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 June 30, 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 [X] No [ ]
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 [ ] N/A
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 July 14, 2006, the number of shares of
common stock outstanding was 10,485,062.
1
Part I. - Financial Statements
Item 1. - Condensed combined statement of net assets
(liabilities) in liquidation as of
June 30, 2006 (Unaudited - LIQUIDATION BASIS) 1
Condensed combined statement of net assets
(liabilities) in liquidation as of
December 31, 2005 (LIQUIDATION BASIS) 2
Condensed consolidated statement of changes in net
assets (liabilities) in liquidation for the three
months ended June 30, 2006 (Unaudited - LIQUIDATION BASIS) 3
Condensed consolidated statement of changes in net
assets (liabilities) in liquidation for the six
months ended June 30, 2006 (Unaudited - LIQUIDATION BASIS) 4-5
Condensed consolidated statements of operations for
the three months and six months ended June 30, 2005
(Unaudited - GOING CONCERN BASIS) 6
Condensed consolidated statements of cash flows for the
six months ended June 30, 2005 (Unaudited -
GOING CONCERN BASIS) 7-8
Notes to condensed combined/consolidated financial
Statements (Unaudited) 9-21
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 22-27
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 27
Item 4. - Controls and Procedures 27
Part II - Other Information
Item 1. - Legal Proceedings 28
Item 1A.- Risk Factors 28-31
Item 6. - Exhibits 31-32
Signature 32
2
PACIFIC MAGTRON INTERNATIONAL CORP. ("PMIC") and Subsidiary -
LIVEWAREHOUSE, INC. ("LW")
CONDENSED COMBINED STATEMENT OF NET ASSETS (LIABILITIES) IN LIQUIDATION
(LIQUIDATION BASIS)
AS OF JUNE 30, 2006
(Unaudited)
COMBINED
PMIC LW TOTAL
--------- --------- ---------
ASSETS
Cash and cash equivalents $ 8,500 $ 103,500 $ 112,000
Pre Petition receivable
from PMI, less allowance
for uncollectible amount
of $230,400 -- 2,100 2,100
Post Petition receivable
from PMI 13,800 -- 13,800
Post Petition receivable
from PMIGA 1,200 -- 1,200
Post Petition receivable
from PMIC -- 17,700 17,700
Office and warehouse equipment -- 15,000 15,000
--------- --------- ---------
Total assets $ 23,500 $ 138,300 $ 161,800
========= ========= =========
LIABILITIES
Post Petition accounts
payable and other
accrued expenses $ 38,000 $ 1,000 $ 39,000
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 74,500 38,500 113,000
Pre Petition unsecured
accounts payable 143,400 13,100 156,500
--------- --------- ---------
Total liabilities 298,400 52,600 351,000
--------- --------- ---------
NET ASETS (LIABILITIES)
IN LIQUIDATION ($274,900) $ 85,700 ($189,200)
========= ========= =========
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 -
and LIVEWAREHOUSE, INC. ("LW")
CONDENSED COMBINED STATEMENT OF CHANGES OF NET ASSETS (LIABILITIES)
IN LIQUIDATION
(LIQUIDATION BASIS)
FOR THE THREE MONTHS ENDED JUNE 30, 2006
(Unaudited)
COMBINED
LW PMIC TOTAL
--------- --------- ---------
NET ASSETS (LIABILITIES) IN
LIQUIDATION, March 31, 2006 135,400 (358,300) (222,900)
Settlement of
preference claims 42,400 42,400
Increase in Post
Petition receivable
from PMI 13,800 13,800
Increase in Post
Petition receivable
from PMIGA 1,200 1,200
Decrease in Post
Petition unsecured
payables and
accruals 7,500 (14,700) (7,200)
Decrease in cash (41,700) (55,900) (97,600)
Income from services
rendered to PMI &
PMIGA Creditor
Trusts (21,800) (21,800)
Costs incurred
during liquidation
period 34,000 77,300 111,300
Accrued estimated
costs of liquidation (49,500) 41,000 (8,500)
Others 100 100
--------- --------- ---------
NET ASSETS (LIABILITIES)
IN LIQUIDATION, June 30,
2006 $ 85,700 ($274,900) ($189,200)
========= ========= =========
See accompanying notes to condensed combined financial statements.
