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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, 1997
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
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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. [ ]
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 4, 1998, was approximately $1,851,000.
As of March 4, 1998, the registrant had 11,525,958 shares of Common Stock, $.01
par value per share outstanding.
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<PAGE>
PART I
ITEM 1. BUSINESS
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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 50 U.S. manufacturers,
including such nationally recognized names as Toshiba America Information
Systems, Inc. ("Toshiba"), NEC Technologies, Inc. ("NEC"), Samsung Information
Systems America, Inc. ("Samsung"), Western Digital Corporation, Iomega, ALPS,
and Creative Labs. 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. (See "Strategy,"
below, for current developments.)
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, with
Norcross serving as the primary distribution hub; the Company continues to
maintain sales offices in Chicago, Melville and Dallas.
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 eight
active subsidiaries which operate its business. The names of these eight
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.; and Liuski International Toronto, Inc.
Strategy
Management plans to address the Company's recurring losses from operations
and return the Company to profitability by (i) increasing sales through its
current distribution system while focusing on profitable items and decreasing
the number of vendors; (ii) improving its credit and collection operations;
(iii) increasing purchasing efficiency by combining its domestic and foreign
purchasing departments; (iv) continuing to monitor employee salaries; (v)
targeting new markets where customers are receptive to the price/performance
advantages of Magitronic products, including government and foreign markets, and
marketing on the Company's internet web site; and (vi) decentralizing its
management and providing profit sharing incentives to each distribution center.
The Company's objective is to grow its business of distributing
microcomputer peripherals, components and accessories in North and South America
while focusing on the profitability and collectibility of each sale and grow its
business of assembling its own Magitronic personal computers and notebooks and
its line of private-label products. The Company believes that the ability to act
quickly and appropriately in response to short and long-term trends in the
microcomputer marketplace is critical to success in this very dynamic industry
characterized by short product life cycles and continuous pricing pressures.
Management will continue to focus on operating efficiencies including cost
controls and improvement in product management systems, which will be critical
to the Company's future.
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 emphasizes its "build
to order" and "assemble to configuration" advantages of distributing Magitronic
products in new markets.
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Product Lines. The Company distributes over 1,800 products made by over 50
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.
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,
1997 1996 1995
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($ in thousands)
REGION
Northeast(1) $ 53,992 18.6% $ 82,772 19.6% $ 98,803 25.0%
Southeast 168,900 57.1% 218,427 51.7% 148,021 37.4%
Mid- and Southwest 46,740 16.1% 73,336 17.4% 100,315 25.4%
West 21,076 7.2% 43,301 10.3% 36,235 9.2%
Pacific(2) - - 1,230 0.3% 4,402 1.1%
Mail Order(3) - - 3,244 0.7% 7,359 1.9%
--------- ------- -------- ------ -------- -------
Total $290,708 100.0% $422,310 100.0% $395,135 100.00%
========= ======= ======== ====== ======== =======
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(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 50 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 17.3%, 21.0% and 19.3% for the years
ended December 31, 1995, 1996 and 1997 respectively. Included in Magitronic
personal computers are private-label and brand-name components that the Company
also sells separately in its distribution business. During 1997, sales of
monitors supplied primarily for Magitronic by Lite-On were 21% of net sales, and
sales of hard disk drives supplied primarily by Western Digital and Samsung were
23.4% of net sales. Sales of the Company's other products, including
microcomputer peripherals, components and accessories, comprised the remaining
sales for the year.
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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.
Magitronic offers systems ranging from Pentium 200MMX Mhz to high-end Pentium-II
400 Mhz which should be available in April 1998. The company also
custom-assembles Magitronic computers to the customers' specifications. The
Company distributes approximately 12 standard Magitronic brand IBM-compatible
notebook computers which range from Pentium 166 MMX Mhz to Pentium II 266 Mhz
with 12.1", 13.3", 14.1" TFT LCD.
To ensure reliability, Magitronic works with various hardware compatibility
labs to test and certify selected products with Microsoft 95 and Windows NT. All
Magitronic standard systems are under Microsoft Windows "Hardware compatibility
list". The Company has received ISO 9001 certification for its Magitronic
assembly standards which further ensures the overall quality of products.
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 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 Agate floppy diskettes. The Company
also distributes tape back-up systems from Iomega Corporation.
Monitors. The Company distributes Magitronic, Goldstar Technology, Inc.,
CTX Corp., Mag Innovision, Inc.,
Maxtech, and Samsung monitors.
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, Diamond Computer
Systems, Inc., and Iomega.
Communications. Modems and fax boards allow communication among computers.
The Company distributes modems and modems with fax boards of Magitronic.
Networking Products. Local area networks (LANs) allow communication among
computers. The Company sells networking products of Complex and Magitronic.
Printers. The Company distributes a broad line of dot matrix and laser
printers sourced primarily from Panasonic, Hewlett-Packard, 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.
Notebooks. The Company distributes Magitronic notebooks.
Suppliers
Substantially all of the Company's brand name products are purchased from
over 50 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 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.
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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.
Many 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.
The Company sources products for its private-label lines from approximately
20 manufacturers, primarily located in the Far East. 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. 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, mice, keyboards, fax modems, networking
products, sound cards, interface cards, and power supplies are Magitronic
components that are manufactured for the Company, while the hard disk drives,
floppy disk drives, CD-roms and memory modules are products that are currently
sourced principally from Western Digital, ALPS, Toshiba, Lucky Goldstar 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 200mmx to Pentium II-333.
The Company is currently planning to introduce other models, such as Pentium II
350 Mhz, 400 Mhz (100 Mhz FSB and New Covington - ZE (66 Mhz FSB processor )) in
April 1998. 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. 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.
5
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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.
Currently, the Company is assembling over 5,000 standard Magitronic
personal computers per month, and has the capacity to assemble approximately
7,500 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-ordered 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 9001 certification has become accepted
by and, in most cases, is required by companies in Europe and throughout the
world. ISO 9001 will open up new markets for Magitronic which, until now, have
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 Chicago sales
office primarily services customers in Texas and the Midwest, respectively,
while the Melville sales office services customers in the Northeast.
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.
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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. 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. 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, government agencies and foreign companies. The
Company's activities in these markets have been increasing as the Company has
been allocating resources towards developing each market. The Company has
focused on providing its customers with the products they demand at a
competitive price, in combination with full service and support programs. The
Company has implemented a series of marketing programs that offer timely product
information and pricing. The Company is planning to increase sales through
discounted volume purchasing and consistent product availability as well as
reliable customer service and technical support.
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.
Employees
As of February 6, 1998, the Company had 311 full-time employees, including
103 in sales and marketing, 47 in engineering, technical and customer service,
45 in warehouse, 66 in administrative, 40 assembly workers and 10 in data
processing. The Company considers its relationship with employees to be
satisfactory. The Company is continuing its evaluation of staffing requirements
and may initiate certain additional reductions in force.
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.
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The trademarks "Magitronic", "Magitronic - The Power of Value", 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. Competitors
include other national distributors, regional distributors, and manufacturers'
direct sales organizations, many of which have substantially greater technical
and financial resources than the Company. However, the Company has direct
relationships with many overseas manufacturers, which may provide the Company
with a strategic advantage over some of its competitors.
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.
ITEM 2. REAL PROPERTY
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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 49,500 May 31, 2000 211,100
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
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Total 349,300 $1,466,600
======= ==========
The Dallas, TX location and a portion of the Melville, NY facility have been
subleased to third parties.
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ITEM 3. LEGAL PROCEEDINGS
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None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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In the fourth quarter of 1997, the majority stockholder of the Company, Mr.
Duke Liao ("Liao"), who owned 3,598,382 (approximately 58%) of the 6,195,287
shares of Common Stock outstanding as of November 20, 1997, consented to the
amendment of the Company's Certificate of Incorporation ("Certificate of
Incorporation") to increase the total number of shares of Common Stock which the
Company has authority to issue from 7,000,000 to 20,000,000 (the "Share
Increase"). On December 22, 1997, the Company furnished an Information Statement
relating to the Share Increase (pursuant to Regulation 14C under the Securities
Exchange Act of 1934) to holders of record of the Common Stock as of November
20, 1997.
In order to provide working capital for the Company, Liao, after June 27,
1997, had made loans to the Company of $9,219,928 (the "Loans") on which
interest of $158,455 (the "Interest") had accrued through October 15, 1997 at
the bank prime loan rate, which was 8.5% at September 30, 1997. By agreement
dated October 15, 1997, Liao and the Company agreed to convert the Loans and
Interest into equity of the Company.
On November 4, 1997, Loans of $2,223,421 and the $158,455 in Interest
(aggregating $2,381,876 were converted into 1,814,762 restricted shares of
Common Stock at $1.3125 per share, the last sale price of the Common Stock on
the Nasdaq National Market on October 15, 1997 (the "Market Price"). As a
result, Liao became the beneficial owner of 3,598,382 shares of Common Stock, or
approximately 58%, of the 6,195,287 shares then outstanding. Because sufficient
shares of Common Stock were not available under the Certificate of Incorporation
to allow for the conversion into Common Stock of the total outstanding Loans and
Interest, additional Loans were not converted at such time.
On November 7, 1997, the remaining $6,996,507 of the Loans were converted
into 100 shares of a non-voting, non-dividend-bearing series of the Company's
preferred stock (the "Preferred Stock") which, pursuant to their terms as set
forth in the Certificate of Designations filed with the Delaware Secretary of
State, were to convert automatically at the Market Price into 5,330,671
restricted shares of Common Stock immediately after the Share Increase. The
Share Increase was effected on January 12, 1998 and the outstanding shares of
Preferred Stock were converted into 5,330,671 shares of Common Stock on such
date. As a result, Liao owns 8,929,053 shares of Common Stock, or approximately
77.5% of the outstanding Common Stock.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's common stock, par value $.01 per share ("Common Stock"), is
quoted on the Nasdaq National Market under the symbol "LSKI." As of March 4,
1998, there were approximately 100 holders of record of the Company's common
stock. On June 16, 1997, the record date for the Company's 1997 annual meeting,
there were approximately 1,789 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 National Market, for the
periods indicated.
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Calendar Period High Low
--------------- ---- ---
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 11-1/16
Year Ended December 31, 1997
First quarter 2-1/2 1-3/8
Second quarter 1-5/8 1-1/16
Third quarter 2 1-5/16
Fourth quarter 1-1/2 11/16
The last sale price of the Company's Common Stock on March 4, 1998 was $23/32.
The Company has been notified by The Nasdaq Stock Market that it no longer
satisfies the following two requirements for maintaining the listing of the
Common Stock on the Nasdaq National Market: the minimum bid price per share of
$1.00 and the minimum market value of the public float of $5,000,000. Public
float is the number of shares of Common Stock outstanding which are not owned by
officers, directors or 10% stockholders of the Company. At March 4, 1998, the
Company's public float was approximately 2,575,000 shares and the market value
of such public float was approximately $1,851,000. The Company is exploring
opportunities to satisfy the maintenance requirements or to have the Common
Stock listed on The Nasdaq SmallCap Market whose minimum bid price for entry
applicable to the Company is $1.00 per share and whose other entry requirements
the Company believes it currently meets. While the Company intends to pursue all
available options to maintain its Nasdaq listing, if the Company does not meet
the maintenance requirements of the Nasdaq National Market or the entry
requirements of The Nasdaq SmallCap Market during the second quarter of 1998,
the Common Stock may be de-listed from Nasdaq and become listed on the OTC
Bulletin Board.
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 in 1991 and does not currently intend to
declare or pay cash dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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, 1997.
Data relating to the years ended December 31, 1997, 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.
