SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 2)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended December 30, 1994
Commission File Number 1-10397
AmeriQuest Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 33-0244136
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2722 Michelson Drive, Irvine, CA 92715
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(Address of principal executive office) (Zip Code)
Registrant's telephone number: (714) 222-6000
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Former name, former address and former fiscal year, if changed since last report
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
---- ----
At December 30, 1994 there were 20,974,736 shares of the Registrant's
Common Stock outstanding.
1
AmeriQuest Technologies, Inc.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information ................. 3
Consolidated Condensed Balance Sheets
December 30, 1994 and June 30, 1994 .................... 4
Consolidated Condensed Statements of Income
Three and Six Months Ended December 30,
1994 and 1993........................................... 5
Consolidated Condensed Statements of
Cash Flows - Six Months Ended
December 30, 1994 ...................................... 6
Consolidated Statements of Shareholders' Equity
December 30, 1994....................................... 7
Notes to Consolidated Condensed Financial
Statements - December 30, 1994 ......................... 8-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........ 13-15
PART II. OTHER INFORMATION ...................................... 16
SIGNATURES ...................................................... 17
2
AMERIQUEST TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 30, 1994
PART I. STATEMENT REGARDING FINANCIAL INFORMATION
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/A for the
fiscal year ended June 30, 1994 as filed with the Securities and Exchange
Commission.
3
AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands) December 30, June 30,
1994 1994
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 4,407 $ 3,200
Accounts receivable, less
allowances for doubtful
accounts of $1,227 and $452 66,781 24,708
as of December 30, 1994 and June 30,
1994, respectively
Inventories 79,944 24,165
Other current assets 2,774 1,627
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Total current assets 153,906 53,700
PROPERTY AND EQUIPMENT, NET 7,114 4,078
INTANGIBLE ASSETS, NET 20,086 6,490
OTHER ASSETS 1,279 877
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$ 182,385 $ 65,145
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 58,762 $ 23,408
Notes payable 72,706 23,059
Other current liabilities 4,047 2,361
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Total current liabilities 135,515 48,828
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LONG-TERM OBLIGATIONS 1,029 267
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SUBORDINATED NOTES PAYABLE 18,000 3,175
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MINORITY INTEREST 1,178 -
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STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
authorized 30,000,000 shares; issued
and outstanding, 20,974,736 and
9,857,779 shares, respectively 210 99
Additional paid-in capital 48,143 27,345
Retained deficit (20,565) (14,569)
Receivables from affiliates (1,125) -
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Total stockholders' equity 26,663 12,875
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$ 182,385 $ 65,145
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands) Three Months Ended Six Months Ended
December 30, December 30,
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1994 1993 1994 1993
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NET SALES $ 123,529 $ 20,286 $ 173,005 $ 39,846
COST OF SALES 117,052 16,666 161,756 33,060
--------------- -------------- --------------- --------------
Gross profit 6,477 3,620 11,249 6,786
OPERATING EXPENSES
Selling, general and administrative 9,423 3,498 14,648 6,527
Restructuring charge - 5,000 - 5,000
--------------- -------------- --------------- --------------
9,423 8,498 14,648 11,527
--------------- -------------- --------------- --------------
(Loss) from operations (2,946) (4,878) (3,399) (4,741)
OTHER (INCOME) EXPENSE
Other (income) expense 349 (47) 282 11
Interest expense 1,588 119 2,315 137
--------------- -------------- --------------- --------------
1,937 72 2,597 148
--------------- -------------- --------------- --------------
Net (loss) $ (4,883) $ (4,950) $ (5,996) $ (4,889)
=============== ============== =============== ==============
Net (loss) per common share and common
stock equivalent (Note 2) $ (0.25) $ (1.07) $ (0.39) $ (1.24)
=============== ============== =============== ==============
Weighted average shares 19,834,322 4,607,198 15,458,468 3,935,530
=============== ============== =============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMERIQUEST TECHNOLOGIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended December 30,
------------------------------
(Dollars in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------
Cash Flow from Operating Activities
Net (loss) $ (5,996) $ (4,889)
Adjustments to reconcile net (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,094 513
Provision for losses on accounts receivable 1,514 (88)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (9,182) (1,849)
(Increase) decrease in inventories and other (14,194) (2,568)
(Increase) decrease in other assets 600 1,502
Increase (decrease) in accounts payable and other (10,058) 63
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Net cash provided by (used in) operating activities (36,222) (7,316)
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Cash Flow from Investing Activities
Purchases of property and equipment (1,047) (582)
Net cash paid for acquisition of businesses (1,973) (50)
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Net cash (used in) investing activities (3,020) (632)
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Cash Flows from Financing Activities
Proceeds from line of credit borrowings, net 17,512 2,195
Proceeds from subordinated debt, less refundings 18,000 -
Proceeds from sale of common stock 4,937 5,984
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Net cash provided by financing activities 40,449 8,179
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Increase ( decrease) in cash 1,207 231
Cash-beginning of the year 3,200 1,020
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Cash-end of the year $ 4,407 $ 1,251
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Supplemental Disclosures of Cash Flow Information
Interest on line of credit: During the periods ended December 30, 1994 and
1993, the Company paid interest costs of
$2,315 and $137, respectively.
