-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CfCoUCXA5SEHvYgvMy3tOlTjUeJaMQwQW1jqcIbcB7OAHfrhn4NAbLh87EElF/h7 JHPl5zN0aK5stSfPRpa8Mg== 0000893220-98-000040.txt : 19980114 0000893220-98-000040.hdr.sgml : 19980114 ACCESSION NUMBER: 0000893220-98-000040 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERIQUEST TECHNOLOGIES INC CENTRAL INDEX KEY: 0000764864 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 330244136 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10397 FILM NUMBER: 98506110 BUSINESS ADDRESS: STREET 1: 425 PRIVET RD CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 7144370099 MAIL ADDRESS: STREET 1: 3 IMPERIAL PROMENADE CITY: SANTA ANA STATE: CA ZIP: 92707 FORMER COMPANY: FORMER CONFORMED NAME: CMS ENHANCEMENTS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRO FUNDS CORP DATE OF NAME CHANGE: 19870210 10-K405 1 FORM 10-K AMERIQUEST TECHNOLOGIES, INC. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-10397 AMERIQUEST TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0244136 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER) OR ORGANIZATION) 425 PRIVET ROAD HORSHAM, PENNSYLVANIA 19044 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(215) 675-9300 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $.01 PAR VALUE TITLE OF EACH CLASS NEW YORK STOCK EXCHANGE NAME OF EACH EXCHANGE ON WHICH REGISTERED SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 10, 1997 is approximately $7,625,507. For purposes of making this calculation only, the Registrant has defined "affiliates" as including all officers, directors and beneficial owners of more than 10% of the outstanding Common Stock of the Registrant. The number of shares of the Registrant's Common Stock outstanding as of December 19, 1997: Common Stock, $.01 par value, 66,881,906 shares. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Exhibit Index is on page 24 ================================================================================ 2 PART I FOREWORD THE INFORMATION SET FORTH HEREIN IS BASED PRIMARILY ON HISTORICAL INFORMATION. TO THE EXTENT THAT THIS ANNUAL REPORT ON FORM 10-K INCLUDES FORWARD-LOOKING STATEMENTS, SUCH STATEMENTS INVOLVE UNCERTAINTY AND RISK, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS. A LIST OF THOSE FACTORS WHICH MANAGEMENT BELIEVES COULD ADVERSELY AFFECT THE ACTUAL RESULTS IS SET FORTH IN A SECTION IMMEDIATELY FOLLOWING THE DESCRIPTION OF AMERIQUEST'S BUSINESS IN THIS PART I UNDER THE CAPTION "SPECIAL FACTORS TO BE CONSIDERED." ITEM 1. BUSINESS. THE COMPANY AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest" or the "Company"), maintains its principal executive offices at 425 Privet Road, Horsham, Pennsylvania 19044, and its telephone number is (215) 675-9300. AmeriQuest historically conducted its business through its subsidiaries. However, on July 31, 1996, all of its first-tier subsidiaries were merged into AmeriQuest, except for AmeriQuest/Kenfil Inc. ("Kenfil"), and AAG, Inc. (formerly "CMS Enhancements, Inc."). AAG, Inc sold its business on June 19, 1997 and Kenfil sold its last operating businesses in Asia on November 20, 1997. Accordingly, the description of AmeriQuest's business set forth below does not address the historical business of its former subsidiaries individually, and Kenfil, and AAG, Inc. are the only remaining subsidiaries, neither of which is operational. During fiscal year 1996 and early 1997 AmeriQuest's sales operations were divided into five domestic regions, each covering a geographical section of the country, and three international regions. By October, 1996, AmeriQuest had reorganized its domestic standard distribution operations in Hollywood, Florida into specialized business units based on the type of product assigned to each unit and one general sales unit. In addition, the Advanced Systems Group was to be operated from Horsham, Pennsylvania; and CMS Enhancements, Inc. operated from Costa Mesa, California. AmeriQuest had exported from Miami, Florida to South American markets; and foreign operations operated from Hong Kong and Malaysia with respect to Asian markets. In April of 1997, AmeriQuest decided to focus its resources on building the Advanced Systems Group ("ASG") in Pennsylvania and close or sell all of the remaining divisions. This reorganization was completed in November, 1997. AmeriQuest is primarily a national valued-added wholesale distributor of micro, mini and mid-range computers and related products to value-added resellers ("VARs") and systems integrators. Mid-range computers range in price from $15,000 to $500,000. AmeriQuest markets, sells and supports a variety of products ranging from individual components to complete systems that have been fully configured, assembled and tested prior to delivery to the customer. AmeriQuest's strategy is to emphasize the sale of complete systems and to provide a high level of value-added services, including consultation on component selection and system assembly and configuration, testing and technical support services. AmeriQuest also provides a variety of programs and seminars designed to enhance its customers' technical capabilities. AmeriQuest currently markets more than 13,000 products to value-added resellers and systems integrators throughout the United States. AmeriQuest focuses its marketing efforts on the products of a limited number of key vendors in order to become one of the leading distributors for each of its principal vendors. This enables AmeriQuest to develop product-specific technical expertise that enhances its value-added support services. AmeriQuest attempts to minimize competition among vendors' products while maintaining some overlap to provide protection against product shortages or discontinuations. Control of AmeriQuest. Computer 2000, Inc., a wholly-owned subsidiary of Computer 2000 AG (collectively referred to herein as "C-2000") owns 36,349,878 shares of AmeriQuest's Common Stock representing approximately 54% of the issued and outstanding shares of AmeriQuest Common Stock. Additionally, on May 6, 1997 AmeriQuest issued 300,000 shares of its Series H Cumulative Convertible Preferred Stock (convertible into 41,958,042 shares, or approximately 63% of the total outstanding shares of 1 3 AmeriQuest Common Stock prior to conversion) to Computer 2000 Inc. in consideration of the payment by Computer 2000 Inc. of $30,000,000 cash. In addition, C-2000 holds achievement warrants and a maintenance option to purchase from AmeriQuest 9,392,515 shares of AmeriQuest Common Stock or approximately 15% of the total issued and outstanding shares of AmeriQuest Common Stock. However, on a fully-diluted basis, all such shares, Common and Preferred, and the exercise of currently exercisable warrants would increase C-2000's ownership from approximately 54% to approximately 74%. As a result of its ownership of more than 50% of AmeriQuest's voting shares, C-2000 assumed control of the Board of Directors of AmeriQuest in August 1995. STRATEGY The Company's current business focus is to continue second tier distribution in areas which minimize direct competition with the largest competitors, and to concentrate on selling higher-margin mid-range computer systems, complementary and related individual computer components, and maintenance and leasing services. AmeriQuest provides value-added services and technical support to its customer base, which improves its margins as compared to the margins of those distributors who provide for sale of equipment only. Although management believes that its niche strategy, when coupled with cost reductions, as appropriate, will return AmeriQuest to profitability, there are numerous risks and uncertainties and no assurance can be given that the new strategy will succeed or that the Company will become profitable. Management will periodically review the need to further reduce costs should sales for any reason not materialize in amounts sufficient to cover the existing cost structure. PRODUCTS AmeriQuest seeks to sell products from nationally-recognized vendors that provide all the components most VARs require to fully configure their computer systems. All new products are extensively tested prior to inclusion in AmeriQuest's distribution network. The following is a description of the major categories of products currently sold by AmeriQuest and the principal current vendors of those products: Personal Computers -- AmeriQuest distributes laptop, desktop and mini-tower personal computers manufactured by Acer, Hewlett Packard, IBM, Trigem and Unisys. Advanced Computer Systems -- AmeriQuest distributes mid-range computer servers manufactured by Acer, IBM (RISC 6000 models) and Unisys, together with software from IBM, including AIX and Lotus Notes, and connectivity products from IBM, including routers, bridges and switches. Communications and Networks -- AmeriQuest distributes local area network ("LAN") software and specialized hardware products manufactured by Novell, IBM, D-Link and Unisys. In addition, the Company distributes modems and other communication products manufactured by Digi International and Multi-Tech Systems. Peripherals and Supplies -- AmeriQuest distributes a broad line of laser, ink-jet and dot matrix printers, monitors, terminals, stand-by power supplies, accessories and supplies manufactured by numerous companies including Okidata, Lexmark, Citizen, Genicom, Relisys, Unisys, Wyse, Acer, IBM, American Power, Imation(3M), Hansol and Hewlett Packard. Software -- AmeriQuest sells a variety of operating systems and LAN software products generally as part of its advanced systems sales. AmeriQuest has also commenced the sale of certain applications software for Unix and midrange systems. Among the manufacturers of these software products are IBM and SCO. Services -- AmeriQuest arranges for leasing and maintenance options for all products to customers, at additional cost. AmeriQuest also provides Engineering services to those customers who do not have the capability or capacity to either design or install system solutions with their own resources. 