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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934 from _____ to_____________.
Commission File Number 1-10397
AMERIQUEST TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0244136
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 PRIVET ROAD, HORSHAM, PENNSYLVANIA, 19044
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (215) 675-9300
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 report(s), and (2) has been subject to
filing requirements for the past 90 days. Yes X No
At July 30, 1998 there were 66,881,906 shares of the Registrant's Common
Stock outstanding.
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PART I. FINANCIAL INFORMATION
AMERIQUEST TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
ITEM 1. FINANCIAL STATEMENTS
The financial statements included herein have been prepared by AMERIQUEST
TECHNOLOGIES, INC. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
normally included in the financial statements prepared in accordance with
generally accepted accounting principles has been omitted pursuant to such rules
and regulations. However, the Company believes that the financial statements,
including the disclosures herein, are adequate to make the information presented
not misleading. It is suggested that the financial statements be read in
conjunction with the Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 as filed with the Securities and Exchange Commission.
In the opinion of management, the consolidated condensed financial statements
include proforma statement presentations necessary to present fairly the
financial position of the Company following the recapitalization on July 20,
1998 that consumated the transactions contemplated by the "Disposition and
Reorganization Agreement" executed and announced on July 2, 1998.
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AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, SEPTEMBER 30, PROFORMA
ASSETS 1998 1997 JUNE 30, 1998
--------- --------- ---------
Current Assets:
Cash and cash equivalents $ 2,710 $ 7,680 (1,5) $ 2,655
Accounts receivable, less allowance for doubtful accounts of $1,610
And $2,156 as of June 30, 1998 and September 30, 1997, respectively 5,588 9,006 5,588
Inventories, net of valuation allowance 6,976 7,066 6,976
Prepaid and other current assets 627 935 627
--------- --------- ---------
Total current assets 15,901 24,687 15,846
--------- --------- ---------
Property and equipment, net 620 1,272 620
Other assets 120 120 120
--------- --------- ---------
Total assets $ 16,641 $ 26,079 $ 16,586
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Lines of credit $ 4,657 $ 3,064 (1,5,6) $ 0
Due to Computer 2000 27,664 27,664 (3) 0
Accounts payable 5,304 9,492 (3,4,6) 4,333
Other current liabilities 3,737 9,251 3,737
--------- --------- ---------
Total current liabilities 41,362 49,471 8,070
--------- --------- ---------
Stockholders' Equity (Deficit)
Preferred Stock, $.01 par value, 7% cumulative dividend, convertible
into Common Stock, 300,000 shares authorized and outstanding;
entitled to $30,000,000 in involuntary liquidation 30,000 30,000 (2) 0
Common stock, $.01 par value; authorized 200,000,000 shares; issued
And outstanding 66,881,906 shares as of June 30, 1998 and
September 30, 1997, respectively 669 669 669
Additional paid-in capital 111,145 111,145 (2,3,4,5) 174,382
Accumulated deficit (166,535) (165,206) (166,535)
--------- --------- ---------
Total stockholders' equity (deficit) (24,721) (23,392) 8,516
--------- --------- ---------
Total liabilities and stockholders' equity (deficit) $ 16,641 $ 26,079 $ 16,586
========= ========= =========
PROFORMA FOOTNOTES (SEE FOOTNOTE 10):
1. Disbursement of cash to pay off IBMCC - $3,055
2. Contribution of Preferred Shares to Paid in Capital - $30,000
3. Contribution of Intercompany Loans to Paid in Capital - $27,664
4. Contribution of Preferred Dividends and Interest to Paid in Capital - $2,573
5. Contribution of Cash to Paid-in Capital - $3,000
6. Reclassification of balance no longer due to IBMCC to IBM Accounts Payable
pending contractual return of $1,602 of inventory
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AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 18,260 $ 35,016 $ 47,371 $ 199,640
