SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD 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.)
3 Imperial Promenade, Santa Ana, CA 92707
- --------------------------------------- ------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (714) 437-0099
2722 Michelson Drive, Irvine, CA. 92715
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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 report(s), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
---- ----
At March 31, 1995 there were 20,984,736 shares of
the Registrant's Common Stock outstanding.
AMERIQUEST TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................. 1
Statement Regarding Financial Information................ 3
Consolidated Condensed Balance Sheets
March 31, 1995 and June 30, 1994...................... 4
Consolidated Condensed Statements of Income
Three and Nine Months Ended March 31, 1995
and 1994.............................................. 5
Consolidated Condensed Statements of
Cash Flows - Nine Months Ended
March 31, 1995 and 1994............................... 6
Consolidated Statements of Shareholders' Equity
March 31, 1995........................................ 7
Notes to Consolidated Condensed Financial
Statements - March 31, 1995........................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......13-15
PART II. OTHER INFORMATION................................... 16
SIGNATURES.................................................... 17
2
PART I. FINANCIAL INFORMATION
1
AMERIQUEST TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
ITEM I. 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/A (Amendment No. 7) for the
fiscal year ended June 30, 1994 as filed with the Securities and Exchange
Commission.
2
AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands) March 31, June 30,
1995 1994
- --------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 425 $ 3,200
Accounts receivable, less
allowances for doubtful
accounts of $7,423 and $452) 58,765 24,708
Inventories 69,185 24,165
Other current assets 3,337 1,627
-------- --------
Total current assets 131,712 53,700
PROPERTY AND EQUIPMENT, NET 6,002 4,078
INTANGIBLE ASSETS, NET 30,598 6,490
OTHER ASSETS 1,727 877
-------- --------
$170,039 $ 65,145
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 45,819 $ 23,408
Notes payable 68,951 23,059
Other current liabilities 7,450 2,361
Subordinated notes payable 18,000
-------- --------
Total current liabilities 140,220 48,828
-------- --------
LONG-TERM OBLIGATIONS 572 267
-------- --------
SUBORDINATED NOTES PAYABLE - 3,175
-------- --------
MINORITY INTEREST 2,800 -
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
authorized 30,000,000 shares; issued
and outstanding, 20,984,736 and 9,857,779, 203 99
respectively 51,381 27,345
Additional paid-in capital (24,012) (14,569)
Retained deficit (1,125) -
Receivables from affiliates -------- --------
26,447 12,875
Total stockholders' equity -------- --------
$170,039 65,145
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands) Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
1995 1994 1995 1994
------------ ----------- ------------ -----------
NET SALES $ 132,659 $ 23,130 $ 305,664 $ 62,976
COST OF SALES 123,573 20,284 285,329 53,344
----------- ---------- ----------- ----------
Gross Profit 9,086 2,846 20,335 9,632
OPERATING EXPENSES
Selling, general and administrative 10,514 2,454 25,335 8,981
Restructuring charge - - - 5,000
----------- ---------- ----------- ----------
10,514 2,454 25,335 13,981
----------- ---------- ----------- ----------
Income (Loss) from operations (1,428) 392 (5,000) (4,349)
OTHER (INCOME) EXPENSE
Other (income) expense 0 (56) 282 (45)
Interest expense 1,846 245 4161 382
----------- ---------- ----------- ----------
1,846 189 4,443 337
----------- ---------- ----------- ----------
Net Income (loss) $ (3,274) $ 203 $ (9,443) $ (4,686)
=========== ========== =========== ==========
Net Income (loss) per common share
and common stock
equivalent (Note 2) $(0.16) $0.03 $(0.52) $(0.90)
=========== ========== =========== ==========
Weighted average shares 20,972,847 7,975,734 18,192,672 5,226,471
=========== ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMERIQUEST TECHNOLOGIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended March 31,
(Dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------
