UNITED STATES
SECURITIES AND EXCHANGE 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, 2005
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 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12,13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date. At August 31, 2005, the number of shares of
common stock outstanding was 10,485,062.
Part I. - Condensed Financial Information
Item 1. - Condensed consolidated statement of net assets
(liabilities) in liquidation as of
September 30, 2005 (Unaudited) 1
Condensed consolidated statement of changes in net
assets (liabilities) in liquidation for the three
months ended September 30, 2005 (Unaudited) 2
Condensed consolidated balance sheet as of
December 31, 2004 (GOING CONCERN BASIS) 3
Condensed consolidated statements of operations for
the six months ended June 30, 2005 and for the three
months and nine months ended September 30,
2004 (Unaudited - GOING CONCERN BASIS) 4
Condensed consolidated statement of shareholders'
Equity (deficiency) for the six months ended
June 30, 2005 and for the nine months ended
September 30, 2004 (Unaudited - GOING CONCERN BASIS) 5
Condensed consolidated statements of cash flows for
the six months ended June 30, 2005 and nine months
ended September 30, 2004 (Unaudited -
GOING CONCERN BASIS) 6
Notes to condensed consolidated financial statements
(Unaudited) 7-12
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-16
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 17
Item 4. - Controls and Procedures 17
Part II - Other Information
Item 1. - Legal Proceedings 17
Item 3. - Defaults upon Senior Securities 18
Item 6. - Exhibits 18
Signature 19
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF NET ASSETS (LIABILITIES) IN LIQUIDATION
(UNAUDITED - LIQUIDATION BASIS)
SEPTEMBER 30,
2005
-----------
ASSETS
Cash $ 409,300
Restricted cash 150,300
Pre Petition unsecured accounts receivable, net
of allowance for doubtful accounts of $81,900 16,200
Pre Petition accounts receivable from unsecured
creditors/customers 17,000
Post Petition accounts receivable 6,000
Income tax refund receivable 73,500
Refundable insurance premiums 25,500
Equipment 2,000
Land and Building 4,200,000
-----------
Total assets $ 4,899,800
===========
LIABILITIES
Post Petition secured accounts payable to Micro
Technology Concepts, Inc. 205,000
Post Petition accounts payable and other accrued expenses 225,600
Estimated costs to be incurred during liquidation
Period 84,600
Pre Petition secured note payable to Wells Fargo Bank,
including interest of $12,000 2,319,800
Pre Petition secured note payable to U.S. Small
Business Administration (SBA) 748,800
Pre Petition secured payable to Micro Technology
Concepts, Inc. 479,800
Pre Petition unsecured accounts payable $ 1,977,400
-----------
Total liabilities 6,041,000
-----------
NET LIABILITIES IN LIQUIDATION $(1,141,200)
===========
See accompanying notes to condensed consolidated financial statements
1
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (LIABILITIES)
IN LIQUIDATION
(UNAUDITED - LIQUIDATION BASIS)
Shareholders' deficiency, June 30, 2005 (Going
concern basis) $(1,043,600)
Liquidation basis adjustments:
Adjust assets and liabilities to fair value 312,800
Abandonment of PMI accounts receivable
and inventories (as ordered by the Court) 67,300
Payments in settlement with Textron Financial
Corporation 302,900
Accrued interest and other costs paid to Textron
Financial Corporation (63,300)
Payment of principal and interest to U.S. Small
Business Administration (SBA) 8,600
Payment of principal and interest to Wells Fargo
Bank 57,100
Accrued estimated costs of liquidation (424,000)
Decrease in restricted cash (56,900)
Decrease in cash (248,800)
Interest income and other income (6,700)
Rebate income from supplier (21,600)
Sale of inventories (23,600)
Cost of inventories sold 12,800
Selling expenses 600
Costs incurred during liquidation period 351,000
Net change in accounts receivable, refundable
insurance premiums and post petition accounts
payable and other accrued expenses (365,800)
-----------
NET LIABILITIES IN LIQUIDATION, September 30, 2005 $(1,141,200)
===========
See accompanying notes to condensed consolidated financial statements.
