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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19378
LIUSKI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3065217
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6585 Crescent Drive, Norcross, Georgia 30071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 447-9454
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 19, 1999, was approximately $1,441,000.
As of March 19, 1999, the registrant had 4,610,292 shares of Common Stock, $.01
par value per share outstanding.
<PAGE>
PART I
ITEM 1. BUSINESS
General
The Company is a distributor of microcomputer peripherals, components and
accessories throughout the U.S. and in certain foreign countries. The Company
also has previously offered its own Magitronic brand of IBM-compatible personal
computers and notebooks, as well as Magitronic private-label components and
accessories. However, as described below, the Company has ceased purchasing
inventory, ceased the Magitronic brand assembly operations and begun closing a
number of its distribution centers. The Company has distributed products made by
U.S. manufacturers, including Samsung Information Systems America, Inc.
("Samsung") and Western Digital Corporation ("Western Digital"). In addition,
the Company has distributed private-label products made by foreign
manufacturers. Customers of the Company have been value-added resellers, systems
integrators, consultants, retail stores, smaller distributors, end-user
corporations and government entities. (See "Strategy and Current Developments"
below).
Although the Company's business has not been highly seasonal, the second
calendar quarter has been generally a period of weaker net sales in comparison
to the rest of the year.
The Company is a Delaware holding company and has eight wholly-owned
subsidiaries that have operated 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 and Current Developments
The Company's credit facility originally expired in June 1998 and had been
extended from time to time since the original termination date. Since December
31, 1996, the Company has been in violation of certain financial covenants under
its credit facility and had been discussing these defaults with its lender with
the goal of renegotiating the credit facility.
In early January 1999, the Company was notified by its lender that further
extensions of the credit facility due date would not be granted. Consequently,
on or about January 22, 1999, in order to repay the secured lender, the Company
ceased purchasing inventories, cut its workforce by seventy-five percent
(approximately 90 personnel), ceased the Magitronic brand assembly operations
and began the process of closing its Miami, Los Angeles, Chicago and Toronto
operations. Additionally, the Company began selling excess fixed assets and
inventories at discounted prices on a COD basis to accelerate the inflow of
cash. Consequently, the 1998 consolidated financial statements include charges
for the impairment of fixed assets and reduction of inventories to the lower of
cost or market-based upon these events. As a consequence of the Company's
implementation of this plan, the secured lender has agreed to forbear from
exercising its rights and remedies under the credit facility through April 16,
1999. The secured lender has reserved all of these rights and remedies. The
amount owed to the secured lender has decreased from $10,340,252 ($6,289,889
under the revolving credit loan and $4,050,363 under the inventory floor
planning facility -- see Note 3) at December 31, 1998 to $1,506,174 at March 19,
1999, a decrease of $8,835,078 or 85%.
Management does not plan to discontinue operations and/or file for
bankruptcy. The first priority of management is to continue raising cash to pay
off the secured debt. The Company is exploring other financial arrangements,
including potential buyers, new secured financings and potential capital
infusions from the majority shareholder or others to support operations when and
if the repayment of the secured lender is complete. If this process is completed
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favorably, management plans to move operations to a smaller location and try to
reestablish its presence in the computer distribution industry on a smaller
basis. In order to continue operations, the Company will have to negotiate
reductions of the amount it owes to its vendors and other unsecured creditors.
The success of this plan depends on the Company's securing new financing and the
willingness of creditors to accept settlements. There can be no assurance that
management's plan will be successful.
This Annual Report on Form 10-K should be read in conjunction with the
disclosure set forth in this section, "Strategy and Current Developments."
Regional Sales
The following table sets forth a regional breakdown for the periods
indicated of the Company's net sales and the percentage of the Company's total
net sales represented thereby:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------------------------ ---------------------------------- --------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
REGION
Northeast(1) $ 31,387 18.7% $ 53,992 18.6% $ 82,772 19.6%
Southeast 88,294 52.4% 168,900 58.1% 218,427 51.7%
Mid- and Southwest 32,942 19.6% 46,740 16.1% 73,336 17.4%
West 15,574 9.3% 21,076 7.2% 43,301 10.3%
Pacific(2) - - - - 1,230 0.3%
Mail Order(3) - - - - 3,244 0.7%
------------ ------------ ---------- ------------ ----------- ---------
Total $168,197 100.0% $290,708 100.0% $422,310 100.00%
========== ======= ========== ======= ========== ========
- -------------
</TABLE>
(1) Includes the distribution center located in Toronto, Canada.
(2) Includes Hong Kong sales center that was closed during 1996.
(3) The Company discontinued its direct mail operations (ProCORP) in June 1996.
The discussions which follow in this Item 1 are indicative of the Company's
business as it existed during 1998 but must be considered in light of the
Company's having ceased purchasing inventory, ceased assembly of Magitronic
products and begun to close a number of its distribution centers during January
1999. See "Strategy and Current Developments," above.
Products (see "Strategy and Current Developments" above)
Sales of the Company's Magitronic brand of personal computers and notebooks
as a percentage of total net sales were 14.9%, 19.3% and 21.0% for the years
ended December 31, 1998, 1997 and 1996, respectively. Included in Magitronic
personal computers are private-label and brand-name components that the Company
has sold separately in its distribution business.
The major categories of products distributed by the Company in 1998 are
described below:
Magitronic Microcomputers and Notebooks. The Company distributed 15
standard Magitronic brand IBM-compatible personal computers. Magitronic offered
systems ranging from Pentium 200MMX MHz to high-end Pentium-II 400 MHz. The
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Company distributed 12 standard Magitronic brand IBM-compatible notebook
computers which ranged from Pentium 166 MMX MHz to Pentium II 266 MHz with
12.1", 13.3", 14.1" TFT LCD (see "Strategy and Current Developments" above).
Other Magitronic Brand Products. The Company's other Magitronic brand
products consisted 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 distributed Western Digital and Samsung hard disk
drives, Goldstar and Samsung CD-ROMs, and Agate floppy diskettes.
Monitors. The Company distributed Magitronic and Goldstar Technology, Inc.
monitors.
Multimedias. The Company distributed soundboards, video cards and speakers
that facilitate music, sound and video pictures that are produced by computers.
The Company distributed multimedia products from Magitronic and Diamond Computer
Systems, Inc.
Networking Products. Local area networks (LANs) allow communication among
computers. The Company sold networking products of Complex and Magitronic.
Software. Along with its own Magitronic personal computers, the Company
bundled Lotus Smart Suite, MS-DOS and Windows software under licenses from Lotus
and Microsoft.
Suppliers (see "Strategy and Current Developments" above)
Products were 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. None of the Company's material supply agreements requires 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 provided 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 were 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.
The Company sourced 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 required. The
Company has not acquired new products from vendors since January 1999. See
"Strategy and Current Developments," above.
Assembly Operations
Throughout 1998, the Company assembled its Magitronic brand of personal
computers at its facility located in Norcross, Georgia. The Company did 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.
On January 22, 1999, the Company ceased its assembly operations (see "Strategy
and Current Developments" above).
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Sales and Marketing
The Company's sales operations are conducted from its distribution
center at Norcross, Georgia and from sales offices located in New York.
(see "Strategy and Current Developments" above).
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) were tested by the Company and replaced
entirely or repaired if the Company was able to simply replace the defective
component(s). The Company serviced Magitronic personal computers that were no
longer covered by warranty and charged the customers for these services.
Generally, the Company shipped returns of other defective products to the
manufacturer or sent them to an authorized manufacturer repair center. The
Company generally accepted returns of "Dead On Arrival" products within 30 days
from invoice. The Company provided full refunds for products returned within two
weeks due to the Company's error in filling or writing a product order. Due to
employee reductions in January 1999, the Company's level of services to its
customers has been significantly reduced and the Company continues to provide
technical assistance to its customers on a limited basis - See "Strategy and
Current Developments," above.
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 has been material as
substantially all of these costs were 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 March 19, 1999, the Company had 24 full-time employees, including 2
in sales, 1 in engineering, 2 in customer service, 4 in warehouse, 14 in
administrative and 1 in data processing.
Patents, Trademarks and Licenses
The Company does not have any patents and does not consider patents
significant to its operations.
The trademarks "Magitronic" and "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 other 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.
