES 81,300 47,900 121,900 110,000
------------ ------------ ------------ ------------
NET INCOME $ 122,000 $ 72,200 $ 182,800 $ 165,100
============ ============ ============ ============
Basic and diluted earnings per share $ 0.01 $ 0.01 $ 0.02 $ 0.02
============ ============ ============ ============
Basic weighted average common shares outstanding 10,100,000 10,100,000 10,100,000 10,100,000
Stock options 49,800 118,600 67,300 114,500
------------ ------------ ------------ ------------
Diluted weighted average common shares outstanding 10,149,800 10,218,600 10,167,300 10,214,500
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 182,800 $ 165,100
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 102,300 87,700
Amortization of prepaid consulting fee -- 350,100
Changes in operating assets and liabilities:
Accounts receivable (346,100) (441,000)
Inventories (390,600) 2,117,000
Prepaid expenses and other current assets (187,100) (456,000)
Accounts and accrued expenses payable (301,100) 1,284,500
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (939,800) 3,107,400
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes and interest receivable from shareholders (4,500) (6,800)
Investments in Rising Edge and ClickRebates.com (750,000) --
Deposits and other assets 501,400 122,400
Acquisition of property and equipment (22,800) (680,900)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (275,900) (565,300)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in floor plan inventory loans 1,090,200 (1,397,100)
Principal payments on SBA loan (13,400) (12,400)
Principal payments on bank loan (9,800) (8,900)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,067,000 (1,418,400)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (148,700) 1,123,700
CASH AND CASH EQUIVALENTS, beginning of period 4,416,300 3,197,100
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,267,600 $ 4,320,800
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION
Pacific Magtron International Corp. (formerly Wildfire Capital Corporation, a
publicly traded shell corporation) (the Company), a Nevada corporation, was
incorporated on January 8, 1996.
On July 17, 1998 the Company completed the acquisition of 100% of the
outstanding common stock of Pacific Magtron, Inc. (PMI), in exchange for
9,000,000 shares of the Company's $.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.
5
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. FINANCIAL STATEMENT PRESENTATION AND NEW ACCOUNTING STANDARD
The accompanying consolidated financial statements at June 30, 2000 and for the
three and six-month periods ended June 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 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 this standard to affect its financial statements.
6
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED 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.
No additional options of the Company's common stock were granted and no issued
options were exercised during the six months ended June 30, 2000.
4. STATEMENTS OF CASH FLOWS
Cash was paid during the six months ended June 30, 2000 and 1999 for:
SIX MONTHS ENDING JUNE 30, 2000 1999
-------- --------
Income taxes $157,000 $386,000
======== ========
Interest $144,600 $133,800
======== ========
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.
7
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 respect to
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 finalized an investment in a 25% ownership interest in
Rising Edge common stock for $500,000. 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 six
months ended June 30, 2000, there were no results of operations for LEA. Results
of operations of Rising Edge for the period from June 13, 2000 to June 30, 2000
were insignificant.
In November 1999, LEA entered into a software development contract with Rising
Edge which calls for the development of certain internet software 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.
In January 2000, the Company acquired in a private placement 485,900 shares of
convertible preferred stock of a 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.
8
<PAGE>
PACIFIC MAGTRON INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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
and segment assets for the six months ended June 30, 2000:
PMI Frontline LEA Totals
----------- ------------ ----- -----------
Revenues from external
customers $40,991,600 $3,807,900(1) $ -- $44,799,500
Segment income
before income taxes 274,500 30,200 -- 304,700
The following table presents information about reported segment profit or loss
for the six months ended June 30, 1999:
PMI Frontline LEA Totals
----------- ------------ ----- -----------
Revenues from external
customers $48,835,700 $1,787,000(1) $ -- $50,622,700
Segment income or (loss)
before income taxes 321,100 (46,000) -- 275,100
The following table presents information about reported segment profit or loss
and segment assets for the three months ended June 30, 2000:
PMI Frontline LEA Totals
----------- ------------ ----- -----------
Revenues from external
customers $19,390,800 $2,593,500(2) $ -- $21,984,300
Segment income
before income taxes 154,900 48,400 -- 203,300
The following table presents information about reported segment profit or loss
for the three months ended June 30, 1999:
PMI Frontline LEA Totals
----------- ------------ ----- -----------
Revenues from external
customers $22,996,200 $1,046,200(2) $ -- $24,042,400
Segment income or (loss)
before income taxes 145,100 (25,000) -- 120,100
----------
(1) Includes service revenues of $105,700 and $126,300 in 2000 and 1999,
respectively.
(2) Includes service revenues of $72,800 and $108,900 in 2000 and 1999,
respectively.
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") with
the goal of serving 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.
The results of operations of Rising Edge for the period from June 13, 2000 to
June 30, 2000 were insignificant.