10
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Income Statement Data:
Year ended December 31,
-----------------------
1997 1996 1995 1994 1993
---------------------------------------------------
Net Sales $290,708 $422,310 $395,135 $365,101 $293,122
Gross Profit $ 17,342 $ 26,072 $ 29,592 $ 28,424 $ 26,369
Selling, General and
Administrative expenses $ 24,684 $ 33,352 $ 29,202 $ 25,375 $ 19,947
Income (Loss) from
Operations $ (7,342) $ (7,280) $ 390 $ 3,049 $ 6,421
Net Income (Loss) $(10,688) $ (7,815) $ (1,069) $ 1,042 $ 3,578
Basic Income (Loss)
per Common Share $ (2.29) $ (1.78) $ (.24) $ .23 $ .91
Diluted Income (Loss)
per Common Share $ (2.29) $ (1.78) $ (.24) $ .23 $ .89
Balance Sheet Data:
Year ended December 31,
-----------------------
1997 1996 1995 1994 1993
---------------------------------------------------
Working Capital $ 14,708 $ 15,953 $ 44,650 $ 44,968 $ 24,848
Total Assets $ 56,943 $ 90,454 $ 83,708 $ 74,043 $ 56,350
Long-Term Liabilities $ 124 $ 406 $ 21,667 $ 21,119 $ 804
Stockholders' Equity $ 17,214 $ 18,524 $ 26,339 $ 27,408 $ 26,241
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
General
Years ended December 31, 1997 and 1996
Net Sales: Net sales for the year ended December 31, 1997 were
$290,708,228, representing a net decrease of $131,602,041 (31.2%) from
$422,310,269 for the year ended December 31, 1996. The Company's distribution
sales, which exclude Magitronic systems and notebooks, for the year ended
December 31, 1997 decreased to $234,587,392 (80.7% of net sales) from
$333,621,593 (79.0% of net sales) for the year ended December 31, 1996. The
Company's sales were negatively affected by shortages of working capital
resulting in the inability of the Company to maintain sufficient inventory of
certain of the Company's products. Additionally, Management began tightening the
Company's credit policy during 1997 in response to increased bad debt write-offs
experienced in the prior year. Since Mr. Liao assumed the role of Chairman of
the Board and Chief Executive Officer of the Company 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. The Company's mail order business was discontinued in
June 1996. The wholesale distribution line has historically made up the majority
of the Company's sales.
Sales of the Company's Magitronic brand of personal computers and notebooks
for the year ended December 31, 1997 decreased to $56,120,836 (19.3% of net
sales) from $88,688,676 (21.0% of net sales) for the year ended December 31,
1996. The decrease in Magitronic sales is substantially attributable to lower
sales of notebook computers in the first quarter, volume decreases throughout
the year resulting from tightening credit policies and price decreases in
components which have resulted in a corresponding price decrease in Magitronic
personal computers and notebook computers. Specifically, Intel central
processing units ("CPU's") have dropped in price by fifty percent (50%), and
monitor and CD ROM prices have also decreased dramatically. In addition, there
has been substantial turnover in Magitronic product management which has
contributed to the reduction in Magitronic sales. Included in Magitronic
11
<PAGE>
personal computers are private-label and brand-name components that the Company
also sells separately in its distribution business. The Company also sells
components separately under the Magitronic name. To enhance the visibility of
Magitronic products, in January 1996, the Company created its Magitronic
Technology, Inc. subsidiary to focus on distributing Magitronic products. The
Company continues to maintain this subsidiary.
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 $8,730,122 to $17,342,022 (6.0% of
net sales) for the year ended December 31, 1997 from $26,072,144 (6.2% of net
sales) for the year ended December 31, 1996. The dollar decrease in gross profit
is directly attributable to the 31.2% sales decrease from the prior year as
discused above. Margins were negatively affected by the sale of certain slower
moving goods at discounted prices to improve the quality of goods on hand.
Additionally, the Company continued to experience lower utilization of vendor
programs such as rebates, returns and price protection due to turnover of
personnel and change in vendors.
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 7.9% for the
year ended December, 31, 1996 to 8.5% for the year ended December, 31, 1997.
Such expenses decreased from $33,352,034 in 1996 to $24,683,516 in 1997. The
increase in selling, general and administrative expenses as a percentage of
sales is primarily due to lower sales as well as a $575,000 charge relating to
the settlement of a lawsuit. The dollar decrease in these expenses was primarily
a result of lower sales levels and significant lay-offs of personnel. During
1997, the Company's number of employees was reduced by approximately 100.
Salaries for the year ended December 31, 1997 decreased to $10,470,721 (3.6% of
net sales) from $13,901,605 (3.3% of net sales) for the year ended December 31,
1996 as a result of the reduction in the number of employees. Additionally, the
Company's bad debt expense decreased to $1,811,721 (0.6% of net sales) for the
year ended December 31, 1997, from $5,330,234 (1.3% of net sales) for the year
ended December 31, 1996, due to the Company's tightening of credit policies and
increased focus on quality sales. For the year ended December 31, 1996, the
Company had provided and extended credit terms to a growing percentage of its
customer base, as well as encountered difficulties with 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 of staff in the credit department.
Other Expenses: Interest expense increased to $2,254,934 in 1997 from
$2,105,015 in 1996. The increase in interest expense was due to the increase in
the Company's borrowing rate from 125 basis points over LIBOR or 25 basis points
over the prime rate to 225 basis points over the prime rate with no LIBOR option
due to the Company's default of certain loan covenants. The increase in
borrowing rate was offset to a significant extent by the Company's decrease in
borrowings. During December 1997, in recognition of the Company's improved
capital position and positive steps to address recurring losses, the Company's
borrowing rate was reduced to 150 basis points over the prime rate.
Income Taxes: Income taxes changed from a $1,652,000 net benefit in 1996 to
a $888,000 net expense in 1997 due primarily to the provision of a 100%
valuation allowance against net deferred tax assets due to the uncertainty of
the Company's ability to realize such assets. The realization of deferred tax
assets is entirely dependent upon the generation of future taxable income. This
deferred tax expense was partially offset by a current benefit which represents
the carryback of current year losses to obtain tax refunds.
Net Loss: Net loss increased by $2,872,718 to $10,688,158 (3.7% of net
sales) for the year ended December 31, 1997 from a loss of $7,815,440 (1.9% of
net sales), for the year ended December 31, 1996. The Company's net loss for the
year ended December 31, 1997 was substantially affected by the decrease in gross
profit, income tax benefits as discussed above and the payment related to the
settlement of a lawsuit in the amount of $575,000.
12
<PAGE>
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.
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.
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 (0.6% of net sales).
Also, due to sales expansion, Magitronic increased reserves in 1996 for rebates,
price protection and warranty offered to customers in the amount of $677,024
(0.8% of Magitronic sales). The Company also increased its provision for
inventory obsolescence in the amount of $1,002,662 (0.2% of net sales) due to
the increase in age of certain goods.
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 (1.3% of net sales) for the year ended December 31, 1996, from
$1,150,181 (0.3% 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
13
<PAGE>
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 (0.3% 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 25 basis points over the
prime rate.
Income Taxes: The income tax benefit increased $987,000 to $1,652,000 in
1996 from $665,000 in 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.
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 (0.3% 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.
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. Management does not believe that the developing economic
recession in Asia will have an adverse impact on the Company's operations.
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. Net cash
provided by operating activities was $3,728,281 in 1997. Net cash used by
operating activities was $6,856,898 in 1996. The change in net cash flows from
operating activities between 1997 and 1996 in the amount of $10,585,179
primarily resulted from a decrease in accounts receivable, inventories and
prepaid expenses, partially offset by corresponding decreases in accounts
payable and accrued expenses. 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 1996 and 1997, the
Company generally paid its suppliers approximately 35 to 45 days from date of
invoice. Terms vary from one day to 60 days.
Working capital was $14,707,598 as of December 31, 1997 and $15,953,069 as
of December 31, 1996. 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 a
decrease in the maximum amount available for borrowing under the revolver to
$20,000,000 and 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 December 31, 1997). The lender has reserved the right to reverse
this rate reduction upon notice to the Company. As of December 31, 1997 and
1996, the Company owed $18,424,730 and $28,614,929, respectively, under its
revolving credit loan. As of December 31, 1997, the Company had $1,575,270
available for cash borrowings under its revolving credit loan and $5,783,755
available for the floor planning of inventory purchases.
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
14
<PAGE>
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
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 45 days during 1997 and 44 days during 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. During 1997, the Company installed a bar coding system for
purposes of inventory control at its Georgia location providing the capability
to monitor inventory levels on a real-time basis.
Many 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
customers. 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 50 U.S. manufacturers,
approximately 14.6% and 10.4% of the Company's net sales for 1997 were derived
from products manufactured by Western Digital and Samsung, respectively, which
are the Company's two largest U.S. suppliers. The Company has written supply
agreements with both Western Digital and Samsung. Additionally, the Company
purchases goods from approximately 20 vendors who are located in the Far East.
The purchases from these vendors were approximately 16.3% of the Company's total
purchases for 1997 and comprised approximately 37.6% of the Company's net sales
for 1997. The loss of any of these 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 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. The Company's average days'
receivable was approximately 27 days and 30 days for the years ended December
31, 1997 and December 31, 1996, respectively. The decrease in the average days
sales receivable was a result of the Company tightening its credit policies and
procedures with customers.
Management's Plans Regarding Going Concern
The Company has experienced net losses of $10,688,158, $7,815,440 and
$1,068,540 for the years ended December 31, 1997, 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, 1997,
the Company is in violation of certain financial covenants under its credit
facility. (See Report of Independent Certified Accountants included elsewhere in
this report.) Management plans to address these negative trends and losses as
follows:
o Financing. Management is discussing the financial covenant defaults with the
Company's lender with the goal of renegotiating these covenants and securing the
credit facility. During 1997, the Company received equity financing of
$9,219,928 from Mr. Liao who became its new Chairman, Chief Executive Officer
and principal shareholder in June 1997. Additionally, under the direction of Mr.
Liao, progress has been achieved in addressing the Company's recurring losses.
15
<PAGE>
Based upon these considerations, Management believes it will be successful
with these negotiations with its lender; however, there can be no assurance that
these negotiations will be successful. If these negotiations are unsuccessful,
Management believes sufficient alternative sources of financing exist, some of
which may be at higher interest rates.
o Decentralize management and provide profit sharing. The Company will
eliminate its hierarchical management style and authorize the branch
managers to select the type of merchandise they prefer to purchase and
sell. Also, the Company will set up each branch as a profit center to
evaluate each branch's performance. As an incentive, 10% of the total
profit of the branch will be used for profit sharing with branch and cost
center employees.
o Focus on preferred items and vendors. In order to focus on more
profitable items and vendors as well as to increase profit and decrease
the amount of slow-moving inventory, the number of U.S. vendors has
recently been to be reduced from approximately 100 to 50.
o Enhance credit and collection of accounts receivable. The credit and
collection department was completely reorganized in June of 1997. The
Company anticipates improved performance from this department in 1998.
o Reduce personnel. Personnel salary and expense comprises the majority of
the Company's total selling, general and administrative expenses. The
Company reduced the number of employees from 645 in January of 1995 to 311
as of February 1998. Management will continue monitoring this expense.
o Increase purchase efficiency. The Company plans to combine its domestic and
Magitronic (primarily foreign) purchasing departments in 1998. This
combination will eliminate job duplication relating to purchasing efforts
in similar product categories. This will also provide the remaining product
managers better knowledge of market trends.
o Web site marketing. The Company plans to enhance its current internet web
site to design more fresh and interactive features to provide better
service to customers, product advertisement, sales and marketing
information and product ordering capabilities.
o Transforming the supply chain with vendors and customers. The Company plans
to transform the supply chain through the sharing of information on
marketing, purchasing and technology data with its vendors and customers to
enable the Company to deliver greater value to ultimate end-users.
Initial Results of Corrective Measures
The fourth quarter of 1997 was the first quarter entirely under the
direction of the new Chairman and principal shareholder and his management team.
Sales for the fourth quarter of 1997 were $55,480,876 as compared to 1996
comparable sales of $111,645,693. Gross profit realized during this quarter as a
percentage of sales rose to 8.3% from the 4.0% realized in the fourth quarter of
1996. This improvement in gross profit as well as the decrease in sales are
products of the Company's initiatives of focusing on higher profit margin
products to creditworthy customers as well as improved utilization of
information systems to better manage operations. Net loss before income taxes
(NIBT) for the fourth quarter of 1997 was $993,417, a significant improvement
compared with the $5,906,327 experienced in the fourth quarter of 1996. Net loss
for the fourth quarter of 1997 improved to $2,281,417 compared to $5,004,327 for
the fourth quarter of 1996. Net income for the fourth quarter of 1997 was
adversely affected by year-end adjustments of deferred income taxes resulting in
a $1,100,000 write-off of deferred income tax assets (expense). Although the new
management team has achieved progress in reducing the Company's net losses and
improving gross profit, recognition of such tax assets depends on future
profitability and conservative principals dictate the need to expense these
assets. This charge is non-recurring in nature and, together with other
unrecorded tax assets, will provide future income, through tax benefits, of
approximately $6,267,000 when the Company returns to profitability.
