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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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 (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
425 PRIVET ROAD
HORSHAM, PENNSYLVANIA 19044
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(215) 675-9300
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
NEW YORK STOCK EXCHANGE
NAME OF EACH EXCHANGE ON WHICH REGISTERED
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
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 10, 1997 is approximately $7,625,507. 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.
The number of shares of the Registrant's Common Stock outstanding as of
December 19, 1997: Common Stock, $.01 par value, 66,881,906 shares.
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]
Exhibit Index is on page 24
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PART I
FOREWORD
THE INFORMATION SET FORTH HEREIN IS BASED PRIMARILY ON HISTORICAL
INFORMATION. TO THE EXTENT THAT THIS ANNUAL REPORT ON FORM 10-K 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 THIS PART I UNDER THE
CAPTION "SPECIAL FACTORS TO BE CONSIDERED."
ITEM 1. BUSINESS.
THE COMPANY
AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest" or the
"Company"), maintains its principal executive offices at 425 Privet Road,
Horsham, Pennsylvania 19044, and its telephone number is (215) 675-9300.
AmeriQuest historically conducted its business through its subsidiaries.
However, on July 31, 1996, all of its first-tier subsidiaries were merged into
AmeriQuest, except for AmeriQuest/Kenfil Inc. ("Kenfil"), and AAG, Inc.
(formerly "CMS Enhancements, Inc."). AAG, Inc sold its business on June 19, 1997
and Kenfil sold its last operating businesses in Asia on November 20, 1997.
Accordingly, the description of AmeriQuest's business set forth below does not
address the historical business of its former subsidiaries individually, and
Kenfil, and AAG, Inc. are the only remaining subsidiaries, neither of which is
operational.
During fiscal year 1996 and early 1997 AmeriQuest's sales operations were
divided into five domestic regions, each covering a geographical section of the
country, and three international regions. By October, 1996, AmeriQuest had
reorganized its domestic standard distribution operations in Hollywood, Florida
into specialized business units based on the type of product assigned to each
unit and one general sales unit. In addition, the Advanced Systems Group was to
be operated from Horsham, Pennsylvania; and CMS Enhancements, Inc. operated from
Costa Mesa, California. AmeriQuest had exported from Miami, Florida to South
American markets; and foreign operations operated from Hong Kong and Malaysia
with respect to Asian markets. In April of 1997, AmeriQuest decided to focus its
resources on building the Advanced Systems Group ("ASG") in Pennsylvania and
close or sell all of the remaining divisions. This reorganization was completed
in November, 1997.
AmeriQuest is primarily a national valued-added wholesale distributor of
micro, mini and mid-range computers and related products to value-added
resellers ("VARs") and systems integrators. Mid-range computers range in price
from $15,000 to $500,000. AmeriQuest markets, sells and supports a variety of
products ranging from individual components to complete systems that have been
fully configured, assembled and tested prior to delivery to the customer.
AmeriQuest's strategy is to emphasize the sale of complete systems and to
provide a high level of value-added services, including consultation on
component selection and system assembly and configuration, testing and technical
support services. AmeriQuest also provides a variety of programs and seminars
designed to enhance its customers' technical capabilities.
AmeriQuest currently markets more than 13,000 products to value-added
resellers and systems integrators throughout the United States. 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.
Control of AmeriQuest. Computer 2000, Inc., a wholly-owned subsidiary of
Computer 2000 AG (collectively referred to herein as "C-2000") owns 36,349,878
shares of AmeriQuest's Common Stock representing approximately 54% of the issued
and outstanding shares of AmeriQuest Common Stock. Additionally, on May 6, 1997
AmeriQuest issued 300,000 shares of its Series H Cumulative Convertible
Preferred Stock (convertible into 41,958,042 shares, or approximately 63% of the
total outstanding shares of
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AmeriQuest Common Stock prior to conversion) to Computer 2000 Inc. in
consideration of the payment by Computer 2000 Inc. of $30,000,000 cash. In
addition, C-2000 holds achievement warrants and a maintenance option to
purchase from AmeriQuest 9,392,515 shares of AmeriQuest Common Stock or
approximately 15% of the total issued and outstanding shares of AmeriQuest
Common Stock. However, on a fully-diluted basis, all such shares, Common and
Preferred, and the exercise of currently exercisable warrants would increase
C-2000's ownership from approximately 54% to approximately 74%. As a result of
its ownership of more than 50% of AmeriQuest's voting shares, C-2000 assumed
control of the Board of Directors of AmeriQuest in August 1995.
STRATEGY
The Company's current business focus is to continue second tier
distribution in areas which minimize direct competition with the largest
competitors, and to concentrate on selling higher-margin mid-range computer
systems, complementary and related individual computer components, and
maintenance and leasing services. AmeriQuest provides value-added services and
technical support to its customer base, which improves its margins as compared
to the margins of those distributors who provide for sale of equipment only.
Although management believes that its niche strategy, when coupled with
cost reductions, as appropriate, will return AmeriQuest to profitability, there
are numerous risks and uncertainties and no assurance can be given that the new
strategy will succeed or that the Company will become profitable. Management
will periodically review the need to further reduce costs should sales for any
reason not materialize in amounts sufficient to cover the existing cost
structure.
PRODUCTS
AmeriQuest seeks to sell products from nationally-recognized vendors that
provide all the components most VARs require to fully configure their computer
systems. All new products are extensively tested prior to inclusion in
AmeriQuest's distribution network.
The following is a description of the major categories of products
currently sold by AmeriQuest and the principal current vendors of those
products:
Personal Computers -- AmeriQuest distributes laptop, desktop and mini-tower
personal computers manufactured by Acer, Hewlett Packard, IBM, Trigem and
Unisys.
Advanced Computer Systems -- AmeriQuest distributes mid-range computer
servers manufactured by Acer, IBM (RISC 6000 models) and Unisys, together with
software from IBM, including AIX and Lotus Notes, and connectivity products from
IBM, including routers, bridges and switches.
Communications and Networks -- AmeriQuest distributes local area network
("LAN") software and specialized hardware products manufactured by Novell, IBM,
D-Link and Unisys. In addition, the Company distributes modems and other
communication products manufactured by Digi International and Multi-Tech
Systems.
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 Okidata,
Lexmark, Citizen, Genicom, Relisys, Unisys, Wyse, Acer, IBM, American Power,
Imation(3M), Hansol and Hewlett Packard.
Software -- AmeriQuest sells a variety of operating systems and LAN
software products generally as part of its advanced systems sales. AmeriQuest
has also commenced the sale of certain applications software for Unix and
midrange systems. Among the manufacturers of these software products are IBM and
SCO.
Services -- AmeriQuest arranges for leasing and maintenance options for all
products to customers, at additional cost. AmeriQuest also provides Engineering
services to those customers who do not have the capability or capacity to either
design or install system solutions with their own resources.
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VENDOR RELATIONS
To maintain strong relationships with its principal vendors, AmeriQuest
focuses on marketing the products of a limited number of key vendors. AmeriQuest
selects its product lines to minimize competition among vendors' products while
maintaining some overlap to provide protection against product shortages or
discontinuations. Accordingly, historical revenues from sale of products of the
three leading vendors, IBM, Hewlett Packard, and Unisys, represent approximately
22%, 7% and 14%, respectively, of the ASG segment of the Company's revenue for
the last six months of the year ended September 30, 1997 (fiscal 1997). The
Company is focused on increasing its share of business represented by each of
Hewlett Packard and Unisys to 25% and has made investment in its sales force to
achieve such objective.
AmeriQuest must obtain permission from IBM to create new authorized IBM
resellers ("IRAs") and must deal with contractual limitations in acquiring
additional existing IRAs who may be dissatisfied with the service of a
competitive distributor. IRAs are contractually precluded from purchasing IBM
product except from their designated distributor for one year, which limits the
ability of AmeriQuest to market its products to IRAs currently "assigned" to
other distributors. Also IBM does not authorize a new reseller to market IBM
product unless such reseller can meet minimum revenue requirements.
Accordingly, AmeriQuest's ability to market to existing IRAs (other than those
IRAs currently "assigned" to it) and its ability to assist in the development
of new IRAs to expand the IBM revenue base of AmeriQuest is constrained by
IBM's current strategy and policy of defining and controlling the IRAs.
Additionally, IBM requires distributors of its mid-range computer systems to
meet certain minimum purchase levels. AmeriQuest is required to purchase $30
million of IBM mid-range computers during calendar 1997 in order to retain the
right to distribute IBM mid-range computers and AmeriQuest believes that it has
satisfied this requirement. No assurance can be given that AmeriQuest will be
able to meet the purchase requirements that might be imposed upon it in the
future by IBM, nor has AmeriQuest received confirmation from IBM that it has
met the required purchase levels of calendar 1997. Although, IBM could refuse
to sell product to AmeriQuest at any time, it would be more likely to refuse
following any period that AmeriQuest might fail to meet the mandated purchase
levels. Although IBM indicated that it would terminate the right of AmeriQuest
to distribute mid-range computer systems if AmeriQuest did not meet the target
purchase levels, AmeriQuest would retain the right to sell IBM mid-range
computer systems directly to end users. Such limitations to the authorization
of resellers and the imposition of sales performance requirements do not exist
with respect to the Company's relationship with Hewlett Packard and Unisys.
AmeriQuest, like most hardware distributors, sells products throughout the
United States for 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 as little as
thirty days' 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. Except as noted above with respect to IBM, 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.
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 generally
attempts to include comparable products from more than one vendor in its product
line.
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SALES AND DISTRIBUTION
During fiscal year 1997 AmeriQuest's sales operations of the Advanced
Systems Group in Pennsylvania were divided into three domestic regions,
Northeast, Southeast and Western, each covering a geographical section of the
country.
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 opening new accounts and serving established
accounts. AmeriQuest places some emphasis on telemarketing as a sales method,
however, most of the Company's sales personnel operate in the field.
Customer orders are generally made by a toll-free telephone call with 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 customer credit status and, upon
reviewing this data, can enter the order immediately. Shipment is usually made
the same day, except on orders that require assembly and testing or purchase
from a vendor. Customers may also pick up their orders at the designated
warehouse. All orders are handled on a prepayment, C.O.D. or credit basis
depending on the customer's creditworthiness and previous payment history. In
addition, AmeriQuest assists some resellers in obtaining equipment financing
through third-party floor planning programs from Deutsche Financial Services,
IBM Credit Corporation, AT&T Capital, the FINOVA Group, Inc. and Transamerica
Inventory Finance. Because of AmeriQuest's prompt delivery times, it does not
generally maintain a substantial order backlog.
CUSTOMERS AND CUSTOMER SERVICES
The Company sells to more than 3,500 computer resellers. The Company's
customers include 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 customers 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. No customer has accounted for more than ten percent of
AmeriQuest's net sales during 1997, 1996 or 1995. Sales by AmeriQuest are not
seasonal to any material extent, except for the sale of IBM RISC product which
has historically evidenced shipment of 40% of total yearly revenues in the
fourth quarter of each of the last two calendar years.
Through the Company's wholesale distribution business, customers are
offered a single source of supply, prompt delivery, financing programs,
engineering services, customer leasing and maintenance and customer support.
Prompt Delivery. In most areas serviced by the Company, orders received by
6:00 p.m. local time are typically shipped the same day, provided the required
inventory is in stock. AmeriQuest typically delivers products from its Horsham,
Pennsylvania warehouse via United Parcel Service and other common carriers, with
customers in key commercial regions of the United States receiving orders within
one to two working days of shipment. AmeriQuest also will provide overnight air
handling if requested and paid for by the customer. These services allow
computer resellers to minimize inventory investment yet provide responsive
service to their customers. For larger customers in the United States,
AmeriQuest is able to provide a fulfillment service so that orders are shipped
directly to the computer resellers' customer, thereby reducing the need for
computer resellers to maintain inventories of certain products.
Customer Support. The Company currently offers computer resellers a single
source for over 13,000 competitively priced hardware and software products. By
purchasing from the Company, the reseller only needs to comply with a single set
of ordering, billing and product return procedures and may also benefit from
attractive volume pricing. The Company also provides training and product
information to its reseller customers.
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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
manufacturers' warranty return basis without any restocking charge.
Unlike its competitors, AmeriQuest offers its resellers terms 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 its customer base.
Financing Programs. AmeriQuest extends credit to qualified resellers,
thereby augmenting their ability to purchase products from a variety of sources.
Additionally, AmeriQuest arranges floor planning and lease financing through a
number of credit institutions and offers programs that permit credit card
purchases by qualified customers. To facilitate a reseller's ability to pursue
large purchase orders within the United States, the Company offers an
"assignment of proceeds" program. By instituting this practice AmeriQuest can,
based upon the credit worthiness of the end-user customer, assist its resellers
in securing purchase orders in excess of what their normal credit facilities
would otherwise allow.
COMPETITION
Competition in the technical distribution of mid-range computer systems is
limited, but intense. Principal national distributors are Dickens, JBA
International, Western Micro, MicroAge and Gates/Arrow. Additionally it is
reasonable to expect that the large broad-line distributors such as Ingram Micro
Inc., Merisel, Inc. and Tech Data Corporation, who have substantially greater
financial resources than AmeriQuest, may enter the market in pursuit of the
substantially greater gross profit margins of technical distribution.
Competition 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 strength and other support services, and speed and accuracy of
delivery.
EMPLOYEES
As of September 30, 1997, AmeriQuest had 80 full-time employees associated
with the ongoing business of AmeriQuest, including 40 persons employed in sales,
sales support and marketing functions. 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
ADDITIONAL LOSSES AND CAPITAL REQUIRED
Continued Losses. The Company has experienced significant operating losses
during recent fiscal years and recorded a net loss of $67.6 million in fiscal
year ended June 30, 1995, a net loss of $33.6 million in fiscal 1996 and a net
loss of $41.3 million in fiscal 1997. The fiscal 1995 loss included the
write-off of approximately $23.8 million of intangible assets and the
liquidation of inventory associated with the termination of the Company's
entertainment software business. In addition, the fiscal 1995 loss included
costs associated with the integration of the significant acquisitions which took
place during that fiscal year. The Company recorded a net loss of $33.6 million
during fiscal 1996 (including lease termination and moving costs of $6.4
million). During the year ended September 30, 1997, the Company had operating
losses of $41.3 million which included restructuring, asset impairment and
relocation costs of $26.4 million associated with the close down of the
unprofitable distribution businesses.
