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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19378
LIUSKI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3065217
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6585 Crescent Drive, Norcross, Georgia 30071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 447-9454
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last sale price of the registrant's
Common Stock on March 18, 1997, was $4,223,141.
As of March 18, 1997, the registrant had 4,380,525 shares of Common Stock, $.01
par value per share outstanding.
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PART I
ITEM 1. BUSINESS
General
The Company is a distributor of microcomputer peripherals, components and
accessories throughout the U.S. and in certain foreign countries. The Company
also offers its own Magitronic brand of IBM-compatible personal computers and
notebooks, as well as Magitronic private-label components and accessories. The
Company distributes over 1,800 products made by over 70 U.S. manufacturers,
including such nationally recognized names as Seagate Technologies, Inc.
("Seagate"), Toshiba America Information Systems, Inc. ("Toshiba"), NEC
Technologies, Inc. ("NEC"), Samsung Information Systems America, Inc.
("Samsung"), Hewlett-Packard, Citizen America Corporation, Western Digital
Corporation, Panasonic Communications and Systems Company ("Panasonic"), and
Exabyte Corporation. In addition, the Company distributes over 170 private-label
products made by over 20 foreign manufacturers. Customers of the Company are
value-added resellers, systems integrators, consultants, retail stores, smaller
distributors, end-user corporations and government entities.
The Company's headquarters and primary assembly operations were relocated
from Melville, New York to Norcross, Georgia, a suburb of Atlanta, during 1995.
Prior to this relocation, all of the Company's products were supplied from ten
distribution centers. The distribution centers were consolidated from ten
locations to four primary centers with limited assembly operations being
performed at the Toronto distribution center. The Company's primary distribution
and sales centers are now in Norcross, Los Angeles, Miami, and Toronto (which
exclusively houses Magitronic products), with Norcross serving as the primary
distribution hub; the Company continues to maintain sales offices in Chicago,
Melville and Dallas. In 1997, the Company reopened distribution centers in
Chicago and Melville on a limited basis to facilitate sales to customers in
close proximity to these centers. In addition, in June 1996, the Company closed
its ProCORP mail-order business.
Although the Company's business is not highly seasonal, the second calendar
quarter is generally a period of weaker net sales in comparison to the rest of
the year.
The Company is a Delaware holding company and the sole owner of nine active
subsidiaries which operate its business. The names of these nine subsidiaries
are: Liuski International New York, Inc.; Liuski International Miami, Inc.;
Liuski International Texas, Inc.; Liuski International Illinois, Inc.; Liuski
International California, Inc.; Liuski International Atlanta, Inc.; Magitronic
Technology, Inc.; Liuski International Toronto, Inc.; and Liuski International
Taiwan, Inc.
Strategy
The Company's long-term objective is to become one of the leading
distributors of microcomputer peripherals, components and accessories in North
and South America with an increasing emphasis on assembling its own Magitronic
personal computers and notebooks as well as expanding its line of private-label
products. The Company believes that its ability to act quickly and appropriately
in response to short and long-term trends in the microcomputer marketplace is
critical to its success in a very dynamic industry characterized by short
product life cycles and continuous pricing pressures. The Company also believes
that as a result of intense competition in the industry, increased and continued
focus on operating efficiencies including cost controls and improvement in
product management systems is critical to the Company's future.
The Company has implemented its objective to expand its business by (i)
increasing sales through its current distribution system with emphasis on higher
profit margin business; (ii) emphasizing a separate subsidiary that focuses
exclusively on Magitronic products; (iii) re-evaluating product lines the
Company will offer based on profitability; and (iv) targeting new markets where
customers are receptive to the price/performance advantages of Magitronic
products, including governmental agencies and foreign markets.
Magitronic Brand Products. The Company's goal is to establish its Magitronic
brand as well recognized, value-priced, brand name products. To enhance the
visibility of the Magitronic line, the Company emphasized its separate
Magitronic subsidiary which focuses on distributing Magitronic products in new
markets.
1
Product Lines. The Company distributes over 1,800 products made by over 70
U.S. manufacturers. The Company is re-evaluating the product lines it will offer
in the future and will attempt to emphasize higher profit margin business. The
Company will continuously upgrade its lines of personal computers to apply and
integrate state of the art technology and reach the market earlier with its own
brand of higher performance and cost competitive systems.
Target Markets. Despite the Company's focus on smaller, price-conscious,
value-added resellers as its primary market, management believes that there are
various other markets in which customers would recognize the price/performance
advantages of Magitronic products including, among others, large corporate
end-users, governmental agencies, and foreign markets. The Company's activities
so far in these markets have been increasing as the Company allocates resources
towards developing each market. The Company has been approved by the General
Services Administration ("GSA") as an approved vendor of personal computers,
components and accessories to U.S. Government purchasers.
Regional Sales
The following table sets forth a regional breakdown for the periods
indicated of the Company's net sales and the percentage of the Company's total
net sales represented thereby:
Year Ended December 31,
1996 1995 1994
-----------------------------------------------------------------------
($ in thousands)
REGION
Northeast(1) $ 82,772 19.6% $ 98,803 25.0% $104,791 28.7%
Southeast 218,427 51.7% 148,021 37.4% 115,476 31.6%
Mid- and Southwest 73,336 17.4% 100,315 25.4% 104,392 28.6%
West 43,301 10.3% 36,235 9.2% 33,687 9.2%
Pacific(2) 1,230 0.3% 4,402 1.1% 6,755 1.9%
Mail Order(3) 3,244 0.7% 7,359 1.9% --- ---
-------- ----- -------- ----- -------- -----
--- Total $422,310 100.0% $395,135 100.0% $365,101 100.0%
======== ===== ======== ===== ======== =====
(1) Includes the distribution center located in Toronto, Canada.
(2) Includes Hong Kong sales center which was closed during 1996.
(3) The Company discontinued its direct mail operations (ProCORP) in June 1996.
Products
In addition to its Magitronic private-label products, the Company markets a
mix of products for nationally recognized manufacturers. The Company stocks
approximately 1,800 products made by over 70 U.S. manufacturers and continually
evaluates new products, the demand for its current products and its product mix.
Products are selected only after careful evaluation of features, availability,
reliability, serviceability, brand recognition and value to the customer in
terms of price and performance. The Company attempts to source products from
more than one supplier when management feels it is desirable to provide
protection against shortages and different price points for the same item. The
Company's goal is to improve its ability to apply and integrate state of the art
technology into its Magitronic personal computers so that it can decrease its
reaction time in response to technological changes and reach the market earlier.
Sales of the Company's Magitronic brand of personal computers and notebooks
as a percentage of total net sales were 20.1%, 17.3% and 21.0% for the years
ended December 31, 1994, 1995 and 1996, respectively. Included in Magitronic
personal computers are private-label and brand-name components that the Company
also sells separately in its distribution business. During 1996, sales of
monitors supplied primarily for Magitronic by Samsung were 6.1% of net sales,
and sales of hard disk drives supplied primarily by Seagate and Samsung were
14.2% of net sales. Sales of the Company's other products, including
microcomputer peripherals, components and accessories, comprised the remaining
sales for the year.
2
The major categories of products presently distributed by the Company are
described below.
Magitronic Microcomputers and Notebooks. The Company distributes
approximately 15 standard Magitronic brand IBM-compatible personal computers
which have a variety of microprocessors, memory configurations and other
features. Magitronic offers a wide range of systems to the industry ranging from
133MHz Pentium systems to the high-performance Pentium Pro/200MHz. The Company
also custom assembles Magitronic computers to the customer's order. The Company
distributes approximately 8 standard Magitronic brand IBM-compatible notebook
computers that range from the low end Pentium/133MHz to the 600 series
multimedia notebook that features Pentium/166MHz microprocessors.
The company's standard Magitronic brand microcomputers are currently sold by
the company at prices ranging from $670 to $3,100. Each is compatible with at
least three of the following operating systems: Microsoft DOS version 6.22;
Novell Netware Versions 3.12 and 4.1, as workstation and file servers; OS/2;
Windows 3.11, Windows for Workgroups 3.11, Windows NT workstation and fileserver
and Windows 95. (Refer to the section entitled "Assembly Operations.")
Other Magitronic Brand Products. The Company's other Magitronic brand
products consist of monitors, power supplies, keyboards, chassis', motherboards,
add-on boards, I/O boards, video display boards, surge suppressers, sound
boards, multimedia kits, fax modems, and various network products.
Mass Storage. The Company distributes Seagate, Toshiba, Western Digital, and
Samsung hard disk drives, Adaptec, Inc., Data Technology ("DTC," a division of
Qume Corporation) controllers, and Distributed Processing Technology, Inc.
("DPT") and Advansys, Inc. hard disk controllers, ALPS and NEC floppy disk
drives, Goldstar, Toshiba, and Samsung CD-ROMs, and 3M floppy diskettes. The
Company also distributes tape back-up systems from Seagate and Exabyte
Corporation.
Monitors. The Company distributes Magitronic, NEC, Goldstar Technology,
Inc., CTX Corp., Mag Innovision, Inc., Hyundai, Samtron, Inc., Techmedia and
Samsung monitors. For 1994 and 1995, the Company was the number one distributor
for computer related products sold by Samsung in the United States.
Multimedia. Soundboards, video cards and speakers facilitate music, sound
and video pictures that are produced by computers. The Company distributes
multimedia products from Creative Labs, Inc., Magitronic, Newcom, Cardinal
Technologies Inc. ("Cardinal"), Diamond Computer Systems, Inc., and NEC.
Communications. Modems and fax boards allow communication among computers.
The Company distributes modems and modems with fax boards of Cardinal, Practical
Peripherals, Inc. (both Hayes Companies), BOCA Research, Inc. ("BOCA"), U.S.
Robotics, and Magitronic. Some of Cardinal's products are bundled with Prodigy
software.
Networking Products. Local area networks (LANs) allow communication among
computers. The Company sells networking products of Microdyne, D-Link Systems,
Inc., BOCA, C-Net Technologies, Inc., Novell (through Microdyne), and Kingston.
Printers. The Company distributes a broad line of dot matrix and laser
printers sourced primarily from Panasonic, Hewlett-Packard, Samsung,
International Business Machines, Inc. ("IBM"), Lexmark, Brother, Inc. and
Citizen America.
Software. Along with its own Magitronic personal computers, the Company
bundles Lotus Smart Suite, MS-DOS and Windows software under licenses from Lotus
and Microsoft and network operating systems by Novell. The Company also bundles
a number of software titles from Netcom along with its Magitronic systems.
Notebooks. The company distributes notebooks from Magitronic and Samsung.
3
Suppliers
Substantially all of the Company's brand name products are purchased from
over 70 suppliers located in the U.S., while substantially all of the Company's
private-label products (including subassemblies and parts for Magitronic
personal computers) are purchased via its Trading Affiliates from over 20
suppliers in the Far East (Refer to Item 13. Certain Relationships and Related
Transactions). Products are selected by the Company to minimize competition
among suppliers' products, while maintaining some overlap to provide protection
against product shortages and discontinuations, and to provide different price
points for certain items. Management believes the Company's relationships with
its suppliers are enhanced by providing feedback to suppliers on products,
advising them of customer preferences, working with them to develop marketing
programs and offering suppliers the opportunity to provide seminars for the
Company's customers.
The Company has agreements with most of its U.S. suppliers which it believes
are in a form customarily used by each manufacturer. Like most of its
competitors, the Company distributes products throughout the U.S. on a
non-exclusive basis without geographic restrictions. These agreements usually
contain provisions which allow termination, without cause, by either party
generally upon 30 to 60 days notice. None of the Company's material supply
agreements require the sale of specified quantities of products. The Company is
not restricted from selling similar products manufactured by competitors. The
Company has the ability to terminate or curtail sales of one product line in
favor of another product line as a result of technological change, pricing
considerations, customer demand, or supplier distribution policy.
Most of the Company's U.S. suppliers provide price protection, by way of
credits, against price reductions by the supplier between the time of the
initial sale to the Company and the subsequent sale by the Company to its
customer. Not all of the Company's products are covered by these programs. Such
suppliers accept defective merchandise returned within 12 to 15 months after
shipment to the Company and most permit the Company to rotate its inventory by
returning slow moving inventory for other inventory. These programs, in part,
reduce the Company's risk with respect to slow moving inventories. Credits,
refunds or other payments to which the Company was entitled by reason of price
protection, advertising allowances, stock rotations and refunds for defective
merchandise totaled approximately 1.8% of net sales for 1996.
While the Company distributes products of more than 70 U.S. suppliers,
approximately 13% and 7% of the Company's net sales for 1996 were derived from
products manufactured by Seagate and Samsung, respectively, the Company's two
largest U.S. suppliers. The Company has written supply agreements with Seagate
and Samsung. The loss of either of these two suppliers or a shortage in a
particular product supplied by either of them could have a material adverse
impact on the Company during the period the Company believes it would need to
establish alternate sources of supply at required volume levels.