16
<PAGE>
Year 2000 Risks
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during the
next two years. The "Year 2000 Issue" arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or
decision-making functions. Management asserts that the Year 2000 issue is not a
problem with its accounting information system software. The inventory
bar-coding management system utilized by the Company is not currently Year 2000
compliant; however, the Company plans to use prepackaged vendor upgrades in 1998
to modify this system. Management believes that the cost of such an upgrade will
not be significant.
There can be no guarantee that the measures taken by the Company will solve
the Year 2000 issue. Specific factors which may prevent the risk to be
neutralized include, but are not limited to, the ability of other companies on
which the Company's systems rely to modify or convert their systems to be Year
2000 compliant, the ability to locate and correct all relevant computer codes
and similar uncertainties.
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 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," "will" 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
reports filed with the Commission.
Recent Accounting Pronouncements
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 has retroactively adopted this
Standard during the year ended December 31, 1997. The impact of the adoption of
this Standard has not been material.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" which establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial information.
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SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial positions,
however, will be unaffected by implementation of this standard.
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. 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
None.
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
--------------------
N/A
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
- -----------------------------------------------------------------------
Duke Liao 42 Chairman of the Board of Directors, President
and Chief Executive Officer
Martin Tsai 51 Vice President-Finance, Chief Financial Officer
and Director
Edwin J. Feinberg 65 Director
Kenny Liu 44 Director
Duke (Chih-Hung) Liao has served as the Company's Chairman of the Board of
Directors and Chief Executive Officer since June 1997 and as its President since
September 1997. Since founding DTK Computer, Inc. ("DTK") in 1986, Liao has been
its President and Chairman. DTK is a distributor and assembler of computer
systems and is wholly-owned by DTK Technology (USA), Inc., of which Liao is the
majority shareholder and Chairman. Liao is also the founder, majority
shareholder and Chairman of other companies in the computer systems and assembly
business which do business in Germany, France, the United Kingdom, Austria,
Poland and Hungary. Liao also founded in 1990, and has since been majority
shareholder and Chairman of, Gemlight Computer Ltd. ("Gemlight"), a Hong Kong
corporation which manufactures computer motherboards, casings, power supplies
and other parts at factories in China and Taiwan. Since 1994, Liao has been
President and majority shareholder of Advanced Creative Computer Corp. Inc., a
Taiwan corporation, engaged in research and development and assembly and
distribution of computer motherboards and workstations in Taiwan.
Martin (Ting Yuan) Tsai has been serving as Vice President and Chief
Financial Officer of the Company since June 1997 and as a member of the Board of
Directors since February 1998. From January 1995 to June 1997, Mr. Tsai served
as the Chief Information Officer and, from 1991 to June 1997, as Vice President
of MIS of the Company. He has been employed by the Company or its privately-held
predecessors since 1986 and served as the principal accounting officer and vice
president of finance of such predecessors from approximately 1986 to 1991.For 13
years Mr. Tsai worked in the Customs Department of the Ministry of Finance,
Taiwan, and, as a senior officer, he managed the import, export and inspection
departments, with authority to approve $50 billion in credit for importers. Mr.
Tsai holds a law degree in finance and taxation from Fong-Chia University and a
MBA degree from Long Island University.
19
<PAGE>
Edwin J. Feinberg has been a member of the Board of Directors of the
Company since June 1991. He was the Company's Vice President -- Finance and
Chief Financial Officer from 1991 to November 1994. Prior thereto, he was
Controller and Chief Financial Officer of BWP Holding Corp., a distributor of
automotive replacement parts, for more than three years. 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., a public company 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.
Kenny Liu has served as a member of the Board of Directors of the Company
since June 1994. He 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 holds a B.S. degree in Electrical Engineering from National
Cheng-Kung University and a M.S. degree in Electrical Engineering from Ohio
State University.
In furtherance of the Company's compensation policy for independent members
of the Board of Directors, Messrs. Feinberg and K. Liu each received an annual
Director's fee of $12,000 in 1997. Mr. Feinberg was granted stock options in his
former capacity as an employee of the Company. Mr. K. Liu was 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 his services as a member of the
Company's Board of Directors. The Company granted 7,500 of these options to Mr.
K. Liu on his initial election to the Board of Directors and options to purchase
7,500 shares of common stock to him on April 17, 1995. These options held by Mr.
K. Liu are exercisable as to 33 1/3% of the shares on each of the first three
anniversaries of the date of grant. Effective February 1, 1998, the Company
reduced the exercise prices of the 13,000 options held by Mr. Feinberg and
15,000 options held by Mr. K. Liu to $2.125 per share.
The Company's Audit Committee is comprised of Messrs. Feinberg 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.
Section 16(a) Beneficial Ownership Reporting Compliance
A review of the Forms 3 and 4 relating to the Company's securities
indicates that the Forms 4 relating to the acquisitions in November and December
1997 of 15,985 shares of Common Stock by Mr. Tsai's minor son were not timely
filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The table below discloses all cash compensation awarded to, earned by or
paid to the Company's present and former Chief Executive Officer and 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, 1997. In addition it provides information with respect to the compensation
of the named executive officers for 1996 and 1995.
20
<PAGE>
Summary Compensation Table
--------------------------
------------------- Annual
Compensation----------------
Other Long-Term
Name and Principal Annual Compensation
Position(1) Year Salary Bonus(2) Compensation Options
- --------------------------------------------------------------------------------
Duke Liao
Chairman, President 1997 -- -- -- --
And CEO 1996 -- -- -- --
1995 -- -- -- --
Morries Liu
Former Chairman and CEO 1997 $ 98,692 $ 4,935 -- --
1996 $230,000 $ 3,892 -- --
1995 $169,077 $ 3,382 -- 50,000
Manuel C. Tan
Former President and 1997 $251,307 $ 1,999 -- --
Chief Operating Officer 1996 $172,500 $ 3,317 -- --
1995 $175,500 $ 3,450 -- 50,000
Shirley Lee
Former Sr. V.P.-Sales and 1997 $125,584 $ 1,385 -- --
Marketing-Magitronic 1996 $102,092 $ 2,042 -- --
1995 $ 95,991 $ 1,920 -- 25,000
(1) Morries Liu resigned as Chairman and Chief Executive Officer of the Company
in June 1997, Manny Tan resigned from the Company in September 1997 and
Shirley Lee resigned from the Company as of the year end 1997. In 1997, the
exercise price of Mr. Tan's options to purchase 79,000 shares of Common
Stock was lowered to $2.18 per share by the Company.
(2) Consists of the Company's contributions to its 401-K plan.
Employment Agreements
The Company does not have employment contracts with any of its employees.
Stock Options
The following table provides information on the value of the Company's
named executive officers' unexercised options to purchase shares of Common Stock
at December 31, 1997. The Company did not grant any options to its named
executive officers during the fiscal year ended December 31, 1997.
21
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
-----------------------------------------------
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1997 (#) December 31, 1997 ($)(1)
------------------------- -------------------------
Shares
Acquired on Value
Officer Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Duke Liao 0 $0 0 0 $0 $0
Morries Liu(2) 0 $0 0 0 $0 $0
Manuel C. Tan(2) 0 $0 79,000 0 $0 $0
Shirley Lee(2) 0 $0 40,000 0 $0 $0
</TABLE>
(1) Fiscal year ended December 31, 1997. The last sale price of the Company's
Common Stock on that day, as reported by NASDAQ-NMS, was $25/32.
(2) Mr. Liu previously held options to purchase shares of Common Stock which
were forfeited as a result of his resignation from the Company. As a result
of Ms. Lee's resignation from the Company, her options will be forfeited as
of March 31, 1998. Mr. Tan's options expire August 14, 1998.
Compensation Committee Interlocks and Insider Participation
Five current or past executive officers of the Company, Morries Liu, Duke
Liao, Martin Tsai, Manny Tan and Edwin Feinberg, are or have been members of the
Company's Board of Directors and have participated in deliberations concerning
executive officer compensation but none of them voted on his individual
compensation. Their joint deliberations gave rise to conflicts of interest which
could have affected their compensation and the number of stock options granted
to them individually and as a group.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth certain information as of March 4, 1998
pertaining to the beneficial ownership of the Common Stock by (i) persons known
to the Company to own 5% or more of its outstanding Common Stock, (ii) each
director of the Company, (iii) each executive officer of the Company and (iv)
directors and executive officers of the Company as a group. Each such person has
sole voting and investment powers with respect to his and her shares. This
information has been obtained from the Company's records, or from information
furnished directly by the individual or entity to the Company.
22
<PAGE>
Number of Shares Percentage of
---------------- -------------
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- ------------------------ ------------------ ------------------
Duke Liao 8,929,053 77.5%
Edwin Feinberg 13,000 (1) *
Martin Tsai 57,512 (1)(2) *
Kenny Liu 12,500 (1)(2) *
All directors and executive
officers as a group
(4 individuals) 9,012,065 (1)(2) 77.8%
----------- -----
- -------------------------------
* Less than 1%
(1) Represents or includes shares subject to stock options granted by the
Company as follows: Mr. Feinberg, 13,000 shares; Mr. Tsai, 27,666 shares;
and Mr. K. Liu, 12,500.
(2) Excludes shares of Common Stock that are subject to options which are not
currently exercisable as follows: Mr. Tsai, 8,334 shares; and Mr. K. Liu,
2,500 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
In order to provide working capital for the Company, Duke Liao made loans
to the Company of $9,219,928 during 1997 which loans and interest thereon have
been converted into 7,145,433 shares of Common Stock at $1.3125 per share, as
described above under "Item 4. Submission of Matters to a Vote of Security
Holders."
From 1984 to July 1997, the Company purchased products in the Far East
through one or more trading companies substantially all of whose activities were
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 certain
members of the family of Mr. Morries Liu, the former Chairman, Chief Executive
Officer and principal stockholder of the Company. The Company made purchases
through the Trading Affiliates at prices of 2% above the amount of the
manufacturer's charge to the Trading Affiliates plus reimbursement for
out-of-pocket costs. The Company's agreement with the Trading Affiliates was
terminated on July 14, 1997. The total purchases through the Trading Affiliates
were approximately $34,924,000 during 1997, for which the Company paid contract
consideration to the Trading Affiliates of approximately $698,500.
In connection with Duke Liao's purchase on June 27, 1997 of 1,783,620
shares of Common Stock (41% of the outstanding shares on such date) from Morries
Liu, Duke Liao guaranteed all existing and future obligations of the Company to
the Trading Affiliates, which obligations totaled approximately $11,000,000 as
of June 27, 1997 and approximately $1,244,000 as of December 31, 1997.
During December 1997, Mr. Liao became a guarantor of the Company's debt to
its lender.
Computer Directions, whose shareholders prior to its ceasing operations in
1994 included former officers of the Company, Morries Liu, Manuel Tan and
Shirley Lee, owed the Company $118,000 during 1997, the payment of which was
guaranteed by Morries Liu. As of December 31, 1997, all outstanding amounts owed
by Computer Directions to the Company had been satisfied.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) (1) Consolidated Financial Statements
Index to Consolidated Financial Statements F - 1
(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.
