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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NO. 1-10397
AMERIQUEST TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0244136
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
2465 MARYLAND ROAD 19090
WILLOW GROVE, PENNSYLVANIA (Zip Code)
(Address of principal executive offices)
(215) 658-8900
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
Title of each class
Securities registered pursuant to Section 12(g) of the Act: None
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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of December 15, 2000 was approximately $6,500,000. For purposes of
making this calculation only, the Registrant has defined "affiliates" as
including all officers, directors and beneficial owners of more than 10% of the
outstanding Common Stock of the Registrant.
There were 67,841,906 shares of the Registrant's Common Stock outstanding as of
December 15, 2000.
The following document is incorporated by reference into Part III, Items 10, 11,
12, and 13 of this Annual Report on Form 10-K: the Registrant's definitive proxy
statement for its 2001 Annual Meeting of Stockholders to be filed within 120
days after the end of the fiscal year covered by this Annual Report on Form
10-K.
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PART I
FOREWORD
THE INFORMATION SET FORTH IN THIS ANNUAL REPORT IS BASED PRIMARILY ON HISTORICAL
INFORMATION. THIS ANNUAL REPORT ALSO CONTAINS SOME FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE PLANS AND OTHER MATTERS. TO THE EXTENT THAT THIS ANNUAL
REPORT INCLUDES FORWARD-LOOKING STATEMENTS, SUCH STATEMENTS INVOLVE UNCERTAINTY
AND RISK, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS. A LIST OF THOSE FACTORS WHICH MANAGEMENT
BELIEVES COULD ADVERSELY AFFECT THE ACTUAL RESULTS IS SET FORTH IN A SECTION
IMMEDIATELY FOLLOWING THE DESCRIPTION OF AMERIQUEST'S BUSINESS IN ITEM 1 UNDER
THE CAPTION "SPECIAL FACTORS TO BE CONSIDERED."
ITEM 1. BUSINESS.
THE COMPANY
AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest" or the
"Company"), markets and sells products and services providing business
information solutions for value-added resellers ("VARs"), systems integrators
and, beginning in fiscal 2000, corporate clients. AmeriQuest's strategy is to
emphasize the sale of complete solutions for its clients and to provide a high
level of value-added services, including consultation on component selection,
system assembly, configuration, testing, logistics, operational start-up,
installation and technical support services. AmeriQuest markets, sells and
supports a variety of applications and products ranging from individual
components to complete systems that have been fully configured, assembled and
tested prior to delivery to the ultimate customer. AmeriQuest also provides
programs and seminars designed to support and enhance its clients' technical,
marketing, logistical and financial capabilities.
AmeriQuest currently markets and sells mid-range Unix and NT server systems,
networking systems, storage sub-systems, printers and related products to VARs,
systems integrators and corporate clients throughout the United States.
Mid-range computers and servers range in price from $5,000 to $800,000.
AmeriQuest focuses its marketing efforts on the products of a limited number of
key vendors in order to become one of the leading distributors for each of its
principal vendors. This enables AmeriQuest to develop product-specific technical
expertise that enhances its value-added support services. AmeriQuest attempts to
minimize competition among vendors' products while maintaining some overlap to
provide protection against product shortages or discontinuations.
AmeriQuest historically conducted its business through its subsidiaries but, in
April of 1997, AmeriQuest decided to focus its resources on building what was
then known as its Advanced Systems Group in Pennsylvania and to close or sell
all of the other divisions. Following the reorganization, the Company became a
more focused technical distributor of services and computer products providing
value added solutions rather than a fulfillment distributor that relies on broad
product lines and high volumes of commodity products. During fiscal 2000,
AmeriQuest began to refocus its outside sales force to sell application
solutions directly to larger corporate clients and to focus on selling its
higher margin products and services to its VAR and systems integrator clients.
The Company is now organized in three divisions: fulfillment distribution,
solutions and leasing.
The Company maintains its principal executive offices at 2465 Maryland Road,
Willow Grove, Pennsylvania 19090, and its telephone number is (215) 658-8900.
STRATEGY
During Fiscal 2000, the Company continued to de-emphasize low margin hardware
product distribution. The Company's current business strategy is to increase the
emphasis on providing application solutions and implementation to corporate
clients while providing value-added services such as engineering design and
system configuration, installation capability, and marketing, financial and
technical support to its VAR and systems integrator client base. The goal of
this new focus is to improve the Company's margins as compared to the margins of
distributors who provide for sale of equipment only. In addition, AmeriQuest
will continue second tier product distribution only in areas which minimize
direct competition with the Company's largest competitors and concentrate on
selling higher-margin mid-range computer and client server systems, networking
products and storage systems along with complementary and related individual
computer components, and maintenance and leasing services. AmeriQuest has
negotiated agreements with several vendors that allow the Company to serve as
the "silent partner" of the Company's resellers by being able to sell services
and products directly to the reseller's end users when the reseller cannot do so
itself or desires AmeriQuest to do so. The Company has also developed a division
known as Consultants Group Commercial Funding Corporation("CG Commercial"),
which facilitates customers in obtaining lease financing through third parties.
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Historically, approximately 30% of the Company's top 500 customers have
represented approximately 80% of the monthly gross profit and approximately 40%
of the monthly sales. The remaining approximately 70% of the top 500 customers
represent approximately 60% of the average monthly sales but only approximately
20% of the gross profit. The majority of the senior debt from the bank line of
credit is used to finance the accounts receivable from customers who provide
less than 5% gross margin contribution to the Company and, net of incremental
operating costs and interest expense, are unprofitable. Therefore, the Company's
action to increase the minimum margins may cause most of the unprofitable
customers to decide to acquire their products from another distribution source.
This strategy of phasing out low gross profit customers will result in lower
sales and accounts receivable, thereby reducing the line of credit from the
senior bank debt lender.
The Company also intends to continue to reduce expenses, including focusing on
reducing outside consulting expenses, payroll expenses and communications
expenses. In summary, the Company's strategy is to increase gross profit even if
lower sales result, and simultaneously to decrease monthly expenses and
borrowings under the bank line of credit used to finance accounts receivable.
Although management believes that this change in strategy, which is expected to
significantly decrease low margin sales, when coupled with planned decreases in
expenses, will return AmeriQuest to profitability, there are numerous risks and
uncertainties, including those described elsewhere in this Annual Report, and no
assurance can be given that the Company's strategy will succeed or that the
Company will become operationally profitable. Management will periodically
review the need to further reduce costs should gross profits for any reason not
materialize in amounts sufficient to cover the existing cost structure.
PRODUCTS
AmeriQuest seeks to sell applications and products from nationally-recognized
vendors that provide all the components most VARs and systems integrators
require to fully configure their business information solutions. Some of the
products are offered only to VARs and systems integrators and others are offered
only to corporate clients. The following is a description of the major
categories of products currently offered by AmeriQuest and the principal vendors
of those products:
CLIENT SERVERS AND PERSONAL COMPUTERS -- AmeriQuest offers a broad
and diverse group of server, notebook and desktop products manufactured
by Acer, Compaq, Hewlett Packard, IBM and Unisys.
COMMUNICATIONS AND NETWORKS -- AmeriQuest provides local and wide
area network ("LAN/WAN") certified engineering services, software and
specialized hardware products manufactured by 3Com, Alcatel, Cisco,
D-Link, Digi International, Hewlett Packard, IBM, Intel, Multi-Tech
Systems and Nortel.
CAS, NAS AND SAN STORAGE -- AmeriQuest offers a broad line of
channel attached storage products, network attached storage products
and storage attached network products from IBM, SMS and Unisys.
PERIPHERALS AND SUPPLIES -- AmeriQuest distributes a broad line of
laser, ink-jet and dot matrix printers, monitors, terminals, stand-by
power supplies, accessories and supplies manufactured by numerous
companies including Acer, American Power, Citizen, Genicom, Hansol,
Hewlett Packard, Imation(3M), Lexmark, Okidata and Wyse.
OPERATING SYSTEM AND APPLICATION SOFTWARE -- AmeriQuest sells a
variety of operating systems and LAN software products, generally as
part of its client server systems sales. AmeriQuest has also commenced
the sale of certain application software for NT, Unix and mid-range
systems. Among the manufacturers of these software products are Citrix,
IBM, including AIX and Lotus Notes, Microsoft, Novell, Perigrine and
SCO.
SERVICES
AmeriQuest seeks to sell its services by providing all the elements most VARs
and systems integrators require to sell business information solutions.
Technical, marketing, logistical, and financial services are marketed and sold
as a part of the Company's "Silent Partner"(TM) services. AmeriQuest also seeks
to sell applications that satisfy certain needs of large corporate clients.
These services and applications are focused around asset management,
distribution management, systems, and network infrastructure solutions,
including e-commerce, high availability servers, security, and thin client
computing. The following is a description of the major categories of services
currently offered by AmeriQuest:
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TECHNICAL SERVICES -- AmeriQuest provides systems engineering,
integration, implementation and project management services to those
clients who do not have the capability or capacity to design, configure
or install business information system solutions with their own
resources. AmeriQuest also provides an Open Systems Technology Center
in its Willow Grove, Pennsylvania facility for its clients to explore
and test new technologies and various configurations and applications.
MARKETING SERVICES -- AmeriQuest offers its VAR and systems
integrator clients a "virtual marketing department" to generate
opportunities, develop materials and programs to sell services and
provide Internet marketing tools.
LOGISTICAL SERVICES -- AmeriQuest offers logistical services to its
VAR, systems integrator and large corporate clients by managing the
entire scope of a project from product selection, procurement and
packaging, to staging of multiple ship point deliveries to installation
and implementation at the end-user.
LEASING SERVICES -- AmeriQuest expands the financial capabilities of
its VAR, system integrator and corporate clients by providing customer
risk analysis and financial and business planning assistance and,
through its subsidiary, CG Commercial, it assists customers in
obtaining equipment leasing and technology upgrade programs through
third parties. AmeriQuest also arranges for leasing and maintenance
options offered by IBM, Hewlett Packard and Unisys for all products to
clients and ultimate customers. By arranging for multiple financing
options, including floor planning through a number of credit
institutions, credit card purchases and an "assignment of proceeds"
program, AmeriQuest can assist its clients in securing purchase orders
in excess of their normal credit facilities.