Since 1984, the Company has been purchasing products for its private-label
lines in the Far East through Marie-Claude Co., Ltd. and Liuski International,
Inc. (Taiwan) (collectively the "Trading Affiliates") which provide certain
purchasing services for the Company (Refer to Item 13. Certain Relationships and
Related Transactions). The Company currently has written agreements with the
Trading Affiliates pursuant to which the Company may, but is not required to,
purchase products from the Trading Affiliates at a price of 2% above the
manufacturers' charge to them plus reimbursement of certain out-of-pocket costs.
The total purchases of products from the Trading Affiliates were approximately
$69,580,000, $72,190,000 and $88,025,000 during the three years ended December
31, 1994, 1995 and 1996, respectively, for which the Company paid contract
consideration to the Trading Affiliates of approximately $1,364,000, $1,444,000
and $1,761,000, respectively. Services performed for the Company by the Trading
Affiliates include: the confirmation of pricing; availability of products and
shipping dates; quality checks at the manufacturers' locations; and the handling
of shipping logistics from the manufacturers' locations to the Company's
distribution centers. In addition, if requested, the Trading Affiliates assist
in evaluating the quality and attractiveness of potential new product lines.
It is the Company's belief that the domicile of the Trading Affiliates and
their banking relationships in Taiwan allow the Trading Affiliates to receive
favorable credit terms from manufacturers and in turn to provide favorable
credit terms which may not otherwise be available to the Company. The agreements
with each of the Trading Affiliates expire on December 31 of each year.
4
The Trading Affiliates source products for the Company from approximately
twenty manufacturers, primarily located in the Far East. Despite the existence
of these intermediaries, it is the Company's practice to establish direct
relationships with each supplier in order to select products and negotiate
price, quality and other supply issues. The Company is in continual telephone
contact and periodic face-to-face contact with its major suppliers directly from
its Norcross headquarters and through its Trading Affiliates. While several of
the manufacturers are based in Taiwan, the Company believes that most of the
products, except notebooks, can be sourced directly from other countries, if
required.
Assembly Operations
The Company assembles its Magitronic brand of personal computers primarily
at its facility located in Norcross, Georgia. The Atlanta Distribution Center
was relocated to this new facility in January 1995 and the Company relocated its
primary assembly facility from Melville (N.Y.) to Norcross during the first
quarter of 1995. The Company also relocated its corporate headquarters from
Melville to Norcross. The Company does not manufacture any of the subassemblies
or components used in the assembly of its Magitronic personal computers. All of
the subassemblies and components are items included in the products offered by
the Company in its distribution operations. Accordingly, the chassis' "bare"
motherboards, video display boards, floppy disk controllers, interface cards,
and power supplies and cabling are Magitronic components that are manufactured
for the Company, while the hard disk drives, floppy disk drives and memory
modules are products that are currently sourced principally from Western
Digital, Seagate, Toshiba, and Samsung. High value chips such as microprocessors
and random access memories are added to "bare" motherboards at the Company's
Norcross facility.
The Company currently assembles approximately 15 standard IBM-compatible
personal computer models. Magitronic personal computers target a broad range of
performance and functionality, ranging from Pentium 133MHz to Pentium
Pro/200MHz. The Company is currently planning to introduce other models, such as
those containing the new MMX 200MHz microprocessor. Magitronic standard personal
computers are currently based on microprocessors manufactured by Intel and AMD.
(Refer to the section entitled "Products.")
The Company's new product development activities relate principally to the
upgrading of its personal computers so that they are competitive in terms of
price and performance. Company marketing and engineering personnel work together
in the testing and evaluation of the available technology, primarily relating to
motherboards and notebooks. Such Company personnel also work in conjunction with
the Company's Trading Affiliates in evaluating such products. These activities
have not required any material expenditure of capital by the Company. The
Company's new product development activities depend in significant part on the
research and development expenditures and technological advances made by the
suppliers of its components and subassemblies.
Most subassemblies and parts used by the Company are available from multiple
suppliers. However, from time to time the Company may be subject to shortages of
key components required to assemble Magitronic personal computers and
motherboards. Any shortage in the supply of components may cause price increases
and production delays which may have a material adverse effect on the Company's
assembly operations. The Company purchases Pentium microprocessors directly from
Intel. All of the other subassemblies and components of the Company's Magitronic
personal computers are available from multiple sources. Currently, the only
shortages the Company has been experiencing are with respect to Intel's Pentium
microprocessors and certain hard disk drives, which have not had a material
adverse effect on the Company's operations.
Investment in production equipment is not material to the Company's assembly
operations. Semi-skilled and skilled workers assemble Magitronic personal
computers using a conveyor belt workstation system that is commonly used for
similar operations. The Company generally cross-trains its workers so that they
are able to work at all workstations. Once assembled, all systems undergo a test
cycle, including environmental and stress testing, using sophisticated
diagnostics procedures.
5
Currently, the Company is assembling over 7,000 standard Magitronic personal
computers per month, and has the capacity to assemble approximately 9,000
Magitronic personal computers per month at its Norcross facility. The Company
has the requisite space and believes it could purchase the components and
subassemblies, acquire the necessary equipment, and hire and train the personnel
necessary to increase the assembly capacity at such facility to 15,000
Magitronic personal computers per month, within a 120-day period, if demand
justified such an increase. The Company also assembles custom-order Magitronic
personal computers at the Toronto distribution center.
Backlog is not material to the Company's assembly operations. Orders for the
Company's standard IBM compatible personal computer models are filled the same
day from inventory and orders for custom models are generally filled within
three to five days after receipt of an order.
Magitronic, after a 10 month preparation process, was certified for ISO 9001
on October 14, 1996. ISO 9001 is the most comprehensive standard in the ISO 9000
family and requires that the Company follow a specific set of standards and
procedures from the purchasing of components through the design and production
process. These standards and procedures provide a framework designed to provide
the customer with quality products. ISO 9000 certification has become accepted
by and, in most cases, is required by companies in Europe and throughout the
world. ISO 9001 has opened up many new markets for Magitronic which, until now,
had been inaccessible because of the lack of certification.
Federal Communications Commission ("FCC") regulations govern radio frequency
emission standards for computing equipment. All of the standard Magitronic
personal computers currently being marketed by the Company meet the FCC's Class
A requirements and certain of the Company's products qualify for the more
stringent Class B requirements. Delays in securing FCC Class B approvals have
been experienced by the Company and may occur in the future. The Company does
not believe that such delays will have any significant adverse impact on the
Company's ability to sell its Magitronic personal computers.
With more and more computers being used in LANs, it has become important
that the Company's products meet one or more of the networking standards. Some
of the Magitronic Systems have been tested and have passed Novell certification.
Also, most of the systems offered by Magitronic have gone through and have
passed IBM's OS/2 Hardware Compatibility and Microsoft's Windows NT Hardware
Compatibility.
Sales and Marketing
The Company's sales operations are currently conducted from four
strategically located distribution and sales centers in, or in the vicinity of,
Norcross, Los Angeles, Miami, and Toronto (collectively the "Primary
Distribution Centers"), and in sales offices located in Dallas, Melville and
Chicago. The Company's Norcross distribution center, which serves as the main
distribution hub, primarily services the southern and eastern U.S., and the
western U.S. is primarily serviced by the Los Angeles distribution center. South
America, Latin America and Canada are serviced primarily by the Company's
distribution centers in Miami and Toronto, respectively. The Dallas and Chicago
sales offices primarily service customers in Texas and the Midwest,
respectively, while the Melville sales office services customers in the
Northeast.
The Company consolidated its sales efforts in 1995 by relocating many of the
sales, administrative, technical and customer service personnel to the Norcross
facility, with the goal of increasing sales productivity and decreasing
administrative costs. As a result of this consolidation, the Company closed its
distribution centers in Baltimore, Houston, Dallas, and San Jose. The Company
temporarily closed its distribution centers in Melville and Chicago, which were
reopened on a limited basis during 1996. The Company maintains sales offices at
each of its distribution centers.
The Primary Distribution Centers and sales offices have a sales manager who
works with the center's account executives. The account executives principally
market and sell to customers in the center's designated geographic territory. In
addition to a sales manager, the Primary Distribution Centers have a general
manager and technical service, accounting and customer service departments.
6
Sales to customers are principally made by telephone. Occasionally, account
executives will take orders at a customer's premises, particularly if the
customer is a corporate end-user. The Company accommodates customers who prefer
to pick-up their orders directly at a center. Account executives are available
to assist in selecting complete systems that suit the needs of customers. Upon
request, the Company's systems engineers will fully assemble a system and test
it before shipment to the customer for a nominal service charge. (Refer to the
section entitled "Assembly Operations.")
Generally, an order written by 5:00 p.m. will be shipped the same day,
except for orders requiring assembly and testing. The Company's order processing
capability, distribution center locations, and agreements with major carriers
permit the Company to deliver products by economical ground transportation
within one or two days following an order placed in the continental U.S. The
amount of inventory backlog is minimal since almost all orders are filled
promptly from current inventory.
The Company's customers are principally value-added resellers, retailers and
smaller distributors. The Company has more than 7,500 active customers each
month and currently maintains a customer list of approximately 35,000. No single
customer accounted for more than 2.5% of the Company's revenue during 1996. Most
of the Company's customers rely upon distributors, such as the Company, as their
principal source of personal computers, peripherals, microcomputer components
and accessories.
Customer Support
The Company provides technical assistance to customers contacting the
customer service departments during normal business hours. Defective Magitronic
personal computers that are returned to the Company during the one year warranty
period (two years for notebooks) are tested by the Company and replaced entirely
or repaired if the Company is able to simply replace the defective component(s).
The Company services Magitronic personal computers that are no longer covered by
warranty and charges the customers for these services. Generally, the Company
will ship returns of other defective products to the manufacturer or send them
to an authorized manufacturer repair center. The Company generally will accept
returns of "Dead On Arrival" products within 30 days from invoice. The Company
provides full refunds for products returned within two weeks due to the
Company's error in filling or writing a product order.
Returns have historically been approximately 5% of net sales. The Company
does not maintain separate records with respect to the rate of return of its
Magitronic brand personal computers as compared to its other products. The
Company does not believe that the cost of product returns is material as
substantially all of these costs are reimbursed to the Company by its suppliers
through credits and/or replacements; however, the Company accrues for losses and
warranty costs for returned goods, which are not covered by supplier protection,
at the time of sale.
Management Information Systems
The Company's operations are computerized with inventory, accounts
receivable and payable, order entry, payroll and general ledger software
systems. The Company changed its management information systems software in
March of 1996. The Company experienced disruption as a result of this change,
but believes this change was essential in order to accommodate future growth.
The Company has implemented a new bar coding inventory control system at the
Norcross facility and is evaluating its operational and cost efficiencies.
Employees
As of March 7, 1997, the Company had 526 full-time employees, including 198
in sales and marketing, 59 in engineering, technical and customer service, 84 in
warehouse, 101 in administrative (including four executive officers), 71
assembly workers and 13 in data processing. The Company considers its
relationship with employees to be satisfactory. The Company is evaluating its'
staffing requirements and is initiating certain reductions in force.
7
Patents, Trademarks and Licenses
The Company does not have any patents and does not consider patents
significant to its Magitronic assembly operations. The Company believes that the
knowledge and experience of its management and personnel and their ability to
market and keep abreast of technological trends and developments in the design
and assembly of microcomputers are more significant than patents to the
Company's success.
The trademarks "Magitronic", "Magitronic - The Power of Value", and
"ProCORP" are registered in the U.S., Canada and certain foreign countries and
registrations are pending in several others. The trade name Liuski is registered
in the U.S., Canada and certain foreign countries.
Competition
The microcomputer distribution industry is intensely competitive and is
characterized by constant pricing pressures and rapid product performance
improvement and technological change resulting in relatively short product life
cycles and rapid product obsolescence. Competition is primarily based on product
lines and availability, price, delivery and other support services. Distributor
competitors of the Company include other national distributors, regional
distributors and manufacturers' direct sales organizations, many of which have
substantially greater technical, financial and other resources than the Company.
Major wholesale electronic distribution competitors include Ingram Micro, Inc.,
Merisel, Inc., Tech Data Corporation, Arrow Electronics, Inc., Synnex and
Southern Electronics Corporation.
The Company's Magitronic personal computers and private-label Magitronic
products compete with a large number of manufacturers, most of which have
significantly greater financial, technological and marketing resources than the
Company and many of which market products principally on the basis of price.
Microcomputer manufacturing competitors include Compaq Computer Corp., Dell
Computer Corp., Packard-Bell, Toshiba, IBM, and ACER, as well as private-label
manufacturers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for further information.
