This filing is made pursuant to Rule 424(b)(3) under the Securities Act of 1933
in connection with Registration No. 333-91528.
PROSPECTUS
Pacific Magtron International Corp.
3,066,668 Shares of Common Stock
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This prospectus is part of a registration statement that covers 3,066,668
shares (the "Shares") of our common stock currently owned by the selling
shareholders (the "Selling Shareholders"). These Shares may be offered and sold
from time to time by the Selling Shareholders. We will not receive any of the
proceeds from the sale.
Our common stock is traded on the NASDAQ Small Cap Market under the Symbol
"PMIC." On September 24, 2002, the average of the high and low prices of the
common stock on the NASDAQ Small Cap Market was $.62 per share. Our principal
executive offices are located at 1600 California Circle, Milpitas, California
95035. Our telephone number is (408) 956-8888.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISKS
RELATED TO AN INVESTMENT IN THE COMMON STOCK.
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The date of this Prospectus is October 15, 2002
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION............................................3
RISK FACTORS...................................................................4
DESCRIPTION OF SECURITIES.....................................................11
USE OF PROCEEDS...............................................................12
SELLING SHAREHOLDERS..........................................................12
PLAN OF DISTRIBUTION..........................................................13
LEGAL MATTERS.................................................................14
EXPERTS.......................................................................14
You should rely only on the information contained or incorporated by
reference in this prospectus. No one has been authorized to provide you with
different information.
The Shares are not being offered in any jurisdiction where the offer is not
permitted.
You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date on the
front of the documents.
-2-
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. Our SEC filings are also available to the public at the SEC's
web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means we can disclose important information to you by referring
to those documents. The information incorporated by reference is considered to
be a part of this prospectus, and information that we file later with the SEC
will automatically update and supersede previously filed information, including
information contained in this document.
We incorporate by reference the documents listed below and any future
filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") until the Selling
Shareholders sell all of their shares:
* Annual Report on Form 10-K for the fiscal year ended December 31,
2001;
* Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002
and June 30, 2002;
* Current report on Form 8-K, dated June 13, 2002; and
* The description of our common stock that is contained in the
Registration of Certain Classes of Securities Pursuant to Section
12(b) or (g) of the Exchange Act on Form 10-12G, dated January 20,
1999, as amended from time to time.
You may request a copy of these filings, at no cost, by writing or
telephoning us at our principal executive offices at the following address and
phone number:
Secretary
Pacific Magtron International Corp.
1600 California Circle
Milpitas California 95035
(480) 956-8888
You should rely only on the information contained or incorporated by
reference in this prospectus and in any prospectus supplement. We have not
authorized anyone else to provide you with different information. The Selling
Shareholders will not make an offer of these shares in any state where the offer
is not permitted. You should not assume that the information in this prospectus
or any supplement is accurate as of any date other than the date on the front of
the documents.
-3-
RISK FACTORS
Unless the context indicates otherwise, all references to "we," "our," the
"Company" or "PMIC" refer to Pacific Magtron International Corp. and its
wholly-owned subsidiaries PMI Capital Corporation ("PMICC"), Lea Publishing, LLC
("Lea/LiveMarket"), Pacific Magtron, Inc. ("PMI") and LiveWarehouse, Inc.
("LiveWarehouse") and its majority owned subsidiaries, FrontLine Network
Consulting, Inc. ("FNC") and Pacific Magtron (GA), Inc. ("PMIGA").
WE HAVE INCURRED We incurred net losses for the year ended December
OPERATING LOSSES AND 31, 2001 and for the six months ended June 30,
DECREASED REVENUES 2002 of $2,850,700 and $1,568,400, respectively,
RECENTLY AND WE CANNOT and we may continue to incur losses. In addition,
ASSURE YOU THAT THIS our revenues decreased 15.6% during the year ended
TREND WILL CHANGE December 31, 2001 as compared to the corresponding
period in 2000 and 5.5% for the six months ended
June 30, 2002 as compared to the corresponding
period in 2001. Our future ability to execute our
business plan will depend on our efforts to
increase revenues and return to profitability. We
have implemented plans to reduce overhead and
operating costs, and to build upon our existing
business and capture new business. No assurance
can be given, however, that these actions will
result in increased revenues and profitable
operations, which may have an adverse impact on
our ability to execute our business plan.