Income taxes: During the periods ended December 30, 1994 and
1993, the Company made no tax payments.
Businesses acquired: During the period ended December 30, 1994, the Company
acquired businesses summarized as follows (dollars in thousands):
Fair value of assets acquired $ 96,474
Liabilities assumed (77,998)
Common stock issued (14,847)
------------
Cash paid 3,629
Less cash acquired (1,656)
------------
Net cash paid for acquisitions $ 1,973
============
The accompanying notes are an integral part of these consolidated financial
statements.
6
AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
December 30, 1994
(UNAUDITED)
Additional Retained
Common Stock Paid-in (Deficit)
(Dollars in thousands) Shares Amount Capital Earnings
- ---------------------------------------------------------------------------------------------------------------
Balances at June 30, 1992 2,925,523 $ 29 14,757 $ (6,834)
Common stock issued to unrelated parties 143,000 2 286 -
Common stock issued for acquisitions 100,000 1 149 -
Exercise of employee stock options 12,187 - 18 -
Net income for the year ended June 30, 1993 - - - 236
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Balances at June 30, 1993 3,180,710 $ 32 15,210 $ (6,598)
Common stock issued to unrelated parties 4,905,072 49 9,054 -
Exercise of employee stock options 41,667 1 70 -
Common stock issued for acquisitions 1,730,330 17 3,011 -
Net (loss) for the year ended June 30, 1994 - - - (7,971)
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Balances at June 30, 1994 9,857,779 $ 99 $27,345 $ (14,569)
Common stock issued to related parties (Note 4) 2,588,400 26 6,006 -
Exercise of employee stock options 20,334 - 30 -
Common stock issued for acquisitions (Note 3) 8,508,223 85 14,762 -
Net (loss) for the six months ended
December 30, 1994 - - - (5,996)
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Balances at December 30, 1994 20,974,736 $ 210 $48,143 $ (20,565)
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The accompanying notes are an integral part of these consolidated financial
statements.
7
AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
December 30, 1994
1. MANAGEMENT OPINION
In the opinion of management, the consolidated condensed financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results
of operations as of and for the periods presented.
2. LOSS PER SHARE
Loss per common share and common share is computed on the basis of the
weighted average number of common shares outstanding plus common stock
equivalents related to dilutive stock options.
3. ACQUISITIONS
The Company is pursuing a growth through acquisition strategy of acquiring
regional distributors with the ultimate goal of creating a national
distributor of value added computers, subsystems and peripherals.
The success of this strategy is dependent upon the ability of the Company
to effectively consolidate and integrate the operations of the acquired
businesses, combine different business cultures and obtain adequate
financing to complete acquisitions and fund working capital requirements.
Since 1993, the acquisitions of the Company have included:
COMPLETED BY JUNE 30, 1993
Vitronix, Inc. ("Vitronix")
As of March 1993, the Company acquired certain assets of Vitronix for
common stock of the Company. Vitronix is a distributor of computer products
and services, specializing in UNIX applications, and is based in Boston,
Massachusetts.
COMPLETED BY JUNE 30, 1994
Management Systems Group ("MSG")
As of December 1993, the Company acquired certain assets and assumed
certain liabilities of MSG for common stock of the Company and certain
contingent consideration. MSG is a distributor of computer products and
services, specializing in systems and networking applications, and is based
in Long Island, New York.