3
PACIFIC MAGTRON INTERNATIONAL CORP. ("PMIC") and Subsidiaries -
and LIVEWAREHOUSE, INC. ("LW")
CONDENSED COMBINED STATEMENT OF CHANGES OF NET ASSETS (LIABILITIES)
IN LIQUIDATION
(LIQUIDATION BASIS)
FOR THE SIX MONTHS ENDED JUNE 30, 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
Settlement of preference
claims 42,400 42,400
Increase in Post Petition
receivable from PMI 13,800 13,800
Increase in Post Petition
receivable from PMIGA 1,200 1,200
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) (700) (19,200) (128,200)
Increase (decrease) in
cash (559,300) (130,800) 72,600 8,300 (609,200)
4
Interest income (1,700) (6,000) (7,700)
Income from services
rendered to PMI & PMIGA
Creditor Trusts (21,800) (21,800)
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 45,600 122,200 311,000
Accrued estimated costs
of liquidation (49,500) (78,000) (127,500)
Others (1,500) 3,200 100 1,800
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, June 30, 2006 $ 0 $ 0 $ 85,700 ($ 274,900) ($ 189,200)
=========== =========== =========== =========== ===========
See accompanying notes to condensed combined financial statements.
5
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2005
(Unaudited - GOING CONCERN BASIS)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2005
------------ ------------
Sales $ 613,800 $ 9,983,500
Cost of sales 604,800 9,596,100
------------ ------------
Gross profit 9,000 387,400
Selling, general and
administrative expenses 590,800 1,685,600
------------ ------------
Loss from continuing operations
before other income (expense) (581,800) (1,298,200)
------------ ------------
Other income (expense):
Interest expense (72,800) (124,200)
Change in fair value of
warrants issued 1,200 2,300
Loss on asset impairment (600) (113,000)
Other expense, net (33,600) (6,000)
------------ ------------
Total other expense (105,800) (240,900)
------------ ------------
Loss from continuing operations (687,600) (1,539,100)
------------ ------------
Discontinued operations:
Income (loss) from discontinued
operations of Pacific Magtron (GA),Inc 14,900 (140,000)
Accretion of discount and deemed
dividend related to beneficial
conversion of Series A
Convertible Preferred Stock (4,000) (8,100)
------------ ------------
Net Loss applicable to
common shareholders $ (676,700) $ (1,687,200)
============ ============
Basic and diluted loss per share:
Loss from continuing operations $ (0.06) $ (0.16)
Loss from discontinued operations (0.00) (0.01)
------------ ------------
Net loss applicable to common
shareholders $ (0.06) $ (0.17)
============ ============
Shares used in basic and diluted
per share calculation 10,485,100 10,485,100
============ ============
See accompanying notes to condensed consolidated financial statements.
6
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2005
(Unaudited - GOING CONCERN BASIS)
CASH FLOWS (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Net loss $(1,687,200)
Less: Accretion of dividend related to Series
A Convertible Preferred Stock 8,100
Loss from discontinued operation 140,000
-----------
Net loss from continuing operations (1,539,100)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 85,000
Loss on asset impairment 112,400
Provision for doubtful accounts (79,000)
Gain on sale of property and equipment (1,900)
Change in fair value of warrants (2,300)
Changes in operating assets and
liabilities:
Accounts receivable 2,947,900
Inventories 2,458,900
Prepaid expenses and other
assets 59,500
Accounts payable (2,488,000)
Accrued expenses and other liabilities (47,000)
-----------
NET CASH PROVIDED BY CONTINUING OPERATIONS 1,506,400
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 148,600
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,655,000
-----------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 2,000
-----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,000
-----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net decrease in floor plan inventory loans (1,993,000)
Decrease in restricted cash 297,800
Principal payments on notes payable (32,400)
-----------
NET CASH USED IN FINANCING ACTIVITIES (1,727,600)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (70,600)
CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS:
Beginning of period 543,800
-----------
End of period 473,200
CASH AND CASH EQUIVALENTS FROM DISCONTINUED
OPERATIONS 184,900
-----------
TOTAL CASH AND CASH EQUIVALENTS $ 658,100
===========
See accompanying notes to condensed consolidated financial statements
7
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 SIX MONTHS ENDED JUNE 30, 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.