2 4 VENDOR RELATIONS To maintain strong relationships with its principal vendors, AmeriQuest focuses on marketing the products of a limited number of key vendors. AmeriQuest selects its product lines to minimize competition among vendors' products while maintaining some overlap to provide protection against product shortages or discontinuations. Accordingly, historical revenues from sale of products of the three leading vendors, IBM, Hewlett Packard, and Unisys, represent approximately 22%, 7% and 14%, respectively, of the ASG segment of the Company's revenue for the last six months of the year ended September 30, 1997 (fiscal 1997). The Company is focused on increasing its share of business represented by each of Hewlett Packard and Unisys to 25% and has made investment in its sales force to achieve such objective. AmeriQuest must obtain permission from IBM to create new authorized IBM resellers ("IRAs") and must deal with contractual limitations in acquiring additional existing IRAs who may be dissatisfied with the service of a competitive distributor. IRAs are contractually precluded from purchasing IBM product except from their designated distributor for one year, which limits the ability of AmeriQuest to market its products to IRAs currently "assigned" to other distributors. Also IBM does not authorize a new reseller to market IBM product unless such reseller can meet minimum revenue requirements. Accordingly, AmeriQuest's ability to market to existing IRAs (other than those IRAs currently "assigned" to it) and its ability to assist in the development of new IRAs to expand the IBM revenue base of AmeriQuest is constrained by IBM's current strategy and policy of defining and controlling the IRAs. Additionally, IBM requires distributors of its mid-range computer systems to meet certain minimum purchase levels. AmeriQuest is required to purchase $30 million of IBM mid-range computers during calendar 1997 in order to retain the right to distribute IBM mid-range computers and AmeriQuest believes that it has satisfied this requirement. No assurance can be given that AmeriQuest will be able to meet the purchase requirements that might be imposed upon it in the future by IBM, nor has AmeriQuest received confirmation from IBM that it has met the required purchase levels of calendar 1997. Although, IBM could refuse to sell product to AmeriQuest at any time, it would be more likely to refuse following any period that AmeriQuest might fail to meet the mandated purchase levels. Although IBM indicated that it would terminate the right of AmeriQuest to distribute mid-range computer systems if AmeriQuest did not meet the target purchase levels, AmeriQuest would retain the right to sell IBM mid-range computer systems directly to end users. Such limitations to the authorization of resellers and the imposition of sales performance requirements do not exist with respect to the Company's relationship with Hewlett Packard and Unisys. AmeriQuest, like most hardware distributors, sells products throughout the United States for vendors on a nonexclusive basis without geographic restriction. AmeriQuest has distribution agreements with most of its vendors and believes they are in the form customarily used by each vendor and generally contain provisions which allow termination by either party upon as little as thirty days' notice. Most of AmeriQuest's major distribution agreements provide price protection by giving AmeriQuest a credit, subject to specified limitations, in the amount of any price reductions by the vendor between the time of the initial sale to AmeriQuest and the subsequent notice of price change to AmeriQuest. Most of the major distribution agreements also give AmeriQuest qualified return privileges on slow-moving inventory. AmeriQuest's distribution agreements do not restrict AmeriQuest from selling similar products manufactured by competitors. Except as noted above with respect to IBM, any minimum purchase provisions in AmeriQuest's distribution agreements are at levels that AmeriQuest believes do not impose significant risk that AmeriQuest will not be able to achieve such minimum purchase requirements. From time-to-time, the demand for certain products sold by AmeriQuest exceeds the supply available from the vendor. AmeriQuest believes that its ability to compete has not been adversely affected to a material extent by these periodic shortages, although sales may be adversely affected for an interim period. In order to limit the impact of such shortages, AmeriQuest generally attempts to include comparable products from more than one vendor in its product line. 3 5 SALES AND DISTRIBUTION During fiscal year 1997 AmeriQuest's sales operations of the Advanced Systems Group in Pennsylvania were divided into three domestic regions, Northeast, Southeast and Western, each covering a geographical section of the country. Compensation for sales personnel is largely based on the gross profits generated from sales. All of AmeriQuest's sales personnel receive technical training and are responsible for opening new accounts and serving established accounts. AmeriQuest places some emphasis on telemarketing as a sales method, however, most of the Company's sales personnel operate in the field. Customer orders are generally made by a toll-free telephone call with a sales representative in AmeriQuest's sales offices, and the order is entered into AmeriQuest's computer system. The sales representative has access to available information on inventory and customer credit status and, upon reviewing this data, can enter the order immediately. Shipment is usually made the same day, except on orders that require assembly and testing or purchase from a vendor. Customers may also pick up their orders at the designated warehouse. All orders are handled on a prepayment, C.O.D. or credit basis depending on the customer's creditworthiness and previous payment history. In addition, AmeriQuest assists some resellers in obtaining equipment financing through third-party floor planning programs from Deutsche Financial Services, IBM Credit Corporation, AT&T Capital, the FINOVA Group, Inc. and Transamerica Inventory Finance. Because of AmeriQuest's prompt delivery times, it does not generally maintain a substantial order backlog. CUSTOMERS AND CUSTOMER SERVICES The Company sells to more than 3,500 computer resellers. The Company's customers include VARs, corporate resellers, systems integrators, and consultants. AmeriQuest estimates that a majority of its sales are to VARs and systems integrators. The Company's smaller customers often do not have the resources to establish a large number of direct purchasing relationships or to stock significant product inventories. Consequently, they tend to purchase a high percentage of their products from distributors. Larger resellers often establish direct relationships with manufacturers for their more popular products, but utilize distributors for slower-moving products and for fill-in orders of fast-moving products which may not be available on a timely basis from manufacturers. No customer has accounted for more than ten percent of AmeriQuest's net sales during 1997, 1996 or 1995. Sales by AmeriQuest are not seasonal to any material extent, except for the sale of IBM RISC product which has historically evidenced shipment of 40% of total yearly revenues in the fourth quarter of each of the last two calendar years. Through the Company's wholesale distribution business, customers are offered a single source of supply, prompt delivery, financing programs, engineering services, customer leasing and maintenance and customer support. Prompt Delivery. In most areas serviced by the Company, orders received by 6:00 p.m. local time are typically shipped the same day, provided the required inventory is in stock. AmeriQuest typically delivers products from its Horsham, Pennsylvania warehouse via United Parcel Service and other common carriers, with customers in key commercial regions of the United States receiving orders within one to two working days of shipment. AmeriQuest also will provide overnight air handling if requested and paid for by the customer. These services allow computer resellers to minimize inventory investment yet provide responsive service to their customers. For larger customers in the United States, AmeriQuest is able to provide a fulfillment service so that orders are shipped directly to the computer resellers' customer, thereby reducing the need for computer resellers to maintain inventories of certain products. Customer Support. The Company currently offers computer resellers a single source for over 13,000 competitively priced hardware and software products. By purchasing from the Company, the reseller only needs to comply with a single set of ordering, billing and product return procedures and may also benefit from attractive volume pricing. The Company also provides training and product information to its reseller customers. 4 6 AmeriQuest permits the return of products within certain time limits and under certain conditions subject to a restocking charge, provided that the products are unused. Products that are defective upon arrival are handled on a manufacturers' warranty return basis without any restocking charge. Unlike its competitors, AmeriQuest offers its resellers terms that reflect those that are offered by each manufacturer's individual warranty program. This pass-through of manufacturers' warranties is one of the value-added services that AmeriQuest provides to its customer base. Financing Programs. AmeriQuest extends credit to qualified resellers, thereby augmenting their ability to purchase products from a variety of sources. Additionally, AmeriQuest arranges floor planning and lease financing through a number of credit institutions and offers programs that permit credit card purchases by qualified customers. To facilitate a reseller's ability to pursue large purchase orders within the United States, the Company offers an "assignment of proceeds" program. By instituting this practice AmeriQuest can, based upon the credit worthiness of the end-user customer, assist its resellers in securing purchase orders in excess of what their normal credit facilities would otherwise allow. COMPETITION Competition in the technical distribution of mid-range computer systems is limited, but intense. Principal national distributors are Dickens, JBA International, Western Micro, MicroAge and Gates/Arrow. Additionally it is reasonable to expect that the large broad-line distributors such as Ingram Micro Inc., Merisel, Inc. and Tech Data Corporation, who have substantially greater financial resources than AmeriQuest, may enter the market in pursuit of the substantially greater gross profit margins of technical distribution. Competition is primarily based upon availability of product, price, technical support and other support services. AmeriQuest believes that it is generally competitive with respect to each of these factors and that its principal, competitive advantages are its personal sales relationships, technical strength and other support services, and speed and accuracy of delivery. EMPLOYEES As of September 30, 1997, AmeriQuest had 80 full-time employees associated with the ongoing business of AmeriQuest, including 40 persons employed in sales, sales