WE CAN PROVIDE NO We recently completed a private placement of 600
ASSURANCE THAT WE WILL shares of our Series A Convertible Preferred Stock
BE ABLE TO SECURE the ("Series A Preferred") at a stated price of
ADDITIONAL CAPITAL $1,000 per share for gross proceeds of $600,000
REQUIRED BY OUR BUSINESS and net proceeds of $477,500. Upon the effectivity
of the registration statement of which this
prospectus is a part we expect to complete the
sale of an additional 400 shares of our Series A
Preferred for gross proceeds of $400,000 and
estimated net proceeds of $360,000. In addition,
we issued common stock purchase warrants
exercisable to purchase 400,000 shares of our
common stock at $1.20 per share at any time within
three years from the date of issuance.
Based on our present operations we anticipate that
our working capital, including the $477,500 raised
in our recent placement and the $360,000 expected
to be raised upon the effectiveness of the
registration statement, of which this prospectus
is a part, as part of the private placement, will
satisfy our working capital needs for the next
twelve months. If we fail to raise additional
working capital prior to the end of that time, we
will be unable to pursue our business plan
involving acquisitions and expansion of our
service and product offerings. We must obtain
additional financing to complete the marketing of
Lea/LiveMarket's software products and expand that
business, to continue to expand our distribution
business, and to develop our FNC business. We also
intend to pursue new markets and the growth of our
business through acquisitions. We can give no
assurance that we will be able to obtain
additional capital when needed or, if available,
that such capital will be available at terms
acceptable to us.
POTENTIAL SALES OF We may issue equity securities in the future whose
ADDITIONAL COMMON terms and rights are superior to those of our
STOCK AND SECURITIES common stock. Our Articles of Incorporation
-4-
CONVERTIBLE INTO OUR authorize the issuance of up to 5,000,000 shares
COMMON STOCK MAY of preferred stock. These are "blank check"
DILUTE THE VOTING POWER preferred shares, meaning our board of directors
OF CURRENT HOLDERS. is authorized to designate and issue the shares
from time to time without shareholder consent. As
of September 1, 2002 we had 600 shares of Series A
Preferred outstanding. The terms of the Series A
Preferred are summarized in "Description of
Securities" below. The Series A Preferred are
convertible based on a sliding scale conversion
price referenced to the market price of our common
stock. As of September 1, 2002, the Series A
Preferred would have been convertible into 800,000
shares of common stock based on the floor
conversion price of $.75. Any additional shares of
preferred stock that may be issued in the future
could be given voting and conversion rights that
could dilute the voting power and equity of
existing holders of shares of common stock, and
have preferences over shares of common stock with
respect to dividends and liquidation rights.
WE HAVE VIOLATED We have a mortgage on our offices with Wells Fargo
CERTAIN FINANCIAL Bank, under which we must maintain the following
COVENANTS CONTAINED IN financial covenants:
THREE OF OUR LOANS AND
MAY DO SO AGAIN IN THE 1) Our total liabilities must not be more than
FUTURE twice our tangible net worth;
2) Our net income after taxes must not be less
than one dollar on an annual basis and for no
more than two consecutive quarters; and
3) We must maintain annual EBITDA of one and one
half times our debt. We are currently in
violation of covenant (2) above, but we have
received a waiver for such violation through
the end of 2002.