The Company's Magitronic personal computers and private-label Magitronic
products have competed with a large number of manufacturers, most of which have
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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
Most of the Company's leases have initial terms not exceeding five years
to allow the Company flexibility to accommodate potential relocation.
Information is set forth below regarding the Company's distribution and sales
centers.
<TABLE>
<CAPTION>
Floor Area Current
Approximate Lease Annual
Location Square Feet Expiration Date Rent
-------------------- ------------- ------------------- -------------
<S> <C> <C> <C>
Norcross, GA 156,000 December 31, 1999 $546,700
Plainview, NY 10,000 July 31, 2003 85,000
Chicago, IL 34,000 December 31, 1999 178,600
Miami, FL 28,800 October 31, 2000 213,000
Los Angeles, CA (1) 49,500 May 31, 2000 211,100
Los Angeles, CA 4,150 November 30, 1999 64,000
Toronto, Canada 34,100 March 31, 1999 22,600
------------- ----------
Total 316,550 $1,321,000
============= ==========
</TABLE>
(1) This location has been subleased to third parties.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named in a number of lawsuits, primarily by vendors,
demanding to be paid for products allegedly delivered to the Company. One such
case by a vendor, Hansol Electronics, Inc., seeks $853,380 plus interest for
computer monitors allegedly previously delivered to the Company. The liabilities
arising from these actions may have a material adverse effect upon the Company.
In addition, the Company's obligations to its landlords arising from the
Company's closing of a number of its distribution centers may have a material
adverse effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), is
quoted on the OTC Bulletin Board under the symbol "LSKI." The Common Stock was
delisted from The NASDAQ SmallCap Market on January 13, 1999. The Common Stock
had also traded on The NASDAQ National Market until November 1998. As of March
19, 1999, there were approximately 100 holders of record 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 and/or The
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NASDAQ SmallCap Market, for the periods indicated. (All per share amounts have
been restated to reflect the two-for-five reverse stock split which became
effective on July 1, 1998).
Calendar Period High Low
--------------- ------ -----
Year Ended December 31, 1997
First quarter 6.25 3.44
Second quarter 4.06 2.66
Third quarter 5.00 3.28
Fourth quarter 3.75 1.00
Year Ended December 31, 1998
First quarter 2.29 1.33
Second quarter 2.73 0.50
Third quarter 2.00 0.63
Fourth quarter 1.13 0.50
The last closing bid price of the Company's Common Stock through March 19, 1999
was $ 5/16.
Dividend Policy
Since its inception, the Company has not paid any dividends other than S
Corporation distributions with respect to periods prior to the completion of its
initial public offering of common stock 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, 1998.
Data relating to the years ended December 31, 1998, 1997, 1996, 1995, and
1994 is derived from the Consolidated Financial Statements appearing elsewhere
in this Report or in previous reports 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.
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<TABLE>
<CAPTION>
Income Statement Data:
Year ended December 31,
1998 1997 1996 1995 1994
---------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $168,197 $ 290,708 $ 422,310 $ 395,135 $ 365,101
Gross Profit $ 4,802 $ 17,342 $ 26,072 $ 29,592 $ 28,424
Selling, General and
Administrative Expenses $ 21,178 $ 24,684 $ 33,352 $ 29,202 $ 25,375
(Loss) Income from Operations $ (16,376) $ (7,342) $ (7,280) $ 390 $ 3,049
Net (Loss) Income $ (17,640) $(10,688) $ (7,815) $ (1,069) $ 1,042
Basic (Loss) Income
Per Common Share $ (3.89) $ (5.72) $ (4.46) $ (.61) $ .59
Diluted (Loss) Income
Per Common Share $ (3.89) $ (5.72) $ (4.46) $ (.61) $ .57
Balance Sheet Data:
December 31,
1998 1997 1996 1995 1994
---------------- -------------- ------------- ------------- --------------
Working Capital $(1,491) $ 14,583 $ 15,953 $ 44,650 $ 44,968
Total Assets $ 20,521 $ 56,943 $ 90,454 $ 83,708 $ 74,043
Long-Term Liabilities $ - $ - $ 406 $ 21,667 $ 21,119
Stockholders' (Deficit) Equity $ (426) $ 17,214 $ 18,524 $ 26,339 $ 27,408
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
This Item 7 should be read in conjunction with the disclosure in "Business
- - Strategy and Current Developments", above.
Years ended December 31, 1998 and 1997
Net Sales: Net sales for the year ended December 31, 1998 were
$168,196,805, representing a net decrease of $122,511,423 (42.1%) from
$290,708,228 for the year ended December 31, 1997. The Company's distribution
sales, which exclude Magitronic systems and notebooks, for the year ended
December 31, 1998 decreased to $143,212,755 (85.1% of net sales) from
$234,587,392 (80.7% of net sales) for the year ended December 31, 1997. 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, turnover in sales personnel and
the gradual downsizing of operations throughout the year due to competitive
pressures as well as the instability of the Company's credit facility
contributed to the decrease in sales. 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, 1998 decreased to $24,984,050 (14.9% of net
sales) from $56,120,836 (19.3% of net sales) for the year ended December 31,
1997. The decrease in Magitronic sales is substantially attributable to lower
sales of notebook computers and price decreases in components which have
resulted in a corresponding price decrease in Magitronic personal computers and
notebook computers. In addition, there has been substantial turnover in
Magitronic product management, which has contributed to the reduction in
Magitronic sales. Included in Magitronic personal computers are private-label
and brand-name components that the Company also sold separately in its
distribution business. The Company also sold components separately under the
Magitronic name. As discussed above, as of January 1999, the Company ceased
purchasing inventory, ceased the Magitronic brand assembly operations and began
closing a number of its distribution centers.
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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 $12,540,482 to $4,801,540 (2.85% of
net sales) for the year ended December 31, 1998 from $17,342,022 (6.0% of net
sales) for the year ended December 31, 1997. The dollar decrease in gross profit
is directly attributable to the 42.1% sales decrease from the prior year as
discussed above. Margins were negatively affected by the sale of certain slower
moving goods at discounted prices. 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 and wrote
off approximately $2.5 million of these vendor credits during the fourth quarter
of 1998. Also, a charge of $1,565,000 was taken in the fourth quarter of 1998 to
reduce inventories to the lower of cost or market.
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 8.5% for the
year ended December, 31, 1997 to 12.5% for the year ended December, 31, 1998.
Such expenses decreased from $24,683,516 in 1997 to $21,177,605 in 1998. The
increase in selling, general and administrative expenses as a percentage of
sales was primarily due to sales decreasing at a higher rate than expenses. The
dollar decrease in these expenses was primarily a result of lower operating
levels and significant lay-offs of personnel. During 1998, the Company's number
of employees was reduced by approximately 160. Salaries for the year ended
December 31, 1998 decreased to $6,950,496 (4.1% of net sales) from $10,470,721
(3.6% of net sales) for the year ended December 31, 1997, as a result of the
reduction in the number of employees. Additionally, the Company's bad debt
expense increased to $3,264,381 (1.9% of net sales) for the year ended December
31, 1998, from $1,811,721 (0.6% of net sales) for the year ended December 31,
1997, due to a deterioration of collectibility, due in part to turnover in the
collection personnel.
Other Expenses: Interest expense decreased to $1,374,991 in 1998 from
$2,254,934 in 1997. The decrease in interest expense was due to a decrease in
borrowings as well as the full year effect of the December 1997 interest rate
reduction to 150 basis points over the prime rate.
Income Taxes: Income taxes decreased from a $888,000 net expense in 1997 to
zero in 1998. This change is due to the reduction of deferred income tax assets
in 1997 that existed as of December 31, 1996. As of December 31, 1998 and 1997,
a 100% valuation allowance exists 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.
Net Loss: Net loss increased by $6,951,683 to $17,639,841 (10.5% of net
sales) for the year ended December 31, 1998 from a loss of $10,688,158 (3.7% of
net sales), for the year ended December 31, 1997. The Company's net loss for the
year ended December 31, 1998 was substantially affected by the decrease in sales
and gross profit as well as increases in bad debt discussed earlier in this
section.
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
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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 increased the emphasis on higher profit margin items to
creditworthy customers. This change in philosophy 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 was 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") dropped in price by fifty percent (50%), and monitor
and CD ROM prices also decreased dramatically. In addition, there was
substantial turnover in Magitronic product management, which contributed to the
reduction in Magitronic sales. Included in Magitronic personal computers are
private-label and brand-name components that the Company also sold separately in
its distribution business. The Company also sold 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.