Additional Capital Required. In the event that operating losses continue,
it is likely that the Company would need to raise additional capital to cover
those losses. There is no assurance that additional capital is available, or if
available, can be secured on terms favorable to the Company. The Company has no
commitment from C-2000 to provide additional funding to the Company, although
C-2000 has guaranteed certain amounts due to two of the Company's suppliers
and $5 million to IBM Credit Corporation
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("IBMCC"). AmeriQuest currently has outstanding an intercompany demand loan from
C-2000 in the amount of $27.7 million dollars. This intercompany loan was
incurred as a result of C-2000's payment of $27.7 million dollars to certain
lenders whose line of credit to AmeriQuest were previously guaranteed by
C-2000. The intercompany loan is non-interest bearing, does not require the
current payment of principal, and is secured by a security interest in all of
AmeriQuests' assets, subordinate only to amounts owed to IBMCC. Although the
loan is a demand loan, Computer 2000 AG has agreed to forebear from taking any
legal action or commencing any legal process to collect any amounts owed under
the intercompany demand loan prior to September 30, 1998. See "Certain
Relationships and Related Transactions." Notwithstanding the agreement by
C-2000 to defer payment of the loan prior to September 30, 1998, certain
specified events such as, but not limited to, merger, sale or reorganization of
the Company will make the loan immediately due and payable.
In addition to the intercompany indebtedness to C-2000 referenced above,
AmeriQuest was indebted to IBMCC in the amount of $3,064,000 at September 30,
1997 under a $20 million line of credit on an interest rate of prime plus
2.625%. IBMCC has approved waivers of prior defaults by the Company under the
Inventory and Working Capital Financing Agreement. The line of credit expires
February 28, 1998. However, as of January 9, 1998, IBMCC agreed to extend the
credit agreement with a reduced line of $5 million from March 1, 1998 until
September 30, 1998. As of December 31, 1997 the Company's indebtedness to IBMCC
was $12,353,000. During December 1997 the Company purchased $6 million of IBM
products, primarily to meet the minimum purchase commitment needed to retain IBM
MIR distributions rights. Under the terms of the IBM vendor agreement, the
Company can return a significant portion of these IBM products and may be
required to do so in order to reduce the IBMCC line of credit from $20 million
to $5 million at February 28, 1998.
MARKET CONSIDERATIONS
The New York Stock Exchange ("NYSE") has repeatedly indicated that
AmeriQuest is not in compliance with certain of the NYSE's requirements for
continued listing on the NYSE. The NYSE could delist AmeriQuest's Common Stock
at any time, thereby adversely affecting the public market for such securities.
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.
NEED TO INCREASE SALES VOLUME
As a distributor, the Company must operate on small gross margins. Further,
the Company must incur operating expenses to maintain a sufficient level of
inventory, facilities, sales staff and support personnel necessary to support
sales of products. Although the Company continues to explore possible cost
reduction measures, it believes that further significant reductions in its
operating expenses will be difficult to achieve without also reducing the sales
volumes currently being generated from operations. As a result of these and
other factors, the Company must achieve substantially greater sales volumes at
satisfactory margins than it has in the past in order to achieve profitability.
The estimate by management, reported in the Form 10-Q for the period ended March
31, 1997, that a 25%-40% increase in sales would be required in order for ASG to
achieve a break-even level of operations on a stand-alone basis has proven to be
cautious as a result of aggressive cost reductions since the issuance of the
report. However, the loss of a significant vendor, such as IBM, would cause that
estimate of a 25% sales increase to reach profitability to remain reliable. As
noted above, IBM's policies restrict the ability of the company to increase
sales to existing IRAs by reason of restrictions imposed by IBM on IRAs which
effectively preclude a switch by the IRAs to AmeriQuest except on an annual
basis as the contract of each respective IRA is renewed. While the Company's new
management is attempting to increase sales and its share of business represented
by such vendors as Hewlett Packard and Unisys, there can be no assurance that
sales will increase or that any increases will be of sufficient magnitude or
will occur soon enough to permit the Company to achieve profitability without
additional business or financial restructuring.
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NEED TO MAINTAIN VENDOR BASE
The Company principally distributes computer products manufactured by other
vendors, principally IBM and Hewlett Packard. Accordingly, the Company's
relationships with its 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. Any
inability of the Company to preserve its existing vendor relationships or to add
new vendors when needed will have a material, adverse effect on its future
results of operations, and particularly with respect to the loss of any of the
three lead vendors, IBM, Hewlett Packard or Unisys. 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
customer orders, due to the inability of certain suppliers to meet their volume
and schedule requirements and/or due to the Company's shortages of cash
resources. Delays in shipments from suppliers can cause fluctuations in the
Company's short-term results and contribute to order cancellations.
Additionally, AmeriQuest must meet certain purchase requirements imposed by IBM
to maintain its distributor status of IBM's mid-range computer systems. IBM has
indicated that it would terminate the right of AmeriQuest to distribute
mid-range computer systems if AmeriQuest did not meet the purchase levels of
calendar 1997 or any future calendar years. AmeriQuest has not received
confirmation from IBM that it has met the calendar 1997 purchase requirements.
No assurance can be given that AmeriQuest will be able to achieve purchases at
levels required by IBM.
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 costcompetitive products that respond to current market needs. As a
value-added wholesale distributor, the Company is particularly vulnerable to
changes caused by technological innovation. The introduction of new products and
the phasing 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. Should the Company fail to
provide new products on a timely basis that respond to industry demands, the
Company's operating results would be adversely affected.
COMPETITION
The Company competes in an industry characterized by intense and increasing
competition. Principal national distributors in the technical distribution of
mid-range computer systems with which the Company competes include Dickens, JBA
International, Western Micro, MicroAge and Gates/Arrow. Many of the Company's
major competitors have substantially greater financial, marketing and other
resources than the Company. Competition in the computer products distribution
industry is based primarily on price, product availability, and technical
support services provided, and to a lesser extent on speed of delivery,
convenience and the level of marketing. Because of the intense competition
within the industry, the Company has been unable to date to increase its market
share. As technological changes occur, the Company's products have had shorter
and shorter product life cycles, and new competing products are introduced by
other vendors and resellers. Moreover, the manner in which computer products are
distributed and sold is changing, and new methods of distribution and sale may
emerge or expand. Additionally, the requirements imposed by IBM on IRAs to buy
only from an "assigned" distributor make it more difficult for AmeriQuest to
compete for the business of existing IRAs. These factors, among others, will
likely cause continued competitive pressures on the Company in the future.
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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 recently 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.
POSSIBLE SALES BY STOCKHOLDERS
Approximately 10,884,905 outstanding shares (16%) of the Company's Common
Stock are eligible for resale pursuant to the provisions of Rule 144 under the
Securities Act of 1933 or current resale Registration Statements. The Company
has also agreed to register the shares of the Common Stock of the Company issued
or issuable to C-2000 consisting of 36,349,878 shares presently held by C-2000
and 9,392,515 additional shares subject to issuance upon the exercise of
outstanding warrants and an option held by C-2000. The Company may grant
additional registration rights when it issues securities in the future. The
public sale of the foregoing shares, or the perception that such shares may be
sold, may have the effect of substantially depressing the market price of the
Company's Common Stock and causing substantial fluctuations in the price of the
Company's Common Stock.
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, industry specific factors, the Company's
ability to maintain access to external financing sources (including C-2000) and
its financial liquidity, the Company's ability to manage expense levels, the
Company's ability to retain key vendors, the continued financial strength of the
Company's customers, 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; competitive conditions within the computer industry may
change adversely; demand for the products distributed 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; and there
may be other material adverse changes in the Company's operations or business.
Certain important presumptions 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, (ii) completing current
restructuring plans, and (iii) accurately forecasting cash needs. 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 Horsham,
Pennsylvania, which consists of approximately 30,000 square feet of office space
and 75,000 square feet of warehouse space on a single level.
The following table sets forth information regarding the regional offices
of AmeriQuest and its subsidiaries:
SQUARE FEET LEASE EXPIRATION YEAR OPENED
----------- ---------------- -----------
LOCATION
Horsham, PA.......................... 105,000 1/31/98(1) 1978
Atlanta, GA.......................... 6,000 9/30/00 1997
Maple Shade, NJ...................... 1,400 8/31/00 1997
St. Louis, MO........................ 1,400 11/30/00 1997
SUBLEASED(2)
Anaheim, CA.......................... 62,298 2/29/00 1995
Alpharetta, GA....................... 1,924 9/30/99 1994
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(1) Commencing February 1, 1998 this lease will become a month-to-month tenancy
terminable upon 30 days prior written notice from either AmeriQuest or the
Landlord. AmeriQuest is currently evaluating prospect for replacement
facilities of approximately 50,000 square feet.
(2) Sub-lessees are in default. Proceedings are being undertaken to evict the
current sub-lessees in preparation for re-lease of these properties to other
sub-tenants, which are yet to be located.
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 and results of operations.
While not expected to be of material effect to the Company, Kenfil Inc. vs.
RLI Insurance Company, Superior Court of the State of California, County of Los
Angeles, No. BC 108564 filed July 12, 1994, involves litigation instituted by
Kenfil Inc. to recover additional monies for the damage it incurred in the
Northridge earthquake of January 17, 1994. The defendant cross-claimed on August
12, 1994 for return of the $840,000 it had paid on claims submitted by Kenfil
Inc., based on affidavits from former Kenfil employees alleging that they had
been instructed following the earthquake to intentionally destroy additional
inventory. The defendant's theory is that the policy was voided ab initio by the
fraudulent actions of Kenfil Inc.'s employees; while Kenfil Inc.'s position is
that fraud unauthorized by the corporation but committed by a few employees does
not operate to void the contract. The defendant's theory is premised on the
language of the contract, while Kenfil Inc.'s position is supported by a case
from the California Supreme Court. Messrs. Irwin Bransky and Nelson Landman,
former officers of Kenfil Inc. at the time of the earthquake, have pleaded
guilty to mail fraud relating to the mailing of documents asserting the
destruction of inventory from the earthquake where such destruction actually
occurred in large part following the earthquake. However, their actions were not
attributed to Kenfil Inc. during the course of the criminal proceedings. Kenfil
Inc. has a continuing claim against the defendant for additional amounts never
paid under the contract for the interruption of the business of Kenfil Inc. and
claims against Messrs. Bransky and Landman for the damages occasioned to Kenfil
Inc. by their unauthorized and unratified criminal conduct. No assurance can be
given as to the final outcome of this legal matter.
While not expected to be of material effect to the Company, Leading Edge
Products, Inc. vs. AmeriQuest Technologies, Inc., involves suit against
AmeriQuest/NCD Inc., one of the Company's predecessors in interest, wherein
Leading Edge is asserting breach of contract and unjust enrichment. In its
complaint Leading Edge alleges a $1,055,438 debt and seeks double or triple
damages, interest, attorney's fees, and costs. The Company responded to the
complaint by denying liability and asserted counterclaims for breach of
contract, breach of implied covenant of good faith and fair dealing, breach of
warranty, and unjust enrichment.
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In its counterclaim the Company seeks to recover money damages in the amount
determined by the court, double or triple damages, interest, attorney's fees,
and costs. The case is in its early stages and the accounting information has
yet to be exchanged. The Company's accounting information indicates that the
Company owes Leading Edge a total of $451,852. The information received to date,
however, indicates that the Company's potential exposure is at least $451,852
and may be as high as $678,597. No assurance can be given as to the final
outcome of this legal matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
See Part II, Item 4 of the Company's 10-Q for the period ending June 30,
1997 for a description of the results of the Annual Meeting of Stockholders of
the Company held July 1, 1997.
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 quoted
on the New York Stock Exchange for each calendar quarter since December 31,
1994.
AMERIQUEST
HIGH LOW
-- ----
1995
First Quarter........................... 3 1/4 2 1/4
Second Quarter.......................... 3 1/4 1 3/4
Third Quarter........................... 2 1/8 1 1/8
Fourth Quarter.......................... 1 3/8 5/8
1996
First Quarter........................... 1 1/4 3/4
Second Quarter.......................... 1 1/2 3/4
Third Quarter........................... 15/16 1/2
Fourth Quarter.......................... 1 7/8 7/16
1997
First Quarter........................... 1 3/8 5/8
Second Quarter.......................... 3/4 6/16
Third Quarter........................... 9/32 3/16
Fourth Quarter.......................... 9/32 1/4
On December 10, 1997, the stock of AmeriQuest closed at $0.25 per share on
the New York Stock Exchange. As of that date AmeriQuest had approximately 1,079
shareholders of record.
The New York Stock Exchange ("NYSE") has repeatedly indicated that
AmeriQuest is not in compliance with certain of the NYSE's requirements for
continued listing on the NYSE. The NYSE could delist AmeriQuest's Common Stock
at any time, thereby adversely affecting the public market for such securities.
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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).
THREE
MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER YEARS ENDED JUNE 30,
30, 30, 30, ----------------------------------
1997 1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- --------- ---------
Net sales(1)................ $ 218,877 $ 424,708 $ 100,723 $ 416,571 $ 87,593 $ 73,082
Income (loss) before
taxes..................... (41,311) (33,609) (7,041) (67,566) (7,971) 236
Net income (loss)(2)........ (41,311) (33,609) (7,041) (67,566) (7,971) 236
Net Income (loss) per
share..................... (0.63) (0.76) (0.30) (3.76) (1.33) 0.08
Total assets................ 26,079 116,372 115,531 128,008 65,145 20,274
Long-term obligations(3).... 0 3,122 6,686 24,515 3,442 1,817
Stockholders' equity
(deficit)................. (23,392) (11,206) 17,565 (25,709) 12,875 8,644
Weighted average shares
outstanding............... 66,881,906 44,208,983 23,786,127 17,993,440 5,973,511 3,060,908
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(1) The sales increase in 1995 was due primarily to acquisitions. The sales
increase in 1994 compared to 1993 was largely due to the initiation of a
broader distribution strategy.
(2) The losses in 1995 were due principally to abandonment of U.S. software
operations, consists of integrating prior acquisitions and the write-down of
assets. Losses in 1994 and 1992 related principally to corporate
restructuring.
(3) For the year ended June 30, 1995, Includes the $18 million advance from
Computer 2000 related to its equity investment (see Note 9 to the
Consolidated Financial Statements) and $5.8 million associated with the
issuance of 6.8 million shares of the Company's common stock required to
complete the Robec merger (see Note 2 to the Consolidated Financial
Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
SIGNIFICANT EVENTS
Commencing in the first half of fiscal 1994 and through early fiscal 1996,
the Company completed the acquisition of three regional distributors. Kenfil
Inc., Ross White Enterprises, Inc. d/b/a "National Computer Distributors"
("NCD"), and Robec, Inc. The Company issued 15,864,608 shares of its common
stock and paid total consideration of approximately $29.5 million for these
acquisitions. During the quarter ended June 30, 1995 the Company closed the U.S.
entertainment software distribution business. The Company's Singapore operation
was sold in the quarter ended March 31, 1995 and its Australian operation was
closed in the quarter ended March 31, 1996.