2
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(GOING CONCERN BASIS)
December 31,
2004
------------
ASSETS
Current Assets:
Cash and cash equivalents $ 543,800
Restricted cash 255,000
Accounts receivable, net of allowance for
doubtful accounts of $310,700 3,661,100
Inventories 2,488,900
Prepaid expenses and other current assets 146,800
Assets from discontinued operations 435,900
------------
Total Current Assets 7,531,500
Property and equipment, net 3,906,700
Restricted cash 250,000
Other assets 16,200
Assets from discontinued operations 36,300
------------
$ 11,740,700
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,569,700
Floor plan inventory loans 2,243,100
Accrued expenses and other liabilities 133,800
Notes payable 71,900
Contingent settlement of Common Stock Warrants 2,300
Liabilities from discontinued operations 52,900
------------
Total Current Liabilities 8,073,700
------------
Notes Payable, less current portion 3,031,500
------------
Shareholders' Equity:
4% Series A Convertible Preferred Stock;
600 shares designated, issued and outstanding
(liquidation value of $400,000) 234,100
Common stock, $0.001 par value; 25,000,000
shares authorized; 10,485,062 shares issued
and outstanding 10,500
Additional paid-in capital 2,036,400
Accumulated deficit (1,645,500)
------------
Total Shareholders' Equity 635,500
------------
$ 11,740,700
============
See accompanying notes to condensed consolidated financial statements
3
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - GOING CONCERN BASIS)
Six Three Nine
Months Ended Months Ended Months Ended
June 30, September 30, September 30,
2005 2004 2004
------------ ------------ ------------
Sales $ 9,983,500 $ 15,866,900 $ 52,063,500
Cost of sales 9,596,100 15,136,000 49,621,300
------------ ------------ ------------
Gross profit 387,400 730,900 2,442,200
Selling, general and
administrative expenses 1,685,600 902,300 3,306,600
------------ ------------ ------------
Loss from continuing operations
before other income (expense) (1,298,200) (171,400) (864,400)
------------ ------------ ------------
Other income (expense):
Interest expense (124,200) (39,200) (122,000)
Change in fair value of
warrants issued 2,300 2,100 45,500
Loss on asset impairment (113,000) -- --
Other expense, net (6,000) (7,500) (22,200)
------------ ------------ ------------
Total other expense (240,900) (44,600) (98,700)
------------ ------------ ------------
Loss from continuing operations (1,539,100) (216,000) (963,100)
------------ ------------ ------------
Discontinued operations:
Income (loss) from discontinued
operations of:
Pacific Magtron (GA),Inc (140,000) (43,900) (155,500)
Frontline Network Consulting, Inc. -- 93,300 93,300
------------ ------------ ------------
Total income (loss) from discontinued
operations (140,000) 49,400 (62,200)
------------ ------------ ------------
Accretion of discount and deemed
dividend related to beneficial
conversion of Series A
Convertible Preferred Stock (8,100) (6,600) (19,500)
Accretion of redemption value of
Series A Convertible Preferred
Stock -- (3,200) (9,700)
------------ ------------ ------------
Net Loss applicable to
common shareholders $ (1,687,200) $ (176,400) $ (1,054,500)
============ ============ ============
Basic and diluted loss per share:
Loss from continuing operations $ (0.16) $ (0.02) $ (0.09)
Loss from discontinued
operations (0.01) (0.00) (0.01)
------------ ------------ ------------
Net loss applicable to common
shareholders $ (0.17) $ (0.02) $ (0.10)
============ ============ ============
Shares used in basic and diluted
per share calculation 10,485,100 10,485,100 10,485,100
============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
PACIFIC MAGTRON INTERNATIONAL CORP. AND Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(Unaudited - GOING CONCERN BASIS)
Retained
Preferred Stock Common Stock Additional Earnings
------------------------ ------------------------ Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 600 $ 234,100 10,485,062 $ 10,500 $ 2,036,400 $(1,645,500) $ 635,500
Preferred stock accretion -- 8,100 -- -- -- (8,100) --
Loss from operations -- -- -- -- -- (1,539,100) (1,539,100)
Loss from discontinued
Operations -- -- -- -- -- (140,000) (140,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2005 600 $ 242,200 10,485,062 $ 10,500 $ 2,036,400 $(3,332,700) ($1,043,600)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - GOING CONCERN BASIS)
SIX MONTHS NINE MONTHS
ENDED JUNE 30 ENDED SEPTEMBER
2005 2004
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Net loss $(1,687,200) $(1,054,500)
Less: Accretion of dividend related to Series
A Convertible Preferred Stock 8,100 19,500
Accretion of redemption value of Series
A Convertible Preferred Stock -- 9,700
Loss from discontinued operation 140,000 62,200
----------- -----------
Net loss from continuing operations (1,539,100) (963,100)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 85,000 260,200
Loss on asset impairment 112,400 --
Provision for doubtful accounts (79,000) 25,000
Gain on sale of property and equipment (1,900) --
Change in fair value of warrants (2,300) (45,500)
Changes in operating assets and
liabilities:
Accounts receivable 2,947,900 (415,000)
Other receivables -- 185,200
Inventories 2,458,900 278,900
Prepaid expenses and other
assets 59,500 14,500
Accounts payable (2,488,000) (260,000)
Accrued expenses and other liabilities (47,000) (96,500)
----------- -----------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATIONS 1,506,400 (1,016,300)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 148,600 26,800
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 1,655,000 (989,500)
----------- -----------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 2,000 1,300
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,000 1,300
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Net increase (decrease) in floor plan
inventory loans (1,993,000) 403,100
Decrease in restricted cash 297,800 214,900
Principal payments on notes payable (32,400) (49,100)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,727,600) 568,900
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (70,600) (413,900)
CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS:
Beginning of period 543,800 1,491,700
----------- -----------
End of period 473,200 $ 1,072,400
===========
CASH AND CASH EQUIVALENTS FROM DISCONTINUED
OPERATIONS 184,900
-----------
TOTAL CASH AND CASH EQUIVALENTS $ 658,100
===========
See accompanying notes to condensed consolidated financial statements.
