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 March 31, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (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. As of May 2, 2006, the number of shares of
common stock outstanding was 10,485,062.
Part I. - Financial Statements
Item 1. - Condensed combined statement of net assets
(liabilities) in liquidation as of
March 31, 2006 (Unaudited) 1
Condensed combined statement of net assets
(liabilities) in liquidation as of
December 31, 2005 2
Condensed consolidated statement of changes in net
assets (liabilities) in liquidation for the three
months ended March 31, 2006 (Unaudited) 3
Condensed consolidated statements of operations for
the three months ended March 31, 2005
(Unaudited - GOING CONCERN BASIS) 4
Condensed consolidated statement of shareholders'
Equity (deficiency) for the three months ended
March 31, 2005 (Unaudited - GOING CONCERN BASIS) 5
Condensed consolidated statements of cash flows for the
three months ended March 31, 2005 (Unaudited -
GOING CONCERN BASIS) 6
Notes to condensed combined/consolidated financial
Statements (Unaudited) 7-22
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 23-28
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4. - Controls and Procedures 28
Part II - Other Information
Item 1. - Legal Proceedings 28
Item 1A.- Risk Factors 29
Item 6. - Exhibits 32
Signature 33
PACIFIC MAGTRON INTERNATIONAL CORP. ("PMIC") and Subsidiary -
LIVEWAREHOUSE, INC. ("LW")
CONDENSED COMBINED STATEMENT OF NET ASSETS (LIABILITIES) IN LIQUIDATION
(LIQUIDATION BASIS)
AS OF MARCH 31, 2006
(unaudited)
COMBINED
PMIC LW TOTAL
--------- ---------- ----------
ASSETS
Cash and cash equivalents $ 64,400 $ 145,200 $ 209,600
Pre Petition receivable
from PMI, less allowance
for uncollectible amount
of $230,400 -- 2,100 2,100
Post Petition receivable
from PMIC -- 17,700 17,700
Office and warehouse equipment -- 15,000 15,000
--------- --------- ---------
Total assets $ 64,400 $ 180,000 $ 244,400
========= ========= =========
LIABILITIES
Post Petition accounts
payable and other
accrued expenses $ 23,300 $ 8,500 $ 31,800
Post Petition payable to PMI 22,100 -- 22,100
Post Petition payable to PMIGA 2,700 -- 2,700
Post Petition payable to LW 17,700 -- 17,700
Estimated costs to be incurred
during liquidation period 171,000 23,000 194,000
Pre Petition unsecured
accounts payable 185,900 13,100 199,000
--------- --------- ---------
Total liabilities 422,700 44,600 467,300
--------- --------- ---------
NET ASETS (LIABILITIES)
IN LIQUIDATION ($358,300) $ 135,400 ($222,900)
========= ========= =========
See accompanying notes to condensed combined financial statements.
1
PACIFIC MAGTRON INTERNATIONAL CORP. ("PMIC") and Subsidiaries -
PACIFIC MAGTRON, INC. ("PMI"), PACIFIC MAGTRON (GA), INC. ("PMIGA"),
And LIVEWAREHOUSE, INC. ("LW")
CONDENSED COMBINED STATEMENT OF NET ASSETS (LIABILITIES) IN LIQUIDATION
(LIQUIDATION BASIS)
AS OF DECEMBER 31, 2005
COMBINED
PMI PMIGA LW PMIC TOTAL
----------- ----------- ----------- ----------- -----------
ASSETS
Cash and cash equivalents $ 1,351,100 $ 158,500 $ 30,900 $ 200 $ 1,540,700
Pre Petition receivable
from PMIGA, less
allowance for uncollectible
amount of $431,600 (secured
by Micro Technology
Concepts, Inc. "MTC") 92,700 -- -- -- 92,700
Pre Petition receivable
from PMI, less allowance
for uncollectible amount
of $230,400 -- -- 159,200 -- 159,200
Refundable previously
overpaid insurance premiums
(secured by MTC) 25,500 -- -- -- 25,500
Refundable real property
transfer taxes 5,500 -- -- -- 5,500
Post Petition receivable
from PMIGA 9,200 -- -- -- 9,200
Post Petition receivable
from LW 7,300 -- -- -- 7,300
Post Petition receivable
from PMIC 13,500 2,700 1,200 -- 17,400
Income tax refund receivable -- -- -- 73,500 73,500
Office and warehouse equipment 15,000 -- -- -- 15,000
----------- ----------- ----------- ----------- -----------
Total assets $ 1,519,800 $ 161,200 $ 191,300 $ 73,700 $ 1,946,000
=========== =========== =========== =========== ===========
LIABILITIES
Post Petition accounts
payable and other
accrued expenses $ 40,500 $ 500 $ 300 $ 18,800 $ 60,100
Post Petition payable to PMI -- 9,200 7,300 13,500 30,000
Post Petition payable to PMIGA -- -- -- 2,700 2,700
Post Petition payable to LW -- -- -- 1,200 1,200
Estimated costs to be incurred
during liquidation period 233,000 17,900 35,600 90,900 377,400
Pre Petition secured payable
to MTC 204,200 -- -- -- 204,200
Pre Petition payable to LW 389,600 -- -- -- 389,600
Pre Petition payable to PMI -- 524,300 -- -- 524,300
Pre Petition unsecured
accounts payable 1,871,000 168,500 16,300 185,900 2,241,700
----------- ----------- ----------- ----------- -----------
Total liabilities 2,738,300 720,400 59,500 313,000 3,831,200
----------- ----------- ----------- ----------- -----------
NET ASETS (LIABILITIES)
IN LIQUIDATION ($1,218,500) ($ 559,200) $ 131,800 ($ 239,300) ($1,885,200)
=========== =========== =========== =========== ===========
See accompanying notes to condensed combined financial statements.
2
PACIFIC MAGTRON INTERNATIONAL CORP. ("PMIC") and Subsidiaries -
PACIFIC MAGTRON, INC. ("PMI"), PACIFIC MAGTRON (GA), INC. ("PMIGA"),
And LIVEWAREHOUSE, INC. ("LW")
CONDENSED COMBINED STATEMENT OF CHANGES OF NET ASSETS
(LIABILITIES) IN LIQUIDATION
(LIQUIDATION BASIS)
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(unaudited)
COMBINED
PMI PMIGA LW PMIC TOTAL
----------- --------- ------- --------- -----------
NET ASSETS (LIABILITIES) IN
LIQUIDATION, December 31, 2005 (1,218,500) (559,200) 131,800 (239,300) (1,885,200)
Cash distribution paid to
PMI (received from PMIGA) (89,200) 89,200 --
Cash distribution paid to LW
(received from PMI) 142,100 (142,100) --
Cash distributions paid 395,400 29,900 425,300
Federal income tax refund
received (73,500) (73,500)
Payment to MTC 89,200 89,200
Decrease in Post Petition
payable to PMI (receivable
from PMIGA) (9,200) 9,200 --
Decrease in Post Petition
payable to PMI (receivable
from LW) (7,300) 7,300 --
Increase in Post Petition
receivable from PMIC
(payable to PMI) 8,600 (8,600) --
Increase in Post Petition
receivable from PMIC
(payable to LW) 16,500 (16,500) --
Increase in Post Petition
unsecured payables and
accruals (103,300) (5,000) (8,200) (4,500) (121,000)
Increase (decrease) in cash (559,300) (130,800) 114,300 64,200 (511,600)
Interest income (1,700) (6,000) (7,700)
Allocated administrative
expenses from other debtors 2,000 1,000 3,000
Allocation of administrative
expenses to others Debtors (3,000) (3,000)
Costs incurred during
liquidation period 137,700 5,500 11,600 44,900 199,700
Accrued estimated costs of
liquidation (119,000) (119,000)
Others (1,500) 3,200 1,700
Assets and liabilities
transferred to Creditor
Trust:
Cash (791,800) (27,700) (819,500)
Other assets (56,600) (2,600) (59,200)
Liabilities 2,068,400 589,500 2,657,900
----------- ---------- ---------- ---------- -----------
NET ASSETS (LIABILITIES) IN
LIQUIDATION, March 31, 2006 $0 $0 $135,400 ($358,300) ($222,900)
=========== ========== ========== ========== ===========
See accompanying notes to condensed combined financial statements.
