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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
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
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
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As of March 31, 1998, the Registrant had 11,525,958 shares of Common Stock, $.0l
par value per share outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements:
Balance sheets as of March 31, 1998 (unaudited)
and December 31, 1997.................................................3
Statements of loss for the three months
ended March 31, 1998 and March 31, 1997 (unaudited)...................4
Statements of cash flows for the three months ended March 31, 1998
and March 31, 1997 (unaudited)........................................5
Notes to Condensed Consolidated Financial Statements..................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................7
2
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
---------------------- --------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,546,288 $ 2,092,405
Accounts receivable, net of allowance for
Doubtful accounts of $2,326,000 and $1,781,000 22,369,410 20,284,367
Inventories, net of allowance for obsolescence of
$1,330,000 and $1,308,000 22,776,646 29,868,561
Prepaid expenses and other current assets 2,136,952 2,067,150
----------------- --------------
49,829,296 54,312,483
Furniture, Autos and Equipment, at cost
Less accumulated depreciation and amortization
of $3,164,912 and $2,911,844 2,151,217 2,367,120
Other assets 263,274 263,220
----------------- ---------------
$ 52,243,787 $ 56,942,823
================= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 17,241,428 $ 20,053,398
Revolving credit loan 17,067,443 18,424,730
Accrued expenses and other 904,359 1,126,757
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35,213,230 39,604,885
Capital lease obligations 61,720 124,113
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Total liabilities 35,274,950 39,728,998
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Commitments and Contingencies
Stockholders' equity:
Preferred stock; convertible, non-voting,
non-dividend-bearing, $.01 par value - 1,000,000 shares
authorized,
0 and 100 shares issued and outstanding - 6,996,507
Common stock; $.01 par value - 20,000,000 shares and
7,000,000 shares authorized; 11,525,958 and 6,195,287
issued and outstanding 115,260 61,953
Additional paid-in capital 27,742,093 20,798,893
Accumulated deficit (10,888,516) (10,643,528)
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Total stockholders' equity 16,968,837 17,213,825
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$ 52,243,787 $ 56,942,823
============== ==============
See accompanying notes to condensed consolidated financial statements
3
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
Three months ended
March 31,
---------------------------
1998 1997
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Net sales $ 57,585,018 $ 92,935,778
Cost of sales 52,751,236 88,627,491
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Gross profit 4,833,782 4,308,287
Selling, general and administrative expenses 4,752,181 7,131,274
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Income (loss) from operations 81,601 (2,822,987)
Other charges, net (interest expense of
$408,716 and $682,593) 326,588 663,360
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Loss before income taxes (244,987) (3,486,347)
Income taxes - (400,000)
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Net loss $ (244,987) $ (3,086,347)
=============== ===============
Basic and diluted loss per common share $ (0.02) $ (0.70)
=============== ===============
Weighted average number of basic and diluted
common shares outstanding 10,874,432 4,380,525
=============== ===============
See accompanying notes to condensed consolidated financial statements
4
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
---------------------------
1998 1997
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Cash Flows from Operating Activities:
Net loss $(244,987) $(3,086,347)
---------- ------------
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 251,286 264,424
Provision for losses on accounts receivable 613,110 276,823
Provision for losses on inventory 22,000 -
Changes in operating assets and liabilities:
Accounts receivable (2,698,153) (5,274,190)
Inventories 7,069,915 9,814,596
Prepaid expenses and other (69,802) 4,265,108
Other assets (54) (28,358)
Accounts payable and accrued expenses (3,034,368) 1,893,668
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Total adjustments 2,153,934 11,212,071
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Net cash provided by operating activities 1,908,947 8,125,724
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Cash Flows from Investing Activities:
Capital expenditures (35,384) (295,978)
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Cash Flows from Financing Activities:
Net repayments on revolving credit loan (1,357,287) (7,450,119)
Repayment of capital lease obligations (62,393) 215,968
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Net cash used by financing activities (1,419,680) (7,234,151)
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Net increase in cash and cash equivalents 453,883 595,595
Cash and cash equivalents,
beginning of period 2,092,405 18,065
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Cash and cash equivalents, end of period $ 2,546,288 $ 613,660
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 408,716 $ 682,593
Income taxes $ 0 $ 0
See accompanying notes to condensed consolidated financial statements
5
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information refer to
the consolidated financial statements and footnotes thereto in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, which are
incorporated by reference herein.