8
ITEM 2. REAL PROPERTY
During 1995, the Company relocated its executive and administrative offices
to its largest distribution center located in Norcross, Georgia (a suburb of
Atlanta). Most of the Company's leases have initial terms not exceeding five
years to allow the Company flexibility to accommodate potential expansion and
relocation. Information is set forth below regarding the Company's distribution
and sales centers.
Floor Area Current
Approximate Lease Annual
Location Square Feet Expiration Date Rent
- - -------- ----------- --------------- ---------
Norcross, GA 156,000 December 31, 1999 $546,700
Melville, NY 30,000 July 31, 1998 204,000
Chicago, IL 34,000 December 31, 1999 178,600
Los Angeles, CA 28,100 March 31, 1997 105,000
Miami, FL 28,800 October 31, 2000 213,000
Dallas, TX 16,900 May 31, 1998 22,900
Toronto, Canada 34,100 April 30, 2000 90,300
------- ----------
Total 327,900 $1,360,500
======= ==========
The Dallas, TX location and a portion of the Melville, NY facility have been
subleased to third parties.
9
ITEM 3. LEGAL PROCEEDINGS
In March 1994, several shareholders of the Company filed class action
lawsuits in the United States District Court for the Eastern District of New
York against the Company and certain of its officers asserting violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)5 promulgated
thereunder. The actions, since consolidated into a single action, purported to
be based on statements contained in a press release and SEC Form 10-Q issued by
the Company in the latter part of 1993 and was entitled "In re Liuski
International, Inc. Securities Litigation," Civil Action No. 94-CV-1045. The
plaintiffs' consolidated amended complaint asserted that the Company's purported
omissions or misrepresentations falsely inflated the value of the Company's
stock. The plaintiffs sought to represent purchasers who acquired the Company's
common stock during various periods, the earliest of which commenced on November
8, 1993 and ended on March 4, 1994. No class was ever certified. The complaint
demanded damages in an unspecified amount. In September, 1995, the plaintiffs
filed and served a second amended and consolidated complaint.
On December 4, 1995, the Company and its named officers filed a motion to
dismiss the action for failure to state a cause of action and failure to plead
fraud with particularity. That motion was granted by United States District
Court Judge Frederick Block by order dated December 8, 1996 in which the Court
found that the plaintiff's complaint failed to state a claim for fraud or to
adequately plead scienter. By judgment dated January 8, 1997, the Court
dismissed the case. No Appeal was filed.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share, is quoted on
NASDAQ-NMS under the symbol "LSKI." As of December 31, 1996, there were
approximately 110 holders of record of the Company's common stock. On May 10,
1996, the record date for the Company's 1996 annual meeting, there were
approximately 2,054 beneficial owners of the Company's Common Stock. The
following table sets forth the high and low last sale prices for the Company's
Common Stock, as reported by the NASDAQ-NMS, for the periods indicated.
Calendar Period High Low
- - --------------- ---- ---
Year Ended December 31, 1995
First quarter 5 1/2 3 1/2
Second quarter 5 1/8 3 1/2
Third quarter 5 1/8 3 5/8
Fourth quarter 4 2 3/8
Year Ended December 31, 1996
First quarter 4 3/4 3 1/8
Second quarter 5 1/2 3 1/4
Third quarter 4 3/8 3 1/2
Fourth quarter 4 1/8 1 11/16
The last sale price of the Company's Common Stock on March 18, 1997 was 1 11/16.
Dividend Policy
Since its inception, the Company has not paid any dividends other than S
Corporation distributions with respect to periods prior to the completion of its
initial public offering of common stock ("IPO"), and does not currently intend
to declare or pay cash dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
The following table sets forth certain selected consolidated financial data
of the Company for the five years ended December 31, 1996.
Data relating to the years ended December 31, 1996, 1995, 1994, and 1993 is
derived from the Consolidated Financial Statements appearing elsewhere in this
Report which have been audited by BDO Seidman, LLP, independent certified public
accountants. The selected consolidated financial data should be read in
conjunction with, and is qualified in its entirety by reference to, the
consolidated financial statements, the notes thereto and the report thereon
included elsewhere in this Report.
Income Statement Data:
Year ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net Sales $422,310 $395,135 $365,101 $293,122 $212,133
Gross Profit $ 26,072 $ 29,592 $ 28,424 $ 26,369 $ 21,866
Selling, General and
Administrative expenses $ 33,352 $ 29,202 $ 25,375 $ 19,947 $ 16,042
Income (Loss) from Operations $ (7,280) $ 390 $ 3,049 $ 6,421 $ 5,825
Net Income (Loss) $ (7,815) $ (1,069) $ 1,042 $ 3,578 $ 3,201
Net Income (Loss) per
Common Share $ (1.78) $ (.24) $ .23 $ .91 $ 1.00
Balance Sheet Data:
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working Capital $15,953 $44,650 $44,968 $24,848 $11,833
Total Assets $90,454 $83,708 $74,043 $56,350 $38,398
Long-Term Liabilities $ 406 $21,667 $21,119 $ 804 $ 137
Stockholders' Equity $18,524 $26,339 $27,408 $26,241 $13,014
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Years ended December 31, 1996 and 1995
Net Sales: Net sales for the year ended December 31, 1996 were $422,310,269,
representing a net increase of $27,175,156 (6.9%) from $395,135,113 for the year
ended December 31, 1995. The Company's distribution sales, which excludes
Magitronic systems and notebooks, for the year ended December 31, 1996 increased
to $333,621,593 (79.0% of net sales) from $326,650,927 (82.7% of net sales) for
the year ended December 31, 1995. Sales from distribution centers in the
following regions of the U.S. changed as follows: Northeast region (including
the Canadian distribution center), -16.2%; Southeast region, +47.6%; Mid- and
Southwest region, -26.9%; Western region, +19.5%; and Pacific region -72.1%. The
Company believes the decreases in the Northeast and Mid- and Southwest regions
were affected by the closings of the Chicago and Melville, New York distribution
centers in December 1995.
Also during March 1996, the Company changed its computerized management
information systems software. Early in the transition, the Company experienced
several problems that temporarily impacted its ability to process orders and
ship products. While these problems are typical for such a systems conversion
and minor in nature, they nonetheless negatively impacted sales during 1996.
Generally, sales were affected negatively by intense price competition in the
industry. Sales also were impacted as a result of price increases to allow for
the recovery of shipping costs related to certain heavy, low margin products. To
a lesser extent, sales during 1996 were negatively affected by shortages the
Company experienced with respect to certain multimedia kits.
Sales of the Company's Magitronic brand of personal computers and notebooks
for the year ended December 31, 1996 increased to $88,688,676 (21.0% of net
sales) from $68,484,186 (17.3% of net sales) for the year ended December 31,
1995. The Company believes that the increase in sales of these products was due
to the success of the Company's high end notebook computers, competitive
pricing, fast delivery of custom-made systems as well as the growing acceptance
of the Company's Magitronic brand in the market. In addition, sales of
Magitronic computers in 1995 were negatively affected by production problems
associated with relocating the Company's assembly operations from Melville, New
York to Norcross, Georgia. To enhance the visibility of Magitronic products, in
January 1996, the Company created its Magitronic subsidiary that focused on
distributing Magitronic products. The Company expects the demand for its
Magitronic brand personal computers to continue to increase.
Sales during the latter part of 1995 were negatively affected by the
shortages the Company experienced with respect to Magitronic 600 series
notebooks and certain models of hard drives that were only available on an
allocation basis.
While management expects net sales of Magritronic products for 1997 to
continue to increase, the rate of increase is likely to diminish as compared to
prior years. Although the Company's business is not highly seasonal, the second
calendar quarter is generally a period of weaker net sales in comparison to the
rest of the year.
Gross Profit: Gross profit decreased by $3,520,251 to $26,072,144 (6.2% of
net sales) for the year ended December 31, 1996 from $29,592,395 (7.5% of net
sales) for the year ended December 31, 1995. The gross profit margins for the
year ended December 31, 1996, were negatively affected by intense price
competition and decreases in the Company's utilization of vendor programs such
as rebates, returns and price protection due to difficulties experienced with
the Company's new management information systems and turnover issues in the
product management department. Additionally, the Company re-examined its methods
of assessing and estimating the adequacy of allowances for doubtful vendor
receivables. It was determined that such allowances were inadequate and an
increase was required. The Company increased reserves and write-offs with
respect to vendor related receivables such as rebates, returns, price protection
and co-operative advertising in the amount of $2,560,808 (.6% of net sales). In
addition, due to sales expansion, Magitronic increased reserves in 1996 for
rebates, price protection and warranty offered to customers in the amount of
$677,024 (.8% of Magitronic sales). The Company also increased its provision
for inventory obsolescence in the amount of $1,002,662 (.2% of net sales) due to
the increase in age of certain goods.
13
Over the last few years, the computer industry has experienced intense price
competition and management believes that the price competitive conditions in the
industry will continue.
Selling, General and Administrative Expenses:, Selling, general and
administrative expenses increased as a percentage of net sales from 7.4% for the
year ended December 31, 1995 to 7.9% for the year ended December, 31, 1996. Such
expenses increased from $29,201,935 in 1995 to $33,352,034 in 1996, partly as a
result of higher sales levels. The Company's bad debt expense increased to
$5,330,234 (1.2% of net sales) for the year ended December 31, 1996, from
$1,150,181 (.3% of net sales) for the year ended December 31, 1995, due to the
Company providing and extending credit terms to a growing percentage of its
customer base, as well as difficulties experienced in the Company's systems of
processing, tracking and monitoring the collection of accounts. The conversion
of the Company's management information systems contributed to these
difficulties as well as turnover issues in the credit department. Salaries for
the year ended December 31, 1996 increased to $13,901,605 from $13,369,601 for
the year ended December 31, 1995 but remained constant as a percentage of net
sales at 3.3%. In March of 1995, the Company relocated its corporate
headquarters and assembly operations for Magitronic personal computers from New
York to Norcross, Georgia. Additional expenses of $1,189,000 (.3% of net sales)
were incurred in relocating, setting up the facility, hiring and training
employees and travel.
Other Charges: Interest expense decreased to $2,105,015 in 1996 from
$2,153,991 in 1995. The interest rate paid by the Company under its revolving
credit loan ranged from 125 basis points over LIBOR to 1/4 over the prime rate.
Income Taxes: The income tax benefit increased $987,000 to $1,652,000 for
1996 from $665,000 for 1995. The increase is due to the increase in taxable
loss. The current tax benefit results from carrying back losses to obtain
refunds of taxes paid in previous years. The deferred tax benefit has been
reduced by a valuation allowance provided against net deferred tax assets.
Consequently, the Company's effective income tax (benefit) rate is (17.5%).
Net Loss: Net loss increased by $6,746,900 to $7,815,440 (1.9%) for the year
ended December 31, 1996 from a loss of $1,068,540 (.3% of net sales), for the
year ended December 31, 1995. The Company's net loss for the year ended December
31, 1996 was substantially affected by the increase in bad debt expense to
$5,123,334 and the significant decrease in gross profit which was discussed
above.
Years ended December 31, 1995 and 1994
Net Sales: Net sales for the year ended December 31, 1995 were $395,135,113,
representing a net increase of $30,033,785 (8.2%) from $365,101,328 for the year
ended December 31, 1994. Sales from distribution centers in the following
regions changed as follows: Northeast region (including Canadian distribution
center), -5.7%; Southeast region, +28.2%; Mid- and Southwest regions, -3.9%;
Western region, +7.6%; and Pacific Region, -34.8%. Part of the decrease in the
Northeast region and the increase in the Southeast region was caused by
crediting corporate sales previously allocated to New York to Georgia in
conjunction with the relocation of corporate sales personnel to the Georgia
office. The Company also commenced mail order sales efforts through a
wholly-owned subsidiary, ProCORP, Inc., which was organized in November 1994.
Net sales from the Company's mail order activities were $7,358,881 for the year
ended December 31, 1995, compared to $23,576 for the year ended December 31,
1994.
Sales of the Company's Magitronic brand of personal computers and notebooks
for the year ended December 31, 1995 decreased to $68,484,186 (17.3% of net
sales) from $73,268,851 (20.1% of net sales) for the year ended December 31,
1994. Sales of the Magitronic computers were affected by production problems
associated with relocating the Company's assembly operations from Melville, New
York to Norcross, Georgia.
Sales during the later part of 1995 were negatively affected by the
shortages the Company experienced with respect to Magitronic 600 series
notebooks and certain models of hard drives that were only available on an
allocation basis.