Our computer product distribution subsidiaries,
PMI and PMIGA, also have a flooring line with
TransAmerica Commercial Finance Corporation. We
must also meet certain financial covenants with
respect to this line. These covenants are:
1) The combined total indebtedness of PMI and
PMIGA may not exceed 3.25 times their
tangible net worth on a quarterly basis;
2) The combined tangible net worth of PMI and
PMIGA may not be less than $4,250,000; and
3) The combined EBIT of PMI and PMIGA must be
greater than ($68,000) for the quarter ended
March 31, 2002; $140,000 for the quarter
ended June 30, 2002; $200,000 for the quarter
ended September 30, 2002; and $275,000 for
the quarter ended December 31, 2002.
We were in violation of our tangible net worth
covenant (prior to the revisions discussed below)
as of December 31, 2001. However, TransAmerica
waived the violation in March 2002 and revised the
credit agreement retroactively to September 30,
2001. We received a letter from TransAmerica
stating that as of March 31, 2002 PMI and PMIGA
were in compliance with all of the above
covenants. We were also in violation of our
tangible net worth covenant and the EBIT covenants
as of June 30, 2002, which gives TransAmerica,
among other things, the right to call the loan
immediately and terminate the credit facility. We
are in discussions with TransAmerica aimed at
obtaining a waiver of the covenant violation or an
amendment of the covenants; however, there can be
no assurance that we will be successful in this
regard.
-5-
Our network consulting subsidiary, FNC, had a
discretionary credit facility with Deutsche
Financial Services Corporation ("Deutsche"). As of
June 30, 2002 and December 31, 2001, FNC was in
violation of a financial covenant to maintain a
ratio of debt minus subordinated debt to tangible
net worth plus subordinated debt of not more than
three to one and it did not obtain a waiver of
this covenant violation from Deutsche. On April
30, 2002, Deutsche elected to terminate the credit
facility effective July 1, 2002. FNC has repaid
the outstanding balance owed under the normal
payment terms specified in the credit agreement.
We cannot assure you that we will be able to meet
all of the above financial covenants in the
future. If we fail to meet the covenants, the
respective lenders may declare us in default and
accelerate the loans. If that was to occur, we
would be unable to continue our operations without
replacement loans.
OUR COMMON STOCK DOES On August 19, 2002 we received a letter from the
NOT MEET THE Nasdaq Stock Market informing us that we did not
REQUIREMENTS FOR meet the criteria for continued listing on the
CONTINUED LISTING ON THE Nasdaq SmallCap Market. The letter stated that
NASDAQ SMALLCAP MARKET Nasdaq will monitor our common stock and if it
closes above $1.00 for a minimum of ten
consecutive trading days, Nasdaq will notify us of
our compliance with its continued listing
standards. If we do not meet the continued listing
standards by February 18, 2003, Nasdaq will
evaluate whether we meet the initial listing
criteria of the SmallCap Market. If we do not,
Nasdaq will inform us of its intent to delist our
common stock. If we do, Nasdaq will provide an
additional 180 days to come into compliance with
the continued listing criteria. If we still do not
meet the continued listing criteria at the end of
the additional period, Nasdaq will inform us of
its intent to delist our common stock. We cannot
assure you that we will meet any of such deadlines
or criteria. If our common stock is delisted, the
market for our common stock will decline and it
will be more difficult to trade in our common
stock, which will likely cause a decrease in the
price of our common stock.
OUR FAILURE TO ANTICIPATE The market for computer systems and products is
OR RESPOND TO characterized by constant technological change,
TECHNOLOGICAL CHANGES frequent new product introductions and evolving
COULD HAVE A MATERIAL industry standards. Our future success is
ADVERSE EFFECT ON OUR dependent upon the continuation of a number of
BUSINESS trends in the computer industry, including the
migration by end-users to multi-vendor and multi-
system computing environments, the overall
increase in the sophistication and interdependency
of computing technology, and a focus by managers
on cost-efficient information technology
management. These trends have resulted in a
movement toward outsourcing and an increased
demand for product and support service providers
that have the ability to provide a broad range of
multi-vendor product and support services. There
can be no assurance these trends will continue
into the future. Our failure to anticipate or
respond adequately to technological developments
and customer requirements could have a material
adverse effect on our business, operating results
and financial condition.