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
discussed 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.
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 was 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.
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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.
Impact of Inflation
The Company has not been adversely affected by inflation because
technological advances and competition within the microcomputer industry have
generally caused prices of products sold by the Company to decline. The Company
has flexibility in its pricing because it has no long-term contracts with most
of its customers and, accordingly, could, if necessary, pass along price changes
to its customers.
Liquidity and Capital Resources
The Company has suffered net losses of $17,639,841, $10,688,158 and
$7,815,440 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company's credit facility originally expired in June 1998 and had been
extended from time to time since the original termination date. Since December
31, 1996, the Company has been in violation of certain financial covenants under
its credit facility and had been discussing these defaults with its lender with
the goal of renegotiating the credit facility.
In early January 1999, the Company was notified by its lender that further
extensions of the credit facility due date would not be granted. Consequently,
on or about January 22, 1999, in order to repay the secured lender, the Company
ceased purchasing inventories, cut its workforce by seventy-five percent
(approximately 90 personnel), ceased the Magitronic brand assembly operations
and began the process of closing its Miami, Los Angeles, Chicago and Toronto
operations. Additionally, the Company began selling excess fixed assets and
inventories at discounted prices on a COD basis to accelerate the inflow of
cash. Consequently, the 1998 consolidated financial statements include charges
for the impairment of fixed assets ($679,000 included in selling, general and
administrative expenses) and reduction of inventories to the lower of cost or
market ($1,565,000 included in cost of sales) based upon these events. Cash
receipts are being monitored throughout each day and are used to reduce amounts
owed to the secured lender with accounts payable to vendors remaining unpaid and
aging. As a result of the Company's implementation of this plan, the secured
lender has agreed to forbear from exercising its rights and remedies under the
credit facility through April 16, 1999. The secured lender has reserved all of
these rights and remedies. The amount owed to the secured lender has decreased
from $10,340,252 ($6,289,889 under the revolving credit loan and $4,050,363
under the inventory floor planning facility -- see Note 3) at December 31, 1998
to $1,506,174 at March 19, 1999, a decrease of $8,835,078 or 85%. These matters
raise substantial doubt about the Company's ability to continue as a going
concern.
11
<PAGE>
Management does not plan to discontinue operations and/or file for
bankruptcy. The first priority of management is to continue raising cash to pay
off the secured debt. The Company is exploring other financial arrangements,
including potential buyers, new secured financings and potential capital
infusions from the majority shareholder or others to support operations when and
if the repayment of the secured lender is complete. If this process is completed
favorably, management plans to move operations to a smaller location and try to
reestablish its presence in the computer distribution industry on a smaller
basis. In order to continue operations, the Company will have to negotiate
reductions of the amount it owes to its vendors and other unsecured creditors.
The success of this plan depends on the Company's securing new financing and the
willingness of creditors to accept settlements. There can be no assurance that
management's plan will be successful.
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 $11,411,194 and $3,701,852 for the years
ended December 31, 1998 and 1997, respectively. The increase in net cash flows
from operating activities between 1998 and 1997 in the amount of $7,709,342
primarily resulted from significant decreases in accounts receivable and
inventories, partially offset by corresponding decreases in accounts payable and
accrued expenses. For the years ended 1998 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 $(1,491,468) and $14,583,485 as of December 31, 1998
and 1997, respectively. 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, the borrowing rate was
reduced to 150 basis points over the prime rate (7.75% as of December 31, 1998).
As of December 31, 1998 and 1997, the Company owed $6,289,889 and $18,424,730,
respectively, under its revolving credit loan. As of December 31, 1998, the
Company had $6,314,980 available for cash borrowings under its revolving credit
loan and floor planning of inventory purchases.
Asset Management
The Company has ceased purchasing inventory as of January 1999 and began
selling excess fixed assets and inventories at discounted prices on a COD basis;
the information set forth below was applicable to the Company during 1998 but is
qualified by such recent developments.
Inventory. 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 46 days
during 1998 and 45 days during 1997. The Company takes a physical inventory
every month that is compared to its perpetual inventory and monitors inventory
levels daily according to sales made by product and distribution center.
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 1998 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
12
<PAGE>
during the period the Company believes it would need to establish alternate
sources of inventory supply at required volume levels. The Company has not
acquired inventory from vendors since January 1999. See "Strategy and Current
Developments," above.
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 34 days and 27 days for the years ended December
31, 1998 and 1997, respectively. The increase in the average days' sales
receivable was a result of reduced sales and turnover in collection personnel
which contributed to a deterioration of collectibility.
Year 2000 Risks
Computers, software and other equipment utilizing microprocessors that use
only two digits to identify a year in a date field may be unable to process
accurately certain data-based information referencing the year 2000. This is
commonly referred to as the "Year 2000 issue." Given the current state of the
Company's business and financial condition as disclosed above, the Company has
had limited resources and personnel to address this issue. The Company does not
have a formal contingency plan, nor has it specifically allocated funds, to
address the year 2000 issue. The Company believes that the products which it
distributes for sale are Year 2000 compliant but has not been able to
independently verify the Year 2000 compliance of each such product. The Company
also has not assessed the risk to the Company with respect to the compliance of
vendors and suppliers which have been important to the Company in the past. The
Company believes that its internal systems and devices are Year 2000 compliant
but has not specifically allocated resources and personnel to ascertain this
belief. During 1998, the Company discovered that its inventory bar-coding
equipment was not Year 2000 compliant and has discontinued use of this
equipment. This inventory system has been supplanted by other procedures. The
total costs to be incurred by the Company to become Year 2000 compliant cannot
be currently estimated but could be material to the Company's financial position
and results of operations, and are expected to be charged to expense as
incurred. The Company may also incur costs related to any customer claims or
other claims against the Company relating to Year 2000 compliance or the cost of
internal software and hardware replaced in the normal course of business. The
total cost estimate will be subject to change as the Year 2000 approaches.
Achieving Year 2000 compliance will depend on many factors, some of which are
not completely within the Company's control. Should either the Company's
internal systems or one or more critical vendors or suppliers fail due to Year
2000 issues, the Company's business and its results of operations could be
materially adversely affected.
Management Estimates
Financial statements prepared in conformity with generally accepted
accounting principles necessitate the use of management estimates. Management
has estimated reserves for inventory 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
13
<PAGE>
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 June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize
all derivative contracts as either assets or liabilities on the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to affect
its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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
Not applicable
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
---------------------- ------- ------------------------------------------------
Chih-Hung Liao 43 Chairman of the Board of Directors
and Chief Executive Officer
Frank Cheng 44 President
Kenny Liu 45 Director
Chih-Hung "Duke" Liao has served as the Company's Chairman of the Board of
Directors and Chief Executive Officer since June 1997 and as its President from
September 1997 to September 1998. Since founding DTK Computer, Inc. ("DTK") in
1986, Mr. 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 Mr. Liao is the majority shareholder and Chairman. Mr. Liao is also the
14
<PAGE>
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. In 1990, Mr. Liao also founded, 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, Mr. 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.
Frank Cheng has served as President of the Company in September 1998. Mr.
Cheng has more than two decades of diverse experience in the computer industry.
Most recently, he managed and had total operational and financial responsibility
for Arsys Innotech Connection's computer distribution business in Texas. Prior
to that, he served for six years, until March 1996, as the Managing Director of
the Southwest Region for DTK, where he was responsible for all of DTK's
operations and its financial results in the region. For eight years prior to
working for DTK, Mr. Cheng served as Senior System Analyst for the Federal
Reserve Board. Mr. Cheng's diverse management experience includes computer
system design, supervision of procedures, finance, sales and marketing. Mr.
Cheng received an MBA with a computer science degree from the University of
Central Oklahoma.
Kenny Liu has served as a member of the Board of Directors of the Company
since June 1994. Since 1994, he has served as the President and Chief Executive
Officer of IGS, Inc., a privately-held multimedia company. 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, 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 an M.S. degree in Electrical Engineering from Ohio
State University.