On April 9, 1997 the Board approved a wide-ranging restructuring plan
encompassing head-count reductions and facility closures with the goal of
focusing on and strengthening the activities of its Advanced Systems Group
("ASG"), which had the highest gross margins of its distribution businesses, at
that time. The Company announced that projected losses for the year ending
September 30, 1997 could be in the range of approximately $45,000,000, partly as
the result of estimated charges in the amount of $25,000,000 related to the
planned restructuring, and $2,000,000 of restructuring costs and provisions
earlier included in operating results predating the authorization of the
restructuring (please reference Note 1 on page F-7). The restructuring measures
were necessitated by the fact that revenues for the quarter ended March 31, 1997
were substantially below expectations, primarily due to the inability of the
Company to compete effectively in the standard distribution of computer
products. Management also continued the investigation of possible other
dispositions.
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On May 6, 1997 AmeriQuest issued 300,000 shares of its Series H Cumulative
Convertible Preferred Stock (convertible into 41,958,042 shares of AmeriQuest
Common Stock) -- to Computer 2000 Inc. in consideration of the payment by
Computer 2000 Inc. of $30,000,000. This infusion fulfilled a previously
announced commitment from Computer 2000 Inc. to make such an investment.
On June 19, 1997 CMS Enhancements Inc. sold substantially all of its assets
to CMS Peripherals Inc., a company formed by the former managing director of CMS
Enhancements Inc., Mr. Ken Burke. CMS Enhancements Inc., as part of the
transaction has changed its name to AAG Inc. AmeriQuest Technologies Inc. also
signed a non-competition agreement with CMS Peripherals with a term of five
years prohibiting use of the former name of the subsidiary and assembly or
manufacture of disk drives.
On September 30, 1997, Computer 2000 AG paid AmeriQuest's outstanding lines
of credit in the amount of $27.7 million (formerly guaranteed by Computer 2000
AG) and converted the loans to a non-interest bearing intercompany demand loan,
deferring demand of payment through September 30, 1998, but subordinated to the
Company's working capital lender.
AmeriQuest/Kenfil Inc. sold its wholly-owned subsidiaries Kenfil
Distribution (Far East) Limited, a Hong Kong corporation and Kenfil Distribution
(M) Sdn. Bhd., a Malaysian corporation, to Regentland Holdings Ltd. for proceeds
of $2,939,062 pursuant to a Stock Purchase Agreement dated November 20, 1997.
The purchase price was equivalent to repayment of a loan and the net book value
of the assets sold plus a premium of $450,000, and was paid by issuance of a
dividend from Kenfil Distribution (Far East) Limited to AmeriQuest/Kenfil Inc.
in the amount of $1,717,106, the loan repayment of $771,956 from Kenfil
Distribution (Far East) Limited to AmeriQuest/Kenfil Inc., and the payment of
$450,000 from Regentland Holdings Ltd. Regentland Holdings Ltd. was formed by
Mr. Simon Yip, the former Chief Executive Officer of Kenfil Distribution (Far
East) Limited to accommodate his purchase of such entities. Concurrent with the
closing, the Board of Directors of AmeriQuest/Kenfil Inc. received an opinion
from Chase Securities, Inc. to the effect that the terms of the sale were fair
to AmeriQuest Technologies, Inc. as the sole stockholder of AmeriQuest/Kenfil
Inc. from a financial point of view. This sale completed the restructuring plan
announced in April, 1997.
Effective September 30, 1995 the Company changed its fiscal year-end from
June 30 to September 30. Transition information for the three months ended
September 30, 1995 is included in the Company's financial statements due to the
change. The following table presents the Company's results of operations as a
percent of sales:
THREE MONTHS
YEARS ENDED YEARS ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1997 1996 1995 1995
------------- ------------- ------------- -------------
Sales........................................ 100.0% 100.0% 100.0% 100.0%
Gross Profit................................. 7.2 5.5 7.4 3.8
Selling, general and administrative.......... 16.1 10.8 12.9 12.8
Intangible write-off......................... 4.1 -- -- 5.7
Restructuring................................ 4.3 1.5 -- --
Interest..................................... 1.6 1.1 1.4 1.5
Net Loss..................................... 18.9 7.9 7.0 16.2
NET SALES
During the fiscal year ended September 30, 1997 sales decreased 49%
compared to the twelve months ended September 30, 1996. Sales decreases were
mainly attributable to the Company's decision to sell CMS Enhancements, Inc.,
and to close the North American and export distribution divisions and focus on
and strengthen the activities of its Advanced Systems Group. Historical revenues
of ASG from sale of products of its three leading vendors, IBM , Hewlett
Packard, and Unisys, represent approximately 22%, 7% and 14%, respectively of
the last six months of fiscal year 1997 revenues. The Company is currently
focused on increasing its share of business represented by each of Hewlett
Packard and Unisys to 25% and has made
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investment in its sales force to achieve such objective. Sales increases in the
fiscal year ended September 30, 1996 and June 30, 1995 were due primarily to the
acquisitions of NCD, Robec and Kenfil during early fiscal 1995.
COST OF SALES AND GROSS PROFIT
Gross profit increased to 7.2% of sales for the fiscal year ended September
30, 1997 compared to 5.5% for the twelve months ended September 30, 1996. The
improvement was partially attributable to the closing of the lower margin
standard distribution businesses and continuation of the higher margin Advanced
Systems Group revenue and related margin. Gross profit decreased to 5.5% of
sales for the fiscal year ended September 30, 1996 compared to 7.4% for the
three months ended September 30, 1995. The decline was primarily attributable to
continued extreme price competition within the industry and lower levels of
vendor rebates due to the lack of availability of certain product lines.
During the fiscal year ended June 30, 1995 gross profit was affected by
competition and significant inventory losses related to the elimination of
certain product lines, loss of certain vendors and a strategy to reduce
inventories to increase operating cash flow. Gross profit in the fiscal year
ended June 30, 1994 reflects a much greater concentration of business in the
area of higher margin disk drive manufacturing.
AmeriQuest manages its inventories by maintaining sufficient quantities to
achieve high order fill rates while at the same time attempting to stock only
those products in high demand with a rapid turnover rate. Inventory balances
will fluctuate as the Company adds new product lines and when appropriate makes
larger purchases from manufacturers when the terms of purchases are considered
advantageous. The Company contracts with certain vendors who provide limited
price protection and stock return privileges to help reduce the risk of loss to
the Company due to manufacturer price reductions. Price protection, however,
will not protect the Company against slow moving and obsolete inventory. In
addition, returns from vendors of refurbished product previously returned to the
vendor due to defects must be sold at reduced prices decreasing overall margins.
An integral aspect of AmeriQuest's business is to exchange products sold to
customers which are either incompatible units or do not work for a variety of
technical or other reasons. If such products are ultimately determined to be
defective, AmeriQuest, under contract terms with its vendors, is able to return
such products to its vendors. Under such agreements AmeriQuest's economic risk
is nominal and generally limited to the cost of freight and technical services,
both of which cost categories are expensed currently. A warranty and return
reserve of approximately $0.4 and $1.5 million is reflected in the balance
sheets at September 30, 1997 and September 30,1996, respectively.
The Company receives funds under incentive programs based upon volume sales
or purchase of the vendors products. The incentive funds reduce the cost of the
products sold. Incentive programs resulted in $2.4 million for the year ended
September 30, 1997, $2.5 million for the year ended September 30, 1996 and $2.4
million for the fiscal year ended June 30, 1995. Incentive rebates for the
quarter ended September 30, 1995 were $0.6 million.
AmeriQuest anticipates that it will continue to experience pressure on
gross sale margins due to industry competition. Although AmeriQuest expects that
it will be able to reduce other cost of sale items, selling, general and
administrative expenses as a percent of sales, no assurance can be given as to
whether such reduction in fact will occur or as to the actual amount of any such
reductions. To the extent gross margins decline and the Company is not
successful in reducing selling, general and administrative expenses as a
percentage of sales, the Company will experience further negative operating
results.
OPERATING EXPENSES
For the fiscal years ended September 30, 1997 and 1996 and the fiscal year
ended June 30, 1995 selling, general and administrative expenses, exclusive of
the loss on sublease and charges for relocation, restructuring and the write-off
of intangibles were approximately 16.1%, 10.8% and 12.8% of sales, respectively.
Selling, general and administrative expenses for the quarter ended September 30,
1995 was 12.9% of sales. Selling,
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general and administrative expenses have declined during the periods as a result
of the integration of the Company's recent acquisitions and reductions in bad
debt expense.
During the year ended September 30, 1997, the Company incurred significant
operating and personnel costs to close down the unprofitable distribution
businesses. During the 1997 fiscal year the Company recorded a $9.3 million
charge to expense the restructuring of the Company's sales and administrative
staffing and planned closing of rented facilities. During fiscal years 1996 and
1995 the Company incurred significant costs to resolve certain lawsuits and
complete an information systems conversion. In addition, bad debt expense was
significant in fiscal 1996 as the Company increased export sales to higher
credit risk Brazilian customers During the year ended September 30, 1996 the
Company also recorded a $6.4 million charge to expense for the sublease of its
California headquarters building and the cost to relocate its headquarters to
Florida.
During fiscal 1995, the Company wrote-off intangibles of $23.8 million
associated with the decision to terminate its entertainment software
distribution business in the U.S. and the elimination of certain redundant
regional distribution businesses. In addition, the Company incurred significant
costs associated with the closure of redundant warehouse facilities and the
reduction of personnel. The Company also wrote-off a significant amount of
customer receivables related to the termination of its entertainment software
distribution business and recorded bad debt reserves related to lower volume and
high credit risks.
Operating expenses are reduced by advertising revenues and market
development funds received from vendors as subsidy for or incentive to market
their products. Funds received during the fiscal year ended September 30, 1997
totaled $2.0 million and funds of $2.8 million were received for each of the
fiscal years ended September 30, 1996 and June 30, 1995 and $.4 million for the
quarter ended September 30, 1995.
OPERATING RESULTS
The annual and quarterly operating results of the domestic operations of
the Company have varied considerably due to the acquisition of distribution
companies, closure and sale of certain subsidiaries and operating units and a
reduced emphasis on manufacturing and assembly for all but mass storage assembly
products, which has also ceased as of June 19, 1997.
INTEREST EXPENSE
Interest expense decreased from $4.8 million during the year ended
September 30, 1996 compared to $3.5 million for the year ended September 30,
1997 due to (i) guarantees provided by C-2000 to banks which charged lower
interest rates and (ii) equity infusions from C-2000, offset by continued
losses. Interest expense increased in the year ended June 30, 1995 compared to
the prior fiscal year due to increased levels of debt to fund acquisitions and
operating losses.
INCOME TAXES
In the period July 1, 1993 through September 30, 1997 no income tax benefit
was recorded as it is not more likely than not that the Company will realize the
tax benefit of its deferred tax assets, including tax-loss carry forwards.
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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had $7.7 million in cash and had borrowed
$3.1 million against lines of credit. The Company generated $21.7 million in
cash from operating activities during the year ended September 30, 1997 compared
to usage of cash of $28.8 million for the year ended September 30, 1996. Cash
generated by operations in fiscal 1997 resulted primarily from collection of
accounts receivable and liquidation
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of inventory offset by full settlement of payment with discontinued vendors.
Sale of assets during fiscal 1997 generated an additional $3.5 million of cash.
Cash receipts were applied to reduce outstanding obligations under lines of
credit.
Accounts receivable days increased during fiscal 1997, representing longer
payment terms extended to customers in order to be competitive. Inventory
turnover increased in both fiscal years 1997 and 1996, reflecting an intentional
reduction in stock carried in an effort to reduce obsolescence costs and
carrying costs necessary to support the business.
At September 30, 1997 the Company had a stockholders' deficit of $23.4
million after operating losses of $41.3 million in the year ended September 30,
1997 and $33.6 million in the year ended September 30, 1996.
The Company had maintained bank lines of credit guaranteed by C-2000 with
four German banks which totaled $27.7 million on September 30, 1997. The
interest rates on such lines of credit were Libor-based. On September 30, 1997,
Computer 2000 AG paid the outstanding bank lines of credit which totaled $27.7
million and converted the loans to a non-interest bearing intercompany demand
loan, and agreed to defer demand of payment through September 30, 1998 and
subordinate its loan to the working capital lender. See "Certain Relationships
and Related Transactions." Notwithstanding the agreement by C-2000 to defer
demand of payment of the loan prior to September 30, 1998, certain specified
events such as, but not limited to, the merger, sale or reorganization of the
Company will make the loan immediately due and payable.
The Company maintains a $20 million line of credit with IBM Credit
Corporation ("IBMCC") which is secured by substantially all of the Company's
assets. Interest rates on the IBMCC line are prime plus 2.625%. Borrowings under
the IBMCC line at September 30, 1997 and 1996 totaled $3.1 million and $12.3
million, respectively. Borrowings under the IBMCC line of credit are limited to
a contractual percentage of eligible inventories and receivables. The terms of
the line include restrictive covenants which require the maintenance of specific
levels of tangible net worth, working capital and operating results. IBMCC has
subsequently approved amendments to the agreement which waive prior defaults.
The IBMCC line is reduced to $5 million on February 28, 1998 and expires on
September 30, 1998.
Operating activities in the upcoming year will require additional cash from
external financing sources. While management believes that the Company's current
sources of external financing, are adequate to meet its current operating
requirements through September 30, 1998, a significant portion of these
external financing sources are represented by the supplier and IBMCC guarantees
and intercompany loan of $27.7 million from Computer 2000 AG. Management
believes that the C-2000 non interest bearing $27.7 million loan and the $5
million line of credit from IBMCC will be adequate for the Company to
accomplish its fiscal 1998 operating plan and to meet its financial obligations
on a timely basis during fiscal 1998.
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.
The following table sets forth certain information regarding the current
directors and executive officers of AmeriQuest.
NAME AGE POSITION
------------------------------- ---- ------------------------------------------------------
Alexander C. Kramer, Jr........ 54 President and a Director
Jon D. Jensen.................. 54 Chief Operating Officer, Chief Financial Officer and
Secretary
Harry Krischik................. 46 Chairman of the Board of Directors
Manfred H. Guenzel............. 46 Director
Richard Obermaier.............. 37 Director
Anton Roedl.................... 34 Director
Marc L. Werner................. 39 Vice Chairman and Director
J.R. Dick Iverson.............. 68 Director
Alexander C. Kramer, Jr. (age 54) served as Vice President -- Operations of
Robec, Inc. for thirteen years prior to its acquisition in November 1995 by
AmeriQuest. From November 1995 he served in various capacities, and during
fiscal 1997 he served as Vice President -- General Manager of the Advanced
Systems Group. On October 8, 1997, he was appointed by the Board of Directors to
serve as President following the resignation of Mr. Michael Dressen; and he was
also elected on October 8, 1997 by the Board to serve as a Director of
AmeriQuest.