3
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2005
(Unaudited - GOING CONCERN BASIS)
Sales $ 9,369,700
Cost of sales 8,991,300
------------
Gross profit 378,400
Selling, general and
administrative expenses 1,094,800
------------
Loss from continuing operations before
other income (expense) (716,400)
------------
Other income (expense):
Interest income 600
Interest expense (51,400)
Change in fair value of warrants issued 1,100
Loss on asset impairment (112,400)
Other expense, net 27,000
------------
Total other expense (135,100)
------------
Loss from continuing operations (851,500)
Loss from discontinued operations of
Pacific Magtron (GA), Inc. (154,900)
Accretion of deemed
dividend related to Series A
Convertible Preferred Stock (4,100)
------------
Net Loss applicable to
common shareholders $ (1,010,500)
============
Basic and diluted loss per share applicable
To shareholders:
Loss from continuing operations $ (0.08)
Loss from discontinued operations (0.01)
------------
Net loss applicable to common
shareholders $ (0.09)
============
Shares used in basic and diluted
per share calculation 10,485,062
============
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)
Preferred Stock Common Stock Additional
--------------------- ------------------------- 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 -- 4,100 -- -- -- (4,100) --
Loss from operations -- -- -- -- -- (851,500) (851,500)
Loss from discontinued
Operations -- -- -- -- -- (154,900) (154,900)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2005 600 $ 238,200 10,485,062 $ 10,500 $ 2,036,400 $(2,656,000) ($ 370,900)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005
(Unaudited - GOING CONCERN BASIS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Net loss $(1,010,500)
Less: Accretion of dividend related to Series
A Convertible Preferred Stock 4,100
Accretion of redemption value of Series
A Convertible Preferred Stock --
Loss from discontinued operation 154,900
-----------
Net loss from continuing operations (851,500)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 60,500
Loss on asset impairment 112,400
Provision for doubtful accounts 24,900
Change in fair value of warrants (1,100)
Changes in operating assets and
liabilities:
Accounts receivable 1,383,600
Other receivables --
Inventories 2,145,600
Prepaid expenses and other
assets (12,700)
Accounts payable (1,711,500)
Accrued expenses and other liabilities 94,900
-----------
NET CASH PROVIDED BY CONTINUING OPERATIONS 1,245,100
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 250,800
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,495,900
-----------
CASH FLOWS (USED IN) PROVIDED BY FINANCING
ACTIVITIES:
Net decrease in floor plan inventory loans (1,173,300)
Decrease in restricted cash 266,600
Principal payments on notes payable (17,100)
-----------
NET CASH USED IN FINANCING ACTIVITIES (923,800)
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 572,100
CASH AND CASH EQUIVALENTS:
Beginning of period 543,800
-----------
End of period $ 1,115,900
===========
See accompanying notes to condensed consolidated financial statements.
6
PACIFIC MAGTRON INTERNATIONAL CORP. ("PMIC") and Subsidiaries -
PACIFIC MAGTRON, INC. ("PMI"), PACIFIC MAGTRON (GA), INC. ("PMIGA"),
and LIVEWAREHOUSE, INC. ("LW")
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED - LIQUIDATION BASIS)
THE COMPANY
The combined financial statements include Pacific Magtron International Corp.
(the "Company" or "PMIC") and its subsidiaries, Pacific Magtron, Inc. ("PMI"),
Pacific Magtron (GA) Inc. ("PMIGA") and LiveWarehouse, Inc. ("LW").
Our primary business had been to distribute computer peripheral products through
our wholly owned subsidiaries, PMI, PMIGA and LW. Our business was organized
into three divisions: PMI, PMIGA and LW. PMIGA ceased its operations on April
30, 2005.
The Company had historically relied on credit terms from its suppliers to fund
inventory purchases. Our vendors progressively imposed more restrictive credit
terms, such that, during the first quarter of 2005, we were unable to fund
purchases and were limited to selling existing inventory with no ability to
replenish or purchase inventory. In addition, we did not have the ability to
draw on lines of credit to fund the shortfall caused by the elimination of terms
by our vendors. Because of the reduced sales caused by the lack of new
inventory, we were not able to pay our obligations on a timely basis.
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 "Court"). The Court is jointly administering these cases as "In
re: Pacific Magtron International Corporation, Inc., et al., Case
No.BK-S-05-14325 LBR" (the "Bankruptcy Proceedings"). Although the petition was
filed for reorganization under Chapter 11 of the Bankruptcy Code, the Company
did not conduct any operations after the second quarter 2005 other than those
necessary to liquidate its assets.
1. BANKRUPTCY PROCEEDINGS
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.
7
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.
On September 15, 2005, PMI entered into an agreement to sell 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. The escrow was closed on November 23, 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. On
December 23, 2005, PMI and PMIGA filed an Amended Disclosure Statement to
Accompany PMI's Second Amended Plan of Liquidation and PMIGA's Second Amended
Plan of Liquidation ("the PMI & PMIGA Plan"). On January 30, 2006, the Court
entered an order (Docket No. 507) ("Confirmation Order") approving and
confirming the PMI & PMIGA Plan. The effective date of the PMI & PMIGA Plan was
February 10, 2006 ("the Effective Date").
On January 30, 2006, PMIC and LW filed a separate Disclosure Statement to
Accompany Third Amended Plans of Reorganization for PMIC and LW ("the PMIC & LW
Plan"). The Court authorized PMIC and LW to send the PMIC & LW Plan and ballots
to creditors and PMIC's shareholders to vote on the PMIC & LW Plan. The deadline
for voting on the PMIC & LW Plan was February 24, 2006 and the hearing on the
confirmation of the PMIC & LW Plan was scheduled for April 10, 2006. The
confirmation hearing was continued pending consideration of a motion for
approval of a settlement of litigation with PMIC's former executive officers and
proposed Fourth Amended Plans of Reorganization for PMIC and LW taking that
settlement into account (the "PMIC & LW Fourth Amended Plan"). The Company
expects that a motion for approval of the settlement and the PMIC & LW Fourth
Amended Plan will be filed with the Bankruptcy Court on or about the date of
filing this Quarterly Report.
8
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 a liquidation basis statement of net assets (liabilities) as of March
31, 2006 and December 31, 2005 and the statement of changes in net assets
(liabilities) for the three months ended March 31, 2006. The valuation of assets
and liabilities requires estimates and assumptions by management and there are
uncertainties in carrying out the liquidation and reorganization plans. The
amount and timing of future liquidating distributions to creditors and
shareholders, if any, will depend upon a variety of factors including, but not
limited to, the actual proceeds from the liquidation of the Company's assets,
and the actual costs incurred in connection with carrying out the liquidation
and reorganization plans, including administrative costs during the liquidation
period, and the timing of the liquidation. These estimates may vary
significantly from the final amounts. On January 30, 2006, the Court entered an
order approving and confirming the PMI & PMIGA Plan. On January 30, 2006, PMIC
and LW filed the PMIC & LW Plan. Both the PMI & PMIGA Plan and the PMIC & LW
Plan treat the assets and debts of each of the entities as a separate case. The
combined statement of net assets (liabilities) in liquidation as of March 31,
2006 and December 31, 2005 and the combined statement of changes of net assets
(liabilities) in liquidation for the three months March 31, 2006 present the
assets and liabilities and the changes of net assets (liabilities) of PMI,
PMIGA, LW and PMIC separately.
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 consolidated financial statements.
The financial information included herein is unaudited. The interim
combined/consolidated financial statements 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 the Company's combined/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 accounting principles generally accepted in the United States of
America have been omitted. These consolidated financial statements should be
read in conjunction with the audited combined/consolidated financial statements
and accompanying notes presented in the Company's Form 10-K for the year ended
December 31, 2005. Interim operating results are not necessarily indicative of
operating results expected for the entire year.
2. SUMMARY OF THE PMI & PMIGA PLAN
The PMI & PMIGA Plan treats the assets and debts of each of the entities as a
separate case. Under the PMI & PMIGA Plan, PMI was required to disburse the
funds in the formerly blocked account at Wells Fargo Bank to Micro Technology
Concepts, Inc. ("MTC"), a secured Creditor, on the Effective Date. However,
pursuant to a separate court order, PMI previously distributed theses funds to
MTC. On the Effective Date, PMI was required to (a) make full payment to its
administrative, priority and administrative convenience class creditors, (b)
disburse not less than 75% of its remaining available funds to its unsecured,
non-priority creditors, and (c) pay the balance of its funds to the trustee of
the PMI Creditor Trust. On the Effective Date, PMIGA was required to (a) make
full payment to its administrative creditors, (b) disburse not less than 75% of
its available funds to its unsecured, non-priority creditors, and (c) pay the
balance of its funds to the trustee of the PMIGA Creditor Trust.
9
Classification and Treatment of Claims and Interests
A. Class 1 (Priority Claims of PMI) was to be paid in full from the assets of
PMI on Effective Date. These claims consisted of pre-petition employee wage and
commission claims payroll taxes and employee benefits (health insurance and
401(k) contributions). Cash distributions of $932 were paid on the Effective
Date.