support and marketing functions. None of AmeriQuest's employees are covered by a collective bargaining agreement. AmeriQuest considers its relations with its employees to be good. SPECIAL FACTORS TO BE CONSIDERED ADDITIONAL LOSSES AND CAPITAL REQUIRED Continued Losses. The Company has experienced significant operating losses during recent fiscal years and recorded a net loss of $67.6 million in fiscal year ended June 30, 1995, a net loss of $33.6 million in fiscal 1996 and a net loss of $41.3 million in fiscal 1997. The fiscal 1995 loss included the write-off of approximately $23.8 million of intangible assets and the liquidation of inventory associated with the termination of the Company's entertainment software business. In addition, the fiscal 1995 loss included costs associated with the integration of the significant acquisitions which took place during that fiscal year. The Company recorded a net loss of $33.6 million during fiscal 1996 (including lease termination and moving costs of $6.4 million). During the year ended September 30, 1997, the Company had operating losses of $41.3 million which included restructuring, asset impairment and relocation costs of $26.4 million associated with the close down of the unprofitable distribution businesses. Additional Capital Required. In the event that operating losses continue, it is likely that the Company would need to raise additional capital to cover those losses. There is no assurance that additional capital is available, or if available, can be secured on terms favorable to the Company. The Company has no commitment from C-2000 to provide additional funding to the Company, although C-2000 has guaranteed certain amounts due to two of the Company's suppliers and $5 million to IBM Credit Corporation 5 7 ("IBMCC"). AmeriQuest currently has outstanding an intercompany demand loan from C-2000 in the amount of $27.7 million dollars. This intercompany loan was incurred as a result of C-2000's payment of $27.7 million dollars to certain lenders whose line of credit to AmeriQuest were previously guaranteed by C-2000. The intercompany loan is non-interest bearing, does not require the current payment of principal, and is secured by a security interest in all of AmeriQuests' assets, subordinate only to amounts owed to IBMCC. Although the loan is a demand loan, Computer 2000 AG has agreed to forebear from taking any legal action or commencing any legal process to collect any amounts owed under the intercompany demand loan prior to September 30, 1998. See "Certain Relationships and Related Transactions." Notwithstanding the agreement by C-2000 to defer payment of the loan prior to September 30, 1998, certain specified events such as, but not limited to, merger, sale or reorganization of the Company will make the loan immediately due and payable. In addition to the intercompany indebtedness to C-2000 referenced above, AmeriQuest was indebted to IBMCC in the amount of $3,064,000 at September 30, 1997 under a $20 million line of credit on an interest rate of prime plus 2.625%. IBMCC has approved waivers of prior defaults by the Company under the Inventory and Working Capital Financing Agreement. The line of credit expires February 28, 1998. However, as of January 9, 1998, IBMCC agreed to extend the credit agreement with a reduced line of $5 million from March 1, 1998 until September 30, 1998. As of December 31, 1997 the Company's indebtedness to IBMCC was $12,353,000. During December 1997 the Company purchased $6 million of IBM products, primarily to meet the minimum purchase commitment needed to retain IBM MIR distributions rights. Under the terms of the IBM vendor agreement, the Company can return a significant portion of these IBM products and may be required to do so in order to reduce the IBMCC line of credit from $20 million to $5 million at February 28, 1998. MARKET CONSIDERATIONS The New York Stock Exchange ("NYSE") has repeatedly indicated that AmeriQuest is not in compliance with certain of the NYSE's requirements for continued listing on the NYSE. The NYSE could delist AmeriQuest's Common Stock at any time, thereby adversely affecting the public market for such securities. The price of the Company's Common Stock has been subject to significant price fluctuations, and there can be no assurance that the price of the Company's Common Stock will stabilize. In addition, the trading volume for the Company's Common Stock has generally been relatively small. A large increase in share trading volume in a short period of time could cause a significant change in share trading prices. NEED TO INCREASE SALES VOLUME As a distributor, the Company must operate on small gross margins. Further, the Company must incur operating expenses to maintain a sufficient level of inventory, facilities, sales staff and support personnel necessary to support sales of products. Although the Company continues to explore possible cost reduction measures, it believes that further significant reductions in its operating expenses will be difficult to achieve without also reducing the sales volumes currently being generated from operations. As a result of these and other factors, the Company must achieve substantially greater sales volumes at satisfactory margins than it has in the past in order to achieve profitability. The estimate by management, reported in the Form 10-Q for the period ended March 31, 1997, that a 25%-40% increase in sales would be required in order for ASG to achieve a break-even level of operations on a stand-alone basis has proven to be cautious as a result of aggressive cost reductions since the issuance of the report. However, the loss of a significant vendor, such as IBM, would cause that estimate of a 25% sales increase to reach profitability to remain reliable. As noted above, IBM's policies restrict the ability of the company to increase sales to existing IRAs by reason of restrictions imposed by IBM on IRAs which effectively preclude a switch by the IRAs to AmeriQuest except on an annual basis as the contract of each respective IRA is renewed. While the Company's new management is attempting to increase sales and its share of business represented by such vendors as Hewlett Packard and Unisys, there can be no assurance that sales will increase or that any increases will be of sufficient magnitude or will occur soon enough to permit the Company to achieve profitability without additional business or financial restructuring. 6 8 NEED TO MAINTAIN VENDOR BASE The Company principally distributes computer products manufactured by other vendors, principally IBM and Hewlett Packard. Accordingly, the Company's relationships with its existing vendors are critical to its ability to purchase on a favorable basis the products that it resells. In addition, from time-to-time the Company may need to initiate relationships with additional vendors without jeopardizing the Company's existing vendor relationships. Any inability of the Company to preserve its existing vendor relationships or to add new vendors when needed will have a material, adverse effect on its future results of operations, and particularly with respect to the loss of any of the three lead vendors, IBM, Hewlett Packard or Unisys. The Company is also dependent upon its vendors' willingness or ability to make timely shipment of the products ordered by the Company. The failure of vendors to make shipments on a timely basis could cause a material disruption of the Company's sales. In the past, the Company has at times experienced delays in its ability to fill customer orders, due to the inability of certain suppliers to meet their volume and schedule requirements and/or due to the Company's shortages of cash resources. Delays in shipments from suppliers can cause fluctuations in the Company's short-term results and contribute to order cancellations. Additionally, AmeriQuest must meet certain purchase requirements imposed by IBM to maintain its distributor status of IBM's mid-range computer systems. IBM has indicated that it would terminate the right of AmeriQuest to distribute mid-range computer systems if AmeriQuest did not meet the purchase levels of calendar 1997 or any future calendar years. AmeriQuest has not received confirmation from IBM that it has met the calendar 1997 purchase requirements. No assurance can be given that AmeriQuest will be able to achieve purchases at levels required by IBM. RAPID CHANGES IN TECHNOLOGY AND MARKETS The computer industry in general, and the specific markets in which the Company competes, are characterized by rapidly changing technology, often resulting in short product life cycles, rapid price declines, inventory imbalances when compared with market demands, and significant shifts in market dynamics. The Company believes its success is highly dependent upon its ability to react to technological changes and shifts in market demand by continuing to provide costcompetitive products that respond to current market needs. As a value-added wholesale distributor, the Company is particularly vulnerable to changes caused by technological innovation. The introduction of new products and the phasing out of old products requires the Company to carefully manage its inventory to minimize inventory obsolescence. The Company has experienced significant losses due to inventory obsolescence in the past and losses due to selling products acquired as vendor surpluses. Should the Company fail to provide new products on a timely basis that respond to industry demands, the Company's operating results would be adversely affected. COMPETITION The Company competes in an industry characterized by intense and increasing competition. Principal national distributors in the technical distribution of mid-range computer systems with which the Company competes include Dickens, JBA International, Western Micro, MicroAge and Gates/Arrow. Many of the Company's major competitors have substantially greater financial, marketing and other resources than the Company. Competition in the computer products distribution industry is based primarily on price, product availability, and technical support services provided, and to a lesser extent on speed of delivery, convenience and the level of marketing. Because of the intense competition within the industry, the Company has been unable to date to increase its market share. As technological changes occur, the Company's products have had shorter and shorter product life cycles, and new competing products are introduced by other vendors and resellers. Moreover, the manner in which computer products are distributed and sold is changing, and new methods of distribution and sale may emerge or expand. Additionally, the requirements imposed by IBM on IRAs to buy only from an "assigned" distributor make it more difficult for AmeriQuest to compete for the business of existing IRAs. These factors, among others, will likely cause continued competitive pressures on the Company in the future. 