14
Gross Profit: Gross profit increased by $1,168,514 to $29,592,395 (7.5% of
net sales) for the year ended December 31, 1995 from $28,423,881 (7.8% of net
sales) for the year ended December 31, 1994. The gross profit margin for the
year ended December 31, 1994, was substantially affected by an inventory write
down of $2,262,189 during the fourth quarter of 1994. The lower gross margin for
the year ended December 31, 1995 was due to intense price competition and lower
manufacturer's incentives than those available in 1994. The decrease in sales of
Magitronic personal computers, which have higher margins, also impacted gross
margin in 1995. Management believes that the price-competitive conditions of the
industry will continue.
Selling, General and Administrative Expenses: In March of 1995, the Company
relocated its corporate headquarters and assembly operations for the Magitronic
personal computers from New York to Norcross, Georgia. Additional selling,
general and administrative expenses were incurred in relocating, setting up the
facility, hiring employees, and related training and travel expenses. Selling,
general and administrative expenses increased as a percentage of net sales from
6.9% for the year ended December 31, 1994 to 7.4% for the year ended December
31, 1995. Such expenses increased from $25,375,225 in 1994 to $29,201,935 in
1995. Salaries for the year ended December 31, 1995 increased to $13,369,601
from $12,315,471 for the year ended December 31, 1994 but remained constant as a
percentage of net sales at 3.4%. The Company's bad debt expense increased to
$1,150,181 (.3% of net sales) for the year ended December 31, 1995 from $584,206
(.2% of net sales) for the year ended December 31, 1994, as a result of the
Company providing credit terms to a higher percentage of its customers.
Throughout 1995, the total costs incurred with the relocation from New York to
Georgia and the Company's strategic streamlining program were approximately
$1,189,000 (.3% of net sales)
Other Charges: Interest expense increased to $2,153,991 in 1995 from
$1,218,518 in 1994 as a result of increased borrowings to support sales growth.
The interest paid by the Company under its revolving credit loans ranged from
125 basis points over LIBOR to 1/4 of a point over the prime rate.
Income Taxes: Income taxes decreased $(1,360,018) to $(665,000) for 1995
from $695,018 for 1994. The decrease is due to the decrease in taxable income.
The current tax benefit results from carrying back losses to obtain refunds of
taxes paid in previous years.
Net Income(Loss): Net income decreased by $2,110,855 to a loss of $1,068,540
(.3% of net sales) for the year ended December 31, 1995 from net income of
$1,042,315 (.3% of net sales), for the year ended December 31, 1994. The
Company's net income for the year ended December 31, 1995 was affected by the
relocation costs associated with moving the Company's headquarters and an income
tax benefit of $665,000 which will result in a refund of taxes previously paid
by the Company. The Company's net income during 1994 was substantially affected
by an inventory write down of $2,262,189 during the fourth quarter of 1994.
Impact of Inflation
The Company has not been adversely affected by inflation because
technological advances and competition within the microcomputer industry have
generally caused prices of products sold by the Company to decline. The Company
has flexibility in its pricing because it has no long-term contracts with most
of its customers and, accordingly, could, if necessary, pass along price changes
to its customers.
Liquidity and Capital Resources
The Company finances its growth through borrowings under its revolving
credit loan, equity capital and credit terms from its major suppliers. Net cash
used by operating activities was $6,856,898 in 1996 and $322,154 in 1995. The
change in net cash flows from operating activities between 1996 and 1995 in the
amount of $6,534,744 primarily resulted from an increase in the Company's net
loss, an increase in inventories and prepaid expenses offset by increases in
accounts payable and accrued expenses. The Company expects to receive income tax
refunds ranging from $1,500,000 to $2,000,000 during 1997 which will increase
its working capital. The Company may experience shifts in cash flow in the
future, particularly if its suppliers provide more restrictive credit terms than
the Company currently is afforded. For the years ended 1995 and 1996, the
Company generally paid its suppliers approximately 35 to 45 days from date of
invoice. Terms vary from one day to 60 days.
15
Working capital was $15,953,069, as of December 31, 1996 and $44,649,616 as
of December 31, 1995. On June 23, 1995, the Company signed a three-year
$50,000,000 credit facility replacing the Company's existing $25,000,000
revolving credit loan and $14,000,000 line for floorplanning of inventory. The
facility provides for revolving cash borrowings of up to $35,000,000, limited by
available collateral and $15,000,000 for inventory floorplanning. Borrowings
under the revolving credit loan bear interest at 125 basis points over LIBOR or
prime rate plus 1/4% and are based upon a formula of up to 85% of eligible
receivables and 50% (30% for Magitronic goods) of eligible inventory not to
exceed $15,000,000. As of December 31, 1996 and 1995, the Company owed
$28,614,929 and $20,965,263, respectively, under its revolving credit loan. As
of December 31, 1996, the Company had $1,641,424 available for cash borrowings
under its revolving credit loan and $11,128,407 available for the floorplanning
of inventory purchases.
As of December 31, 1996, the Company is in violation of two financial
covenants under its credit facility agreement. The Company's lender has
preserved all of the rights available to it as a result of the Company's default
of these financial covenants. Consequently, the balance of the revolving credit
loan is classified as a current liability at December 31, 1996. The Company is
discussing these defaults with its lender with the goal of renegotiating these
covenants. If such negotiations are successful, the amended terms will likely be
less favorable to the Company than those that now exist. There can be no
assurance that these negotiations will be successfully completed.
Asset Management
Inventory. Management attempts to maximize product availability and delivery
while minimizing inventory levels to lessen the risk of product obsolescence and
price fluctuations. Most products are stocked to provide a 30 to 45-day supply.
The Company often reduces prices of products in its inventory in order to
improve its turnover rate. The Company turned its inventory on average every 43
days during 1996 and 44 days during 1995. The Company takes a physical inventory
every month which is compared to its perpetual inventory and monitors inventory
levels daily according to sales made by product and distribution center.
Most of the Company's U.S. suppliers provide price protection, by way of
credits, against price reductions by the supplier between the time of the
initial sale to the Company and the subsequent sale by the Company to its
customer. Not all of the Company's products are covered by these programs. Such
suppliers accept defective merchandise returned within 12 to 15 months after
shipment to the Company and some permit the Company to rotate its inventory by
returning slow moving inventory for other inventory. These programs, in part,
reduce the Company's risk with respect to slow moving inventories.
While the Company distributes products of more than 70 U.S. suppliers,
approximately 13% and 7% of the Company's net sales for 1996 were derived from
products manufactured by Seagate and Samsung, respectively, which are the
Company's two largest U.S. suppliers. The Company has written supply agreements
with both Seagate and Samsung. The loss of either of these two suppliers, or a
shortage in a particular product supplied by them, could have a material adverse
impact on the Company during the period the Company believes it would need in
order to establish alternate sources of inventory supply at required volume
levels.
Accounts Receivable. The Company primarily sells its products on the basis
of cash, C.O.D. or on terms of up to 30 days, however, the Company has expanded
its' extension of credit terms. The Company's average days' receivable was
approximately 30 days and 26 days for the years ended December 31, 1996 and
December 31, 1995, respectively. The increase in the average days sales
receivable was a result of the Company offering and extending credit to more of
its customers.
16
Management's Plans Regarding Negative Trends
The Company has experienced net losses of $7,815,440 and $1,068,540 for the
years ended December 31, 1996 and 1995, respectively. The Company has also
experienced steady declines in its gross profit as a percentage of net sales
over the last several years. As of December 31, 1996 the Company is in violation
of two financial covenants under its credit facility. The Company's lender has
preserved all of the rights available to it as a result of the Company's default
of these financial covenants. Management plans to address these negative trends
and losses as follows:
*During March 1997, the Company reduced its work force by approximately 100
personnel or 19%. Management will continue to evaluate its staffing requirements
to manage personnel costs.
*Management intends to improve gross profit as a percentage of sales by
emphasizing higher margin products and more profitable vendor relationships and
by expanding its sales of Magitronic systems and notebooks. Additionally,
management intends to increase the utilization of vendor discount, rebate and
price protection programs.
*Management intends to reduce and monitor its selling, general and
administrative expenses by instituting strict budgetary controls.
*Management is discussing its lending relationship with its lenders with
the goal of renegotiating the financial covenants in its lending agreements.
While management believes these plans will be successfully implemented
there can be no assurance that further corrective measures, such as additional
restructuring and alternative sources of financing, will be not necessary or, if
so, can be successfully accomplished.
Management Estimates
Financial statements prepared in conformity with generally accepted
accounting principles necessitates the use of management estimates. Management
has estimated reserves for inventory obsolescence and uncollectible vendor and
accounts receivables based upon historical and developing trends, aging of
items, and other information it deems pertinent to estimate collectibility and
realizability. It is reasonably possible that these reserves will change within
a year, and the effect of the change could be material to the consolidated
financial statements.
Forward-Looking Information May Prove Inaccurate
This report contains forward-looking statements and information that are
based on management's beliefs, as well as assumptions made by, and information
currently available to, management. When used in this document, the words
"anticipate," "believe," "estimate," "intends" and "expect" and similar
expressions are intended to identify forward-looking statements. Such statements
involve a number of risks and uncertainties. Among the factors that could cause
actual results to differ materially are the following: business conditions,
rapid or unexpected technological changes, product development, inventory risks
due to shifts in product demand, competition, domestic and foreign government
regulations, fluctuations in foreign exchange rates, rising costs for components
or unavailability of components, the timing of orders booked, lender
relationships and the risk factors listed from time to time in the Company's SEC
reports.
17
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which establishes financial and
reporting standards for stock-based employee compensation plans. The Standard
encourages, but does not require, companies to recognize compensation expense
based upon the fair value of grants of stock options and other equity
instruments to employees. Companies which do not adopt the expense recognition
provision of the Standard, must disclose pro forma net income and earnings per
share. The Company has adopted this statement during its year ended December 31,
1996 and continues to apply the prior accounting rules and has provided the pro
forma disclosures.
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company adopted this statement during its year ended
December 31, 1996. This statement did not have a material impact on the
Company's consolidated financial statements.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This Standard provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. This Standard is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996. The
adoption of this Standard is not expected to impact the Company's consolidated
financial statements.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." The new Standard simplifies the standards for computing
earnings per share and requires presentation of two new amounts, basic and
diluted earnings per share. The Company will be required to retroactively adopt
this standard when it reports its operating results for the quarter and year
ending December 31, 1997. The Company does not expect the effect of this new
Standard to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)(1) and (2) of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Positions and Offices
---- --- ---------------------
Morries Liu 48 Chairman of the Board of Directors and Chief
Executive Officer
Manuel C. Tan 40 President, Chief Operating Officer and Director
Edward A. Williams 36 Acting Chief Financial Officer
Shirley Lee 35 Sr. Vice President-Sales and Marketing-Magitronic
Edwin J. Feinberg 65 Director
Paul J. Konigsberg 61 Director
Kenny Liu 43 Director
Eric Bashford 37 Director
Morries Liu has been the Company's Chairman of the Board of Directors and
Chief Executive Office since founding the Company in 1984. He also served as its
President until the election of Mr. Tan in April 1993. Prior to founding the
Company, he worked for Northern Telecom, Inc. as a systems engineer for more
than two years. He graduated from the Chinese Cultural University, Taiwan, in
1972 with a B.A. degree in Journalism.
Manuel C. Tan has been with the Company since 1984 and was the Company's
Executive Vice President, Chief Operating Officer, and Secretary from 1988 until
April 1993, when he was elected President of the Company. He has been a director
of the Company since June 1991. Prior to joining the Company, he was the general
manager for two years of a wholesale and retail lumber company located in the
Philippines. He graduated from De Lasalle University, Philippines in 1979 with a
B.A. degree in General Studies.
Shirley Lee has been with the Company since 1985 and was the Company's
Senior Vice President--Sales and Marketing from April 1992 until April 1993,
when she was elected Executive Vice President--Sales and Marketing. From 1985 to
April 1992, she was the Company's Vice President--Sales and Marketing. Prior
thereto, Ms. Lee graduated from the National Taiwan University in 1984 with a
B.A. degree in Business Administration and took courses toward an M.B.A. at New
York University.
Edward A. Williams has been with the Company since July 1996 and is the
Company's controller and acting Chief Financial Officer. Prior to joining the
Company, he was employed by Aviation Service Corporation, a subsidiary of
Aerospatiale, since 1985. He held the position of Controller from March 1993
until May 1996 and was also a member of the board of directors. Aviation Service
Corporation is the second largest wholesale distributor of aircraft parts in the
world. Mr. Williams graduated from East Tennessee State University in 1984 with
a BBA in Accounting and is a member of the American Institute of Certified
Public Accountants.