8
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, however, the
Company did not receive the Court's approval for the plan. On June 21, 2006,
PMIC and LW filed the Fourth Amended Plans of Reorganization (the "PMIC & LW
Plan") which incorporates a settlement of litigation with PMIC's former
executive officers (the "Terminated Executives").
A confirmation hearing for the PMIC & LW Plan, including approval of the
settlement with the Terminated Executives, was held on July 26, 2006. PMIC
expects that an order confirming the Plan and approving the settlement will be
entered during the week of July 31, 2006.
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 June
30, 2006 and December 31, 2005 and the statements of changes in net assets
(liabilities) for the three months and six months ended June 30, 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 June 21,
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
June 30, 2006 and December 31, 2005 and the combined statement of changes of net
assets (liabilities) in liquidation for the three months and six months ended
June 30, 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.
9
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 combined/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.
10
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.
11
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 and two former executives shall own 10.55% of post-merger
PMIC/Herborium. PMIC's current common stockholders other than ACT shall own
3.71% of post-merger PMIC/Herborium; and Herborium's current stockholders shall
own 85% of post-merger PMIC/Herborium.
12
Classification and Treatment of Claims and Interests
PMIC
A. Unclassified Claims
Allowed 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 allowed 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.
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 PMIC & LW 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. ACT shall
contribute up to $50,000 on behalf of its shareholders to effectuate the PMIC
Plan. The existing common shares of PMIC will be cancelled and new stock in
merged PMIC/Herborium will be issued. With respect to the Class 6 equity
interest of ACT, new stock shall be issued directly to the shareholders of ACT.
ACT's shareholders and the Terminated Executives shall own 10.55% of post-merger
PMIC/Herborium. PMIC's current common stockholders other than ACT shall own
3.71% of post-merger PMIC/Herborium.
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
Allowed 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.
13
B. Class 1
Class 1 claims consist of allowed 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 allowed unsecured claims of LW and will be paid in
full. The total distributions to be paid to the Class 2 claims holders shall not
exceed $5,000.
D. Class 3
Class 3 shall consist of PMIC's equity interest in LW. PMIC shall
retain such interest. LW will distribute all its remaining cash to PMIC.
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
========== ==========
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 six months ended June 30, 2006 are as
follow:
14
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 49,500 78,000 127,500
Other income and costs
incurred during liquidation
period from January 1, 2006
to June 30, 2006:
Interest and other income 1,700 6,000 7,700
Income from services
rendered to PMI & PMIGA
Creditor Trusts 21,800 21,800
Other costs incurred during
liquidation period (137,700) (5,500) (45,600) (122,200) (311,000)
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 June 30, 2006 0 0 38,500 74,500 113,000
========= ========= ========= ========= =========
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. The parties subsequently
entered into a more formal Mutual Settlement Agreement and Release based on the
terms of the binding letter agreement. PMIC's obligations under the settlement
are contingent on 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
15
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 have been 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;
(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.
16
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.
17
PACIFIC MAGTRON INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 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.
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. 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.
On June 23, 2005, Micro Technology Concepts, Inc. ("MTC"), a secured creditor,
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 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. 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.
18
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 and six months ended June 30, 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.
3. DISCONTINUED OPERATIONS
On April 30, 2005, the Company ceased its operations in PMIGA. The operating
results of PMIGA for the three months and six months ended June 30, 2005 were as
follows:
Three months Six months
Ended Ended
June 30, 2005 June 30, 2005
------------- -------------
Net sales $ 34,300 $ 1,023,200
Net income (loss) $ 14,900 $ (140,000)
4. STATEMENTS OF CASH FLOWS
Cash was paid during the six months ended June 30, 2005 for:
State income taxes $ 3,500
=========
Interest $ 124,200
=========
The following are the non-cash financing activities for the six months ended
June 30, 2005:
Accretion of preferred stock dividend $ 8,100
=========
5. SEGMENT INFORMATION
The Company had two reportable segments: PMI and LW.
19
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 six months ended June 30, 2005.