Cash Flow from Operating Activities $ (9,443) $ (4,686)
Net (loss)
Adjustments to reconcile net (loss) to
Net cash provided by operating activities:
Depreciation and amortization 2,487 986
Provision for losses on accounts receivable 2,208 201
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,860) (1,764)
(Increase) decrease in inventories and other (3,435) (3,307)
(Increase) decrease in other assets (718) 1,193
Increase (decrease) in accounts payable and other (24,306) (2,845)
- ---------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (35,067) (10,222)
- ---------------------------------------------------------------------------------
Cash Flow from Investing Activities
Purchases of property and equipment (1,988) (1,339)
Net cash paid for acquisition of businesses, net of
acquired cash of $1,656 (1,973) (50)
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Net Cash (used in) investing activities (3,961) (1,389)
- ---------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from line of credit borrowings, net 13,301 27,135
Proceeds from subordinated debt, less refundings 18,000 (21,745)
Proceeds from sale of common stock 4,952 5,588
- ---------------------------------------------------------------------------------
Net cash provided by financing activities 36,253 10,978
- ---------------------------------------------------------------------------------
Increase (decrease) in cash (2,775) (633)
Cash-beginning of the year 3,200 1,020
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Cash-end of the year $ 425 $ 387
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Supplemental Disclosures of Cash Flow Information
Interest on line of credit: During the nine months ended March 31, 1995 and
1994, the Company paid interest costs of $1,696,000
and $382,000, respectively.
Income taxes: During the nine months ended March 31, 1995 and
1994, the Company made no tax payments.
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMERIQUEST TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
MARCH 31, 1995
(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
- -------------------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------------------
Balances at June 30, 1994 9,857,779 $ 99 $27,345 $(14,569)
Common stock issued to related parties (Note 5) 2,588,400 26 6,006 -
Exercise of employee stock options 30,334 - 45 -
Common stock issued for acquisitions (Note 4) 8,508,223 78 17,985 -
Net (loss) for the nine months ended
March 31, 1995 - - - (9,443)
- -------------------------------------------------------------------------------------------------
Balances at March 31, 1995 20,984,736 $203 $51,381 $(24,012)
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
6
AMERIQUEST TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1995
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. No effect is given to
stock options as they are anti-dilutive.
3) FISCAL PERIODS
The Company's fiscal year is the 52- or 53- week period ending on the
Saturday nearest to June 30 and its fiscal quarters are the 13- or 14- week
periods ending on the Saturday nearest to March 31, June 30, September 30,
and December 31. For clarity of presentation, the Company has described
year-ends presented as if the years ended on June 30 and quarter-ends
presented as if the quarters ended on March 31, June 30, September 30, and
December 31. The 1994 and 1995 fiscal years are 52 weeks, while the quarters
presented are 13 weeks in duration.
4) 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 additional
adequate financing to complete acquisitions and fund working capital
requirements.
Since the beginning of fiscal 1994, the Company entered into the following
acquisition transactions:
7
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.
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 DURING THE NINE MONTH PERIOD ENDED MARCH 31, 1995
Kenfil Inc. ("Kenfil")
As of September 1994, the Company acquired the remaining outstanding 49% of
the common stock of Kenfil and converted cerain 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 the
computer products and services, specializing in systems and connectivity
applications, and is based in Fort Lauderdale, Florida.
IN PROCESS AT MAY 1995
Robec, Inc. ("Robec")
Under the terms of the Robec acquisition agreements the Company expects to
acquire the remaining 49% of the outstanding common stock of Robec during
1995.