B. Class 2 (Administrative Convenience Class of PMI) was to be paid in full from
the assets of PMI on the Effective Date. These claims were those of pre-petition
unsecured creditors of PMI whose claims were $100 or less or who agreed to
reduce their claim to $100. Most of these claims were for rebates promised by
PMI to retail customers of PMI's wholesale customers. The total amount of these
claims was $43,937 and was paid on the Effective Date.
C. Class 3A (unsecured creditors of PMI including the unsecured portion of the
claim of MTC) was to be paid from the liquidation of the assets of PMI. On the
Effective Date, PMI (a) made a partial distribution of not less than 75% of the
cash assets of PMI to holders of undisputed, allowed claims in this class and
(b) reserved funds for disputed claims and administrative expenses. A total cash
amount of $314,836 was distributed on the Effective Date to the holders of
undisputed, allowed claims in this class, excluding MTC and LW. PMI has also
reserved $84,095 for disputed claims. In addition, PMI has also withheld
distribution of $478,152 from those claims filed by those creditors whom were
alleged to have received preferences or other avoidable transfers or payments
from PMI within 90 days of the Petition Date ("Preference Claims").
D. Class 3B consisted of the unsecured claim of LW. On the Effective Date, PMI
transferred its physical assets consisting of miscellaneous computers, desks,
chairs, office equipment, warehouse racks and equipment to LW for a $15,000
credit which was deducted from the payment to LW. LW shared pro rata with Class
3A after taking into account the credit for the transfer of the physical assets.
LW received a cash payment $142,085 from PMI's distribution on the Effective
Date.
E. Class 4 (secured creditor) consisted solely of MTC. Pursuant to the
settlement agreement with MTC, MTC's pre-petition claim against PMI is set at
$679,847 MTC has no lien and has no claim against PMIC, PMIGA and LW. MTC was
partially secured by (a) a lien on PMI's cash, inventory, equipment and accounts
receivable and their proceeds, and (b) a lien on PMI's bank accounts. Pursuant
to Court order, the inventory and accounts receivable of PMI were abandoned to
MTC. Pursuant to the settlement agreement with MTC, the liquidation value of the
inventory and the accounts receivable was set at $200,000. In addition, MTC was
secured by a lien on PMI's bank accounts (including the blocked account at Wells
Fargo Bank) and the "pre-building sale" account at Union Bank, neither of which
accounts held proceeds from the sale of PMI's building or the proceeds of
avoidance actions. After the sale of PMI's building in November 2005, MTC had a
first lien on the bank accounts. A total of $125,688 from these accounts was
paid to MTC. Pursuant to the settlement agreement with MTC, it was agreed that
PMI had a $524,317 claim against PMIGA and such claim was subject to MTC's
security interest. MTC received a partial cash distribution of $89,217 from
PMIGA on the Effective Date. MTC is also to receive a refund from PMI's workers
compensation insurer in the approximate amount of $25,500. Thus, MTC had
received $440,405 on its collateral and had an unsecured claim of $239,442.
Pursuant to the settlement agreement with MTC, MTC reduced its unsecured claim
by $150,000. MTC had an unsecured claim of $89,442 and is treated as a Class 3
claim. On the Effective Date, MTC received $35,880 cash distribution from PMI as
a Class 3 unsecured creditor.
10
F. Class 5 (unsecured creditors of PMIGA) was to be paid from PMIGA's funds
after reducing for administrative expenses with payment in full for claims of
any government creditors and partial distribution of not less than 75% of the
cash assets of PMIGA to holders of undisputed, allowed claims in this class.
Pursuant to the settlement agreement with MTC, it was agreed that PMI has a
$524,317 claim against PMIGA and such claim was subject to MTC's security
interest. Funds amounting to $5,896 were reserved for disputed claims and
administrative expenses. On the Effective Date, $89,217 was distributed to MTC
as a Class 5 creditor and $28,470 was distributed to other Class 5 creditors.
G. Class 6 (PMIC, the sole shareholder of PMI) retained nothing.
H. Class 7 (PMI, the sole shareholder of PMIGA) retained nothing.
On the Effective Date, the remaining balances of the assets of PMI and PMIGA and
the reserve for the disputed claims and Preference Claims would be delivered to
the PMI Creditor Trust and PMIGA Creditor Trust. The remaining assets of PMI and
PMIGA on the Effective Date were approximately $848,400 and $30,300,
respectively.
PMI has filed claims against various vendors who received payment within 90 days
of the Petition Date. These payments are called "Preferences." A Preference
occurs when a debtor treats one creditor more favorably than another. A creditor
receiving a Preference may be forced to restore it to the debtor's estate. Any
preferences recovered will be paid to the PMI Creditors Trust to be distributed
to Class 3.
3. SUMMARY OF THE PMIC & LW PLAN
The PMIC & LW Plan treats the assets and debts of each of PMIC and LW
separately. Under the PMIC & LW Plan, non-insider Creditors holding Allowed
Unsecured Claims against PMIC will receive a fifty percent (50%) initial
distribution on account of such claims, provided that the total distribution to
be made to holders of Allowed Claims other than Class 1 shall not exceed
$120,000, which shall be distributed pro rata to the creditors of PMIC. On the
effective date of the PMIC & LW Plan, PMIC will merge with Herborium Inc.
("Herborium"), a provider of proprietary, natural and complimentary healthcare
products, and shall be the surviving operating entity post-merger (the
"Herborium Merger"). LW will be reorganized and remain a wholly-owned subsidiary
of PMIC. Advanced Communications Technologies, Inc. ("ACT"), a 61.56%
shareholder of PMIC, shall contribute up to $50,000 on behalf of PMIC's
shareholders to effectuate the PMIC & LW Plan. The existing stock of PMIC shall
be cancelled and new stock shall be issued. With respect to the Class 6 equity
interest of ACT, new stock shall be issued directly to the shareholders of ACT
subject to the dilution of such interests upon plan consummation and the
corresponding merger of Herborium with PMIC as provided in the PMIC & LW Plan.
The existing Series A Convertible Preferred Stock of PMIC shall be converted to
800,000 shares of PMIC common stock or 0.74% of post-merger PMIC/Herborium.
ACT's shareholders shall own 10.55% of post-merger PMIC/Herborium; PMIC's
current common stockholders shall own 3.71% of post-merger PMIC/Herborium; and
Herborium's current stockholders shall own 85% of post-merger PMIC/Herborium.
11
Classification and Treatment of Claims and Interests
PMIC
A. Unclassified Claims
Administrative claims and priority tax claims (except as to the claim
of the Internal Revenue Service ("IRS") treated under Class 3) are not
classified for purposes of voting or receiving distributions under the PMIC & LW
Plan. Unclassified claims will be paid in full.
B. Class 1
Class 1 claims consist of priority claims other than the unclassified
claims as described above and will be paid in full in cash.
C. Class 2
Class 2 claims are unsecured claims of PMIC and will be paid in cash an
initial distribution equal to 50% of the claim amounts.
D. Class 3
Class 3 claim consist of the claim of the IRS. Such claim was amended
by the IRS to $0.00 in November
2005.
E. Class 4
Class 4 claims consist of the subordinated claims of 2 former
executives ("Terminated Executives") of PMIC. Under the PMIC & LW Plan, no
distributions would be made to the Class 4 claims unless such claims were
determined to be allowed claims. PMIC had filed a motion with the Court
requesting (i) that the Subordinated Claims of the Terminated Executives be
estimated at no more than $25,000 for voting and distribution purposes, and (ii)
with respect to the Subordinated Claims, that PMIC be permitted to take
discovery in connection with any estimation hearing before the Court. PMIC was
to establish a reserve for Disputed Claims (including the Subordinated Claims)
not to exceed $25,000, and entry by the Court of a final order estimating the
total Subordinated Claims at no more than $25,000 for voting and distribution
purposes shall be a condition precedent to confirmation of the PMIC & LW Plan.
If the Bankruptcy Court approves the proposed settlement with the Terminated
Executives reached on April 12, 2006 (see Note 7), the PMIC & LW Plan will be
amended. Under the proposed amended plans of reorganization for PMIC and LW, the
settlement with Mr. Li and Ms. Lee will affect the recovery of only ACT and its
stockholders; the other creditors of PMIC and LW will not be affected by the
settlement. As discussed above, any stock to be issued to Mr. Li and Ms. Lee
under the settlement will come directly from ACT's distribution or, in the event
that the Herborium Merger is not consummated, ACT's common stock will be issued
in place of the Herborium Stock. The cash reimbursement obligation of PMIC under
the settlement is triggered only after all distributions to all other creditors
have been made and adequate funds have been reserved for disputed claims. As a
party to the settlement, ACT has agreed to the modified treatment.
F. Class 5
Class 5 claim consists of the claim of Hartford Insurance Company for
pre-petition workers compensation premiums for employees of PMI. This claim is
disallowed under the Plan.