The Company's policy is to pay independent members of the Board of
Directors $16,000 per year as director's fees. Edwin Feinberg, who resigned
during the last quarter of 1998, and Kenny Liu were independent directors of the
Company during 1998. Effective February 1, 1998, the Company reduced the
exercise prices of the 6,000 options held by Mr. K. Liu from $11.875 per share
to $5.3125 per share. Three thousand of these options have expired and the
remainder will expire on April 17, 1999. During June 1998, the Company granted
to Mr. K. Liu options to purchase 6,000 shares of Common Stock at a price of
$1.175 per share, such options vesting as to 2,000 shares on each of the first
three anniversaries of the date of the grant and expiring five years from the
date of grant. The same number of options were granted to Mr. Feinberg and
Martin Tsai during 1998 but they were cancelled upon their resignations from the
Company.
Section 16(a) Beneficial Ownership Reporting Compliance
A review of the Form 3 and 4 reports filed or due in 1998 relating to the
Company's securities indicates that a report relating to the appointment of
Martin Tsai (who was at the time already an affiliate of the Company) as a
director of the Company and a report relating to the purchase of 15,985 shares
of Common Stock by Mr. Tsai during November and December 1997 were not filed
timely.
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, 1998. In addition, it provides information with respect to the compensation
of the named executive officers for 1997 and 1996.
15
<PAGE>
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
Long-Term
Name and Principal Other Annual Compensation
Position(1) Year Salary Bonus Compensation Options
- ----------------------------------- ---------------- ---------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Duke Liao
Chairman and CEO 1998 -- -- -- --
1997 -- -- -- --
Martin Tsai
Former Chief Financial Officer 1998 $ 46,667 -- $147,909 (1) --
1997 $ 70,000 -- -- --
1996 $ 70,000 -- -- --
</TABLE>
(1) Severance package.
Employment Agreements
The Company does not have employment contracts with any of its employees.
During 1998, Mr. Martin Tsai received approximately $148,000 as severance pay
from the Company upon his resignation from the Company in August 1998.
Stock Options
The Company did not grant any options to its named executive officers
during the fiscal year ended December 31, 1998, except that options to purchase
6,000 shares were granted to Martin Tsai which options were later canceled. None
of the Company's named executive officers had unexercised options to purchase
shares of the Company's Common Stock at December 31, 1998.
Compensation Committee Interlocks and Insider Participation
Duke Liao and Martin Tsai were during 1998 members of the Company's Board
of Directors and participated in deliberations concerning executive officer
compensation but none of them voted on his own 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 19, 1999
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 shares. This information
has been obtained from the Company's records, or from information furnished
directly by the individual or entity to the Company. (All common share amounts
have been restated to reflect the two-for-five reverse stock split which became
effective on July 1, 1998).
16
<PAGE>
Number of Shares Percentage of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- ------------------------ ------------------ ------------------
Duke Liao 3,089,945 67.0%
Kenny Liu 3,000 (1) *
All directors and executive
officers as a group
(2 individuals) 3,092,945 (1) 67.0%
----------- -----
* Less than 1%
(1) Represents shares subject to stock options granted by the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In order to provide working capital for the Company, Duke Liao, the
Company's current Chairman, Chief Executive Officer and principal stockholder,
made loans to the Company of $9,219,928 during 1997 which loans and interest
thereon were converted into 725,905 shares of Common Stock at $3.2813 per share
and 100 shares of preferred stock. In January 1998, all 100 shares of preferred
stock were converted into 2,132,268 shares of common stock at $3.2813 per share.
The Company purchases inventories from five companies that are owned by or
are otherwise related to Mr. Liao. The Company and each of these affiliates do
not give special preference or terms to the other with respect to their
purchases and sales. Total purchases from these affiliates for the year ended
December 31, 1998 were approximately $5,361,000. Included under "Accounts
payable -- trade" as of December 31, 1998 was an aggregate of $990,718 due to
these affiliates.
The Company sold certain products to two affiliated companies of Mr. Liao.
Total sales to the affiliated companies for the year ended December 31, 1998
were approximately $249,000. As of December 31, 1998, $200,958 was due from the
affiliates.
During December 1997, Mr. Liao became a guarantor of the Company's debt to
its secured lender.
17
<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) Schedule to Financial Statements
Index to Consolidated Financial Statements Schedule 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
The registrant filed no reports on Form 8-K during
the last quarter of the period covered by this
Report.
18
<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: April 2, 1999
LIUSKI INTERNATIONAL, INC.
By: /s/
-----------------------------
Frank Cheng
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Chairman of the Board of Directors, April 2, 1999
----------------------- Chief Executive Officer and Director --
Duke Liao
/s/ President and Acting Chief Financial April 2, 1999
----------------------- Officer (Principal Accounting Officer) --
Frank Cheng
/s/ Director April 2, 1999
----------------------- --
Kenny Liu
19
<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 and amendments thereto.*
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.[12]
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]
10(k) 1994 Stock Option Plan.[8]
10(1) 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
E-1
<PAGE>
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]
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]
E-2
<PAGE>
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.
[12] Incorporated by reference to registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1997.
E-3
<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' (deficit) equity F-5
Statements of cash flows F-6
Notes to consolidated financial statements F-7 to 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, 1998 and 1997, and the
related consolidated statements of loss, stockholders' (deficit) equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 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, has a net deficit in stockholders' capital and has been
notified by its lender that further extensions of the credit facility due date
will not be granted. These matters raise substantial doubt about the Company's
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 all adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Atlanta, Georgia
March 19, 1999
F-2
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS (Notes 2 and 3)
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 1,334,424 $ 2,092,405
Accounts receivable, net of allowance for doubtful accounts of
$2,529,000 and $1,781,000 7,803,407 20,284,367
Inventories, net of reserve of $2,760,000 and $1,308,000(Note 1) 9,509,832 29,868,561
Prepaid expenses and other current assets 808,126 2,067,150
----------------- -----------------
19,455,789 54,312,483
FURNITURE AND EQUIPMENT, at cost, less accumulated
depreciation and amortization of $3,897,149 and $2,911,844 (Note 1), and
impairment loss of $679,000 (Notes 1 and 2) 736,866 2,367,120
OTHER ASSETS (Note 1) 328,586 263,220
----------------- -----------------
TOTAL ASSETS $ 20,521,241 $ 56,942,823
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade (Notes 3 and 6) $ 13,532,057 $ 20,053,398
Revolving credit loan (Note 3) 6,289,889 18,424,730
Accrued expenses and other 1,125,311 1,250,870
----------------- -----------------
TOTAL LIABILITIES 20,947,257 39,728,998
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 4)
STOCKHOLDERS' (DEFICIT) EQUITY (Notes 6, 8 and 9)
Preferred stock; convertible, non-voting, non-dividend-bearing; $.01 par
value; 1,000,000 shares authorized; 0 and 100 shares issued and - 6,996,507
outstanding
Common stock; $.01 par value; 8,000,000 and 2,800,000 shares authorized;
4,610,383 and 2,478,115 shares issued and outstanding 46,104 24,781
Additional paid-in capital 27,811,249 20,836,065
Accumulated deficit (28,283,369) (10,643,528)
----------------- -----------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (426,016) 17,213,825
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $20,521,241 $ 56,942,823
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
Year ended December 31,
--------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
<S> <C> <C> <C>
NET SALES $ 168,196,805 $ 290,708,228 $ 422,310,269
COST OF SALES 163,395,265 273,366,206 396,238,125
------------------- ------------------- -------------------
Gross profit 4,801,540 17,342,022 26,072,144
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,177,605 24,683,516 33,352,034
------------------- ------------------- -------------------
Loss from operations (16,376,065) (7,341,494) (7,279,890)
OTHER EXPENSES, net (interest expense - $1,374,991,
$2,254,934 and $2,105,015) 1,263,776 2,458,664 2,187,550
------------------- ------------------- -------------------
Loss before income taxes (17,639,841) (9,800,158) (9,467,440)
INCOME TAXES (Note 7) - 888,000 (1,652,000)
------------------- -------------------- -------------------
NET LOSS $ (17,639,841) $ (10,688,158) $ (7,815,440)
------------------- -------------------- -------------------
Basic and diluted loss per common share $ (3.89) $ (5.72) $ (4.46)
------------------- -------------------- -------------------
Basic and diluted average shares outstanding 4,540,281 1,867,559 1,752,210
=================== ==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
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, 1995 1,752,210 $ 17,522 - $ - $ 18,461,448 $7,860,070 $ 26,339,040
Net Loss - - - - - (7,815,440) (7,815,440)
------------- ------------- ------------- -------------- -------------- ---------------- ----------------
December 31, 1996 1,752,210 17,522 - - 18,461,448 44,630 18,523,600
Conversion of
Subordinated Debt
to Common Stock