Note 2. Revolving Credit Loan
On June 23, 1995, the Company obtained a three-year $50,000,000 credit
facility. The original terms of the facility provided for revolving cash
borrowings of up to $35,000,000, limited by available collateral, and
$15,000,000 for inventory floor planning, with interest at 125 basis points over
LIBOR or 25 basis points over the prime rate. Amendments to the facility due to
the Company's default of certain financial covenants consisted of an increase in
the interest rate to 225 basis points over the prime rate with no LIBOR option.
During December 1997, in recognition of the Company's improved capital position
and positive steps to address recurring losses, the borrowing rate was reduced
to 150 basis points over the prime rate (8.5% as of March 31, 1998). The lender
has reserved the right to reverse this rate reduction upon notice to the
Company. An additional amendment to the facility has been made decreasing the
credit facility to $35,000,000. This amendment provides $17,000,000 for
revolving cash borrowings, limited by available collateral, and $18,000,000 for
inventory floor planning, with flexibility between the revolving and floor
planning, not to exceed the total facility of $35,000,000. The debt is
collateralized by a lien on all of the Company's assets. As of March 31, 1998,
the Company owed $17,067,443 under its revolving credit loan. During December
1997, the Company's principal shareholder became a guarantor of this credit
facility.
Since December 31, 1996, the Company has been in violation of certain
financial covenants under its credit facility agreement. The Company's lender
has reserved all of the rights available to it as a result of the Company's
default of these financial covenants. Management is discussing these defaults
with its lender with the goal of renegotiating the covenants and securing the
credit facility. Management believes it will be successful in these negotiations
based upon the Company's progress achieved under the direction of its new
Chairman and Chief Executive Officer; however, there can be no assurance that
these negotiations will be successfully completed. If these negotiations are
unsuccessful, management believes sufficient alternative sources of financing
exist, some of which may be at higher interest rates. The Company's strategic
plans with regard to the line of credit include the pursuit of a lending
joint-venture between the Company's current lender and a bank located in the Far
East in order to obtain more favorable financing terms.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
Three months ended March 31, 1998 and 1997
Net Sales: Net sales for the three months ended March 31, 1998 were
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$57,585,018 representing a decrease of $35,350,760 (38.0%) from $92,935,778 for
the three months ended March 31, 1997. Sales from the distribution centers in
the following regions changed as follows: Southeast region, -36.18%; Northeast
region (including Canadian distribution center), -39.01%; Mid- and Southwest
region, -43.99%; and Western region, -38.73%. Sales other than Magitronic
personal computers and notebooks for the three months ended March 31, 1998 were
$41,848,550, representing a decrease of $36,076,228 (42.3%) from $77,924,778 for
the three months ended March 31, 1997. Under the leadership of the Company's new
Chairman of the Board and Chief Executive Officer, who assumed these roles
midway through 1997, the Company's sales approach has increased the emphasis on
higher profit margin items to creditworthy customers.
This change in philosophy has contributed to the net decrease in sales.
Sales of the Company's Magitronic brand of personal computers and
notebook computers for the three months ended March 31, 1998, increased to
$15,736,468 (27.3% of net sales) from $15,011,000 (16.2% of net sales) for the
three months ended March 31, 1997. The increase in Magitronic sales was due
primarily to the Company's improved working capital position which has allowed
the Company to maintain sufficient levels of inventory. Shortages of working
capital during the first quarter of 1997 contributed to lower sales of notebook
computers. Additionally, the turnover of Magitronic Product management which
negatively affected the Company during 1997 has stabilized and has contributed
to the increase in Magitronic sales.