Cost of sales 16,300 29,754 42,554 184,866
------------ ------------ ------------ ------------
Gross profit 1,960 5,262 4,817 14,774
Operating Expenses:
Selling, general and administrative 1,516 8,639 4,082 30,555
Depreciation and amortization 79 576 241 2,216
Restructuring costs 0 0 0 20,437
------------ ------------ ------------ ------------
Income (Loss) from operations 365 (3,953) 494 (38,434)
Interest income (37) 0 (197) 0
Interest expense 340 713 445 3,054
------------ ------------ ------------ ------------
Net Income (loss) $ 62 ($ 4,666) $ 246 ($ 41,488)
============ ============ ============ ============
Basic loss per common share $ (0.01) $ (0.07) $ (0.02) $ (0.62)
------------ ------------ ------------ ------------
Diluted loss per common share $ (0.01) $ (0.07) $ (0.02) $ (0.62)
------------ ------------ ------------ ------------
Basic Common shares outstanding (Note 2) 66,881,906 66,881,906 66,881,906 66,881,906
------------ ------------ ------------ ------------
Diluted Common shares outstanding (Note 2) 66,881,906 66,881,906 66,881,906 66,881,906
------------ ------------ ------------ ------------
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AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
-------- -------- -------- --------
Cash flow from operating activities:
Net Income (loss) $ 62 ($ 4,666) $ 246 ($41,488)
-------- -------- -------- --------
Gain on sale of subsidiaries 0 (385) (184) (385)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 79 576 241 2,216
Restructuring costs 0 0 0 20,437
Provision for losses on accounts receivable 2,249 7,527
Provision for losses on inventory 0 (1,013) 348 2,562
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,086 18,452 997 33,072
(Increase) decrease in inventories 8,019 20,195 (683) 28,999
(Decrease) in accounts payable and accrued expenses (1,525) (18,505) (6,493) (27,665)
(Increase) decrease in other assets (134) (264) (1,418) (295)
-------- -------- -------- --------
Net cash provided by (used in) operating activities 7,587 16,639 (6,946) 24,980
-------- -------- -------- --------
Cash flow from investing activities:
Net cash received from sale of subsidiaries 0 3,550 450 3,550
Capital expenditures, net of disposals (2) (37) (67) (408)
-------- -------- -------- --------
Net cash provided by (used in) investing activities (2) 3,513 383 3,142
-------- -------- -------- --------
Cash flow from financing activities:
Net borrowings (repayment) under lines of credit (7,998) (47,455) 1,593 (55,805)
Issuance of Preferred Stock 0 30,000 0 30,000
-------- -------- -------- --------
Net cash provided by (used in) financing activities (7,998) (17,455) 1,593 (25,805)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (413) 2,697 (4,970) 2,317
-------- -------- -------- --------
Cash and cash equivalents at beginning of period $ 3,123 $ 1,920 7,680 2,300
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 2,710 $ 4,617 $ 2,710 $ 4,617
======== ======== ======== ========
Supplemental Disclosures of Cash Flow Information
Interest on lines of credit:
During the nine months ended June 30, 1998 and 1997, the
Company paid interest of $248 and $3,054, respectively.
Income taxes:
During the nine months ended June 30, 1998 and 1997, the
Company made no federal income tax payments.
PROFORMA ADJUSTMENTS TO CASH FLOW INFORMATION
On July 20, 1998, the Company received a capital contribution of $3,000 from
Computer 2000, Inc. as part of closing of the transaction further described in
footnote 10 and the management discussion below. Additionally, the line of
credit due IBM Credit Corporation of $4,657 was paid in full on July 20, 1998.
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AMERIQUEST TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- -------- ---------- -------- -------- ----------
BALANCES AT SEPTEMBER 30, 1997............. 300,000 $30,000 66,881,906 $669 $111,145 ($165,206)
========= ======== ========== ======= ======== =========
Accrued dividend on Preferred stock........ (525)
Net Income for the Quarter ended
December 31, 1997................... 95
Accrued dividend on Preferred stock........
(525)
Net Income for the Quarter ended
March 31, 1998......................
89
Accrued dividend on Preferred stock........