(Note 8) 725,905 7,259 - - 2,374,617 - 2,381,876
Conversion of
Subordinated Debt
to Preferred Stock - - 100 6,996,507 - - 6,996,507
(Note 8)
Net Loss - - - - - (10,688,158) (10,688,158)
------------- ------------- ------------- -------------- -------------- ---------------- ----------------
December 31, 1997 2,478,115 24,781 100 6,996,507 20,836,065 (10,643,528) 17,213,825
Conversion of
Preferred Stock to
Common Stock 2,132,268 21,323 (100) (6,996,507) 6,975,184 - -
(Note 8)
Net Loss - - - - - (17,639,841) (17,639,841)
------------- ------------- ------------- -------------- -------------- ---------------- ----------------
December 31, 1998 4,610,383 $ 46,104 - $ - $ 27,811,249 $(28,283,369) $ (426,016)
============= ============= ============= ============== ============== ================ ===============
</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,
-----------------------------------------------------------
1998 1997 1996
----------------- ------------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (17,639,841) $ (10,688,158) $ (7,815,440)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization 985,588 1,031,935 1,040,165
Write-off of impaired fixed assets 679,000 - -
Provision for losses on accounts receivable 3,264,381 1,811,721 5,330,234
Provision for losses on inventory 2,102,643 553,427 1,002,662
Provision for losses on vendor receivables 2,915,351 - -
Deferred taxes - 1,100,000 (513,000)
Changes in operating assets and liabilities:
Accounts receivable 9,216,579 9,898,056 (4,310,435)
Inventories 18,256,086 19,450,630 (7,579,840)
Prepaid expenses and other 1,259,024 2,425,042 (1,238,303)
Other assets (65,366) (28,075) 19,683
Accounts payable - trade, accrued
expenses and other (9,562,251) (21,852,726) 6,911,690
----------------- ------------------- -----------------
Net cash provided (used) by operating activities 11,411,194 3,701,852 (7,152,584)
----------------- ------------------- -----------------
INVESTING ACTIVITIES:
Capital expenditures (34,334) (657,241) (680,006)
----------------- ------------------- -----------------
FINANCING ACTIVITIES:
Net (repayment of) proceeds from revolving credit loan (12,134,841) (10,190,199) 7,649,666
Proceeds from subordinated notes payable - 9,219,928 -
----------------- ------------------- -----------------
Net cash (used) provided by financing activities (12,134,841) (970,271) 7,649,666
----------------- ------------------- -----------------
CHANGE IN CASH AND
CASH EQUIVALENTS (757,981) 2,074,340 (182,924)
CASH AND CASH EQUIVALENTS, beginning of year 2,092,405 18,065 200,989
----------------- ------------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 1,334,424 $ 2,092,405 $ 18,065
================= =================== =================
</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 has
previously offered its own Magitronic brand of IBM-compatible personal computers
as well as Magitronic private-label components and accessories. However, the
Company has ceased purchasing inventory, ceased the Magitronic brand assembly
operations and begun closing a number of its distribution centers. 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 were 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 has an assembly
facility in Norcross, Georgia and performed limited assembly operations at its
Toronto distribution center. The Company also had sales offices in Chicago,
Dallas and Melville (New York). Export sales were not material in any of the
three years ending December 31, 1998. The Company operates as one reportable
segment based upon the similarity of all products and customers.
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.
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 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 estimates will change within
a year, and the effect of the change could be material to the consolidated
financial statements.
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).
Concentrations of Risk
Financial instruments that 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. In 1998, 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
F-7
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 30% and 25% of the Company's net sales for the years
ended December 31, 1998 and 1997, respectively, included components manufactured
by two third-party domestic suppliers.
Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments in the accompanying consolidated balance sheets are not materially
different from their fair values. (See Note 2).
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.
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 and Equipment
Furniture 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). See "Asset Impairment" below.
Other Assets
Other assets consist primarily of security deposits which are refundable
under various operating leases.
Asset Impairment
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, effective for years beginning after
December 15, 1995, requires that long-lived assets to be held and used by the
Company be reviewed for impairment. The Company periodically assesses whether
there has been a permanent impairment of its long-lived assets in accordance
with SFAS 121. Due to the subsequent events discussed in Note 2, management
determined that, based upon an analysis of projected undiscounted future cash
flows calculated in accordance with SFAS 121, the carrying amount of certain
fixed assets necessitated a write-down of approximately $679,000 as of December
31, 1998 (Note 2). The estimated fair values of these long-lived assets were
determined by calculating the present value of estimated future cash flows using
a discounted rate commensurate with the risks involved.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with 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
F-8
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and operating loss and tax credit carryforwards. A valuation allowance is
recorded to reduce deferred tax assets to an amount that is considered more
likely than not to be realizable.
Common Stock
The Company's Board of Directors approved an amendment to the Company's
Certificate of Incorporation to effect a two-for-five reverse stock split of the
issued and outstanding shares of Common Stock and to decrease the total number
shares of Common Stock which the Company has authority to issue from 20,000,000
to 8,000,000. The amendment was approved by written consent of the Company's
majority stockholder. The par value of the Common Stock was maintained at the
pre-reverse split par value or $0.01 per share. The effective date of the
amendment was July 1, 1998. All references to Common Shares outstanding and per
share amounts in these consolidated financial statements have been restated to
reflect the two-for-five reverse stock split.
Earnings Per Common Share
The Company has adopted the provisions of SFAS No. 128, Earnings Per Share,
which is effective for fiscal years ending after December 31, 1997. This 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. There were
495,439 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.
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 that
are not covered by OEM warranties at the time of sale. The Company generally
offers a thirty-day warranty for defective distribution products. These goods
are returned to the vendor for credit or replacement.
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 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize
all derivative contracts as either assets or liabilities on the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
F-9
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, the Company has not entered into
derivative contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to affect
its financial statements.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
NOTE 2 - GOING CONCERN AND SUBSEQUENT EVENTS
The Company has suffered net losses of $17,639,841, $10,688,158 and
$7,815,440 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company's credit facility originally expired in June 1998 and had been
extended from time to time since the original termination date. Since December
31, 1996, the Company has been in violation of certain financial covenants under
its credit facility and had been discussing these defaults with its lender with
the goal of renegotiating the credit facility.
In early January 1999, the Company was notified by its lender that
further extensions of the credit facility due date would not be granted.
Consequently, on or about January 22, 1999, in order to repay the secured
lender, the Company ceased purchasing inventories, cut its workforce by
seventy-five percent (approximately 90 personnel), ceased the Magitronic brand
assembly operations and began the process of closing its Miami, Los Angeles,
Chicago and Toronto operations. Additionally, the Company began selling excess
fixed assets and inventories at discounted prices on a COD basis to accelerate
the inflow of cash. Consequently, the 1998 consolidated financial statements
include charges for the impairment of fixed assets ($679,000 included in
selling, general and administrative expenses) and reduction of inventories to
the lower of cost or market ($1,565,000 included in cost of sales) based upon
these events. As a consequence of the Company's implementation of this plan, the
secured lender has agreed to forbear from exercising its rights and remedies
under the credit facility through April 16, 1999. The secured lender has
reserved all of these rights and remedies. The amount owed to the secured lender
has decreased from $10,340,252 ($6,289,889 under the revolving credit loan and
$4,050,363 under the inventory floor planning facility -- see Note 3) at
December 31, 1998 to $1,506,174 at March 19, 1999, a decrease of $8,835,078 or
85%.
Management does not plan to discontinue operations and/or file for
bankruptcy. The first priority of management is to continue raising cash to pay
off the secured debt. The Company is exploring other financial arrangements,
including potential buyers, new secured financings and potential capital
infusions from the majority shareholder or others to support operations when and
if the repayment of the secured lender is complete. If this process is completed
favorably, management plans to move operations to a smaller location and try to
reestablish its presence in the computer distribution industry on a smaller
basis. In order to continue operations, the Company will have to negotiate
reductions of the amount it owes to its vendors and other unsecured creditors.