24
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Certified Public Accountants F-2
Consolidated financial statements:
Balance sheets F-3
Statements of loss F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-17
<PAGE>
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, 1997 and 1996, and the
related consolidated statements of loss, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is in violation of certain financial covenants under its
credit facility which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Atlanta, Georgia
March 6, 1998
F-2
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------------
1997 1996
-----------------------------------------
ASSETS (Notes 2 and 3)
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 2,092,405 $ 18,065
Accounts receivable, net of allowance
for doubtful accounts of $1,781,000
and $3,208,000 20,284,367 31,994,144
Inventories, net of obsolescence reserve of
$1,308,000 and $1,600,000 (Note 1) 29,868,561 49,872,618
Prepaid expenses and other current assets
(Note 7) 2,067,150 5,592,192
------------- -----------
54,312,483 87,477,019
FURNITURE, AUTOS AND EQUIPMENT, at cost,
less accumulated depreciation and
amortization of $2,911,844 and $3,425,870
(Notes 1 and 9) 2,367,120 2,741,814
OTHER ASSETS 263,220 235,145
-------------- --------------
TOTAL ASSETS $ 56,942,823 $ 90,453,978
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade (Notes 3 and 6) $ 20,053,398 $ 40,098,877
Revolving credit loan (Note 3) 18,424,730 28,614,929
Accrued expenses and other 1,126,757 2,810,144
-------------- --------------
39,604,885 71,523,950
CAPITAL LEASE OBLIGATIONS (Note 9) 124,113 406,428
-------------- --------------
TOTAL LIABILITIES 39,728,998 71,930,378
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (Notes 6, 8 and 10)
Preferred stock; convertible, non-voting,
non-dividend-bearing, $.01 par value,
1,000,000 shares authorized, 100 and 0
shares issued and outstanding 6,996,507 -
Common stock; $.01 par value,
7,000,000 shares authorized,
6,195,287 and 4,380,525 shares
issued and outstanding 61,953 43,806
Additional paid-in capital 20,798,893 18,435,164
Accumulated deficit (10,643,528) 44,630
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 17,213,825 18,523,600
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $56,942,823 $90,453,978
============= =============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
<S> <C> <C> <C>
NET SALES $290,708,228 $422,310,269 $395,135,113
COST OF SALES (Note 6) 273,366,206 396,238,125 365,542,718
------------------- -------------------- --------------------
Gross profit 17,342,022 26,072,144 29,592,395
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (Note 4) 24,683,516 33,352,034 29,201,935
------------------- ------------------- --------------------
(Loss) income from operations (7,341,494) (7,279,890) 390,460
OTHER EXPENSES, net
(interest expense - $2,254,934,
$2,105,015 and $2,153,991) 2,458,664 2,187,550 2,124,000
------------------- -------------------- --------------------
Loss before income taxes (9,800,158) (9,467,440) (1,733,540)
INCOME TAXES (Note 7) 888,000 (1,652,000) (665,000)
------------------- -------------------- --------------------
NET LOSS $ (10,688,158) $ (7,815,440) $ (1,068,540)
------------------- -------------------- --------------------
Basic and diluted loss per common share $ (2.29) $ (1.78) $ (.24)
=================== ==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock, Preferred stock,
$.01 par value $.01 par value
-------------------------- -------------------------
Retained
Additional earnings
Number of Number of paid-in (accumulated
shares Amount shares Amount capital deficit) Total
------------- ------------- ------------- -------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Conversion of
subordinated debt
to common stock
(Note 8) 1,814,762 18,147 - - 2,363,729 - 2,381,876
Conversion of
subordinated debt
to preferred stock
(Notes 8 and 11) - - 100 6,996,507 - - 6,996,507
Net loss - - - - - (10,688,158) (10,688,158)
------------- ------------- ------------- -------------- -------------- ---------------- ---------------
December 31, 1997 6,195,287 $ 61,953 100 $6,996,507 $ 20,798,893 $ (10,643,528) $17,213,825
============= ============= ============= ============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ------------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (10,688,158) $ (7,815,440) $ (1,068,540)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization 1,031,935 1,040,165 996,316
Provision for losses on accounts receivable 1,811,721 5,330,234 1,150,181
Provision for losses on inventory 553,427 1,002,662 -
Deferred taxes 1,100,000 (513,000) 94,000
Changes in operating assets and liabilities:
Accounts receivable 9,898,056 (4,310,435) (12,471,550)
Inventories 19,450,630 (7,579,840) 583,931
Prepaid expenses and other 2,425,042 (1,238,303) 143,273
Other assets (28,075) 19,683 65,338
Accounts payable - trade, accrued
expenses and other (21,826,297) 7,207,376 10,184,897
----------------- ------------------- -----------------
Net cash provided (used) by operating activities 3,728,281 (6,856,898) (322,154)
----------------- ------------------- -----------------
INVESTING ACTIVITIES:
Capital expenditures (657,241) (680,006) (859,908)
----------------- ------------------- -----------------
FINANCING ACTIVITIES:
Net proceeds from (repayment of) revolving credit loan (10,190,199) 7,649,666 965,263
Repayment of capital lease obligations (26,429) (295,686) (416,567)
Proceeds from subordinated notes payable 9,219,928 - -
----------------- ------------------- -----------------
Net cash (used) provided by financing activities (996,700) 7,353,980 548,696
----------------- ------------------- -----------------
CHANGE IN CASH AND
CASH EQUIVALENTS 2,074,340 (182,924) (633,366)
CASH AND CASH EQUIVALENTS, beginning of year 18,065 200,989 834,355
----------------- ------------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 2,092,405 $ 18,065 $ 200,989
================= =================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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,
1997. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
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 is 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 25% and 20% of the Company's net sales for the years
ended December 31, 1997 and December 31, 1996 included components manufactured
by two third-party domestic suppliers. Additionally, the Company purchases goods
from approximately 20 vendors who are located in the Far East. During 1997,
total sales attributable to purchases from these foreign vendors were
approximately 38% of the Company's net sales and from one of such foreign
vendors were approximately 21% of the Company's net sales. 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 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.
Inventories
Inventories, which consist principally of finished goods, are stated at the
lower of cost or market. Cost is determined on the average cost method.
Furniture, Autos and Equipment
Furniture, autos and equipment are stated at cost. Depreciation is computed
by the straight-line method over the estimated useful lives of the assets (5 to
7 years).
F-7
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with maturities of three months or less to
be cash equivalents.
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).
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." Under SFAS 109, current income taxes are provided
based upon taxes currently payable or refundable and deferred taxes are provided
to reflect temporary differences in the tax bases of assets and liabilities and
their reported amounts in the financial statements and operating loss and tax
credit carryforwards. A valuation allowance is recorded to reduce deferred tax
assets to an amount which is considered more likely than not to be realizable.
Earnings Per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The new Standard simplifies the computation of earnings per share and
requires presentation of two amounts, basic and diluted earnings per share for
all periods presented.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding during each
year. Shares issued during the year are weighted for the portion of the year
that they were outstanding. Diluted loss per share is calculated in a manner
consistent with that of basic loss per share while giving effect to all dilutive
potential common shares that were outstanding during the period. Basic and
diluted loss per share are based upon 4,668,898 shares for the year ended
December 31, 1997 and 4,380,525 shares for the years ended December 31, 1996 and
1995. There were 1,238,597 of potential weighted common shares outstanding
during 1997 related to convertible subordinated debt and convertible preferred
stock. These shares were not included in the computation of the diluted per
share amount because the Company was in a net loss position and, thus, any
potential common shares were anti-dilutive.
Use of 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 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.
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.
F-8
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
The Company's financial instruments consist primarily of cash equivalents
and other debt. Management believes the carrying values approximate fair value.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" which establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial information.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial positions,
however, will be unaffected by implementation of this standard.
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. 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.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
NOTE 2 - GOING CONCERN
The Company experienced net losses of $10,688,158, $7,815,440 and
$1,068,540 for the three years ended December 31, 1997. 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, 1997, the Company is in
violation of certain financial covenants under its credit facility. 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 plans to address
these negative trends and losses as follows:
F-9
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Financing. Management is discussing the financial covenant defaults with
the Company's lender with the goal of renegotiating these covenants and
securing the credit facility. During 1997, the Company received equity
financing of $9,219,928 from Mr. Liao who became its new Chairman, Chief
Executive Officer and principal shareholder in June 1997. Additionally,
under the direction of Mr. Liao, progress has been achieved in
addressing the Company's recurring losses. Based upon these considerations,
Management believes it will be successful with these negotiations with its
lender; however, there can be no assurance that these negotiations will be
successful. If these negotiations are unsuccessful, Management believes
sufficient alternative sources of financing exist, some of which may be at
higher interest rates.
- Decentralize management and provide profit sharing. The Company will
eliminate its hierarchical management style and authorize the branch
managers to select the type of merchandise they prefer to purchase and
sell. Also, the Company will set up each branch as a profit center to
evaluate each branch's performance. As an incentive, 10% of the total
profit of the branch will be used for profit sharing with branch and cost
center employees.
- - Focus on preferred items and vendors. In order to focus on more
profitable items and vendors as well as to increase profit and decrease
the amount of slow-moving inventory, the number of U.S.vendors has recently
been reduced from approximately 100 to 50.
- Enhance credit and collection of accounts receivable. The credit and
collection department was completely reorganized in June of 1997. The
Company anticipates improved performance from this department in 1998.
- Reduce personnel. Personnel salary and expense comprises the majority of
the Company's total selling, general and administrative expenses. The
Company reduced the number of employees from 645 in January of 1995 to 311
as of February 1998. Management will continue monitoring this expense.
- Increase purchase efficiency. The Company plans to combine its domestic and
Magitronic (primarily foreign) purchasing departments in 1998. This
combination will eliminate job duplication relating to purchasing efforts
in similar product categories. This will also provide the remaining product
managers better knowledge of market trends.
- Web site marketing. The Company plans to enhance its current internet web
site to design more fresh and interactive features to provide better
service to customers, product advertisement, sales and marketing
information and product ordering capabilities.
- Transforming the supply chain with vendors and customers. The Company plans
to transform the supply chain through the sharing of information on
marketing, purchasing and technology data with its vendors and customers to
enable the Company to deliver greater value to ultimate end-users.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 - 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 a decrease in
the maximum amount available for borrowing under the revolver to $20,000,000 and
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 December
31, 1997). The lender has reserved the right to reverse this rate reduction upon
notice to the Company. As of December 31, 1997 and 1996, the Company owed
$18,424,730 and $28,614,929, respectively, under its revolving credit loan. As
of December 31, 1997, the Company had $1,575,270 available for cash borrowings
under its revolving credit loan and $5,783,755 available for the floor planning
of inventory purchases. During December 1997, the Company's pricipal shareholder
became a guarantor of the Company's debt to its lender.
F-10
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since December 31, 1996, the Company has been in violation of certain
financial covenants under its credit facility agreement. See Note 2 for
Management's plan to address these financial covenant defaults.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated for rental of office and warehouse space and
certain equipment. Future minimum rental payments due under these operating
leases are as follows:
Year ending
December 31,
1998 $ 1,500,231
1999 1,423,535
2000 321,900
--------------------
Total $3,245,666
====================
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, 1997, 1996 and 1995 was
approximately $1,590,000, $1,574,000 and $1,657,000, respectively.
Litigation
During 1997, the Company settled various discrimination cases brought on by
fourteen former employees for $575,000. This amount is included in "Selling,
General and Administrative Expenses." There are various other 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 Management that such claims are not material
in relation to the Company's consolidated financial position, results of
operations, and liquidity.
Year 2000 Risks
As is the case with other companies using computers in their operations,
the Company is faced with the task of addressing the Year 2000 issue during the
next two years. The "Year 2000 Issue" arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or
decision-making functions. Management asserts that the Year 2000 issue is not a
problem with its accounting information system software. The inventory
bar-coding management system utilized by the Company is not currently Year 2000
compliant; however, the Company plans to use prepackaged vendor upgrades in 1998
to modify this system. Management believes that the cost of such an upgrade will
not be significant.
There can be no guarantee that the measures taken by the Company will solve
the Year 2000 issue. Specific factors which may prevent the risk to be
neutralized include, but are not limited to, the ability of other companies on
which the Company's systems rely to modify or convert their systems to be Year
2000 compliant, the ability to locate and correct all relevant computer codes
and similar uncertainties.
NOTE 5 - 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 1997. The contribution and
administration costs charged against operations amounted to $78,827, $115,874
and $104,286 for the years ended December 31, 1997, 1996 and 1995, respectively.
F-11
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company purchased inventories through two affiliated trading companies
in Taiwan which functioned 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 former principal
stockholder. During July 1997, the Company ceased purchasing goods from these
companies. Total purchases, which include buying commissions of 2% of the cost
of purchased goods, through the affiliated companies for the years ended
December 31, 1997, 1996 and 1995 were approximately $34,924,000, $88,025,000 and
$72,190,000, respectively. Included under "accounts payable -- trade" as of
December 31, 1997 and 1996 were $1,244,170 and $13,889,474, respectively, due to
purchases from these companies.
The Company purchases inventories from three companies which are owned by
or are otherwise related to the Company's current Chairman, Chief Executive
Officer and principal stockholder. The Company and each of these companies do
not give special preference or terms to the other with respect to their
purchases and sales. Total purchases from these companies for the year ended
December 31, 1997 were approximately $2,580,000. Included under "accounts
payable -- trade" as of December 31, 1997 was an aggregate of $411,810 due to
purchases from these companies.
The Company sold certain products to an affiliated company which had a
chain of four retail stores. The Company ceased selling products to this
affiliated company in 1994. Certain former stockholders and officers of the
Company owned approximately 56% of the affiliated company. As of December 31,
1996, $118,000 was due from the affiliate to the Company. The Company's former
principal stockholder guaranteed the amount in prior years and satisfied this
amount during 1997.