(525)
Net Income for the Quarter ended
June 30, 1998....................... 62
-------
BALANCES AT JUNE 30, 1998.................. 300,000 $30,000 66,881,906 $669 $111,145 ($166,535)
========= ======== ========== ======= ======== =========
PROFORMA ADJUSTMENTS
(SEE FOOTNOTE 10)
Contribution of Preferred Shares to
Paid in Capital..................... (300,000) (30,000) 30,000
Contribution of Intercompany Loans to
Paid in Capital..................... 27,664
Contribution of Preferred Dividends and
Accrued Interest to Paid in Capital. 2,573
Contribution of Cash to Paid-in Capital.... 3,000
-----
PROFORMA BALANCES AT JUNE 30, 1998.......... 0 $0 66,881,906 $669 $174,382 ($166,535)
========= ======== ========== ======= ======== =========
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AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (which
include only normal recurring adjustments and accruals) considered necessary for
a fair presentation are included. For further information, refer to the audited
Consolidated Financial Statements and Notes thereto included in AmeriQuest
Technologies, Inc. Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, as filed with the Securities and Exchange Commission.
The results of operations and cash flows for the three and nine month periods
ended June 30, 1998 are not necessarily indicative of the results of operations
or cash flows which may be reported for the remainder of fiscal 1998.
(2) LOSS PER SHARE
In February, 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" effective for periods ending after December 15, 1997. SFAS
No. 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. The Company has accordingly adopted the
provisions of SFAS 128 for the current year. Previously reported earnings per
share amounts have been restated, if applicable.
Basic loss per common share is computed by dividing net income (loss) less
dividends applicable to convertible preferred stock by the weighted average
number of common stock outstanding during the period. Diluted loss per common
share is computed using the "if-converted method" applicable for convertible
preferred stock. The "if-converted method" is not applied if the preferred
dividend adjustment results in a loss for basic earnings per share and income
for diluted earnings per share. Because of the net loss attributable to common
shareholders, options of 565,504 and warrants of 9,392,515 outstanding on June
30, 1998 are antidilutive. Accordingly, the basic and diluted per share loss is
the same.
(3) DERIVATIVE INVESTMENTS
In February, 1997, the Financial Accounting Standards Board issued SFAS No. 133,
"Derivative Investments" effective for periods ending after December 15, 1997.
SFAS No. 133 requires a definitive statement that the Company has no derviative
investments. The Company asserts that it has no such investments.
(4) FISCAL PERIODS
The Company's fiscal year is the 52- or 53-week period ending on the Saturday
nearest to September 30 and its fiscal quarters are the 13- or 14-week periods
ending on the Saturday nearest to December 31, March 31, June 30 or September
30. For clarity of presentation, the Company has presented year-ends as if the
years ended on September 30; and quarter-ends are presented as if the quarters
ended on December 31, March 31, and June 30. The 1997 and 1998 fiscal years are
52 weeks, while the quarters presented are 13 weeks in duration.
(5) COMMON AND PREFERRED STOCK
On May 6, 1997 the Company issued and sold to Computer 2000 AG ("C-2000")
300,000 shares of its Series H Cumulative Convertible Preferred Stock
("Preferred Stock") for a purchase price of $30.0 million. The proceeds of the
sale were used to partially pay down the Company's outstanding bank lines of
credit. The Preferred stock is convertible at the option of C-2000 into
41,958,042 shares of the Company's Common Stock. The Preferred Stock has a 7%
per annum cumulative dividend payable in either company shares or cash until
June 30, 1998, at the option of the Company. Thereafter such dividends were to
be paid in cash.