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 Six Months Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.9 92.0 92.1 92.5
----- ----- ----- -----
Gross margin 8.1 8.0 7.9 7.5
Operating expenses 7.1 7.4 7.2 6.9
----- ----- ----- -----
Income from operations 1.0 0.6 0.7 0.6
Other expense, net 0.0 0.1 0.0 0.1
Income taxes 0.4 0.2 0.3 0.2
----- ----- ----- -----
Net income 0.6% 0.3% 0.4% 0.3%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Sales for the three months ended June 30, 2000 were $21,984,300, a decrease of
$2,058,100, or approximately 9%, compared to $24,042,400 for the three months
ended June 30, 1999. Approximately $2,593,500 of the sales recognized by the
Company during the second quarter of 2000 was attributable to the FrontLine
division, an increase of $1,547,300, or approximately 148%, compared to
$1,046,200 for the three months ended June 30, 1999. Accordingly, there was a
decrease in sales attributable to the Company's computer products group for the
three months ended June 30, 2000 of $3,605,400, or approximately 16%, compared
to the corresponding period of 1999. This decrease was due to a shortage of
certain critical components in the computer products industry during the second
quarter of 2000. The Company continued to focus its efforts on (i) improving its
gross margin by emphasizing higher margin product sales, (ii) developing its
e-commerce business and (iii) controlling operating expenses during the quarter.
Gross margin for the three months ended June 30, 2000 was $1,771,000, a decrease
of $145,200 or 8%, compared to $1,916,200 for the three months ended June 30,
1999. The gross margin as a percentage of sales increased from 8.0% for the
three months ended June 30, 1999 to 8.1% for the three months ended June 30,
2000. This increase in gross margin percentage arose primarily as a result of
better cost controls, including participation in more vendor rebate programs and
a focus on marketing product lines with a higher gross margin. Gross margin
relating to the FrontLine division for the three months ended June 30, 2000 was
$335,200, or 12.9% of FrontLine's sales during the same period. Gross margin
relating to the FrontLine division for the three months ended June 30, 1999 was
$124,600, or 11.9% 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 overall increase in the Company's
gross margin during the three months ended June 30, 2000.
11
<PAGE>
Operating expenses, including selling, general, administrative and amortization
of prepaid consulting fee, for the three months ended June 30, 2000 were
$1,557,100, a decrease of $210,500, or 12%, compared to $1,767,600 for the three
months ended June 30, 1999. A portion of the decrease is due to a non-cash
charge of $130,700 for the amortization of a prepaid consulting fee during the
three months ended June 30, 1999 which was not incurred during the same period
in 2000. Additionally, in response to the shortage of certain critical
components in the computer products industry, management increased its focus on
controlling operating expenses during the second quarter of 2000. As a
percentage of sales, operating expenses decreased to 7.1% for the three months
ended June 30, 2000 compared to 7.4% for the three months ended June 30, 1999,
which resulted from a decrease in the Company's fixed cost component of
operating expenses.
Income from operations for the three months ended June 30, 2000 was $213,900, an
increase of $65,300, or 44%, compared to $148,600 for the three months ended
June 30, 1999. As a percentage of sales, income from operations increased to
1.0% for the three months ended June 30, 2000 compared to 0.6% for the three
months ended June 30, 1999. This increase was primarily due to the 12% decrease
in operating expenses, and to a lesser extent, the improved gross margin
percentage earned during a period of decreased sales.
Interest expense for the three months ended June 30, 2000 was $72,500, an
increase of $4,300, or 6%, compared to $68,200 for the three months ended June
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 $39,700 for the three months ended June 30, 1999
to $61,900 for the three months ended June 30, 2000, an increase of $22,200, or
56%, which was principally due to higher market interest rates available for
short-term investments of cash and cash equivalents.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Sales for the six months ended June 30, 2000 were $44,799,500, a decrease of
$5,823,200, or approximately 12%, compared to $50,622,700 for the six months
ended June 30, 1999. Approximately $3,807,900 of the sales earned by the Company
during the second quarter of 2000 was attributable to the FrontLine division, an
increase of $2,020,900, or approximately 113%, compared to $1,787,000 for the
six months ended June 30, 1999. Accordingly, there was a decrease in sales
attributable to the Company's computer products group for the six months ended
June 30, 2000 of $7,844,100, or approximately 16%, compared to the corresponding
period of 1999, due to a shortage of certain critical components in the computer
products industry. The Company focused its efforts on (i) improving its gross
margin by emphasizing higher margin product sales and (ii) developing its
e-commerce business during the period.