8
Rhino Sales Company ("Rhino")
As of December 1993, the Company acquired the outstanding common stock of Rhino
for a combination of cash and common stock of the Company. Rhino is a
distributor of computer products and services, specializing in UNIX
applications, and is based in Fenton, Michigan.
Kenfil Inc. ("Kenfil")
As of June 1994, the Company acquired 51% of the outstanding common stock of
Kenfil for common stock of the Company. Kenfil distributes microcomputer
software and is based in Southern California.
COMPLETED BY DECEMBER 30, 1994
Kenfil Inc. ("Kenfil")
As of September 1994, the Company acquired the remaining outstanding 49% of the
common stock of Kenfil and converted certain trade and subordinated debt of
Kenfil for common and convertible preferred stock of the Company.
Robec, Inc. ("Robec")
As of September 1994, the Company acquired 51% of the outstanding common stock
of Robec for common stock of the Company. Robec is a distributor of computer
products and services, specializing in systems and UNIX applications, and is
based in Horsham, Pennsylvania.
National Computer Distributors ("NCD")
As of November 1994, the Company acquired the outstanding common stock of NCD
for cash and common stock of the Company. NCD is a distributor of computer
products and services, specializing in systems and connectivity applications,
and is based in Fort Lauderdale, Florida.
IN PROCESS AT JANUARY 1995
Robec, Inc. ("Robec")
The Company proposes to acquire the remaining 49% of the outstanding common
stock of Robec during 1995.
The following summarizes the cost of the Company's acquisitions (dollars in
thousands):
Common Shares Common Stock Cash Consideration and
Company Issued Consideration Transaction Cost
- ------- -------------- -------------- ----------------------
Completed by June 30, 1994
MSG 400,000 $ 700
Rhino 200,000 350 $ 50
Kenfil, 51% 1,130,330 1,978
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1,730,330 $ 3,028
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Completed by December 30, 1994
Kenfil, 49% 1,046,254 $ 1,831 $ 785
Robec, 51% 1,402,805 2,455 265
Kenfil, vendors 2,400,037 4,200
Kenfil, debt conversion 1,894,360 3,315
NCD 1,864,767 3,221 3,400
MSG contingency (100,000) (175)
--------- -------
8,508,223 $14,847
--------- -------
In process at January 1995
Robec, 49% 1,397,195
9
The acquisitions were accounted for using the purchase method and, accordingly,
the financial statements include the results of their operations from the
effective acquisition dates. As to common stock consideration, all such
acquisitions are reflected utilizing a per share valuation of $1.75,
representing management's best estimate of the fair value of the Company's
common stock. This valuation is based upon prices obtained for large blocks of
the Company's common stock in recently completed private equity placement
transactions. This valuation represents a significant discount from quoted
market prices due to the thin public trading volume and small public float of
AmeriQuest common stock.
The contingent consideration granted to certain of the former owners of the
acquired businesses is dependent upon the attainment of certain defined profit
objectives of the acquired companies and consists of the right to acquire common
stock of the Company at previously agreed upon prices, additional cash
consideration or the issuance of additional common stock. Additional contingent
consideration earned in connection with the attainment of the profit objectives,
if any, will be reflected as an increase in the excess of cost over the fair
value of net assets acquired. As to the specific acquisitions of the Company,
such potential contingent common stock and cash consideration is less than
$400,000 in the aggregate and is limited to the MSG and Rhino acquisitions.
Management believes that the most significant intangible acquired as part of
these transactions is that of the distribution channels. Management has assigned
a 10 year economic life to this intangible asset as that is the period of time
that management expects to derive benefit from the existing vendor relationships
and market position. Management determined that 10 years is 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.
The purchase price allocations associated with the Kenfil, Robec and NCD
acquisitions are based upon the Company's preliminary estimate of the fair value
of net assets acquired. The Company is currently in the process of completing
its detailed analysis of the fair value of Kenfil, Robec and NCD net assets
acquired and therefore the related intangible assets included in the
accompanying financial statements may change as a result of the completed
analysis.