G. Class 6
Class 6 claims consist of the equity interests of PMIC shareholders
other than the holder of PMIC's Series A Convertible Preferred Stock. The
existing common shares of PMIC will be cancelled and new stock will be issued.
The treatment of ACT and its shareholders under the April 12, 2006 settlement
with the Terminated Executives (see Note 7) and the proposed amended plans of
reorganization for PMIC and LW is described above under Class 4 claims.
12
H. Class 7
Class 7 claim consists of the equity interests of the holder of PMIC
preferred stock. The existing preferred stock will be converted into 800,000
shares of PMIC common stock. These shares will represent 0.74% of the
post-merger PMIC/Herborium.
LW
A. Unclassified Claims
Administrative claims and priority tax claims are not classified for
purposes of voting or receiving distributions under the PMIC & LW Plan.
Unclassified claims will be paid in full.
B. Class 1
Class 1 claims consist of priority claims other than the unclassified
claims as described above and will be paid in full in cash. LW estimated that
the amount of the allowed claims in this Class is zero.
C. Class 2
Class 2 claims are unsecured claims of LW and will be paid a Pro Rata
distribution from available cash of LW.
D. Class 3
Class 3 shall consist of PMIC's equity interest in LW. PMIC shall
retain such interest.
4. DISTRIBUTIONS AND TRANSFER OF ASSETS AND LIABILITIES TO CREDITOR TRUSTS
On the Effective Date, PMIGA distributed cash of $89,200 to PMI and $29,900 to
other unsecured creditors. Upon the receipt of the distribution of $89,200 from
PMIGA, PMI immediately transferred the $89,200 to MTC in compliance with the
Confirmation Order. On the Effective Date, PMI distributed cash of $142,100 to
LW and $35,900 to MTC and $359,500 to other unsecured creditors. In addition,
PMI transferred all its physical assets for a value of $15,000 to LW. On the
Effective Date, PMI and PMIGA transferred all their remaining assets and
liabilities to the PMI Creditor Trust and PMIGA Creditor Trust, respectively.
The following are the assets and liabilities transferred to the PMI Creditor
Trust and PMIGA Creditor Trust on the Effective Date:
PMI PMIGA
----------- --------
Cash $ 791,800 $ 27,700
Other assets 56,600 2,600
----------- --------
Total assets 848,400 30,300
Liabilities 2,068,400 589,500
----------- --------
Net liabilities $1,220,000 $559,200
=========== ========
13
5. INCOME TAX REFUND RECEIVABLE
As of December 31, 2005, PMIC anticipated a federal income tax refund resulting
from carrying back tax losses in 2002 to 1998. On March 3, 2006, PMIC received a
federal income tax refund of $73,485 plus interest of $6,001.
6. 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 for the three months ended March 31, 2006 are as
follow:
COMBINED
PMI PMIGA LW PMIC TOTAL
-------- --------- --------- --------- ---------
Estimated costs to be incurred during
liquidation as of December 31, 2005 $ 233,000 $ 17,900 $ 35,600 $ 90,900 $ 377,400
Accrued estimated costs of liquidation 119,000 119,000
Other income and costs incurred
during liquidation period from
January 1, 2006 to March 31,
2006:
Interest and other income 1,700 6,000 7,700
Other costs incurred during
liquidation period (137,700) (5,500) (11,600) (44,900) (199,700)
Administrative costs allocated
from other debtors (2,000) (1,000) (3,000)
Administrative costs allocated to
other debtors 3,000 3,000
Transfer of liabilities to
Creditor Trust (100,000) (10,400) (110,400)
--------- --------- --------- --------- ---------
Estimated costs to be incurred during
liquidation as of March 31, 2006 0 0 23,000 171,000 194,000
========= ========= ========= ========= =========
7. SETTLEMENT WITH FORMER EXECUTIVES
On April 12, 2006, ACT and Theodore S. Li and Cynthia Lee (also referred to
herein collectively as the "Former Executives") entered into binding letter
agreements with respect to the settlement of certain litigation proceedings and
potential claims involving ACT, PMIC, Encompass Group Affiliates, Inc., the
Former Executives, Martin Nielson and Wayne Danson.
14
The litigation proceedings covered by this settlement include the following:
o the suit filed on May 11, 2005 by ACT in the United States
District Court for the Southern District of New York against
Mr. Li and Ms. Lee for the recovery of damages and costs for
securities fraud, breach of contract, misrepresentation and
other counts in connection with the Stock Purchase Agreement
pursuant to which Mr. Li and Ms. Lee sold shares of PMIC's
common stock to ACT (the "New York Action"); and
o the suit brought in January 2006 by Mr. Li and Ms. Lee in the
California Superior Court, Santa Clara County against ACT and
Encompass and certain of their officers and directors
alleging, among other things, fraud, intentional
misrepresentation, breach of contract, breach of implied
covenant of good faith and fair dealing, violation of the
California Labor Code, violation of the Business of
Professions Code of California, and defamation (the
"California Action").
The provisions of this settlement are being incorporated into a Settlement
Agreement to which PMIC and its subsidiaries will be a party upon Bankruptcy
Court approval. The material terms of this settlement are as follows:
o Upon the closing of the Herborium Merger and the occurrence of the effective
date of the PMIC & LW Plan, ACT will pay Mr. Li and Ms. Lee $325,000. PMIC will
reimburse ACT for a portion of this payment using available cash or other assets
remaining in the PMIC bankruptcy estate after final distribution under the PMIC
& LW Plan, as amended.
o PMIC will issue Mr. Li and Ms. Lee an aggregate of 1,750,000 freely-tradable
shares of Herborium common stock ("Herborium Stock") with a minimum value of
$.10 per share subject to the following conditions:
(a) such shares will be subject to a lock-up period of 150 days
after issuance during which Mr. Li and Ms. Lee may only sell
the shares for $.10 per share or greater; if the price per
share is less than $.10 per share at the end of the lock-up
period, then ACT will "top up" the value provided to Mr. Li
and Ms. Lee by delivering either:
o cash equal to $.10 minus the price per share on
said date times the number of shares still held,
or
o additional shares of Herborium Stock which would
otherwise be issued to ACT or its stockholders
under the Fourth Amended Plan having a value equal
to said the same amount;
(b) ACT's obligation to "top up" Mr. Li's and Ms. Lee's shares of
Herborium Stock shall be collateralized by 1,750,000 shares of
Herborium Stock held by ACT which will be placed in escrow
upon the earliest date that such shares can be issued
following the Herborium Merger;
15
(c) in the event that the Herborium Merger does not occur, Mr. Li
and Ms. Lee will receive the $325,000 and $175,000 worth of
shares of ACT's common stock, respectively, on the 76th day
following execution of the Settlement Agreement; on the date
upon which the Bankruptcy Court approves this settlement,
87,500,000 shares of ACT's common stock will be placed in
escrow at an estimated value of $.002 per share, which shares
will be deemed to be issued pursuant to the convertible notes
issued to Mr. Li and Ms. Lee in connection with the Stock
Purchase Agreement pursuant to which they sold shares of PMIC
common stock to ACT. The shares will be released from escrow
to Mr. Li and Ms. Lee based upon the closing price as of the
75th day or the next preceding business day and shall be
"topped up" to $.002 per share if the arms length third party
closing price is below $.002. If the Herborium Merger occurs
these shares shall immediately be released to ACT.
o Mr. Li and Ms. Lee will each receive a reference letter from PMIC relating to
the circumstances of their employment with PMIC.
o Mr. Li and Ms. Lee will execute broad general releases in favor of ACT, PMIC,
Encompass and each of their subsidiaries and their directors, employees, heirs,
insurers, attorneys and agents from any and all claims, including but not
limited to those that have or could have been brought in connection with the New
York Action, the California Action or in any of the Bankruptcy Proceedings or
under the Stock Purchase Agreement or the Employment Agreements entered into
among each of Mr. Li and Ms. Lee and PMIC, ACT and Encompass in connection with
the Stock Purchase Agreement. ACT, PMIC and Encompass and each of their
subsidiaries will execute similar releases in favor of Mr. Li and Ms. Lee. This
settlement will not be construed as an admission of liability by any party. The
parties further agree not to instigate or participate in any future litigation
or proceeding against any released party based upon events occurring prior to
settlement.
o The parties agree to cause any and all pending litigation between them to be
dismissed with prejudice as soon as practical following the payment of
consideration contemplated by this settlement.
o This settlement will be subject to approval by the Bankruptcy Court in the
Bankruptcy Proceedings and will be incorporated in the PMIC & LW Plan, and the
Bankruptcy Court will retain jurisdiction to enforce the settlement. Mr. Li and
Ms. Lee will withdraw their proofs of claims in the PMIC Bankruptcy Proceedings
and their objections to the confirmation of the PMIC & LW Plan.
o Each party will bear its own costs and attorneys' fees incurred in connection
with this settlement and the pending litigation between the parties except as
follows: ACT will pay (and has paid) the mediation fees incurred in connection
with the parties' mediation on April 12, 2006, and in the event of a breach of
the letter agreement, the prevailing party in any ensuing litigation will be
entitled to reasonable attorneys' fees and costs.