8
The following summarizes the cost of the Company's acquisitions (dollars in
thousands):
Common Share Common Stock Cash Consideration and
Company Issued Consideration Transaction Cost
- --------------------------------------------------------------------------------------
Completed by June 30, 1994
MSG 400,000 $ 700 $ 50
Rhino 200,000 350
Kenfil, 51% 1,130,330 1,978
---------- ------- ------
1,730,330 $ 3,028 $ 50
========== ======= ======
Completed by March 31, 1995
Kenfil, 49% 1,046,254 $ 2,511 $ 785
Robec, 51% 1,402,805 2,749 265
Kenfil, vendors 2,400,037 5,761
Kenfil, debt conversion 1,894,360 4,546
NCD 1,864,767 4,987 3,400
MSG contingency (100,000) (175)
---------- ------- ------
8,508,223 $20,379 $4,450
========== ======= ======
In process at May 1995
Robec, 49% 1,397,195
==========
In connection with the issuance of the Company's common stock associated with
the NCD acquisition, the Company entered into a stock repurchase agreeement with
holders of 661,586 shares of the Company's common stock. The holders of the
Company's common stock covered by this agreement may require the Company to
repurchase the stock at $3.50 per share which is recorded as a current liability
in the accompanying balance sheet. Management believes that the ultimate
settlement of this agreement will be through an arranged third party purchase of
the shares or through the issuance of additional shares of the Company's common
stock.
The acquisitions were accounted for using the purchase method and, accordingly,
the financial statements include the results of the acquirees' operations from
the effective acquisition dates. As to common stock consideration, all such
acquisitions are reflected utilizing a per share valuation representing a
discounted quoted market price, based upon weighted average discounts received
on recently completed private equity cash transactions. This valuation
represents management's best estimate of the fair value of the Company's common
stock and includes significant discounts from quoted market prices due to the
thin public trading volume and small public float of AmeriQuest common stock.
9
The contingent consideration granted to certain of the former owners of certain
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 acquirees'
vendor relationships and the overall size and quality of the acquirees' 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; however management does not expect the future purchase price
allocation adjustments will have a material effect on the Company's future
results of operations or financial position.
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 March 31, Nine Months Ended March 31,
1995 1994 1995 1994
-------------- ------------- ------------- -------------
Net sales $ 132,659 $ 152,431 $ 409,227 $ 487,187
Gross Profit 9,086 7,907 26,555 39,925
Net (loss) (3,274) (15,005) (12,891) (28,524)
Net (loss) per common
share and common stock
equivalent $ (0.16) $ (0.85) $ (0.60) $ (1.90)
Weighted average shares 20,972,847 17,714,287 21,364,963 14,965,024
----------- ----------- ----------- -----------
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.
10
During the three months ended March 31, 1995, intangibles increased
approximately $2.2 million, net of amoritization, due to the recording of
additional acquisition transaction costs and integration costs associated with
the NCD acquisition. These costs primarily relate to legal, accounting and other
transaction costs directly related to the acquisitions, closure costs associated
with NCD's headquarters and two warehouse facilities, and adjustments to the
fair value of acquired information systems disposed of during the third quarter
following the migration to a common information system platform.
5. COMMON STOCK
Common stock issued to related parties and others in private placement equity
transactions during the nine months ended March 31, 1995 follows:
Date Purchaser Shares Consideration
- ------------------------------------------------------------------------
(In Thousands)
September 1994 Computer 2000 AG, 532,000 $1,236
a publicly traded
German company /(1)/
October 1994 Private placement /(2)/ 516,400 1,188
October and
November 1994 Private placement/ (3)/ 1,540,000 3,608
========= ======
2,588,400 $6,032
========= ======
(1) This represents Computer 2000 AG's initial investment in the Company.
Subsequently, Computer 2000 entered into an Investment Agreement with the
Company on November 14, 1994 pursuant to which it advanced $18 million to
the Company in the first step of a transaction pursuant to which Computer
2000 may acquire 51% of the Company.
(2) Includes purchases by an affiliate of the Chairman of the Board, two
officers and directors, one employee and an outside consultant.
Consideration 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.
(3) Includes purchases by two directors totaling 290,000 shares as
participants in a placement to independent investors, two of which had
earlier invested in the Company. An additional 250,000 shares were issued
to an affiliate of Computer 2000. The remaining one million shares were
issued to unrelated investors. Each share included a warrant to purchase a
share of the Company's stock at $3.50 per share; subject to downward
adjustment and exercisable through November 1998.