While the Company distributes products from more than 70 U.S. and
foreign suppliers, the loss of major suppliers or a shortage in a particular
product could have a material adverse impact on the Company during the
relatively brief period the Company believes it would need to establish
alternate sources of supply at required volume levels. 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 increased by $525,495 to $4,833,782 (8.4% of
------------
net sales) for the three months ended March 31, 1998, from $4,308,287 (4.6% of
net sales) for the three months ended March 31, 1997. The higher gross margin
was primarily due to lower costs associated with direct purchases from foreign
vendors and the Company's focus on selling higher profit items as well as
improved utilization of information systems to better manage operations.
Additionally, margins for the three months ended March 31, 1997 were negatively
affected by the sale of certain slower moving goods at discounted prices to
improve the quality of goods on hand. Margins during the first quarter of 1998
also improved due to greater utilization of vendor programs such as rebates,
returns and price protection, which programs were available due to the greater
financial stability of vendors used by the Company.
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Selling, General and Administrative Expenses: For the three months
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ended March 31, 1998, selling, general and administrative expenses decreased by
$2,379,093 to $4,752,181 (8.3% of net sales) from $7,131,274 (7.7% of net sales)
for the three months ended March 31, 1997. The percentage increase from 7.7% to
8.3% is primarily due to lower sales. The dollar decrease is primarily due to
the Company's reduction in the number of employees and, to a lesser extent,
increased vendor support for the Company's advertising and promotional expenses.
Salaries, employment taxes and employee benefits for the three months ended
March 31, 1998 decreased to $2,398,141 from $3,925,465 for the three months
ended March 31, 1997. These decreases were partially offset by an increase in
bad debt expense to $613,110 (1.1% of net sales) for the three months ended
March 31, 1998, from $467,801 (0.5% of net sales) for the three months ended
March 31, 1997, due to a bankruptcy filed by a long-standing major customer
during March 1998.
Other Charges: Net interest expense decreased to $408,716 for the three
-------------
months ended March 31, 1998, from $682,593 for the first three months in 1997 as
a result of decreased borrowings. Additionally, during the first quarter of
1998, the interest rate was at the reduced rate of 150 basis points over the
prime rate.
Net Loss: Net loss decreased by $2,841,360 to a loss of $244,987 (0.4%
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of net sales) for the three months ended March 31, 1998, from a net loss of
$3,086,347 (3.3 % of net sales) for the three months ended March 31, 1997. The
decrease in net loss was primarily affected by the increase in gross margin and
the Company's continued monitoring and management of operating expenses.
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 any of
its customers and, accordingly, could, if necessary, and depending on
competitive factors, pass along price changes to its customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through borrowings under its
revolving credit loan, equity capital and credit terms from its major suppliers.
For the three months ended March 31, 1998, net cash provided by operating
activities was $1,908,947 and for the three months ended March 31, 1997 net cash
provided by operating activities was $8,125,724. The change in net cash flow
from operating activities between the three months ended March 31, 1998 and
March 31, 1997, in the amount of $6,216,777, was primarily due to a reduction in
accounts payable. The Company may experience shifts in cash flow in the future,
particularly if its suppliers provide more restrictive credit terms than the
Company is currently afforded. For the three months ended March 31, 1998, and
March 31, 1997, the Company generally paid its suppliers approximately 35 to 45
days from date of invoice. Terms vary from one day to 60 days.