VENDOR RELATIONS
To maintain strong relationships with its principal manufacturers, AmeriQuest
focuses on marketing the products of a limited number of key manufacturers.
AmeriQuest selects its product lines to offer a total solution while minimizing
competition among manufacturers' products, but maintains overlap to provide
protection against product shortages or discontinuations. Accordingly, sales of
products of AmeriQuest's four leading manufacturers, Acer, Hewlett Packard,
Okidata and Unisys, represented approximately 28%, 18%, 10%, and 9%,
respectively, of the Company's sales for the fiscal year ended September 30,
2000.
During fiscal 2000, AmeriQuest continued its relationship with IBM as a
Solutions Provider. Pinacor initially served as an IBM mid-range distributor to
AmeriQuest, and AmeriQuest has since executed a solution provider agreement with
SupportNet to be its mid-range product distributor.
AmeriQuest expanded its relationship with Unisys during fiscal 1999 and fiscal
2000 by negotiating a corporate account reseller ("CAR") agreement which allows
AmeriQuest to sell, directly to end users, Unisys mid-range products that are
not available to the Company's resellers.
Also, during fiscal 2000 one of the Company's primary suppliers of hardware
products experienced financial difficulty which caused AmeriQuest to switch to a
secondary source with less favorable prices and terms. This change resulted in a
reduction to the Company's gross margin during the second and third fiscal
quarters.
AmeriQuest, like most hardware distributors, sells products throughout the
United States on behalf of its vendors on a nonexclusive basis without
geographic restriction. AmeriQuest has distribution agreements with most of its
vendors and believes they are in the form customarily used by each vendor and
generally contain provisions which allow termination by either party upon short
notice. Most of AmeriQuest's major distribution agreements provide price
protection by giving AmeriQuest a credit, subject to specified limitations, in
the amount of any price reductions by the vendor between the time of the initial
sale to AmeriQuest and the subsequent notice of price change to AmeriQuest. Most
of the major distribution agreements also give AmeriQuest qualified return
privileges on slow-moving inventory. AmeriQuest's distribution agreements do not
restrict AmeriQuest from selling similar products manufactured by competitors.
Any minimum purchase provisions in AmeriQuest's distribution agreements are at
levels that AmeriQuest believes do not impose significant risk that AmeriQuest
will not be able to achieve such minimum purchase requirements.
AmeriQuest has continued to pursue a strategy to reduce inventory of non-core
vendors and to satisfy its clients' needs for non-core, supplemental or
complementary products by concentrating its procurement efforts with one or more
of the large national fulfillment distributors.
From time-to-time, the demand for certain products sold by AmeriQuest exceeds
the supply available from the vendor. AmeriQuest believes that its ability to
compete has not been adversely affected to a material extent by these periodic
shortages, although sales may be adversely affected for an interim period. In
order to limit the impact of such shortages, AmeriQuest
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generally attempts to include comparable products from more than one vendor in
its product line and to have arrangements with one or more of the national
fulfillment distributors to purchase products in short supply.
SALES AND MARKETING
The Company sells to more than 1,700 computer resellers and directly to over 300
end-users. The Company's clients include corporations, VARs, corporate
resellers, systems integrators, and consultants. AmeriQuest estimates that a
majority of its sales are to VARs and systems integrators. The Company's smaller
clients often do not have the resources to establish a large number of direct
purchasing relationships or to stock significant product inventories.
Consequently, they tend to purchase a high percentage of their products from
distributors. Larger resellers often establish direct relationships with
manufacturers for their more popular products, but utilize distributors for
slower-moving products and for fill-in orders of fast-moving products which may
not be available on a timely basis from manufacturers. AmeriQuest has chosen to
satisfy its clients' needs for supplemental and complementary products by
concentrating the Company's procurement efforts with two of the national
fulfillment distributors. No client has accounted for more than 10% of
AmeriQuest's net sales during fiscal 2000, 1999, or 1998. Sales by AmeriQuest
are not seasonal to any material extent.
Recently, the sales staff had been increased to 25, with training and selection
of such staff oriented toward the markets, services and products earlier
described. Management has elected to refocus the outside, or solutions, sales
force on corporate end user opportunities. This change in emphasis resulted in a
70% turnover of the solutions sales staff since the beginning of fiscal 2000,
including the resignation of Michael J. McCarthy, Vice President of Sales and
Marketing, in December, 2000. The outside sales force is currently focused on
selling asset management, distribution management, and network infrastructure
solutions. There is a higher cost structure maintaining the new solutions and
outside sales force compared with the inside distribution product sales force.
The inside, or product, sales staff has also experienced high turnover as a
result of the Company's continued emphasis on reducing lower margin commodity
hardware product sales. The sales staff turnover is primarily a result of the
Company's requirement to have a more consultative and solutions oriented
approach to selling. Management believes that the current staff is more aligned
with the needs of the Company and, therefore, turnover during fiscal 2001 is
expected to be lower. The inside sales force is expected to decline in
importance and a significant decline in low-margin revenues is also expected
during fiscal 2001, as compared to prior fiscal years. While increased
performance is expected from the outside sales force, the Company believes that
lower overall revenues will likely result, although the goal is to markedly
increase gross profits per revenue dollar.
Compensation for sales personnel is largely based on the gross profits generated
from sales. All of AmeriQuest's sales personnel receive technical training and
are responsible for developing new accounts and serving established accounts.
AmeriQuest places some emphasis on telemarketing, but most of the Company's new
sales personnel operate in the field and directly with end-users.
OPERATIONS AND CUSTOMER SERVICES
The Company offers its clients a single source of supply, prompt delivery,
financing programs, engineering services, marketing assistance, logistical
support, customer leasing and maintenance and client support.
CUSTOMER ORDER ENTRY. Client orders are generally made by a toll-free telephone
call to a sales representative in AmeriQuest's sales offices, and the order is
entered into AmeriQuest's computer system. The sales representative has access
to available information on inventory and client credit status and, upon
reviewing this data, can enter the order immediately. The Company's e-Commerce
facility allows clients to search inventory, place product orders and determine
order status via the internet at any time. Orders are handled on a prepayment,
C.O.D. or credit basis depending on the client's creditworthiness and previous
payment history. In addition, AmeriQuest assists some clients in obtaining
equipment financing through leasing or third-party floor planning programs from
Deutsche Financial Services, IBM Credit Corporation, AT&T Capital, Leasetech
(Unisys), the FINOVA Group, Inc. and Transamerica Inventory Finance. Because of
AmeriQuest's prompt product delivery times, it historically has not maintained a
substantial order backlog. Greater emphasis on end-user application solutions,
with longer lead times, is expected to create an increase in backlog in fiscal
2001.
PROMPT DELIVERY. In most geographic areas serviced by the Company, orders
received by 5:00 p.m. local time are shipped the same day, provided the required
inventory is in stock, except on orders that require assembly and testing or
purchase from a vendor. Clients may also pick up their orders at the designated
warehouse. AmeriQuest typically delivers products directly from its vendors or
its Willow Grove, Pennsylvania warehouse via United Parcel Service and other
common carriers, with customers
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in key commercial regions of the United States receiving orders within one to
two business days of shipment. AmeriQuest also will provide overnight air
handling if requested and paid for by the client. These services allow clients
to minimize inventory investment yet provide responsive service to their
customers. AmeriQuest is also able to provide a fulfillment service so that
orders are shipped directly to a client's customer, thereby reducing the need
for clients to maintain inventories of certain products.
CUSTOMER SUPPORT. The Company currently offers clients a single source for
competitively priced hardware and software products from numerous vendors. By
purchasing from the Company, the client only needs to comply with a single set
of ordering, billing and product return procedures. A part of the Company's
strategy is to use its system engineers and technicians to provide training and
product information to its clients. The systems engineers also provide on-site
service and support for a fee to its clients. The Company also provides training
and product information to its clients.
AmeriQuest permits the return of products within certain time limits and under
certain conditions subject to a restocking charge, provided that the products
are unused. Products that are defective upon arrival are handled on a
manufacturer's warranty return basis without any restocking charge. AmeriQuest
offers its clients warranty return rights that reflect those that are offered by
each manufacturer's individual warranty program. This pass-through of
manufacturers' warranties is one of the value-added services that AmeriQuest
provides to clients.
COMPETITION
Competition in the technical, as opposed to fulfillment only, distribution of
services and mid-range computer systems is limited but intense and focuses on
mid-range, Unix and NT server systems, networking systems, storage sub-systems,
printers and related products. Many of the national and regional technical
distributors with which the Company competes have greater financial resources
than the Company. Additionally it is reasonable to expect that the large
broad-line fulfillment distributors such as Ingram Micro Inc. and Tech Data
Corporation, which have substantially greater financial resources than
AmeriQuest, may enter the market in pursuit of the greater gross profit margins
of technical distribution and end-user sales.
Competition in the distribution business is primarily based upon availability of
product, price, technical support and other support services. AmeriQuest
believes that it is generally competitive with respect to each of these factors
and that its principal, competitive advantages are its personal sales
relationships, technical strengths and other support services offerings, and
speed and accuracy of delivery.
Competition in the solutions business is primarily from independent solutions
providers and, at times, large national consulting firms, depending on the
magnitude of the opportunity. Many of these competitors have substantially
greater financial resources than AmeriQuest.
Competition in the leasing business comes primarily from financial institutions
and specialty equipment leasing companies. Virtually all of these competitors
have substantially greater financial resources than AmeriQuest, but few have
greater technical competence.
EMPLOYEES
As of September 30, 2000, AmeriQuest had 83 full-time employees. None of
AmeriQuest's employees are covered by a collective bargaining agreement.
AmeriQuest considers its relations with its employees to be good.
SPECIAL FACTORS TO BE CONSIDERED
In addition to the other information in this Annual Report on Form 10-K, the
following factors should be carefully considered:
CONTINUED LOSSES
The Company had a loss of $4,709,000 during the fiscal year ended September 30,
2000 and has had substantial losses in prior years. During the year ended
September 30, 1999, the Company had a loss of $1,909,000. The Company had net
income of $747,000 during the fiscal year ended September 30, 1998, but such
income included a reversal of prior year restructuring
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accruals of $1,376,000. Additionally, the Company recorded a significant benefit
due to the reversal of other previously established reserves.