During 1997, the Company's principal stockholder provided working capital
funds to the Company in exchange for subordinated notes payable totaling
$9,378,383. These notes payable were converted to common and preferred stock as
of December 31, 1997. See Note 8 for further discussion.
NOTE 7 - INCOME TAXES
Components of income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------
<S> <C> <C> <C>
Current
Federal $ (212,000) $ (1,015,000) $ (480,000)
State and local - (124,000) (91,000)
----------------------- ----------------------- ------------------
(212,000) (1,139,000) (571,000)
----------------------- ----------------------- ------------------
Deferred
Federal 924,000 (430,000) (79,000)
State and local 176,000 (83,000) (15,000)
----------------------- ----------------------- ------------------
1,100,000 (513,000) (94,000)
----------------------- ----------------------- ------------------
Total expense (benefit) $ 888,000 $ (1,652,000) $ (665,000)
======================= ======================= ==================
</TABLE>
F-12
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provisions for income taxes on pre-tax income differ from the amounts
computed by applying the applicable Federal statutory rate due to the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Federal income tax benefit based
upon the statutory rate $ (3,332,000) $ (3,219,000) $ (589,000)
State and local income
taxes, net of Federal
tax benefit (392,000) (379,000) (70,000)
Change in valuation allowance 4,345,000 1,600,000 (47,000)
Other 267,000 346,000 41,000
---------------- ----------------- -----------------
Total expense (benefit) $ 888,000 $ (1,652,000) $ (665,000)
================ ================= =================
</TABLE>
The tax effects of temporary differences and carryforwards which give rise
to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts $ 641,000 $ 1,465,000
Inventory allowances 540,000 705,000
Tax credits and net foreign operating loss carryforwards 2,254,000 1,340,000
Net operating loss carryforwards 2,926,000 -
------------------ ------------------
Total gross deferred tax assets 6,361,000 3,510,000
------------------ ------------------
Valuation allowance (6,267,000) (1,922,000)
------------------ ------------------
Deferred tax liabilities
Basis differences of fixed assets (94,000) (95,000)
Other - (393,000)
------------------ ------------------
Total gross deferred tax liabilities (94,000) (488,000)
------------------ ------------------
Net deferred tax asset $ - $ 1,100,000
================== ==================
</TABLE>
As of December 31, 1997, the Company has provided a 100% valuation
allowance against net deferred tax assets due to the uncertainty of their
realization.
As of December 31, 1997, the Company had approximately $7,700,000 in
federal net operating loss carryforwards. These net operating loss carryforwards
expire in 2010 through 2012.
F-13
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and 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. These warrants expired
unexercised during the year.
On June 27, 1997, Duke Liao purchased 1,783,620 shares of Common stock from
Mr. Morries Liu, the founder and former principal stockholder of the Company,
representing approximately 41% of the 4,380,525 shares of the Common stock
outstanding. The purchase price was $2,497,068. Simultaneously, the Board
elected Liao as Chairman of the Board and Chief Executive Officer of the
Company. In order to provide working capital for the Company, Liao made loans to
the Company of $9,219,928 on which interest of $158,455 had accrued through
October 15,1997 at the bank prime loan rate. By agreement dated October 15,
1997, Liao and the Company agreed to convert the loans and interest into equity.
On November 4, 1997, loans of $2,223,421 and $158,455 in interest
(aggregating $2,381,876) were converted into 1,814,762 restricted shares of
common stock at $1.31 per share, the last sale price of the common stock on the
Nasdaq National Market on October 15, 1997 (the "Market Price"). As a result,
Liao owned 3,598,382 shares of common stock, or approximately 58%, of the
6,195,287 shares outstanding. Due to the fact that sufficient shares of common
stock were not available under the Certificate of Incorporation to allow for the
conversion into common stock of the total outstanding loans and interest,
additional loans were not converted at such time. The remaining $6,996,507 of
the loans were converted into 100 shares of non-voting, non-dividend-bearing
preferred stock which, pursuant to the terms as set forth in the Certificate of
Designations filed with the Delaware Secretary of State, converted automatically
at the Market Price into 5,330,671 restricted shares of common stock on January
12, 1998 (Note 11).
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,
1998 $ 276,552
1999 128,480
-------------------
Total minimum lease payments 405,032
Less: amounts representing interest (25,033)
-------------------
Present value of net minimum lease payments $ 379,999
===================
Current $ 255,886
Long-term 124,113
-------------------
Total obligations $ 379,999
===================
The current portion of capital lease obligations is included in current
liabilities under "accrued expenses and other current liabilities."
F-14
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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) (450,000 shares
under the 1991 Plan and 650,000 shares under the 1994 Plan) may be granted from
time to time (at the fair market value at the date of the grant for incentive
stock options and not less than 75% of fair market value at the date of the
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.
In January 1997, the Company offered all employees holding stock options
the opportunity to lower the exercise price of their options from $4.750 per
share to the current market price in exchange for taking a 5% reduction in
salary for a six month period. During the year ended December 31, 1997,
approximately 340,000 stock option shares were repriced to $2.125, the market
price per share at the time of such repricing.
Changes in shares under all option plans for the three years ended December
31, 1997 were as follows:
<TABLE>
<CAPTION>
Price Range
Shares per Share
------------------ ------------------
<S> <C> <C>
Options outstanding as of December 31, 1994 348,650 $ -
Granted 556,600 2.12 to 4.75
Exercised - -
Canceled (114,200) -
------------------ ------------------
Options outstanding as of December 31, 1995 791,050 -
Granted 118,450 2.12 to 4.75
Exercised - -
Canceled (201,100) -
------------------ ------------------
Options outstanding as of December 31, 1996 708,400 -
Granted - -
Exercised - -
Canceled (399,200) -
------------------ ------------------
Options outstanding as of December 31, 1997 309,200 $ -
================== ==================
</TABLE>
F-15
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average remaining contractual life of the options outstanding
as of December 31, 1997 is 3.1 years. Approximately 286,000 and 289,000 options
were exercisable as of December 31, 1997 and 1996, respectively.
The Company has two options 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," but applies Accounting Principles Board Opinion No.25 and related
interpretations in accounting for its stock option plans. If the Company had
elected to recognize compensation cost based on the fair value at the grant
dates for options issued or repriced under the plans described above, consistent
with the method prescribed by SFAS No. 123, net loss applicable to common
shareholders and loss per share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1996 1995
------------------ ------------------- ----------------
<S> <C> <C> <C>
Net loss applicable to common shareholders
as reported $ (10,688,158) $ (7,815,440) $ (1,068,450)
pro forma (10,828,908) (8,050,156) (1,992,825)
Basic and diluted loss per common share
as reported (2.29) (1.78) (0.24)
pro forma (2.32) (1.84) (0.45)
</TABLE>
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-average
assumptions used for grants or repricings in 1997, 1996 and 1995, respectively:
expected volatility of 60%, 50% and 40%; risk-free interest rate of a range of
4.00% to 6.48%, 6.39% and a range of 5.76% to 7.60%; and expected lives of 3.8
years as of 1997 and 4.0 years as of 1996 and 1995. No dividends are expected to
be paid by the Company in the future. As of December 31, 1997, no options
outstanding possessed an exercise price less than the Market Price.
NOTE 11 - SUBSEQUENT EVENT
On January 12, 1998, the principal stockholder of the Company converted all
100 shares of preferred stock issued during 1997 (Note 8) to 5,330,671
restricted shares of common stock. After this conversion, the principal
stockholder owns approximately 77.5% of the outstanding shares of common stock
(75.4% of the outstanding common stock on a fully diluted basis after taking
into account outstanding options to purchase approximately 309,200 shares of
common stock).
F-16
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 2,254,934 $ 2,105,015 $ 2,152,581
================ ================= ================
Income taxes $ - $ 189,160 $ -
================ ================= ================
</TABLE>
Non-cash Transaction:
During 1997, subordinated notes payable of $2,381,876 and $6,996,507 (for a
total of $ 9,378,383 which includes accrued interest of $158,455) were converted
into shares of common stock and preferred stock, respectively.
F-17
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL SCHEDULES
Report of Independent Certified Public Accountants
on Financial Statements Schedule S-2
Schedule II - Valuation and qualifying accounts S-3
S-1
<PAGE>
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 6, 1998 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 this 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 6, 1998
S-2
<PAGE>
SCHEDULE II
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------------------------
Balance at Charged to Charged to Balance
beginning Costs and other at end of
Description of period expenses accounts Deductions(a) period
- ----------- --------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1997:
Allowance for
doubtful accounts $3,208,000 $1,811,721 $ -- $3,238,721 $1,781,000
For the year ended
December 31, 1996:
Allowance for
doubtful accounts $1,050,000 $5,330,234 $ -- $3,172,234 $3,208,000
For the year ended
December 31, 1995:
Allowance for
doubtful accounts $746,663 $1,150,181 $ -- $846,844 $1,050,000
- -------------
(a) Doubtful accounts written off against accounts receivable.
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------------------------
Balance at Charged to Charged to Balance
beginning Costs and other at end of
Description of period expenses accounts Deductions(b) period
- ----------- --------- --------- -------- ------------ ---------
For the year ended December 31, 1997:
Reserve for inventory
obsolescence $1,600,000 $553,427 $ -- $845,427 $1,308,000
For the year ended December 31, 1996:
Reserve for inventory
obsolescence $597,338 $1,002,662 $ -- $ -- $1,600,000
For the year ended December 31, 1995:
Reserve for inventory
obsolescence $597,338 $ -- $ -- $ -- $597,338
(b) Obsolete inventory written off against inventory.
</TABLE>
S-3
<PAGE>
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 30, 1998
LIUSKI INTERNATIONAL, INC.
/s/
By: ------------------------------------
Duke Liao
President and Chief Executive Officer
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 March 30, 1998
- ------------------------------- Directors, President,
Duke Liao Chief Executive Officer
and Director
/s/ Vice President, Chief March 30, 1998
- ------------------------------- Financial Officer and
Martin Tsai Director (Principal
Accounting Officer)
/s/ Director March 30, 1998
- -------------------------------
Edwin J. Feinberg
/s/ Director March 30, 1998
- -------------------------------
Kenny Liu
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit
----------- ----------------------
2(a) Stock Purchase Agreement, dated June 26, 1997, between
Morries Liu and Duke Liao (incorporated herein by reference
to the Schedule 13D of Duke Liao, dated July 3, 1997).
2(b) Agreement, dated October 15, 1997, between Duke Liao and the
Registrant relating to the recapitalization of the Company
(incorporated herein by reference to the amended Schedule
13D/A of Duke Liao, dated February 4, 1998).
3(a) Certificate of Incorporation[2]
3(b) By-Laws[2]
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.
10(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,[2] and lease dated March 3, 1989
between the same parties,[5] and amendment thereto dated
February 25, 1995.[7]
10(i) Lease, dated March 21, 1997, between Barbara M. Ross and the
Registrant of the premises at 15939 E. Valley Blvd., City of
Industry, California.*
10(j) Warehouse Lease, dated June 22, 1994, between New World
Farmers 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.[7]
1
<PAGE>
10(k) 1994 Stock Option Plan.[8]
10(l) 1991 Stock Option Plan.[2]
10(m) Intentionally Omitted.
10(n) Business Credit and Security Agreement, dated June 23, 1995,
between Registrant and its wholly-owned subsidiaries, and
Deutsche Financial Service.[9]
10(o) Intentionally Omitted
10(p) Intentionally Omitted.
10(q) Intentionally Omitted.
10(r) Distributor Agreement, dated August 9, 1989, between
Registrant and Samsung Information Systems America, Inc.[2]
10(s) Distributor Agreement, dated January 1, 1990, between
Registrant and Seagate Technology, Inc.[2]
10(t) License Agreement, dated October 1, 1994, between Liuski
International, Inc., and Microsoft Corporation,[2] and
Amendment Nos. 1, 2, and 3 thereto executed February 8,
1995, May 25, 1995 and August 8, 1995, respectively[10] and
amendments Nos. 4, 5, 6 and 7 thereto executed January 1,
1996, April 1, 1996, July 1, 1996 and September 1, 1996,
respectively.[11]
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,[3] and amendment thereto
executed March 10, 1993[5] and April 25, 1995.[10] 10(w)
Form of Employee Stock Option Agreement[3] 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.[7]
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.[7]
10(ee) 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.[11]
10(ff) 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.[11]
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10(gg) Lease, dated April 19, 1996 between Rolex Developments
Limited and Liuski International, Toronto, Inc. of the
premises at 1229 Lorimar Drive, Mississauqa, Ontario,
Canada.[11]
11 Statement re: Computation of Per Share Loss. See
Consolidated Financial Statements.