On July 20, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's
senior management, Alex Kramer (CEO) and Jon Jensen (CFO), completed an
agreement to acquire the 36,349,878 shares of AmeriQuest common stock owned by
Computer 2000. As part of the transaction, Computer 2000 contributed to the
capital of AmeriQuest approximately $28 million in intercompany debt
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AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(5) COMMON AND PREFERRED STOCK (CONTINUED)
obligations and an additional $3 million in cash. Computer 2000 further agreed
to the redemption by AmeriQuest of all of the outstanding AmeriQuest Preferred
Stock, and to the cancellation of all outstanding AmeriQuest options and
warrants held by Computer 2000. As a result of the transaction, the number of
outstanding shares of AmeriQuest, assuming conversion by Computer 2000 of all
Preferred Stock, warrants and options, was reduced from 118,232,465 to
66,881,906.
See Note 10 regarding contribution of Preferred Stock to Paid in Capital and
cancellation of warrants subsequent to June 30, 1998.
(6) LINES OF CREDIT
At June 30, 1998, the Company's line of credit with IBM Credit Corporation
(IBMCC) utilizing a floor planning arrangement, totalled $8.5 million. The IBMCC
$8.5 million line of credit was to be reduced to $6.5 million on July 1, 1998,
to $5 million on August 1, 1998 and to expire on September 30, 1998. At June 30,
1998, the terms of the IBM Credit Corporation ("IBMCC") lending agreement
included certain restrictive covenants which required the maintenance of
specified financial ratios generally related to net income, tangible net worth,
and working capital. The Company was not in compliance with the year to date net
income covenant of $300,000 as of June 30, 1998. The weighted average interest
rate for all borrowings under the above IBMCC credit facilities was 12.3% at
June 30, 1998, reflecting a penalty rate of 6.5% on a portion of the debt due
IBMCC. All IBMCC debt was retired on July 20, 1998. On July 20, 1998 the Company
paid IBMCC in full and replaced the IBMCC line of credit with a three year,
$10,000,000 line of credit facility from Fleet Financial Corporation.
The terms of the Fleet Finacial Corporation ("Fleet") lending agreement include
certain restrictive covenants which require the maintenance of specified
financial ratios generally related to net income and tangible net worth.
(7) NEED FOR ADDITIONAL REVENUE
It is important to note that to date the Company has not been profitable in
prior quarterly periods without benefit of non-operating income. Therefore,
management estimates that a 15% increase in sales would be required in order for
AQS to achieve profitability on a consistent basis without benefit of such
non-operating income. No assurance can be given that such a sales increase will
occur or that the Company will be consistently profitable on an operating basis
only.
(8) NEGATIVE TANGIBLE NET WORTH
As of June 30, 1998, the Company has a working capital deficit and Stockholder's
deficit of $25.5 and $24.7 million, respectively. As a result of the events
outlined in Note 10, the Company's tangible net worth increased, on a proforma
basis at June 30, 1998, to $8,516,000 as further detailed in the preceeding
statement of stockholder's equity.
(9) SALE OF SUBSIDIARIES
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. The Company recognized a gain, net of
expenses, of $184,000 during the first quarter of fiscal 1998. The gain was
included in "Selling, General and Administrative Expenses" in the accompanying
Statement of Operations.
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AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(10) ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR
MANAGEMENT
On July 2, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's
senior management, Alex Kramer (CEO) and Jon Jensen (CFO), signed an agreement
to acquire the 36,349,878 shares of AmeriQuest common stock owned by Computer
2000. The transaction was approved by the outside directors of AmeriQuest and by
the full Board of Directors of AmeriQuest.
In taking over majority control of AmeriQuest from Computer 2000, AmeriQuest's
management arranged for a new $10 million asset-backed bank credit line for
AmeriQuest, in part to release Computer 2000 from its guarantee of IBMCC,
obtained the release of Computer 2000 and its affiliates from all other
guarantees of AmeriQuest obligations, and agreed to pay certain transaction
costs totaling approximately $220,000.
As part of the transaction, completed on July 20, 1998, Computer 2000
contributed to the capital of AmeriQuest approximately $28 million in
intercompany debt obligations and an additional $3 million in cash. Computer
2000 further agreed to the redemption by AmeriQuest of all of the outstanding
AmeriQuest preferred stock, convertible into approximately 42 million common
shares, and to the cancellation of all outstanding dividends, interest and
AmeriQuest options and warrants held by Computer 2000. As a result of the
transaction, the number of outstanding shares of AmeriQuest, on a fully diluted
basis, was reduced from approximately 118 million to approximately 67 million.
