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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, 1997
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 ___
As of March 31, 1997, the Registrant had 4,380,525 shares of Common Stock, $.01
par value per share outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Financial Statements:
Balance sheets as of March 31, 1997 (unaudited)
and December 31, 1996................................................ 3
Statements of income for the three months
ended March 31, 1997 and March 31, 1996 (unaudited)................ 4
Statements of cash flows for the three months ended March 31, 1997
and March 31, 1996 (unaudited)..................................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 7
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<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
ASSETS (unaudited)
------
<S> <C> <C>
CURRENT:
Cash and cash equivalents $ 613,660 $ 18,065
Accounts receivable, net of allowance for
doubtful accounts of $3,484,823 in 1997
and $3,208,000 in 1996 38,991,511 31,994,144
Inventories 39,558,022 49,872,618
Prepaid expenses and other current assets 1,327,084 5,592,192
------------ ------------
TOTAL CURRENT ASSETS 80,490,277 87,477,019
FURNITURE, AUTOS AND EQUIPMENT, at cost,
less accumulated depreciation and amortization
of $3,689,876 in 1997 and $3,425,870 in 1996 2,773,368 2,741,814
OTHER ASSETS 263,503 235,145
------------ ------------
$ 83,527,148 $ 90,453,978
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT:
Accounts payable - affiliate $ 12,549,490 $ 13,889,474
Accounts payable - trade 30,940,185 26,209,403
Revolving Credit Loan 21,164,810 28,614,929
Accrued expenses and other 1,313,014 2,810,144
------------ ------------
TOTAL CURRENT LIABILITIES 65,967,499 71,523,950
CAPITAL LEASE OBLIGATIONS 622,396 406,428
------------ ------------
TOTAL LIABILITIES 66,589,895 71,930,378
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
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 issued and outstanding 43,806 43,806
Additional paid-in capital 18,435,164 18,435,164
Retained earnings (1,541,717) 44,630
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,937,253 18,523,600
------------ ------------
$ 83,527,148 $ 90,453,978
============ ============
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended
March 31,
1997 1996
--------------- ---------------
NET SALES $ 94,935,778 $ 98,627,335
COST OF SALES 89,127,491 90,750,338
------------ ------------
GROSS PROFIT 5,808,287 7,876,997
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,131,274 6,562,569
------------ ------------
INCOME/ (LOSS) FROM OPERATIONS (1,322,987) 1,314,428
OTHER CHARGES, net 663,360 492,945
------------ ------------
INCOME/ (LOSS) BEFORE INCOME TAXES (1,986,347) 821,483
INCOME TAXES (400,000) 312,000
------------ ------------
NET INCOME/ (LOSS) $ (1,586,347) $ 509,483
============ ============
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary and fully diluted $ (0.36) $ 0.12
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Primary and fully diluted 4,380,525 4,380,525
============ ============
See notes to condensed consolidated financial statements
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<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (1,586,347) $ 509,483
------------ ------------
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 264,424 245,262
Provision for losses on accounts receivable 276,823 200,000
Changes in operating assets:
Accounts receivable (7,274,190) (3,775,263)
Inventories 10,314,596 1,262,291
Prepaids and other 4,265,108 74,363
Other assets (28,358) (2,283)
Changes in operating liabilities:
Accounts payable - affiliate (1,339,984) 4,469,654
Accounts payable and accrued expenses 3,233,652 (4,902,001)
------------ ------------
Total adjustments 9,712,071 (2,427,977)
------------ ------------
Net cash used by operating activities 8,125,724 (1,918,494)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (295,978) (143,297)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit loan (7,450,119) 2,566,157
Repayment of capital lease obligations 215,968 (93,699)
------------ ------------
Net cash provided by financing activities (7,234,151) 2,472,458
------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 595,595 410,667
CASH AND CASH EQUIVALENTS - beginning 18,065 200,989
------------ ------------
CASH AND CASH EQUIVALENTS - end $ 613,660 $ 611,656
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 682,593 $ 552,502
Income taxes $ 0 $ 0
</TABLE>
See notes to condensed consolidated financial statements
-5-
<PAGE>
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,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. 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, 1996, which are incorporated by
reference herein.