19
Edwin J. Feinberg was the Company's Vice President--Finance and Chief
Financial Officer from 1988 to November 1994. Since December of 1994, he has
served as a consultant to the Company. Prior thereto, he was Controller and
Chief Financial Officer of BWP Holding Corp., a distributor of automotive
replacement parts, for more than three years. He has been a director of the
Company since June 1991. Mr. Feinberg has approximately 35 years of accounting
experience, including three years as Corporate Controller, from 1974 to 1977, of
Lafayette Radio Electronics Corp., which was then an American Stock Exchange
listed company engaged in the wholesale and retail sale of consumer electronic
products and components, and four years as Corporate Controller, from 1977 to
1981, of Diplomat Electronics Corp., which was then traded over-the-counter and
engaged in the distribution of electronic components. Mr. Feinberg graduated
from New York University (School of Commerce) in 1955 with a B.S. degree in
Accounting.
Paul J. Konigsberg has been a senior partner of Konigsberg Wolf & Co.,
P.C., an accounting firm, since 1972. Mr. Konigsberg received a B.B.A. degree in
Business Administration in 1965 and a Master of Laws in Taxation in 1968, both
from New York University. He has been a director of the Company since November
1991. In addition to the Company, Mr. Konigsberg is a member of the board of
directors of Sandata, Inc. Mr. Konigsberg is the designee of Reich & Co., Inc.
pursuant to an agreement made with the Company in connection with the Company's
initial public offering.
Kenny Liu (who is not related to Morries Liu) has served as the President
and Chief Executive Officer of IGS, Inc., a privately held multimedia company
since March 1994. Prior thereto, Mr. K. Liu served as the Chief Executive
Officer of Opti, Inc. from January 1989 to March 1994, served as its President
from January 1989 to February 1993, and from February 1993 to July 1994 he
served as the Chairman of the Board. From September 1986 to January 1989, Mr. K.
Liu was employed by Chips and Technologies, Inc., a chipset design company,
serving most recently as a design manager. Mr. K. Liu became a director of the
Company in June 1994. Mr. K. Liu holds a B.S. degree in Electrical Engineering
from National Cheng-Kung University and a M.S. in Electrical Engineering from
Ohio State University.
Eric R. Bashford serves as Managing Director of Investment Banking at M.H.
Meyerson & Co., Inc. where he has been employed since March 1, 1997. Prior
thereto he served as Senior Vice President and Director of Corporate Finance at
RAS Securities Corp. where he had been employed since January 1994. From July
1990 to January 1994, he was Senior Vice President of Reich & Co., Inc. (the
underwriter of the Company's initial public offering in 1991 and secondary
public offering in 1993). From February to July 1990, he was a Senior Vice
President of Hopper Soliday & Co., Inc. From 1988 to January 1990, he was a
Senior Vice President of J.T. Moran & Co., Inc. Mr. Bashford is a Chartered
Financial Analyst. He received a B.A. in Economics and Management from Beloit
College in 1981 and an M.B.A. from the Wharton School of the University of
Pennsylvania in 1988.
In furtherance of the Company's compensation policy for independent members
of the Board of Directors, Messrs. Bashford, K. Liu, and Konigsberg each receive
an annual Director's fee of $12,000 and, with the exception of Mr. Feinberg who
was granted stock options in his capacity as an employee of the Company, were
granted options to purchase 15,000 shares of the Company's Common Stock, at fair
market value on the date of grant in consideration for their services as members
of the Company's Board of Directors. The Company granted 7,500 of these options
to each of these directors on his initial election to the Board of Directors
(the "Initial Election Options") and options to purchase 7,500 shares of common
stock to each of them on April 17, 1995. All of these options are exercisable as
to 33 1/3% of the shares on each of the first three anniversaries of the date of
grant. All stock options granted by the Company which had exercise prices in
excess of $4.75 per share were repriced by the Company to $4.75 per share, which
was in excess of the fair market value of the Company's common stock on December
22, 1994, the date the repricing was effected. The purchase prices of Common
Stock subject to the Initial Election Options granted to Messrs. Konigsberg and
K. Liu and the options held by Mr. Feinberg were reduced accordingly. The
Initial Election Options awarded to Mr. Bashford were not effected by the
repricing since the purchase price for the Common Stock subject to his options
is $4.625, the fair market value of the Company's Common Stock on the date the
options were granted. Executive officers hold office until their successors are
chosen and qualify, subject to earlier removal by the Board of Directors.
20
The Company's Audit Committee is comprised of Messrs. Konigsberg and K.
Liu. The Audit Committee reviews the engagement of the independent accountants,
the scope of the annual audit undertaken by the independent accountants, and the
adequacy of the Company's internal control procedures, including those related
to affiliated parties.
In June 1991, the Company adopted a classified Board of Directors consisting
of five members. One sitting director was elected in 1994; the current Board of
Directors of the Company now consists of six members. The directors are divided
into three classes consisting of two directors in each of Class 1, Class 2 and
Class 3. Messrs. Morries Liu and Konigsberg, as Class 1 directors, were
re-elected at the 1995 annual meeting of stockholders and will hold office until
the 1998 annual stockholders meeting. Mr. Tan and Mr. K. Liu are Class 2
directors and will hold office until the 1999 annual stockholder's meeting. The
term of office of Messrs. Feinberg and Bashford, who are Class 3 directors, will
expire at the 1997 annual stockholder's meeting. The term of office of each
director expires at the third annual meeting of stockholders following his or
her election. Having a classified Board of Directors may be viewed as inhibiting
a change of control of the Board of Directors by stockholder vote.
Article Seven of the Company's Certificate of Incorporation provides that,
to the fullest extent permitted by Section 102 of the General Corporation Law of
the State of Delaware, no director of the Company shall be liable to the Company
for damages for breach of his or her fiduciary duty as a director. Article Eight
of the Company's Certificate of Incorporation provides that, to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, the Company shall indemnify any and all persons whom it shall have the
power to indemnify (which include directors, officers, employees or agents of
the Company) against liability for certain of their acts.
21
ITEM 11. EXECUTIVE COMPENSATION
The table below discloses all cash compensation awarded to, earned by or
paid to each executive officer of the Company who earned $100,000 or more for
services rendered in all capacities to the Company during the fiscal year ended
December 31, 1996. In addition it provides information with respect to the
compensation of the named executive officers for 1995 and 1994.
Summary Compensation Table
----------- Annual Compensation----------
Long-Term
Name and Principal Other Annual Compensation
Position Year Salary Bonus(1) Compensation Options
- - ------------------ ---- ------ -------- ------------ -----------
Morries Liu
Chairman of the Board 1996 $230,000 --- --- ---
of Directors and Chief 1995 $169,077 $ 3,382 --- 50,000
Executive Officer 1994 $206,846 $ 3,875 --- ---
Manual C. Tan 1996 $172,500 --- --- ---
President and Chief 1995 $172,500 $ 3,450 --- 50,000
Operating Officer 1994 $155,260 $ 3,105 --- 29,000(2)
Shirley Lee 1996 $102,092 --- --- ---
Sr. V.P.-Sales and 1995 $ 95,991 --- --- 25,000
Marketing-Magitronic 1994 $ 87,093 --- --- 15,000(2)
(1) Includes the Company's contribution to its 401-K plan in the following
amounts for 1996, 1995 and 1994, respectively: Mr. Liu, $3,892, $3,382 and
$3,875; Mr. Tan, $3,317, $3,450 and $3,105; and Ms. Lee, $2,042, $1,920 and
$1,742.
(2) Includes 9,000 and 7,000 stock options originally granted to Mr. Tan
and Ms. Lee in 1992, respectively, that were repriced in December 1994, with no
change in their exercise or expiration dates. The new exercise price was $4.75
per share and the closing market price per share on the date the options were
repriced was $4.625 per share.
22
Employment Agreements
The Company does not have employment contracts with any of its employees.
The following table provides information on option grants in 1996 to the
Company's named executive officers.
The following table provides information on the value of the Company's
named executive officers' unexercised options at December 31, 1996. The Company
did not grant any options to its named executive officers during the fiscal year
ended December 31, 1996.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1996(#) December 31, 1996($)(1)
-------------------- -----------------------
Shares
Acquired on Value
Officer Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- - ------- ----------- -------- ----------- ------------- ----------- -------------
Morries Liu 0 $0 16,665 33,335 $0 $0
Manual C. Tan 0 $0 56,998 40,002 $0 $0
Shirley Lee 0 $0 30,666 19,334 $0 $0
(1) Fiscal year ended December 31, 1996. The last sale price of the
Company's Common Stock on that day, as reported by NASDAQ-NMS, was
$1.75.
23
Compensation Report
It is the Board of Directors' responsibility to review compensation levels
of members of management, evaluate the performance of management, consider
management succession and other related matters and administer the Company's
various incentive plans. The Board determines what it considers appropriate
compensation based on the individual's performance and contribution, the
financial status of the Company, competitive national compensation levels
prevailing in the computer industry, competitive pressure for key personnel and
Company objectives. In order to accommodate its rapid growth in sales, the
Company has monitored its costs very carefully over the years, including the
compensation paid to all of the Company's employees. As a consequence of this
policy, the Board believes that salary of the Company's executive officers has
been modest compared to executives employed by the Company's competitors.
Incentive Plans
1991 and 1994 Stock Option Plans: In 1991, the Company adopted its 1991
Stock Option Plan. As of December 31, 1996, options to purchase 248,600 shares
of the Company's Common Stock had been granted and had been exercised or were
outstanding out of the total number of options authorized under the Company's
1991 plan of 450,000. In July 1994, the Board of Directors adopted the Company's
1994 Stock Option Plan. As of December 31, 1996, options to purchase 527,350 of
the Company's Common Stock had been issued out of the total number of options
authorized under the plan of 650,000. The purpose of the Company's stock option
plans is to provide a means for the Company, by granting Company options to
purchase stock to employees, executive officers, and directors of the Company,
to attract and retain persons of ability and motivate them to advance the
interest of the Company. Stock options are awarded by the Board of Directors
subject to the terms of the plans. The Board of Directors considers the
contribution made to the Company's business and the number of Company's stock
option grants previously awarded to employees, including executive officers,
when awarding new stock options. The Board of Directors may amend outstanding
stock option and grant agreements, subject to plan limitations. Because the
Company believes that the level of compensation paid to all employees is modest
as compared to that paid by its competitors, grants of options to purchase the
Company's Common Stock has been an important feature of the compensation program
for all employees. The Board of Directors issued options to purchase an
aggregate 118,450 shares of the Company's Common Stock under the Company's Stock
Option Plans during 1996.
At the present time, the Company's officers receive compensation in the form
of base salary and long-term incentive compensation through stock options,
pursuant to the Company's stock option plans. In addition, the Company offers
health insurance as long as the officer is actively employed. The officers, as
well as substantially all full-time employees, are eligible to participate in
the Company's Deferred Profit Sharing Plan under Section 401(k) of the Internal
Revenue Code. In general, the Board believes the Company should increase
executive compensation to levels more in-line with industry standards. In order
to narrow the compensation gap, the Board has authorized increased cash
compensation and has awarded incentive stock awards to certain of the Company's
executive officers.
Three current or past executive officers of the Company, Messrs. M. Liu,
Tan, and Feinberg, are members of the Company's Board of Directors and have
participated in deliberations concerning executive officer compensation but none
of them voted on their individual compensation.
With respect to compensation for officers including Mr. Liu, the Chief
Executive Officer, the Board of Director's policy is to review compensation
proposals from management, which are based on performance evaluation measuring
past performance as well as expected future contributions. Mr. Liu's
compensation is based on his experience in the industry, his responsibilities as
the Company's Chief Executive Officer and the dominant role he has played in the
Company's growth.
24
BOARD OF DIRECTORS
Morries Liu
Manuel C. Tan
Edwin J. Feinberg
Paul J. Konigsberg
Kenny Liu
Eric Bashford
STOCK PRICE PERFORMANCE CHART
The following chart presents a comparison of the cumulative total
stockholder return on the Common Stock with the NASDAQ Stock Market (U.S.) Index
and the average performance of a group consisting of the Company's peer
corporations on a line-of-business basis. The peer corporations in the group are
Arrow Electronics, Inc., Intelligence Electronics, Inc., Merisel, Inc., Southern
Electronics Corporation and Tech Data Corp. This chart assumes that $100 was
invested on August 13, 1991 (or such later date the applicable company
registered its common stock under Section 12 of the Securities Exchange Act of
1934) in the Common Stock and in the other indices, and that all dividends were
reinvested and are weighted on a market capitalization basis at the time of each
reported data point. The stock price performance shown below is not necessarily
indicative of future price performance.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG LIUSKI INTERNATIONAL, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
Fiscal year ending,
-------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Liuski International, Inc. 100 145.83 183.33 68.75 55.21 29.17
Peer Group 100 129.09 214.48 127.06 120.95 167.77
NASDAQ Stock Market 100 100.98 121.13 127.17 164.96 204.98
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of March 18, 1997, by (i)
each of the Company's directors and executive officers, (ii) directors and
executive officers of the Company as a group and (iii) each person believed by
the Company to own beneficially more than 5% of its outstanding shares of Common
Stock. Each such person has sole voting and investment powers with respect to
his and her shares.