The Board of Directors of the Company agreed to reserve 6.7 million shares of
common stock for future issuance to AmeriQuest employees as incentive
compensation pursuant to terms to be approved by outside directors of the board.
Proforma adjustments to the June 30, 1998 balance sheet, reflecting the above
described transactions that occurred on 20, 1998 are shown below:
JUNE 30 PROFORMA Foot PROFORMA
Current Assets: 1998 ADJUSTMENTS Notes JUNE 30, 1998
- --------------- ---- ----------- ----- -------------
Cash and cash equivalents......................................... $ 2,710 $ (3,055) 1 $2,655
3,000 5
-------
Total assets............................................... $ 16,641 $(55) $16,586
======== ======= =======
Current liabilities:
Lines of credit................................................... $ 4,657 $ (3,055) 1
(1,602) 6 $ 0
Due to Computer 2000.............................................. 27,664 (27,664) 3 0
Accounts payable.................................................. 5,304 (2,573) 4
1,602 6 4,333
Total current liabilities.................................. 41,362 8,070
-------- -----
Stockholders' Equity (Deficit)
Preferred Stock, $.01 par value, 7% cumulative dividend.............. 30,000 (30,000) 2 0
Common stock, $.01 par value; outstanding 66,881,906 shares.......... 669 669
Additional paid-in capital........................................... 111,145 30,000 2
27,664 3
2,573 4
3,000 5 174,382
--------
Accumulated deficit.................................................. (166,535) (166,535)
-------- ---------
Total stockholders' equity (deficit)....................... (24,721) 8,516
-------- -----
Total liabilities and stockholders' equity (deficit)....... $16,641 $(55) $16,586
======== ===== =======
Footnotes:
1. Disbursement of cash to pay off IBMCC
2. Contribution of Preferred Shares to Paid in Capital
3. Contribution of Intercompany Loans to Paid in Capital
4. Contribution of Preferred Dividends and Interest to Paid in Capital
5. Contribution of Cash to Paid-in Capital
6. Reclassification of balance no longer due to IBMCC to IBM Accounts Payable
pending contractual return of $1,602 of inventory
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AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(11) NYSE LISTING
The New York Stock Exchange ("NYSE") suspended trading of the Company's Common
Stock before the opening of trading on Tuesday, March 10, 1998. Following
suspension, the NYSE delisted the Company's Common Stock. The NYSE's action is
based on the fact that the Company fell below the NYSE' continued listing
criteria related to net tangible assets available to common stock (less than $12
million) and average net income for the last three years (less than $600,000);
and aggregate market value of publicly held shares (less than $8 million).
The Company's Common Stock is currently traded on the Bulleting Board of NASDAQ
under the "AMQT" symbol.
(12) SALE OF COMPUTER 2000 AG
In April 1998, Tech-Data Corp. of Clearwater, Florida entered into an agreement
with Kloeckner & Co. AG to purchase the latters 80% interest in Computer 2000
AG, the majority stockholder of the Company. The transaction was completed on
June 30, 1998.
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AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
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.
The Company had net income of $62,000 for the quarter ended June 30, 1998
compared to a net loss of $4,666,000 for the quarter ended June 30, 1997.
Revenue for the current quarter of $18,260,000 included the sale of
approximately $5,000,000 of IBM Risc product inventory at either low margin or
cumulative discount of $730,000 for cash prepayment. The low margin and cash
discount losses resulting from such sales were offset by release of inventory
loss reserves of $732,000 that had been set aside for that specific purpose.
Since the Company had non-recurring net interest expense of $303,000 and
achieved bad debt recoveries of $53,000 during the quarter, operating profit
without benefit of such recovery, or penalty from inventory liquidation, was
$310,000.