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 the 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 the
eligible inventory or $15,000,000. Under the loan agreement, in the absence of
default, outstanding borrowings bear interest at 1/4% per annum above the
lending banks prime rate 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 March 31, 1997, the Company owed $21,164,810 under its revolving credit
loans.
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 March 31, 1997. As a consequence of
this default, commencing on April 14, 1997, the interest rate paid by the
Company under its revolving credit loan has been 2 1/4% over the prime rate and
the LIBOR rates are no longer available. 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 then these that now exist. There can be no assurance that these
negotiations will be successfully completed.
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<PAGE>
Note 3. Contingencies
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 is 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.
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, 1997 and 1996
Net Sales: Net sales for the three months ended March 31, 1997 were
$94,935,778 representing a decrease of $3,691,557 (3.7%) from $98,627,335 for
the three months ended March 31, 1996. Sales from the distribution centers in
the following regions changed as follows: Southeast region, 7.1%; Northeast
region (including Canadian distribution center), -8.8%; Mid- and Southwest
region, -4.6% and Western region, -21.2%. Sales other than Magitronic personal
computers and notebooks for the three months ended March 31, 1997 were
$78,424,778, representing an increase of $2,465,416 (3.2%) from $75,959,362 for
the three months ended March 31, 1996.
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<PAGE>
Sales of the Company's Magitronic brand of personal computers and notebook
computers for the three months ended March 31, 1997 decreased to $16,511,000
(17.4% of net sales) from $22,667,973 (23.0% of net sales) for the three months
ended March 31, 1996. This decrease is attributable to lower sales of notebook
computers, which represented a decrease of $5,550,000 from the previous year.
The Company believes the lower sales of notebook computers was related to
intense price competition from name-brand notebook manufacturers. Included in
Magitronic personal computers are private-label and brand-name components that
the Company also sells separately in its distribution business. In addition, the
company also sells components separately under the Magitronic name.
While the Company distributes products from more than 70 U.S. 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 year.
Gross Profit: Gross profit decreased by $2,068,710 to $5,808,287 (6.2% of
net sales) for the three months ended March 31, 1997 from $7,876,997 (8.0% of
net sales) for the three months ended March 31, 1996. The lower gross margin was
primarily due to the reduced sales of the Company's Magitronic notebook
computers which generally have higher margins. 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: For the three months ended
March 31, 1997, selling, general and administrative expenses increased by
$568,705 to $7,131,274 (7.5% of net sales) from $6,562,569 (6.7% of net sales)
for the three months ended March 31, 1996. The increase is primarily due to an
advertising and promotional campaign during the three months ended March 31,
1997 which amounted to $560,835. Salaries, employment taxes and employee
benefits for the three months ended March 31, 1997 decreased to $3,925,465 from
$4,217,000 for the three months ended March 31, 1996, partially due to the 19%
reduction of staff in mid-March 1997.
Other Charges: Net interest expense increased to $682,593 for the three
months ended March 31, 1997 from $492,945 for the first quarter of 1996 as a
result of increases in interest costs due to the Company's related increased
borrowings. During the first quarter of 1997, the interest rate paid by the
Company under its revolving credit loan was 1/4% over the prime rate or 125
basis points over LIBOR. Commencing on April 14, 1997, the interest rate paid by
the Company under its revolving credit loan has been 2 1/4% over the prime rate
and no LIBOR rates will be available.
Net Income (Loss): Net income decreased by $2,095,830 to a loss of
$1,586,347 (1.7% of net sales) for the three months ended March 31, 1997 from
$509,483 (.5% of net sales) for the three months ended March 31, 1996.