-6-
IF WE ARE UNABLE TO As a distributor, we incur the risk that the value
SECURE PRICE PROTECTION of our inventory will be adversely affected by
PROVISIONS IN OUR VENDOR industry wide forces. Rapid technology change is
AGREEMENTS, THE VALUE OF commonplace in the industry and can quickly
OUR INVENTORY WOULD diminish the marketability of certain items, whose
QUICKLY DIMINISH functionality and demand decline with the
appearance of new products. These changes and
price reductions by vendors may cause rapid
obsolescence of inventory and corresponding
valuation reductions in that inventory. We
currently seek provisions in the vendor agreements
common to industry practice that provide price
protections or credits for declines in inventory
value and the right to return unsold inventory. No
assurance can be given, however, that we can
negotiate such provisions in each of our contracts
or that such industry practice will continue.
WE MAY NOT BE ABLE TO A key element of our strategy for the future is to
INTEGRATE OUR RECENT expand through acquisition of companies that have
ACQUISITIONS OF complimentary businesses, that can utilize or
TECHNICAL INSIGHTS AND enhance our existing capabilities and resources,
LIVEMARKET IN AN that expand our geographic presence or that expand
EFFICIENT MANNER our range of services or products. In September of
2001, FNC successfully acquired certain assets of
Technical Insights which has expertise to provide
computer technical training to corporate clients.
Lea, through our newly incorporated subsidiary,
PMICC, acquired certain assets of LiveMarket in
October of 2001. LiveMarket is an internet
software development company which designs and
develops online stores to allow consumers to
purchase products directly via secured transaction
network. It also designs and develops e-store site
management tools to administer customer inquiry
and support payment processing service. Moreover,
we are always evaluating potential acquisition
prospects.
Acquisitions involve a number of special risks,
some of which include:
* the time associated with identifying and
evaluating acquisition candidates;
* the diversion of management's attention
because of the need to integrate the
operations and personnel of the acquired
businesses into our own business and
corporate culture;
* the incorporation of the acquired
products or services into our products
and services;
* possible adverse short-term effects on
our operating results;
* the realization of acquired intangible
assets; and
* the loss of key employees of the
acquired companies.
In addition to the foregoing risks, we believe
that we will see increased competition for
acquisition candidates in the future. Increased
competition for candidates could raise the cost of
acquisitions and reduce the number of attractive
candidates. We cannot assure you that we will be
able to identify additional suitable acquisition
candidates, consummate or finance any such
acquisitions, or integrate any such acquisition
successfully into our operations.
-7-
EXCESSIVE CLAIMS AGAINST Our suppliers generally warrant the products that
WARRANTIES THAT WE we distribute and allow us to return defective
PROVIDE COULD ADVERSELY products, including those that have been returned
EFFECT OUR BUSINESS to us by customers. We do not independently
warrant the products that we distribute, except
that we do warrant services provided in connection
with the products that we configure for customers
and that we build to order from components
purchased from other sources. If excessive claims
are made against these warranties our results of
operations would suffer.
WE MAY NOT BE ABLE TO All aspects of our business are highly
SUCCESSFULLY COMPETE competitive. Competition within the computer
WITH SOME OF OUR products distribution industry is based on product
COMPETITORS availability, credit availability, price, speed
and accuracy of delivery, effectiveness of sales
and marketing programs, ability to tailor specific
solutions to customer needs, quality and breadth
of product lines and services, and the
availability of product and technical support
information. We also compete with manufacturers
that sell directly to resellers and end users.
Competition within the corporate information
systems industry is based primarily on flexibility
in providing customized network solutions,
resources and contracts to provide products for
integrated systems and consultant and employee
expertise needed to optimize network performance
and stability.
A number of our competitors in the computer
distribution industry, and most of our competitors
in the information technology consulting industry,
are substantially larger and have greater
financial and other resources than we do.