16
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2005
(Unaudited - GOING CONCERN BASIS)
1. THE COMPANY
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 distributed certain
computer and electronics products and sold consumer computer products on the
internet. PMIGA ceased its operation as of April 30, 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. 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 was 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, 2005. 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.
The Company incurred a net loss applicable to common shareholders of $1,010,500
for the three months ended March 31, 2005. As of March 31, 2005, the Company
also had a working capital deficiency of $4,387,100, including the
classification of notes payable in default as a current liability, and an
accumulated deficit of $2,656,000 and a shareholders' deficiency of $370,900. As
of March 31, 2005, the Company was in violation of certain of its debt covenants
with Textron Financial Corporation ("Textron") and Wells Fargo Bank ("Wells
Fargo"). The Company's inventory flooring line with Textron could be terminated
and loan payments on its inventory flooring line with Textron and mortgage loan
with Wells Fargo could be accelerated. The Company relied on credit terms from
its suppliers to fund inventory purchases. Certain vendors had progressively
imposed more restrictive credit terms, such that, beginning in March 2005, the
Company was unable to fund purchases. The Company's business was limited to
selling its existing inventory with no ability to obtain credit to replenish or
purchase other items our customers might need. As of March 31, 2005, the Company
had $343,300 of inventories compared to $2,488,900 at December 31, 2004. The
Company did not have the ability to fund the shortfall caused by the elimination
of terms by vendors. Because of the reduced sales caused by the lack of new
inventory, the Company was not able to pay its obligations on a timely basis. On
May 11, 2005, the Company filed voluntary petitions to reorganize the business
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court.
17
The financial information included herein is unaudited. The interim consolidated
financial statements 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 the Company's 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 accounting principles generally accepted in the United States of America
have been omitted. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes presented in the Company's Form 10-K for the year ended December 31, 2005.
Interim operating results are not necessarily indicative of operating results
expected for the entire year.
The accompanying condensed consolidated financial statements include the
accounts of PMIC and its wholly-owned subsidiaries, PMI, PMIGA, and LW.
Inter-company accounts and transactions have been eliminated in consolidation.
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 shown in the accompanying condensed consolidated
financial statements.
2. LOSS PER SHARE
Basic loss per share is computed by dividing loss applicable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities,
using the treasury stock method, that could share in the earnings of an entity.
During the three months ended March 31, 2005, options and warrants to purchase
shares of the Company's common stock and shares of common stock issuable upon
conversion of Series A Preferred Stock were excluded from the calculation of
diluted loss per share as their effect would be anti-dilutive.
The following is the computation of the Company's basic and diluted loss per
Share for the three months ended March 31, 2005:
Loss from continuing operations $ (851,500)
Accretion of deemed dividend related to
Series A Convertible Preferred Stock (4,100)
------------
Loss from continuing operations
applicable to common shareholders $ (855,600)
============
Basic and diluted loss per share -
Loss from continuing operations $ (0.08)
============
Shares used in basic and diluted
per share calculation 10,485,062
============
18
3. DISCONTINUED OPERATIONS
On April 30, 2005, the Company ceased its operations in PMIGA. The operating
results of PMIGA for the three months ended March 31, 2005 were as follows:
Net sales $ 988,900
Net loss $ (154,900)
4. STATEMENTS OF CASH FLOWS
Cash was paid during the three months ended March 31, 2005 for:
State income taxes $ 3,500
=========
Interest $ 51,400
=========
The following are the non-cash financing activities for the three months ended
March 31, 2005:
Accretion of preferred stock dividend $ 4,100
=========
5. FLOOR PLAN INVENTORY LOANS AND LETTER OF CREDIT
In May 2003, PMI obtained from Textron a $3,500,000 inventory financing
facility, which included a $1 million letter of credit facility used as security
for inventory purchased on terms from vendors in Taiwan. The credit facility was
guaranteed by PMIC, PMIGA, LW and two shareholders/officers of the Company, and
could be discontinued by Textron at any time at its sole discretion. Borrowings
under the inventory line were subject to 30 days repayment, at which time
interest accrues at the prime rate plus 6%. The Company was required to maintain
collateral coverage equal to 120% of the outstanding balance. A prepayment was
required when the outstanding balance exceeds the sum of 70% of the Company's
eligible accounts receivable, and 90% of the Textron-financed inventory and 100%
of any cash assigned or pledged to Textron. The Company was also required to
maintain $250,000 in a restricted account as a pledge to Textron. During March
2005, Textron applied the $250,000 restricted cash against the amounts owed
Textron. As of March 31, 2005, there was no amount in the restricted account.
PMI and PMIC were required to meet certain financial ratio covenants, including
a minimum current ratio, a maximum leverage ratio, a minimum tangible capital
fund and required levels of profitability. As of March 31, 2005, the Company was
out of compliance with those covenants and a waiver was not obtained from
Textron. This gave Textron the option to terminate the credit facility and
accelerate the loan payments. Upon termination, the Company would have no other
facility to finance its inventory purchases.
As of March 31, 2005, the outstanding balance of this loan was $1,069,800.
19
6. NOTES PAYABLE
The Company's wholly-owned subsidiary, PMI, obtained financing of $3,498,000
from Wells Fargo 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 plus 2.5%, and was 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 was secured by the underlying property.
Under the Wells Fargo bank loan, PMI was required, among other things, to
maintain a minimum debt service coverage, a maximum debt to tangible net worth
ratio, and to have no more than two consecutive quarterly losses. In addition,
PMI was required to achieve a net income on an annual basis. PMI was in
violation of the annual income covenants and the minimum EBITA coverage ratio as
of March 31, 2005 and December 31, 2004. These covenant violations constituted
an event of default under the loan agreement and gave Wells Fargo the right to
call the loan. A waiver of the loan covenant violations was obtained from the
bank through December 31, 2005. As a condition for the waiver, the Company
maintained a restricted account as a reserve for the debt service. As of March
31, 2005, the balance of the restricted account was $238,400.
7. SEGMENT INFORMATION
The Company has two reportable segments: PMI and LW.
PMI imported and distributed electronic products, computer components, and
computer peripheral equipment to various distributors and retailers throughout
the United States. LW sold similar products to end-users and resellers through a
website. PMIGA ceased its business as of April 30, 2005. The activities of PMIGA
for all periods were reclassified for reporting purposes as discontinued
operations.
The accounting policies of the segments are the same as those described in the
notes to consolidated financial statements presented in the Company's Form 10-K
for the year ended December 31, 2005. The Company evaluated performance based on
income or loss before income taxes, not including nonrecurring gains or losses.
Inter-segment transfers between reportable segments had been insignificant. The
Company's reportable segments were separate strategic business units. They were
managed separately because each business required different technology and/or
marketing strategies. Sales to foreign countries were approximately $1,800,000
for the three months ended March 31, 2005.
The following table presents information about reported continuing segment
profit or loss for the three months ended March 31, 2005:
20
Revenues from external
customers:
PMI $ 9,322,000
LW 47,700
------------
Total $ 9,369,700
============
Segment loss before income taxes:
PMI $ (759,600)
LW (91,000)
------------
Loss before income
taxes for reportable segments (850,600)
Change in fair value of
warrants issued 1,100
Amortization of warrant
issuance costs (2,000)
------------
Consolidated loss from
continuing operations $ (851,500)
============
8. ACCOUNTS RECEIVABLE AGREEMENTS
On April 1, 2003, the Company purchased a credit insurance policy from American
Credit Indemnity covering certain accounts receivable up to $2,000,000 of
losses. This policy expired on March 31, 2005. The Company also entered into an
insurance agreement with ENX, Inc. ("ENX") for its accounts receivable. The ENX
agreement also expired on March 31, 2005. Under this agreement, the Company sold
its past-due accounts receivable from pre-approved customers with pre-approved
credit limits under certain conditions. The commission was 0.5% of the approved
invoice amounts with a minimum annual commission of $50,000. These accounts
receivable agreements were not renewed after their expiration dates and no other
agreements were entered into after March 31, 2005.
9. CAPITAL STOCK
In April 2003, Nasdaq notified the Company that its common stock was delisted
from the Nasdaq SmallCap Market, effective April 30, 2003. The Company's common
stock is being traded on the Over the Counter Bulletin Board ("OCTBB"). The
delisting of the Company's common stock enabled the holder of the Company's
Series A Preferred Stock to request the repurchase of such shares. The Company
had increased the carrying value of the Series A Preferred Stock to its
redemption value.