There is no assurance that the Company will become profitable in the future. In
the event that losses were to continue at significant levels, the Company will
need to raise additional equity capital to cover those losses or liquidate one
or more operating units. There is no assurance that such additional capital
would be available, or if available, could be secured on terms favorable to the
Company. If the Company's efforts to raise additional equity capital were
unsuccessful, there is no assurance that the Company could continue as a going
concern.
UNCERTAIN BANK LINE OF CREDIT STATUS
The Company's $10 million bank line of credit with Fleet Capital Corporation
expires July 20, 2001. The bank line may not be extended or renewed without
Fleet's agreement, and if the bank line were not extended or renewed, the
Company would have to find a replacement bank line of credit. There is no
assurance that the Fleet line will be extended or renewed or that such
additional bank credit would be available, or if available, could be secured on
terms favorable to the Company. If no debt line were available the Company may
not be able to pay its debts as they become due, WHICH COULD RESULT IN A
REORGANIZATION OR LIQUIDATION.
OPERATING STRATEGY RISK - NEED TO INCREASE GROSS PROFIT
As a distributor, the Company has historically operated on small gross margins.
Further, the Company incurs operating expenses to maintain a sufficient level of
inventory, facilities, sales staff and support personnel necessary to support
sales of products. The Company took actions to improve its profitability during
the first quarter of fiscal 2001 ended December 31, 2000. The Company goal is to
significantly decrease low margin revenue during fiscal 2001. The primary impact
of these actions on profitability is not expected to occur until the second or
third quarter.
The Company's strategy is to increase gross profit, regardless of its impact on
sales, and simultaneously decrease monthly expenses. The Company must achieve
substantially greater gross profit to stay in business, and there can be no
assurance that this will happen.
NEED TO MAINTAIN VENDOR BASE
The Company principally provides computer products manufactured by Acer, Hewlett
Packard, IBM, Okidata and Unisys. Accordingly, the Company's relationships with
these and its other existing vendors are critical to its ability to purchase on
a favorable basis the products that it resells. In addition, from time-to-time
the Company may need to initiate relationships with additional vendors without
jeopardizing the Company's existing vendor relationships. The Company is also
dependent upon its vendors' willingness or ability to make timely shipment of
the products ordered by the Company. The failure of vendors to make shipments on
a timely basis could cause a material disruption of the Company's sales. In the
past, the Company has at times experienced delays in its ability to fill client
orders, due to the inability of certain suppliers to meet their volume and
schedule requirements and/or due to the Company's shortage of cash. Delays in
shipments from suppliers can cause fluctuations in the Company's short-term
results and contribute to order cancellations. During fiscal 2000, one of the
Company's primary suppliers of hardware products experienced financial
difficulty which caused AmeriQuest to switch to a secondary source with less
favorable prices and terms. This change reduced the Company's gross margin
during the second and third fiscal quarters.
RAPID CHANGES IN TECHNOLOGY AND MARKETS
The computer industry in general, and the specific markets in which the Company
competes, are characterized by rapidly changing technology, often resulting in
short product life cycles, rapid price declines, inventory imbalances when
compared with market demands, and significant shifts in market dynamics. The
Company believes its success is highly dependent upon its ability to react to
technological changes and shifts in market demand by continuing to provide
cost-competitive products and services that respond to current market needs. As
a value-added distributor, the Company is particularly vulnerable to changes
caused by technological innovation. The introduction of new products and the
phase out of old products requires the Company to carefully manage its inventory
to minimize inventory obsolescence. The Company has experienced significant
losses due to inventory obsolescence in the past and losses due to selling
products acquired as vendor surpluses. The Company believes it has instituted
the necessary inventory and purchasing safeguards to prevent these difficulties
in the future. Should the Company fail
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to provide new products on a timely basis that respond to industry demands or
should the safeguards referred to above be inadequate, the Company's operating
results would be adversely affected.
COMPETITION
The Company competes in an industry characterized by intense competition.
Competition in the technical, as opposed to fulfillment only, distribution of
services and mid-range computer systems is limited but intense and focuses on
mid-range, Unix and NT server systems, networking systems, storage sub-systems,
printers and related products. Many distributors, resellers and retailers sell
products identical or substantially similar to the products sold by the Company
to corporate end users. Many of the national and regional technical distributors
with which the Company competes have greater financial resources than the
Company. Additionally it is reasonable to expect that the large broad-line
fulfillment distributors such as Ingram Micro Inc. and Tech Data Corporation,
which have substantially greater financial resources than AmeriQuest, may enter
the market in pursuit of the greater gross profit margins of technical
distribution and end-user sales. Competition in the solutions business is
primarily from independent solutions providers and, at times, large national
consulting firms, while competition in the leasing business comes primarily from
financial institutions and speciality equipment leasing companies, all of which
generally have greater financial reserves than the Company. Moreover, the manner
in which computer products and services are sold is changing, and new methods of
distribution and sale may emerge or expand. These factors, among others, will
likely cause continued competitive pressures on the Company in the future.
SALES FORCE RESTRUCTURING
During fiscal 2000, the Company changed the focus of its sales and marketing
function towards greater emphasis on the higher margin corporate account
opportunities. This change in emphasis also resulted in a 70% turnover of the
solutions sales staff since the beginning of fiscal 2000. The solutions sales
staff has not generated sufficient high margin sales to offset the higher cost
structure of providing expert business solutions. The inside, or product sales
staff, also experienced high turnover as a result of the Company's continued
emphasis on reducing the lower margin commodity hardware product sales.
Management believes that the current staff is more aligned with the needs of the
Company and, therefore, turnover during fiscal 2001 is expected to be lower. If
the Company's sales for any reason in the near future do not materialize in
amounts sufficient to cover the existing cost structure, management may again
have to consider restructuring alternatives.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, product development and
operational personnel and the Company's ability to retain and continue to
attract highly skilled personnel. Competition for employees in the computer
industry is intense, and there can be no assurance that the Company will be able
to attract and retain qualified employees. The Company has previously made a
number of management changes, and has had substantial layoffs and other employee
departures. If the Company continues to experience financial difficulties, it
may become increasingly difficult for it to hire new employees and retain
current employees. The Company does not carry any key person life insurance with
respect to any of its personnel.
STOCK MARKET VALIDITY
The price of the Company's Common Stock has been subject to significant price
fluctuations, and there can be no assurance that the price of the Company's
Common Stock will stabilize. In addition, the trading volume for the Company's
Common Stock has generally been relatively small. A large increase in share
trading volume in a short period of time could cause a significant change in
share trading prices.
FORWARD-LOOKING INFORMATION
Future operating results may be impacted by a number of factors that could cause
actual results to differ materially from those stated herein, which reflect
management's current expectations. These factors include worldwide economic and
political conditions, the Company's ability to maintain access to its senior
bank line of credit, the Company's ability to increase gross profit margins, the
Company's ability to manage expense levels, the Company's ability to retain key
vendors, the continued
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financial strength of the Company's clients, and the Company's ability to
accurately anticipate customer demand and manage inventories.
This Annual Report on Form 10-K contains certain forward-looking statements that
are based on current expectations. In light of the important factors that can
materially affect results, including those set forth above and elsewhere in this
Annual Report on Form 10-K, the inclusion of forward-looking information herein
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. The Company may
encounter competitive, technological, financial, legal and business challenges
making it more difficult than expected to continue as a value-added wholesale
distributor and solutions provider; competitive conditions within the computer
industry may change adversely; demand for the products distributed by the
Company, or solutions provided by the Company, may weaken; the Company may be
unable to retain existing key vendors and existing key management personnel;
inventory risks may rise due to shifts in market demand; the Company's forecasts
may not accurately anticipate market demand; the Company's insistence on only
accepting higher margin business may not allow the Company to generate
sufficient revenue to cover its fixed operating expenses; and there may be other
material adverse changes in the Company's operations or business. Certain
important assumptions affecting the forward-looking statements made herein
include, but are not limited to, (i) timely identifying and delivering new
products as well as enhancing existing products and services, (ii) successful
implementation of sales force restructuring, the sales force identifying new
clients, and marketing the Company's services and products to those clients,
(iii) maintaining good relationships with key vendors (iv) accurately
forecasting cash needs and (v) non-renewal of or changes in terms under the
company's senior line of credit Assumptions relating to budgeting, marketing,
advertising, product mix and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause the
Company to alter its marketing, cash expenditures or other budgets, which may in
turn affect the Company's financial position and results of operations.
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ITEM 2. PROPERTIES.
AmeriQuest's principal offices are located in leased facilities in Willow Grove,
Pennsylvania, which consists of approximately 17,500 square feet of office space
and 25,000 square feet of warehouse space on a single level.
The following table sets forth information regarding the principal and regional
offices of AmeriQuest:
SQUARE FEET LEASE EXPIRATION YEAR OPENED
----------- ---------------- -----------
LOCATION
Willow Grove, PA .. 42,500 8/31/03 1998
Atlanta, GA ....... 6,000 9/30/00 1997
St. Louis,. MO .... 1,400 11/30/00 1997
ITEM 3. LEGAL PROCEEDINGS.
AmeriQuest is both a plaintiff and defendant from time-to-time in lawsuits
incidental to its business. AmeriQuest management believes that none of such
current proceedings individually, or in the aggregate, will have a material
adverse effect on AmeriQuest's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during the
fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the market prices for the shares of Common Stock
of AmeriQuest. The prices reflect the high and low closing prices reported on
NASDAQ OTC Bulletin Board for each calendar quarter since October 1, 1998.
HIGH LOW
---- ---
1998
Fourth Quarter ...... 1/8 1/16
1999
First Quarter ....... 1/16 1/16
Second Quarter ...... 11/64 1/16
Third Quarter ....... 1/8 5/64
Fourth Quarter ...... 21/64 5/64
2000
First Quarter ....... 25/32 1/8
Second Quarter ...... 19/32 19/64
Third Quarter ....... 33/64 3/16
Fourth Quarter ...... 13/32 3/16
On December 15, 2000, the stock of AmeriQuest closed at 11/64 (or approximately
$0.17) per share. As of that date AmeriQuest had approximately 1,000
stockholders of record.