Number of Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- - ------------------------ ------------------ ------------------
Morries Liu 1,813,285(1)(2)(3)(4) 41.2%
Manuel C. Tan 99,800(3)(4) 2.3%
Shirley Lee 69,167(3)(4) 1.6%
Edwin Feinberg 26,000(3)(4) .6%
Paul J. Konigsberg 12,500(3)(4) .3%
Kenny Liu 7,500(4) .2%
Eric Bashford 20,000(3) (4)(5) .5%
All directors and executive
officers as a group
(8 individuals) 2,005,252(1)(2)(3)(4)(5) 45.4%
(1) Excludes an aggregate of 122,542 shares owned by Mr. Liu's three sisters
and brother-in-law as follows: Ms. Tina Peng, 34,267 shares; Ms. Shing-Gyy
Hu, 24,267 shares; and Ms. Li Shin Liu and Mr. Jin Yao Shen, 34,008 shares
jointly.
(2) Includes 80,000 shares of Common Stock that are subject to options granted
by Mr. Liu to current or prior employees of the Company on May 28, 1991,
which are exercisable until December 29, 1998, at $5.25 per share. These
include options granted to Ms. Peng, Ms. Hu and Ms. Lee to purchase 10,000
shares each and options granted to Mr. Tan and Mr. Feinberg to purchase
18,000 and 15,000 shares, respectively.
(3) Represents or includes shares subject to stock options referred to in
footnote (2) and options granted by the Company as follows: Mr. Liu,
16,665; Mr. Tan, 38,998 shares; Mr. Feinberg, 11,000 shares; Ms. Lee,
20,600 shares; Mr. K. Liu, 7,500 shares; Mr. Bashford: 7,500 shares; and
Mr. Konigsberg, 12,500 shares.
(4) Excludes shares of common stock that are subject to options which are not
currently exercisable as follows: Mr. Liu, 33,335 shares; Mr. Tan, 40,002;
Ms. Lee, 19,334; Mr. Feinberg, 2,000; Mr. Bashford 7,500; Mr. Konigsberg,
2,500; and Mr. K. Liu, 7,500.
(5) Represents shares subject to options referred to in footnote (3) and 12,500
shares that are subject to options issued to Mr. Bashford, as an officer of
Reich & Co. Inc., in connection with the Company's secondary public
offering in 1993, which are exercisable until May 21, 1998, initially at
$11.55 per share, subject to adjustment.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Taiwan Affiliates
Since 1984, the Company has been purchasing products in the Far East through
one or more trading companies substantially all of whose activities have been
dedicated to providing purchasing services for the Company. The majority of the
stock of the trading companies, Marie-Claude Co., Ltd. and Liuski International,
Inc. (Taiwan) (collectively, the "Trading Affiliates" ) is owned by Mr. Liu's
mother and the remainder is owned by certain members of Mr. Liu's immediate
family. The Company has an agreement with each of the Trading Affiliates
pursuant to which the Company may, but is not required to, purchase products
from the Trading Affiliates, at a price of 2% above the amount of the
manufacturer's charge to the Trading Affiliates plus reimbursement of
out-of-pocket costs. Pursuant to the agreements, the Trading Affiliates handle a
variety of purchasing logistics for the Company. The total purchases through the
Trading Affiliates were approximately $88,025,000 during 1996, for which the
Company paid contract consideration to the Trading Affiliates of approximately
$1,761,000. The agreements with each of the Trading Affiliates expire on
December 31 of each year with annual renewals. The Company's purchases of
products from the Trading Affiliates are denominated in U.S. dollars.
The Company has undertaken not to materially broaden the scope of its
relationships with the Trading Affiliates. All relationships and transactions
with the Trading Affiliates, including the approval of renewals and amendments
to existing agreements, are subject to review and approval by the Company's
Audit Committee, all of which are independent directors, with the assistance of
the Company's independent auditors.
Computer Directions
Prior to Computer Directions ceasing operations in April of 1994, the
Company sold microcomputer peripherals, components and accessories to Computer
Directions, a chain of four retail stores located primarily in North Carolina,
owned approximately 36.3% by Mr. Liu, 10.7% by Mr. Tan, 6.6% by Ms. Lee, 2.4% by
Ms. Peng and 44.0% by unaffiliated individuals. Computer Directions made no
payments to Mr. Liu, Mr. Tan, Ms. Lee or Ms. Peng except to reimburse them for
tax liabilities incurred by them as a result of Computer Directions' status as
an S corporation for Federal income tax purposes. At December 31, 1996, Computer
Directions owed the Company $118,000 or approximately .4% of the Company's total
accounts receivable. The Company has security interests in Computer Directions
assets. In addition, Mr. Liu has guaranteed the entire outstanding balance. The
Company believes that Mr. Liu's guarantee provides sufficient allowances against
any uncollected account receivable balance of Computer Directions.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
Index to Consolidated Financial F - 1
Statements
(2) Schedules to Financial Statements
Index to Consolidated Financial
Statements Schedules S - 1
(3) The exhibits listed in the exhibit index
attached to this Report are filed as part of
this Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant
during the last quarter of the period covered by
this Report.
28
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
29
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Page No.
--------
Report of Independent Certified Public Accountants F - 2
Consolidated Financial Statements:
Balance Sheets F - 3
Statements of Operations F - 4
Statements of Stockholders' Equity F - 5
Statements of Cash Flows F - 6
Notes to the Consolidated Financial Statements F - 7 to F - 16
F - 1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of
Liuski International, Inc.
Norcross, Georgia
We have audited the accompanying consolidated balance sheets of Liuski
International, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liuski
International, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Atlanta, Georgia
March 21, 1997
F - 2
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
------------------------ ------------------------
ASSETS (Note 2)
- - ---------------
CURRENT ASSETS
Cash and Cash Equivalents (Note 1) $ 18,065 $ 200,989
Accounts Receivable net of Allowance for
Doubtful Accounts of $3,208,000 and $1,050,000
respectively 31,994,144 33,013,943
Inventories (Note 1) 49,872,618 43,295,440
Prepaid Expenses and Other Current Assets (Notes
5 and 6) 5,592,192 3,840,889
------------------------ ------------------------
TOTAL CURRENT ASSETS 87,477,019 80,351,261
FURNITURE, AUTOS AND EQUIPMENT, at cost, less
Accumulated Depreciation and Amortization of
$3,425,870 in 1996 and $2,645,806 in 1995,
respectively (Notes 1 and 9) 2,741,814 3,101,973
OTHER ASSETS 235,145 254,828
------------------------ ------------------------
TOTAL ASSETS 90,453,978 83,708,062
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES
Trade Accounts Payable: Affiliate (Note 5) $ 13,889,474 $ 9,245,742
Trade Accounts Payable (Note 2) 26,209,403 24,491,010
Revolving Credit Loan (Note 2) 28,614,929 -
Accrued Expenses and Other Current Liabilities 2,810,144 1,964,893
----------------------- ------------------------
TOTAL CURRENT LIABILITIES 71,523,950 35,701,645
REVOLVING CREDIT LOAN (Note 2) - 20,965,263
CAPITAL LEASE OBLIGATIONS (Note 9) 406,428 702,114
----------------------- ------------------------
TOTAL LIABILITIES 71,930,378 57,369,022
----------------------- ------------------------
COMMITMENTS AND CONTINGENCIES (Note 3) - -
STOCKHOLDERS' EQUITY (Notes 7, 8 and 11)
Preferred Stock, $.01 par value, 1,000,000
shares authorized; none issued - -
Common Stock, $.01 par value; 7,000,000 shares
authorized; 4,380,525 shares issued and
outstanding 43,806 43,806
Additional Paid-in Captial 18,435,164 18,435,164
Retained Earnings 44,630 7,860,070
------------------------ ------------------------
TOTAL STOCKHOLDERS' EQUITY 18,523,600 26,339,040
------------------------ ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 90,453,978 $ 83,708,062
======================== ========================
See notes to consolidated financial statements
F - 3
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1996 1995 1994
----------------------- ------------------------ -------------------------
Net Sales $ 422,310,269 $ 395,135,113 $ 365,101,328
Cost of Sales (Note 5) 396,238,125 365,542,718 336,677,447
----------------------- ------------------------ -------------------------
Gross Profit 26,072,144 29,592,395 28,423,881
Selling, General and
Administrative Expenses 33,352,034 29,201,935 25,375,225
----------------------- ------------------------ -------------------------
Income (Loss) from Operations (7,279,890) 390,460 3,048,656
----------------------- ------------------------ -------------------------
Other Expenses (Income):
Interest Expense 2,105,015 2,153,991 1,218,518
Miscellaneous 82,535 (29,991) 92,805
----------------------- ------------------------ -------------------------
Total Other Expenses (Income) 2,187,550 2,124,000 1,311,323
----------------------- ------------------------ -------------------------
Income (Loss) before Income Taxes (9,467,440) (1,733,540) 1,737,333
Income Taxes (Note 6) (1,652,000) (665,000) 695,018
----------------------- ------------------------ -------------------------
Net Income (Loss) $ (7,815,440) $ (1,068,540) $ 1,042,315
======================= ======================== =========================
Net Income (Loss) per Common and
Common Equivalent Share: Primary and
Fully Diluted $ (1.78) $ (0.24) $ 0.23
======================= ======================== =========================
Weighted Average number of Common and
Common Equivalent Shares Outstanding:
Primary and Fully Diluted 4,380,525 4,380,525 4,442,000
======================= ========================
See notes to consolidated financial statements
F - 4
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock, $.01 par value
-----------------------------------------
Additional
Number Paid-In Retained
of Shares Amount Capital Earnings Total
--------- ------ ------- -------- -----
December 31, 1993 4,363,250 $ 43,633 $ 18,310,712 $ 7,886,295 $26,240,640
Issuance of Common Stock for
Stock Options exercised (Note 11) 17,275 173 124,452 - 124,625
Net Income - - - 1,042,315 1,042,315
------------- ------------ ------------- -------------- --------------
December 31, 1994 4,380,525 43,806 18,435,164 8,928,610 27,407,580
Net Loss - - - (1,068,540) (1,068,540)
------------- ------------ ------------- -------------- --------------
December 31, 1995 4,380,525 43,806 18,435,164 7,860,070 26,339,040
Net Loss - - - (7,815,440) (7,815,440)
------------- ------------ ------------- ------------- --------------
December 31, 1996 4,380,525 $ 43,806 $ 18,435,164 $ 44,630 $ 18,523,600
============= ============ ============= ============= ==============
See notes to consolidated financial statements
F - 5
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (7,815,440) $ (1,068,540) $ 1,042,315
Adjustments to reconcile Net Income (Loss) to Net Cash used by
Operating Activities:
Depreciation and Amoritization 1,040,165 996,316 630,095
Provision for Losses on Accounts Receivable 5,330,234 1,150,181 584,206
Provision for Inventory Obsolescence 1,002,662 - 2,262,189
Deferred Income Taxes (513,000) (94,000) (188,000)
Changes in Operating Assets
Accounts Receivable (4,310,435) (12,471,550) (6,764,226)
Inventories (7,579,840) 583,931 (10,806,449)
Prepaid Expenses and Other (1,238,303) 331,273 (855,445)
. Other Assets 19,683 65,338 (139,508)
Changes in Operating Liabilities:
Accounts Payable: Affiliate 4,643,732 (3,906,290) (2,478,291)
Accounts Payable and Accrued Expenses 2,563,644 14,091,187 (1,454,677)
---------------- ------------- ----------------
.Total Adjustments 958,542 746,386 (14,253,524)
----------------- ------------- ----------------
Net Cash used by Operating Activities (6,856,898) (322,154) (13,211,209)
---------------- ------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (680,006) (859,908) (1,312,730)
--------------- ------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Revolving Credit Loan 7,649,666 965,263 15,000,000
Repayment of Capital Lease Obligations (295,686) (416,567) (224,605)
Proceeds from issuance of Common Stock - 124,625
--------------- -------------- ----------------
Net Cash provided by Financing Activities 7,353,980 548,696 (14,900,020)
--------------- -------------- ----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (182,924) (633,366) 376,081
CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR 200,989 834,355 458,274
--------------- -------------- -----------------
CASH AND CASH EQUIVALENTS: END OF YEAR $ 18,065 200,989 834,355
=============== ============== ================
See notes to consolidated financial statements
F-6
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
Liuski International, Inc., and subsidiaries (the "Company") is a
distributor of microcomputer peripherals, components, and accessories throughout
the United States and to certain foreign countries. The Company also offers its
own Magitronic brand of IBM-compatible personal computers, as well as Magitronic
private-label components and accessories. Customers of the Company are primarily
value-added resellers, systems integrators, consultants, retail stores,
governmental and corporate end users and small distributors, substantially all
of which are located in the United States and Canada. All of the Company's
products are supplied from four primary distribution centers located in, or in
the vicinity of, Norcross (an Atlanta, Georgia suburb), Los Angeles, Miami, and
Toronto. The Company reopened distribution centers in Chicago and Melville (New
York) on a limited basis to facilitate sales to customers in close proximity to
these centers. The Company has an assembly facility in Norcross, Georgia, and
performs limited assembly operations at its Toronto distribution center. The
Company also has sales offices in Chicago, Dallas and Melville (New York).