The pro forma effects of the acquisitions as if they occurred at the
beginning of each period follow (dollars in thousands except per share
data):
Three Months Ended December 30, Six Months Ended December 30,
1994 1993 1994 1993
------------ --------------- ------------ --------------
Net sales $ 143,377 $ 176,440 $ 276,568 $ 334,756
Gross profit 8,060 14,717 19,553 32,018
Net (loss) (5,451) (13,545) (6,836) (13,519)
Net (loss) per common
share and common stock
equivalent $ (0.27) $ (0.28) $ (0.32) $ (1.03)
Weighted average shares 20,455,911 13,215,421 21,364,963 13,087,777
----------- ----------- ----------- -----------
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 which may occur as a result of the consolidation of the
acquired companies.
During the three month period ended December 30, 1994, intangibles increased
approximately $13.7 million. The November 1994 acquisition of NCD contributed
$8.5 million of this increase. The remaining $5.2 million related to additional
purchase price allocation adjustments associated with the Kenfil acquisition.
During the second quarter 1994, the Company completed its detailed review of
acquired Kenfil inventory and determined that a large portion of acquired titles
would need to be liquidated. The $5.2 million purchase price allocation
adjustment was required to state the acquired Kenfil inventory at its net
realizable value at the date of acquisition.
4. COMMON STOCK
Common stock issued to related parties during the six months ended December 30,
1994 follows:
Common
Date Purchaser Shares Proceeds
- ----------------- ----------------- ---------- --------------
(In Thousands)
September 1994 Computer 2000 AG, 532,000 $1,236
a publicly traded
German company
October 1994 Private placement 516,400 1,188
October and
November 1994 Private placement 1,540,000 3,608
--------- ------
2,588,400 $6,032
========= ======
10
In October 1994 the Company issued 516,400 common shares to certain
affiliates and an advisor to the Company. Proceeds from this issuance
included note obligations of $625,000, trade obligation assumption of
$63,360, services of $100,000 and an open account of $500,000. The notes are
non-interest bearing and are due in October 1995.
Additionally, in October, 1994 the Company issued subordinated debt of
approximately $3.3 million, which in November, 1994 automatically converted
to 1,540,000 shares of common stock of the Company, upon the acquisition of
NCD as described in Note 3. The conversion provided for the issuance of the
common stock at $2.40 per share and further for warrants to acquire 1,540,000
shares of common stock of the Company at $3.50 per share, subject to downward
adjustment, and exercisable through November 1998. Of the aggregate
1,540,000 shares and warrants, 290,000 were issued to affiliates of the
Company and 250,000 were issued to an affiliate of Computer 2000.
5. SUBORDINATED NOTES PAYABLE
In November 1994 the Company entered into an agreement to sell a controlling
interest, 51%, of its common stock to Computer 2000. Under the terms of the
agreement, Computer 2000 initially extended to the Company $18 million as
subordinated indebtedness. The Company's repayment obligations under the
subordinated debt will be satisfied by the issuance to Computer 2000 of up to
approximately 8.1 million shares of common stock of the Company at a rate of
$2.22 per share, subject however to approval thereof by stockholders of the
Company. The agreement further provides that, subject to certain conditions,
on or before September 1, 1995, Computer 2000 will invest an additional $32
million in the Company in exchange for 14.1 million additional newly issued
shares of common stock of the Company, bringing Computer 2000's total
ownership interest to approximately 22.9 million shares or 51% of the then
outstanding shares of the Company. The $32 million investment is contingent
upon a number of performance levels, including but not limited to the Company
achieving certain monthly and cumulative after-tax profitability conditions
during the first half of calendar 1995, including that the Company must
generate an operational profit of $3.3 million during the first six months of
calendar 1995. The Company also issued to Computer 2000 options to purchase
(i) additional shares of the Company equal to the number of common shares
issuable upon exercise of currently outstanding options and warrants and the
conversion of other convertible securities and (ii) an option to acquire
additional shares allowing Computer 2000 to increase its ownership of the
Company to 55 percent of the then outstanding common stock shares at a strike
price of $10.00 per share between June 30, 1996 and June 30, 1998 and at a
price of $20.00 per share at any time between July 1, 1998 and November 30,
1999.
6. OPERATING EXPENSES
Writedown of assets
In December, 1994 the Company wrote down certain of its assets aggregating $3
million. This write down relates to the Company's integration activities
associated with the recent acquisitions and includes the following components
(dollars in millions):
Inventories $2.1
Receivables 0.6
Other assets 0.3
----
3.0
====
The Company began its integration of Robec and NCD during the three months
ended December 30, 1994. As part of this integration process, management has
implemented an operating strategy to improve inventory management. Part of
this strategy includes improving inventory turnover by better matching
product purchases with customer demand. Management performed a detailed
review of its current inventory and identified certain items which are
projected to turn substantially slower than the newly developed targets. As a
result, the Company has provided additional inventory reserves in the amount
of $2,100,000 in the three month period ended December 30, 1994 associated
with the estimated cost to liquidated (i.e. primarily through discounts)
excess quantities of slow moving inventory items.