Jon D. Jensen (age 54) served as Vice President of Finance and Chief
Financial Officer of Robec, Inc. from September, 1994 until its acquisition by
AmeriQuest in November, 1995. From November, 1995 to January, 1997, he served
AmeriQuest as Vice President of Planning and Business Process Re-engineering, at
which time he was appointed to serve as Vice President of Finance. On October 8,
1997, he was appointed by the Board of Directors to serve as Chief Operating
Officer, Chief Financial Officer and Secretary of AmeriQuest following the
resignation of Mr. Holger Heims as Chief Financial Officer and Secretary, and
his replacement of Mr. John Tonnison as Chief Operating Officer. For six years
prior to September, 1994, Mr. Jensen had served as Chief Financial Officer,
Controller and Treasurer of Philadelphia Gear Company.
Dr. Harry Krischik (age 46) has served as a Member of the Executive Board
of Computer 2000 AG for more than the last five years, with responsibility for
the areas of logistics, electronic data processing and human resources. He is
now responsible for worldwide sales and also has regional responsibility for
Southern Europe, North America and Latin America.
Manfred H. Guenzel (age 46) was appointed to serve as a Member of the
Executive Board of Computer 2000 AG in January 1996. From August 1990 until
January 1996, he served as Head of Corporate
Development/Acquisitions/Controlling (Energy, Chemistry, Aluminum Refractories,
Telecommunications) for VIAG AG, the ultimate parent of Computer 2000 AG.
Richard Obermaier (age 37) has served as Controller and Senior Staff Member
of Mergers & Acquisitions for Computer 2000 AG since July, 1995. From 1991
through July, 1995, he served as a Senior Staff Member in the corporate finance
department at Allianz AG, engaged in mergers and acquisitions.
Anton Roedl (age 34) joined Computer 2000 AG in September 1996 to serve as
Manager of Taxation. From 1990 to August 1996 he was employed by KPMG Peat
Marwick where his last position was that of a Supervising Senior in the audit
department. He was elected by the Board of Directors to serve as a Director
following the resignation of Mr. Holger Heims.
Marc L. Werner (age 40) serves as President and Chief Executive Officer of
Cornucopias Capital Advisors. He was employed by Werner Co. and various
companies affiliated with Werner Co. from 1986 until April 30, 1997, with his
last position there being that of Chief Executive Officer, President and
Director for
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Werner Financial, Inc. Mr. Werner is a Certified Public Accountant, and holds a
Bachelor of Science degree in Accounting from Northern Illinois University.
J. R. Dick Iverson (age 69) is currently retired, except for his service on
the board of directors of AmeriQuest, Telegen Corporation and ComStream
Corporation, a subsidiary of Spar Aerospace Limited. From 1986 to 1994 he served
as Chief Executive Officer and President of the American Electronics
Association.
On October 8, 1997, Michael Dressen resigned as President of the Company,
Holger Heims resigned as Chief Financial Officer and Secretary of the Company
and John Tonnison was replaced as Chief Operating Officer of the Company. On
October 8, 1997, Alexander C. Kramer, Jr. was elected President of the Company,
and Jon Jensen was elected Chief Operating Officer, Chief Financial Officer and
Secretary of the Company.
The Company has an Audit Committee, which currently consists of two
directors: Marc L. Werner and J. R. Dick Iverson. Messr's Werner and Iverson
are neither officers nor employees of the Company or any of its affiliates. The
Compensation Committee consists of Dr. Harry Krischik and Marc L. Werner. The
Compensation Committee is concerned primarily with establishing executive
compensation policies for the Company. See "Executive Compensation --
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions."
In May, 1997, the Company formed an Acquisition Committee, which consists
of two directors: Marc L. Werner and Richard Obermaier. The Acquisition
Committee was formed to investigate, evaluate and negotiate potential
acquisitions, mergers and divestitures involving AmeriQuest or its assets. The
Acquisition Committee serves at the discretion of the Board of Directors of the
Company and may be disbanded at any time by resolution of the Company's Board of
Directors.
17
19
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides information concerning the annual and
long-term compensation of the Chief Executive Officer of AmeriQuest and each of
the four other highest paid executive officers who served as such at the end of
fiscal year 1997 and their titles at such date, and for two of the other highest
paid executive officers who terminated their employment with AmeriQuest prior to
the end of fiscal year 1997 (collectively, the "Named Executive Officers") for
services rendered to AmeriQuest and its subsidiaries in all capacities during
the fiscal years 1997, 1996 and 1995. This information includes the dollar
values of base salaries and bonus awards, and certain other compensation, if
any, whether paid or deferred. AmeriQuest does not provide long-term
compensation benefits other than stock options. On October 8, 1997, Michael
Dressen resigned as President of the Company, Holger Heims resigned as Chief
Financial Officer and Secretary of the Company and John Tonnison was replaced as
Chief Operating Officer of the Company. On October 8, 1997, Alexander C. Kramer,
Jr. Was elected President of the Company, and Jon D. Jensen was elected Chief
Operating Officer, Chief Financial Officer and Secretary of the Company.
ANNUAL COMPENSATION(1) (4)
------------------------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(5) COMPENSATION
- ------------------------------------------------- ---- -------- -------- ------------
Michael Dressen,................................. 1997 $250,000 $165,000 107,393
President 1996 40,000 -0- -0-
1995 -0- -0- -0-
Holger Heims,.................................... 1997 150,000 200,000 87,128
Chief Financial Officer and Secretary 1996 150,000 -0- -0-
1995 -0- -0- -0-
John Tonnison,................................... 1997 150,000 199,749 84,000
Chief Operating Officer 1996 107,000 16,837 -0-
1995 -0- -0- -0-
Alexander C. Kramer, Jr.,........................ 1997 150,000 165,000 -0-
Vice President, Advanced Systems Group 1996 150,000 19,974 -0-
1995 150,000 4,154 -0-
Andrew J. Lewis,................................. 1997 80,000 76,250 101,604
Controller 1996 80,000 1,588 -0-
1995 -0- -0- -0-
Richard McIntyre,................................ 1997 104,873 11,586 264,285(3)
Vice President -- Sales 1996 133,750 15,918 -0-
1995 -0- -0- -0-
John Hudson,..................................... 1997 122,563 95,569 85,967(3)
Vice President -- U.S. Sales 1996 39,385 11,006 -0-
1995 -0- -0- -0-
- ---------------
(1) In fiscal years 1997, 1996 and 1995, no executive officer received
perquisites or other personal benefits, securities or property which
exceeded the lesser of $50,000 or 10% of such executive officer's salary and
bonus, excepting Michael Dressen who received housing and health care
reimbursement of $57,393.
(2) Salary compensation includes amounts paid for vacation time not taken by the
employees.
(3) Messrs. Richard McIntyre and John Hudson terminated their employment on May
9, 1997 and August 25, 1997, respectively, and the amounts set forth under
the column entitled "All Other Compensation" represents severance payments
and other compensation to which they were entitled under their respective
employment arrangements.
18
20
(4) Includes amounts paid during the fiscal year as a bonus for the employee's
cooperation to move to Florida and where applicable the employees' cost to
return to California.
(5) Includes loyalty bonus paid to ensure continuity and orderly completion of
close of Florida operation.
OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table provides, as to the Named Executive Officers,
information concerning unexercised stock options at September 30, 1997. None of
the executive officers exercised any stock options during fiscal year 1997.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
Michael Dressen............................ -0- -0- -0- -0-
Holger Heims............................... -0- -0- -0- -0-
John Tonnison.............................. -0- -0- -0- -0-
Alexander C. Kramer, Jr.(2)................ 37,635 16,129 -0- -0-
Andrew J. Lewis............................ -0- -0- -0- -0-
Richard McIntyre........................... -0- -0- -0- -0-
John Hudson................................ -0- -0- -0- -0-
- ---------------
(1) Based on the closing price of AmeriQuest's Common Stock on the New York
Stock Exchange on September 30, 1997.
(2) Represents 16,129 shares as having vested with respect to an option granted
on June 7, 1994 and 21,506 shares as having vested under an option granted
March 22, 1993.
EMPLOYMENT CONTRACTS
As of October 1, 1997, the Company entered into an Employment Agreement
with Alexander C. Kramer, Jr. Providing for an annual salary of $200,000 plus
eligibility for bonus up to 114% of annual salary. The Employment Agreement
provides for six months severance if the employee is terminated without cause
and 12 months severance if the employee is terminated or resigns following a
diminution of responsibility within 12 months after a change of control.
As of October 1, 1997, the Company entered into an Employment Agreement
with Jon Jensen providing for an annual salary of $157,500 plus eligibility for
bonus up to 114% of annual salary. The Employment Agreement provides for six
months severance if the employee is terminated without cause and 12 months
severance if the employee is terminated or resigns following a diminution of
responsibility within 12 months after a change of control.
COMPENSATION OF OUTSIDE DIRECTORS
AmeriQuest pays its outside Directors, Marc L. Werner and J.R. Dick
Iverson, $2,500 per calendar quarter plus expenses incurred to attend Board
meetings. All directors are also eligible to receive stock and/or stock options
as a form of compensation. The Company has agreed to pay Marc L. Werner $5,000
per month, commencing as of October, 1997, plus reimbursement of expenses for
his services as Chairman of the Acquisition Committee of the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997 the Compensation Committee consisted of Dr. Harry
Krischik and Marc L. Werner. Dr. Krischik is a member of the Executive Board of
Computer 2000 AG.
19
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of November 30, 1997, information
relating to the beneficial ownership of AmeriQuest's Common Stock by (i) each
person known to AmeriQuest to be the beneficial owner of more than five percent
of AmeriQuest's outstanding Common Stock, (ii) each director, (iii) each of the
Named Executive Officers, and (iv) all directors and executive officers as a
group. AmeriQuest knows of no agreements among its shareholders which relate to
voting or investment power over its Common Stock.
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP AS OF
NOVEMBER 30, 1997(1)
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL ------------------------------------ PERCENT OF OUTSTANDING
OWNER COMMON PREFERRED CLASS OF SECURITY(19)
- ----------------------------------- ---------- ---------------- ----------------------
Computer 2000 Inc.(2).............. 43,385,158 56%
Wolfratshauser Strasse 84 300,000 Series H 100%
81379 Munchen, Germany
Computer 2000 AG(2)................ 43,385,158 56%
Wolfratshauser Strasse 84 300,000 Series H 100%
81379 Munchen, Germany
DIRECTORS AND OFFICERS(17)
Michael Dressen(3)................. -0- -0- 0%
Holger Heims(4).................... -0- -0- 0%
Harry Krischik(5).................. 43,385,158 56%
300,000 Series H 100%
Manfred H. Guenzel(6).............. 43,385,158 56%
300,000 Series H 100%
Richard Obermaier(7)............... 43,385,158 56%
300,000 Series H 100%
Anton Roedl(8)..................... -0- -0- *
John Tonnison(9)................... -0- -0- 0%
Alexander C. Kramer, Jr.(10)....... 37,635 -0- *
Marc L. Werner(11)................. 20,000 -0- *
J.R. Dick Iverson(12).............. 10,000 -0- *
Andrew J. Lewis(13)................ -0- -0- 0%
Richard McIntyre(14)............... -0- -0- 0%
John Hudson(15).................... -0- -0- 0%
All officers and directors as a
group (13 persons)(17)........... 43,452,793(16)(18) 59%
300,000 Series H 5)(6)(7) 100%
- ---------------
* Denotes less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Includes shares owned directly by Computer 2000 Inc., a wholly-owned
subsidiary of Computer 2000 AG. The amount reflected in the table includes
7,035,280 shares subject to outstanding Achievement Warrants in favor of
Computer 2000 Inc., which are currently exercisable. The warrants and
option held by Computer 2000 Inc. are as follows:
Achievement Warrants.......... 7,035,280
Maintenance Option............ 2,357,235
20
22
The Series H Cumulative Convertible Preferred Stock held by Computer 2000
Inc. is convertible into 41,958,042 shares of Common Stock, which, when
combined with the Common Stock beneficially owned by Computer 2000, Inc. on
November 30, 1997 would equal 74% of the outstanding Common Stock upon
conversion.
(3) Mr. Dressen became President of AmeriQuest on August 1, 1996, and was
appointed to serve as a Director on September 12, 1996. Mr. Dressen
resigned his positions on October 8, 1997.
(4) Mr. Heims served during 1997 as Executive Vice President, Chief Financial
Officer, Secretary and a Director of AmeriQuest. Mr. Heims resigned his
positions on October 8, 1997.
(5) Represents the shares held of record by Computer 2000 Inc. (see footnote
(2) above). Mr. Krischik is a Member of the Executive Board of Computer
2000 AG, and therefore may be deemed to have shared voting power over the
shares of AmeriQuest held by Computer 2000 Inc. There are a total of five
persons who serve as a Member of the Executive Board of Computer 2000 AG,
of which Mr. Krischik is one. Mr. Krischik disclaims beneficial ownership
of all shares of AmeriQuest held by Computer 2000 Inc. Mr. Krischik is a
nominee of Computer 2000 AG, and serves as the Chairman of the Board of
Directors of AmeriQuest.
(6) Represents the shares held of record by Computer 2000, Inc. (see footnote
(2) above). Mr. Guenzel is a Member of the Executive Board of Computer 2000
AG, and therefore may be deemed to have shared voting power over the shares
of AmeriQuest held by Computer 2000 Inc. There are a total of five persons
who serve as a Member of the Executive Board of Computer 2000 AG, of which
Mr. Guenzel is one. -- Mr. Guenzel disclaims beneficial ownership of all
shares of AmeriQuest held by Computer 2000 Inc. Mr. Guenzel is a nominee of
Computer 2000 AG, and serves as a Director of AmeriQuest.
(7) Represents the shares held of record by Computer 2000, Inc. (see footnote
(2) above). Mr. Obermaier is an officer and director of Computer 2000 Inc.,
and therefore may be deemed to have shared voting power over the shares of
AmeriQuest held by Computer 2000 Inc. Mr. Obermaier disclaims beneficial
ownership of all shares of AmeriQuest held by Computer 2000 Inc. Mr.
Obermaier is a nominee of Computer 2000 AG, and serves as a Director of
AmeriQuest.
(8) Mr. Roedl disclaims beneficial ownership of all shares of AmeriQuest held
by Computer 2000 Inc., because although he is an employee of Computer 2000
AG, he is not an officer or director of Computer 2000 Inc. nor is he a
member of the Executive Board of Computer 2000 AG, which is the level at
Computer 2000 AG which would decide the manner in which AmeriQuest shares
would be voted by Computer 2000 Inc. Mr. Roedl is a nominee of Computer
2000 AG, and serves as a Director of AmeriQuest.
(9) Mr. Tonnison served as Chief Operating Officer during fiscal 1997, until he
was replaced by Mr. Jon Jensen on October 8, 1997.