FAILURE TO RECRUIT AND Our success depends upon our ability to attract,
RETAIN TECHNICAL hire and retain technical personnel who possess
PERSONNEL WILL HARM OUR the skills and experience necessary to meet our
BUSINESS personnel needs and the staffing requirements of
our clients. Competition for individuals with
proven technical skills is intense, and the
computer industry in general experiences a high
rate of attrition of such personnel. We compete
for such individuals with other systems
integrators and providers of outsourcing services,
as well as temporary personnel agencies, computer
systems consultants, clients and potential
clients. Failure to attract and retain sufficient
technical personnel would have a material adverse
effect on our business, operating results and
financial condition.
WE DEPEND UPON The future success of FNC depends in part on our
CONTINUED CERTIFICATION continued certification from leading
FROM CERTAIN OF OUR manufacturers. Without such authorizations, we
SUPPLIERS would be unable to provide the range of services
currently offered. There can be no assurance that
such manufacturers will continue to certify us as
an approved service provider, and the loss of one
or more of such authorizations could have a
material adverse effect on FNC and thus to our
business, operating results and financial
condition.
-8-
WE DEPEND ON KEY One supplier, Sunnyview/CompTronic ("Sunnyview"),
SUPPLIERS FOR A LARGE accounted for approximately 10%, 16% and 20% of
PORTION OF OUR INVENTORY, our total purchases for the years ended December
LOSS OF THOSE SUPPLIERS 31, 2001, 2000 and 1999, respectively. During the
COULD HARM OUR BUSINESS year ended December 31, 1999, one additional
supplier located in Taiwan accounted for
approximately 11% of our total purchases. We do
not have a supply contract with Sunnyview, but
rather purchase products from it through
individual purchase orders, none of which has been
large enough to be material to us. Although we
have not experienced significant problems with
Sunnyview or our other suppliers, and we believe
we could obtain the products that Sunnyview
supplies from other sources, there can be no
assurance that our relationship with Sunnyview and
with our other suppliers, will continue or, in the
event of a termination of our relationship with
any given supplier, that we would be able to
obtain alternative sources of supply on comparable
terms without a material disruption in our ability
to provide products and services to our clients.
This may cause a loss of sales that could have a
material adversely effect on our business,
financial condition and operating results.
IF A CLAIM IS MADE The nature of our corporate information systems
AGAINST US IN EXCESS OF engagements expose us to a variety of risks. Many
OUR INSURANCE LIMITS WE of our engagements involve projects that are
WOULD BE SUBJECT TO critical to the operations of a client's business.
POTENTIAL EXCESS LIABILITY Our failure or inability to meet a client's
expectations in the performance of services or to
do so in the time frame required by such client
could result in a claim for substantial damages,
regardless of whether we were responsible for such
failure. We are in the business of employing
people and placing them in the workplace of other
businesses. Therefore, we are also exposed to
liability with respect to actions taken by our
employees while on assignment, such as damages
caused by employee errors and omissions, misuse of
client proprietary information, misappropriation
of funds, discrimination and harassment, theft of
client property, other criminal activity or torts
and other claims. Although we maintain general
liability insurance coverage, there can be no
assurance that such coverage will continue to be
available on reasonable terms or in sufficient
amounts to cover one or more large claims, or that
the insurer will not disclaim coverage as to any
future claim. The successful assertion of one or
more large claims against us that exceed available
insurance coverage or changes in our insurance
policies, including premium increases or the
imposition of large deductible or co-insurance
requirements, could have a material adverse effect
on our business, operating results and financial
condition.
WE ARE DEPENDENT ON Our continued success will depend to a significant
KEY PERSONNEL extent upon our senior management, including
Theodore Li, President, and Hui Cynthia Lee,
Executive Vice President, and head of sales
operations, and Steve Flynn, general manager of
FrontLine. The loss of the services of Messrs. Li
or Flynn or Ms. Lee, or one or more other key
employees, could have a material adverse effect on
our business, financial condition or operating
results. We do not have key man insurance on the
lives of any of members of our senior management.