It is important to note that to date the Company has not been profitable in
prior quarterly periods without benefit of non-operating income. Therefore,
management estimates that a 15% increase in sales would be required in order for
the Company to achieve profitability on a consistent basis without benefit of
such non-operating income. No assurance can be given that such a sales increase
will occur or that the Company will be consistently profitable on an operating
basis only.
-------------------------------------
The following table sets forth certain items in the Consolidated Condensed
Statements of Income as a percent of net sales.
PERCENT OF SALES
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----- ----- ----- -----
Net sales 100.0 100.0 100.0 100.0
Cost of sales 89.3 85.0 89.8 92.6
Gross profit 10.7 15.0 10.2 7.4
Selling, general and administrative 8.3 24.7 8.6 15.3
Depreciation and amortization 0.4 1.6 0.5 1.1
Restructuring costs -- -- -- 10.2
Interest income (expense), net (1.7) (2.0) (0.5) (1.5)
Net Income (Loss) 0.3 (13.3) 0.5 (20.8)
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998
Sales for the quarter ended June 30, 1998 declined by 48% from $35,016,000 for
the quarter ended June 30, 1997 to $18,260,000, reflecting the closing of the
standard distribution business, the sale of the Company's Asian subsidiaries and
the sale of the assets of CMS Enhancements, Inc. Revenue for the current quarter
of $18,260,000 included the sale of approximately $5,000,000 of the IBM Risc
product inventory at either low margin or cumulative discount of $730,000 for
cash prepayment.
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AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 (CONTINUED)
Cost of sales increased to 89.3% of sales for the quarter ended June 30, 1998
compared to 85.0% of sales in the same quarter for the prior year primarily as a
result of the favorable liquidation of inventory that occurred in the year ago
quarter from the closing of the the standard and export distribution businesses.
Gross profit performance for the current quarter was maintained at above single
digit margins (10.7%), despite the sale of IBM Risc inventory at either low
margin or cumulative discount of $730,000 for cash prepayment. This was due to
release of inventory loss reserves of $732,000 that had been set aside for that
specific purpose.
Selling, general and administrative expenses of $1,516,000 decreased by
$7,123,000 for the quarter ended June 30, 1998 compared to the expenditure of
$8,639,000 for the same quarter of the prior year, primarily as a result of the
closing of the standard and export distribution businesses, the sale of the
Company's Asian subsidiaries and the sale of the assets of CMS Enhancements,
Inc. Additionally, the Company achieved net bad debt recoveries of $53,000
during the quarter, thereby reducing total expenditures.
Depreciation and amortization of $79,000 for the quarter ended June 30, 1998
decreased from $576,000 in the quarter ended June 30, 1997 primarily as a result
of sale or disposal of assets related to the standard and export distribution
businesses, the Company's Asian subsidiaries and the assets of CMS Enhancements,
Inc.
Net interest expense of $303,000 in the quarter ended June 30, 1998 compares to
$576,000 for the quarter ended June 30, 1997. The reduction is primarily as a
result of repayment of $30 million in bank debt by the Company, from proceeds
derived from the sale of 300,000 shares of the Company's Series H Cumulative
Convertible Preferred Stock (the "Preferred Stock"), and the repayment of all
other outstanding bank debt by Computer 2000 AG, the guarantor of such debt.
Interest expense was high for the quarter compared to the previous two quarters
of the current fiscal year due to the delay in liquidation of the IBM Risc
inventory and the resultant delay in payment to IBMCC of the associated debt.
The debt carried a penalty of 6-1/2% over the prime rate for payment beyond
terms, a period that lasted from mid May to mid June.
No income tax expense was recorded against net operating profit at June 30, 1998
nor was an income tax benefit recorded on the net operating loss at June 30,
1997 as valuation allowances were provided, because it is not more likely than
not, as defined in SFAS 109, that 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 Company had net income of $62,000 for the quarter ended June 30, 1998
compared to a net loss of $4,666,000 for the quarter ended June 30, 1997.