The success of this plan depends on the Company's securing new financing and the
willingness of creditors to accept settlements. There can be no assurance that
management's plan will be successful.
F-10
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These matters raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include all 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. During 1997, 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, the borrowing rate was
subsequently reduced to 150 basis points over the prime rate (7.75% as of
December 31, 1998). The lender has reserved the right to reverse this rate
reduction upon notice to the Company. During 1997, the Company's principal
shareholder became a guarantor of the Company's debt to its lender. During 1998,
the revolving line of credit limit and inventory floor planning limit were
reduced to $12,000,000 and $4,000,000, respectively. As of December 31, 1998 and
1997, the Company owed $6,289,889 and $18,424,730, respectively, under its
revolving credit loan. As of December 31, 1998 and 1997, the Company owed
$4,050,363 and $9,216,245, respectively, under the floor planning facility
(included in Accounts payable - trade). As of December 31, 1998, the Company had
$6,314,980 available for cash borrowings under its revolving credit loan and
floor planning of inventory purchases.
As of December 31, 1998, the Company was in violation of certain financial
covenants under its credit facility agreement. As discussed further in Note 2,
in early January 1999, the Company was notified by its lender that further
extensions of the credit facility due date would not be granted.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated for rental of office and warehouse space and
certain equipment. Approximate future minimum rental payments due under these
operating leases are as follows:
Year ending
December 31,
------------
1999 $ 1,506,000
2000 372,000
2001 92,000
2002 96,000
2003 99,000
-------------
Total $ 2,165,000
=============
Included in these amounts are commitments related to certain facilities
that are underutilized. The Company has subleased all or a portion of the
Company's facilities located in Melville, New York, Dallas and Los Angeles.
F-11
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,508,000, $1,590,000 and $1,574,000, respectively.
Litigation
There are various claims of third parties involving allegations against the
Company incidental to the operation of its business. The liability, if any,
associated with the claims is not currently determinable. It is the opinion of
management that such claims are not material in relation to the Company's
consolidated financial position, results of operations and liquidity. 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."
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 $10,000 for 1998. The contribution and
administration costs charged against operations amounted to $65,274, $78,827 and
$115,874 for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company purchased inventories through two affiliated trading companies
in Taiwan that 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 and 1996 were approximately $34,924,000 and $88,025,000,
respectively. Amounts due to these affiliates totaled $1,244,170 as of December
31, 1997 and were included in "Accounts payable - trade".
The Company purchases inventories from five companies that are owned by or
are otherwise related to the Company's current Chairman, Chief Executive Officer
("CEO") 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, 1998 were approximately $5,361,000. Included under "Accounts
payable -- trade" as of December 31, 1998 was an aggregate of $990,718 due to
these companies.
The Company sold certain products to two affiliated companies of the
Company's current Chairman, CEO and principal stockholder. Total sales to the
affiliated companies for the year ended December 31, 1998 were approximately
$249,000. As of December 31, 1998, $200,958 was due from the affiliates.
During 1997, the Company's principal stockholder provided working capital
funds to the Company in exchange for subordinated notes payable totaling
$9,219,928. These notes payable were converted to common and preferred stock as
of December 31, 1997. In 1998, the preferred stock was completely converted to
common stock. See Note 8 for further discussion.
F-12
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
Components of income taxes are as follows:
Year ended December 31,
------------------------------------------------------
1998 1997 1996
-------------- ---------------- -----------------
Current
Federal $ - $ (212,000) $ (1,015,000)
State and local - - (124,000)
-------------- ---------------- -----------------
- (212,000) (1,139,000)
-------------- ---------------- -----------------
Deferred
Federal - 924,000 (430,000)
State and local - 176,000 (83,000)
-------------- ---------------- -----------------
- 1,100,000 (513,000)
-------------- ---------------- -----------------
Total expense (benefit) - $ 888,000 $ (1,652,000)
============== ================ =================
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>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Federal income tax benefit based
upon the statutory rate $ (5,905,000) $ (3,332,000) $ (3,219,000)
State and local income
taxes, net of Federal
tax benefit (695,000) (392,000) (379,000)
Change in valuation allowance 6,539,000 4,345,000 1,600,000
Other 61,000 267,000 346,000
---------------- ----------------- -----------------
Total expense (benefit) $ - $ 888,000 $ (1,652,000)
================ ================= =================
</TABLE>
F-13
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities are as follows:
1998 1997
---------------- ----------------
Deferred tax assets
Allowance for doubtful accounts $ 960,000 $ 641,000
Inventory allowances 1,077,000 540,000
Tax credits and net foreign
operating loss carryforwards 2,568,000 2,254,000
Net operating loss carryforwards 8,037,000 2,926,000
Other reserve 258,000 -
---------------- ----------------
Total gross deferred tax assets 12,900,000 6,361,000
---------------- ----------------
Valuation allowance (12,806,000) (6,267,000)
---------------- ----------------
Deferred tax liabilities
Basis differences of fixed assets (94,000) (94,000)
---------------- ----------------
Net deferred tax asset $ - $ -
================ ================
As of December 31, 1998, the Company has provided a 100% valuation
allowance against net deferred tax assets due to the uncertainty of their
realization.
As of December 31, 1998, the Company had approximately $20,574,000 in
federal net operating loss carryforwards. These net operating loss carryforwards
expire in 2010 through 2013.
NOTE 8 - STOCKHOLDERS' EQUITY
The Company's Board of Directors approved an amendment to the Company's
Certificate of Incorporation to effect a two-for-five reverse stock split of the
issued and outstanding shares of Common Stock and to decrease the total number
shares of Common Stock which the Company has authority to issue from 20,000,000
to 8,000,000. The amendment was approved by written consent of the Company's
majority stockholder. The par value of the Common Stock was maintained at the
pre-reverse split par value or $0.01 per share. The effective date of the
amendment was July 1, 1998. All references to Common Shares outstanding and per
share amounts in these consolidated financial statements have been restated to
reflect the two-for-five reverse stock split.
On June 27, 1997, Mr. Duke Liao purchased 713,448 shares of Common stock
from Mr. Morries Liu, the founder and former principal stockholder of the
Company, representing approximately 41% of the 1,752,210 shares of the Common
Stock outstanding. The purchase price was $2,497,068. Simultaneously, the Board
elected Mr. Liao as Chairman of the Board and Chief Executive Officer of the
Company. In order to provide working capital for the Company, Mr. 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, Mr. Liao and the Company agreed to convert the loans and interest into
equity.
F-14
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 4, 1997, loans of $2,223,421 and $158,455 in interest
(aggregating $2,381,876) were converted into 725,905 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, Mr. Liao
owned 1,439,353 shares of common stock, or approximately 58%, of the 2,478,115
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 $6,996,507 of the loans were
converted into 100 shares of non-voting, non-dividend-bearing preferred stock
which, pursuant to the terms as set forth in the Certificate of Designations
filed with the Delaware Secretary of State, converted automatically at the
Market Price into 2,132,268 restricted shares of common stock on January 12,
1998. Immediately after this conversion, Mr. Liao owned approximately 77.5% of
the outstanding shares of Common Stock (75.4% of the outstanding common stock on
a fully diluted basis after taking into account outstanding options to purchase
approximately 123,680 shares of Common Stock).
NOTE 9 - STOCK OPTION PLANS
The Company's Board of Directors has adopted, and the Company's
stockholders have approved, the Company's 1991 Stock Option Plan, effective
August 20, 1991 and the Company's 1994 Stock Option Plan, effective June 30,
1995 (the "Plans"). Under the Plans, options to purchase an aggregate of not
more than 520,000 shares of Common Stock ($.01 par value) (180,000 shares under
the 1991 Plan and 340,000 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 136,000 stock option shares were repriced to $5.31, the market
price per share at the time of such repricing.
Changes in shares under the Plans for the three years ended December 31,
1998 were as follows:
Price Range
Shares Per Share
---------- -----------------
Options outstanding as of December 31, 1995 316,420 5-5/16 to 11-7/8
Granted 47,380 5-5/16 to 11-7/8
Exercised - -
Canceled (80,440) 5-5/16 to 11-7/8
---------- -----------------
Options outstanding as of December 31, 1996 283,360 5-5/16 to 11-7/8
Granted - -
Exercised - -
Canceled (159,680) 5-5/16 to 11-7/8
---------- -----------------
Options outstanding as of December 31, 1997 123,680 5-5/16 to 11-7/8
Granted 18,000 1-1/6
Exercised - -
Canceled (113,840) 1-1/6 to 5-5/16
---------- -----------------
Options outstanding as of December 31, 1998 27,840 1-1/6 to 5-5/16
========== =================
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, 1998 is 2.6 years. Approximately 21,000 and 114,400 options
were exercisable as of December 31, 1998 and 1997, respectively.