-9-
WE CANNOT ASSURE YOU We plan to enter the proprietary software
THAT OUR PURSUIT OF NEW development business through Lea/LiveMarket. We
BUSINESS THROUGH have limited experience in developing commercial
LIVEMARKET WILL BE software products. We have conducted no
SUCCESSFUL independent, formal market studies regarding the
demand for the software currently in development
and planned to be developed. We have, however,
conducted informal surveys of our customers and
have relied on business experience in evaluating
this market. Further, while we have experience in
marketing computer related products, we have not
marketed software or a proprietary line of our own
products. This market is very competitive and
nearly all of the software publishers or
distributors with whom Lea/LiveMarket will compete
have greater financial and other resources than
Lea/LiveMarket. There can be no assurance
Lea/LiveMarket will be successful in developing
commercial software products, or even if
Lea/LiveMarket develops such products, that it
will find market acceptance for them. Finally,
there can be no assurance that Lea/LiveMarket will
generate a profit.
ESTABLISHMENT OF OUR We have established a new business-to-consumer
NEW BUSINESS-TO- website, LiveWarehouse.com. We cannot assure you
CONSUMER WEBSITE that we will achieve market acceptance for this
LIVEWAREHOUSE.COM project and achieve a profit, that we will be able
MAY NOT BE SUCCESSFUL to hire and retain personnel with experience in
online retail marketing and management, that we
will be able to execute our business plan with
respect to this market segment or that we will be
able to adapt to technological changes once
operational. Further, while we have experience in
the wholesale marketing of computer-related
products, we have virtually no experience in
retail marketing. This market is very competitive
and some of our competitors have substantially
greater resources than we have.
WE ARE SUBJECT TO RISKS Our success will depend upon factors that may be
BEYOND OUR CONTROL SUCH beyond our control and cannot clearly be predicted
AS ECONOMIC AND at this time. Such factors include general
GENERAL RISKS OF OUR economic conditions, both nationally and
BUSINESS internationally, changes in tax laws, fluctuating
operating expenses, changes in governmental
regulations, including regulations imposed under
federal, state or local environmental laws, labor
laws, and trade laws and other trade barriers.
-10-
DESCRIPTION OF SECURITIES
We are authorized to issue up to 5,000,000 shares of preferred stock that
may be issued in one or more series and with such stated value and terms as may
be determined by our board of directors. We have designated 1,000 shares as 4%
Series A Redeemable Convertible Preferred Stock with a stated value per share of
$1,000 plus all accrued and unpaid dividends.
On May 31, 2002 we entered into a Preferred Stock Purchase Agreement with
an investor pursuant to which we agreed to sell 1,000 shares of Series A
Preferred at $1,000 per share. On May 31, 2002, we issued 600 shares of the
Series A Preferred to the investor, with the remaining 400 shares to be issued
when the registration statement of which this prospectus is a part becomes
effective. As part of the Preferred Stock Purchase Agreement, we also issued a
common stock purchase warrant to the investor. The warrant may be exercised at
any time within three years from the date of issuance and entitles the investor
to purchase 300,000 shares of our common stock at $1.20 per share and includes a
cashless exercise provision. We also issued a common stock purchase warrant with
the same terms and conditions for the purchase of 100,000 shares of our common
stock to a broker who facilitated the transaction as a commission.