7 9 DEPENDENCE UPON KEY PERSONNEL The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, product development and operational personnel and the Company's ability to retain and continue to attract highly skilled personnel. Competition for employees in the computer industry is intense, and there can be no assurance that the Company will be able to attract and retain qualified employees. The Company has recently made a number of management changes, and has had substantial layoffs and other employee departures. If the Company continues to experience financial difficulties, it may become increasingly difficult for it to hire new employees and retain current employees. The Company does not carry any key person life insurance with respect to any of its personnel. POSSIBLE SALES BY STOCKHOLDERS Approximately 10,884,905 outstanding shares (16%) of the Company's Common Stock are eligible for resale pursuant to the provisions of Rule 144 under the Securities Act of 1933 or current resale Registration Statements. The Company has also agreed to register the shares of the Common Stock of the Company issued or issuable to C-2000 consisting of 36,349,878 shares presently held by C-2000 and 9,392,515 additional shares subject to issuance upon the exercise of outstanding warrants and an option held by C-2000. The Company may grant additional registration rights when it issues securities in the future. The public sale of the foregoing shares, or the perception that such shares may be sold, may have the effect of substantially depressing the market price of the Company's Common Stock and causing substantial fluctuations in the price of the Company's Common Stock. FORWARD-LOOKING INFORMATION Future operating results may be impacted by a number of factors that could cause actual results to differ materially from those stated herein, which reflect management's current expectations. These factors include worldwide economic and political conditions, industry specific factors, the Company's ability to maintain access to external financing sources (including C-2000) and its financial liquidity, the Company's ability to manage expense levels, the Company's ability to retain key vendors, the continued financial strength of the Company's customers, and the Company's ability to accurately anticipate customer demand and manage inventories. This Annual Report on Form 10-K contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially affect results, including those set forth above and elsewhere in this Annual Report on Form 10-K, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial, legal and business challenges making it more difficult than expected to continue as a value-added wholesale distributor; competitive conditions within the computer industry may change adversely; demand for the products distributed by the Company may weaken; the Company may be unable to retain existing key vendors and existing key management personnel; inventory risks may rise due to shifts in market demand; the Company's forecasts may not accurately anticipate market demand; and there may be other material adverse changes in the Company's operations or business. Certain important presumptions affecting the forward-looking statements made herein include, but are not limited to, (i) timely identifying and delivering new products as well as enhancing existing products, (ii) completing current restructuring plans, and (iii) accurately forecasting cash needs. Assumptions relating to budgeting, marketing, advertising, product mix and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, cash expenditures or other budgets, which may in turn affect the Company's financial position and results of operations. 8 10 ITEM 2. PROPERTIES. AmeriQuest's principal offices are located in leased facilities in Horsham, Pennsylvania, which consists of approximately 30,000 square feet of office space and 75,000 square feet of warehouse space on a single level. The following table sets forth information regarding the regional offices of AmeriQuest and its subsidiaries:
SQUARE FEET LEASE EXPIRATION YEAR OPENED ----------- ---------------- ----------- LOCATION Horsham, PA.......................... 105,000 1/31/98(1) 1978 Atlanta, GA.......................... 6,000 9/30/00 1997 Maple Shade, NJ...................... 1,400 8/31/00 1997 St. Louis, MO........................ 1,400 11/30/00 1997 SUBLEASED(2) Anaheim, CA.......................... 62,298 2/29/00 1995 Alpharetta, GA....................... 1,924 9/30/99 1994
- --------------- (1) Commencing February 1, 1998 this lease will become a month-to-month tenancy terminable upon 30 days prior written notice from either AmeriQuest or the Landlord. AmeriQuest is currently evaluating prospect for replacement facilities of approximately 50,000 square feet. (2) Sub-lessees are in default. Proceedings are being undertaken to evict the current sub-lessees in preparation for re-lease of these properties to other sub-tenants, which are yet to be located. ITEM 3. LEGAL PROCEEDINGS. AmeriQuest is both a plaintiff and defendant from time-to-time in lawsuits incidental to its business. AmeriQuest management believes that none of such current proceedings individually or in the aggregate, will have a material adverse effect on AmeriQuest's financial position and results of operations. While not expected to be of material effect to the Company, Kenfil Inc. vs. RLI Insurance Company, Superior Court of the State of California, County of Los Angeles, No. BC 108564 filed July 12, 1994, involves litigation instituted by Kenfil Inc. to recover additional monies for the damage it incurred in the Northridge earthquake of January 17, 1994. The defendant cross-claimed on August 12, 1994 for return of the $840,000 it had paid on claims submitted by Kenfil Inc., based on affidavits from former Kenfil employees alleging that they had been instructed following the earthquake to intentionally destroy additional inventory. The defendant's theory is that the policy was voided ab initio by the fraudulent actions of Kenfil Inc.'s employees; while Kenfil Inc.'s position is that fraud unauthorized by the corporation but committed by a few employees does not operate to void the contract. The defendant's theory is premised on the language of the contract, while Kenfil Inc.'s position is supported by a case from the California Supreme Court. Messrs. Irwin Bransky and Nelson Landman, former officers of Kenfil Inc. at the time of the earthquake, have pleaded guilty to mail fraud relating to the mailing of documents asserting the destruction of inventory from the earthquake where such destruction actually occurred in large part following the earthquake. However, their actions were not attributed to Kenfil Inc. during the course of the criminal proceedings. Kenfil Inc. has a continuing claim against the defendant for additional amounts never paid under the contract for the interruption of the business of Kenfil Inc. and claims against Messrs. Bransky and Landman for the damages occasioned to Kenfil Inc. by their unauthorized and unratified criminal conduct. No assurance can be given as to the final outcome of this legal matter. While not expected to be of material effect to the Company, Leading Edge Products, Inc. vs. AmeriQuest Technologies, Inc., involves suit against AmeriQuest/NCD Inc., one of the Company's predecessors in interest, wherein Leading Edge is asserting breach of contract and unjust enrichment. In its complaint Leading Edge alleges a $1,055,438 debt and seeks double or triple damages, interest, attorney's fees, and costs. The Company responded to the complaint by denying liability and asserted counterclaims for breach of contract, breach of implied covenant of good faith and fair dealing, breach of warranty, and unjust enrichment. 9 11 In its counterclaim the Company seeks to recover money damages in the amount determined by the court, double or triple damages, interest, attorney's fees, and costs. The case is in its early stages and the accounting information has yet to be exchanged. The Company's accounting information indicates that the Company owes Leading Edge a total of $451,852. The information received to date, however, indicates that the Company's potential exposure is at least $451,852 and may be as high as $678,597. No assurance can be given as to the final outcome of this legal matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. See Part II, Item 4 of the Company's 10-Q for the period ending June 30, 1997 for a description of the results of the Annual Meeting of Stockholders of the Company held July 1, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The following table sets forth the market prices for the shares of Common Stock of AmeriQuest. The prices reflect the high and low closing prices quoted on the New York Stock Exchange for each calendar quarter since December 31, 1994. AMERIQUEST
HIGH LOW -- ---- 1995 First Quarter........................... 3 1/4 2 1/4 Second Quarter.......................... 3 1/4 1 3/4 Third Quarter........................... 2 1/8 1 1/8 Fourth Quarter.......................... 1 3/8 5/8 1996 First Quarter........................... 1 1/4 3/4 Second Quarter.......................... 1 1/2 3/4 Third Quarter........................... 15/16 1/2 Fourth Quarter.......................... 1 7/8 7/16 1997 First Quarter........................... 1 3/8 5/8 Second Quarter.......................... 3/4 6/16 Third Quarter........................... 9/32 3/16 Fourth Quarter.......................... 9/32 1/4
On December 10, 1997, the stock of AmeriQuest closed at $0.25 per share on the New York Stock Exchange. As of that date AmeriQuest had approximately 1,079 shareholders of record. The New York Stock Exchange ("NYSE") has repeatedly indicated that AmeriQuest is not in compliance with certain of the NYSE's requirements for continued listing on the NYSE. The NYSE could delist AmeriQuest's Common Stock at any time, thereby adversely affecting the public market for such securities. 10 12 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data has been derived from and should be read in conjunction with the audited consolidated financial statements of AmeriQuest, and the notes thereto, and with "Management's Discussion and Analysis of Results of Operations and Financial Condition", included elsewhere herein and incorporated herein by this reference (dollars in thousands, except share data).