Export sales were not material in any of the three years ending December 31,
1996. During 1995, the Company relocated its headquarters to its Norcross,
Georgia facility and consolidated its distribution centers. As a result of the
relocation, the Company incurred selling, general and administrative costs of
approximately $1,189,000 relating to setting up the facility, hiring employees,
and related training and travel expenses.
(b) Management's Plans Regardoing Negative Trends
The Company has experienced net losses of $7,815,440 and $1,068,540 for the
years ended December 31, 1996 and 1995, respectively. The Company has also
experienced steady declines in its gross profit as a percentage of net sales
over the last several years. As of December 31, 1996 the Company is in violation
of two financial covenants under its credit facility. The Company's lender has
preserved all of the rights available to it as a result of the Company's default
of these financial covenants. Management plans to address these negative trends
and losses as follows:
*During March 1997, the Company reduced its work force by approximately 100
personnel or 19%. Management will continue to evaluate its staffing requirements
to manage personnel costs.
*Management intends to improve gross profit as a percentage of sales by
emphasizing higher margin products and more profitable vendor relationships and
by expanding its sales of Magitronic systems and notebooks. Additionally,
management intends to increase the utilization of vendor discount, rebate and
price protection programs.
*Management intends to reduce and monitor its selling, general and
administrative expenses by instituting strict budgetary controls.
*Management is discussing its lending relationship with its lenders with
the goal of renegotiating the financial covenants in its lending agreements.
While management believes these plans will be successfully implemented
there can be no assurance that further corrective measures, such as additional
restructuring and alternative sources of financing, will be not necessary, if
so, or can be successfully accomplished.
F - 7
(c) Principles of Consolidation
The consolidated financial statements include the accounts of Liuski
International, Inc. ("Liuski") and its wholly-owned subsidiaries (the
"Subsidiaries"). All significant intercompany balances and transactions have
been eliminated.
(d) Concentrations of Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. At times, such cash in banks are in excess of the FDIC insurance
limit. The Company's sales to any one customer did not exceed 10% of total
sales. Also, the Company attempts to minimize credit risk by reviewing all
customers' credit history before extending credit, and by monitoring customers'
credit exposure on a daily basis. The Company established an allowance for
accounts receivable based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
The Company is vulnerable to concentrations with certain suppliers of its
inventory. Approximately 20% and 17% of the Company's net sales for the years
ended December 31, 1996 and 1995, included components manufactured by two
third-party suppliers. Shortages of these products have adversely affected
operating results in the past, and the loss of these suppliers or a shortage in
a particular product supplied by either of them could have a material adverse
impact on the Company during the period the Company believes it would need to
establish alternate sources of supply at required volume levels. Approximately
22% of the Company's net sales for the year ended December 31, 1994 included
components manufactured by these suppliers.
(e) Inventories
Inventories, which consist principally of finished goods, are stated at the
lower of cost or market. Cost is determined on an average method, which
approximates the first-in, first-out method.
F - 8
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(f) Furniture, Autos, Equipment and Depreciation
Furniture, automobiles, and equipment are stated at cost. Depreciation is
computed by the straight-line method, over the estimated useful lives of the
related assets (5 to 7 years).
(g) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with maturities of three months or less to
be cash equivalents.
(h) Revenue Recognition
Sales are recognized upon shipment of products. The Company allows its
customers to return products for exchange or credit subject to certain
limitations. Provision for losses and warranty costs on such returns are accrued
at the time of sale (see Product Warranty below).
(i) Taxes on Income
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes". Under SFAS No. 109,
current income taxes are provided based upon taxes currently payable and
deferred taxes are provided to reflect the temporary difference in the tax bases
of assets and liabilities and their reported amounts in the financial
statements. A valuation allowance is recorded to reduce deferred tax assets to
an amount which is considered more likely than not to be realized.
(j) Net Income per Common and Common Equivalent Share
Per share data is calculated using the weighted average number of common
shares and dilutive common share equivalents (stock options) outstanding during
the period.
(k) Product Warranty
The Company offers one to two year warranty coverage for Magitronic system
and notebook sales. The Company accrues warranty costs for labor and parts which
are not covered by OEM warranties at the time of sale. The Company generally
offers a 30-day warranty for defective distribution products. These goods are
returned to the vendor for credit or replacement.
(l) Use of Estimates
Financial statements prepared in conformity with generally accepted
accounting principles necessitates the use of management estimates. Management
has estimated reserves for inventory obsolescence and uncollectible vendor and
accounts receivables based upon historical and developing trends, aging of
items, and other information it deems pertinent to estimate collectibility and
realizability. It is reasonably possible that these reserves will change within
a year, and the effect of the change could be material to the consolidated
financial statements.
F - 9
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(m) Financial Instruments
During the year ended December 31, 1995, the Company adopted SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments". The Company's financial
instruments consist primarily of cash equivalents and other debt. As the
interest incurred on the Company's credit facility is based on floating rates,
management believes the carrying value approximates fair value.
(n) Stock-Based Compensation
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for Stock-Based Compensation" which establishes financial accounting
and reporting standards for stock-based employee compensation plans. The Company
adopted the disclosure provisions of this statement during the year ended
December 31, 1996.
(o) Long-Lived Assets
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company adopted this statement during its year ended
December 31, 1996. This statement did not have a material impact on the
Company's consolidated financial statements.
(p) Foreign Currency Translation
Certain of the Company's subsidiaries' financial statements are denominated
in foreign currencies. Disclosures regarding translation adjustments have not
been made as the amounts are considered immaterial.
NOTE 2 - REVOLVING CREDIT LOAN
In June of 1995, the Company signed a $50,000,000 credit facility replacing
the Company's existing $25,000,000 revolving credit loan and $14,000,000 line
for floorplanning of inventory. The new facility provides for revolving
borrowings of up to $35,000,000, limited by available collateral, and
$15,000,000 for inventory floorplanning. Amounts available on the revolving
credit loan are based on a formula of up to the sum of 85% of eligible
receivables and the lesser of up to 50% (30% for Magitronic goods) of eligible
inventory or $15,000,000. Outstanding borrowings bear interest at 1/4% per annum
above the lending bank's prime rate (8.5% as of December 31, 1996) or 125 basis
points above LIBOR rates and mature in June 1998. The debt is collateralized by
a lien on all of the Company's assets. As of December 31, 1996 and 1995,
borrowings under the inventory floorplanning portion of the credit facility were
$3,871,593 and $3,572,714, respectively, and are included in trade accounts
payable. As of December 31, 1996 and 1995, the Company owed $28,614,929 and
$20,965,263, respectively, under its revolving credit loans. As of December 31,
1996, the Company had $1,641,424 available for cash borrowings under its line of
credit and $11,128,407 available for inventory purchases under the floorplanning
line.
As of December 31, 1996, the Company is in violation of two financial
covenants under its credit facility agreement. The Company's lender has
preserved all of the rights available to it as a result of the Company's default
of these financial covenants. Consequently, the balance of the revolving credit
loan is classified as a current liability at December 31, 1996. The Company is
discussing these defaults with its lender with the goal of renegotiating these
covenants. If such negotiations are successful, the amended terms will likely be
less favorable to the Company than those that now exist. There can be no
assurance that these negotiations will be successfully completed. (See Note 1)
F - 10
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
(a) The Company is obligated for rental of office and warehouse space and
certain equipment. Approximate future minimum rental payments due under these
operating leases are as follows:
Year Ending
December 31, Annual Amount
------------ -------------
1997 $1,445,000
1998 1,339,000
1999 1,221,000
2000 271,000
Total $4,276,000
Included in these amounts are commitments related to certain facilities
which are underutilized. The Company has subleased all or a portion of the
Company's facilities located in Melville and Dallas.
Rent expense for the years ended December 31, 1996, 1995, and 1994 was
approximately $1,574,000, $1,657,000, and $1,405,000, respectively.
(b) There are various claims of third parties involving allegations against
the Company incidental to the operation of its business. The liability, if any,
associated with the claims is not currently determinable. It is the opinion of
the Company that such claims are not material in relation to the Company's
consolidated financial position, results of operations, and liquidity.
NOTE 4 - EMPLOYEE BENEFIT PLANS
Effective May 1, 1992, the Company established a profit sharing plan for
eligible employees under Section 401(k) of the Internal Revenue Code. The
Company's contribution to the plan, as determined by the Board of Directors, is
50% of each employee participant's contributions up to 2% of compensation. The
contribution for any participant may not exceed the lesser of 15% of that
participant's compensation or $9,500 for 1996. The contribution and
administrative costs charged to operations amounted to $115,874, $104,286, and
$77,720 for the years ended December 31, 1996, 1995, and 1994, respectively.
F - 11
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5 - RELATED PARTY TRANSACTIONS
(a) The Company purchases inventories through two affiliated trading
companies in Taiwan which function as the Company's buying agents for personal
computer accessories and peripherals manufactured in Taiwan. The affiliated
companies are owned by members of the immediate family of the Company's
principal stockholder. Total purchases, which include buying commissions of 2%
of the cost of purchased goods, for the years ended December 31, 1996, 1995, and
1994 through affiliated companies were approximately $88,025,000, $72,190,000,
and $69,580,000, respectively.
(b) The Company sold certain products to an affiliated company which had a
chain of four retail stores. Certain stockholders and officers of the Company
owned approximately 56% of the affiliated company. Total sales to the affiliated
company for the year ended December 31, 1994 was approximately $329,000. The
affiliated company ceased operations as of April 31, 1994. As of December 31,
1996 and 1995, amounts due from the affiliated company were approximately
$118,000 and $136,000, respectively. The Company's principal stockholder has
guaranteed the entire outstanding balance.
NOTE 6 - INCOME TAXES
Components of income taxes are as follows:
Year Ended December 31,
1996 1995 1994
---- ---- ----
Current Taxes
Federal $(1,015,000) $(480,000) $735,000
State and Local (124,000) ( 91,000) 148,000
----------- --------- --------
Total Current Taxes
Payable (Refundable) (1,139,000) (571,000) 883,000
----------- --------- --------
Deferred Taxes
Federal $(430,000) $( 79,000) $(167,982)
State and Local (83,000) ( 15,000) (20,000)
----------- --------- ---------
Total Deferred Taxes (513,000) ( 94,000) (187,982)
----------- --------- ---------
Total $(1,652,000) $(665,000) $ 695,018
=========== ========= =========
F - 12
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provisions for income taxes on historical income differ from the amounts
computed by applying the applicable Federal statutory rate due to the following:
Year Ended December 31,
1996 1995 1994
---- ---- ----
Provision for Federal
Income Taxes at the
statutory rate $(3,219,000) $(589,000) $590,693
State and Local Income
taxes, net of Federal
benefit (379,000) ( 70,000) 84,325
Change in
Valuation allowance 1,600,000 ( 47,000) 20,000
Other 346,000 41,000 --
----------- --------- ---------
Total Taxes on Income $(1,652,000) $(665,000) $ 695,018
=========== ========= =========
Components of the Company's deferred income tax assets and liabilities are
as follows::
December 31,
1996 1995
---- ----
Deferred Income Tax Assets:
Reserves not currently deductible $ 1,465,000 $ 399,000
Inventory Allowances and capitalized costs 705,000 375,000
Tax credits and net foreign operating
loss carryforwards 1,340,000 322,000
---------- ----------
Total gross deferred tax assets 3,510,000 1,096,000
---------- ----------
Valuation allowance (1,922,000) (322,000)
---------- ----------
Deferred Income Tax Liabilities:
Accelerated depreciation for income
tax purposes (95,000) (103,000)
Other (393,000) ( 84,000)
---------- ----------
Total gross deferred tax liabilities (488,000) (187,000)
---------- ----------
Net deferred tax asset $1,100,000 $ 587,000
---------- ----------
A valuation allowance has been provided to reduce net deferred tax assets to
amounts which are considered more likely than not to be realized. The net
deferred tax asset is included in current assets under "Prepaid Expenses and
Other Current Assets".