8
Working capital was $14,616,066 as of March 31, 1998 and $14,707,598 as
of December 31, 1997. On June 23, 1995, the Company obtained a three-year
$50,000,000 credit facility. The original terms of the facility provided for
revolving cash borrowings of up to $35,000,000, limited by available collateral,
and $15,000,000 for inventory floor planning, with interest at 125 basis points
over LIBOR or 25 basis points over the prime rate. Amendments to the facility
due to the Company's default of certain financial covenants consisted of an
increase in the interest rate to 225 basis points over the prime rate with no
LIBOR option. During December 1997, in recognition of the Company's improved
capital position and positive steps to address recurring losses, the borrowing
rate was reduced to 150 basis points over the prime rate (8.5% as of March 31,
1998). The lender has reserved the right to reverse this rate reduction upon
notice to the Company. An additional amendment to the facility has been made
decreasing the credit facility to $35,000,000. This amendment provides
$17,000,000 for revolving cash borrowings, limited by available collateral, and
$18,000,000 for inventory floor planning, with flexibility between the revolving
and floor planning, not to exceed the total facility of $35,000,000. The debt is
collateralized by a lien on all of the Company's assets. At March 31, 1998, and
December 31, 1997, the Company owed $17,067,443 and $18,424,730, respectively,
under its revolving credit loans. As of March 31, 1998 and December 31, 1997,
the Company had $3,482,253 and $7,359,025 combined available for cash borrowing
under its revolving credit loan and for the floor planning of inventory
purchases, respectively. During December 1997, the Company's principal
shareholder became a guarantor of this credit facility.
Since December 31, 1996, the Company has been in violation of certain
financial covenants under its credit facility agreement. The Company's lender
has reserved all of the rights available to it as a result of the Company's
default of these financial covenants. Management is discussing these defaults
with its lender with the goal of renegotiating the covenants and securing the
credit facility. Management believes it will be successful in these negotiations
based upon the Company's progress achieved under the direction of its new
Chairman and Chief Executive Officer; however, there can be no assurance that
these negotiations will be successfully completed. If these negotiations are
unsuccessful, management believes sufficient alternative sources of financing
exist, some of which may be at higher interest rates. The Company's strategic
plans with regard to the line of credit include the pursuit of a lending
joint-venture between the Company's current lender and a bank located in the Far
East in order to obtain more favorable financing terms.
ASSET MANAGEMENT
Inventory: Management attempts to maximize product availability and
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delivery while minimizing inventory levels so as 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 an
average every 45 days during the first three months of 1998 and every 46 days
during the first three months of 1997. The Company takes a physical inventory
monthly, which is then compared to its perpetual inventory, and monitors
inventory levels daily according to sales made by product and distribution
center.
Most of the Company'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.
Accounts Receivable: The Company primarily sells its products on the
--------------------
basis of cash, C.O.D., or on terms of up to 30 days. The Company's average days'
receivable was approximately 33 days for the three month period ended March 31
1998, and approximately 37 days for the three month period ended March 31, 1997.
This decrease in the average days sales receivable results from the Company
tightening credit to more of its customers.
9
MANAGEMENT ESTIMATES
Financial statements prepared in conformity with generally accepted
accounting principles necessitate the use of management estimates. Management
has estimated reserves for inventory obsolescence and uncollectible accounts
receivable 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 Company's
consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which supersedes SFAS No. 14, "Financial Reporting of Segments of a Business
Enterprise." SFAS No. 131 establishes financial and reporting standards for the
reporting of public companies of information about operating segments in annual
financial statements and for the first time, requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources in assessing performance.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires the restatement of comparative
information for earlier periods. Disclosure for interim financial statements is
not required until the first quarter of fiscal 1999. Management has been
evaluating the impact the new statement will have on future financial statement
disclosures and has determined that the impact will not be significant.
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", "intend", "expect" and, depending on the
context, "will", 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 results to differ materially
are the following: business conditions , rapid or unexpected technological
changes, product development, inventory risks due to shift in product demand,
competition, domestic and foreign government regulations, fluctuations in
foreign exchange rates, rising costs for components or unavailability of
components, the timing or orders booked, lender relationships, and the risk
factors listed from time to time in the Company's reports filed with the
Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
None.
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 (financial data schedule for the first three months of
1998)
(b) No reports on Form 8-K were filed by the Registrant during the
period ended March 31, 1998.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 7, 1998
LUISKI INTERNATIONAL, INC.
By: /s/
-------------------------------------
Ting Y. Tsai
Chief Financial Officer
12