The Company did not declare any dividends on its Common Stock in fiscal 2000 and
does not intend to declare dividends on its Common Stock in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data has been derived from and
should be read in conjunction with the audited consolidated financial statements
of AmeriQuest, and the notes thereto, and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition", included elsewhere
herein and incorporated herein by this reference (dollars in thousands, except
share data).
YEAR ENDED SEPTEMBER 30,
------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales .................... $62,154 $56,865 $ 60,466 $ 218,877 $ 424,708
Net income (loss) ............ (4,709) (1,909) (1) 747 (2) (41,311) (2) (33,609)
Net Income (loss) per share .. (0.07) (0.03) (3) (0.01) (3) (0.63) (0.76)
Total assets ................. 12,316 14,168 12,955 26,079 116,372
Long-term obligations ........ 0 0 0 0 3,122
Stockholders' equity (deficit) 2,725 7,169 9,018 (23,392) (11,206)
- ---------
(1) While the Company had net income of $747,000, such income included a
reversal of prior year restructuring accruals of $1,376,000.
Additionally, the Company recorded a significant benefit due to the
reversal of other previously established reserves (See Notes 3 5, 7 and
10 to Notes to Consolidated Financial Statements).
(2) The losses in 1997 included restructuring, asset impairment and
relocation costs of $26.4 million associated with the close down of the
unprofitable distribution businesses. The losses in 1996 included lease
termination costs and moving costs of $6.4 million.
(3) Net income (loss) per share includes a deduction for dividends on
Preferred Stock to arrive at net income (loss) available to Common
Stockholders.
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[ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
SIGNIFICANT EVENTS
On July 20, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's
senior management, Alex Kramer (CEO) and Jon Jensen (CFO and COO), acquired the
36,349,878 shares of AmeriQuest common stock owned by Computer 2000. In taking
over majority control of AmeriQuest from Computer 2000, AmeriQuest's management
arranged for a new $10 million asset-backed bank credit line for AmeriQuest, in
part to release Computer 2000 from its guarantee of IBM Credit Corporation,
obtained the release of Computer 2000 and its affiliates from all other
guarantees of AmeriQuest obligations, and agreed to pay certain transaction
costs totaling approximately $220,000. As part of the transaction, Computer 2000
contributed to the capital of AmeriQuest approximately $28 million in
intercompany debt obligations and an additional $3 million in cash. Computer
2000 further agreed to the redemption by AmeriQuest of all of the outstanding
AmeriQuest preferred stock, convertible into approximately 42 million common
shares, and to the cancellation of all outstanding dividends, interest and
AmeriQuest options and warrants held by Computer 2000. As a result of the
transaction, the number of outstanding shares of AmeriQuest common stock, on a
fully diluted basis, was reduced from approximately 118 million to approximately
67 million.
Arthur Andersen LLP's audit opinion on the Company's fiscal 2000 financial
statements includes an explanatory fourth paragraph raising substantial doubt
about the ability of the Company to continue as a going concern. (See Item 8
Financial Statements and Supplementary Data).
ANNUAL OPERATING RESULTS
The following table presents the Company's yearly results of operations as a
percent of sales:
Year Ended
September 30,
2000 1999 1998
---- ------ ------
Sales 100.0% 100.0% 100.0%
Gross Profit 7.8 8.6 10.1
Selling, general and administrative 14.5 11.8 10.7
Restructuring -- -- (2.3)
Interest 0.9 0.2 0.5
Net Income (Loss) (7.6) (3.4) 1.2
NET SALES
During the fiscal year ended September 30, 2000, sales increased 9.3% compared
to the fiscal year ended September 30, 1999. This increase resulted from the
success of the Company's inside sales force with respect to low-end server,
desktop and peripheral products and the Company's outside sales force on its
sales of business information solutions. With the Company's greater focus in
fiscal 2001 on sales of substantially higher margin network infrastructure
products and services, information systems asset management software and
services, and distribution management systems installation and services,
including serving as an application service provider to clients, the Company
expects to significantly reduce its low margin sales during fiscal 2001, which
is also expected to reduce total sales.
During the fiscal year ended September 30, 1999, sales decreased 6% compared to
the fiscal year ended September 30, 1998. However, included in sales for fiscal
1998 were shipments to other IBM distributors of approximately $7,850,000 of IBM
RS6000 product that represented liquidation of inventory that took place as
AmeriQuest exited the IBM two tier distributor program. Sales attributable to
the Company's ongoing business during fiscal 1998 were thus $52,616,000
representing an increase of 8%, or $4,249,000 over fiscal 1998. This increase
resulted from the Company's decision to focus on business information solution
selling during fiscal 1999.
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The Company has relationships with several key vendors as primary suppliers of
computer products to the Company. For the years ended September 30, 2000, 1999
and 1998, product sales from three, three and two vendors, respectively,
accounted for 69%, 65% and 54%, respectively, of the Company's sales.
COST OF SALES AND GROSS PROFIT
Cost of sales includes primarily the cost of merchandise, freight expenses and
provisions for inventory losses and is reduced by vendor volume rebates and
other items. Gross profit (sales less cost of sales) decreased to 7.8% of sales
for the fiscal year ended September 30, 2000 compared to 8.6% for the fiscal
year ended September 30, 1999. The decrease in gross profit was due to the
growth of low-end server, desktop and peripheral products sales that increased
more rapidly than the higher margin sales of application solutions, hardware and
services. During fiscal 2000, one of the Company's primary suppliers of hardware
products experienced financial difficulty which caused AmeriQuest to switch to a
secondary source with less favorable prices and terms. This change reduced the
Company's gross margin during the second and third fiscal quarters.
Gross profit decreased to 8.6% of sales for the fiscal year ended September 30,
1999 compared to 10.1% for the fiscal year ended September 30, 1998. The desired
transition of the Company's sales force towards "solution" and services selling
with its higher margins had not increased sufficiently to offset either the
lower margins of increasing revenue of low-end server, desktop and peripheral
products or the loss of the margin associated with the IBM 2nd tier RS6000
program in the first half of fiscal 1998. In addition, the Company recorded in
fiscal 1999 and 1998 cost of sales benefits of approximately $400,000, related
to reversal of certain previously established inventory reserves.
The Company receives funds under incentive programs based upon volume sales or
purchases of a vendor's products. These incentive funds reduce the cost of the
products sold. Incentive programs resulted in $0.4 million, $0.5 million and
$0.3 million for the years ended September 30, 2000, 1999 and 1998,
respectively.
AmeriQuest anticipates that it will continue to experience pressure on gross
profit margins of open source hardware product sales due to severe industry
competition. Although AmeriQuest expects that it will be able to improve its
sales product mix toward those products and services generating higher margins
and reduce operating expenses as a percent of sales, no assurance can be given
as to whether such improvement in fact will occur. To the extent gross profits
decline and the Company is not successful in reducing selling, general and
administrative expenses as a percentage of sales, the Company will continue to
experience negative operating results.
OPERATING EXPENSES
For the fiscal years ended September 30, 2000, 1999 and 1998, operating
expenses, exclusive of restructuring costs were approximately 14.5%, 11.8%, and
10.7% of sales, respectively. Selling, general and administrative expenses
continued to increase during fiscal 2000 as the Company increased its sales
force with a focus on consultative selling and providing services and quality
products for business information solutions to VARs and systems integrators and
expanded those efforts to include direct selling to large corporate accounts.
AmeriQuest's strategy remains to emphasize the sale of complete solutions for
its clients and to provide a high level of value-added services, including
consultation on component selection, system assembly, configuration, testing and
technical support services, but with greater emphasis on sales to large
corporate accounts. As the Company pursued more profitable business
opportunities than the historically low margin sale of distributed products, the
Company invested in numerous programs to increase its presence with large
corporate accounts, resulting in greater expenditures than would otherwise be
expected, including a substantial investment of management time and
approximately $240,000 of costs to evaluate a potential acquisition, now
abandoned, that would have furthered the above objectives. In addition the
Company incurred legal and financial fees of $110,000 related to issuance of an
equity line of credit, and a related non cash charge of $265,000 representing
the fair value of warrants issued to an investment bank.
Selling, general and administrative expenses increased during fiscal 1999 as the
Company expanded and rebuilt its sales force with a focus on consultative
selling and providing services and quality products for business information
solutions to VARs and systems integrators. The increases were partially offset
by a benefit of approximately $600,000 resulting from the reversal of previously
established accruals.
During the year ended September 30, 1998, the Company settled two lawsuits
favorably and reversed $1.3 million of reserves in excess of settlement amounts
which served to offset certain general and administrative costs incurred during
the fiscal year that related to the withdrawal from business with certain
clients and vendors and residual expenses resulting from closing of the
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Company's other divisions in fiscal 1997 and 1998. The Company also recorded the
benefit of approximately $400,000 in fiscal 1998 resulting from the reversal of
previously established accruals.
Operating expenses are reduced by advertising and market development funds
received from vendors as a subsidy for, or incentive to, market their products.
Funds received during the fiscal years ended September 30, 2000, 1999 and 1998
totaled $0.3 million, $0.3 million and $0.6 million, respectively.
RESTRUCTURING
During the year ended September 30, 1998, the Company completed a restructuring
plan. Costs incurred to complete the restructuring plan were charged against the
related, previously established restructuring accruals. Certain estimates made
of the costs to complete the restructuring plan exceeded the actual costs
incurred. When the Company determined that the estimated costs exceeded the
actual costs, the remaining accruals were reversed into income. During the year
ended September 30, 1998, the Company reversed approximately $1.4 million into
income (See Note 4 to Notes to Consolidated Financial Statements).
INTEREST EXPENSE
Interest expense, net, increased from $0.1 million for the year ended September
30, 1999 to $0.6 million for the year ended September 30, 2000 due solely to
increased borrowings against the Company's line of credit to fund its operating
losses.
Interest expense, net, decreased from $0.3 million for the year ended September
30, 1998 to $0.1 million for the year ended September 30, 1999 due to the
elimination of debt associated with the change in control on July 20, 1998.
Borrowings on the bank credit line did not occur until April, 1999 as sales
increases were achieved.