A holder of the Series A Preferred is entitled to cumulative dividends at
the rate of 4% per annum, payable on each conversion date, as defined in the
agreement, in cash or by accretion of the stated value. Dividends must be paid
in cash, if among other circumstances, the number of our authorized common
shares is insufficient for the conversion in full of the Series A Preferred, or
our common stock is not listed or quoted on Nasdaq, NYSE or AMEX. The Series A
Preferred is non-voting and is entitled to a liquidation preference of the
stated value plus accrued and unpaid dividends. A sale or disposition of 50% or
more of our assets, or effectuation of transactions in which more than 33% of
our voting power is disposed of, would constitute liquidation. At any time and
at the option of the holder, each share of Series A Preferred is convertible
into shares of common stock at a conversion ratio that is defined as the stated
value divided by the conversion price. The conversion price is the lesser of (i)
120% of the average of the 5 closing prices immediately prior to the date on
which the preferred stock was issued, known as the set price, and (ii) 85% of
the average of the 5 lowest VWAPs (the daily volume weighted average price as
reported by Bloomberg Financial L.P. using the VAP function) during the 30
trading days immediately prior to the conversion date but not less than a floor
price of $0.75. The set price and floor price are subject to certain
anti-dilution adjustments, such as stock dividends.
We have the right to redeem the Series A Preferred for cash at a price
equal to 115% of the stated value plus accrued and unpaid dividends if (a) the
conversion price is less than $1 during the 5 trading days prior to the
redemption, or (b) the conversion price is greater than 175% of the set price
during the 20 trading days prior to the redemption. Upon the occurrence of a
triggering event, such as failure to register the underlying common shares,
among other events, a holder of the Series A Preferred has the right to require
us to redeem the Series A Preferred in cash at a price equal to the sum of (a)
the redemption amount (the greater of (i) 150% of the stated value or (ii) the
product of the per share market value and the conversion ratio) plus other
costs, and (b) the product of the number of converted common shares and per
market share value. As of June 30, 2002, the liquidation value of the Series A
Preferred was $602,000. As of June 30, 2002, the redemption value of the Series
A Preferred, if the holder had required us to redeem the Series A Preferred as
of that date, was $903,000.
We have accounted for the sale of the Series A Preferred in accordance with
Emerging Issues Task Force (EITF) 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments." Proceeds of $329,000 (net of $80,500 cash
issuance costs) were allocated to the Series A Preferred and $148,300 was
allocated to the detachable warrant based upon its fair value as computed using
the Black-Scholes option pricing model. The $303,000 value of the beneficial
conversion option on the 600 shares of Series A Preferred and the $148,300 value
of the warrant issued to the investor were recorded as a deemed dividend on the
date of issuance. The allocated $49,400 value of the warrant issued to the
broker who facilitated the transaction was recorded as a stock issuance cost
relating to the sale of the Series A Preferred. As of June 30, 2002, 800,000
shares of common stock could have been issued if the Series A Preferred were
converted into common stock.
-11-
USE OF PROCEEDS
All net proceeds from the sale of the common stock covered by this
prospectus will be received by the Selling Shareholders who offer and sell their
Shares. We will not receive any proceeds from the sale of the common stock by
the Selling Shareholders. However, if the common stock warrants are exercised,
we will receive $480,000.
SELLING SHAREHOLDERS
The following table provides certain information with respect to the common
stock beneficially owned by the Selling Shareholders who are entitled to use
this prospectus. The information in the table is as of the date of this
prospectus. No selling shareholder has had a material relationship with us
within the past three years other than as a result of the ownership of common
stock. The common stock listed below may be offered from time to time by the
Selling Shareholders named below or their nominees:
SHARES AVAILABLE PERCENT OWNED
NAME AND ADDRESS OF SHARES FOR SALE UNDER AFTER COMPLETION
SELLING SHAREHOLDER OWNED THIS PROSPECTUS OF THE OFFERING(1)
------------------- ------------ --------------- ------------------
Stonestreet L.P.(2) 2,966,668(3) 2,966,668(3) *
260 Town Centre Boulevard
Suite 201
Markham, ON L3R 8H8
Canada
M. H. Meyerson(4) 100,000(5) 100,000(5) *
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(1) Because (i) a Selling Shareholder may offer all or some of the Shares that
he holds pursuant to the offerings contemplated by this prospectus, (ii)
the offerings of the Shares are not necessarily being underwritten on a
firm commitment basis, and (iii) a Selling Shareholder could purchase
additional shares of common stock from time to time, no estimate can be
given as to the number of Shares that will be held by any Selling
Shareholder upon termination of such offerings. See "PLAN OF DISTRIBUTION."