The Company has two options plans that 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:
Year ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Net loss applicable to
common shareholders
as reported $(17,639,841) $(10,688,158) $(7,815,440)
pro forma (17,643,512) (10,828,908) (8,050,156)
Basic and diluted loss
per common share
as reported (3.89) (5.72) (4.46)
pro forma (3.89) (5.80) (4.59)
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 1998, 1997 and 1996, respectively;
expected volatility of 60%, 60% and 50%; risk-free interest rate of 5.50%, a
range of 4.00% to 6.48%, and 6.39%; and expected lives of 3.0, 3.8 and 4.0
years. No dividends are expected to be paid by the Company in the future. As of
December 31, 1998, no options outstanding possessed an exercise price less than
the Market Price.
NOTE 10 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter ended December 31, 1998, the Company increased
reserves for accounts receivable and wrote-off vendor receivables by
approximately $676,000 and $2,915,000, respectively. These charges were
primarily due to the increased deterioration of collectibility. Additionally,
the Company recorded a loss on impairment of fixed assets of $679,000 and
additional costs of $1,565,000 for the reduction of inventories to the lower of
cost or market. These adjustments were due to the subsequent events discussed at
Note 2. The Company also incurred additional charges of $675,000 based upon the
results of sales tax audits.
F-16
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 1,444,460 $2,254,934 $2,105,015
================ ================= ================
Income taxes (net of refunds) $ (536,116) $ - $ 189,160
================ ================= ================
</TABLE>
Non-cash Transactions:
During 1997, subordinated notes payable of $2,381,876 and $6,996,507 (for a
total of $9,378,383 which included accrued interest of $158,455) were converted
into shares of common stock and preferred stock, respectively.
During 1998, all shares of preferred stock (100 shares) were converted to
2,132,268 shares of common stock.
F-17
<PAGE>
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE
---------------------------------------------------
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 19, 1999 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. Our report
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern. 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 19, 1999
S-2
<PAGE>
<TABLE>
SCHEDULE II
LIUSKI INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------
<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, 1998:
Allowance for
doubtful accounts $1,781,000 $3,264,381 $ -- $2,516,381 $2,529,000
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
- ---------------
<FN>
(a) Doubtful accounts written off against accounts receivable.
</FN>
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
- ----------- ------------- ------------ ------------ --------------- ------------
For the year ended
December 31, 1998:
Reserve for inventory $1,308,000 $2,102,643 $ -- $650,643 $2,760,000
For the year ended
December 31, 1997:
Reserve for inventory $1,600,000 $553,427 $ -- $845,427 $1,308,000
For the year ended
December 31, 1996:
Reserve for inventory $597,338 $1,002,662 $ -- $ -- $1,600,000
- ---------------
<FN>
(b) Obsolete inventory written off against inventory.
</FN>
</TABLE>
S-3
<PAGE>
LIUSKI INTERNATIONAL, INC.
INDEX OF EXHIBITS ATTACHED
Exhibit No. Description of Exhibit
- ----------- ----------------------
3(a) Certificate of Incorporation and amendments thereto.
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
LIUSKI INTERNATIONAL, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation")
is LIUSKI INTERNATIONAL, INC.
2. The Certificate of Incorporation of the Corporation is hereby
amended by striking out Article FOURTH thereof and by substituting in lieu of
said Article FOURTH the following new Article:
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Nine Million (9,000,000) which are
divided into One Million (1,000,000) shares of Preferred Stock, par value $.01
per share, and Eight Million (8,000,000) shares of Common Stock, par value $.01
per share.
"On the effective date (the "Effective Date") of this Certificate of
Amendment, all outstanding shares of Common Stock of the Corporation shall be
automatically combined at the rate of two-for-five (the "Reverse Split") without
the necessity of any further action on the part of the holders thereof or the
Corporation, provided, however, that the Corporation shall, through its transfer
agent, exchange certificates representing Common Stock outstanding immediately
prior to the Reverse Split (the "Existing Common") into new certificates
representing the appropriate number of shares of Common Stock resulting from the
combination ("New Common"). No fractional shares, but only whole shares of New
Common, shall be issued to any holder of any number of shares which, when
divided by five (5), does not result in a whole number. In lieu of fractional
shares, the Corporation has arranged for its transfer agent (the "Exchange
Agent") to remit payment therefor on the following terms and conditions:
"The price payable by the Corporation for fractional shares of
Existing Common, certificates for which are surrendered to the Exchange Agent in
connection with the Reverse Split, shall be equal to the product of (a) the
number of such shares which cannot be exchanged for a whole number of shares of
New Common and (b) the average of the closing price of one share of Existing
Common as reported on The Nasdaq National Market for the 10 business days
immediately preceding the Effective Date for which transactions in the Existing
Common are reported. The par value of the Common Stock shall remain as otherwise
provided in Article FOURTH of this Certificate of Incorporation and shall not be
modified as a result of the Reverse Split. From and after the Effective Date,
certificates representing shares of Existing Common shall represent only the
right of the holders thereof to receive New Common and payment as provided
herein for any fractional shares of Existing Common.
"From and after the Effective Date, the term "New Common" as used in
this Article FOURTH shall mean Common Stock as provided in this Certificate of
Incorporation.
The board of directors of the Corporation is expressly authorized to
fix by resolution or resolutions the designations and the powers, preferences,
and rights, and the qualifications, limitations, or restrictions permitted by
Section 151 of the Delaware General Corporation Law in respect of any class or
classes of stock or any series of any class of stock of the Corporation which
may be desired but which shall not be fixed by this certificate of
incorporation. Such grant of authority includes the power to specify the number
of shares in any series."
IN WITNESS WHEREOF, the Amendment of the Certificate of Incorporation
herein certified has been duly adopted in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State of Delaware.
Prompt written notice of the adoption of the amendment herein certified has been
given to those stockholders who have not consented in writing thereto, as
provided in Section 228 of the General Corporation Law of the State of Delaware.
<PAGE>
The undersigned does affirm the foregoing as true under the penalties of perjury
this 30th day of June 1998.
LIUSKI INTERNATIONAL, INC.
By: /s/
-----------------------------
Martin Tsai
Vice President and
Chief Financial Officer
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
LIUSKI INTERNATIONAL,INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
LIUSKI INTERNATIONAL, INC.
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article FOURTH thereof and by substituting in lieu of said Article
FOURTH the following new Article:
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authorized to issue 21,000,000 shares consisting of:
a) 20,000,000 shares of common stock, par value $0.01; and
b) 1,000,000 shares of preferred stock, par value $0.01.
The board of directors of the Corporation is expressly authorized to fix by
resolution or resolutions the designations and the powers, preferences, and
rights, and the qualifications, limitations, or restrictions permitted by
section 151 of the Delaware General Corporation Law in respect of any class or
classes of stock or any series of any class of stock of the Corporation which
may he desired but which shall not be fixed by this certificate of
incorporation, Such grant of authority includes the power to specify the number
of shares in any series.
<PAGE>
IN WITNESS WHEREOF, the Amendment of the Certificate of Incorporation
herein certified has been duly adopted in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State of Delaware.
Prompt written notice of the adoption of the amendment herein certified has been
given to those stockholders who have not consented in writing thereto, as
provided in Section 228 of the General Corporation Law of the State of Delaware.
The undersigned does affirms the foregoing as true under the penalties of
perjury this 12th day of January, 1998.
LIUSKI INTERNATIONAL, INC.
By:/s/
------------------------------
Martin Tsai
Vice President and
Chief Financial Officer
2
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware)
LIUSKI INTERNATIONAL, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), does hereby certify that:
FIRST: The Corporation was incorporated in the State of Delaware on June
12, 1991.