INCOME TAXES
In the period October 1, 1997 to September 30, 2000, no income tax expense was
recorded due to losses or the availability of tax-loss carryforwards. Due to the
acquisition by Listen Group Partners, LLC of the Company's stock held by
Computer 2000 (see Note 3 to the Notes to Consolidated Financial Statements),
there was a change in ownership as defined by section 382 of the Internal
Revenue Code ("Section 382 Limitations"). The Section 382 Limitations limit the
Company's ability to utilize its net operating loss carryforwards created prior
to the ownership change. The Company has calculated that the net operating loss
carryforwards available to offset future taxable income is approximately $22
million (see Note 9 to the Notes to Consolidated Financial Statements). The
Company had not benefited from these net operating carryforwards as of September
30, 2000.
OPERATING INCOME VARIABILITY
The annual and quarterly operating results of the Company have varied
considerably from net income of $0.7 million during fiscal 1998 to a net loss of
$1.9 million during fiscal 1999 and a net loss of $4.7 million during fiscal
2000. Included in the net income for fiscal 1998 was the reversal of
restructuring accruals of $1.4 million and other previously established
reserves.
INFLATION
To date, AmeriQuest has not been significantly affected by inflation. Moreover,
technological changes in the electronics industry have generally resulted in
price reductions, despite increases in certain costs which may be affected by
inflation.
SEASONALITY
Generally, the Company's sales volumes are not seasonal between quarters,
although historical monthly sales within various quarters have varied
considerably. For example, sales tend to decrease in November, primarily due to
industry attendance at Comdex, with a corresponding increase in December.
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15
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $0.7 million in cash and had borrowed
$5.3 million against its line of credit. The Company used $2.8 million in cash
during the year ended September 30, 2000, primarily to finance its change in
sales strategy, operating losses, and to finance capital expenditures.
At September 30, 1999, the Company had $0.7 million in cash and had borrowed
$2.4 million against its line of credit. The Company used $2.5 million in cash
during the year ended September 30, 1999 primarily to finance one-time capital
expenditures and the growth in sales and related accounts receivable.
Accounts receivable days increased slightly during fiscal 2000 compared to
fiscal 1999 and increased during fiscal 1999 compared to fiscal 1998, primarily
due to longer payment terms extended to clients. Inventory turnover increased in
fiscal years 2000, 1999 and 1998, reflecting an intentional reduction in stock
carried in an effort to reduce obsolescence costs and carrying costs.
At September 30, 2000, the Company had a stockholders' equity of $2.7 million
compared to stockholders' equity of $7.2 million at September 30, 1999.
The Company maintains a $10 million line of credit with Fleet Capital
Corporation ("Fleet") which is secured by substantially all of the Company's
assets. Interest rates on the Fleet line are prime plus 150 basis points or
LIBOR plus 400 basis points. Borrowings under the Fleet line of credit are
limited to 80% of eligible accounts receivable plus the lesser of $3.5 million
or 50% of eligible inventory, as defined. The Fleet line expires July 20, 2001.
Borrowings under the Fleet line of credit at September 30, 2000 and September
30, 1999 were $5,269,000 and $2,443,000 respectively. Borrowings under the Fleet
line of credit have been reduced to approximately $4,250,000 at December 29,
2000 out of a total eligible borrowing availability of approximately $4,700,000
at December 29, 2000.
On January 12, 2001, the Company amended its Fleet facility. The amendment
waived defaults of the minimum tangible net worth and minimum cash flow
covenants as of September 30, 2000 and reset certain financial covenants
effective October 1, 2000.
The Company took action to improve its liquidity during the first quarter of
fiscal 2001 ended December 31, 2000 by reducing its overhead and payroll,
raising minimum margins to its VAR and systems integrator customer base,
charging interest on its overdue accounts receivable, and lowering its
outstanding balance under its line of credit by reducing inventory and narrowing
its focus on higher gross margin solution sales. The primary impact of these
actions are not expected to have a benefit to liquidity until early in the
second quarter of fiscal 2001 ended March 31, 2001.
The Company's strategy to increase the minimum margins may cause most of these
customers to decide to acquire their products from another distribution source.
This strategy of phasing out low gross profit customers will result in lower
revenues and accounts receivable, thereby reducing the line of credit from the
senior bank debt lender and improving the Company's cash flow. If this
strategy is not successful, the Company may not have sufficient liquidity to
continue its business.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" which
is required to be adopted by the Company in fourth quarter of fiscal 2001. The
bulletin draws on existing accounting rules and provides specific guidance on
revenue recognition related to service transactions and up-front non-refundable
fees. The Company does not expect the adoption of this pronouncement to have a
material effect on the Company's financial position or results of operations.
In June 1998, the Financial Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) which must be
adopted by the Company in the year ending September 30, 2001. SFAS 133 provides
a comprehensive and consistent standard for the recognition and measurement of
derivative and hedging activities. As the Company does not currently hold
derivative instruments or engage in hedging activities, the adoption of this
pronouncement is expected to have no impact on the Company's financial position
or results of operations.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates. Pursuant to the
Company's line of credit with Fleet, a change in either the lender's base rate
or LIBOR would affect the rate at which the Company could borrow funds
thereunder. The Company believes that the effect of any such change would be
minimal. Management estimates that had either the lenders base rate or LIBOR
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increased by one percent, the Company's interest expense for the year ended
September 30, 2000 would have increased by approximately $6,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes thereto, and the report of independent public
accountants thereon are included herein. Supplementary data, including quarterly
financial information, is included following the financial statements. A list of
the information so included is set forth in response to Item 14(a) entitled
"Exhibits, Financial Statement Schedules, and Reports on Form 8-K," which is
incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See "Election of Directors" in the proxy statement for the 2001 annual meeting
of the stockholders of the Company, which will be filed within 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See "Executive Officers Compensation" in the proxy statement for the 2001 annual
meeting of the stockholders of the Company, which will be filed within 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See "Stock Ownership" in the proxy statement for the 2001 annual meeting of the
stockholders of the Company, which will be filed within 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Other Information-Certain Relationships and Related Transactions" in the
proxy statement for the 2001 annual meeting of the stockholders of the Company,
which will be filed within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
PAGE
REFERENCE
---------
(1) Financial Statements included in Part II of this Report:
Report of Independent Public Accountants ...................... F-1
Consolidated Statements of Operations ......................... F-2
Consolidated Balance Sheets ................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) ..... F-4
Consolidated Statements of Cash Flows ........................ F-5
Notes to Consolidated Financial Statements .................... F-7
(2) Financial Statement Schedules
Schedule II -- -- Valuation and Qualifying Accounts and Reserve F-14
(b) Reports on Form 8-K
None
(c) Exhibits
EXHIBIT INDEX
EXHIBIT
NO. TITLE OF DOCUMENT LOCATION OF FILING
--- ----------------- ------------------
3.01* Restated Certificate of Incorporation of AmeriQuest................... SEC File No. 1-10397
Exhibit 3.01
10-K for September 30, 1998
3.02* By-laws of AmeriQuest................................................. SEC File No. 33-81726
4.01* Reference is made to Exhibits 3.01 and 3.02, the
Certificate of Incorporation and By-laws, which define
the rights of security holders........................................
4.02* Specimen Stock Certificate ........................................... SEC File No. 33-81726
10.01* Inventory and Working Capital Financing Agreement dated July
20, 1998 by and between AmeriQuest and Fleet Capital Corporation ..... SEC File No. 1-10397
8-K for July 30, 1998
10.02* 1996 Equity Incentive Plan............................................ SEC File No. 1-10397
Exhibit 10.07
10-K for September 30, 1997
10.03* Employment Agreement for Alexander C. Kramer, Jr. .................... SEC File No. 1-10397
Exhibit 10.10
10-K for September 30, 1997
10.04* Employment Agreement for Jon D. Jensen .............................. SEC File No. 1-10397
Exhibit 10.11
10-K for September 30, 1997
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EXHIBIT INDEX (CONTINUED)
10.05* Lease Agreement dated July 1, 1998 by and between
AmeriQuest and Merion Mills Associates .............................. SEC File No. 1-10397
Exhibit 10.05
10-K for September 30, 1998
10.06* Sublease dated as of September 4, 1996 by and between
AmeriQuest and Central Video, Inc.......... .......................... SEC File No. 1-10397
Exhibit 10.26
10-K for September 30, 1996
10.07* 1998 Equity Incentive Plan............................................ SEC File No. 1-10397
Exhibit 10.08
10-K for September 30, 1999
21.01 Subsidiaries of AmeriQuest............................................ SEC File No. 1-10397
Exhibit 21.01
10-K for September 30, 1999
27.01 Financial Data Schedule (for SEC use only)
- ----------
* Incorporated herein by reference to the indicated filing pursuant to Rule
12b-32 under the Securities Exchange Act of 1934, as amended, and Rule 24 of
the Commission's Rules of Practice.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1933, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Willow
Grove, State of Pennsylvania, on the 12th day of January, 2001.
AmeriQuest Technologies, Inc.