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<PAGE>
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. In the
three months ended March 31, 1997 and March 31, 1996, net cash used by operating
activities was $8,125,724 and $1,918,494, respectively. The change in net cash
flow from operating activities between the three months ended March 31, 1997 and
March 31, 1996 in the amount of $10,044,218 was primarily due to growth in
accounts receivable which was partially offset by reduced inventories. 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 three month periods ended March 31, 1997 and March 31, 1996,
the Company generally paid its suppliers approximately 35-45 days from the date
of invoice. Terms vary from one day to 60 days.
Working capital was $14,522,778 as of March 31, 1997 and $15,953,069 as of
December 31, 1996. On June 23, 1995, the Company signed a new three year
$50,000,000 credit facility replacing its 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. Under the loan
agreement, in the absence of default, 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. At March 31,
1997 and December 31, 1996, the Company owed $21,164,810 and $28,614,929,
respectively, under its revolving credit loans. The Company was obligated under
letters of credit in the amount of $742,800 on March 31, 1996 and had no such
obligations outstanding as of December 31, 1996. As of March 31, 1997 and
December 31, 1996, the Company had $1,567,461 and $1,641,424 available for cash
borrowings under its revolving credit loan and $13,432,539 and $11,128,407
available for the floorplanning of inventory purchases, respectively.
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 March 31, 1997. As a consequence of
this default, commencing on April 14, 1997, the interest rate paid by the
Company under its revolving credit loan has been 2 1/4% over the prime rate and
the LIBOR rates are no longer available. 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 then these that now exist. There can be no assurance that these
negotiations will be successfully completed.
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<PAGE>
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 an
average every 46 days during the first three months of 1997 and every 43 days
during first three months of 1996. 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. 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.
Accounts Receivable: The Company primarily sells its products on a cash,
C.O.D. or terms of up to 30 days basis. The Company's average days' receivable
was approximately 37 days for the three month period ended March 31, 1997 and
approximately 33 days for the three month period ended March 31, 1996. This
increase in the average days sales receivable results from the Company extending
credit to more of its customers.
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 accounts
receivable based upon historical and developing trends, aging of items, and
other information it deems pertinent to estimate collectibility and
realizability. It is 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.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Form 10-Q 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," and "expect," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the specific risk factors
described in the Company's Form 10-K for the year ended December 31, 1996.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, believed, estimated or expected. The Company does not intend
to update these forward-looking statements and information.
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.
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<PAGE>
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.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (i) Exhibit 11 (statement concerning computation of per share earnings)
and exhibit 15 (letter concerning unaudited interim financial information) are
each hereby incorporated by reference from "Notes to Condensed Consolidated
Financial Statements" of Part I - Financial Information, Item 1 - Financial
Statements, contained in this Form 10-Q.
(ii) Exhibit 27 (financial data schedule for the first quarter of 1997)
(b) No reports on Form 8-K were filed by the Registrant during the
period ended March 31, 1997.
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<PAGE>
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 20, 1997
LIUSKI INTERNATIONAL, INC.
By: /s/ Edward A. Williams
----------------------
Edward A. Williams
Chief Financial Officer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 614
<SECURITIES> 0
<RECEIVABLES> 38,992
<ALLOWANCES> 2,770
<INVENTORY> 39,558
<CURRENT-ASSETS> 80,490
<PP&E> 2,773
<DEPRECIATION> 3,690
<TOTAL-ASSETS> 83,527
<CURRENT-LIABILITIES> 65,967
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 16,893
<TOTAL-LIABILITY-AND-EQUITY> 83,527
<SALES> 94,936
<TOTAL-REVENUES> 94,936
<CGS> 89,127
<TOTAL-COSTS> 89,127
<OTHER-EXPENSES> 7,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663
<INCOME-PRETAX> (1,986)
<INCOME-TAX> (400)
<INCOME-CONTINUING> (1,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,586)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