In addition, the Company provided an additional $600,000 in allowances for
bad debts. This was due in part, to the repositioning of the Company's
customer base to focus on higher volume customers.
These charges have been aggregated in the following statement of income
captions for the three and six months ended December 30, 1994 (dollars in
millions):
Cost of sales $ 2.1
Selling, general and
administrative 0.9
------
$ 3.0
======
11
The writedowns were determined in part based upon an evaluation of the
salability and/or collectibility of the related assets.
Restructuring charge -
During the six months ended December 30, 1993, the Company restructured
certain of its activities in order to emphasize and streamline its
operations, consistent with its core capabilities in value-added
distribution. Such restructuring spanned organizational aspects of product
and production alignment, market channel and customer delineation, vendor
arrangements and personnel capabilities. The components of the restructuring
charge follow (dollars in thousands):
Employee terminations $ 500
Facilities abandonment 300
Discontinued product line 4,200
------
$5,000
------
The discontinued product line related to the then direct manufacture of
personal computers utilizing proprietary designs with open architecture to
the myriad of compatible personal computing hardware and software available
in the marketplace. The restructuring charge consisted of incremental direct
costs and such costs were largely incurred and paid in fiscal year 1994,
other than for approximately $400,000 which extended through 1995.
Restatement -
The accompanying unaudited condensed consolidated financial statements for
the first quarter ended September 30, 1994, have been restated to reflect
certain duplicate operating costs associated with the recent Kenfil
acquisition as operating expenses of the Company, rather than purchase
accounting adjustments. The effect of the restatement for the three months
ended September 30, 1994 is to increase selling, general and administrative
expenses by $700,000 and increase the loss from operations and the net loss
by this same amount. The net loss per share for the first quarter 1994
increased from ($0.04) to ($0.10) as a result of this restatement.
The restatement resulted from management's continued review of its purchase
accounting policies regarding the Kenfil acquisition and the determination
that certain costs required to integrate the Kenfil business did not meet the
APB number 16 criteria for purchase accounting.
12
ITEM 2. MANAGEMENT'S' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
SUMMARY
The following table sets forth certain items in the Consolidated Condensed
Statements of Income as a percent of net sales.
Percent of Net Sales Percent of Net Sales
---------------------- -----------------------
Three Months Ended Six Months Ended
December 30, December 30,
1994 1993 1994 1993
--------------------- --------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 94.8% 82.2% 93.5% 83.0%
Gross profit, including inventory
writedowns 5.2% 17.8% 6.5% 17.0%
Selling, general and
administrative, including
receivable writedowns 7.6% 17.2% 8.5% 16.4%
Restructuring charge - 24.6% - 12.5%
Interest and other expense, net 1.6% 0.4% 1.5% 0.4%
Net (loss) (4.0)% (24.4)% (3.5)% (12.3)%
AmeriQuest is following a business strategy of growth by acquisition,
consistent with the consolidation that is occurring in the maturing personal
computer marketplace. This strategy creates the following risks involving the
ability to successfully:
. Consolidate the operations of previously unaffiliated businesses, some of
which were unprofitable
. Combine the business cultures of diverse operations
. Obtain adequate capital resources to complete acquisitions and working capital
required for continuing operations
RESULTS OF OPERATIONS
For the three and six months ended December 30, 1994, net sales increased
appreciably as contrasted to the same period in the prior year due to the
acquisitions of NCD, Robec and Kenfil during November, 1994, September, 1994 and
June, 1994, respectively. Net sales contributed by these acquisitions during
the three and six months ended December, 1994 were 19,732 and 94,996,
respectively.
13
Costs of sales as a percentage of net sales increased significantly for the
three and six months ended December 30, 1994 as compared to the same periods in
the prior year due to the significant sales volumes contributed by the Company's
recent acquisitions of lower margin distribution businesses. Prior period
gross margin percentages reflected a significantly higher sales mix towards
higher margin value added storage operations.