THREE MONTHS YEAR ENDED YEAR ENDED ENDED SEPTEMBER SEPTEMBER SEPTEMBER YEARS ENDED JUNE 30, 30, 30, 30, ---------------------------------- 1997 1996 1995 1995 1994 1993 ---------- ---------- ---------- ---------- --------- --------- Net sales(1)................ $ 218,877 $ 424,708 $ 100,723 $ 416,571 $ 87,593 $ 73,082 Income (loss) before taxes..................... (41,311) (33,609) (7,041) (67,566) (7,971) 236 Net income (loss)(2)........ (41,311) (33,609) (7,041) (67,566) (7,971) 236 Net Income (loss) per share..................... (0.63) (0.76) (0.30) (3.76) (1.33) 0.08 Total assets................ 26,079 116,372 115,531 128,008 65,145 20,274 Long-term obligations(3).... 0 3,122 6,686 24,515 3,442 1,817 Stockholders' equity (deficit)................. (23,392) (11,206) 17,565 (25,709) 12,875 8,644 Weighted average shares outstanding............... 66,881,906 44,208,983 23,786,127 17,993,440 5,973,511 3,060,908
- --------------- (1) The sales increase in 1995 was due primarily to acquisitions. The sales increase in 1994 compared to 1993 was largely due to the initiation of a broader distribution strategy. (2) The losses in 1995 were due principally to abandonment of U.S. software operations, consists of integrating prior acquisitions and the write-down of assets. Losses in 1994 and 1992 related principally to corporate restructuring. (3) For the year ended June 30, 1995, Includes the $18 million advance from Computer 2000 related to its equity investment (see Note 9 to the Consolidated Financial Statements) and $5.8 million associated with the issuance of 6.8 million shares of the Company's common stock required to complete the Robec merger (see Note 2 to the Consolidated Financial Statements). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. SIGNIFICANT EVENTS Commencing in the first half of fiscal 1994 and through early fiscal 1996, the Company completed the acquisition of three regional distributors. Kenfil Inc., Ross White Enterprises, Inc. d/b/a "National Computer Distributors" ("NCD"), and Robec, Inc. The Company issued 15,864,608 shares of its common stock and paid total consideration of approximately $29.5 million for these acquisitions. During the quarter ended June 30, 1995 the Company closed the U.S. entertainment software distribution business. The Company's Singapore operation was sold in the quarter ended March 31, 1995 and its Australian operation was closed in the quarter ended March 31, 1996. On April 9, 1997 the Board approved a wide-ranging restructuring plan encompassing head-count reductions and facility closures with the goal of focusing on and strengthening the activities of its Advanced Systems Group ("ASG"), which had the highest gross margins of its distribution businesses, at that time. The Company announced that projected losses for the year ending September 30, 1997 could be in the range of approximately $45,000,000, partly as the result of estimated charges in the amount of $25,000,000 related to the planned restructuring, and $2,000,000 of restructuring costs and provisions earlier included in operating results predating the authorization of the restructuring (please reference Note 1 on page F-7). The restructuring measures were necessitated by the fact that revenues for the quarter ended March 31, 1997 were substantially below expectations, primarily due to the inability of the Company to compete effectively in the standard distribution of computer products. Management also continued the investigation of possible other dispositions. 11 13 On May 6, 1997 AmeriQuest issued 300,000 shares of its Series H Cumulative Convertible Preferred Stock (convertible into 41,958,042 shares of AmeriQuest Common Stock) -- to Computer 2000 Inc. in consideration of the payment by Computer 2000 Inc. of $30,000,000. This infusion fulfilled a previously announced commitment from Computer 2000 Inc. to make such an investment. On June 19, 1997 CMS Enhancements Inc. sold substantially all of its assets to CMS Peripherals Inc., a company formed by the former managing director of CMS Enhancements Inc., Mr. Ken Burke. CMS Enhancements Inc., as part of the transaction has changed its name to AAG Inc. AmeriQuest Technologies Inc. also signed a non-competition agreement with CMS Peripherals with a term of five years prohibiting use of the former name of the subsidiary and assembly or manufacture of disk drives. On September 30, 1997, Computer 2000 AG paid AmeriQuest's outstanding lines of credit in the amount of $27.7 million (formerly guaranteed by Computer 2000 AG) and converted the loans to a non-interest bearing intercompany demand loan, deferring demand of payment through September 30, 1998, but subordinated to the Company's working capital lender. AmeriQuest/Kenfil Inc. sold its wholly-owned subsidiaries Kenfil Distribution (Far East) Limited, a Hong Kong corporation and Kenfil Distribution (M) Sdn. Bhd., a Malaysian corporation, to Regentland Holdings Ltd. for proceeds of $2,939,062 pursuant to a Stock Purchase Agreement dated November 20, 1997. The purchase price was equivalent to repayment of a loan and the net book value of the assets sold plus a premium of $450,000, and was paid by issuance of a dividend from Kenfil Distribution (Far East) Limited to AmeriQuest/Kenfil Inc. in the amount of $1,717,106, the loan repayment of $771,956 from Kenfil Distribution (Far East) Limited to AmeriQuest/Kenfil Inc., and the payment of $450,000 from Regentland Holdings Ltd. Regentland Holdings Ltd. was formed by Mr. Simon Yip, the former Chief Executive Officer of Kenfil Distribution (Far East) Limited to accommodate his purchase of such entities. Concurrent with the closing, the Board of Directors of AmeriQuest/Kenfil Inc. received an opinion from Chase Securities, Inc. to the effect that the terms of the sale were fair to AmeriQuest Technologies, Inc. as the sole stockholder of AmeriQuest/Kenfil Inc. from a financial point of view. This sale completed the restructuring plan announced in April, 1997. Effective September 30, 1995 the Company changed its fiscal year-end from June 30 to September 30. Transition information for the three months ended September 30, 1995 is included in the Company's financial statements due to the change. The following table presents the Company's results of operations as a percent of sales:
THREE MONTHS YEARS ENDED YEARS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 1997 1996 1995 1995 ------------- ------------- ------------- ------------- Sales........................................ 100.0% 100.0% 100.0% 100.0% Gross Profit................................. 7.2 5.5 7.4 3.8 Selling, general and administrative.......... 16.1 10.8 12.9 12.8 Intangible write-off......................... 4.1 -- -- 5.7 Restructuring................................ 4.3 1.5 -- -- Interest..................................... 1.6 1.1 1.4 1.5 Net Loss..................................... 18.9 7.9 7.0 16.2
NET SALES During the fiscal year ended September 30, 1997 sales decreased 49% compared to the twelve months ended September 30, 1996. Sales decreases were mainly attributable to the Company's decision to sell CMS Enhancements, Inc., and to close the North American and export distribution divisions and focus on and strengthen the activities of its Advanced Systems Group. Historical revenues of ASG from sale of products of its three leading vendors, IBM , Hewlett Packard, and Unisys, represent approximately 22%, 7% and 14%, respectively of the last six months of fiscal year 1997 revenues. The Company is currently focused on increasing its share of business represented by each of Hewlett Packard and Unisys to 25% and has made 12 14 investment in its sales force to achieve such objective. Sales increases in the fiscal year ended September 30, 1996 and June 30, 1995 were due primarily to the acquisitions of NCD, Robec and Kenfil during early fiscal 1995. COST OF SALES AND GROSS PROFIT Gross profit increased to 7.2% of sales for the fiscal year ended September 30, 1997 compared to 5.5% for the twelve months ended September 30, 1996. The improvement was partially attributable to the closing of the lower margin standard distribution businesses and continuation of the higher margin Advanced Systems Group revenue and related margin. Gross profit decreased to 5.5% of sales for the fiscal year ended September 30, 1996 compared to 7.4% for the three months ended September 30, 1995. The decline was primarily attributable to continued extreme price competition within the industry and lower levels of vendor rebates due to the lack of availability of certain product lines. During the fiscal year ended June 30, 1995 gross profit was affected by competition and significant inventory losses related to the elimination of certain product lines, loss of certain vendors and a strategy to reduce