21 List of Subsidiaries.[7]
23 Consent of BDO Seidman, LLP*
27 Financial Data Schedule*
Numbers inside brackets indicate documents from which
exhibits have been incorporated by reference.
Unless otherwise indicated each document incorporated by
reference herein refers to the identical exhibit number in
the document from which it is being incorporated by
reference.
* Filed herewith.
[2] Incorporated by reference to the Registrant's registration statement
on Form S-1 (Commission File No. 33-41297), effective August 13, 1991
(including all pre-effective amendments to the Registration
Statement).
[3] Incorporated by reference to registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1991.
[4] Incorporated by reference to registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1992.
[5] 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.
[6] Incorporated by reference to registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1993.
[7] Incorporated by reference to registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1994.
[8] Incorporated by reference to registrant's Proxy Statement with respect
to its 1995 annual meeting.
[9] Incorporated by reference to registrant's Form 10-Q Quarterly Report
for the quarter ended June 30, 1995.
[10] Incorporated by reference to registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1995.
[11] Incorporated by reference to registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1996.
3
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LIUSKI INTERNTAIONAL, INC.
INDEX OF EXHIBITS ATTACHED
Exhibit 10(i) Lease, dated March 21, 1997, between
Barbara M. Ross and Registrant of the
premises at 15939 E. Valley Blvd., City
of Industry, California.
Exhibit 23 Consent of BDO Seidman, LLP.
Exhibit 27 Financial Data Schedule.
EXHIBIT 10(i) STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only, March
21, 1997, is made by and between Barbara M. Ross, an individual ("Lessor") and
Liuski International, Inc., a Delaware corporation ("Lessee"), (collectively the
"Parties," or individually a "Party").
1.2 (a) Premises: That certain portion of the Building, including all
Improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 15939 E. Valley Blvd., located in the
City of Industry, County of Los Angeles, State of California, with zip code
91744, as outlined on Exhibit ____ attached hereto ("Premises"). The "Building"
is that certain building containing the Premises and generally described as
(describe briefly the nature of the Building): that certain 49,558 square foot
portion of a larger 112,335 square foot concrete tilt-up industrial building
(See Exhibit A), which is delineated in red and shall be for the exclusive use
of Lessee. 1.3 Term: Three (3) years and one (1) month ("Original Term")
commencing May 1, 1997 ("Commencement Date") and ending May 31, 2000
("Expiration Date"). (Also see Paragraph 3.)
1.4 Early Possession: Upon execution of leases ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $17,593.09 per month ("Base Rent"), payable on the first
(1st) day of each month commencing May 1, 1997 (Also see Paragraph 4.) [X] If
this box is checked, this Lease provides for the Base Rent to be adjusted per
Paragraph 49, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $17,593.09 as Base Rent for the
period May 1997.
1.6(b) Lessee's Share of Common Area Operating Expenses; forty four percent
(44%) ("Lessee's Share") as determined by [ ] pro rata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum _____.
1.7 Security Deposit: $17,593.09 ("Security Deposit"). (Also see Paragraph
5.)
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1.8 Permitted use: Warehousing, distribution, and assembly of computer
products and related office uses. ("Permitted Use") (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] S.D. Herman Co. represents Lessor exclusively ("Lessor's Broker");
[X] The Seeley Company represents Lessee exclusively ("Lessee's Broker");
or
[ ] represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph
15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) for brokerage services
rendered by said Broker(s) in connection with this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 53, and Exhibits "A" through "B", all of
which constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision unless the actual square footage is materially more or less.
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2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warrant exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any Improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge el any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Promises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
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<PAGE>
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, country, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in Paragraph
1.4 and if Lessee totally or partially occupies the Premises after the Early
Possession Date but prior to the Commencement Date, the obligation to pay Base
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including but not limited to the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
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<PAGE>
3.3 Delay In Possession. If for any reason Lessor cannot deliver possession
of the Premises to Lessee by the Early Possession Date, if one is specified in
Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement
Date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease, or the obligations of Lessee
hereunder, or extend the term hereof, but in such case, Lessee shall not, except
as otherwise provided herein, be obligated to pay rent or perform any other
obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within thirty (30) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said thirty (30) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period. Lessee's right to cancel this Lease hereunder shall
terminate and be of no force or effect. Except as may be otherwise provided, and
regardless of when the Original Term actually commences, if possession is not
tendered to Lessee when required by this Lease and Lessee does not terminate
this Lease, as aforesaid, the padded free of the obligation to pay Base Rent, if
any, that Lessee would have otherwise enjoyed shall run from the date of
delivery of possession and continue for a period equal to the period during
which the Lessee would have otherwise enjoyed under the terms hereof, but minus
any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated heroin
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
5
<PAGE>
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all costs incurred by Lessor relating to the ownership and operation
of the Industrial Center, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean, good order
and condition, of the following:
(aa) The Common Areas, including parking areas, loading and unloading
areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, Irrigation
systems, Common Area lighting facilities, fences and gates,
elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to service the
Common Areas. (iii) Trash disposal, property management and
security services. (iv) Reserves set aside for maintenance and
repair of Common Areas. (v) Any Increase above the Base Real
Property Taxes (as defined In Paragraph 10.2(b)) for the Building
and the Common Areas.
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(vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1).
(vii)The cost of Insurance carried by Lessor with respect to the
Common Areas.
(viii) Any deductible portion of an Insured loss concerning the
Building or the Common Areas that is not due to the acts or
omissions to Lessor. (ix) Any other services to be provided by
Lessor that are stated elsewhere in this Lease to be a Common
Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However. any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lesser has agreed elsewhere in this Lease to provide
the same or some of them.
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<PAGE>
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lesser from time to time of Lessee's Share of Annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such
overpayment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were loss than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's
execution hereof those Security Deposit set forth in Paragraph 1.7 as security
for Lessee's faithful performance of Lessee's obligations under this Lease. If
Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may
use, apply or retain all or any portion of said Security Deposit for the payment
of any amount due Lessor or to reimburse or compensate Lessor for any liability,
cost, expense, loss or damage (including reasonable attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or
any portion of said Security Deposit. Lessee shall within ten (10) days after
written request therefore deposit monies with Lessor sufficient to restore said
Security Deposit to the full amount required by this Lease. Lessor shall not be
required to keep all or any part of the Security Deposit separate from its
general accounts, Lessor shall, at the expiration or earlier termination of the
term hereof and after Lessee has vacated the Premises, return to Lessee (or, at
lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by lessor. Unless
otherwise expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other increment for
its use, or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. Use.
8
<PAGE>
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other leases, is not significantly more burdensome to the premises or the
Building and the improvements thereon, and its otherwise permissible pursuant to
this paragraph 6. If Lessor elects to withhold such consent, lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of lessor's reasonable objections to
the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. the term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; (iii) a basis for potential liability of Lessor to any governmental
agency or third party under any applicable statute or common law theory.
Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable use has hereinafter defined) or Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation or disposal of a hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without obligation to do so) condition its consent to any Reportable Use of any
Hazardous Substance by Lessee upon Lessee's giving lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasement) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
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(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation through the plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and reasonable
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under lessee's
control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not
be limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation
(including reasonable consultant's and attorneys' fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this lease. No termination, cancellation or release agreement entered into by
Lessor and lessee shall release lessee form its obligations under this lease
with respect to Hazardous Substances, unless specifically so agreed by Lessor in
writing at the time of such agreement. Indemnification should be mutual.
6.3 Lessee's Compliance with Requirements. Lessee shall, at lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the reasonable recommendations of
Lessor's engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) or any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
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6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purposes of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed by Lessee, is found to exist or
to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations,Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair reasonable wear and tear
excepted, (whether or not such portion of the Premises requiring repair, or the
means of repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use, any
prior use, the elements or the age of such portion of the Premises), including,
without limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire hose connections if within the Premises, fixtures, interior walls,
interior surfaces of exterior walls, ceilings, floors, windows, doors, plate
glass, and skylights, but excluding any items which are the responsibility of
Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the premises in good
order, condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations, replacements or
renewals when necessary to keep the Premises and all improvements thereon or a
part thereof in good order, condition and state of repair.
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(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14( Condemnation), Lessor, subject to reimbursement
pursuant to paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Area and all parts thereof, as well as providing the services
for which there is a Common Area Operating Expense pursuant to Paragraph 4.2.
Lessor shall not be obligated to paint the exterior or interior surfaces of
exterior walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessee expressly waives the
benefit of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is
used in this Lease to refer to all airlines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7 4(a) Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent which consent shall not be
unreasonably withheld. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible from
the outside of the Premises, do not involve puncturing relocating or removing
the roof or an existing walls or changing or interfering with the fire sprinkler
or fire detection systems and the cumulative cost thereof during the term of
this Lease as extended does not exceed $10,000.00.
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(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. all consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in good and workmanlike manner, with
good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition itsconsent to any requested alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to the estimated cost of such
Alteration or utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to pest
notices of nonresponsibility in or on the Premises as provided by law. If Lessee
shall, in good faith, contest the validity of any such lien, claim or demand,
then Lessee shall, at its sole expense, defend and protect itself, Lessor and
the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to the amount of such
contested lien claim or demand, indemnifying Lessor against liability for the
same, as required by law for the holding of the Premises free from the effect of
such lien or claim.
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7.4 Ownership, Removal, Surrender and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility installations made to the Premises by
Lessee shall be the property of and owned by lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
installations shall, at the expiration or earlier termination of this Lease
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee. Utility Installations shall not include Lessee's
communications system.
(b) Removal. Unless otherwise agreed in writing, Lessor may require in
its reasonable discretion, that any or all Lessee-Owned Alterations or utility
installations be removed by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any Alterations
or Utility installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the premises by the
end of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Expect
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or property of lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
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8. Insurance; Indemnity.
8.1 Payment of Premium Increases
(a) As used herein the term "Insurance Cost Increase" is defined as
any increase in the actual cost of the insurance applicable to the Building and
required to be carried by lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b), ("Required Insurance"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis, "Insurance Cost Increase" shall include,
but not be limited, to increased valuation of the Premises, and/or a general
premium rate increase. The term "Insurance Cost Increase" shall not, however,
include any premium increases resulting rom the nature of the occupancy of any
other lessee of the Building. If the parties insert a dollar amount in Paragraph
1.9, such amount shall be considered the "Base Premium". If a dollar amount has
not been inserted in Paragraph 1.9 and if the Building was not fully occupied
during such twelve (12) month period, the "Base Premium" shall be the annual
premium applicable to such twelve (12) month period, the "Base Premium" shall be
the lowest annual premium reasonably obtainable for the Required Insurance as of
the Commencement Date, assuming the most nominal use possible of the Building.
In no event, however, shall Lessee be responsible for any portion of the premium
cost attributable to liability insurance coverage in excess of $1,000,000
procured under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increases to Lessor pursuant
to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon , involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on a occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured_Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes, from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "Insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by lessee shall be primary to and not
contributory with any similar insurance carried by lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance
required to be maintained by Lessee, Lessee shall not be named as an additional
insured therein.
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8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against los or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by an Lender(s), but in no
event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature of or age of the improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility installations, Trade Fixtures and Lessee's personal
property shall be insured by lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender or included in the Base
Premium), including coverage for any additional costs resulting rom debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Building required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain and agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during
the term of this lease a policy of policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, Insurance costs, al Common Area Operating
Expenses and any scheduled rental increase). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount int he event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
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8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be reasonably required by a Lender, as
set forth in the most current issue of "Best's Insurance Guide." Lessee shall
not do or permit to be done anything which shall invalidate the insurance
policies referred to in this Paragraph 8. Lessee shall cause to be delivered to
Lessor, within seven (7) days after the earlier of the Early Possession Date or
the Commencement Date, certified copies of, or certificates evidencing the
existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4.
No such policy shall be cancelable or subject to modification except after
thirty (30) days' prior written notice to Lessor. Lessee shall prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof.