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 an advance of $18
million that 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
11
by stockholders of the Company. If the Computer 2000 advance is not satisfied
through the issuance of common stock, then the advance becomes due and payable
on July 20, 1995 and in addition, a break-up fee of approximately $1.8 million
plus accrued interest of approximately $800,000 would become payable to
Computer 2000. The $18 million advance is classified as a current liability in
the accompanying balance sheet based upon the terms of its maturity. Computer
2000 would also have the option at that time to convert a portion of such
indebtedness to common stock of the Company at $2.00 per share up to a number
of shares, which when added to its current holdings, would equal 19.9% of the
then outstanding shares of the Company. Management believes, however, that the
Company will secure the required number of shareholder votes to approve the
issuance of common stock to Computer 2000. The advance is collateralized by
the stock of Robec and NCD. 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.
In its original form, this investment agreement would have obligated Computer
2000 to invest an additional $32 million in the Company if Ameriquest met
certain profitability criteria and other conditions. Since Ameriquest did not
achieve the profit levels required under the investment agreement or meet
certain other conditions, Computer 2000 is no longer obligated to make the
investment. However, Computer 2000 continues to have the option (subject to
shareholder vote referred to above) to purchase from Ameriquest up to $32
million of common stock at approximately $2.22 per share. The option will be
exercisable, in whole or in part, commencing on September 1, 1995 and until
the later of September 30, 1995 or 45 days following its receipt from
Ameriquest of the financial information for the fiscal year ending June 30,
1995.
6. RESTRUCTURING CHARGE
During the nine months ended March 31, 1994, 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
12
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.
7. CONTINGENCIES
Richard M. Terrell, et. al. vs. AmeriQuest Technologies, Inc., was
-------------------------------------------------------------
filed December 20, 1994 in the Circuit Court of the State of Oregon for the
County of Washington, Case No. C941228CV. The Company has recently learned by
happenstance that default judgements in the amount of $15.9 million were
entered against it and its former Chief Executive Officer in the Circuit Court
of Washington County, Oregon on February 17, 1995 in favor of certain
shareholders of defunct Microware Corporation ("Microware"). The lawsuit
relates to the Company's decision not to proceed with the acquisition of
Microware in early 1993. The Company has retained Oregon counsel to proceed
vigorously with efforts to petition the Court to vacate the judgment based
upon the fact that the Company's registered agent was not served and the
judgment was taken without the Company's consent or appearance. In the
opinion of management the suit is without merit. The Plaintiffs' claims are
premised on a Share Exchange Agreement dated January 14, 1993 by and between
the Company and the Plaintiffs, which was terminated on January 21, 1993 in
light of an ever continuing and accelerating deterioration in the operations
of Microware, which the Company believed to constitute a "material adverse
change" under the Share Exchange Agreement.
Based on discussions with counsel, management believes that substantial
grounds exist for vacating the judgment and that the judgment should be
vacated such that it will not have an adverse effect on the Company's future
financial position or its results of operations.
The Company is a party to various other legal matters. Based on discussions
with counsel, management believes that the outcome of these matters will not
have an adverse effect on the Company's future financial position or its
results of operations.
13
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 March 31, Six Months Ended March 31,
1995 1994 1995 1994
--------------- -------------- -------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.2% 87.7% 93.3% 84.7%
Gross profit, including inventory 6.8% 12.3% 6.7% 15.3%
writedowns
Selling, general and administrative, 7.9% 10.6% 8.3% 14.3%
including receivable writedowns
Restructuring charge - - - 7.9%
Interest and other expense, net 1.4% 0.8% 1.5% 0.5%
Net income (loss) (2.5%) 0.9% (3.1%) (7.4%)
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, all but one
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 nine months ended March 31, 1995, 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 nine months ended March 31, 1995 were $103 million and $198
million, respectively. Due to the significant impact of the acquisitions on the
Company's fiscal 1995 results of operations and financial position, the fiscal
1995 results are not comparable to those recognized during the same periods of
the prior year.