inventories to increase operating cash flow. Gross profit in the fiscal year ended June 30, 1994 reflects a much greater concentration of business in the area of higher margin disk drive manufacturing. AmeriQuest manages its inventories by maintaining sufficient quantities to achieve high order fill rates while at the same time attempting to stock only those products in high demand with a rapid turnover rate. Inventory balances will fluctuate as the Company adds new product lines and when appropriate makes larger purchases from manufacturers when the terms of purchases are considered advantageous. The Company contracts with certain vendors who provide limited price protection and stock return privileges to help reduce the risk of loss to the Company due to manufacturer price reductions. Price protection, however, will not protect the Company against slow moving and obsolete inventory. In addition, returns from vendors of refurbished product previously returned to the vendor due to defects must be sold at reduced prices decreasing overall margins. An integral aspect of AmeriQuest's business is to exchange products sold to customers which are either incompatible units or do not work for a variety of technical or other reasons. If such products are ultimately determined to be defective, AmeriQuest, under contract terms with its vendors, is able to return such products to its vendors. Under such agreements AmeriQuest's economic risk is nominal and generally limited to the cost of freight and technical services, both of which cost categories are expensed currently. A warranty and return reserve of approximately $0.4 and $1.5 million is reflected in the balance sheets at September 30, 1997 and September 30,1996, respectively. The Company receives funds under incentive programs based upon volume sales or purchase of the vendors products. The incentive funds reduce the cost of the products sold. Incentive programs resulted in $2.4 million for the year ended September 30, 1997, $2.5 million for the year ended September 30, 1996 and $2.4 million for the fiscal year ended June 30, 1995. Incentive rebates for the quarter ended September 30, 1995 were $0.6 million. AmeriQuest anticipates that it will continue to experience pressure on gross sale margins due to industry competition. Although AmeriQuest expects that it will be able to reduce other cost of sale items, selling, general and administrative expenses as a percent of sales, no assurance can be given as to whether such reduction in fact will occur or as to the actual amount of any such reductions. To the extent gross margins decline and the Company is not successful in reducing selling, general and administrative expenses as a percentage of sales, the Company will experience further negative operating results. OPERATING EXPENSES For the fiscal years ended September 30, 1997 and 1996 and the fiscal year ended June 30, 1995 selling, general and administrative expenses, exclusive of the loss on sublease and charges for relocation, restructuring and the write-off of intangibles were approximately 16.1%, 10.8% and 12.8% of sales, respectively. Selling, general and administrative expenses for the quarter ended September 30, 1995 was 12.9% of sales. Selling, 13 15 general and administrative expenses have declined during the periods as a result of the integration of the Company's recent acquisitions and reductions in bad debt expense. During the year ended September 30, 1997, the Company incurred significant operating and personnel costs to close down the unprofitable distribution businesses. During the 1997 fiscal year the Company recorded a $9.3 million charge to expense the restructuring of the Company's sales and administrative staffing and planned closing of rented facilities. During fiscal years 1996 and 1995 the Company incurred significant costs to resolve certain lawsuits and complete an information systems conversion. In addition, bad debt expense was significant in fiscal 1996 as the Company increased export sales to higher credit risk Brazilian customers During the year ended September 30, 1996 the Company also recorded a $6.4 million charge to expense for the sublease of its California headquarters building and the cost to relocate its headquarters to Florida. During fiscal 1995, the Company wrote-off intangibles of $23.8 million associated with the decision to terminate its entertainment software distribution business in the U.S. and the elimination of certain redundant regional distribution businesses. In addition, the Company incurred significant costs associated with the closure of redundant warehouse facilities and the reduction of personnel. The Company also wrote-off a significant amount of customer receivables related to the termination of its entertainment software distribution business and recorded bad debt reserves related to lower volume and high credit risks. Operating expenses are reduced by advertising revenues and market development funds received from vendors as subsidy for or incentive to market their products. Funds received during the fiscal year ended September 30, 1997 totaled $2.0 million and funds of $2.8 million were received for each of the fiscal years ended September 30, 1996 and June 30, 1995 and $.4 million for the quarter ended September 30, 1995. OPERATING RESULTS The annual and quarterly operating results of the domestic operations of the Company have varied considerably due to the acquisition of distribution companies, closure and sale of certain subsidiaries and operating units and a reduced emphasis on manufacturing and assembly for all but mass storage assembly products, which has also ceased as of June 19, 1997. INTEREST EXPENSE Interest expense decreased from $4.8 million during the year ended September 30, 1996 compared to $3.5 million for the year ended September 30, 1997 due to (i) guarantees provided by C-2000 to banks which charged lower interest rates and (ii) equity infusions from C-2000, offset by continued losses. Interest expense increased in the year ended June 30, 1995 compared to the prior fiscal year due to increased levels of debt to fund acquisitions and operating losses. INCOME TAXES In the period July 1, 1993 through September 30, 1997 no income tax benefit was recorded as it is not more likely than not that the Company will realize the tax benefit of its deferred tax assets, including tax-loss carry forwards. INFLATION To date AmeriQuest has not been significantly affected by inflation. Moreover, technological changes in the electronics industry have generally resulted in price reductions, despite increases in certain costs which may be affected by inflation. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997 the Company had $7.7 million in cash and had borrowed $3.1 million against lines of credit. The Company generated $21.7 million in cash from operating activities during the year ended September 30, 1997 compared to usage of cash of $28.8 million for the year ended September 30, 1996. Cash generated by operations in fiscal 1997 resulted primarily from collection of accounts receivable and liquidation 14 16 of inventory offset by full settlement of payment with discontinued vendors. Sale of assets during fiscal 1997 generated an additional $3.5 million of cash. Cash receipts were applied to reduce outstanding obligations under lines of credit. Accounts receivable days increased during fiscal 1997, representing longer payment terms extended to customers in order to be competitive. Inventory turnover increased in both fiscal years 1997 and 1996, reflecting an intentional reduction in stock carried in an effort to reduce obsolescence costs and carrying costs necessary to support the business. At September 30, 1997 the Company had a stockholders' deficit of $23.4 million after operating losses of $41.3 million in the year ended September 30, 1997 and $33.6 million in the year ended September 30, 1996. The Company had maintained bank lines of credit guaranteed by C-2000 with four German banks which totaled $27.7 million on September 30, 1997. The interest rates on such lines of credit were Libor-based. On September 30, 1997, Computer 2000 AG paid the outstanding bank lines of credit which totaled $27.7 million and converted the loans to a non-interest bearing intercompany demand loan, and agreed to defer demand of payment through September 30, 1998 and subordinate its loan to the working capital lender. See "Certain Relationships and Related Transactions." Notwithstanding the agreement by C-2000 to defer demand of payment of the loan prior to September 30, 1998, certain specified events such as, but not limited to, the merger, sale or reorganization of the Company will make the loan immediately due and payable. The Company maintains a $20 million line of credit with IBM Credit Corporation ("IBMCC") which is secured by substantially all of the Company's assets. Interest rates on the IBMCC line are prime plus 2.625%. Borrowings under the IBMCC line at September 30, 1997 and 1996 totaled $3.1 million and $12.3 million, respectively. Borrowings under the IBMCC line of credit are limited to a contractual percentage of eligible inventories and receivables. The terms of the line include restrictive covenants which require the maintenance of specific levels of tangible net worth, working capital and operating results. IBMCC has subsequently approved amendments to the agreement which waive prior defaults. The IBMCC line is reduced to $5 million on February 28, 1998 and expires on September 30, 1998. Operating activities in the upcoming year will require additional cash from external financing sources. While management believes that the Company's current sources of external financing, are adequate to meet its current operating requirements through September 30, 1998, a significant portion of these external financing sources are represented by the supplier and IBMCC guarantees and intercompany loan of $27.7 million from Computer 2000 AG. Management believes that the C-2000 non interest bearing $27.7 million loan and the $5 million line of credit from IBMCC will be adequate for the Company to accomplish its fiscal 1998 operating plan and to meet its financial obligations on a timely basis during fiscal 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements, notes thereto, and the report of independent public accountants thereon are included herein. Supplementary data, including quarterly financial information, is included following the financial statements. A list of the information so included is set forth in response to Item 14(a) entitled "Exhibits, Financial Statement Schedules, and Reports on Form 8-K," which is incorporated herein by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 15 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth certain information regarding the current directors and executive officers of AmeriQuest.
NAME AGE POSITION ------------------------------- ---- ------------------------------------------------------ Alexander C. Kramer, Jr........ 54 President and a Director Jon D. Jensen.................. 54 Chief Operating Officer, Chief Financial Officer and Secretary Harry Krischik................. 46 Chairman of the Board of Directors Manfred H. Guenzel............. 46 Director Richard Obermaier.............. 37 Director Anton Roedl.................... 34 Director Marc L. Werner................. 39 Vice Chairman and Director J.R. Dick Iverson.............. 68 Director
Alexander C. Kramer, Jr. (age 54) served as Vice President -- Operations of Robec, Inc. for thirteen years prior to its acquisition in November 1995 by AmeriQuest. From November 1995 he served in various capacities, and during fiscal 1997 he served as Vice President -- General Manager of the Advanced Systems Group. On October 8, 1997, he was appointed by the Board of Directors to serve as President following the resignation of Mr. Michael Dressen; and he was also elected on October 8, 1997 by the Board to serve as a Director of AmeriQuest. Jon D. Jensen (age 54) served as Vice President of Finance and Chief Financial Officer of Robec, Inc. from September, 1994 until its acquisition by AmeriQuest in November, 1995. From November, 1995 to January, 1997, he served AmeriQuest as Vice President of Planning and Business Process Re-engineering, at which time he was appointed to serve as Vice President of Finance. On October 8, 1997, he was appointed by the Board of Directors to serve as Chief Operating Officer, Chief Financial Officer and Secretary of AmeriQuest following the resignation of Mr. Holger Heims as Chief Financial Officer and Secretary, and his replacement of Mr. John Tonnison as Chief Operating Officer. For six years prior to September, 1994, Mr. Jensen had served as Chief Financial Officer, Controller and Treasurer of Philadelphia Gear Company. Dr. Harry Krischik (age 46) has served as a Member of the Executive Board of Computer 2000 AG for more than the last five years, with responsibility for the areas of logistics, electronic data processing and human resources. He is now responsible for worldwide sales and also has regional responsibility for Southern Europe, North America and Latin America. Manfred H. Guenzel (age 46) was appointed to serve as a Member of the Executive Board of Computer 2000 AG in January 1996. From August 1990 until January 1996, he served as Head of Corporate Development/Acquisitions/Controlling (Energy, Chemistry, Aluminum Refractories, Telecommunications) for VIAG AG, the ultimate parent of Computer 2000 AG. Richard Obermaier (age 37) has served as Controller and Senior Staff Member of Mergers & Acquisitions for Computer 2000 AG since July, 1995. From 1991 through July, 1995, he served as a Senior Staff Member in the corporate finance department at Allianz AG, engaged in mergers and acquisitions. Anton Roedl (age 34) joined Computer 2000 AG in September 1996 to serve as Manager of Taxation. From 1990 to August 1996 he was employed by KPMG Peat Marwick where his last position was that of a Supervising Senior in the audit department. He was elected by the Board of Directors to serve as a Director following the resignation of Mr. Holger Heims. Marc L. Werner (age 40) serves as President and Chief Executive Officer of Cornucopias Capital Advisors. He was employed by Werner Co. and various companies affiliated with Werner Co. from 1986 until April 30, 1997, with his last position there being that of Chief Executive Officer, President and Director for 16 18 Werner Financial, Inc. Mr. Werner is a Certified Public Accountant, and holds a Bachelor of Science degree in Accounting from Northern Illinois University. J. R. Dick Iverson (age 69) is currently retired, except for his service on the board of directors of AmeriQuest, Telegen Corporation and ComStream Corporation, a subsidiary of Spar Aerospace Limited. From 1986 to 1994 he served as Chief Executive Officer and President of the American Electronics Association. On October 8, 1997, Michael Dressen resigned as President of the Company, Holger Heims resigned as Chief Financial Officer and Secretary of the Company and John Tonnison was replaced as Chief Operating Officer of the Company. On October 8, 1997, Alexander C. Kramer, Jr. was elected President of the Company, and Jon Jensen was elected Chief Operating Officer, Chief Financial Officer and Secretary of the Company. The Company has an Audit Committee, which currently consists of two directors: Marc L. Werner and J. R. Dick Iverson. Messr's Werner and Iverson are neither officers nor employees of the Company or any of its affiliates. The Compensation Committee consists of Dr. Harry Krischik and Marc L. Werner. The Compensation Committee is concerned primarily with establishing executive compensation policies for the Company. See "Executive Compensation -- Compensation Committee Interlocks and Insider Participation in Compensation Decisions." In May, 1997, the Company formed an Acquisition Committee, which consists of two directors: Marc L. Werner and Richard Obermaier. The Acquisition Committee was formed to investigate, evaluate and negotiate potential acquisitions, mergers and divestitures involving AmeriQuest or its assets. The Acquisition Committee serves at the discretion of the Board of Directors of the Company and may be disbanded at any time by resolution of the Company's Board of Directors. 17 19 ITEM 11. EXECUTIVE COMPENSATION. The following table provides information concerning the annual and long-term compensation of the Chief Executive Officer of AmeriQuest and each of the four other highest paid executive officers who served as such at the end of fiscal year 1997 and their titles at such date, and for two of the other highest paid executive officers who terminated their employment with AmeriQuest prior to the end of fiscal year 1997 (collectively, the "Named Executive Officers") for services rendered to AmeriQuest and its subsidiaries in all capacities during the fiscal years 1997, 1996 and 1995. This information includes the dollar values of base salaries and bonus awards, and certain other compensation, if any, whether paid or deferred. AmeriQuest does not provide long-term compensation benefits other than stock options. On October 8, 1997, Michael Dressen resigned as President of the Company, Holger Heims resigned as Chief Financial Officer and Secretary of the Company and John Tonnison was replaced as Chief Operating Officer of the Company. On October 8, 1997, Alexander C. Kramer, Jr. Was elected President of the Company, and Jon D. Jensen was elected Chief Operating Officer, Chief Financial Officer and Secretary of the Company.