8.6 Waiver of Subrogation. without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other,a nd waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
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8.7 Indemnity. Except for Lessor's, its agents', employees', contractors'
or invitees', negligence and/or breach of express warranties, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and its
agents, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, reasonable attorneys' and
consultants' fees, expenses and/or liabilities arising out of, involving, or in
connection with the occupancy of the Premises by Lessee, the conduct of Lessee's
business, any act, omission or neglect of Lessee, its agents contractors,
employees or invitees, and out of any uncured Default or Breach by Lessee in the
performance in a timely manner of any obligation on Lessee's part to be
performed under this Lease. The foregoing shall include, but not be limited to,
the defense or pursuit of any claim or any action or proceeding involved
therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgment, in case any action or proceeding be
brought against lessor by reason of any of the foregoing matters, Lessee upon
notice from lessor shall defend the same at lessee's expense by counsel
reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such
defense, Lessor need not have first paid any such claim in order to be so
indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury to the person or goods, wares, merchandise or other property of Lessee,
Lessee's employees, contracts, invitees, customers, or any other person in or
about the Premise, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire, sprinklers, wires, appliances,
plumbing, air conditioning, or lighting fixtures, or any other cause, whether
said injury or damage results from conditions arising on the Premises or upon
other portions of the Building of which the Premises are a part, from other
sources or places, and regardless of whether thecause of such damage or injury
or the means of repairing the same is accessible or not. Lessor shall not be
liable for any damages arising from any act or neglect of any other lessee of
Lessor nor from the failure by lessor to enforce the provisions of any other
lease in the industrial Center. Notwithstanding lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable to Lessee's business
or for any loss income or profit therefrom.
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9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alternations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility installations and Trade
Fixtures) immediately prior to such damage or destruction. In addition, damage
or destruction to the building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alternations and utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than LesseeOwned Alterations and utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the premises (excluding Lessee-Owned Alternations and
utility installations and Trade Fixtures) immediately prior to such damage or
destructions. In addition, damage or destruction to the Building, other than
lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage
limited involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in paragraph 6.2(a), in, on, or under the
Premises.
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9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. In the vent, however, that there is a shortage of
insurance proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement cost
insurance coverage was not commercially reasonable an available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises. Lessor may nevertheless elect by
written notice to Lessee within ten (10) days thereafter to make such
restoration and repair as is commercially reasonable with lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect. If Lessor does not so elect to restore and repair, then this Lease shall
terminate ninety (90) days following the occurrence of the damage or
destruction. Premises Partial Damage due to flood or earthquake shall be subject
to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either party.
9.3 Partial Damage -- Uninsured Loss. If Premises Partial Damage that is
not an Insured Loss occurs, no less caused by a negligent or willful act of
Lessee (in which event lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to lessee within thirty (30) days after receipt by
lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date ninety (90) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate its Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of lessee's commitment
to pay for the repair of such damage totally at lessee's expense and without
reimbursement from lessor. Lessee shall provide lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. in such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. if Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
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9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessors' damages from lessee
except as released and waived in paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost of repair exceeds
one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises then lessee may preserve this
Lease by exercising such option. If Lessee duly exercises such option during
such period Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option during such period, then this Lease shall
terminate as of the date set forth in the first sentence of this Paragraph 9.5.
If Lessee has notified Lessor of its intent to exercise its option prior to the
occurrence of said damage, Lessee shall have the right to rescind its exercise.
9.6 Abatement of Rent' Lessee's Remedies.
(a) In the event of (i) Premises partial Damage or (ii) Hazardous
Substance Condition for which lessee is not legally responsible, the Base Rent,
Common Area Operating expenses and other charges, if any, payable by lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired. Except for abatement
of Base Rent, Common Area Operating Expenses and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and Lessee shall have no claim against Lessor for any damage suffered by
reason of any such damage, destruction, repair, remediation or restoration.
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(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
sixty (60) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
lessor and to any Lenders of which Lessee has actual notice of lessee's election
to terminate this Lease on a date not less than thirty (30) days following the
giving of such notice. If Lessee gives such notice to lessor and such lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as sued in its Paragraph 9.6
shall mean the beginning of the actual work on the Premises.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to lessors's rights under paragraph 6.2(c) and Paragraph 13), Lessor shall at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Conditions, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated Lessee within thirty (30) days after receipt by lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate its Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
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9.8 Termination--Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2(a) applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax, improvement bond or bonds, levy or tax (other than
inheritance, personal income or estate taxes) imposed upon the Industrial Center
by any authority having the direct or indirect power to tax, including any city,
state or federal government, or any school, agricultural, sanitary, fire,
street, drainage, or other improvement district thereof, levied against any
legal or equitable interest of Lessor in the Industrial Center or any portion
thereof, Lessor's right to tent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Industrial Center or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof, and
whether or not contemplated by the Parties.
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(b) As used herein, the term "Base Real Estate Property Taxes" shall
be the amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in the calendar year during which the Lease is
executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessments. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
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11. Utilities. Lessee shall pay direct for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily of by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of fifty-one
percent (51%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the New Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than fifty-one percent (51%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
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(d) As assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non- curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Further, in the event of such Breach and rental adjustment,
(i) the purchase price of any option to purchase the Premises held by Lessee
shall be subject to similar adjustment to the then fair market value as
reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation or obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the Index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, nor (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
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(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of the Lessee's obligations under this
Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee of sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any. Lessee agrees to provide Lessor
with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligation as are contrary to or inconsistent with provisions of an
assignment of sublease to which Lessor has specifically consented in writing.
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12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease, Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of such sublessee, upon receipt of a written notice from Lessor
stating that a non-disputed Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor the rents and other charges due
and to become due under the sublease. Sublessee shall rely upon any such
statement and request from Lessor and shall pay such rents and other charges to
Lessor without any obligation or right to inquire as to whether such non-
disputed Breach exists and notwithstanding any notice from or claim from Lessee
to the contrary. Lessee shall have no right or claim against such sublessee, or,
until the Breach has been cured, against Lessor, for any such rents and other
charges so paid by said sublessee to Lessor.
(b) In the event of a non-disputed Breach by Lessee in the performance
of its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
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(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. A "Default" by Lessee is defined as a failure by
Lessee to observe, comply with or perform any of the terms, covenants,
conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of five
(5) business days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) or (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) business
days following written notice by or on behalf of Lessor to Lessee.
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(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors:
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee' interest in this Lease, where possession
is not restored to Lessee within thirty (300 days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (300 days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
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13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) business days after
written notice to Lessee (or in case of an emergency, without notice), Lessor
may at its option (but without obligation to do so), perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The reasonable costs and expenses of any such performance by
Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If
any check given to Lessor by Lessee shall not be honored by the bank upon which
it is drawn, Lessor, at its own option, may require all future payments to be
made under this Lease by Lessee to be made only by cashier's check. In the event
of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise of
any right or remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by and
lawful means, in which case this Lease and the term thereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which has been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to reasonably compensate
Lessor for all the detriment proximately caused by the Lessee's failure to
perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including but not limited to the
cost of recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's fees,
and that portion of any leasing commission paid by Lessor in connection with
this Lease applicable to the unexpired term of this Lease. The worth at the time
of award of the amount referred to in provision (iii) of the immediately
preceding sentence shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank
District in which the Premises are located at the time of award plus one percent
(1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach
of this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the lawful
detainer statute shall run concurrently after the one such statutory notice, and
the failure of Lessee to cure the Default within the greater of the two (2) such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
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(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws of judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
forms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by lessee, any such
inducement Provision shall automatically be deemed deleted from this lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor, under such an
inducement Provision shall be immediately due and payable by Lessee to Lessor
and recoverable by Lessor, as additional rent due in this Lease, notwithstanding
any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent
or the cure of the Breach which initialed the operation of this Paragraph 13.3
shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3
unless specially so stated in writing by Lessor at the time of such acceptance.
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13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause lessor to incur costs
and contemplated by this lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (20) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonably estimate of the costs Lessor will incur by reason of late payment by
lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of lessee's Default or Breach with respect to such overdue amount, nor
prevent lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three 93) consecutive installments of Base Rent, then
notwithstanding paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach of Lessor. Lessor shall not be deemed in breach of this lease
unless lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. for purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days (unless in case of an
emergency) after receipt by Lessor, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then lessor shall not be in
breach of this lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
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14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called 'condemnation"), this lease shall terminate sa
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
lessee may,a t Lessee's option, to be exercised in writing within ten (10) days
after lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises or the portion of the Common Areas designated for Lessee's parking. Any
award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or of Lessee's Trade Fixtures. In the event that this lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its net
severance damages received, repair any damage to the Premises caused by such
condemnation authority.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in
writing, lessor agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) granted under this Lease or any Option subsequently granted, or
(b) if Lessee acquires any rights to the Premises or other premises in which
lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
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15.3 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 Representations and Warranties. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each party (as "Responding Party") shall within ten
(10) days after written notice form the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
publicly available financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's publicly available financial statements for the past three (3) years.
All such financial statements shall be received by Lessor and such lender or
purchaser in confidence and shall be used only for the purposes herein set
forth.
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17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this lease hereafter to be performed by the Lessor. subject to
the foregoing, the obligations and/or covenants in this lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. the invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) business days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. Time is of the essence with respect to the performance of all
obligations to be performed or observed by the Parties under this Lease.
22. No Prior or other Agreements; Broker Disclaimer. This lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as tot he nature, quality,
character and financial responsibility of the other Party to this Lease as to
the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
thereof by either Party. Each Broker shall be an intended thirty party
beneficiary of the provisions of this Paragraph 22.
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23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
party's signature on this lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown,t he postmark thereon. if sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar moans, the same shall
be deemed served or delivered upon telephone confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach of Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by lessor shall not be a waiver of any Default or breach by lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by lessor at or before the
time of deposit of such payment.
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25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
lease for recording purposes. the party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased one hundred twenty-five
percent (125%) of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination. Nothing contained herein shall
be construed as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
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30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
party, to any and all advances made on the security thereof, and to al renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
lease. If any lender shall elect to have this Lease and/or any Option granted
hereby superior to the lien of its Security Device and shall give written notice
thereof to lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent and the Security Deposit.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorneys to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution el any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
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31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereinafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party or Broker of its claim or defense. The attorneys'
fee award shall not be computed in accordance with any court fee schedule, but
shall be such as to fully reimburse all attorneys' fees reasonably incurred.
Broker(s) shall be intended third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise upon twenty-four (24) hours notice to Lessee for the purpose at
showing the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time place
on or about the Premises or Building any ordinary "For Sale" signs and Lessor
may at any time during the last one hundred eighty (180) days of the term hereof
place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lesser and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions of
Paragraph 7 (Maintenance Repairs Utility Installations Trade Fixtures an agreed
heroin Lessor reserves all rights to the use of the roof of the Building, and
the right to install advertising signs on the Building, including the roof,
which do not unreasonably interfere with the conduct of Lessee's business or
advertise the business of competitors of Lessee. Lessor shall be entitled to all
revenues from such advertising signs.
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35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises: provided, however, Lessor shall, in the event of any such surrender.
Termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser Interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise specifically
stated in writing Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this lease per
paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
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38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the following
moaning: (a) the right to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal to lease the Premises or the
right to first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right to purchase the Premises, or the right to
first refusal to purchase the Premises, or the right of first offer to purchase
the Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first offer
to purchase other property of Lessor.
39.2 Options Personal to Original Lessee. Each Options granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession el the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, heroin granted to Lessee are not
assignable, either as a pad of an assignment of this Lease or separately or a
pad therefrom, and no Option may be separated from this Lease in any manner, by
reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exorcised unless
the prior Options to extend or renew this Lease have boon validly exorcised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13,1 and
continuing until the noticed Default is cured, or (it) during the period of lime
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Broach of this Lease, or (iv) in the event that Lessor has given to Lessee throe
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month pod-ed immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (it) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
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40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the record a
lien of parcel maps and restrictions, so long as such easements, rights of way,
utility raceways, dedications, maps and restrictions do not reasonably interfere
with the use of the Premises by Lessee. Lessee agrees to sign any documents
reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment 'under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the pad of said Party to pay such sum or
any pad thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
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45. Conflict. Any conflict between the printed provisions to this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not change
Lessee's obligations hereunder, Lessee agrees to make such reasonable
non-monetary modifications to this Lease as may be reasonably required by an
institutional insurance company or pension plan Lender in connection with the
obtaining of normal financing or refinancing of the property of which the
Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR
YOUR ATTORNEY'S REVIEW AND APPROVAL, FURTHER, EXPERTS SHOULD
BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE
POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR
HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY
THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS
LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at:Los Angeles, CA Executed at:City of Industry, CA
on:March 27, 1997 on:March 21, 1997
By LESSOR: By LESSEE:
Barbara M. Ross, an individual Liuski International, Inc.