(10) Includes 37,635 shares subject to stock options exercisable within 60 days
after November 30, 1997. Mr. Kramer served as Vice President -- Advanced
Systems Group during fiscal 1997, and is now serving as President.
(11) Includes 20,000 shares of Common Stock held of record by Mr. Werner as
custodian for certain of his children.
(12) Mr. Iverson commenced service as a Director of AmeriQuest on July 10, 1996.
(13) Mr. Lewis served as Controller of AmeriQuest during fiscal 1997.
(14) Mr. McIntyre served as Vice President -- Sales until his severance from
employment on May 31, 1997.
(15) Mr. Hudson served as Vice President -- U.S. Sales until his severance from
employment on September 30, 1997.
(16) Includes 37,635 shares subject to stock options and warrants currently
vested and issuable upon exercise of such options and warrants.
(17) The address for the executive officers and directors and proposed directors
is: 425 Privet Road, Horsham, Pennsylvania 19044.
21
23
(18) The executive officers of AmeriQuest at November 30, 1997 were Alexander C.
Kramer, Jr. and Jon Jensen. The shares reflected in the table as owned by
all officers and directors as a group includes the shares referred to in
footnotes (5) through (12) above.
(19) For purposes of determining the percentage of outstanding Common Stock held
by each person or group set forth in the table, the number of shares held
by a person or group is divided by the number of shares of AmeriQuest's
Common Stock outstanding on November 30, 1997 (66,881,906) plus the number
of shares of Common Stock subject to outstanding stock options and warrants
exercisable currently or within 60 days of November 30, 1997 by such person
or group, in accordance with Rule 13d-3(d)(1) under the Securities Exchange
Act of 1934, as amended. Percentages of less than 1% are represented by an
asterisk.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1995, Computer 2000 AG issued guarantees to certain lenders to
secure up to $66 million of lines of credit such lenders might extend to
AmeriQuest. In November 1996 Computer 2000 AG increased the $66 million of
credit lines to $76 million. These borrowings were used in part to reduce the
Company's interest-bearing indebtedness under its previously outstanding lines
of credit from approximately $52 million to zero, resulting in a reduction, as
of September 30, 1996, in the average interest rate on the Company's total
outstanding indebtedness from approximately 11.0% per annum to approximately
6.4% per annum. In return for the guarantees, AmeriQuest agreed to pay Computer
2000 AG one-half of one percent (0.5%) per annum of the amounts guaranteed, on a
weighted average basis, and provided Computer 2000 AG with a security interest
in all of AmeriQuest's assets, and agreed to seek refinancing of its outstanding
debt as soon as reasonably practicable. Computer 2000 AG's guarantees expired on
September 30, 1997, at which time Computer 2000 AG paid the amounts guaranteed
in full, totaling $27.7 million. AmeriQuest is now indebted to Computer 2000 AG
in the amount of $27.7 million under the terms of the Reimbursement and Security
Agreement of December 1995. This intercompany loan is non-interest bearing, and
is guaranteed by all the assets of AmeriQuest, subordinate only to the security
interests of IBMCC. Notwithstanding the agreement by C-2000 to defer payment of
the loan prior to September 30, 1998, certain specified events such as, but not
limited to, merger, sale or reorganization of the Company will make the loan
immediately due and payable. In the opinion of management, this financing is
more favorable to AmeriQuest than could have been obtained from unaffiliated
third party lenders. Additionally, C-2000 has guaranteed certain amounts due to
two of the Company's suppliers and $5 million to IBMCC.
------------------------------
On May 6, 1997, AmeriQuest issued and sold to Computer 2000 Inc. 300,000
shares of its Series H Cumulative Convertible Preferred Stock (the "Preferred
Stock") (convertible as of November 30, 1997 at an exercise price of $.715 per
share into 41,958,042 shares of AmeriQuest Common Stock) for a purchase price of
$30 million. The proceeds of the sale were used to partially pay down
AmeriQuest's existing bank credit lines. A preferred dividend of 7% per annum is
being accrued pursuant to the terms of the Preferred Stock. In the opinion of
management this financing is at least as favorable to AmeriQuest as could have
been obtained from unaffiliated third party lenders.
------------------------------
On April 19, 1997, AmeriQuest and Computer 2000 AG entered into identical
indemnification agreements with Board members Dr. Harry Krischik, Manfred
Guenzel, Michael Dressen, Holger Heims, Robert H. Beckett, Marc L. Werner and J.
R. Dick Iverson, and with John Tonnison. Subsequently, Computer 2000 AG entered
into indemnification agreements identical to those executed on April 19, 1997
with newly elected Board members, Messrs. Richard Obermaier, Anton Roedl and
Alexander C. Kramer, Jr. and executive officer Jon D. Jensen. The
indemnification agreements so executed are referred to hereinafter as the
"Indemnification Agreements."
AmeriQuest's Certificate of Incorporation provides that AmeriQuest as a
corporation will indemnify its directors and officers to the fullest extent
permitted by law and shall advance expenses in connection therewith.
22
24
Among other things, each of the Indemnification Agreements provides that in
the event an indemnitee becomes a party to certain specified legal proceedings
by reason of an Indemnifiable Event (as defined below), AmeriQuest and Computer
2000 AG, jointly and severally, shall indemnify such indemnitee to the fullest
extent permitted by law against Indemnifiable Expenses (as defined below) if the
indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of AmeriQuest and, with respect to any
criminal proceeding or investigation, had no reasonable cause to believe his
conduct was unlawful. In the event an indemnitee becomes a party to a legal
proceeding by or in the right of AmeriQuest to procure a judgment in its favor
by reason of an Indemnifiable Event, AmeriQuest and Computer 2000 AG, jointly
and severally, shall indemnify such indemnitee to the fullest extent permitted
by law against Indemnifiable Expenses actually and reasonably incurred by the
Indemnitee in connection with such legal proceeding or any appeal therefrom, if
the indemnitee acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of AmeriQuest, except that no
indemnification shall be made in respect of any such legal proceeding as to
which the indemnitee shall have been adjudged to be liable to AmeriQuest unless
and only to the extent that the court in which such proceeding was brought shall
determine that the indemnitee is fairly and reasonably entitled to indemnity for
such Indemnifiable Expenses. All such indemnification will be subject to the
terms and conditions set forth in the Indemnification Agreements.
As used in each of the Indemnification Agreements, "Indemnifiable Expenses"
means any and all costs, charges and expenses, including, without limitation,
attorneys' fees and other fees, expenses in connection with the investigation,
defense or appeal of any legal proceeding, judgments, fines and amounts paid in
settlement (including all interest, assessments and other charges paid or
payable in connection with or in respect of any such attorneys' fees and other
fees and expenses, judgments, fines or amounts paid in settlement) actually and
reasonably incurred by the Indemnitee in connection with the legal proceeding or
any appear therefrom. The term "Indemnifiable Event" means any actual or
asserted event or occurrence related to the fact that the indemnitee is or was a
director, officer, employee, agent or fiduciary of AmeriQuest, or is or was
serving at the request of AmeriQuest as a director, officer, employee, trustee,
agent, or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust, or other entity, or anything done or not done by the
indemnitee in any such capacity.
------------------------------
AmeriQuest leases its facility in Horsham, Pennsylvania from Bowe 3
Partners at a lease rate of approximately $522,000 per year for 105,000 square
feet of office and warehouse space. The Lease for this facility was first
scheduled to terminate on December 31, 1996, but by mutual agreement of the
parties was extended on September 10, 1996 through January 31, 1998 at the same
rate as that in effect for September 1996. On December 5, 1997, the Lease was
further extended to expire by its terms on March 31, 1998, with rent payable
after January 31, 1998 at the current rate. Alexander C. Kramer, Jr., President
and a Director of the Company, is a partner in Bowe 3 Partners. In the opinion
of management, the terms of the Lease are as favorable to AmeriQuest as those
which could be obtained from unaffiliated third parties.
SEVERANCE ARRANGEMENTS WITH PRIOR MEMBERS OF MANAGEMENT
During fiscal 1997 several officers terminated their employment with
AmeriQuest as part of its efforts to reduce overhead expenses and retain
personnel skilled enough to effect a turn-around of the Company. The following
table sets forth the amounts of severance payments made and the names of the
officers to whom such payments were made.
EMPLOYEE DATE OF SEVERANCE
NAME AND POSITION SEVERANCE CONTRACT RIGHT PAID
--------------------------------------- --------------- -------------- ---------
Dennis Fairchild....................... January 7, 1997 $ 75,000 $75,000(1)
Richard McIntyre....................... May 9, 1997 $ 75,000 $75,000(2)
John Hudson............................ August 25, 1997 -0- $37,500(3)
- ---------------
(1) Mr. Fairchild also received reimbursement of moving expenses totaling
$65,000 and reimbursement of his home rental while in Florida of $12,000.
(2) Mr. McIntyre also received a payment for adjustment of housing expenses
incurred in reliance on promise of future employment of $126,220.
(3) Mr. Hudson also received $20,000 as incentive pay to remain with AmeriQuest
through the date of his termination and a relocation bonus of $20,000.
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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 Certified Public Accountants.......... F-1
Consolidated Statements of Operations....................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Stockholders' 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 F-19
Reserves...................................................
(b) Reports on Form 8-K
Current report on Form 8-K dated November 20, 1997 to report the dale of
Kenfil Distribution (Far East), a Hong Kong Corporation and Kenfil Distribution
(M) Sd. Bhd., a Malaysian corporation, formerly wholly owned subsidiaries of
AmeriQuest/Kenfil Inc., a wholly owned subsidiary of the Registrant.
(c) Exhibits
EXHIBIT INDEX
EXHIBIT
NO. TITLE OF DOCUMENT PAGE NO. LOCATION OF FILING
- --------- ------------------------------------------- -------- ------------------------------
3.01(a)* Certificate of Incorporation of AmeriQuest SEC File No. 1-10397
as amended through September 22, 1994. 10-K for June 30, 1994
3.01(b)* Amendment to the Certificate of SEC File No. 1-10397
Incorporation of AmeriQuest dated April 1, 10-K for September 30, 1996
1996 pursuant to which authorized Common
Stock was increased to 200,000,000 shares
and authorized Preferred Stock was restored
to 5,000,000 shares
3.01(c) Certificate of Designations for Series H SEC File No. 1-10397
Preferred Stock issued and issuable to 10-K for September 30, 1997
Computer 2000.
3.02* By-laws of AmeriQuest 189 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 274 SEC File No. 33-81726
10.01* Inventory and Working Capital Financing SEC File No. 1-10397
Agreement dated May 5, 1995 by and between 10-K for June 30, 1995
CDS Distribution, Inc. and IBM Credit
Corporation, as amended.
10.02* Inventory and Working Capital Financing SEC File No. 0-18115
Agreement dated September 21, 1994 by and 8-K dated September 22, 1994
between Robec, Inc. and IBM Credit
Corporation, as amended.
24
26
EXHIBIT
NO. TITLE OF DOCUMENT PAGE NO. LOCATION OF FILING
- --------- ------------------------------------------- -------- ------------------------------
10.03 Reimbursement and Security Agreement dated SEC File No. 1-10397
December 20, 1995 by and between AmeriQuest 10-K for September 30, 1997
and Computer 2000 AG
10.05* Incentive Stock Option Plan SEC File No. 2-96539
10.06* Employee Stock Bonus Plan SEC File 33-23809
10.07* 1996 Equity Incentive Plan SEC File No. 1-10397
10.08* Employment Agreement for Michael Dressen SEC File No. 1-10397
10-K for September 30, 1996
10.09* Employment Agreement for Holger Heims SEC File No. 1-10397
10-K for September 30, 1996
10.10 Employment Agreement for Alexander C. SEC File No. 1-10397
Kramer, Jr. 10-K for September 30, 1997
10.11 Employment Agreement for Jon D. Jensen SEC File No. 1-10397
10-K for September 30, 1997
10.12 Form of Indemnification Agreement by and To be filed by Amendment
between and among Computer 2000 AG and
Officers and Directors Michael Dressen,
Holger Heims, Harry Krischik, Manfred
Guenzel, Richard Obermeier, Anton Roedl,
Marc L. Werner, J. R. Dick Iverson, John
Tonnison, Alexander C. Kramer, Jr. and Jon
D. Jensen
10.13* Purchase Agreement dated August 7, 1995 by SEC File No. 1-10397
and between AmeriQuest and Computer 2000 AG 8-K dated August 7, 1995
10.14 Preferred Stock Purchase Agreement dated To be filed by Amendment
April 28, 1997 by and between AmeriQuest
and Computer 2000 AG
10.21* Lease Agreement dated January 1, 1994, as SEC File No. 1-10397
amended, by and between AmeriQuest as 10-K for September 30, 1996
successor in interest by merger to the
interests of Robec, Inc. and Bowe 3
Partners
10.22 Lease Agreement dated September 8, 1997, by SEC File No. 1-10397
and between AmeriQuest and AP Southeast 10-K for September 30, 1997
Portfolio Partners LP d/b/a Highwoods
Anderson.
10.23 Lease Agreement dated August 26, 1997, by SEC File No. 1-10397
and between AmeriQuest and Tall Oaks 10-K for September 30, 1997
Associates, LP
10.25* Lease Agreement dated January 25, 1995, as SEC File No. 1-10397
amended, by and between AmeriQuest and 10-K for September 30, 1996
Anaheim Technology Center
10.26* Sublease dated as of September 4, 1996 by SEC File No. 1-10397
and between AmeriQuest and Central Video, 10-K for September 30, 1996
Inc.
21.01 Subsidiaries of AmeriQuest SEC File No. 1-10397
10-K for September 30, 1997
25
27
EXHIBIT
NO. TITLE OF DOCUMENT PAGE NO. LOCATION OF FILING
- --------- ------------------------------------------- -------- ------------------------------
23.01 Consent of Arthur Andersen LLP to the SEC File No. 1-10397
incorporation of their report included in 10-K for September 30, 1997
the Annual Report on Form 10-K of
AmeriQuest for the fiscal year ended
September 30, 1997 into certain of
AmeriQuest's previously filed Registration
Statements.
24.01 Powers of Attorney for Messrs. Harry SEC File No. 1-10397
Krischik, Manfred H. Guenzel, Anton Roedl, 10-K for September 30, 1997
Richard Obermaier, Alexander C. Kramer,
Jr., Marc L. Werner and J.R. Dick Iverson
27.01 Financial Data Schedule (for SEC use only) SEC File No. 1-10397
10-K for September 30, 1997
- ---------------
* 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.