21
In December 2004, the Company entered into an agreement (the "Series A
Agreement") with the holder of the Series A Preferred Stock (the "Investor") for
restructuring certain terms of the Series A Preferred Stock. In connection with
the closing of the transactions under the Series A Agreement, the Company
amended and restated its Certificate of Designation of Preferences, Rights and
Limitations of the Series A Preferred Stock on December 31, 2004. Among the
terms amended are (1) the number of shares designated as Series A Preferred
Stock were decreased from 1,000 to 600 shares; (2) the Stated Value of each
share of Series A Preferred Stock was reduced from $1,000 to $666.67; (3) the
holders of the Series A Preferred Stock no longer have the right to require the
Company to redeem each share of Series A Preferred Stock, which rights were
triggered upon the occurrence of certain events; (4) the redemption amount
payable by the Company upon exercise of its redemption right was reduced from
150% of Stated Value to 100% of Stated Value; (5) there was a 181-day waiting
period from the date of filing the Amended and Restated Certificate of
Designation before the holder may exercise conversion (unless the Company
initiates a redemption prior to the end of the 181-day period); (6) the
conversion price of the Series A Preferred Stock was changed to a fixed price of
$0.50 per share, subject to customary and anti-dilution adjustments; and (7) the
Company had five trading days, instead of three, to comply with conversion
procedures. As part of the Series A Agreement, the Investor forfeited a stock
purchase warrant, exercisable for 300,000 shares of the Company's common stock
that was issued in connection with the original issuance of the Company's Series
A Preferred Stock. The Company accounted for these transactions in accordance
with SFAS 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings." As of March 31, 2005, the carrying amount of the Series A
Preferred Stock was classified as shareholders' equity in the balance sheet.
10. SUBSEQUENT EVENTS
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, ACT and ACT's
wholly-owned subsidiary. 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 that could be paid in cash or in
shares of common stock of ACT. Under the earn-out provisions, the Stockholders
could earn the right to receive in aggregate up to 99,999,999 shares of ACT's
common stock. In the event the Company terminated the Employment Agreements
without cause upon 30 days prior written notice, the Stockholders would be
entitled to 6 months severance pay.
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 were
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.
22
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 and in Part II, Item 1A - Risk Factors of this Form 10-Q and in Part
I, Item 1A - Risk Factors in the report on Form 10-K of Pacific Magtron
International Corp. for the year ended December 31, 2005. 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,
Pacific Magtron, Inc. ("PMI"), Pacific Magtron (GA) Inc. ("PMIGA") and
LiveWarehouse, Inc. ("LW"). .
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" (the "Bankruptcy Proceedings").
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. On
December 23, 2005, PMI and PMIGA filed an Amended Disclosure Statement to
Accompany PMI's Second Amended Plan of Liquidation and PMIGA's Second Amended
Plan of Liquidation ("the PMI & PMIGA Plan"). On January 30, 2006, the Court
entered an order (Docket No. 507) ("Confirmation Order") approving and
confirming the PMI & PMIGA Plan. The effective date of the PMI & PMIGA Plan was
February 10, 2006 ("the Effective Date").
23
On January 30, 2006, PMIC and LW filed a separate Disclosure Statement to
Accompany Third Amended Plans of Reorganization for PMIC and LW ("the PMIC & LW
Plan"). The Court authorized PMIC and LW to send the PMIC & LW Plan and ballots
to creditors and PMIC's shareholders to vote on the PMIC & LW Plan. The deadline
for voting on the PMIC & LW Plan was February 24, 2006 and the hearing on the
confirmation of the PMIC & LW Plan was scheduled for April 10, 2006. The
confirmation hearing was continued pending consideration of a motion for
approval of a settlement of litigation with PMIC's former executive officers and
proposed Fourth Amended Plans of Reorganization for PMIC and LW taking that
settlement into account (the "PMIC & LW Fourth Amended Plan"). The Company
expects that a motion for approval of the settlement and the PMIC & LW Fourth
Amended Plan will be filed with the Bankruptcy Court on or about the date of
filing this Quarterly Report.
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 March 31, 2006 and December 31, 2005, and the statement of
changes in net assets (liabilities) for the three months ended March 31, 2006.
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. The Company has been
forced to cease business activities effective July 1, 2005, except those
necessary to liquidate its remaining assets.
CHANGES IN NET ASSETS (LIABILITIES) IN LIQUIDATION
Costs Incurred During Liquidation Period
The amounts of costs incurred during the liquidation for the three months ended
March 31, 2006 were $137,700, $5,500, $11,600 and $44,900 for PMI, PMIGA, LW and
PMIC, respectively. The costs incurred primarily consist of $26,300 and $29,000
in salaries and related costs for PMI and PMIC, respectively, and $137,100 in
legal fees of which $113,800, $5,500, $8,500 and $9,300 was allocated to PMI,
PMIGA, LW and PMIC, respectively. PMIC has accrued an additional estimated cost
of $119,000 for the liquidation period.
24
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, LW and PMIC had cash in the amounts of $145,200 and
$64,400, respectively. For the quarter ended March 31, 2006, LW and PMIC have
incurred costs of $11,600 and $44,900, respectively. As of March 31, 2006, LW
and PMIC had unpaid Post-Petition payables and accruals of $8,500 and $65,800,
respectively. LW had a Post-Petition receivable of $17,700 from PMIC as of March
31, 2006.
On the Effective Date, PMIGA distributed cash of $89,200 to PMI and $29,900 to
other unsecured creditors. Upon the receipt of the distribution of $89,200 from
PMIGA, PMI immediately transferred the $89,200 to Micro Technology Concepts,
Inc. ("MTC") in compliance with the Confirmation Order. On the Effective Date,
PMI distributed cash of $142,100 to LW and $35,900 to MTC and $359,500 to other
unsecured creditors. In addition, PMI transferred all its physical assets for a
value of $15,000 to LW. On the Effective Date, PMI and PMIGA transferred all
their remaining assets and liabilities to the PMI Creditor Trust and PMIGA
Creditor Trust, respectively. The following are the assets and liabilities
transferred to the PMI Creditor Trust and PMIGA Creditor Trust on the Effective
Date:
PMI PMIGA
----------- --------
Cash $ 791,800 $ 27,700
Other assets 56,600 2,600
----------- --------
Total assets 848,400 30,300
Liabilities 2,068,400 589,500
----------- --------
Net liabilities $1,220,000 $559,200
=========== ========
PMIC had anticipated a federal income tax refund resulting from carrying back
tax losses in 2002 to 1998. On March 3, 2006, PMIC received a federal income tax
refund of $73,485 plus $6,001 interest for a total of $79,486.
The PMIC & LW Plan treats the assets and debts of each of PMIC and LW
separately. Under the PMIC & LW Plan, non-insider Creditors holding Allowed
Unsecured Claims against PMIC will receive a fifty percent (50%) initial
distribution on account of such claims, provided that the total distribution to
be made to holders of Allowed Claims other than Class 1 shall not exceed
$120,000, which shall be distributed pro rata to the creditors of PMIC. On the
effective date of the PMIC & LW Plan, PMIC will merge with Herborium Inc.
("Herborium"), a provider of proprietary, natural and complimentary healthcare
products, and shall be the surviving operating entity post-merger (the
"Herborium Merger"). LW will be reorganized and remain a wholly-owned subsidiary
of PMIC. ACT shall contribute up to $50,000 on behalf of PMIC's shareholders to
effectuate the PMIC & LW Plan. The existing stock of PMIC shall be cancelled and
new stock shall be issued. With respect to the Class 6 equity interest of ACT,
new stock shall be issued directly to the shareholders of ACT subject to the
dilution of such interests upon plan consummation and the corresponding merger
of Herborium with PMIC as provided in the PMIC & LW Plan. The existing Series A
Convertible Preferred Stock of PMIC shall be converted to 800,000 shares of PMIC
common stock or 0.74% of post-merger PMIC/Herborium. ACT's shareholders shall
own 10.55% of post-merger PMIC/Herborium; PMIC's current common stockholders
shall own 3.71% of post-merger PMIC/Herborium; and Herborium's current
stockholders shall own 85% of post-merger PMIC/Herborium.
25
On April 12, 2006, ACT and Theodore S. Li and Cynthia Lee (also referred to
herein collectively as the "Former Executives") entered into binding letter
agreements with respect to the settlement of certain litigation proceedings and
potential claims involving ACT, PMIC, Encompass Group Affiliates, Inc. , the
Former Executives, Martin Nielson and Wayne Danson. The provisions of this
settlement are being incorporated into a Settlement Agreement to which PMIC and
its subsidiaries will be a party upon Bankruptcy Court approval.