Selling, general and administrative costs as a percentage of net sales decreased
for the three and six months ended December 30, 1994 when compared to the same
periods the prior year due to the relatively lower cost structures required by
the acquired high volume distribution companies.
Gross margin and operating results were negatively impacted during the three and
six month periods ended December 30, 1994 by significant costs and management
efforts focused on the integration of the acquired businesses. Gross margin was
also negatively impacted during the fiscal 1995 periods due to the consolidation
of sales forces and the elimination of regional sales offices. Overall, $3
million of assets were written off during the three months ended December 30,
1994. The Company began its integration of Robec and NCD during the three months
ended December 30, 1994. As part of this integration process, management has
implemented an operating strategy to improve inventory management. Part of this
strategy includes improving inventory turnover by better matching product
purchases with customer demand. Management performed a detailed review of its
current inventory and identified certain items which are projected to turn
substantially slower than the newly developed targets. As a result, the Company
has provided additional inventory reserves in the amount of $2,100,000 in the
three month period ended December 30, 1994 associated with the estimated cost to
liquidated (i.e. primarily through discounts) excess quantities of slow moving
inventory items.
In addition, the Company provided an additional $600,000 in allowances for bad
debts. This was due in part, to the repositioning of the Company's customer base
to focus on higher volume customers.
Interest expense increased substantially for the three and six months ended
December 30, 1994, when compared to the same period one year earlier, reflecting
the increased financing associated with the acquired operations.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has generated cash to meet its needs from operations by
sales of common stock, subordinated indebtedness and bank borrowings. At
December 30, 1994, the Company had $4.4 million in cash, and had borrowed
approximately $73 million against its existing lines of credit. The Company
experienced negative operating cash flow of $37.3 million during the six
months ended December 30, 1994 compared to negative operating cash flow of $7.3
million in the same period of the prior year. Operating cash flow was used
during the current year period to invest in business integration activities
associated with the current year acquisitions discussed above and investment in
working capital required to support the significant increase in business volume
associated with the acquired distribution companies. The Company's continued
product distribution emphasis and proposed expansion will require substantial
additional capital resources through fiscal 1995. At December 1994, AmeriQuest
has working capital lines of credit of over $80 million. Borrowings under these
accounts bear interest at from 1 to 3 percent over the prime rate and are
limited to specified percentages of eligible accounts receivable (a borrowing
base in excess of $50 million) and inventories (a borrowing base of over $50
million). Based on contractual advance rates, at March 10, 1995, the Company had
credit line availability of approximately $5 million.
During the three month period ended December 30, 1994, intangibles increased
approximately $13.7 million. The November 1994 acquisition of NCD contributed
$8.5 million of this increase. The remaining $5.2 million related to additional
purchase price allocation adjustments associated with the Kenfil acquisition.
During the second quarter 1994, the Company completed its detailed review of
acquired Kenfil inventory and determined that a large portion of acquired
software titles would need to be liquidated. The $5.2 million purchase price
allocation adjustment was required to state the acquired Kenfil inventory at its
net realizable value at the date of acquisition.
In November 1994 the Company entered into an agreement to sell a controlling
interest, 51%, of it's common stock to Computer 2000 AG, a publicly held German
company in the same line of business (see Note 5 of the accompanying
consolidated condensed financial statements). Of the aggregate proceeds of $50
million, $18 million was received in November 1994, with the remaining $32
million expected in September 1995 (see notes).
The management of the Company is implementing a cost reduction and efficiency
program as part of its efforts to integrate the acquired distribution businesses
and provide a cost structure which will allow for the future profitable
operations of the Company. This program will focus on centralized
administrative operations, product procurement efficiencies and a continuing
cost/benefit analysis of resource allocation. Committed capital expenditures
at December 30, 1994, are less than $2 million.
14
Management believes that its existing product lines will enable the Company to
generate sufficient cash through operations, supplemented by the periodic use of
its lines of credit, to finance a continuation of the Company's existing
business over the next twelve months. However, as the Company continues to
execute its strategy, significant cash resources will be required to effect this
effort. There is no assurance that required funds for acquisitions will be
available, or that sufficient funds can either be obtained or if available, that
such funds can be secured at commercially acceptable rates of costs.