/s/ ALEXANDER C. KRAMER
-----------------------
By: Alexander C. Kramer
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Each Person, in so signing, also causes and appoints Alexander C. Kramer and Jon
D. Jensen, and each of them acting alone, as his true and lawful
attorney-in-fact, in his name, place and stead, to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALEXANDER C. KRAMER President and a Director January 12, 2001
-----------------------
Alexander C. Kramer (Principal Executive Officer)
/s/ JON D. JENSEN Chief Financial Officer, Chief January 12, 2001
----------------- Operating Officer, Secretary and
Jon D. Jensen a Director (Principal Financial
and Accounting Officer)
/s/ EDWARD B. CLOUES, II Director January 12, 2001
-------------------------
Edward B. Cloues, II
/s/ WALTER A. REIMANN Director January 12, 2001
---------------------
Walter A. Reimann
/s/ CHARLES W. SOLTIS Director January 12, 2001
---------------------
Charles W. Soltis
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AmeriQuest Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of AmeriQuest
Technologies, Inc. (a Delaware corporation) and subsidiaries as of September 30,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended September 30, 2000. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of AmeriQuest Technologies, Inc.
and subsidiaries (the Company) as of September 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's existing credit facility
expires on July 20, 2001, which raises substantial doubt about the ability of
the Company to continue as a going concern. In addition the Company has incurred
recurring losses from operations and negative cash flows from operations.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania,
December 22, 2000 (except with
respect to the covenant waivers
discussed in Notes 1 and 8, as to
which the date is January 12, 2001)
F-1
22
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30
------------
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................... $ 723 $ 667
Accounts receivable, net of allowance for doubtful accounts
of $381 and $264 ..................................................... 8,069 8,323
Inventories ............................................................. 1,843 3,565
Other current assets .................................................... 478 319
--------- ---------
Total current assets ............................................ 11,113 12,874
PROPERTY AND EQUIPMENT, NET ................................................ 909 961
OTHER ASSETS ............................................................... 294 333
--------- ---------
$ 12,316 $ 14,168
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit .......................................................... $ 5,269 $ 2,443
Accounts payable ........................................................ 3,393 3,709
Accrued expenses and other .............................................. 929 847
--------- ---------
Total current liabilities ...................................... 9,591 6,999
--------- ---------
Commitments and Contingencies (Note 10)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 per value, 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 200,000,000 shares authorized; 67,841,906
shares issued and outstanding ......................................... 679 679
Additional paid-in capital .............................................. 174,698 174,433
Accumulated deficit ..................................................... (172,652) (167,943)
--------- ---------
Total stockholders' equity ................................ 2,725 7,169
--------- ---------
$ 12,316 $ 14,168
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
23
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended September 30
-----------------------
2000 1999 1998
---- ---- ----
NET SALES ............................................. $ 62,153 $ 56,865 $ 60,466
COST OF SALES ......................................... 57,288 51,990 54,323
-------- -------- --------
Gross profit ................................. 4,865 4,875 6,143
OPERATING EXPENSES
Selling, general and administrative ............... 9,004 6,693 6,499
Restructuring costs ............................... -- -- (1,376)
-------- -------- --------
Income (loss) from operations ................ (4,139) (1,818) 1,020
INTEREST EXPENSE, NET ................................. 570 91 273
-------- -------- --------
NET INCOME (LOSS) ..................................... (4,709) (1,909) 747
DIVIDENDS ON PREFERRED STOCK .......................... -- -- (1,575)
-------- -------- --------
NET LOSS TO COMMON STOCKHOLDERS ....................... $ (4,709) $ (1,909) $ (828)
======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE ................. $ (0.07) $ (0.03) $ (0.01)
======== ======== ========
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER
SHARE ................................................. 67,842 67,329 66,882
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
24
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
Preferred Stock Common Stock Additional
--------------- ------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
Balances at September 30, 1997 .............. 300,000 $ 30,000 66,881,906 $669 $111,145 $(165,206) $(23,392)
Accrued dividend on preferred stock ...... -- -- -- -- -- (1,575) (1,575)
Contribution of cash, preferred stock,
accrued dividends and debt by Computer
2000 (see Note 3) ........................ (300,000) (30,000) -- -- 63,238 -- 33,238
Net income ............................... -- -- -- -- -- 747 747
-------- -------- ----------- ---- -------- --------- --------
Balances at September 30, 1998 .............. -- -- 66,881,906 669 174,383 (166,034) 9,018
Issuance of shares to executive management -- -- 960,000 10 50 -- 60
Net loss ................................. -- -- -- -- -- (1,909) (1,909)
-------- -------- ----------- ---- -------- --------- --------
Balances at September 30, 1999 .............. -- -- 67,841,906 679 174,433 (167,943) 7,169
Issuance of warrants in connection
with equity line ......................... -- -- -- -- 265 -- 265
Net loss ................................. -- -- -- -- -- (4,709) (4,709)
-------- -------- ----------- ---- -------- --------- --------
Balances at September 30, 2000 .............. -- $ -- 67,841,906 $679 $174,698 $(172,652) $ 2,725
======== ======== =========== ==== ======== ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
25
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED SEPTEMBER 30
-----------------------
2000 1999 1998
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $(4,709) $(1,909) $ 747
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation ........................................ 380 301 307
Warrants issued in connection with equity line....... 265 -- --
Gain on sale of division assets ..................... -- -- (184)
Restructuring costs ................................. -- -- (1,376)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable .......... 254 (1,788) (415)
Decrease in inventories ............................. 1,723 626 2,450
(Increase) decrease in other assets ................. (123) 23 229
Increase (decrease) in accounts payable and
accrued expenses and other ........................ (233) 679 (8,757)
------- ------- -------
Net cash used in operating
activities ...................................... (2,443) (2,068) (6,999)
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of division assets .................. -- -- 450
Capital expenditures, net of disposals ................. (327) (463) (312)
------- ------- -------
Net cash provided by (used in) investing
activities ...................................... (327) (463) 138
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit ...... 2,826 2,443 (3,064)
Contribution to capital from Computer 2000 ............. -- -- 3,000
------- ------- -------
Net cash provided by (used in) financing
activities ...................................... 2,826 2,443 (64)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... 56 (88) (6,925)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ..................................................... 667 755 7,680
------- ------- -------
CASH AND CASH EQUIVALENTS AT END
OF YEAR ..................................................... $ 723 $ 667 $ 755
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
26
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest: During the fiscal years ended September 30, 2000, 1999 and 1998, the
Company paid cash for interest of approximately $601,000, $128,000, and
$499,000, respectively.
Income taxes: During the fiscal years ended September 30, 2000, 1999 and 1998, the
Company made no income tax payments.
Noncash investing and financing activities:
Contribution of non-interest During the fiscal year ended September 30, 1998, Computer 2000
Bearing demand loan and contributed to the capital of the Company a non-interest bearing demand
Preferred stock to capital: loan due Computer 2000 and preferred stock of approximately $28 million
and $30 million, respectively.
Dividends on Preferred Stock: During the fiscal year ended September 30, 1998, the Company had
accrued $1,575,000 in dividends payable to preferred stockholders. The
accrued dividends of $2,450,000 were contributed to capital on July 20,
1998.
Issuance of Common Stock: During the fiscal year ended September 30, 1999, the Company issued
960,000 shares of its common stock to certain members of executive
management as settlement for bonuses accrued for at September 30, 1998.
Issuance of Warrants During the fiscal year ended September 30, 2000, the Company issued
warrants to purchase 1,567,391 shares of common stock at an exercise
price of $0.51 per share in connection with the establishment of an
equity line.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
27
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND LIQUIDITY:
Description of Business. AmeriQuest Technologies, Inc. and subsidiaries (the
"Company" or "AmeriQuest"), a Delaware corporation, markets and sells products
and services for business information solutions to value-added resellers
("VARs") and systems integrators, and, beginning in fiscal 2000, corporate
accounts. During fiscal 1998, the Company's senior management acquired all of
the Company's common stock held by Computer 2000, the then current majority
stockholder. Computer 2000 also contributed cash, preferred stock, accrued
dividends and obligations due Computer 2000 to the Company's equity (see Note
3).
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern. These
principles contemplate the realization of assets and satisfaction of liabilities
in the normal course of business. During fiscal 2000 and as of September 30,
2000, the Company was not in compliance with covenants under its bank line of
credit. Such non-compliance was waived by the bank on January 12, 2001. The
Company's existing credit facility expires on July 20, 2001. In addition,
through September 30, 2000, the Company has incurred significant losses from
operations and has generated negative cash flow from operations.
The Company has taken actions to improve its liquidity during the first fiscal
2001 quarter ended December 31, 2000 by reducing its overhead and payroll,
raising minimum margins to its VAR and system integrator customer base, charging
interest on its overdue accounts receivable, reducing inventory, and narrowing
its focus on solution sales to concentrate on substantially higher margin sale
of network infrastructure products and services, information systems asset
management software and services, and distribution management systems
installation and services, including serving as an application service provider
to clients. Accordingly, the Company expects to significantly decrease net sales
in general during fiscal 2001,and low margin sales in particular. The primary
impact of these actions are not expected to have a benefit to the Company's
liquidity until the second or third quarter of fiscal 2001.
In summary, the Company's strategy is to increase gross profit, regardless of
its impact on revenue, and simultaneously decrease monthly expenses and the
borrowings under its bank line of credit used to finance accounts receivable.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation. The consolidated financial statements include the
accounts of AmeriQuest and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
Reclassifications. Certain amounts in the prior periods have been reclassified
to conform to the current year's presentation.
Cash and Cash Equivalents. The Company considers cash on deposit with financial
institutions and all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company generally
limits its investments in cash equivalents to certificates of deposit.
Inventories. Inventories consist principally of computer hardware and software
held for resale and are stated at the lower of cost, using the first-in,
first-out method, or market. Reserves for inventory obsolescence and slow moving
product are provided based upon specified criteria, such as recent sales
activity and date of purchase. Amounts due from vendors for price protection and
stock rotations are recorded as an offset to the amounts due vendors in accounts
payable. Management assesses the net realizable value of these amounts and
reserves for potential uncollectable balances.
F-7
28
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and equipment. Property and equipment are stated at cost. Depreciation
is computed using straight-line method over estimated useful lives as follows:
Equipment .................... 5 to 7 years
Furniture and fixtures ....... 5 years
Leasehold improvements ....... Lease term
Computer hardware and software 3 years
Vehicles ..................... 3 to 5 years
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and betterments to property and equipment are capitalized.
When assets are disposed of, the related cost and accumulated depreciation
thereon are removed from the accounts and any resulting gain or loss is included
in operations.
Market development funds and volume incentive rebates. In general, vendors
provide various incentive programs to the Company. The funds received under
these programs are determined based on purchases and/or sales of the vendors'
product and the performance of certain training, advertising and other market
development activities. Revenue associated with these funds is recorded when
earned either as a reduction of selling, general and administrative expenses or
product cost, according to the specific nature of the program.
Sales recognition. Sales are recorded as of the date shipments are made to
customers. Sales returns and allowances are reflected as a reduction in sales
and recorded in inventory at expected net realizable value. The Company permits
the return of products within certain time limits and will exchange returned
products. Products that are defective upon arrival are handled on a warranty
return basis with the Company's vendors. The Company provides for product
warranty and return obligations at the point of sale based on estimates of
expected future costs. Sales related to engineering, integration and
implementation services are recognized on a time and materials basis as the
services are performed.