6
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. VOLUNTARY REORGANIZATION/LIQUIDATION UNDER CHAPTER 11
The consolidated financial statements of Pacific Magtron International Corp.
(the "Company" or "PMIC") include its subsidiaries, Pacific Magtron, Inc.
("PMI"), Pacific Magtron (GA) Inc. ("PMIGA") and LiveWarehouse, Inc. ("LW"). PMI
and PMIGA's principal activity consisted of the importation and wholesale
distribution of electronics products, computer components, and computer
peripheral equipment throughout the United States. LW distributes certain
computer and electronics products and sells consumer computer products on the
internet. PMIGA ceased its operation as of April 30, 2005.
Bankruptcy Proceedings
As set forth in more detail below, the Company has filed a petition in
bankruptcy. Although the petition was filed for reorganization under Chapter 11
of the Bankruptcy Code, the Company is currently not conducting any operations
other than those necessary to liquidate its assets.
On May 11, 2005 (the "Petition Date"), PMIC, PMI, PMIGA and LW filed voluntary
petitions to reorganize their businesses under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Nevada, (the "Bankruptcy Court"). The Bankruptcy Court is jointly
administering these cases as "In re: Pacific Magtron International Corporation,
Inc., et al., Case No.BK-S-05-14325 LBR."
Upon the filing of the petition in May 2005, the Company intended to form a
joint venture with General Procurement, Inc. ("GPI") to continue the business
operations. On May 16, 2005, the Court approved the Interim Management Agreement
with GPI. Subsequent to the hearings on May 16, 2005, Micro Technology Concepts,
Inc. ("MTC"), a major secured creditor of the Company, negotiated a similar
joint venture agreement with the Company to replace the one entered into with
GPI. The joint venture agreement included an interim management agreement
("IMA") whereby the joint venture partner, MTC, would take over management of
the Company's sales and provide the Company with inventory on a secured basis
while the Company sought approval of the joint venture as part of a plan of
reorganization.
On June 23, 2005, MTC informed the Company that it would not continue to perform
under the Interim Management Agreement and would not agree to allow the Company
to use MTC's cash collateral for any business purpose except for liquidating the
remaining assets of the Company. The Company has been forced to cease business
activities except those necessary to liquidate its remaining assets. On August
31, 2005, PMI filed a complaint against MTC alleging that MTC breached its
obligation under the IMA and MTC filed a motion to convert the PMI case to a
case under Chapter 7 of the United States Bankruptcy Code. On September 9, 2005,
MTC filed a counterclaim against PMI.
On September 19, 2005, PMI and MTC reached a settlement by which the various
issues between MTC and PMI have been settled and the litigation dismissed. The
settlement agreement was approved by the Court on November 7, 2005.
7
On July 18, 2005, the Company filed the "Disclosure Statement to Accompany
Debtors' Joint Liquidating Plan of Reorganization" detailing the liquidation
plan, however, the Company did not receive the Court's approval for the plan.
The Company anticipates filing an amended Plan and Disclosure Statement for both
PMI and PMIGA on November 16, 2005 for hearing on December 8, 2005.
Financial Statement Presentation
Effective July 1, 2005, the Company adopted the liquidation basis of accounting,
whereby assets are valued at their estimated net realizable values and
liabilities are valued at their estimated settlement amounts. The Company has
provided an estimated liquidation basis statement of net assets (liabilities) in
its Form 10-Q as of September 30, 2005 and the statement of changes in net
assets (liabilities) for the quarterly period ended September 30, 2005. The
valuation of assets and liabilities requires estimates and assumptions by
management and there are substantial uncertainties in carrying out the
liquidation plan. The amount and timing of future liquidating distribution to
creditors and shareholders, if any, will depend upon a variety of factors
including, but not limited to, the actual proceeds from the sale of the
Company's assets, and the actual costs incurred in connection with carrying out
the liquidation plan, including administrative costs during the liquidation
period, and the timing of the liquidation. These estimates may vary
significantly from the final amounts.
Prior to July 1, 2005, the Company had prepared its consolidated financial
statements on a going-concern basis, which assumes continuity of operations,
realization of assets and satisfaction of liabilities in the ordinary course of
business. PMIGA ceased its operation as of April 30, 2005. The activities,
assets and liabilities of PMIGA were reclassified for reporting purposes as
discontinued operations for all periods prior to June 30, 2005 shown in the
accompanying condensed consolidated financial statements. On June 23, 2005, MTC
informed the Company that it would not continue to perform under the Interim
Management Agreement and would not agree to allow the Company to use MTC's cash
collateral for any business purpose except for liquidating the remaining assets
of the Company. The Company has been forced to cease business activities except
those necessary to liquidate its remaining assets. The accompanying condensed
consolidated financial statements and notes to these statements should be read
in conjunction with the consolidated financial statements and related notes
contained in the Company's annual report on Form 10-K for the year ended
December 31, 2004. The interim financial information contained herein is
unaudited; however, in management's opinion, all adjustments necessary for fair
presentation of such financial information have been included.