Revenue for the current quarter of $18,260,000 included the sale of
approximately $5,000,000 of the IBM Risc product inventory at either low margin
or cumulative discount of $730,000 for cash prepayment. The low margin and cash
discount losses resulting from such sales were offset by release of inventory
loss reserves of $732,000 that had been set aside for that specific purpose.
Since the Company had non-recurring net interest expense of $303,000 and
achieved bad debt recoveries of $53,000 during the quarter, operating profit
without benefit of such recovery, or penalty from inventory liquidation, was
$310,000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1998
Sales for the nine months ended June 30, 1998 declined by 76% from $199,640,000
for the nine months ended June 30, 1997 to $47,371,000, reflecting the closing
of the standard distribution business, the sale of the Company's Asian
subsidiaries and the sale of the assets of CMS Enhancements, Inc.
Cost of sales decreased to 89.8% of sales for the nine months ended June 30,
1998 compared to 92.6% of sales in the same nine months for the prior year
primarily as a result of the improved profit mix of the ASG business this year
compared to the prior fiscal year which included the lower gross margin standard
and export distribution businesses.
12
13
AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1998 (CONTINUED)
Selling, general and administrative expenses of $4,082,000 decreased by
$26,473,000 for the nine months ended June 30, 1998 compared to the expenditure
of $30,555,000 for the same nine months of the prior year, primarily as a result
of the closing of the standard and export distribution businesses, the sale of
the Company's Asian subsidiaries and the sale of the assets of CMS Enhancements,
Inc.
Depreciation and amortization of $241,000 for the nine months ended June 30,
1998 decreased from $2,216,000 in the nine months ended June 30, 1997 primarily
as a result of sale or disposal of assets related to the standard and export
distribution businesses, the Company's Asian subsidiaries and the assets of CMS
Enhancements, Inc.
Net interest expense of $248,000 in the nine months ended June 30, 1998 compares
to $3,054,000 for the nine months ended June 30, 1997. The reduction is
primarily as a result of repayment of $30 million in bank debt by the Company,
from proceeds derived from the sale of 300,000 shares of the Company's Series H
Cumulative Convertible Preferred Stock (the "Preferred Stock"), and the
repayment of all other outrstanding bank debt by Computer 2000 AG, the guarantor
of such debt, and because most of the payments under the lending arrangement
with IBM Credit Corporation were made before the end of the free financing
period of 75 days.
No income tax expense was recorded against net operating profit at June 30, 1998
nor was an income tax benefit recorded on the net operating loss at June 30,
1997 as valuation allowances were provided, because it is not more likely than
not, as defined in SFAS 109, that 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.
VARIABILITY OF QUARTERLY RESULTS
Historically, the Company has experienced variability in its net sales and
operating margins on a quarterly basis and expects these patterns to continue in
the future. Management believes that the factors influencing quarterly
variability include: (i) the overall growth and seasonal fluctuations in market
demand in the microcomputer industry; (ii) shifts in short-term demand for the
Company's products resulting, in part, from the introduction of new products or
updates of existing products; and (iii) the fact that virtually all sales in a
given quarter result from orders booked in that quarter. Due to the factors
noted above, as well as the fact that the Company participates in a highly
dynamic industry, the Company's revenues and earnings may be subject to material
volatility, particularly on a quarterly basis. In addition the decision to close
the standard distribution and export businesses could involve unforseeable
additional expenses and impede the prospects for ASG to obtain the additional
sales needed to achieve operating profitablity.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $2,710,000 in cash and had borrowed $4,657,000
against its existing lines of credit. The Company generated $7,587,000 of cash
from operating activities in the quarterly period ended June 30, 1998, primarily
due to liquidation of excess inventories related to the 2nd tier IBM Risc
business. The funds were utilized to partially retire the IBMCC borrowings. On
July 20, 1998, the Company utilized a capital infusion from C-2000 and its own
cash to pay in full the IBMCC debt.