Restructuring Costs. In April 1997, the Board approved a wide-ranging
restructuring plan with the goal of focusing on the Company's Advanced Systems
Group ("ASG"). The plan included closure of certain warehouse facilities,
reduction in the number of employees and closure of its corporate headquarters
in Florida. The restructuring plan was implemented, but not completed,
throughout fiscal year 1997. The Company completed this restructuring plan
during fiscal 1998. Certain estimates made of the costs to complete the
restructuring plan exceeded the actual costs incurred. When the Company
determined that the estimated costs exceeded the actual costs, the remaining
accruals were reversed into income. During fiscal 1998, the Company reversed
$1,376,000 into income, which is recorded in restructuring costs in the
accompanying consolidated statement of operations. In addition, during fiscal
1999 and 1998, the Company recorded significant benefits to its consolidated
statements of operations due to the reversal of previously established reserves
(See Notes 5, 7 and 10).
Income taxes. The Company accounts for income taxes under Statement of Financial
Accounting Standards No.109 "Accounting for Income Taxes" (SFAS 109), which
requires an asset and liability approach in accounting for income taxes payable
or refundable at the date of the financial statements as a result of all events
that have been recognized in the financial statements and as measured by the
provisions of enacted laws. Additionally, SFAS 109 requires that deferred tax
assets be evaluated and a valuation allowance be established if it is "more
likely than not" that all or a portion of the deferred tax asset will not be
realized.
Net loss per common share and common share equivalent. The Company follows
Statement of Financial Accounting Standards No. 128, "Earnings per Share". This
statement requires the disclosure of both basic and diluted earnings per share.
Basic and diluted shares outstanding for the fiscal years ended September 30,
2000, 1999 and 1998 are the same, as all common stock equivalents are
anti-dilutive due to the loss to common stockholders.
Concentration of credit risks. Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of cash and
accounts receivable. The Company places its cash with high credit quality
financial institutions. Concentrations of credit risk with respect to accounts
receivable are not significant due to the large number of clients. At September
30, 2000 and 1999, no one client represented greater than 10% of accounts
receivable and for fiscal 2000, 1999 and 1998, no customer accounted for greater
than 10% of sales.
Dependence on Vendors. The Company has relationships with several key vendors as
primary suppliers of computer products to the Company. For the years ended
September 30, 2000, 1999 and 1998, product sales derived from three, three
F-8
29
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and two vendors accounted for 69%, 65%, and 54%, respectively, of the Company's
sales. There can be no assurance that the Company will maintain its relationship
with these vendors, or that it will be able to find alternative vendors capable
of providing product on terms satisfactory to the Company should its
relationship with its current vendors terminate.
Recent Accounting Pronouncements. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" which is required to be adopted by the Company in fourth
quarter of fiscal 2001. The bulletin draws on existing accounting rules and
provides specific guidance on revenue recognition related to service
transactions and up-front non-refundable fees. The Company does not expect the
adoption of this pronouncement to have a material effect on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) which
must be adopted by the Company in the year ending September 30, 2001. SFAS 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivative and hedging activities. As the Company does not
currently hold derivative instruments or engage in hedging activities, the
adoption of this pronouncement is expected to have no impact on the Company's
financial position or results of operations.
3. ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR MANAGEMENT:
On July 2, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's
senior management, Alex Kramer (CEO) and Jon Jensen (CFO), signed an agreement
to acquire the 36,349,878 shares of AmeriQuest common stock owned by Computer
2000. The transaction was approved by the outside directors of AmeriQuest and by
the full Board of Directors of AmeriQuest.
In taking over majority control of AmeriQuest from Computer 2000, AmeriQuest's
management arranged for a new $10 million asset-backed bank credit line for
AmeriQuest (see Note 8), in part to release Computer 2000 from its guarantee of
IBM Commercial Credit, obtained the release of Computer 2000 and its affiliates
from all other guarantees of AmeriQuest obligations, and agreed to pay certain
transaction costs totaling approximately $220,000.
As part of the transaction, completed on July 20, 1998, Computer 2000
contributed to the capital of AmeriQuest approximately $28 million in
intercompany debt obligations and an additional $3 million in cash. Computer
2000 further agreed to the redemption by AmeriQuest of all of the outstanding
AmeriQuest preferred stock, convertible into approximately 42 million common
shares, and to the cancellation of all outstanding dividends of $2,450,000,
interest of $124,000 and AmeriQuest options and warrants held by Computer 2000.
As a result of the transaction, the number of outstanding shares of AmeriQuest
on a fully diluted basis, was reduced from approximately 118 million to
approximately 67 million. The Board of Directors of the Company agreed to
reserve 6.7 million shares of common stock for future issuance to AmeriQuest
employees as incentive compensation pursuant to terms to be approved by outside
directors of the board (See Note 11).
4. DISPOSITION:
Early in the first quarter of fiscal 1998, the Company sold its wholly owned
subsidiaries Kenfil Distribution (Far East) Limited, a Hong Kong corporation and
Kenfil Distribution (M) Sdn. Bhd., a Malaysian corporation (collectively,
"Kenfil Asia"). Proceeds from the sale of Kenfil Asia were $450,000, with a gain
of $184,000, which was classified as a reduction of selling, general and
administrative expenses in the accompanying consolidated statement of
operations.
5. INVENTORIES:
Inventories consist of finished goods and are reflected net of reserves for
excess and obsolete inventory. In estimating the inventory reserves, management
relied upon its knowledge of the industry, projected sales volumes, current
inventory levels and aging of product on-hand. Because of the assumptions used,
the amounts the Company will ultimately realize could differ materially in the
near term from the net inventory balances as included in the accompanying
consolidated financial statements. Inventories do not contain any labor or
overhead. The Company's contracts with most of its vendors provide price
protection and stock return privileges to reduce to some degree the risk of loss
to the Company due to manufacturer price reductions and slow moving or obsolete
inventory.
In fiscal 1999 and 1998, the Company recorded cost of sales benefits of
approximately $400,000 and $1,700,000, respectively, related principally to the
reversal of previously established vendor debit reserves.
F-9
30
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
September 30
------------
2000 1999
---- ----
Equipment .................... $ 316 $ 270
Computer Hardware and Software 2,095 1,831
Furniture and fixtures ....... 205 193
Leasehold improvements ....... 336 332
Less accumulated depreciation (2,043) (1,665)
------- -------
$ 909 $ 961
======= =======
For the years ended September 30, 2000, 1999 and 1998, depreciation expense was
$380,000, $301,000, and $307,000, respectively.
7. ACCRUED EXPENSES AND OTHER:
Accrued expenses and other consist of approximately $306,000 of accrued payroll
and related expenses and approximately $623,000 of deferred income and other
accrued expenses at September 30, 2000. Accrued expenses and other consist of
approximately $377,000 of accrued payroll and related expenses and approximately
$470,000 of deferred income and other accrued expenses at September 30, 1999. In
fiscal 1999 and 1998, the Company recorded operating expense benefits of
approximately $600,000 and $400,000, respectively, related to the reversal of
previously established accruals and reserves.
8. LINES OF CREDIT:
In connection with the purchase, in fiscal 1998, by the Company's management of
the Company's stock held by Computer 2000 (see Note 3), the Company entered into
a three year credit facility with a bank (the "Credit Facility") to provide
additional working capital for the Company. The Company can borrow on the Credit
Facility up to the lesser of $10 million or 80% of eligible accounts receivable
plus the lesser of $3.5 million or 50% of eligible inventory, as defined. The
Credit Facility bears interest at either the bank's prime rate plus 150 basis
points or LIBOR plus 400 basis points (11.0% and 9.75% at September 30, 2000 and
1999, respectively). The Credit Facility also provides for various covenants
including a minimum tangible net worth and minimum cash flows, as defined. The
Credit Facility expires on July 20, 2001.
The Company paid a $100,000 commitment fee during fiscal 1998 and is obligated
to pay fees of 0.5% per annum of unused available borrowings and 2% per annum on
outstanding letters of credit. The Credit Facility can be utilized for letters
of credit in an aggregate amount not to exceed $5 million. Outstanding letters
of credit are a reduction of available borrowing under the Credit Facility. As
of September 30, 2000, the Company has borrowed $5.5 million on the Credit
Facility and has outstanding letters of credit of $300,000. The weighted average
interest rate on borrowings under the credit facility was 10.5%, 9.4% and 13.5%
during fiscal 2000, 1999 and 1998, respectively.
The Company was not in compliance with the minimum tangible net worth and
minimum cash flow covenants, as defined. On January 12, 2001, the Company
amended its credit facility. The amendment waived defaults of these covenants as
of September 30, 2000, and reset certain financial covenants effective October
1, 2000.
F-10
31
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
The Company has historically incurred significant operating losses and has
recorded a valuation allowance against its net deferred tax asset, as the
Company believed that it is more likely than not that the net deferred tax asset
would not be realized through future taxable income. The valuation allowance
recorded against the net deferred tax asset is based on management's estimates
related to the Company's ability to realize these benefits. Appropriate
adjustments will be made to the valuation allowance if circumstances warrant in
future periods. Such adjustments may have a significant impact on the Company's
consolidated financial statements.
The tax effect of significant cumulative temporary differences consist of the
following (in thousands):
Year ended September 30
-----------------------
2000 1999 1998
---- ---- ----
Inventory reserves ............. $ 60 $ 68 $ 282
Allowance for doubtful accounts 152 106 209
Other .......................... 131 148 677
Net operating loss carryforwards 7,364 5,920 4,556
Valuation allowance ............ (7,707) (6,242) (5,724)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
Due to the acquisition by the Company's management of the Company's stock held
by Computer 2000 on July 20, 1998 (see Note 3), there was a change in ownership
as defined by section 382 of the Internal Revenue Code ("Section 382
Limitations"). The Section 382 Limitations limit the Company's ability to
utilize its net operating loss carryforwards created prior to the ownership
change. As of the date of ownership change (July 20, 1998), the Company had net
operating loss carry-forwards available to offset future taxable income of up to
approximately $11.9 million. Such carry-forwards may be subject to further
limitation. Subsequent to July 20, 1998, the Company has generated additional
net operating loss carryforwards of approximately $1.5 million, $4.0 million and
$4.5 million in fiscal 1998, 1999 and 2000, respectively. The Company has not
benefited from these net operating carryforwards as of September 30, 2000.