The litigation proceedings covered by this settlement include the following:
o the suit filed on May 11, 2005 by ACT in the United States
District Court for the Southern District of New York against
Mr. Li and Ms. Lee for the recovery of damages and costs for
securities fraud, breach of contract, misrepresentation and
other counts in connection with the Stock Purchase Agreement
pursuant to which Mr. Li and Ms. Lee sold shares of PMIC's
common stock to ACT (the "New York Action"); and
o the suit brought in January 2006 by Mr. Li and Ms. Lee in the
California Superior Court, Santa Clara County against ACT and
Encompass and certain of their officers and directors
alleging, among other things, fraud, intentional
misrepresentation, breach of contract, breach of implied
covenant of good faith and fair dealing, violation of the
California Labor Code, violation of the Business of
Professions Code of California, and defamation (the
"California Action").
The material terms of the settlement are set forth below.
o Upon the closing of the Herborium Merger and the occurrence of the effective
date of the PMIC & LW Plan, ACT will pay Mr. Li and Ms. Lee $325,000. PMIC will
reimburse ACT for a portion of this payment using available cash or other assets
remaining in the PMIC bankruptcy estate after final distribution under the PMIC
& LW Plan, as amended.
o PMIC will issue Mr. Li and Ms. Lee an aggregate of 1,750,000 freely-tradable
shares of Herborium common stock ("Herborium Stock") with a minimum value of
$.10 per share subject to the following conditions:
(a) such shares will be subject to a lock-up period of 150 days
after issuance during which Mr. Li and Ms. Lee may only sell
the shares for $.10 per share or greater; if the price per
share is less than $.10 per share at the end of the lock-up
period, then ACT will "top up" the value provided to Mr. Li
and Ms. Lee by delivering either:
o cash equal to $.10 minus the price per share on
said date times the number of shares still held,
or
o additional shares of Herborium Stock which would
otherwise be issued to ACT or its stockholders
under the Fourth Amended Plan having a value equal
to said the same amount;
26
(b) ACT's obligation to "top up" Mr. Li's and Ms. Lee's shares of
Herborium Stock shall be collateralized by 1,750,000 shares of
Herborium Stock held by ACT which will be placed in escrow
upon the earliest date that such shares can be issued
following the Herborium Merger;
(c) in the event that the Herborium Merger does not occur, Mr. Li
and Ms. Lee will receive the $325,000 and $175,000 worth of
shares of ACT's common stock, respectively, on the 76th day
following execution of the Settlement Agreement; on the date
upon which the Bankruptcy Court approves this settlement,
87,500,000 shares of ACT's common stock will be placed in
escrow at an estimated value of $.002 per share, which shares
will be deemed to be issued pursuant to the Convertible Notes
issued to Mr. Li and Ms. Lee in connection with the Stock
Purchase Agreement. The shares will be released from escrow to
Mr. Li and Ms. Lee based upon the closing price as of the 75th
day or the next preceding business day and shall be "topped
up" to $.002 per share if the arms length third party closing
price is below $.002. If the Herborium Merger occurs, these
shares shall immediately be released to ACT.
o Mr. Li and Ms. Lee will each receive a reference letter from PMIC relating to
the circumstances of their employment with PMIC.
o Mr. Li and Ms. Lee will execute broad general releases in favor of ACT, PMIC,
Encompass and each of their subsidiaries and their directors, employees, heirs,
insurers, attorneys and agents from any and all claims, including but not
limited to those that have or could have been brought in connection with the New
York Action, the California Action or in any of the bankruptcy proceedings or
under the Stock Purchase Agreement or the employment agreements entered into by
each of Mr. Li and Ms. Lee with us, ACT and Encompass. ACT, PMIC and Encompass
and each of their subsidiaries will execute similar releases in favor of Mr. Li
and Ms. Lee. This settlement will not be construed as an admission of liability
by any party. The parties further agree not to instigate or participate in any
future litigation or proceeding against any released party based upon events
occurring prior to settlement.
o The parties agree to cause any and all pending litigation between them to be
dismissed with prejudice as soon as practical following the payment of
consideration contemplated by this settlement.
o This settlement will be subject to approval by the Bankruptcy Court in the
Bankruptcy Proceedings and will be incorporated in the PMIC & LW Plan, as
amended, and the Bankruptcy Court will retain jurisdiction to enforce the
settlement. Mr. Li and Ms. Lee will withdraw their proofs of claims in the PMIC
Bankruptcy Proceedings and their objections to the confirmation of the PMIC & LW
Plan.
o Each party will bear its own costs and attorneys' fees incurred in connection
with this settlement and the pending litigation between the parties except as
follows: ACT will pay (and has paid) the mediation fees incurred in connection
with the parties' mediation on April 12, 2006, and in the event of a breach of
the letter agreement, the prevailing party in any ensuing litigation will be
entitled to reasonable attorneys' fees and costs.
27
OFF-BALANCE ARRANGEMENTS
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
We are not involved as a party to any legal proceeding or settlement other than
various claims and lawsuits arising in the course of the Bankruptcy Proceedings.
The discussion set forth under Part I, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations under the headings
Overview and Bankruptcy Proceedings and Liquidity and Capital Resources is
incorporated by reference herein.
28
ITEM 1A. - RISK FACTORS.
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM
10-Q, YOU SHOULD CAREFULLY REVIEW AND CONSIDER THE FACTORS DISCUSSED IN PART I,
ITEM 1A - RISK FACTORS IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2005, CERTAIN OF WHICH HAVE BEEN UPDATED AS SET FORTH BELOW. THESE
FACTORS COULD MATERIALLY AFFECT RECOVERY UNDER THE BANKRUPTCY PROCEEDINGS IN
WHICH WE ARE INVOLVED, THE PRICE OF OUR COMMON STOCK AND THE PROPOSED MERGER OF
HERBORIUM WITH AND INTO OUR COMPANY. THE RISKS, UNCERTAINTIES AND OTHER FACTORS
DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-K ARE NOT THE ONLY ONES PERTINENT TO
OUR COMPANY AND OUR CREDITORS. ADDITIONAL RISKS, UNCERTAINTIES AND OTHER FACTORS
NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT
RECOVERY UNDER THE BANKRUPTCY PROCEEDINGS IN WHICH WE ARE INVOLVED, THE PRICE OF
OUR COMMON STOCK AND THE PROPOSED MERGER OF HERBORIUM WITH AND INTO OUR COMPANY.
RISKS RELATED TO THE BANKRUPTCY PROCEEDINGS
THE AMOUNT AND TIMING OF FUTURE DISTRIBUTIONS TO OUR CREDITORS AND STOCKHOLDERS
WILL DEPEND UPON OUR ACTUAL PROCEEDS FROM LIQUIDATION AND OUR ACTUAL COSTS OF
CARRYING OUT THE LIQUIDATION.
The amount and timing of future liquidating distributions to our creditors and
stockholders, if any, will depend upon a variety of factors including, but not
limited to, the actual proceeds that we receive from liquidating our assets, and
the actual costs that we incur in connection with carrying out our liquidation
and reorganization plans, including administrative costs during the liquidation
period, and the timing of the liquidation. As of March 31, 2006, our estimated
costs of liquidation were as follows:
COMBINED
PMI PMIGA LW PMIC TOTAL
--- ----- ------ ------- --------
Estimated costs to be incurred
during liquidation as of March
31, 2006 0 0 23,000 171,000 194,000
Our estimates may vary significantly from the actual amounts.
THERE IS NO ASSURANCE OF ADDITIONAL RECOVERY FOR PAYMENT TO UNSECURED CREDITORS
UNDER THE PMI & PMIGA PLAN.
The PMI & PMIGA Plan involves some risk of reduced payment. The total recovery
by unsecured creditors (Class 3 and 5) will depend upon:
o the recovery of "preferences"; and
o the recovery in PMIGA's accounts receivable by the PMIGA
Creditor Trust
As part of our bankruptcy proceedings, we have claims against vendors who
received payments within 90 days of the bankruptcy petition date. These payments
are called "preferences." No assurance can be made there will be a substantial
recovery from any of these sources. In addition, on April 12, 2006, we reached
settlement with respect to litigation proceedings and potential claims involving
us, our majority stockholder, Advanced Communications Technologies, Inc. (also
referred to as "ACT"), its wholly-owned subsidiary Encompass Group Affiliates,
Inc., and our former executives Theodore S. Li and Cynthia Lee. Under the terms
of this settlement, we obtained no recovery from Mr. Li or Ms. Lee although the
PMI & PMIGA Plan contemplated possible recovery from them.
29
IF APPROVED BY THE BANKRUPTCY COURT, THE SETTLEMENT WITH OUR FORMER EXECUTIVES
MAY RESULT IN A DIMINUTION OF THE RECOVERY OF SOME OF OUR CREDITORS, NAMELY ACT
AND ITS STOCKHOLDERS.