An aggregate warranty and returns reserve of approximately $2 million is
reflected in the balance sheet of the Company at December 30, 1994. Since the
Company began its distribution operations in December 1993, the effect of the
market development funds received through December 30, 1994 was not significant.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
AmeriQuest is both a plaintiff and defendant from time-to-time in
lawsuits incidental to its business.The management of AmeriQuest
believes that none of such current proceedings individually or in the
aggregate, will have a material adverse effect on AMERIQUEST. 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 empoyees alleging that they had been instructed
following the earthquake to intentionally destroy additional inventory.
The defendant's theory is that it is not obligated to even cover that
portion of the damage cause by the earthquake because of the possible
fraud involved with such actions; while the management of Kenfil
maintains that only that portion of damages actually incurred by the
earthquake were submitted as claimed losses. There exists a question of
fact as to whether the actions of Kenfil's employees were instigated by
upper-level management and a question of law as to whether the lower-
level managers of Kenfil are able to take ultra vires actions which can
be attributed to Kenfil. The testimony to date appears fragmented and
uncorroborated, such that a close examination of the evidence deduced
to date reveals no clear evidence that would allow one to conclude that
the defendant was in any way defrauded. Additionally, it appears that
the defendant insurance company failed to terminate the contract upon
discovery of the alleged "fraud," and merely chose to not renew the
contract upon its expiration. Although there are pictures available to
prove the actual damage immediately following the earthquake, no
assurance can be given that the defendant will not ultimately prevail.
The ability of Kenfil Inc. to satisfy any possible future judgement is
dependent on the results of its future operations. However, such a
judgement would not directly impact the other subsidiaries of
AmeriQuest nor AmeriQuest itself.
On November 17, 1994, three days after the announcement of the proposed
investment by Computer 2000 pursuant to the Investment Agreement, an
action was filed against the Board of Directors of AmeriQuest, Computer
2000 and AmeriQuest styled Erica Hartman vs. Marc L. Werner, Harold
----------------------------------------
L. Clark, Stephen G. Holmes, Eric J. Werner, Terren S. Peizer, William
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N. Silvis, William T. Walker, Jr. and Computer 20000 AG, Defendants and
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AmeriQuest Technologies, Inc., Nominal Defendant, Court of Chancery of
------------------------------------------------
the State of Delaware, New Castle County, C.A. No. 13883. The Complaint
seeks to have the Court either (i) enjoin the consummation of the
Investment Agreement or (ii) enter a monetary judgment for damages in
an unspecified amount against the Directors of AmeriQuest for an
alleged failure of the Board of Directors to discharge their fiduciary
duties in causing AmeriQuest to enter into the Investment Agreement.
The director Defendants filed a motion to dismiss the Complaint on
January 15, 1995. Pending resolution of that motion, discovery has been
stayed. The Plaintiff has not responded to the motion or taken any
other action concerning the same. The general allegations of the
Complaint relate solely to a comparison of the proposed sale price with
market value and book value and the sale of control without extracting
a premium and an allegation that the consideration to be paid by
Computer 2000 is inadequate. It is the opinion of the Board of
Directors that the Plaintiff fails to understand AmeriQuest's
growth-by-acquisition strategy or the synergies examined by the Board
of Directors and the value to AmeriQuest of a world-wide alliance with
Computer 2000. In the opinion of the Board of Directors, the proposed
transaction with Computer 2000 is fair to and in the best interests of
AmeriQuest and its shareholders for the reasons set forth above. The
Board of Directors and AmeriQuest intend to vigorously defend against
such litigation, and do not expect the litigation to have a material
adverse impact on AmeriQuest's financial condition or results of
operations, since AmeriQuest is only a nominal defendant.
Item 2. Changes in Securities.
----------------------
None.
Item 3. Defaults upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
Item 5. Other Information.
------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated November 14, 1994 to report (i)
the acquisition of Ross White Enterprises, Inc. d/b/a "National
Computer Distributors" ("NCD") and (ii) the execution of an
Investment Agreement with Computer 2000 AG.
16
SIGNATURES
Pursuant to the requirements of the Securities and 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.
-----------------------------
(Registrant)
Date: April 4, 1995 By: /s/ Harold L. Clark
----------------- ----------------------------------------
Harold L. Clark
Chief Executive Officer
Date: April 4, 1995 By: /s/ Stephen G. Holmes
----------------- -----------------------------------------
Stephen G. Holmes
Chief Financial Officer
17