14
Costs of sales as a percentage of net sales increased significantly for the
three and nine months ended March 31, 1995 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 nine month periods in fiscal 1995 when compared to the same
periods in 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
nine month periods in fiscal 1995 by significant costs and management efforts
focused on the integration of the acquired businesses. Gross margin has also
been negatively impacted by high levels of sales returns and very competitive
pricing in its software and certain regional hardware distribution businesses
along with inventory provisions of $2.1 million recorded during the second
quarter of fiscal 1995. As part of the Company's acquisition 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
$2.1 million in the second quarter of fiscal 1995 associated with the estimated
cost to liquidate (i.e., primarily through discounts) excess quantities of slow-
moving inventory items.
In addition, the Company provided during fiscal 1995 an additional $600,000 in
allowances for bad debts. This was due to the identification of uncollectable
accounts associated with lower volume and higher credit risk customers. The
Company is in the process of repositioning its customer base to focus on higher
volume customers.
The Company also recorded during Fiscal 1995 a $300,000 provision associated
with the closure of certain sales offices.
Interest expense for the three months and nine months ended March 31, 1995, when
compared to the same periods a year earlier, increased as the Company relied
more heavily on debt financing of its inventories and receivables.
For the three and nine months ended March 31, 1995, and 1994, no tax benefit was
provided on pre-tax losses.
The Company anticipates that gross margins will continue to decline in the
future due to industry price competition. Management is continuing its process
of reducing the operations cost structure of acquired companies as part of its
business integration activities. To the extent gross margins continue to
decline and the Company is not successful in sufficiently reducing selling,
general and administrative expenses as a percentage of sales, the Company will
continue to experience operating losses.
15
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: (1) the overall growth 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
earning may be subject to material volatility, particularly on a quarterly
basis.
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 March
31, 1995, the Company had $425,000 in cash and had borrowed approximately $69
million against its existing lines of credit. During the nine months ended
March 31, 1995 the Company used $35 million of cash in operating activities,
compared to the use of $10.2 million in operating activities in the same period
of the prior year. The significant amount of cash used in operating activities
resulted from operating losses, investments of approximately $3 million in
business integration activities associated with the current year acquisitions,
conversion of approximately $13.3 million of trade payables into borrowings
under the Company's line of credit facility and investment in working capital
required to support the significant increase in business volume associated with
the acquired distribution companies.
In connection with the Company's acquisition of NCD in November, 1994, it began
a program to reduce operating costs through the closure of unprofitable field
sales offices and the consolidation of distribution warehouses and the
elimination of duplicate labor and non payroll operating costs. In addition,
administrative costs have been reduced through the flattening of the Company's
management structure. By the end of the third quarter, these efforts reduced the
Company's ongoing monthly operating costs by approximately $500,000. Management
is continuing these cost reduction activities and expects to further improve its
operating cash flow, at current revenue levels. Further cost reductions should
also result through the elimination of duplicate administration and other
operating costs once the Robec merger is complete.
The Company's continued product distribution expansion and business integration
activities will require additional capital resources. To satisfy its capital
needs, the Company has established a plan to improve its liquidity through
improved asset management practices. This includes the liquidation of slow
moving inventory which is not currently covered by the Company's working
capital line of credit agreement and a program designed to reduce trade
receivable days outstanding which are factored through the Company's primary
lender. Although no assurances can be made as to the ultimate outcome,
management has targeted these programs to yield additional cash resources of $5
to $7 million over the next three to six months. In addition, on May 17, 1995
the Company's board of directors authorized the Company to offer to certain
holders of warrants (such warrants give the holders the right to purchase
1,540,000 shares of common stock of the Company) a reduction in the exercise
price from the existing $2.22 per share (as adjusted) to $1.75 per share,
provided the warrant holder immediately exercises the warrants and purchases a
corresponding number of additional shares at $1.75 per share. For those holders
who exercise the original warrant, AmeriQuest will issue an additional three-
year warrant exercisable at $3.00 per share for each warrant exercised. However,
there can be no assurances that this offer will be accepted by the warrant
holders.