26
28
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
Horsham, State of Pennsylvania, on the 12th day of January, 1998.
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.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
/s/ ALEXANDER C. KRAMER President and a Director January 12, 1998
- ------------------------------------------ (Principal Executive
Alexander C. Kramer Officer)
/s/ JON D. JENSEN Chief Financial Officer, Chief January 12, 1998
- ------------------------------------------ Operating Officer and
Jon D. Jensen Secretary (Principal
Financial and Accounting
Officer)
/s/ DR. HARRY KRISCHIK Director January 12, 1998
- ------------------------------------------
Dr. Harry Krischik**
/s/ MANFRED H. GUENZEL Director January 12, 1998
- ------------------------------------------
Manfred H. Guenzel**
/s/ RICHARD OBERMAIER Director January 12, 1998
- ------------------------------------------
Richard Obermaier**
/s/ ANTON ROEDL Director January 12, 1998
- ------------------------------------------
Anton Roedl**
/s/ MARC L. WERNER Director January 12, 1998
- ------------------------------------------
Marc L. Werner**
/s/ J. R. DICK IVERSON Director January 12, 1998
- ------------------------------------------
J. R. Dick Iverson**
/s/ ALEXANDER C. KRAMER
- ------------------------------------------
Alexander C. Kramer*,
Attorney-in-Fact
/s/ JON JENSEN
- ------------------------------------------
Jon Jensen,**
Attorney-in-Fact
27
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
TO AMERIQUEST TECHNOLOGIES, INC.:
We have audited the accompanying consolidated balance sheets of AmeriQuest
Technologies, Inc. (a Delaware corporation) and subsidiaries (AmeriQuest) as of
September 30, 1997 and 1996 and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years then ended and
for the three months ended September 30, 1995 and for the year ended June 30,
1995. These financial statements are the responsibility of AmeriQuest's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the consolidated financial
statements of Kenfil Distribution (Far East) Limited, which statements reflect
total assets and total revenues of 24 percent and 11 percent in 1997,
respectively, of the consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for those entities, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of AmeriQuest Technologies, Inc. and subsidiaries, as of
September 30, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended and for the three months ended September 30, 1995
and for the year ended June 30, 1995 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
December 16, 1997 (Except
with respect to the
matters discussed in Note
12, as to which the date
is January 9, 1998).
F-1
30
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1997 1996 1995 1995
------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NET SALES............................. $ 218,877 $ 424,708 $ 100,723 $ 416,571
COST OF SALES......................... 203,199 401,165 93,308 400,820
----------- ----------- ----------- -----------
Gross Profit..................... 15,678 23,543 7,415 15,751
OPERATING EXPENSES
Selling, general and
administrative................. 35,160 45,998 13,019 53,471
Intangibles write-off............ 9,036 -0- -0- 23,777
Restructuring, asset impairment
and relocation costs........... 9,338 6,400 -0- -0-
----------- ----------- ----------- -----------
53,534 52,398 13,019 77,248
----------- ----------- ----------- -----------
Loss from operations............. (37,856) (28,855) (5,604) (61,497)
Interest expense................. 3,455 4,754 1,437 6,069
----------- ----------- ----------- -----------
Net loss......................... $ (41,311) $ (33,609) $ (7,041) $ (67,566)
=========== =========== =========== ===========
Net loss per common share and
common share equivalent........ $ (0.63) $ (0.76) $ (0.30) $ (3.76)
=========== =========== =========== ===========
Weighted average shares
outstanding.................... 66,881,906 44,208,983 23,786,127 17,993,440
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-2
31
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................... $ 7,680 $ 2,300
Accounts receivable, net of allowances for doubtful accounts of
$2,156 and $5,811 as of September 30, 1997 and September 30,
1996, respectively........................................... 9,006 56,492
Inventories..................................................... 7,066 38,019
Other current assets............................................ 935 2,837
--------- ---------
Total current assets......................................... 24,687 99,648
PROPERTY AND EQUIPMENT, NET....................................... 1,272 6,134
INTANGIBLE ASSETS, net of accumulated amortization of $1,961 as of
September 30, 1996.............................................. -0- 9,546
OTHER ASSETS...................................................... 120 1,044
--------- ---------
26,079 116,372
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable................................................ 9,492 36,152
Due to Computer 2000............................................ 27,664 -0-
Lines of credit................................................. 3,064 77,446
Other current liabilities....................................... 9,251 10,858
--------- ---------
Total current liabilities.................................... 49,471 124,456
LONG-TERM OBLIGATIONS............................................. -0- 3,122
COMMITMENTS AND CONTINGENCIES (NOTES 5, 7, 8 AND 12)
STOCKHOLDERS' DEFICIT
Preferred Stock, $.01 par value, 7% cumulative dividend,
convertible into common, 300,000 shares authorized and
outstanding; entitled to $30,000,000 in involuntary
liquidation.................................................. 30,000 -0-
Common stock, $.01 par value; authorized 200,000,000 shares;
issued and outstanding 66,881,906 and 67,047,392 shares as of
September 30, 1997 and September 30, 1996, respectively...... 669 670
Additional paid-in capital...................................... 111,145 111,144
Accumulated deficit............................................. (165,206) (123,020)
--------- ---------
Total stockholders' deficit.................................. (23,392) (11,206)
--------- ---------
$ 26,079 $ 116,372
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
F-3
32
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' DEFICIT
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ------- ---------- ------ ---------- ---------
(DOLLARS IN THOUSANDS)
BALANCES AT JUNE 30, 1995............. -0- -0- 22,966,711 $230 $ 56,196 $ (82,135)
Conversion of subordinated note
payable............................. 810,811 8 -0- -0- 17,992
Sale of subsidiary.................... -0- -0- (350,000) (4) (697)
Common stock issued by private
placement and other................. -0- -0- 1,229,429 12 1,719
Exercise of employee stock options.... -0- -0- 50,000 1 37
Sale of preferred stock............... 1,785,714 18 -0- -0- 31,229
Net loss for the three months ended
September 30, 1995.................. -0- -0- -0- -0- -0- (7,041)
---------- ------- ---------- ---- -------- ---------
BALANCES AT SEPTEMBER 30, 1995........ 2,596,525 $ 26 23,896,140 $239 $106,476 $ (89,176)
Exercise of employee stock options.... -0- -0- 82,500 1 3
Preferred stock issued for
acquisition......................... 25,830 -0- -0- -0- 1,603
Common stock issued for acquisition... -0- -0- 3,969,905 40 2,367
Exercise of warrants by Computer
2000................................ 301,249 3 -0- -0- 232
Common stock issued for legal
settlement.......................... -0- -0- 500,000 5 305
Common stock issued for series G
preferred stock dividend............ -0- -0- 197,958 2 233 (235)
Preferred stock conversion............ (2,923,604) (29) 33,104,371 330 (302)
Exercise of warrants by Computer
2000................................ -0- -0- 5,296,518 53 227
Net loss for the year ended September
30, 1996............................ -0- -0- -0- -0- -0- (33,609)
---------- ------- ---------- ---- -------- ---------
BALANCES AT SEPTEMBER 30, 1996........ -0- -0- 67,047,392 $670 $111,144 $(123,020)
Correction of outstanding shares that
were authorized but never issued in
connection with settlement of
debt(1)............................. -0- -0- (165,486) (1) 1
Sale of preferred stock............... 300,000 30,000
Accrued Dividend on Preferred Stock... -0- -0- -0- -0- -0- (875)
Net loss for the year ended September
30, 1997............................ -0- -0- -0- -0- -0- (41,311)
---------- ------- ---------- ---- -------- ---------
BALANCES AT SEPTEMBER 30, 1997........ 300,000 $30,000 66,881,906 $669 $111,145 $(165,206)
========== ======= ========== ==== ======== =========
- ---------------
(1) Correction of Outstanding Shares -- The number of outstanding shares of
Common Stock was corrected to account for shares that were authorized but
never issued in connection with settlement of debt, and the elimination of
duplicate shares erroneously issued upon exercise of an employee stock
option.
The accompanying notes are an integral part of these consolidated financial
statements
F-4
33
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1997 1996 1995 1995
------------- ------------- ------------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................. $ (41,311) $ (33,609) $ (7,041) $(67,566)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 2,664 3,235 691 4,723
Gain on sale of division assets......... (385) -0- -0- -0-
Restructuring, asset impairment and
relocation costs..................... 13,849 956 -0- 25,317
Provision for losses on accounts
receivable........................... 4,970 1,661 758 5,787
Provision for losses on inventory....... 4,032 7,482 462 17,039
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable......................... 38,655 (6,564) 3,995 (3,016)
(Increase) decrease in inventories... 25,581 (5,028) 6,304 (390)
(Increase) decrease in other
assets............................. 2,704 1,305 868 (189)
Increase (decrease) in accounts
payable and other.................. (29,027) 1,728 (10,050) (25,312)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.............................. 21,732 (28,834) (4,013) (43,607)
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of division assets... 3,550 -0- -0- -0-
Net cash paid for acquisition of
businesses, net of cash acquired..... -0- -0- -0- (1,973)
Capital expenditures, net of
disposals............................ (62) (1,798) (1,361) (4,316)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities............... 3,488 (1,798) (1,361) (6,289)
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayment) under lines
of credit............................ (77,504) 32,202 (27,701) 20,926
Increase in due to Computer 2000........ 27,664 -0- -0- -0-
Proceeds from subordinated debt......... -0- -0- -0- 18,000
Proceeds from sale of Preferred and
Common Stock......................... 30,000 520 32,315 8,740
-------- -------- -------- --------
Net cash provided by (used in)
financing activities............... (19,840) 32,722 4,614 47,666
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.......................... 5,380 2,090 (760) (2,230)
Cash and cash equivalents at beginning
of period............................ 2,300 210 970 3,200
-------- -------- -------- --------
Cash and cash equivalents at end of
period............................... $ 7,680 $ 2,300 $ 210 $ 970
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements
F-5
34
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(DOLLARS IN THOUSANDS)
Interest on lines of credit:..... During the fiscal year ended September 30,
1997, September 30, 1996, the three months
ended September 30, 1995, and the fiscal
year ended June 30, 1995, the Company paid
interest costs of approximately $3,614,
$4,774, $1,886, and $5,974, respectively.
Income taxes:.................... During the fiscal years ended September 30,
1997 and September 30, 1996, the three
months ended September 30, 1995, and the
fiscal year ended June 30, 1995, the
Company made no income tax payments.
Noncash investing and financing
activities:
Acquisition of Robec minority
interest:........................ During the fiscal year ended September 30,
1996, the Company issued 6,750,874 shares
of common stock valued at $4,245 in
exchange for the remaining minority
interest of Robec, Inc.
Legal settlement:................ During the fiscal year ended September 30,
1996, the Company issued 500,000 shares of
common stock for full settlement of an
accrued legal liability of $310.
Conversion of subordinated note
payable and preferred stock into
common stock:.................... During the fiscal year ended September 30,
1996, the Company converted 2,923,604
shares of preferred stock into 33,104,371
shares of the Company's common stock.
During the three months ended September 30,
1995, the Company issued 810,811 shares of
preferred stock upon conversion of an
$18,000 subordinated note payable.
Intangible write-off:............ During the quarter ended March 31, 1997,
the Company wrote-off $9,036 of intangibles
related to the termination of its standard
distribution business.
During the fiscal year ended June 30, 1995,
the Company wrote-off $23,777 of
intangibles related to the termination of
its entertainment software business and
impairment of intangible assets at certain
acquired regional distributors.
Dividends on Preferred Stock:.... During the fiscal year ended September 30,
1997, the Company has accrued $875 in
dividends payable to preferred stock
convertible into shares of common stock at
the Company's election.
The accompanying notes are an integral part of these consolidated financial
statements
F-6
35
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business. AmeriQuest Technologies, Inc. and subsidiaries
("Company" or "AmeriQuest") is primarily a national valued-added wholesale
distributor of micro, mini and mid-range computers and related products to
value-added resellers ("VARs") and systems integrators.
The Company's current business focus is to continue second tier
distribution in areas which minimize direct competition with the largest
competitors, and to concentrate on selling higher-margin mid-range computer
systems, complementary and related individual computer components, and
arrangements for maintenance and leasing services. AmeriQuest provides
value-added services and technical support to its customer base. AmeriQuest
focuses on marketing the products of a limited number of key vendors. AmeriQuest
selects its product lines to minimize competition among vendors' products while
maintaining some overlap to provide protection against product shortages or
discontinuations. Historical revenues from sale of products of the three leading
vendors, IBM, Hewlett Packard and Unisys, represent approximately 22%, 7% and
14%, respectively, of the ASG segment of the Company's overall revenue. No other
vendor represents 10% or more of the Company's purchases. In addition, no one
customer represents more than 10% of consolidated revenues.
Restructuring, Asset Impairment and Relocation Costs. On April 9, 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
all warehouse facilities, other than ASG, which is based in Horsham,
Pennsylvania. The restructuring has resulted in the closure of warehouse
facilities in Visalia, California, Miami, Florida, Dallas, Texas, and Chicago,
Illinois. In addition the number of employees has been reduced to 84 employees
in the US. The Company has also closed its corporate headquarters in Florida and
moved two employees to Horsham. At September 30, 1997, the Company has accrued
$3,738,000 of cost related to the restructuring plan which may be incurred from
litigation, closing of facilities and other restructuring costs. The
restructuring plan was implemented, but not completed, throughout fiscal year
1997 and resulted in a substantial reduction in sales revenue with the goal of
returning the Company to profitability in future years.
Sales, for the year ended September 30, 1997, of the businesses to be
closed were approximately $126 million.
The components of the restructuring, asset impairment and relocation costs
for the year ended September 30, 1997 are as follows (dollars in thousands):
Impairment of intangible assets............................................ $ 9,036
-------
Restructuring, Asset Impairment and Relocation Costs:
Abandonment of leasehold improvements and other property and equipment... 2,448
Lease payments in excess of sublease income.............................. 1,362
Employee severance costs................................................. 2,680
Relocation costs........................................................... 670
Other...................................................................... 2,178
-------
Total classified as restructuring, asset impairment and
relocation costs................................................ $ 9,338
Provision for losses on inventory and vendors (included in cost of
sales)................................................................... 4,032
Provision for losses on accounts receivable (included in SG&A expenses).... 3,945
-------
Total costs relating to restructuring, asset impairment and
relocation for the year ended September 30, 1997................ $26,351
=======
F-7
36
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal year 1996, the Company closed its corporate headquarters in
California and moved its operations to Florida. The components of the loss on
sublease and relocation costs are as follows (dollars in thousands):
Abandonment of leasehold improvements............................... $ 956
Lease payments in excess of sublease income......................... 2,744
Personnel costs..................................................... 1,455
Other............................................................... 1,245
------
$6,400
======
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.