SECOND: Pursuant to authority conferred upon the Board of Directors of the
Corporation (the "Board") by the Certificate of Incorporation of the Corporation
[the "Certificate of Incorporation") and Section 151 (g) of the General
Corporation Law of the State of Delaware, the Board has duly adopted the
following resolutions, which are still in full force and effect and are not in
conflict with any provisions of the Corporation's Certificate of Incorporation
or its By-Laws:
RESOLVED, that the Board hereby fixes and determines the designation of,
the number of shares constituting, and the rights, preferences, privileges, and
restrictions relating to, a series of Preferred Stock, as follows:
1. Designation Amount Stated Value. From the Corporation's one million
(1,000,000) authorized shares of Preferred Stock, per value $0.01 per share, one
<PAGE>
hundred (100) shares are hereby designated Series A Convertible Preferred Stock
("Series A Preferred") with the rights, preferences, privileges and restrictions
specified heroin. Each share of Series A Preferred shall have a stated value of
$69,965.07 (the "Stated Value").
2. Dividends. The holders of the Series A Preferred shall not be entitled
to any dividends except that, if any dividends are declared on the Corporation's
common stock, $.01 par value per share (the "Common Stock"), the Corporation
must declare the same dividend on the Series A Preferred as though each share of
Series A Preferred is equal to 53,306.71 shares of Common Stock.
3. Liquidation Preference. In the event of a liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, the holders of
record of the Series A Preferred shall be entitled to receive ratably in full,
out of lawfully available assets of the Corporation, whether such assets are
stated capital or surplus of any nature, an amount in cash per outstanding share
of Series A Preferred equal to the sum of the Stated Value and all dividends
(whether or not declared) accrued and unpaid thereon as of the date of final
distribution to such holders, without interest, before any payment shall be made
or any assets distributed to the holders of Common stock or any other class or
series of the Corporation's capital stock ranking junior as to liquidation
rights no the Series A Preferred; provided, however that, such rights shall
accrue to the holders of the Series A Preferred only in the event the
Corporation's payments with
2
<PAGE>
respect to the liquidation preferences of any holders of capital stock of the
Corporation ranking senior as to liquidation rights to the Series A Preferred
are. fully met. If, upon any liquidation, dissolution and winding up, the amount
available for such payment to the holders of Series A Preferred shall not be
sufficient to pay in full amounts payable on the Series A Preferred, the holders
of the Series A Preferred and any other class or series of the Corporation's
capital stock which may hereafter be created having parity as to liquidation
rights with the Series A Preferred shall share in the distribution of the amount
available in proportion to the respective preferential amounts to which each is
entitled. None of a consolidation or merger of the Corporation with another
corporation, a Bale or transfer of all or part of the Corporation assets for
cash, securities or other property, or a reorganization of the Corporation shall
be considered a liquidation, dissolution or winding-up of the Corporation.
4. Voting Rights. The holders of record of the Series A Preferred shall not
have any voting rights, except as otherwise provided herein or required by law.
So long as shares of Series A Preferred are outstanding, without the approval
(by vote or written consent, as provided by law) of the holders of record of at
least a majority of the then outstanding shares of Series A Preferred, voting
separately as a class, the Corporation shall not:
3
<PAGE>
(a) alter or change the rights, preferences, privileges or restrictions of
shares of Series A Preferred so as to affect them adversely, or
(b) increase the authorized number of shares of Series A Preferred or
increase or decrease the par value of the Series A Preferred.
5. Automatic Conversation. Upon amendment of the Company's Certificate o~
Incorporation to increase the authorized number of shares of Common Stock from
7,000,000 to at least 14,000,000, all of the outstanding shares of Series A
Preferred shall automatically be converted into a total of 5,330,671 shares of
Common Stock.
6. Payment of Taxes. The Corporation shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed with respect to
the issuance of the Series A Preferred, or the issuance or delivery of any
shares of Common Stock upon conversion of the Series A Preferred.
7. Option of Holders to Cause Redemption. If the Series A Preferred is not
converted into shares of Common Stock by March 31, 1998, the holders of the
Series A Preferred shall have the option to cause the Company to redeem the
Series A Preferred by paying the Stated value to such holders plus interest
thereon at the annual rate of 8.5% accruing from October 16, 1997.
8. Status of Reacquired Shares. The shares of series A Preferred which have
been issued and reacquired in any manner by the Corporation shall have the
status of authorized and unissued
4
<PAGE>
shares of Preferred StoCk and may be reclassified and reissued as a part of a
new series of Preferred Stock to be created by resolution or resolutions of the
Board.
9. Notices. Any notice to be given to the holders of Series A Preferred
shall be deemed given on the second business day after mailing, first class
mail, postage prepaid, or on the day of delivery if sent by overnight courier,
in each instance in an envelope addressed to each holder of record of Series A
Preferred at such holder's address appearing on the books of the Corporation.
RESOLVED, FURTHER, that the officers of the Corporation be, and they hereby are,
authorized and directed to prepare and file a Certificate of Designations in
accordance with this resolution and as required by law.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Designation on behalf of Liuski International, Inc. and does affirm the
foregoing as true under the penalties of perjury this 7th day of November, 1997.
LIUSKI INTERNATIONAL, INC.
By:/s/
-------------------------------
Martin Tsai
Chief Financial Officer
5
<PAGE>
CERTIFICATION OF INCORPORATION
OF
LIUSKI INTERNATIONAL, INC.
(a Delaware corporation)
Under Section 102 of the General Corporation Law
FIRST: The name of the corporation is LIUSKI INTERNATIONAL, INC. (the
"Corporation").
SECOND: The registered office of the Corporation is located at 32
Loockerman Square, Suite L-100, in the City of Dover, in the County of Kent, in
the State of Delaware. The name of its registered agent at that address is The
Prentice-Hall Corporation System, Inc.
THIRD: The nature of the business and of the purposes to be conducted and
promoted by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH: The total number of shares of all classes of shares of stock which
the Corporation shall have authorized to issue is 8,000,000 shares consisting
of:
a) 7,000,000 shares of common stock, par value $0.01; and
b) 1,000,000 shares of preferred stock, par value $0.01. The board of
directors of the Corporation is expressly authorized to fix by resolution or
resolutions the designations and
<PAGE>
the powers, preferences, and rights, and the qualifications, limitations, or
restrictions permitted by Section 151 of the Delaware General Corporation Law in
respect of any class or classes of stock or any series of any class of stock of
the Corporation which may be desired but which shall not be fixed by this
certificate of incorporation. Such grant of authority includes the power to
specify the number of shares in any series.
FIFTH: The name and address of the sole incorporator is Ken Wagner, Summit
Rovins Feldesman, 445 Park Avenue, New York, NY 10022-2641.
SIXTH: The By-Laws of the Corporation may be made, altered, amended,
changed, added to, or repealed by the board of directors of the Corporation
without the assent of vote of the stockholders. Elections of directors need not
be by ballot unless the bylaws so provide.
SEVENTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented.
EIGHTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law or the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said
2
<PAGE>
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-Law, agreement, vote of stockholders or disinterested directors, or
otherwise, both as to action in his on her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
NINTH: The Corporation reserves the right to amend, alter, change, or
repeal any provision contained in this certificate of incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors, and officers are subject to this reserved
power.
I, THE UNDERSIGNED, to form a corporation for the purposes hereinabove
stated, under and pursuant to the provisions of the General corporation law of
the State of Delaware, do hereby certify that the facts stated herein are true
and hereunto set my hand and seal this 12th day of June, 1991,
/s/
----------------------------
Ken Wagner, Incorporator
3
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 19,
1999, 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, 1998. 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.
/s/
BDO Seidman, LLP
March 19, 1999
Atlanta, Georgia
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,334
<SECURITIES> 0
<RECEIVABLES> 7,803
<ALLOWANCES> 2,529
<INVENTORY> 9,510
<CURRENT-ASSETS> 19,456
<PP&E> 737
<DEPRECIATION> 4,576
<TOTAL-ASSETS> 20,521
<CURRENT-LIABILITIES> 20,947
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> (478)
<TOTAL-LIABILITY-AND-EQUITY> 20,521
<SALES> 168,197
<TOTAL-REVENUES> 168,197
<CGS> 163,395
<TOTAL-COSTS> 163,395
<OTHER-EXPENSES> 21,198
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,264
<INCOME-PRETAX> (17,640)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,640)
<EPS-PRIMARY> (3.89)
<EPS-DILUTED> (3.89)
</TABLE>