At March 31, 1995, AmeriQuest had 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). Borrowings in excess of the collateral
base bear interest at 6.5 percent above the prime rate. At March 31, 1995 the
Company's borrowings from its primary lender exceeded its collateralized base by
approximately $7.5 million. The Company is currently negotiating an expansion of
its collateral with its lenders. The Company is currently in default under the
terms of the agreement with its primary lender by reason of both (i) its
borrowings exceeding its collateral base and (ii) the entry of a judgement
against the Company in Oregon on February 17, 1995 totaling $15.9 million
discussed below. However, the primary lender has continued to provide financing
under the working capital line of credit. By the end of the fourth quarter,
management expects to reduce its borrowings under this line to a level where the
loan is fully collateralized. This will be accomplished in part through the
improvement in operating cash flow and the cash resources provided by improved
asset management practices discussed above. Additional cash resources are
anticipated to be provided through either the expansion of the existing
collateral base or additional financing secured by available receivables and
inventory (in addition to the slow moving inventory targeted for liquidation
discussed above) which are not currently pledged as collateral. In addition,
proceeds, if any, received from the warrant offering will be used to further
reduce the borrowings under the working capital line of credit.
Management believes that its cost reduction and asset management programs
discussed above should provide necessary levels of liquidity to meet its
operating requirements over the next twelve months. However, to meet the
Company's growth objectives, it will be necessary to obtain additional capital
through the financing alternatives discussed above.
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 an advance of $18
million which is expected to 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
16
Company. If the Computer 2000 advance is not satisfied through the issuance of
common stock, then the advance becomes due and payable on July 20, 1995 and as a
result, the advance is reflected as a current liability in the accompanying
balance sheet. In addition, a break-up fee of approximately $1.8 million plus
accrued interest of approximately $800,000 would become payable to Computer
2000. Computer 2000 would also have the option at that time to convert a portion
of such indebtedness to common stock of the Company at $2.00 per share up to a
number of shares, which when added to its current holdings, would equal 19.9% of
the then outstanding shares of the Company. The advance is collateralized by the
stock of Robec and NCD. While the Company does not presently have the cash
resources available to satisfy this obligation in the event that shareholder
approval is not obtained, management believes that the Company will secure the
required number of shareholder votes to approve the transaction. This conclusion
was reached based on the composition of the Company's shareholders and the fact
that a severe economic penalty will be incurred if the Company's shareholders do
not approve the transaction.
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.
In its original form, this investment agreement would have obligated Computer
2000 to invest an additional $32 million in the Company if the Company met
certain profitability criteria and other conditions. Since the Company did not
achieve the profit levels required under the investment agreement or meet
certain other conditions, Computer 2000 is no longer obligated to make the
investment. However, Computer 2000 continues to have the option (subject to
shareholder vote referred to above) to purchase from the Company up to $32
million of common stock at approximately $2.22 per share. The option will be
exercisable, in whole or in part, commencing on September 1, 1995 and until the
later of September 30, 1995 or 45 days following its receipt from the Company of
the financial information for the fiscal year ending June 30, 1995.
The Company has recently learned by happenstance that default judgements in the
amount of $15.9 million were entered against it and its former Chief Executive
Officer in the Circuit Court of Washington County, Oregon on February 17, 1995
in favor of certain shareholders of defunct Microware Inc. ("Microware"). The
lawsuit relates to the Company's decision not to proceed with the acquisition of
Microware in early 1993. The Company has retained Oregon counsel to proceed
vigorously with efforts to petition the Court to vacate the judgment based upon
the fact that the Company's registered agent was not served and the judgment was
taken without the Company's consent or appearance. In the opinion of management
the suit is without merit. The Plaintiffs' claims are premised on a Share
Exchange Agreement dated January 14, 1993 by and between the Company and the
Plaintiffs, which was terminated on January 21, 1993 in light of an ever
continuing and accelerating deterioration in the operations of Microware, which
the Company believed to constitute a "material adverse change" under the Share
Exchange Agreement.