Accounting period. Effective September 30, 1995, the Company changed its
fiscal year end to September 30. The Company's 1995 fiscal year ended on the
Saturday closest to June 30, 1995. The year end dates for the past three fiscal
years were September 30, 1997, September 30, 1996 and July 1, 1995. For
presentation purposes, fiscal year end 1995 is referred to as June 30.
Inventories. Inventories consist principally of computer hardware and
software held for resale and are stated at the lower of first-in, first-out 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.
Property and equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using straight line method over
estimated useful lives as follows:
Equipment............................... 5 years
Furniture and fixtures.................. 5 years
Leasehold improvements.................. Lease term
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.
Intangible assets. Intangible assets relate primarily to acquired
distribution channels and related vendor relationships and market positions.
Intangibles are amortized using the straight-line method from the date of
acquisition over the expected period to be benefited, initially estimated at 10
years. In determining the appropriate amortization period, the Company
considered the historical length of the acquiree's vendor relationships and the
overall size and quality of the vendors and their product offerings. On a
quarterly basis, the Company assesses the recoverability of intangible assets
based upon consideration of past performance and future expectations of
undiscounted cash flow on an acquisition by acquisition basis to the extent
separately identifiable, in accordance with Statement of Financial Accounting
Standards No.121 "Accounting for the Impairment of Long-Lived Assets and For
Long Lived Assets to be Disposed of." To the extent separate assessment of such
acquired intangibles is no longer feasible (i.e. as a result of integrating
multiple acquisitions into a single business unit), such assessment is performed
on a combined basis as appropriate.
As a result of these assessments, during the quarter ended March 31, 1997,
the Company wrote-off approximately $9 million of intangibles related to the
termination of its standard distribution business.
During the year ended June 30, 1995, in anticipation of the completion of
Computer 2000 AG's (Computer 2000) equity investment, the Company, with input
from Computer 2000 management, terminated its entertainment software business to
focus its management efforts and capital in the higher margin, value-
F-8
37
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
added products, application software and computer hardware distribution
businesses. Management determined that future operating cash flow from certain
regional acquisitions were not sufficient to recover the related intangible
assets. As a result of these assessments, the Company wrote-off approximately
$23.8 million of intangibles related to the termination of its software business
and the impairment of intangibles related to acquired regional distributors.
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.
Translation of foreign currencies. Assets and liabilities of foreign
subsidiaries are translated at the rate of exchange in effect at the balance
sheet date; income and expenses are translated at the average rates of exchange
prevailing during the year. The related translation adjustments and foreign
currencies gains and losses resulting from transactions denominated in foreign
currencies were not material.
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. Net loss per common
share and common share equivalent is computed by dividing net loss and dividends
applicable to preferred stock by the weighted average number of shares of common
stock and common stock equivalents outstanding. Common stock equivalents that
increase earnings per share or decrease loss per share are excluded from the
computation. In February, 1997, the Financial Accounting Standards Board issued
SFAS 128, "Earnings Per Share" effective for fiscal years ending after December
15, 1997. SFAS 128 simplifies the calculation of earnings per share to measure
the performance of an entity over a reporting period for both basic earnings per
share and diluted earnings per share. SFAS 128 does not currently have an impact
on the Company's earnings per share as the Company is incurring net losses.
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.
2. ACQUISITIONS AND DISPOSITIONS
AmeriQuest/Kenfil Inc. sold its wholly-owned subsidiaries Kenfil
Distribution (Far East) Limited, a Hong Kong corporation and Kenfil Distribution
(M) Sdn. Bhd., a Malaysian corporation, to Regentland Holdings Ltd. for proceeds
of $2,939,062, pursuant to a Stock Purchase Agreement dated November 20, 1997.
The purchase price was equivalent to repayment of a loan and the net book value
of the assets sold plus a premium of $450,000, and was paid by issuance of a
dividend from Kenfil Distribution (Far East) Limited to AmeriQuest/Kenfil Inc.
in the amount of $1,717,106, the loan repayment of $771,956 from Kenfil
F-9
38
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Distribution (Far East) Limited to AmeriQuest/Kenfil Inc., and the payment of
$450,000 from Regentland Holdings Ltd.
Regentland Holdings Ltd. was formed by Mr. Simon Yip, the former Chief
Executive Officer of Kenfil Distribution (Far East) Limited to accommodate his
purchase of such entities. Concurrent with the closing, the Board of Directors
of AmeriQuest/Kenfil Inc. received an opinion from Chase Securities, Inc. to the
effect that the terms of the sale were fair to AmeriQuest Technologies, Inc. as
the sole stockholder of AmeriQuest/Kenfil Inc. from a financial point of view.
On June 19, 1997 CMS Enhancements Inc. sold substantially all of its assets
to CMS Peripherals Inc., a company formed by the former managing director of CMS
Enhancements Inc., Mr. Ken Burke. CMS Enhancements Inc., as part of the
transaction has changed its name to AAG Inc. AmeriQuest Technologies Inc. also
signed a non-competition agreement with CMS Peripherals with a term of five
years. Proceeds from the sale of the assets of CMS Enhancements, Inc. was $3.55
million, with a gain of $385,000, which was classified as a reduction of
selling, general and administrative expenses in the accompanying Statement of
Operations.
The Company had previously pursued a strategy of growth through acquisition
by acquiring regional distributors with the goal of creating a national
distributor of value-added computers, subsystems and peripherals. The success of
this strategy was dependent upon the ability of the Company to effectively
consolidate and integrate the operations of the acquired businesses, combine
different cultures and obtain adequate financing to complete acquisitions and
fund working capital requirements. All of the Company's acquisitions completed
during fiscal years June 30, 1994 through September 30, 1996 have been accounted
for in accordance with the purchase method of accounting. The Company's
consolidated financial statements include acquiree's results of operations from
the effective acquisition dates.
The per share valuation of the Company's common stock issued in connection
with the following acquisitions represents a discount from the quoted market
price, based upon the weighted average discounts received on recently completed
private equity cash transactions. Management believes this method of valuation
is the best indication of fair value due to the Company's thin stock trading
value and small public float.
AmeriQuest/Kenfil, Inc. ("Kenfil"). As of June 30, 1994, the Company
acquired 51% of the outstanding common stock of Kenfil for common stock of the
Company. Kenfil distributed microcomputer software in both the U.S. and Asia. As
of September 1994, the Company acquired the remaining 49% of the outstanding
common stock of Kenfil and converted certain trade and subordinated debt of
Kenfil for common and preferred stock, subsequently converted to common stock of
the Company. During the fiscal year ended June 30, 1995, the former U.S.
operations of Kenfil, including principally educational and entertainment
software distribution, were terminated by the Company. Total consideration given
for the Kenfil acquisition was 5,846,162 shares of the Company's common stock
valued at approximately $14 million, plus transaction costs of $785,000.
Robec, Inc. ("Robec"). As of September 1994, the Company acquired 50.1% of
the outstanding common stock of Robec for common stock of the Company. Robec was
a distributor of computer products and services, specializing in systems and
UNIX applications based in Horsham, Pennsylvania. In November 1995, the Company
acquired the remaining 49.9% of Robec outstanding common stock not owned by the
Company. The Robec merger agreement required the Company to issue additional
common shares to provide former and current Robec shareholders participating in
the merger with a minimum value associated with the Company's common stock
issued or to be issued to complete the merger transaction. Based upon the
exchange ratio included in the Robec merger agreement, 1,402,805 shares of the
Company's common stock valued at $2.7 million were issued in exchange for 50.1%
of Robec's common stock in September 1994. Due to the minimum value provisions
and adjustments to the exchange ratio included in the amended Robec merger
F-10
39
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement, an additional 3,969,905 shares of the Company's common stock, 25,830
shares of Series G convertible preferred stock, (convertible into 2,583,011
shares of common stock) and a related preferred stock dividend of 197,958 shares
of common stock were issued to complete the Robec merger. The additional common
and preferred shares issued were valued at $4.2 million. Total consideration,
after conversion of the Series G convertible preferred stock into common stock,
was 8,153,679 shares of the Company's common stock valued at $6.9 million, plus
transaction costs of $265,000.
National Computer Distributors. In November 1994, the Company acquired all
of the outstanding common stock of Ross White Enterprises, Inc. d/b/a "National
Computer Distributors" ("NCD") for cash and common stock of the Company. NCD was
a distributor of computer products and services, specializing in systems and
connectivity applications. Total consideration given in the NCD acquisition was
1,864,767 shares of the Company's common stock valued at $4.1 million and cash
of $3.4 million.
Management believed that distribution channel access represented the most
significant intangible acquired in connection with the acquisitions discussed
above. Management initially assigned a 10 year economic life to this intangible
asset as that is the period in which management expects to derive benefit from
the existing vendor relationships and market positions. Management determined
that 10 years was an appropriate economic life based upon the historical length
of the acquiree's vendor relationships and the overall size and quality of the
acquiree's vendors and their product offerings. See Note 1 for a discussion of
the Company's policy for evaluating the realization of the intangible assets,
the termination of the standard distribution business, the termination of the
entertainment software business and the related write-off of intangibles.
The following unaudited pro forma combined information shows the results of
the Company's operations for the fiscal year ended June 30, 1995, as though the
acquisitions and the Computer 2000 equity investment (see Note 9) all had
occurred as of the beginning of the fiscal year (in thousands except per share
data):
YEAR ENDED
JUNE 30,
1995
-------------
Revenues........................................................ $ 520,134
Net loss........................................................ (70,020)
Net loss per share.............................................. (1.33)
Weighted average shares......................................... 52,729,000
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place at the beginning of the indicated period or the results
that may occur in the future. Furthermore, the pro forma results do not give
effect to cost savings or incremental costs which may occur as a result of the
integration and consolidation of the acquired companies.
The entertainment software business of Kenfil contributed revenues of $25
million and incurred net losses of $25.9 million on a pro forma basis during
fiscal year 1995.
3. INVENTORIES
Inventories consist of the following (in thousands):
SEPTEMBER 30
-------------------
1997 1996
------- --------
Finished goods............................................ $ 6,927 $ 36,684
Raw materials and subassemblies........................... 139 1,335
------ -------
$ 7,066 $ 38,019
====== =======
F-11
40
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories are reflected net of reserves of approximately $1.3 million,
and $6.8 million at September 30, 1997 and 1996, respectively. 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 financial statements. Inventories do not contain
any labor or overhead. The Company manages its inventories by maintaining
sufficient quantities to achieve high order fill rates while at the same time
attempting to stock only those products in high demand with a rapid turnover
rate. Inventory balances will fluctuate as the Company adds new product lines
and when appropriate, makes large purchases from manufacturers when the terms of
such purchases are considered advantageous. Short product life years and rapid
technological obsolescence significantly increases the risk of declines in
inventory value and the lack of recovery of inventory balances at recorded
values. 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.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
SEPTEMBER 30
-------------------
1997 1996
------- -------
Equipment................................................ $ 3,224 $ 8,362
Furniture and fixtures................................... 1,497 3,391
Leasehold improvements................................... 329 2,266
Less accumulated depreciation and amortization........... (3,778) (7,885)
------ ------
$ 1,272 $ 6,134
====== ======
5. LINES OF CREDIT
As of September 30, 1997, the Company maintained floor planning
arrangements with IBM Credit Corporation (IBMCC) for a maximum credit line of
$20 million, bearing interest at the lender's prime rate plus two and
five-eighths percent (11.625 percent at September 30, 1997). The borrowing base
under the IBMCC facility is limited to a contractual percentage of eligible
inventories and receivables, which totaled approximately $7.2 million at
September 30, 1997. At September 30, 1997, all inventories and accounts
receivable were pledged as collateral under this facility and IBMCC holds liens
on substantially all other assets owned by the Company. The amount outstanding
under this arrangement at September 30, 1997 was approximately $3.1 million.
At September 30, 1997, the terms of the IBMCC lending agreement included
certain restrictive covenants which required the maintenance of specified
financial ratios generally related to tangible net worth, working capital and
total debt to tangible net worth. At various dates during fiscal years 1996 and
1997 and at September 30, 1997, the Company was in default with certain
financial covenants. In December 1997, the Company received a waiver to its
credit agreement with IBMCC, which waived the financial covenants the Company
was not in compliance with at September 30, 1997. The IBMCC line of credit
expires February 28, 1998. (See note 12).
In December 1995, the Company obtained lines of credit with four
Germany-based financial institutions at Libor-based interest rates which, in the
aggregate, provided for revolving credit totaling $66 million as of September
30, 1996. In October 1996, the total credit granted under these credit
facilities was increased by $10 million to allow a maximum extension of
financing to the Company of $76 million. All of the aforementioned German lines
of credit were guaranteed by Computer 2000 at September 30, 1996. Computer
F-12
41
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000's guarantees expired on September 30, 1997. On September 30, 1997, Computer
2000, paid the outstanding bank lines of credit which totaled $27.7 million and
converted the loans to a noninterest bearing demand loan, agreed to defer demand
of payment through September 30, 1998, and subordinate its loan to the working
capital lender. Notwithstanding the agreement by C-2000 to defer demand of
payment of the loan prior to September 30, 1998, certain specified events such
as, but not limited to, the merger, sale or reorganization of the Company will
make the loan immediately due and payable. Additionally, C-2000 has guaranteed
$5 million to IBMCC (see Note 12) and certain amounts due to two of the
Company's suppliers.
The weighted average interest rate for all borrowings under the above
credit facilities was 6.3%, 6.4%, 11.0%, and 11.2% at September 30 of 1997, 1996
and 1995 and June 30, 1995, respectively.
6. INCOME TAXES
The deferred tax assets, net of the valuation allowance, of the Company
consist of the following (in thousands):
SEPTEMBER 30
----------------------------------
1997 1996 1995
-------- -------- --------
Inventory reserves......................... $ 498 $ 2,694 $ 5,420
Allowance for doubtful accounts............ 868 2,253 3,440
Other, including restructuring charge...... 8,964 5,780 2,110
Net operating loss carryforwards........... 46,163 38,663 25,619
Valuation allowance........................ (56,493) (49,390) (36,589)
-------- -------- --------
$ -0- $ -0- $ -0-
======== ======== ========
The valuation allowances at September 30, 1997, 1996 and 1995 were provided
because it is not more likely than not, as defined in SFAS 109, that the
deferred tax benefits will be realized through operations. The valuation
allowances recorded against deferred tax assets are based on management's
estimates related to the Company's ability to realize these benefits.
Appropriate adjustments will be made to the valuation allowances if
circumstances warrant in future periods. Such adjustments may have a significant
impact on the Company's financial statements.