2. RESTRICTED CASH
The Company's wholly owned subsidiary, PMI, obtained financing of $3,498,000
from Wells Fargo Bank for the purchase of its office and warehouse facility. Of
the amount financed, $2,500,000 was in the form of a 10-year bank loan utilizing
a 30-year amortization period. This loan bears interest at the bank's 90-day
LIBOR rate (3.75% as of September 30, 2005) plus 2.5%, and is secured by a deed
of trust on the property. The balance of the financing was obtained through a
$998,000 Small Business Administration ("SBA") loan due in monthly installments
through April 2017. The SBA loan bears interest at 7.569%, and is secured by the
underlying property. The Company had violated certain financial covenant ratios
in the loan agreement with Wells Fargo Bank of December 31, 2004 and was
required to deposit $250,000 in a restricted cash account for debt services. As
of September 30, 2005, $150,300 remained in the restricted cash account.
8
3. ABANDONMENT OF ACCOUNTS RECEIVABLE AND INVENTORIES
The amounts of accounts receivable as of September 30, 2005 are estimated at
their fair collectible values and were recorded on the book of PMIGA.
On August 2, 2005, the Court authorized PMI to abandon its remaining accounts
receivable and inventories to MTC. Under the settlement agreement between PMI
and MTC on September 19, 2005, MTC agreed to reduce its pre petition claim by
$200,000 and to reduce its post petition claim to $205,000 which was paid by the
Company on November 11, 2005. The changes in assets and liabilities resulted
from the abandonment are as follows:
Accounts receivable, net of allowance
for doubtful accounts of $231,700 $ 714,500
Less payable to customers/vendors that could be
used to offset accounts receivable (577,300)
Inventories --
Reduction of MTC's pre petition claim (200,000)
Reduction of MTC's post petition claim (4,500)
---------
Net decrease in liabilities $ (67,300)
=========
The Company purchased products from certain vendors who were also customers of
the Company. Due to the Company's non-payment of the due payable invoices, these
customers/vendors are holding their payments on our invoices. The amount of
PMIGA's receivables that were unpaid by these customers/vendors was $17,000 as
of September 30, 2005. The accounts receivable abandoned to MTC included the
amount of $577,300 receivables that were unpaid by these customers/vendors.
4. INCOME TAX REFUND RECEIVABLE
As of September 30, 2005, the Company anticipated a federal income tax refund
resulted in carrying back the tax losses in 2002 to 1998.
5. REFUNDABLE INSURANCE PREMIUMS
The Company was required to make installment payments for the workers'
compensation insurance premiums based on the annual payroll amounts estimated at
the beginning of 2005. As of September 30, 2005, the amounts paid by the Company
were in excess of the estimated premiums by $25,500. The overpayment will be
refundable to the Company upon the termination or the expiration date (December
31, 2005) of the policy.
6. LAND AND BUILDING
The net realizable value of the Company's facility in Milpitas, California ("the
Facility") is estimated to be $4,200,000 based on the offer to sell the property
as of September 30, 2005 after deducting the normal expected transaction costs.
On September 15, 2005, PMI entered into an agreement of selling the Facility to
a third party for $4,389,000. The sale agreement was subject to the Court's
approval. On October 14, 2005, PMI sold the Facility to another party for
$4,990,000 pursuant to a Court order on October 28, 2005. The net realizable
value of the Facility as of September 30, 2005 is based on the first sale
agreement for $4,389,000.
9
7. ESTIMATED COSTS TO BE INCURRED DURING LIQUIDATION PERIOD
The Company estimated the cost to be incurred to complete the liquidation of its
assets. The actual costs incurred are also dependent of the length of time to
liquidate the assets and might be materially different from the estimated
amount. The amounts of accrued estimated costs of liquidation and costs incurred
and other income and expenses from July 1, 2005 to September 30, 2005 are as
follow:
Accrued estimated costs of liquidation $ 424,000
Costs incurred and other income and expenses
during liquidation period:
Costs incurred during liquidation period 351,000
Interest and other income (6,700)
Rebate income from supplier (21,600)
Sale of inventories (23,600)
Cost of inventories sold 12,800
Selling expenses 600
Interest paid to Wells Fargo Bank and U.S. Small
Business Administration 26,900
---------
339,400
---------
Estimated costs to be incurred during liquidation
as of September 30, 2005 $ 84,600
=========
8. SECURED CREDITORS OF PRE-PETITION DEBTS
The secured creditors of the Company' Pre-Petition debts are as follows:
Textron Financial Corporation ("Textron") - Textron was fully secured by the
Company's accounts receivable, inventories, cash and other assets. As of
September 30, 2005, the outstanding balance due to Textron was fully paid. The
Company agreed and the Court approved that Textron be paid $100,000 per month
beginning June 2005 until the outstanding balance is fully paid. The Company
remitted $100,000 on June 27, 2005 and $100,000 on July 18, 2005 to Textron. On
August 2, 2005, the Company settled with Textron, with the Court's approval, for
$202,900 for the principal and interest owed to Textron and legal costs
incurred.