The following table presents information about reported continuing segment
profit or loss for the three months and six months ended June 30, 2005:
Three Months Six Months
Ended Ended
June 30, 2005 June 30, 2005
------------- -------------
Revenues from external
customers:
PMI $ 608,400 $ 9,930,400
LW 5,400 53,100
----------- -----------
Total $ 613,800 $ 9,983,500
=========== ===========
Segment income (loss) before income taxes:
PMI $ (690,200) $(1,449,800)
LW 3,400 (87,600)
----------- -----------
Loss before income
taxes for reportable segments (686,800) (1,492,600)
Change in fair value of
warrants issued 1,200 2,300
Amortization of warrant
issuance costs (2,000) (4,000)
----------- -----------
Consolidated loss from
continuing operations $ (687,600) $(1,539,100)
=========== ===========
20
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").
21
On June 21, 2006, PMIC and LW filed a separate Fourth Amended Plans of
Reorganization for PMIC and LW ("the PMIC & LW Plan").
A confirmation hearing for the PMIC & LW Plan, including approval of the
settlement with the Terminated Executives, was held on July 26, 2006. PMIC
expects that an order confirming the Plan and approving the settlement will be
entered during the week of July 31, 2006.
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 June 30, 2006 and December 31, 2005, and the statement of
changes in net assets (liabilities) for the three months and six months ended
June 30, 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
Income From Services Rendered
During the three months ended June 30, 2006, PMIC rendered certain accounting
services to the PMI Creditor Trust and PMIGA Creditor Trust for a total income
of $21,800.
22
Costs Incurred During Liquidation Period
The amounts of costs incurred during the liquidation for the three months ended
June 30, 2006 were $34,000 and $77,300 for LW and PMIC, respectively. The costs
incurred primarily consist of $29,000 and $16,900 in salaries and related costs
for LW and PMIC, respectively. PMIC also incurred $39,000 accounting fees and
$15,900 travel expenses for the three months ended June 30, 2006. During the
three months ended June 30, 2006, LW has accrued an additional estimated cost of
$49,500 and PMIC has decreased $41,000 of the estimated costs for the
liquidation period.
The amounts of costs incurred during the liquidation for the six months ended
June 30, 2006 were $137,700, $5,500, $45,600 and $122,200 for PMI, PMIGA, LW and
PMIC, respectively. The costs incurred primarily consist of $26,300, $29,000 and
$45,900 in salaries and related costs for PMI, LW and PMIC, respectively, and
$138,800 in legal fees of which $113,800, $5,500, $8,500 and $11,000 was
allocated to PMI, PMIGA, LW and PMIC, respectively. PMIC also incurred $39,000
accounting fees and $16,900 travel expenses for the six months ended June 30,
2006. During the six months ended June 30, 2006, LW and PMIC have accrued an
additional estimated cost of $49,500 and $119,000, respectively, for the
liquidation period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, LW and PMIC had cash in the amounts of $103,500 and $8,500,
respectively. For the quarter ended June 30, 2006, LW and PMIC have incurred
costs of $34,000 and $77,300, respectively. As of June 30, 2006, LW and PMIC had
unpaid Post-Petition payables and accruals of $1,000 and $38,000, respectively.
As of June 30, 2006, PMIC also had a Post-Petition payable of $22,100, $2,700
and $17,700 to PMI, PMIGA and LW, respectively. During the three months ended
June 30, 2006, PMIC rendered certain accounting services to the PMI Creditor
Trust and PMIGA Creditor Trust for a total income of $21,800. As of June 30,
2006, PMIC had a receivable of $13,800 and $1,200 from the PMI Creditor Trust
and PMIGA Creditor Trust, respectively.
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
========== ==========
23
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 and two
former executives 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.
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").
24
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;
(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.
25
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.
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.
26
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.
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 June 30, 2006, our estimated
costs of liquidation were as follows:
COMBINED
PMI PMIGA LW PMIC TOTAL
-------- -------- -------- -------- --------
Estimated costs to be incurred during
liquidation as of June 30, 2006 0 0 38,500 74,500 113,000
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:
27
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.
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:
28
(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;
(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.
29
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.
We have filed the fourth amended plans of organization with the bankruptcy court
on June 21, 2006. Under the 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).
2.4 Fourth Amended Plans of Reorganization for Pacific Magtron
International Corp. and Livewarehouse, Inc. (filed herewith).
30
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).
* 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: July 31, 2006
By /s/ Martin Nielson
-----------------------------
Martin Nielson
President and Chief Executive
Officer
31
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).
2.4 Fourth Amended Plans of Reorganization for Pacific Magtron
International Corp. and Livewarehouse, Inc. (filed herewith).
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.
32