The principal elements accounting for the difference between income taxes
computed at the statutory rate and the effective rate are as follows (in
thousands):
SEPTEMBER 30
---------------------------------
1997 1996 1995
-------- -------- -------
Tax credit computed at statutory rate....... $(15,492) $(13,444) $(2,816)
Intangible write-offs and amortization...... 7,992 400 83
Net operating losses not benefited.......... 7,500 13,044 2,733
-------- -------- -------
$ -0- $ -0- $ -0-
======== ======== =======
At September 30, 1997, Company had an income tax operating loss
carry-forward of approximately $117 million, which is available to offset
earnings in future periods through 2012, subject to Internal Revenue Code
section 382 limitations discussed below. The Company experienced ownership
changes in 1994 and 1995. For income tax purposes, this results in future annual
limitations on the utilization of net operating loss carry-forwards generated
prior to these ownership changes in August 1995 to approximately $2.6 million
per year. Losses incurred subsequent to the changes in ownership in August 1995
of $54.8 million are not subject to this limitation and are available to offset
earnings in future periods through 2012, unless there is a subsequent change in
control.
F-13
42
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. 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, 1997 are as follows (in
thousands):
Year ended September 30,
1998............................................................ $ 862,600
1999............................................................ 467,000
2000............................................................ 243,900
2001............................................................ 16,200
Total rental expense under non-cancelable agreements for the periods ending
September 30, 1997, September 30, 1996, and September 30, 1995 was approximately
$4,298,000, $3,759,000, and $1,232,000, respectively.
The Company is contingently liable at September 30, 1997 under the terms of
repurchase agreements with financial institutions providing inventory financing
for dealers of the Company's products. The contingent liability under those
agreements approximates the amount financed, reduced by the resale value of any
products which may be repurchased, and the risk of loss is spread over numerous
dealers and financial institutions. Losses under these agreements have been
immaterial in the past. Sales under these agreements during the years ended
September 30, 1997, 1996, for the three months ended September 30, 1995 and for
the year ended June 30, 1995 were approximately $18 million, $16 million, $2
million and $17 million, respectively.
8. LEGAL PROCEEDINGS
While not expected to be of material effect to the Company, Kenfil Inc. vs.
RLI Insurance Company, Superior Court of the State of California, County of Los
Angeles, No. BC 108564 filed July 12, 1994, involves litigation instituted by
Kenfil Inc. to recover additional monies for the damage it incurred in the
Northridge earthquake of January 17, 1994. The defendant cross-claimed on August
12, 1994 for return of the $840,000 it had paid on claims submitted by Kenfil,
Inc., based on affidavits from former Kenfil employees alleging that they had
been instructed following the earthquake to intentionally destroy additional
inventory. The defendant's theory is that the policy was voided ab initio by the
fraudulent actions of Kenfil Inc.'s employees; while Kenfil Inc.'s position is
that the fraud unauthorized by the corporation but committed by a few employees
does not operate to void the contract. The defendant's theory is premised on the
language of the contract, while Kenfil Inc.'s position is supported by a case
from the California Supreme Court. Messrs. Irwin Bransky and Nelson Landman,
former officers of Kenfil Inc. at the time of the earthquake, have pleaded
guilty to mail fraud relating to the mailing of documents asserting the
destruction of inventory from the earthquake where such destruction actually
occurred in large part following the earthquake. However, their actions were not
attributed to Kenfil Inc. during the course of the criminal proceedings. Kenfil
Inc. has a continuing claim against the defendant for additional amounts never
paid under the contract for the interruption of the business of Kenfil Inc. and
claims against Messrs. Bransky and Landman for the damages occasioned to Kenfil
Inc. by their unauthorized and unratified criminal conduct. No assurance can be
given as to the final outcome of this legal matter.
While not expected to be of material effect to the Company, Leading Edge
Products, Inc. vs. AmeriQuest Technologies, Inc. involves suit against
AmeriQuest/NCD Inc., one of the Company's predecessors in interest, wherein
Leading Edge is asserting breach of contract and unjust enrichment. In its
complaint Leading Edge alleges a $1,055,438 debt and seeks double or triple
damages, interest, attorney's fees, and costs. The Company responded to the
complaint by denying liability and asserted counterclaims for breach of
contract, breach of implied covenant of good faith and fair dealing, breach of
warranty, and unjust enrichment.
F-14
43
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In its counterclaim the Company seeks to recover money damages in the amount
determined by the court, double or triple damages, interest, attorney's fees,
and costs. The case is in its early stages and the accounting information has
yet to be exchanged. The Company's accounting information indicates that the
Company owes Leading Edge a total of $451,852. The information received to date,
however, indicates that the Company's potential exposure is at least $451,852
and may be as high as $678,597. No assurance can be given as to the final
outcome of this legal matter.
The Company is also a party to various other legal matters. Based upon
discussions with counsel, management believes that the ultimate outcome of these
matters and the litigation described above will not have a material adverse
effect on the Company's future financial position or its results of operations.
9. COMPUTER 2000 PURCHASE AGREEMENT AND RELATED BUSINESS TRANSACTIONS
In August 1995, Computer 2000 exchanged the $18 million subordinated note
for 810,811 shares of AmeriQuest's Series A preferred stock (convertible into
8,108,110 shares of common stock). In addition, Computer 2000 purchased from
AmeriQuest, for $31.2 million, 1,785,714 shares of Series B preferred stock
(convertible into 17,857,140 shares of common stock). In April 1996, the 810,811
shares of Series A preferred stock and the 1,785,714 shares of Series B
preferred stock, noted above, were converted into 8,108,110 and 17,857,140
shares of common stock, respectively.
In connection with the conversion of the $18 million subordinated note, the
capital infusion of $31.2 million, the completion of the Robec merger and
various private placements throughout the fiscal year, Computer 2000 was issued
warrants to purchase additional shares of common stock at prices ranging from
$.05 to $.53 per common share. During fiscal year ended September 30, 1996,
warrants were exercised by Computer 2000 to purchase 7,868,518 shares of common
stock. Assuming the exercise of the remaining warrants, Computer 2000 will hold
approximately 58% of the outstanding voting stock of the Company.
In March 1996, the shareholders approved an increase in the authorized
common stock of the Company from 30 to 200 million shares.
During November 1996, Computer 2000 had obligated itself to provide
AmeriQuest with additional financing early in calendar 1997 in the amount of $30
million. Computer 2000 fulfilled this obligation in full through the purchase of
preferred stock from the Company, as described in the following paragraph.
In May 1997, Computer 2000 invested $30 million in the Company for which it
received 300,000 shares of Series H Cumulative Convertible Preferred Stock. The
proceeds received were used to partially pay down the outstanding lines of
credit. All of the Company's bank lines of credit were at that time guaranteed
by Computer 2000 AG. These convertible preferred shares carry a 7% per annum
cumulative dividend right, payable at the choice of AmeriQuest in either shares
or cash until June 30, 1998. Thereafter such dividends must be paid in cash. The
shares are convertible into Common Stock at a conversion price of $0.715 per
share of Common Stock.
F-15
44
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTION PLANS
The Company has instituted various stock option plans which authorize the
granting of options to key employees, directors, officers, vendors and customers
to purchase 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 JUNE 30, 1995............................ 519,693 56,901 $1.50 - 4.50
Increase in shares available for grant............... 2,000,000
Options granted...................................... (2,795,000) 2,795,000 0.05 - 4.50
Options cancelled.................................... 429,327 (429,327) 1.50 - 2.00
---------- ---------- ------------
BALANCES AT SEPTEMBER 30, 1995....................... 154,020 2,422,574 $0.05 - 4.50
Options exchanged in Robec acquisition............... (301,978) 301,978 0.45 - 2.00
Options exercised.................................... (82,500) 0.05
Options cancelled.................................... 447,561 (447,561) 0.45 - 4.50
---------- ---------- ------------
BALANCES AT SEPTEMBER 30, 1996....................... 299,603 2,194,491 $0.05 - 4.50
Options cancelled.................................... 1,628,987 (1,628,987) 0.05 - 3.50
---------- ---------- ------------
BALANCES AT SEPTEMBER 30, 1997....................... 1,928,590 565,504 $0.45 - 4.50
========== ========== ============
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
RANGE OF NUMBER OF OUTSTANDING REMAINING WEIGHTED AVERAGE
EXERCISE PRICE AS OF SEPTEMBER 30, 1997 CONTRACTUAL LIFE EXERCISE PRICE
- -------------- ------------------------ ---------------- ----------------
$0.453 181,907 20 months $0.453
1.325 60,931 6 months 1.325
1.500 152,666 3 months 1.500
3.150 20,000 3 months 3.150
4.500 150,000 18 months 4.500
- -------------- ------- --------- ------
$0.453 - 4.500 565,504 13 months $1.998
============== ======= ========= ======
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. No stock options or warrants were granted in fiscal
years 1997 or 1996. Accordingly, no compensation cost has been recorded or
proforma disclosures are required under the provisions of SFAS 123, "Accounting
for Stock-Based Compensation".
Of the 565,504 options outstanding, 529,123 options are currently
exercisable.
F-16
45
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FOREIGN SALES INFORMATION
A summary of the Company's operations by geographic area is as follows (in
thousands):
FAR
U.S. EAST ELIMINATIONS CONSOLIDATED
--------- ------- ------------ --------
YEAR ENDED SEPTEMBER 30, 1997
Sales to unaffiliated customers................ $ 194,342 $24,535 -0- $218,877
Loss (income) from operations.................. 37,887 (31) -0- 37,856
Identifiable assets............................ 19,799 6,280 -0- 26,079
YEAR ENDED SEPTEMBER 30, 1996
Sales to unaffiliated customers................ $ 404,151 $20,557 -0- $424,708
Loss (income) from operations.................. 29,231 (376) -0- 28,855
Identifiable assets............................ 110,955 5,417 -0- 116,372
THREE MONTHS ENDED SEPTEMBER 30, 1995
Sales to unaffiliated customers................ $ 94,742 $ 5,981 -0- $100,723
Loss from operations........................... 5,541 63 -0- 5,604
Identifiable assets............................ 109,419 6,112 -0- 115,531
YEAR ENDED JUNE 30, 1995
Sales to unaffiliated customers................ $ 374,552 $42,019 -0- $416,571
Loss from operations........................... 60,746 751 -0- 61,497
Identifiable assets............................ 122,548 5,460 -0- 128,008
United States sales include export sales of approximately $5.3 million,
$41.9 million, $1.6 million, and $6.4 million made principally to Europe, Latin
America, the Far East and Canada during the fiscal years ended September 30,
1997, September 30, 1996, the three months ended September 30, 1995 and the
fiscal year ended June 30, 1995, respectively. See Footnote 2 for disposition of
the Far East operations.
12. LIQUIDITY AND SUBSEQUENT EVENTS
At September 30, 1997, the Company had borrowed $3.1 million against its
secured line of credit with IBMCC. On September 30, 1997, the Company was not in
compliance with various financial covenants of the agreement. IBMCC has
subsequently issued a waiver to the Agreement which waived prior defaults. The
IBMCC line of credit was scheduled to expire on February 28, 1998.
On January 9, 1998, the Company obtained a commitment letter from IBMCC
(the Commitment Letter) to extend its credit line through September 30, 1998,
subject to certain modifications and conditions. Under the terms of the
Commitment Letter, the credit line will be reduced from $20 million to $5
million on March 1, 1998. The $5 million credit line is guaranteed by Computer
2000 and any amounts owed by the Company to Computer 2000 is subordinated to
the credit line. The Company's collateral advance rates are 100% (or as may be
determined by audit) of IBMCC financed inventory and 80% (50% of which will be
used to compute the maximum advance amount) of eligible accounts receivable.
The Commitment Letter is subject to certain conditions, including a
satisfactory audit of the collateral by IBMCC scheduled to commence on January
12, 1998. In addition, certain financial statement covenants of the IBMCC
credit line will be revised based upon management's estimate of future results.
F-17
46
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997 the Company's indebtedness to IBMCC was
$12,353,000. During December 1997 the Company purchased $6 million of IBM
products, primarily to meet the minimum purchase commitment needed to retain
IBM MIR distribution rights. Under the terms of the IBM vendor agreement, the
Company may return a significant portion of these IBM products and may be
required to do so in order to reduce the IBMCC line of credit from $20 million
to $5 million at February 28, 1998.
The Company's distribution agreement with IBM requires the Company to
achieve certain purchase levels for IBM's mid-range computer systems. There
is no assurance that the Company will be able to meet the purchase
requirements that might be imposed upon it in the future by IBM. Nor has the
Company received confirmation from IBM that it has met the required purchase
levels for calendar 1997.
Through September 30, 1997, Computer 2000 guaranteed lines of credit with
four German banks. Such guarantees expired on September 30, 1997, at which time
Computer 2000 paid the outstanding bank lines of credit that totaled $27.7
million and converted the loans to a non-interest bearing demand loan. Computer
2000 has agreed to defer demand of payment through September 30, 1998 and
subordinate its loan to IBMCC (See Note 5). It is unlikely that the Company
will have the ability to repay the loan if payment was demanded by Computer
2000.
The Company has no commitment from Computer 2000 to provide additional
funding to the Company, although Computer 2000 has guaranteed $5 million to
IBMCC and certain amounts due to two of the Company's suppliers. Management
believes that its existing cash, the non-interest bearing $27.7 million loan
from Computer 2000, the supplier guarantees and the $5 million line of credit
from IBMCC will be adequate for the Company to continue in business and meet its
financial obligations on a timely basis through September 30, 1998.
The New York Stock Exchange ("NYSE") has repeatedly informed the Company
that it is not in compliance with certain of the NYSE's requirements for
continued listing on the NYSE. The NYSE could delist the Company's common stock
at any time, thereby adversely affecting the public market for such securities.
The Company is considering various strategic alternatives, including
possible merger or sale of the Company.
F-18
47
SCHEDULE II
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND ACCOUNTS AT END
DESCRIPTIONS OF PERIOD EXPENSE WRITTEN-OFF OTHER OF PERIOD
- --------------------------------------- ---------- ---------- ---------- ------ ---------
Allowance for Doubtful Accounts:
July 1, 1995 to September 30, 1995... 9,572 758 2,150 8,180
October 1, 1995 to September 30,
1996.............................. 8,180 1,661 4,030 5,811
October 1, 1996 to September 30,
1997.............................. 5,811 4,970 8,625 2,156
Inventory Reserves:
July 1, 1995 to September 30, 1995... 13,779 462 929 13,312
October 1, 1995 to September 30,
1996.............................. 13,312 7,482 13,966 6,828
October 1, 1996 to September 30,
1997.............................. 6,828 4,032 9,537 1,323
F-19