12
<PAGE>
Gross margin for the six months ended June 30, 2000 was $3,552,800, a decrease
of $264,900, or 7%, compared to $3,817,700 for the six months ended June 30,
1999. The gross margin as a percentage of sales increased from 7.5% for the six
months ended June 30, 1999 to 7.9% for the six months ended June 30, 2000. This
increase in gross margin percentage arose primarily as a result of better cost
controls, including participation in more vendor rebate programs, and a focus on
marketing product lines with a higher gross margin. Gross margin relating to the
FrontLine division for the six months ended June 30, 2000 was $503,200, or 13.2%
of FrontLine's sales during the same period. Gross margin relating to the
FrontLine division for the six months ended June 30, 1999 was $245,900, or 13.8%
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 overall increase in the Company's gross margin
during the six months ended June 30, 2000.
Operating expenses, including selling, general, administrative and amortization
of prepaid consulting fee, for the six months ended June 30, 2000 were
$3,218,600, a decrease of $283,400, or 8%, compared to $3,502,000 for the six
months ended June 30, 1999. The decrease is primarily due to a non-cash charge
of $350,100 for the amortization of a prepaid consulting fee during the six
months ended June 30, 1999 which was not incurred during the same period in
2000. As a percentage of sales, operating expenses increased to 7.2% for the six
months ended June 30, 2000 as compared to 6.9% for the six months ended June 30,
1999, which resulted from a decrease in the Company's fixed cost component of
operating expenses.
Income from operations for the six months ended June 30, 2000 was $334,200, an
increase of $18,500 or 6%, as compared to $315,700 for the six months ended June
30, 1999. As a percentage of sales, income from operations increased to 0.7% for
the six months ended June 30, 2000 as compared to 0.6% for the six months ended
June 30, 1999. This increase was primarily due to the 8% decrease in operating
expenses and the improved gross margin percentage earned during a period of
decreased sales.
Interest expense for the six months ended June 30, 2000 was $144,600, an
increase of $10,800 or 8%, compared to $133,800 for the six months ended June
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 $93,200 for the six months ended June 30, 1999 to
$115,100 for the six months ended June 30, 2000, an increase of $21,900 or 23%,
which was principally due to higher market interest rates available for
short-term investments of cash and cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through cash
generated by operations and borrowings under its floor plan inventory loans.
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At June 30, 2000, the Company had consolidated cash and cash equivalents
totaling $4,267,600 and working capital of $7,845,200. 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 used in operating activities during the six months ended June 30, 2000
was $939,800, which reflected the net effect of increases in accounts
receivable, inventories and prepaid expenses and other current assets, and a
decrease in accounts and accrued expenses payable that were partially offset by
the net income for the period and depreciation and amortization. Net cash
provided by operating activities during the six months ended June 30, 1999 was
$3,107,400, which principally reflected the decrease in inventories, the
increase in accounts payable, 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. The decrease
in inventory 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 six months ended June 30, 2000
was $275,900, 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 $565,300 during the six months
ended June 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 $1,067,000 for the six months
ended June 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 June 30, 2000, the Company had available financing in the form
of a $7.0 million floor plan inventory loan which 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 June 30, 2000 was
$2,573,100 and the loan is subject to 45-day repayment terms, at which time
interest begins to accrue at the prime rate (9.5% at June 30, 2000). Net cash
used in financing activities was $1,418,400 for the six months ended June 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 Lea product development and future expansion of the Company's
existing business segments prove to be more capital intensive than planned, the
Company may require additional funding.
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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 $2,443,900 balance at June 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.
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PART II
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 6, 2000, the Company granted a third party an option to purchase 65,000
shares of the Company's common stock at an exercise price of $6.50 per share.
This option was granted pursuant to the terms of a consulting agreement whereby
the consultant is required to provide consulting services in connection with
capital raising transactions. This option was granted pursuant to a private
transaction and the transaction is exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended. On May 22, 2000, the agreement was
terminated, and the options were forfeited prior to vesting.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting on June 30, 2000.
(b) At the Annual Meeting, Theodore S. Li, Hui "Cynthia" Lee, Jey Hsin
Yao, Ph.D., Betty Li, Hank C. Ta and Limin Hu, Ph.D. were elected as
directors until the next annual meeting and the election of their
successors.
The vote was as follows:
Theodore S. Li - For 9,396,858; withheld 0
Hui "Cynthia" Lee - For 9,396,858; withheld 0
Jey Hsin Yao, Ph.D. - For 9,396,858; withheld 0
Betty Li - For 9,396,858; withheld 0
Hank C. Ta - For 9,396,858; withheld 0
Limin Hu, Ph.D. - For 9,396,858; withheld 0
(c) At the Annual Meeting, the Company's stockholders ratified BDO
Seidman, LLP as auditors for the Company for its 2000 fiscal year.
The vote was as follows:
Broker
Votes for Votes withheld Votes against Abstentions Non-Votes
--------- -------------- ------------- ----------- ---------
9,396,858 0 0 0 0
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: August 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 financial officer)