Based on discussions with counsel, management believes that substantial
grounds exist for vacating the judgment and that the judgment should be
vacated such that it will not have an adverse effect on the Company's future
financial position or its results of operations.
The Company is a party to various other legal matters. Based on discussions
with counsel, management believes that the outcome of these matters will not
have an adverse effect on the Company's future financial position or its
results of operations.
An aggregate warranty and returns reserve of approximately $2 million is
reflected in the balance sheet of the Company at March 31, 1995. Since the
Company began its distribution operations in December 1993, the effect of the
market development funds received through March 31, 1995 was not significant.
ASSET MANAGEMENT
AmeriQuest attempts to manage its inventory position to maintain levels
sufficient to achieve high product availability and same-day order fill rates.
Inventory levels may vary from period to period, due in part to increases or
decreases in sales levels, AmeriQuest's practice of making large-volume
purchases when it deems the terms of such purchases to be attractive and the
addition of new manufacturers and products. The Company has negotiated
agreements with many of its manufacturers which contain stock balancing and
price protection provisions intended to reduce, in part, AmeriQuest's risk of
loss due to slow moving or obsolete inventory or manufacturer price reductions.
The Company is not assured that these agreements will succeed in reducing this
risk. In the event of a manufacturer price reduction, the Company generally
receives a credit for products in inventory. In addition, the Company has the
right to return a certain percentage of purchases, subject to certain
limitations. Historically, price protection and stock return privileges as well
as the Company's inventory management procedures have helped to reduce the risk
of loss of carrying inventory.
17
The Company offers credit terms to qualifying customers and also sells on a
prepay, credit card and cash-on-delivery basis. With respect to credit sales,
the Company attempts to control its bad debt exposure through monitoring of
customer's creditworthiness and, where practicable, through participation in
credit associations that provide credit rating information about its customers.
In certain markets, the Company may elect to purchase credit insurance for
certain accounts.
18
PART II. OTHER INFORMATION
19
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 employees 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 caused 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 N.
----------------------------------------------------------------------
Silvis, William T. Walker, Jr. and Computer 2000 AG, Defendants and
-------------------------------------------------------------------
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
20
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.
--------------
Richard M. Terrell, et. al. vs. AmeriQuest Technologies, Inc., was filed
-------------------------------------------------------------
December 20, 1994 in the Circuit Court of the State of Oregon for the
County of Washington, Case No. C941228CV. The Company has recently
learned by happenstance that default judgements in the amount of $15.9
million were entered against it and its former Chief Executive Officer in
the Circuit Court of Washington County, Oregon on February 17, 1995 in
favor of certain shareholders of defunct Microware Corporation
("Microware"). The lawsuit relates to the Company's decision not to
proceed with the acquisition of Microware in early 1993. The Company has
retained Oregon counsel to proceed vigorously with efforts to petition the
Court to vacate the judgment based upon the fact that the Company's
registered agent was not served and the judgment was taken without the
Company's consent or appearance. On May 25, 1995 the Court stayed
enforcement of the judgements pending a hearing on whether the judgements
should be vacated. In the opinion of management the suit is without merit.
The Plaintiffs' claims are premised on a Share Exchange Agreement dated
January 14, 1993 by and between the Company and the Plaintiffs, which was
terminated on January 21, 1993 in light of an ever continuing and
accelerating deterioration in the operations of Microware, which the
Company believed to constitute a "material adverse change" under the Share
Exchange Agreement.
Based on discussions with counsel, management believes that substantial
grounds exist for vacating the judgment and that the judgment should be
vacated such that it will have no adverse effect on the Company's
financial condition or its results of operations.
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.
21
Item 6. Exhibits an Reports on Form 8-K.
-------------------------------
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
22
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.
-----------------------------
(Registrant)
Date: May 25, 1995 By: /s/ Harold L. Clark
-----------------------------
Harold L. Clark
Executive Officer
Date: May 25, 1995 By: /s/ Stephen G. Holmes
-----------------------------
Stephen G. Holmes
Chief Financial Officer
23