The litigation proceedings covered by this settlement include the following:
o the suit filed on May 11, 2005 by ACT in the United States
District Court for the Southern District of New York against
Mr. Li and Ms. Lee for the recovery of damages and costs for
securities fraud, breach of contract, misrepresentation and
other counts in connection with the Stock Purchase Agreement
pursuant to which Mr. Li and Ms. Lee sold shares of PMIC's
common stock to ACT. We refer to this litigation as the "New
York Action"); and
o the suit brought in January 2006 by Mr. Li and Ms. Lee in the
California Superior Court, Santa Clara County against ACT and
Encompass and certain of their officers and directors
alleging, among other things, fraud, intentional
misrepresentation, breach of contract, breach of implied
covenant of good faith and fair dealing, violation of the
California Labor Code, violation of the Business of
Professions Code of California, and defamation. We refer to
this litigation as the "California Action".
The material terms of the settlement reached among us, ACT, Encompass and Mr. Li
and Ms. Lee on April 12, 2006 are as follows:
o Upon the closing of the merger of Herborium with and into us and the
occurrence of the effective date of plans of reorganization for us and our
subsidiary LW, as may be amended, ACT will pay Mr. Li and Ms. Lee $325,000. We
will reimburse ACT for a portion of this payment using available cash or other
assets remaining in our bankruptcy estate after final distribution under our
plan of reorganization.
o We will issue Mr. Li and Ms. Lee an aggregate of 1,750,000 freely-tradable
shares of Herborium common stock with a minimum value of $.10 per share subject
to the following conditions:
(a) such shares will be subject to a lock-up period of 150 days
after issuance during which Mr. Li and Ms. Lee may only sell
the shares for $.10 per share or greater; if the price per
share is less than $.10 per share at the end of the lock-up
period, then ACT will "top up" the value provided to Mr. Li
and Ms. Lee by delivering either:
o cash equal to $.10 minus the price per share on
said date times the number of shares still held,
or
o additional shares of Herborium common stock which
would otherwise be issued to ACT or its
stockholders under our plan of reorganization, as
amended, having a value equal to said the same
amount;
(b) ACT's obligation to "top up" Mr. Li's and Ms. Lee's shares of
Herborium common stock shall be collateralized by 1,750,000
shares of Herborium common stock held by ACT which will be
placed in escrow upon the earliest date that such shares can
be issued following the merger with Herborium;
30
(c) in the event that the merger with Herborium does not occur,
Mr. Li and Ms. Lee will receive the $325,000 and $175,000
worth of shares of ACT's common stock, respectively, on the
76th day following execution of the Settlement Agreement; on
the date upon which the Bankruptcy Court approves this
settlement, 87,500,000 shares of ACT's common stock will be
placed in escrow at an estimated value of $.002 per share,
which shares will be deemed to be issued pursuant to the
convertible notes issued to Mr. Li and Ms. Lee in connection
with the Stock Purchase Agreement in which Mr. Li and Ms. Lee
sold an aggregate of 6,454,300 shares of our common stock to
ACT for the aggregate purchase price of $500,000.. The shares
of ACT's common stock will be released from escrow to Mr. Li
and Ms. Lee based upon the closing price as of the 75th day or
the next preceding business day and shall be "topped up" to
$.002 per share if the arms length third party closing price
is below $.002. If the merger with Herborium occurs, these
shares shall immediately be released to ACT.
o Mr. Li and Ms. Lee will each receive a reference letter from us relating to
the circumstances of their employment with us.
o Mr. Li and Ms. Lee will execute broad general releases in favor of us, ACT,
Encompass and each of our and their subsidiaries and our and their directors,
employees, heirs, insurers, attorneys and agents from any and all claims,
including but not limited to those that have or could have been brought in
connection with the New York Action, the California Action or in any of the
Bankruptcy Proceedings or under the Stock Purchase Agreement or the Employment
Agreements that Mr. Li and Ms. Lee entered into with us, ACT and Encompass in
connection with the Stock Purchase Agreement. We, ACT and Encompass and each of
our and their subsidiaries will execute similar releases in favor of Mr. Li and
Ms. Lee. This settlement will not be construed as an admission of liability by
any party. The parties further agree not to instigate or participate in any
future litigation or proceeding against any released party based upon events
occurring prior to settlement.
o The parties agree to cause any and all pending litigation between them to be
dismissed with prejudice as soon as practical following the payment of
consideration contemplated by this settlement.
o This settlement will be subject to approval by the Bankruptcy Court in the
Bankruptcy Proceedings and will be incorporated in the amended reorganization
plans of us and LW, and the Bankruptcy Court will retain jurisdiction to enforce
the settlement. Mr. Li and Ms. Lee will withdraw their proofs of claims in our
bankruptcy proceedings and their objections to the confirmation of our plan of
reorganization.
o Each party will bear its own costs and attorneys' fees incurred in connection
with this settlement and the pending litigation between the parties except as
follows: ACT will pay (and has paid) the mediation fees incurred in connection
with the parties' mediation on April 12, 2006, and in the event of a breach of
the letter agreement, the prevailing party in any ensuing litigation will be
entitled to reasonable attorneys' fees and costs.
31
If the Bankruptcy Court approves the proposed settlement with our former
executives, our plan of reorganization and that of our subsidiary LW will be
amended. For this reason, we anticipate filing fourth amended plans of
organization with the bankruptcy court on or about the date of the filing of
this Quarterly Report on Form 10-Q. Under the proposed amended plan of
reorganization, the settlement with Mr. Li and Ms. Lee will affect the recovery
of only ACT and its stockholders; our other creditors will not be affected by
the settlement. As discussed above, any stock to be issued to Mr. Li and Ms. Lee
under the settlement will come directly from ACT's distribution or, in the event
that the merger of Herborium with and into us is not consummated, ACT's common
stock will be issued in place of the common stock of Herborium. Our cash
reimbursement obligation under the settlement is triggered only after all
distributions to all of our other creditors have been made and adequate funds
have been reserved for disputed claims. As a party to the settlement, ACT has
agreed to the modified treatment.
ITEM 6. - EXHIBITS
EXHIBIT
NUMBER DESCRIPTION*
------ -----------
2.1 Settlement Agreement Affecting Adversary Proceeding, Payment of Claims
and Plans of Reorganization (filed as Exhibit 10.2 to our Quarterly
Report on Form 10-Q on November 14, 2005).
2.2 Amended Disclosure Statement to Accompany Pacific Magtron, Inc.'s
Second Amended Plan of Liquidation and Pacific Magtron (GA), Inc.'s
Second Amended Plan of Liquidation (filed as Exhibit 2.1 to our Current
Report on Form 8-K on February 3, 2006).
2.3 Disclosure Statement to Accompany Third Amended Plans of Reorganization
for Pacific Magtron International Corp. and Livewarehouse, Inc. (filed
as Exhibit 99.1 to our Current Report on Form 8-K on February 3, 2006).
3.1 Articles of Incorporation, as Amended and Restated (filed as an exhibit
to our Form 10-12G, File No. 000-25277).
3.2 Bylaws, as Amended and Restated (filed as an exhibit to our Form
10-12G, File No. 000-25277).
3.3 Amended and Restated Certificate of Designation of Preferences, Rights
and Limitations of Series A Redeemable Convertible Preferred Stock
(filed as an exhibit to our Form 8-K on January 5, 2005).
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certificate of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
32
* 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.
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: May 15, 2006
By /s/ Martin Nielson
-----------------------------
Martin Nielson
President and Chief Executive
Officer
33
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION*
------ -----------
2.1 Settlement Agreement Affecting Adversary Proceeding, Payment of Claims
and Plans of Reorganization (filed as Exhibit 10.2 to our Quarterly
Report on Form 10-Q on November 14, 2005).
2.2 Amended Disclosure Statement to Accompany Pacific Magtron, Inc.'s
Second Amended Plan of Liquidation and Pacific Magtron (GA), Inc.'s
Second Amended Plan of Liquidation (filed as Exhibit 2.1 to our Current
Report on Form 8-K on February 3, 2006).
2.3 Disclosure Statement to Accompany Third Amended Plans of Reorganization
for Pacific Magtron International Corp. and Livewarehouse, Inc. (filed
as Exhibit 99.1 to our Current Report on Form 8-K on February 3, 2006).
3.1 Articles of Incorporation, as Amended and Restated (filed as an exhibit
to our Form 10-12G, File No. 000-25277).
3.4 Bylaws, as Amended and Restated (filed as an exhibit to our Form
10-12G, File No. 000-25277).
3.5 Amended and Restated Certificate of Designation of Preferences, Rights
and Limitations of Series A Redeemable Convertible Preferred Stock
(filed as an exhibit to our Form 8-K on January 5, 2005).
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certificate of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
* 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.
34