Wells Fargo Bank ("Wells Fargo") - Wells Fargo holds a first mortgage on the
Company's land and building and funds in the Restricted Cash Account. The
Company agreed and the Court approved that funds in the Restricted Account will
be used to make the normal mortgage payments (currently $2,740 per month plus
interest at 2.5% plus LIBOR, or a total of 6.25% at September 30, 2005). As of
September 30, 2005, the outstanding amount due to Wells Fargo was $2,319,800
which includes interest of $12,000.
10
U.S. Small Business Administration ("SBA") - SBA holds a second mortgage
interest on the Company's land and building. Payments of $8,591 are due monthly.
The unpaid balance at September 30, 2005 was $748,800.
Micro Technology Concept, Inc. ("MTC") - PMI's cash, accounts receivable and
inventories are secured by MTC. As of September 30, 2005, the amount of PMI's
cash secured by MTC was $212,100 and the accounts receivable and inventories had
been abandoned to MTC.
As described in Note 1 to the condensed consolidated financial statements, PMI
and MTC reached a settlement on September 19, 2005 on various issues between MTC
and PMI. The agreement includes that (a) MTC will give a credit of $200,000 from
its pre petition claim in full satisfaction of the accounts receivable and
inventories MTC has received from PMI's abandonment (see Note 2 to the condensed
consolidated financial statements), (b) PMI will dismiss the adversary
proceeding against MTC and MTC will dismiss the counterclaim against PMI, (c)
PMI agrees that MTC has an allowed post petition secured claim against PMI in
the amount of $205,000 which will be paid within 5 days of entry of the
Bankruptcy Court's order approving the settlement agreement, (d) MTC's pre
petition claim is secured by PMI's cash, PMI's accounts receivable and
inventories (abandoned to MTC) and PMI's unsecured claim for repayment from
PMIGA but not PMI's real estate, (e) MTC waives $150,000 of that portion of its
claim not satisfied by its collateral that may be remaining after the
application of its security to its pre petition claim, and (f) MTC does not
object that PMI has an allowed unsecured, non-priority claim against PMIGA in
the amount of $524,317 and that LW has an allowed unsecured, non-priority claim
against PMI in the amount of $389,644. The settlement agreement was approved by
the Court on November 7, 2005. As of September 30, 2005, the amount of pre
petition and post petition secured payable to MTC was $479,800 and $205,000,
respectively. On November 11, 2005, the Company paid $205,000 to MTC for the
post petition secured claim against PMI.
9. FACILITY LEASE AND ASSIGNMENT OF CONTRACT
The Company had a contract with MarketPoint ("MP") whereby the Company provides
warehouse and distribution services to MP. In July 2005, the Court has approved
the assignment of MP contract from the Company to Encompass Group Affiliates,
Inc. ("Encompass"), a wholly owned subsidiary of Advanced Communications
Technologies, Inc. which is a majority shareholder of the Company. The Company
leases certain space in its facility to Encompass on a month-to-month basis. The
Company has recorded a rental income of $6,000 for the quarter ended September
30, 2005 and a receivable from Encompass for $6,000 as of September 30, 2005.
10. TRANSACTIONS WITH FORMER STOCKHOLDERS/EXECUTIVES
In December 2004, two stockholders/executives (the "Stockholders") holding a
collective majority interest in the Company entered into a Stock Purchase
Agreement with Advanced Communications Technologies, Inc., a Florida corporation
("ACT"), pursuant to which ACT agreed to purchase from the Stockholders, and the
Stockholders agreed to sell to ACT, an aggregate of 6,454,300 shares of the
common stock of the Company (the "PMIC Shares") for the aggregate purchase price
of $500,000. On December 30, 2004, the Stockholders and ACT closed on the sale
of the PMIC Shares (the "Closing"). In connection with the sale, the
Stockholders entered into employment agreements with the Company and ACT. The
Employment Agreements, dated December 30, 2004, provided for a cash bonus of
$225,000 each to be paid within 30 days of the Closing and other bonus and
earn-out provisions payable in cash or in shares of common stock of ACT. Under
the earn-out provisions, the Stockholders could have earned the right to receive
in aggregate up to 99,999,999 shares of ACT's common stock. The Employment
Agreements further provided that in the event the Company terminates the
Employment Agreements without cause upon 30 days prior written notice, the
Stockholders were entitled to 6 months severance pay.
11
On May 10, 2005, the Company terminated the Employment Agreements for "cause"
pursuant to the terms of the Employment Agreements. No part of the bonuses has
been paid. On May 11, 2005, ACT filed a complaint in the United States District
Court for the Southern District of New York against the former officers and
principal shareholders of PMIC, for the recovery of damages and costs for
securities fraud, breach of contract and other counts in connection with the
Stock Purchase Agreement.