On September 30, 1997, C-2000 paid the outstanding bank lines of credit which
totalled $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. IBMCC received a $5 million guarantee from C-2000 in support
of the Company's line of credit. C-2000 had also guaranteed certain amounts to
two of the Company's suppliers.
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14
AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company also maintained an $8.5 million line of credit with IBMCC which was
secured by substantially all of the Company's assets. The line of credit was
scheduled to be reduced to $6.5 million on July 1, 1998, to $5 million on August
1, 1998 and to expire on September 30, 1998. Borrowings under the IBMCC line of
credit at June 30, 1998 totalled $4.7 million. The Company replaced its line of
credit from IBMCC with a three year $10,000,000 revolving credit facility from
Fleet Financial on July 20, 1998.
On July 20, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's
senior management, Alex Kramer (CEO) and Jon Jensen (CFO), completed an
agreement to acquire the 36,349,878 shares of AmeriQuest common stock owned by
Computer 2000. As part of the transaction, Computer 2000 has agreed to
contribute to the capital of AmeriQuest $27.7 million in intercompany debt
obligations and an additional $3 million in cash. In taking over majority
control of AmeriQuest from Computer 2000, AmeriQuest's management has obtained
the release of Computer 2000 and its affiliates from all guarantees of
AmeriQuest obligations.
Management believes that the capital infusion from C-2000 on July 20, 1998 and
the availability of credit from Fleet Financial Corporation will be adequate for
the Company to meet its financial obligations on a timely basis during fiscal
1998 and 1999.
VENDOR RELATIONS
The marketing and selling efforts of AmeriQuest concentrate on a limited number
of key manufacturers including Acer, American Power, Digi-board, Hewlett
Packard, IBM, Multitech, Okidata, Unisys, and Wyse. With this strategy the
company is able to maintain a superior level of solution or application
expertise on products from these manufacturers. Additionally, the Company
sources products from other vendors to complete solutions.
AmeriQuest, during the past year, has maintained both reseller and distribution
agreements with IBM for mid-range systems. IBM requires distributors of its
mid-range computer systems to meet certain minimum purchase requirements and to
make specific levels of resource commitment. Since it is not in Ameriquest's
best interests to continue to meet these requirements, the Company will withdraw
from IBM's mid range distribution program by August 31, 1998. However, the
Company will continue to distribute IBM's networking products and resell, rather
than distribute, IBM's mid-range systems.
AmeriQuest's initial contract with Hewlett Packard has been extended past its
expiration of March 1,1998. During the past year the Company has started to sell
the HP Netserver and Vectra product lines, but sales of these products have been
slow and have not increased as rapidly as desired. HP has recently informed the
Company that it will remain a partner but will be required to purchase products
from one of HP's larger fulfillment distributors after August 1998. Accordingly,
the Company has made the necessary arrangements to acquire HP products. This
arrangement affords greater product availability as well as a broader range of
products. In the short term, this agreement may impact product pricing and
marketing funding. However, the Company believes that there is a strong
possibility that product margins can be maintained or increased as a result of
better product availability, buying power, and purchasing arrangements.
The comments above contain forward-looking statements that involve a number of
risks and uncertainties. Among other factors that could cause actual operating
results to differ materially are general economic and business conditions, the
rate of growth in the computer industry, competitive factors and pricing
pressures, changes in product mix, inventory risks due to shifts in market
demand, and changes in agreements with manufacturers and master distributors
regarding the terms of product sales to the Company.
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15
AMERIQUEST TECHNOLOGIES, INC.
JUNE 30, 1998
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
Report dated July 2, 1998
Report dated July 16, 1998
(b) The following exhibits are filed with this report.
10.1 Loan and Security Agreement with Fleet Financial
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AmeriQuest Technologies, Inc.
August 6, 1998
/s/ ALEXANDER C. KRAMER
Alexander C. Kramer
Chief Executive Officer
August 6, 1998
/s/ JON D. JENSEN
Jon D. Jensen
Chief Operating Officer,
Chief Financial Officer and Secretary
15