By: By: /s/ Hsing Yen Liu
Name Printed: Barbara M. Ross Name Printed: Hsing Yen Liu
Title: /s/ Barbara M. Ross Title: CEO
By: /s/ Gordon L. Polimer By:
Her attorney in fact
Title: Title:
Address: 1201 South Olive Street Address: 6585 Crescent Drive
Los Angeles, CA 90015 Norcross, Georgia 30071
Telephone: (213)747-6531 Telephone:
Facsimile: (213)747-4305 Facsimile:
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BROKER: S.D. HERMAN CO. BROKER: THE SEELEY COMPANY
Executed at: Los Angeles, CA Executed at:
on: March 27, 1997 on:
By: /s/ S.D. Herman By:
Name Printed: S.D. Herman Name Printed: Steven J. Bellitti
Title: Treasurer Title: Associate Vice President
Address: 1201 South Olive Street Address: 21700 E. Copley Dr., Suite 700
Los Angeles, CA 90015 Diamond Bar, CA 91765
Telephone: (213)747-6531 Telephone: (818)964-2225
Facsimile: (213)747-4305 Facsimile: (909)860-9669
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RENT ADJUSTMENT(S)
ADDENDUM TO
STANDARD LEASE
Dated March 21, 1997
By and Between (Lessor) Barbara M. Ross
(Lessee) Liuski International, Inc.
Property Address: 15939 E. Valley Boulevard, City of Industry
Paragraph 49
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
|X| I. Cost of Living Adjustment(s) (COL)
(a) On (Fill in COL Adjustment Date(s): The first (1st) day of the
nineteenth (19th) month
--------------------------------------------------------
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted by the change, if any, from the Base month specified below, in
the Consumer Price Index of the Bureau of Labor Statistics of the U.S.
Department of Labor for(select one): |X| CPIW (Urban Wage Earners and Clerical
Workers) or |_| CPIU (All Urban Consumers), for (Fill in Urban Area): Los
Angeles - Anaheim - Riverside , All Items (1982-1984 = 100), herein referred to
as "C.P.I."
(b) The monthly rent payable in accordance with paragraph Al(a) of this
Addendum shall be calculated as follows: The Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph A(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): |X| the first month of the
term of this Lease as set forth in paragraph 1.3 ("Base Month") or |_| (Fill in
Other "Base Month"): June 1, 2000 . The sum so calculated shall constitute the
new monthly rent hereunder, but in no event, shall any such new monthly rent be
less than the rent payable for the month immediately preceding the date for rent
adjustment.
(c) In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
(d) The C.P.I. shall be no less than three percent (3%) and no greater than
six percent (6%) per annum.
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_
|_| II. Market Rental Value Adjustment(s) (MRV)
(a) On (Fill in MRV Adjustment Date(s):
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted to the "Market Rental Value" of the property as follows:
1) Four months prior to the market Rental Value (MRV) Adjustment
Date(s) described above, Lessor and Lessee shall meet to establish an agreed
upon new MRV for the specified term. if agreement cannot be reached, then:
i) Lessor and Lessee shall immediately appoint a mutually acceptable
appraiser or broker to establish the new MRV within the next thirty (30) days.
Any associated costs will be split equally between the parties, or
ii) Both lessor and lessee shall each immediately select and pay the
appraiser or broker of their choice to establish a MRV within the next thirty
(30) days. If, for any reason, either one of the appraisals is not completed
within the next 30 days, as stipulated, then the appraisal that is completed at
that time shall automatically become the new MRV. If both appraisals are
completed and the two appraisers/brokers cannot agree on a reasonable average
MRV then they shall immediately select a third mutually acceptable
appraiser/broker to establish a third MRV within the next day 30 days. The
average of the two appraisals closest in value shall then become the new MRV.
The costs of the third appraisal will be split equally between the parties.
2) In any event, the new MRV shall not be less than the rent payable for
the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as described in
paragraph All:
1) the monthly rental sum so calculated for each term as specified in
paragraph AII(a) will become the new "Base Rent" for the purpose of calculating
any further Cost of Living Adjustments as specified in paragraph AI(a) above and
2) the first month of each Market Rental value term as specified in
paragraph AII(a) shall become the new "Base Month" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
AI(b).
_
|_| III. Fixed Rental Adjustments(s) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached lease
shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment Date(s)): The New Base Rental Shall be:
$
------------------------------------ -----------------------------
$
------------------------------------ -----------------------------
$
------------------------------------ -----------------------------
$
------------------------------------ -----------------------------
B. NOTICE: Unless specified otherwise herein, notice of any escalations other
than Fixed Rental Adjustment(s) shall be made as specified in paragraph 23 of
the attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in
accordance with paragraph 15 of the attached lease.
48
<PAGE>
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
Dated March 21, 1997
By and Between (Lessor) Barbara M. Ross
(Lessee) Liuski International, Inc.
Property Address: 15939 E. Valley Boulevard
Paragraph 50
A. OPTIONS TO EXTEND:
Lessor hereby grants to lessee the option to extend the term of this Lease
for ( (1) ) additional (36) month period(s) commencing when the prior term
expires upon each and all of the following terms and conditions:
(i) Lessee gives to lessor, and Lessor actually receives on a date which is
prior to the date that the option period would commence (if exercised) by at
least (4) and not more than (6) months, a written notice of the exercise of the
option(s) to extend this lease for said additional term(s), time being of
essence. if said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to default
of Lessee set forth in paragraph 39.4 of this lease are conditions of this
Option;
(iii) All of the terms and conditions of this Lease except where specifically
modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be calculated as
follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
_
|_| I. Cost of Living Adjustment(s) (COL)
(a) On (Fill in COL Adjustment Date(s): the first (1st) day of the
nineteenth (19th) month of herein option term.
- --------------------------------------------------------------------------------
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted by the change, if any, from the Base month specified below, in
the Consumer Price Index of the Bureau of Labor Statistics of the U.S.
Department of Labor for(select one): |X| CPIW (Urban Wage Earners and Clerical
Workers) or |_| CPIU (All Urban Consumers), for (Fill in Urban Area): Los
Angeles - Anaheim Riverside, All Items (1982-1984 = 100), herein referred to as
"C.P.I."
(b) The monthly rent payable in accordance with paragraph Al(a) of this
Addendum shall be calculated as follows: The Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph AI(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): |_| the first month of the
term of this Lease as set forth in paragraph 1.3 ("Base Month") or [X] (Fill in
Other "Base Month"): June 1, 2000 . The sum so calculated shall constitute the
new monthly rent hereunder, but in no event, shall any such new monthly rent be
less than the rent payable for the month immediately preceding the date for rent
adjustment.
(c) In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that Lessor and Lessee cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
49
<PAGE>
|X| II. Market Rental Value Adjustment(s) (MRV)
(a) On (Fill in MRV Adjustment Date(s): June 1, 2000
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be adjusted to the "Market Rental Value" of the property as follows:
1) Four months prior to the market Rental Value (MRV) Adjustment
Date(s) described above, Lessor and Lessee shall meet to establish an agreed
upon new MRV for the specified term. if agreement cannot be reached, then:
i) Lessor and Lessee shall immediately appoint a mutually acceptable
appraiser or broker to establish the new MRV within the next 30 days. Any
associated costs will be split equally between the parties, or
ii) Both lessor and lessee shall each immediately select and pay the
appraiser or broker of their choice to establish a MRV within the next 30 days.
If, for any reason, either one of the appraisals is not completed within the
next 30 days, as stipulated, then the appraisal that is completed at that time
shall automatically become the new MRV. If both appraisals are completed and the
two appraisers/brokers cannot agree on a reasonable average MRV then they shall
immediately select a third mutually acceptable appraiser/broker to establish a
third MRV within the next day 30 days. The average of the two appraisals closest
in value shall then become the new MRV. The costs of the third appraisal will be
split equally between the parties.
2) In any event, the new MRV shall not be less than the rent payable for
the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as described in
paragraph All:
1)the monthly rental sum so calculated for each term as specified in
paragraph AII(a) will become the new "Base Rent" for the purpose of calculating
any further Cost of Living Adjustments as specified in paragraph AI(a) above and
2) the first month of each Market Rental value term as specified in
paragraph AII(a) shall become the new "Base Month" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
AI(b).
|_| III. Fixed Rental Adjustments(s) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached lease
shall be increased to the following amounts on the dates set forth below:
$
------------------------------------ -----------------------------
$
------------------------------------ -----------------------------
$
------------------------------------ -----------------------------
$
------------------------------------ -----------------------------
B. NOTICE: Unless specified otherwise herein, notice of any escalations other
than Fixed Rental Adjustment(s) shall be made as specified in paragraph 23 of
the attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in
accordance with paragraph 15 of the attached lease.
50
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-
GROSS BY AND BETWEEN BARBARA M. ROSS (LESSOR) AND LIUSKI
INTERNATIONAL, INC. (LESSEE) DATED: MARCH 21, 1997
51. PERMITS AND LICENSES: Lessee shall have five (5) days from mutual execution
of leases to satisfy itself that it can obtain the necessary governmental
permits and licenses to operate its business in the subject premises.
52. TENANT IMPROVEMENTS: Lessor, at Lessor's sole cost and expense shall
complete the following tenant improvements prior to the lease Commencement:
A. Remove the walls in the existing office area in
accordance with Exhibit"B".
B. Construct new offices adjacent to the existing
offices in accordance with Exhibit "B". The new
offices shall include a large sales area, a
conference room, a training room, a cafeteria, a
phone room, and four (4) enlarged pass throughs in
the concrete demising wall.
C. Recarpet the existing and new office areas with a
mutually agreed upon standard industrial grade
carpet.
D. Retile the cafeteria and restrooms with a mutually
agreed upon standard industrial grade tile.
E. Repaint the new and existing office areas.
F. Repair/replace any broken or stained ceiling tiles.
G. Sanitize the restrooms.
H. Seal the existing pass through in the warehouse area.
All tenant improvements shall be constructed in a
workmanlike manner in accordance with all city codes
and ordinances. lessor shall submit plans for herein
tenant improvements, prepared by a licensed engineer,
to Lessee for its review and approval. Lessee agrees
to return singed plans to lessor within three (3)
business days of receipt.
53. RENTAL ABATEMENT: Lessor shall grant to lessee month two (2) of the
initial lease term free of base rental payments.
54. Wherever the words"Industrial Care" are stated in herein Lease, it shall be
replaced with the word "Premises".
[EXHIBITS "A" and "B" -- Diagrams of Property -- have been omitted.]
51
Exhibit 23
Consent of Independent Certified Public Accountants
Liuski International, Inc.
Norcross, Georgia
We hereby consent to the incorporation by reference in the Registration
Statements No. 33-5776, 333-04275 and 333-04277, respectively, on Forms S-8 and
Registration Statement No. 33-69126 on Form S-3 of our reports dated March 6,
1998, relating to the consolidated financial statements and schedules of Liuski
International, Inc. appearing in the Company's Annual Report on Form 10-K, for
the year ended December 31, 1997. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Registration statement on Form S-3.
BDO Seidman, LLP
March 27, 1998
Atlanta, Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,092
<SECURITIES> 0
<RECEIVABLES> 20,284
<ALLOWANCES> 1,781
<INVENTORY> 29,869
<CURRENT-ASSETS> 54,312
<PP&E> 2,367
<DEPRECIATION> 2,912
<TOTAL-ASSETS> 56,943
<CURRENT-LIABILITIES> 39,605
<BONDS> 0
0
6,997
<COMMON> 62
<OTHER-SE> 10,155
<TOTAL-LIABILITY-AND-EQUITY> 56,943
<SALES> 290,708
<TOTAL-REVENUES> 290,708
<CGS> 273,366
<TOTAL-COSTS> 273,366
<OTHER-EXPENSES> 24,684
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,459
<INCOME-PRETAX> (9,800)
<INCOME-TAX> 888
<INCOME-CONTINUING> (10,688)
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<NET-INCOME> (10,688)
<EPS-PRIMARY> (2.29)
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