11. EMPLOYMENT OF COUNSELS
On July 26, 2005, the Company filed a motion with the Court (a) to employ a
special litigation counsel for handling the legal dispute arising under or
related to the interim management agreement between the Company and MTC, and (b)
to authorize the Company to obtain a $30,000 loan from ACT, a majority
shareholder of PMIC. The proceeds of the loan from ACT would be used as payment
to retain the special counsel for the MTC litigation. The loan would bear
interest at 6.25%. The principal would be repaid in 9 months or upon the sale of
the Company's real property. The legal dispute arising under the interim
management agreement between the Company and MTC was settled on September 19,
2005 (see Note 8 to the condensed consolidated financial statements). The fees
for the employment of the special litigation counsel incurred through September
30, 2005 were approximately $26,000. On October 27, 2005, PMI obtained a loan of
$26,100 from ACT and the proceeds were used to pay for the special litigation
counsel's fees.
The Company also incurs professional services from a bankruptcy counsel and
independent accountants. As of September 30, 2005, the Company has accrued
$186,100 for the fees owed to the special litigation counsel, the bankruptcy
counsel and accountants and the accrued amount was included in Post Petition
accounts payable and other accrued expenses in the accompanying condensed
consolidated statement of net assets (liabilities) in liquidation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
Certain matters in this Form 10-Q, including, without limitation, certain
matters discussed under Part I -- Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations constitute "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.
Forward-looking statements are typically identified by the words "believes,"
"expects," "anticipates," "intends," "estimates," "will," "continue," "seeks"
and similar expressions. In addition, any statements that refer to expectations
or other characterizations of future events or circumstances are forward-looking
statements. Readers are cautioned that any such forward-looking statements are
not guarantees of performance and that matters referred to in such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Pacific Magtron International Corp. and each of its subsidiaries to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, risks and uncertainties discussed throughout Part I - Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. Pacific Magtron International Corp. undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
OVERVIEW AND BANKRUPTCY PROCEEDINGS
As used herein and unless otherwise indicated, the terms "Company," "we," and
"our" refer to Pacific Magtron International Corp. and each of its subsidiaries.
As set forth in more detail below, the Company has filed a petition in
bankruptcy. Although the petition was filed for reorganization under Chapter 11
of the Bankruptcy Code, the Company is currently not conducting any operations
other than those necessary to liquidate its assets.
On May 11, 2005 (the "Petition Date"), PMIC, PMI, PMIGA and LW filed voluntary
petitions to reorganize their businesses under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Nevada, (the "Bankruptcy Court"). The Bankruptcy Court is jointly
administering these cases as "In re: Pacific Magtron International Corporation,
Inc., et al., Case No.BK-S-05-14325 LBR."
Upon the filing of the petition in May 2005, the Company intended to form a
joint venture with General Procurement, Inc. ("GPI") to continue the business
operations. On May 16, 2005, the Court approved the Interim Management Agreement
with GPI. Subsequent to the hearings on May 16, 2005, Micro Technology Concepts,
Inc. ("MTC"), a major secured creditor of the Company, negotiated a similar
joint venture agreement with the Company to replace the one entered into with
GPI. The joint venture agreement included an interim management agreement
("IMA") whereby the joint venture partner, MTC, would take over management of
the Company's sales and provide the Company with inventory on a secured basis
while the Company sought approval of the joint venture as part of a plan of
reorganization.
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On June 23, 2005, MTC informed the Company that it would not continue to perform
under the Interim Management Agreement and would not agree to allow the Company
to use MTC's cash collateral for any business purpose except for liquidating the
remaining assets of the Company. The Company has been forced to cease business
activities except those necessary to liquidate its remaining assets. On August
31, 2005, PMI filed a complaint against MTC alleging that MTC breached its
obligation under the IMA and MTC filed a motion to convert the PMI case to a
case under Chapter 7 of the United States Bankruptcy Code. On September 9, 2005,
MTC filed a counterclaim against PMI.
On August 2, 2005, the Court authorized PMI to abandon its remaining accounts
receivable and inventories to MTC. The abandonment resulted in a net decrease in
our liabilities by $63,600.
On September 19, 2005, PMI and MTC reached a settlement by which the various
issues between MTC and PMI have been settled and the litigation dismissed. The
settlement agreement was approved by the Court on November 7, 2005.
On September 15, 2005, PMI entered into an agreement of selling the real
property at 1600 California Circle, Milpitas, California ("Facility") to a third
party for $4,389,000. The sale agreement was subject to the Court's approval. On
October 14, 2005, PMI rejected the prior sale agreement and sold its Facility to
another party for $4,990,000 pursuant to a Court order entered on October 28,
2005.
On July 18, 2005, the Company filed the "Disclosure Statement to Accompany
Debtors' Joint Liquidating Plan of Reorganization" detailing the liquidation
plan, however, the Company did not receive the Court's approval for the plan.
The Company anticipates filing an amended Plan and Disclosure Statement for both
PMI and PMIGA on November 16, 2005 for hearing on December 8, 2005.