F - 13
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - STOCK OPTION AGREEMENTS
In May 1991, the principal stockholder of the Company executed stock option
agreements with certain officers and key employees. Under these agreements, an
option entitles the holder to purchase a percentage of the common stock of the
Company from the principal stockholder. The option price is $5.25, representing
the fair value of a share of common stock of the Company on a combined basis at
the date of grant of the option, assuming 2,100,000 shares were outstanding.
NOTE 8 - STOCKHOLDERS' EQUITY
The Company completed a secondary public offering of 1,100,000 shares of
common stock on May 20, 1993. The net proceeds to the Company, after deducting
underwriting discounts, commissions and expenses incurred in connection with the
offering, amounted to $9,205,786. In connection with this offering, the Company
sold to certain representatives of the underwriting firms, for nominal
consideration, warrants to purchase 120,000 shares of common stock exercisable
at $11.55 for a four-year period beginning May 20, 1993. No such warrants have
been exercised.
NOTE 9 - CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital lease obligations. Future
minimum lease payments under capital lease obligations together with the present
value of the net minimum lease payments are as follows:
Year Ending December 31,
1997 $ 348,055
1998 300,588
1999 142,507
---- ----------
Total minimum lease payments 791,150
Less: amounts representing interest 89,036
----------
Present value of net minimum lease payments $ 702,114
==========
Current Obligations $ 295,686
Long-Term Obligations 406,428
----------
Total Obligations $ 702,114
==========
The current portion of capital lease obligations is included in current
liabilities under "Accrued Expenses and Other Current Liabilities".
F - 14
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year Ended December 31,
1996 1995 1994
---- ---- ----
Cash paid for interest $2,105,015 $2,152,581 $1,218,518
---------- ---------- ----------
Cash paid for income taxes $ 189,160 $ -- $1,468,500
========== =========== ==========
Non-cash transactions
---------------------
During the year ended December 31, 1994, the Company acquired fixed
assets and assumed capital lease obligations of $538,561.
NOTE 11 - STOCK OPTION PLANS
The Company's Board of Directors has adopted, and the Company's stockholders
have approved, the Company's 1991 Stock Option Plan, effective August 20, 1991
and the Company's 1994 Stock Option Plan, effective June 30, 1995 (the "Plans").
Under the Plans, options to purchase an aggregate of not more than 1,100,000
shares of common stock ($.01 par value) may be granted from time to time (at the
fair market value at the date of grant for incentive stock options and not less
than 75% of fair market value at the date of grant for non-qualified stock
options), to employees, including officers, directors, advisors and independent
consultants to the Company or to any of its subsidiaries. Options granted to
directors, officers and employees may be designated as incentive stock options.
Changes in shares under all option plans for the three years ended December
31, 1996, are:
Price Range
Shares per Share (1)
------ -------------
Options outstanding as of December 31, 1993 199,550 $ --
Granted 252,500 4.75
Exercised (17,275) 7.00 to 7.25
Canceled (86,125) --
-------
Options outstanding as of December 31, 1994 348,650 --
Granted 556,600 4.75
Exercised -- --
Canceled (114,200) --
--------
Options outstanding as of December 31, 1995 791,050 --
Granted 118,450 4.75
Exercised -- --
Canceled (201,100) --
--------
Options outstanding as of December 31, 1996 708,400 --
========
(1) All options were granted at the market value at the time of grant. Exercise
price of all options outstanding were subsequently changed to $4.75 as of
December 22, 1994.
F - 15
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average remaining contractual life of the options outstanding
as of December 31, 1996 is 3.1 years. Approximately 289,000 options were
exercisable as of December 31, 1996.
The Company has two option plans which reserve shares of common stock for
issuance to executives, key employees and directors. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost been determined based on the fair
value at the grant date for awards in 1996 and 1995 consistent with the
provisions of the Standard, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
1996 1995
Net loss - as reported ($7,815,440) ($1,068,450)
Net loss - pro forma ($8,051,156) ($1,992,825)
Earnings per share - as reported $ (1.78) $ (0.24)
Earnings per share - pro forma $ (1.84) $ (0.45)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-averaged
assumptions used for grants in 1996 and 1995, respectively: expected volatility
of 50% and 40%; risk-free interest rate of 6.39% and a range of 5.76% to 7.60%;
and expected lives of 4 years.
F - 16
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE
Page No.
--------
Report of Independent Certified Public Accountants on Financial
Statements Schedule S - 2
Schedule II - Valuation and Qualifying Accounts S - 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENTS SCHEDULE
Board of Directors and Shareholders of
Liuski International, Inc.
Norcross, Georgia
The audits referred to in our report dated March 21, 1997 relating to the
consolidated financial statements of Liuski International, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the audit
of the accompanying Schedule of Valuation and Qualifying Accounts. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Atlanta, Georgia
March 21, 1997
S - 2
LIUSKI INTERNATIONAL, INC., AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
|------------ Additions ------------|
Balance at Charged to Charged to Balance at
Beginning Costs and Other the end of
Description of Period Expenses Accounts Deductions (1) Period
- - ----------- --------- -------- -------- -------------- ------
For the year ended December 31, 1996:
Allowance for Doubtful Accounts $1,050,000 $5,330,234 $ -- $ 3,172,234 $3,208,000
========== ========== =========== =========== ==========
Allowance for Inventory Obsolescence $ 597,338 $1,002,662 $ -- $ -- $1,600,000
========== ========== =========== =========== ==========
For the year ended December 31, 1995:
Allowance for Doubtful Accounts $ 746,663 $1,150,181 $ -- $ 846,844 $1,050,000
========== ========== =========== =========== ==========
Allowance for Inventory Obsolescence $ 597,338 $ -- $ -- $ -- $ 597,338
========== ========== =========== =========== ==========
For the year ended December 31, 1994:
Allowance for Doubtful Accounts $ 646,663 $ 584,206 $ -- $ 484,206 $ 746,663
========== ========== =========== =========== ==========
Allowance for Inventory Obsolescence $ 547,338 $ 2,312,189 $ -- $ 2,262,189 $ 597,338
========== =========== =========== =========== ==========
(1) Doubtful accounts are written off against accounts receivable.
S - 3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28, 1997
LIUSKI INTERNATIONAL, INC.
By: /s/
------------------------------------
Hsing Yen Liu
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Chairman of the Board of Directors, March 28, 1997
- - ---------------- Chief Executive Officer and Director
Hsing Yen Liu (Principal Executive Officer)
/s/ President, Chief Operating Officer March 28, 1997
- - ----------------- and Director
Manuel C. Tan
/s/ Acting Chief Financial Officer March 28, 1997
- - ----------------- (Principal Financial Officer)
Edward A. Williams
/s/ Director March 28, 1997
- - -----------------
Paul J. Konigsberg
/s/ Director March 28, 1997
- - -----------------
Edwin J. Feinberg
- - ---------------- Director March 28, 1997
Kenny Liu
- - ---------------- Director March 28, 1997
Eric Bashford
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
2 Form of Exchange of Shares Agreement, dated July, 1991,
between Registrant and Hsing Yen Liu, Hsin-Wan Peng,
Shing-Gyy Liu Hu, Ting Yuan Tsai, Manuel C. Tan, Ruey-Yi
Lee, Jin-Yao Shen, Shin Li Shen Liu, Peng-Ching Kao, and
Hsiu-Yuan Yen Lin (collectively the "Stockholders")**
3(a) Certificate of Incorporation**
3(b) By-Laws**
10(a) Intentionally Omitted.
10(b) Intentionally Omitted.
10(c) Intentionally Omitted.
10(d) Intentionally Omitted.
10(e) Intentionally Omitted
10(f) Intentionally Omitted.
10(g) Intentionally Omitted.
1(h) Lease, dated April 12, 1990, and Amendment dated March 3,
1990, between Reckson Associates and Liuski International
Inc., a New York corporation, of the premises at 10 Hub
Drive, Melville, New York,** and lease dated March 3, 1989
between the same parties,***** and amendment thereto dated
February 25, 1995.*******
10(i) Lease, dated August 28, 1989, between Copley - Industry -
Gale Associates and Liuski International California, Inc.,
of the premises at 18535 East Gale Avenue, Los Angeles,
California,** and amendments thereto dated August 29,
1989**** and September 28, 1993.******
10(j) Warehouse Lease, dated June 22, 1994, between New World
Parmers Joint Venture Number Three and Liuski International
Miami, Inc., of the premises at Beacon Centre, 8501 N.W.
17th Street, Miami, FL 33126 and amendment thereto dated
June 22, 1994.*******
10(k) 1994 Stock Option Plan.********
10(1) 1991 Stock Option Plan. **
10(m) Form of Escrow Agreement, dated July 1991, between
Registrant and the Stockholders. **
10(n) Business Credit and Security Agreement, dated June 23, 1995,
between Registrant and its wholly-owned subsidiaries, and
Deutsche Financial Service.*********
10(o) Intentionally Omitted
10(p) Agreement, dated January 1, 1991, between Registrant and
Liuski International Inc., a Taiwanese corporation,** and
December 31, 1991 amended and Restated Agreement.*****
10(q) Agreement, dated January 1, 1991, between Registrant and
Marie-Claude Co., Ltd., a Taiwanese corporation,** and
December 31, 1991 Amended and Restated Agreement. *****
10(r) Distributor Agreement, dated August 9, 1989, between
Registrant and Samsung Information Systems America, Inc.**
10(s) Distributor Agreement, dated January 1, 1990, between
Registrant and Seagate Technology, Inc.**
10(t) Form of License Agreement, dated October 1, 1994, between
Liuski International, Inc., and Microsoft Corporation,** and
Amendment Nos. 1, 2, and 3 thereto executed February 8,
1995, May 25, 1995 and August 8, 1995, respectively
********** and form of amendments Nos. 4, 5, 6 and 7 thereto
executed January 1, 1996, April 1, 1996, July 1, 1996 and
September 1, 1996, respectively.*
10(u) Intentionally Omitted
10(v) Lease, dated October 1, 1991, between Trammell Crow Company
No. 91 and Liuski International, Texas, Inc. of the premises
at 2009 McKenzie Road, Suite 102, Carrollton, Texas, * * *
and amendment thereto executed March 10, 1993 * * * * * and
April 25, 1995.**********
10(w) Form of Employee Stock Option Agreement. * * *
10(x) Intentionally Omitted
10(y) Lease, dated October 17, 1994, between Rockdale Industries,
Inc. and Liuski International, Inc. of the Premises at 6585
Crescent Drive, Norcross, GA.*******
10(z) Intentionally Omitted
10(aa) Intentionally Omitted
10(bb) Intentionally Omitted
10(cc) Intentionally Omitted
10(dd) Lease, dated August, 1994, between Industrial Developments
International, Inc. and Liuski International, Inc. of the
premises located at 80 International Blvd., Glendale
Heights, IL.*******
10(ee) Form of Sublease, dated August 1996, between Liuski
International, Inc. and E & F Warehousing Corp. of 16,650
sq. ft. of the Premises at 10 Hub Drive, Melville, NY.*
10(ff) Form of Sublease, dated January 8, 1996, between Liuski
International, Inc. and General Instrument Corporation of
Delaware of the Premises at 2009 McKenzie Road, Suite 102,
Carrollton, TX.*
10(gg) Form of Lease, dated April 19, 1996 between Rolex
Developments Limited and Liuski International, Toronto, Inc.
of the premises at 1229 Lorimar Drive, Mississauqa, Ontario,
Canada.*
21 List of Subsidiaries.*******
23 Consent of BDO Seidman, LLP*
27 Financial Data Schedule*
Unless otherwise indicated, documents incorporated by
reference refers to the identical exhibit number in the
document from which it is being incorporated by reference.
* Filed herewith.
** Incorporated by reference to the Registrant's registration
statement on Form S-1 (Commission File No. 3341297),
effective August 13, 1991 (including all pre-effective
amendments to the Registration Statement).
*** Incorporated by reference to registrant's form 10-K Annual
Report for the fiscal year ended December 31, 1991
(Commission File No. 0-19378)
**** Incorporated by reference to registrant's form 10-K Annual
Report for the fiscal year ended December 31, 1992.
***** Incorporated reference to the Registrant's registration
statement on Form S-1 (Commission File No. 33-61368).
****** Effective May 21, 1993 (including all pre-effective
amendments to the Registration Statement. Incorporated by
reference to registrant's form 10-K Annual Report for the
fiscal year ended December 31, 1993.
******* Incorporated by reference to registrant's form 10-K Annual
Report for the fiscal year ended December 31, 1994.
******** Incorporated by reference to registrant's Proxy Statement
with respect to its 1995 annual meeting.
********* Incorporated by reference to registrant's form 10-Q
Quarterly Report for the quarter ended June 30, 1995.
********** Incorporated by reference to registrant's form 10-K Annual
Report for the fiscal year ended December 31, 1995.