The principal elements accounting for the difference between income taxes
computed at the statutory rate and the effective rate are as follows (in
thousands):
Year Ended September 30
------------------------
2000 1999 1998
---- ---- ----
Federal statutory rate ............................ $(1,484) $(649) $ 255
State taxes, net of federal benefit ............... (262) (115) 45
Intangible write-offs, amortization and other
nondeductable amounts .......................... 6 46
Net operating losses not benefited ................ 1,746 758 --
Benefit of net operating losses previously reserved -- -- (346)
------- ----- -----
$ -- $ -- $ --
======= ===== =====
F-11
32
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
The Company leases its corporate office, warehouse space and certain equipment
under operating leases. Future minimum rental commitments for all non-cancelable
operating leases at September 30, 2000 are as follows (in thousands):
Year ended
September 30
------------
2001 306
2002 234
2003 200
2004 --
2005 --
----
$740
====
Total rental expense, net of sub-rental income, under non-cancelable agreements
for the years ending September 30, 2000, 1999 and 1998 was approximately
$391,000, $355,000, and $589,000, respectively.
In fiscal 1998, the Company settled two law suits: Kenfil Inc. vs. RLI Insurance
Company and Leading Edge Products, Inc. vs. AmeriQuest. Total amounts owed for
the settlements were $920,000. At September 30, 1997, the Company had reserves
in excess of the settlement amounts of approximately $1.3 million, which were
taken into income during fiscal 1998 as an offset to selling, general and
administrative expense in the accompanying consolidated statement of operations.
The Company is a party to various legal matters arising in the ordinary course
of business. Management believes that the ultimate outcome of these matters will
not have a material adverse effect on the Company's future financial position or
its results of operations.
11. STOCK OPTION PLANS:
The Company has instituted various stock option plans, which authorize the
granting of options to key employees, directors, officers, vendors and clients
to purchase up to 6,700,000 shares of the Company's common stock. All grants of
options during the years presented have been to employees or directors and were
granted at the then quoted market price. A summary of shares available for grant
and the options outstanding under the plans is as follows:
Shares
Available Options Price
for Grant Outstanding Range
--------- ----------- -----
Balances at September 30, 1997 ....... 1,928,590 565,504 $0.45-4.50
Options no longer available for grant (365,953) -- --
Options cancelled .................... 437,363 (437,363) 0.45-4.50
Options granted ...................... (1,910,000) 1,910,000 0.08
---------- ---------- -----------
Balances at September 30, 1998 ....... 90,000 2,038,141 $0.08-0.45
Increase in shares available for grant 4,700,000 -- --
Options no longer available for grant (128,141) -- --
Options cancelled .................... 318,141 (318,141) 0.08-0.45
Options granted ...................... (150,000) 150,000 0.06-0.11
---------- ---------- -----------
Balances at September 30, 1999 ....... 4,830,000 1,870,000 $0.06-0.11
Options cancelled .................... 298,000 (298,000) 0.08-0.11
Options granted ...................... (730,000) 730,000 $0.09-0.36
---------- ---------- -----------
Balances at September 30, 2000 ....... 4,398,000 2,302,000 $0.06-0.36
========== ========== ===========
F-12
33
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding at
September 30, 2000:
Number of options Weighted
Range of outstanding as of Remaining average Options
Exercise price September 30, 2000 Contractual life exercise price Exercisable
- -------------- ------------------ ---------------- -------------- -----------
$ 0.36 140,000 117 months $0.36 36,000
0.09 464,000 110 months $0.09 104,000
0.08 1,598,000 95 months $0.08 1,002,000
0.06 50,000 101 months $0.06 20,000
0.11 50,000 107 months $0.11 20,000
------------- --------- ----- ---------
$0.06 -- 0.36 2,302,000 $0.10 1,182,000
============= ========= ===== ==========
The Company accounts for its option plan under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company follows the disclosure requirements
of Financial Accounting Standards Board No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value based method of
accounting for stock-based compensation plans. SFAS 123 requires that an
employer's financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
the plan. Had the Company recognized compensation cost for its stock option
plans consistent with the provisions of SFAS 123, the following pro forma net
loss to common stockholders for each of the three years in the period ended
September 30, 1999 would have resulted:
Year Ended September 30,
------------------------
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
Net loss to common stockholders:
As reported ........................................... $(4,709) $(1,909) $ (828)
======= ======= =======
As calculated in accordance with SFAS 123 ............. $(4,737) $(1,923) $ (829)
======= ======= =======
Net loss per Common Share:
As reported ............................................ $ (0.07) $ (0.03) $ (0.01)
======= ======= =======
As calculated .......................................... $ (0.07) $ (0.03) $ (0.01)
======= ======= =======
Shares used in calculating net loss per basic and diluted
common share ...................................... 67,842 67,329 66,882
======= ======= =======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with risk-free interest rates of 6.18% 4.96%
to 5.99% for fiscal 2000, 1999 and 1998, respectively, no expected dividend
yield, an expected life of five years and a volatility factor of 50%. During
fiscal 2000, 1999 and 1998, the weighted average fair value of options granted
was $0.08, $0.05, and $0.04, respectively.
F-13
34
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EQUITY LINE AGREEMENT
In July 2000, the Company entered into a Common Stock Purchase Agreement (the
"Equity Line Agreement") with an institutional investor (the "Investor")
establishing a common stock equity line. Pursuant to the Equity Line Agreement,
the Investor, subject to Company's satisfaction of certain conditions, has
committed to purchase at the Company's option, up to $13.5 million of the
Company's common stock over an 18 month period, at a 12% discount to the average
trading price over a specified period prior to each draw down. The amount that
can be drawn down by the Company at any one time is dependent upon a number of
factors, including the Company's stock price and trading volume during the draw
down period. In addition, the Company must register the shares of common stock
under the Securities Act of 1933, as amended, prior to any draw downs. In
connection with the Equity Line Agreement, the Company issued warrants to
purchase 1,567,391 shares of common stock at an exercise price of $0.51 per
share through July 2003 to the Investor and a placement agent.
13. BENEFIT PLANS
The Company has a 401(k) employee benefit plan that covers all eligible
employees with at least six months of service who are between the ages of 21 and
65. Employees can contribute up to the maximum allowable under the law. The
Company matches a portion of the employee's pre-tax contribution. Employer
contributions become fully vested when an employee has reached five years of
service. Employee benefits are distributed upon normal retirement, death,
disability or termination. Amounts contributed by the Company for the years
ended September 30, 2000, 1999, and 1998 were approximately $28,000, $30,000 and
$27,000, respectively.
14. SEGMENT INFORMATION
Beginning in fiscal 2000, the Company is organized into three divisions;
fulfillment distribution, solutions and leasing. Fulfillment distribution
markets and sells products and applications to VARs and systems integrators.
Solutions provides engineering, integration and implementation services to
corporate accounts in addition to the sales of products and applications to
those customers. Leasing assists customers in obtaining equipment leasing and
technology upgrade programs through third parties. The Company evaluates and
manages these divisions only at the sales and cost of sales level. Therefore,
operating income, total assets, depreciation and capital expenditures by
division are not presented.
During fiscal 2000, leasing represented less than 5% of total sales and
therefore has been presented with fulfillment distribution. The following table
represents information about the Company's divisions for the year ended
September 30, 2000 ($ in thousands):
Sales Gross Profit
------------ ------------
Fulfillment distribution and leasing $49,839 $3,584
Solutions 12,314 1,281
-------- ------
$62,153 $4,865
======== ======
F-14
35
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for the years ended September 30, 2000 and
1999 is as follows:
FISCAL 2000
---------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 2000 2000 2000
-------------- ------------ ----------- ------------
Net sales $15,636,000 $14,837,000 $15,127,000 $16,553,000
Cost of sales 14,356,000 13,685,000 14,135,000 15,112,000
----------- ----------- ----------- -----------
Gross profit 1,280,000 1,152,000 992,000 1,441,000
Selling, general and
administrative expenses 1,893,000 2,054,000 2,012,000 2,780,000
----------- ----------- ----------- -----------
Loss from operations (613,000) (902,000) (1,020,000) (1,339,000)
Interest expense, net 79,000 96,000 83,000 312,000
----------- ----------- ----------- -----------
Net loss $ (692,000) $ (998,000) $(1,103,000) $(1,651,000)
=========== =========== =========== ===========
Basic and diluted net
loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.02)
=========== =========== =========== ===========
FISCAL 1999
-------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999
------------ ------------ ----------- -------------
Net sales $11,804,000 $12,560,000 $15,761,000 $16,740,000
Cost of sales 10,694,000 11,709,000 14,177,000 15,410,000
----------- ----------- ----------- -----------
Gross profit 1,110,000 851,000 1,584,000 1,330,000
Selling, general and
administrative expenses 1,652,000 1,530,000 1,641,000 1,870,000
----------- ----------- ----------- -----------
Loss from operations (542,000) (679,000) (57,000) (540,000)
Interest expense, net 1,000 (1,000) 41,000 50,000
----------- ----------- ----------- -----------
Net loss $ (543,000) $ (678,000) $ (98,000) $ (590,000)
=========== =========== =========== ===========
Basic and diluted net
loss per share $ (0.01) $ (0.01) $ -- $ (0.01)
=========== =========== =========== ===========
F-15
36
SCHEDULE II
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(amounts in thousands)
Additions
Balance at charged to Deductions Balance
Beginning costs and Accounts at end
Description Of period expense written-off Other of period
----------- --------- ------- ----------- ----- ---------
Allowance for Doubtful Accounts:
October 1, 1997 to September 30, 1998 $2,156 -- 1,547 -- $609
October 1, 1998 to September 30, 1999 $ 609 -- 137 208(2) $264
October 1, 1999 to September 30, 2000 $ 264 202 85 -- $381
Restructuring Accounts
October 1, 1997 to September 30, 1998 $3,738 -- 2,362 1,376(1) $ --
(1) Reversed into income due to change in estimate. See Note 2 to Notes to
Consolidated Financial Statements.
(2) Reversed into income due to change in estimate.
F-16