Financial Statement Presentation
Effective July 1, 2005, the Company adopted the liquidation basis of accounting,
whereby assets are valued at their estimated net realizable values and
liabilities are valued at their estimated settlement amounts. The Company has
provided an estimated liquidation basis statement of net assets (liabilities) in
its Form 10-Q as of September 30, 2005 and the statement of changes in net
assets (liabilities) for the quarterly period ended September 30, 2005. The
valuation of assets and liabilities requires estimates and assumptions by
management and there are substantial uncertainties in carrying out the
liquidation plan. The amount and timing of future liquidating distribution to
creditors and shareholders, if any, will depend upon a variety of factors
including, but not limited to, the actual proceeds from the sale of the
Company's assets, and the actual costs incurred in connection with carrying out
the liquidation plan, including administrative costs during the liquidation
period, and the timing of the liquidation. These estimates may vary
significantly from the final amounts.
Prior to July 1, 2005, the Company had prepared its consolidated financial
statements on a going-concern basis, which assumes continuity of operations,
realization of assets and satisfaction of liabilities in the ordinary course of
business. PMIGA ceased its operation as of April 30, 2005. The activities,
assets and liabilities of PMIGA were reclassified for reporting purposes as
discontinued operations for all periods prior to June 30, 2005 shown in the
accompanying condensed consolidated financial statements. On June 23, 2005, MTC
informed the Company that it would not continue to perform under the Interim
Management Agreement and would not agree to allow the Company to use MTC's cash
collateral for any business purpose except for liquidating the remaining assets
of the Company. The Company has been forced to cease business activities except
those necessary to liquidate its remaining assets.
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CHANGES IN NET ASSETS (LIABILITIES) IN LIQUIDATION
Adjustment of Assets and Liabilities to Fair Value
Upon the adoption of liquidation basis of accounting, the Company adjusted its
assets and liabilities to their fair value. The net adjustment amount was
$312,800 for the quarter ended September 30, 2005. The net adjustment is
primarily attributed to the $474,100 adjustment in value of the real estate. On
September 15, 2005, PMI entered into an agreement of selling the Facility to a
third party for $4,389,000. The sale agreement was subject to the Court's
approval. On October 14, 2005, PMI sold its Facility to another party for
$4,990,000 pursuant to a Court order entered on October 28, 2005.
Abandonment of PMI Accounts Receivable and Inventories
On August 2, 2005, the Court authorized PMI to abandon its remaining accounts
receivable and inventories to MTC. Under the settlement agreement between PMI
and MTC on September 19, 2005, MTC agreed to reduce its pre petition claim by
$200,000 and to reduce its post petition claim to $205,000 for the abandoned
receivables and inventories received. The abandonment resulted in a net decrease
in our liabilities by $67,300.
Costs Incurred During Liquidation Period
The amount of costs incurred during the liquidation period from July 1, 2005 to
September 30, 2005 was $351,000. The costs incurred primarily consist of $77,100
in salaries and related costs, $238,700 in legal and other professional fees,
$19,700 in real property taxes and $14,600 in utilities costs. The Company has
accrued an estimated cost of $424,000 for the liquidation period.
Other Items
During the quarter ended September 30, 2005, the Company liquidated certain of
its inventories for $23,600 and received $21,600 of rebates earned prior to June
30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, PMI, PMIGA, LW and PMIC had cash in the amounts of
$212,100, $161,100, $35,900 and $200, respectively. PMI's cash of $212,100 is
secured by MTC. In addition, PMI has $150,100 in an account restricted for the
use of servicing the monthly mortgage payments to Wells Fargo Bank. For the
quarter ended September 30, 2005, the Company has incurred $351,000 in costs.
Included in the costs incurred are legal fees of $186,100 which were accrued but
not yet been paid as of September 30, 2005.
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In June 2005, the Company agreed and the Court approved that Textron be paid
$100,000 per month beginning June 2005 until the outstanding balance is fully
paid. The Company remitted $100,000 on June 27, 2005 and $100,000 on July 18,
2005 to Textron. On August 2, 2005, the Company settled with Textron, with the
Court's approval, for a total payment of $202,800 of which $139,500 was for the
balance owed and $63,300 for interest and legal costs incurred.
The Company made its monthly mortgage payments to Wells Fargo Bank from its
restricted cash. For the three months ended September 30, 2005, principal and
interest totaled to $57,100 were paid to Wells Fargo Bank from the restricted
cash account.
U.S. Small Business Administration ("SBA") holds a second mortgage interest on
the Company's real property. Payments of $8,591 are due monthly. The Company has
not been remitting the monthly payments since August 2005. As of September 30,
2005, the outstanding principal balance due SBA was $748,800.