(2) Michael Finkelstein is the natural person who exercises voting and/or
dispositive control over Stonestreet L.P. Stonestreet L.P. is not an
affiliate of a broker-dealer.
(3) Assumes (i) exercise in full of a warrant to purchase 300,000 Shares, and
(ii) conversion in full of all shares of Series A Preferred held by
Stonestreet L.P. into Shares at the floor conversion price of $0.75 per
share multiplied by two.
(4) The Registration Rights Agreement with the Selling Shareholders requires us
to register twice the number of shares required for complete conversion of
the Series A Preferred.
(5) M. H. Meyerson is a registered broker/dealer.
(6) Assumes exercise in full of a warrant to purchase 100,000 Shares of Common
Stock.
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PLAN OF DISTRIBUTION
We are registering the Shares covered by this prospectus for the Selling
Shareholders. As used in this prospectus, "Selling Shareholders" includes the
pledgees, donees, transferees or others who may later hold the Selling
Shareholders' interests. We will pay the costs and fees of registering the
common shares, but the Selling Shareholders will pay any brokerage commissions,
discounts or other expenses relating to the sale of the Shares.
The Selling Shareholders may sell the Shares in the over-the-counter market
or otherwise, at market prices prevailing at the time of sale, at prices related
to the prevailing market prices, or at negotiated prices. In addition, the
Selling Shareholders may sell some or all of their Shares through:
* a block trade in which a broker-dealer may resell a portion of the
block, as principal, in order to facilitate the transaction;
* purchases by a broker-dealer, as principal, and resale by the
broker-dealer for its account; or
* ordinary brokerage transactions and transactions in which a broker
solicits purchasers.
When selling the Shares, the Selling Shareholders may enter into hedging
transactions. For example, the Selling Shareholders may:
* enter into transactions involving short sales of the Shares by
broker-dealers;
* sell Shares short themselves and redeliver such Shares to close out
their short positions;
* enter into option or other types of transactions that require the
Selling Shareholder to deliver common shares to a broker-dealer, who
will then resell or transfer the Shares under this prospectus; or
* loan or pledge the Shares to a broker-dealer, who may sell the loaned
Shares or, in the event of default, sell the pledged Shares.
The Selling Shareholders may negotiate and pay broker-dealers commissions,
discounts or concessions for their services. Broker-dealers engaged by the
Selling Shareholders may allow other broker-dealers to participate in resales.
However, the Selling Shareholders and any broker-dealers involved in the sale or
resale of the Shares may qualify as "underwriters" within the meaning of the
Section 2(a)(11) of the Securities Act of 1933 (the "Securities Act"). In
addition, the broker-dealers' commissions, discounts or concession may qualify
as underwriters' compensation under the Securities Act. If the Selling
Shareholders qualify as "underwriters," they will be subject to the prospectus
delivery requirements of Section 5(b)(2) of the Securities Act. We have informed
the Selling Shareholders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the market.
In addition to selling their Shares under this prospectus, the Selling
Shareholders may:
* agree to indemnify any broker-dealer or agent against certain
liabilities related to the selling of the common shares, including
liabilities arising under the Securities Act;
* transfer their Shares in other ways not involving market makers or
established trading markets, including directly by gift, distribution,
or other transfer; or
* sell their Shares under Rule 144 of the Securities Act rather than
under this prospectus, if the transaction meets the requirements of
Rule 144.
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LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for us
by Quarles & Brady Streich Lang LLP, Phoenix, Arizona.
EXPERTS
The consolidated annual financial statements and schedule incorporated by
reference in this Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report incorporated herein by reference, and are incorporated herein in
reliance upon said report given upon the authority of said firm as experts in
auditing and accounting.
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