On October 14, 2005, PMI entered into an agreement to sell its real estate to a
third party for $4,990,000 pursuant to a Court order entered on October 28,
2005. On October 27, 2005, PMI obtained a loan of $26,100 from ACT and the
proceeds were used to pay for the special litigation counsel's fees. The Company
issued a promissory note which bears interest at 6.25% per annum and principal
and interest are due in 9 months or upon the receipts of the proceeds from the
sale of the Company's real estate. PMI and MTC reached a settlement on September
19, 2005 on various issues between MTC and PMI. The agreement includes that (a)
MTC will give a credit of $200,000 from its pre petition claim in full
satisfaction of the accounts receivable and inventories MTC has received from
PMI's abandonment, (b) PMI will dismiss the adversary proceeding against MTC and
MTC will dismiss the counterclaim against PMI, (c) PMI agrees that MTC has an
allowed post petition secured claim against PMI in the amount of $205,000 which
will be paid within 5 days of entry of the Bankruptcy Court's order approving
the settlement agreement, (d) MTC's pre petition claim is secured by PMI's cash,
PMI's accounts receivable and inventories (abandoned to MTC) and PMI's unsecured
claim for repayment from PMIGA but not PMI's real estate, (e) MTC waives
$150,000 of that portion of its claim not satisfied by its collateral that may
be remaining after the application of its security to its pre petition claim,
and (f) MTC does not object that PMI has an allowed unsecured, non-priority
claim against PMIGA in the amount of $524,317 and that LW has an allowed
unsecured, non-priority claim against PMI in the amount of $389,644. The court
hearing date was set on October 31, 2005. The settlement agreement was approved
by the Court on November 7, 2005. As of September 30, 2005, the amount of pre
petition and post petition secured payable to MTC was $479,800 and $205,000,
respectively. On November 11, 2005, the Company paid $205,000 to MTC for the
post petition secured claim against PMI.
OFF-BALANCE ARRANGEMENT
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors, and the Company does not have any non-consolidated special purpose
entities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
one of our bank loans with a $2,307,800 balance at September 30, 2005, which
bears fluctuating interest based on the bank's 90-day LIBOR rate. We believe
that fluctuations in interest rates in the near term will not materially affect
our financial conditions. We are not exposed to material risk based on exchange
rate fluctuation or commodity price fluctuation.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the design and
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this quarterly report. Based on this
evaluation, our principal executive officer and principal financial officer
concluded, as of the end of such period, that these disclosure controls and
procedures are effective and designed to ensure that the information required to
be disclosed in our reports filed or submitted under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the requisite
time periods.
(b) Changes in Internal Controls Over Financial Reporting.
There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) identified in connection with the evaluation of our internal control
performed during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
ITEM 1. - LEGAL PROCEEDINGS
On May 11, 2005 (the "Petition Date"), PMIC, PMI and 3 direct and indirect
wholly-owned subsidiaries filed voluntary petitions to reorganize their
businesses under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of Nevada (the "Bankruptcy
Court"). The Bankruptcy Court is jointly administering these cases as "In re:
Pacific Magtron International Corporation, Inc., et al., Case No. BK-S-05-14325
LBR."
In August 2005 PMI filed a lawsuit against MTC and several individuals,
including two former employees of PMI. The complaint ("Adversary Proceeding")
includes charges of breach of contract, among other things, and seeks damages as
restitution. `On September 9, 2005, MTC filed an answer and counterclaim to the
Adversary Proceeding naming PMI and two PMI's officers and executives as
counter-defendants. On September 19, 2005, PMI, MTC and all other participating
parties reached a global settlement resolving the issues raised in the Adversary
Proceeding, the motion and the proposed plans of reorganization. The settlement
agreement was approved by the Court on November 7, 2005.
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ITEM 3. - DEFAULTS UPON SENIOR SECURITIES.
Our mortgage loan with Wells Fargo Bank and our Small Business Administration
Loan are in default. All of our loan agreements contain provisions that the
filing of a voluntary petition in bankruptcy is a default under the loans.
However, under bankruptcy law, those provisions are unenforceable. See "Part I -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" for more information about the
outstanding amounts due under our loans with Wells Fargo Bank and the Small
Business Administration.
ITEM 6. - EXHIBITS
(a) Exhibits Description Reference*
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
3.3 Amended and Restated Certificate of Designation of
Preferences, Rights and Limitations of Series A
Redeemable Convertible Preferred Stock (2)
10.1 Agreement of Purchase and Sale and Joint Escrow
Instructions (3)
10.2 Settlement Agreement Affecting Adversary Proceeding,
Payment of Claims and Plans of Reorganization **
31.1 Certificate of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 **
31.2 Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 **
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 **
(1) Incorporated by reference to the Company's registration statement on Form
10SB-12G filed January 20, 1999.
(2) Incorporated by reference to the Company's Current Report on Form 8-K filed
on January 5, 2005.
(3) Incorporated by reference to the Company's Current Report on Form 8-K filed
on November 1, 2005.
* In the case of incorporation by reference to documents filed by the Registrant
under the Securities Exchange Act of 1934, as amended, the Registrant's file
number under the Exchange Act is 000-25277.
** Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
Date: November 14, 2005
By /s/ Martin Nielson
-----------------------------------------
Martin Nielson
President and Chief Executive
Officer
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