ANNUAL COMPENSATION(1) (4) ------------------------------ ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(5) COMPENSATION - ------------------------------------------------- ---- -------- -------- ------------ Michael Dressen,................................. 1997 $250,000 $165,000 107,393 President 1996 40,000 -0- -0- 1995 -0- -0- -0- Holger Heims,.................................... 1997 150,000 200,000 87,128 Chief Financial Officer and Secretary 1996 150,000 -0- -0- 1995 -0- -0- -0- John Tonnison,................................... 1997 150,000 199,749 84,000 Chief Operating Officer 1996 107,000 16,837 -0- 1995 -0- -0- -0- Alexander C. Kramer, Jr.,........................ 1997 150,000 165,000 -0- Vice President, Advanced Systems Group 1996 150,000 19,974 -0- 1995 150,000 4,154 -0- Andrew J. Lewis,................................. 1997 80,000 76,250 101,604 Controller 1996 80,000 1,588 -0- 1995 -0- -0- -0- Richard McIntyre,................................ 1997 104,873 11,586 264,285(3) Vice President -- Sales 1996 133,750 15,918 -0- 1995 -0- -0- -0- John Hudson,..................................... 1997 122,563 95,569 85,967(3) Vice President -- U.S. Sales 1996 39,385 11,006 -0- 1995 -0- -0- -0-
- --------------- (1) In fiscal years 1997, 1996 and 1995, no executive officer received perquisites or other personal benefits, securities or property which exceeded the lesser of $50,000 or 10% of such executive officer's salary and bonus, excepting Michael Dressen who received housing and health care reimbursement of $57,393. (2) Salary compensation includes amounts paid for vacation time not taken by the employees. (3) Messrs. Richard McIntyre and John Hudson terminated their employment on May 9, 1997 and August 25, 1997, respectively, and the amounts set forth under the column entitled "All Other Compensation" represents severance payments and other compensation to which they were entitled under their respective employment arrangements. 18 20 (4) Includes amounts paid during the fiscal year as a bonus for the employee's cooperation to move to Florida and where applicable the employees' cost to return to California. (5) Includes loyalty bonus paid to ensure continuity and orderly completion of close of Florida operation. OPTION EXERCISES AND FISCAL YEAR END VALUES The following table provides, as to the Named Executive Officers, information concerning unexercised stock options at September 30, 1997. None of the executive officers exercised any stock options during fiscal year 1997.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SEPTEMBER 30, 1997 SEPTEMBER 30, 1997(1) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------- ----------- ------------- ----------- ------------- Michael Dressen............................ -0- -0- -0- -0- Holger Heims............................... -0- -0- -0- -0- John Tonnison.............................. -0- -0- -0- -0- Alexander C. Kramer, Jr.(2)................ 37,635 16,129 -0- -0- Andrew J. Lewis............................ -0- -0- -0- -0- Richard McIntyre........................... -0- -0- -0- -0- John Hudson................................ -0- -0- -0- -0-
- --------------- (1) Based on the closing price of AmeriQuest's Common Stock on the New York Stock Exchange on September 30, 1997. (2) Represents 16,129 shares as having vested with respect to an option granted on June 7, 1994 and 21,506 shares as having vested under an option granted March 22, 1993. EMPLOYMENT CONTRACTS As of October 1, 1997, the Company entered into an Employment Agreement with Alexander C. Kramer, Jr. Providing for an annual salary of $200,000 plus eligibility for bonus up to 114% of annual salary. The Employment Agreement provides for six months severance if the employee is terminated without cause and 12 months severance if the employee is terminated or resigns following a diminution of responsibility within 12 months after a change of control. As of October 1, 1997, the Company entered into an Employment Agreement with Jon Jensen providing for an annual salary of $157,500 plus eligibility for bonus up to 114% of annual salary. The Employment Agreement provides for six months severance if the employee is terminated without cause and 12 months severance if the employee is terminated or resigns following a diminution of responsibility within 12 months after a change of control. COMPENSATION OF OUTSIDE DIRECTORS AmeriQuest pays its outside Directors, Marc L. Werner and J.R. Dick Iverson, $2,500 per calendar quarter plus expenses incurred to attend Board meetings. All directors are also eligible to receive stock and/or stock options as a form of compensation. The Company has agreed to pay Marc L. Werner $5,000 per month, commencing as of October, 1997, plus reimbursement of expenses for his services as Chairman of the Acquisition Committee of the Board. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1997 the Compensation Committee consisted of Dr. Harry Krischik and Marc L. Werner. Dr. Krischik is a member of the Executive Board of Computer 2000 AG. 19 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of November 30, 1997, information relating to the beneficial ownership of AmeriQuest's Common Stock by (i) each person known to AmeriQuest to be the beneficial owner of more than five percent of AmeriQuest's outstanding Common Stock, (ii) each director, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers as a group. AmeriQuest knows of no agreements among its shareholders which relate to voting or investment power over its Common Stock.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP AS OF NOVEMBER 30, 1997(1) NUMBER OF SHARES NAME AND ADDRESS OF BENEFICIAL ------------------------------------ PERCENT OF OUTSTANDING OWNER COMMON PREFERRED CLASS OF SECURITY(19) - ----------------------------------- ---------- ---------------- ---------------------- Computer 2000 Inc.(2).............. 43,385,158 56% Wolfratshauser Strasse 84 300,000 Series H 100% 81379 Munchen, Germany Computer 2000 AG(2)................ 43,385,158 56% Wolfratshauser Strasse 84 300,000 Series H 100% 81379 Munchen, Germany DIRECTORS AND OFFICERS(17) Michael Dressen(3)................. -0- -0- 0% Holger Heims(4).................... -0- -0- 0% Harry Krischik(5).................. 43,385,158 56% 300,000 Series H 100% Manfred H. Guenzel(6).............. 43,385,158 56% 300,000 Series H 100% Richard Obermaier(7)............... 43,385,158 56% 300,000 Series H 100% Anton Roedl(8)..................... -0- -0- * John Tonnison(9)................... -0- -0- 0% Alexander C. Kramer, Jr.(10)....... 37,635 -0- * Marc L. Werner(11)................. 20,000 -0- * J.R. Dick Iverson(12).............. 10,000 -0- * Andrew J. Lewis(13)................ -0- -0- 0% Richard McIntyre(14)............... -0- -0- 0% John Hudson(15).................... -0- -0- 0% All officers and directors as a group (13 persons)(17)........... 43,452,793(16)(18) 59% 300,000 Series H 5)(6)(7) 100%
- --------------- * Denotes less than 1% (1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) Includes shares owned directly by Computer 2000 Inc., a wholly-owned subsidiary of Computer 2000 AG. The amount reflected in the table includes 7,035,280 shares subject to outstanding Achievement Warrants in favor of Computer 2000 Inc., which are currently exercisable. The warrants and option held by Computer 2000 Inc. are as follows: Achievement Warrants.......... 7,035,280 Maintenance Option............ 2,357,235
20 22 The Series H Cumulative Convertible Preferred Stock held by Computer 2000 Inc. is convertible into 41,958,042 shares of Common Stock, which, when combined with the Common Stock beneficially owned by Computer 2000, Inc. on November 30, 1997 would equal 74% of the outstanding Common Stock upon conversion. (3) Mr. Dressen became President of AmeriQuest on August 1, 1996, and was appointed to serve as a Director on September 12, 1996. Mr. Dressen resigned his positions on October 8, 1997. (4) Mr. Heims served during 1997 as Executive Vice President, Chief Financial Officer, Secretary and a Director of AmeriQuest. Mr. Heims resigned his positions on October 8, 1997. (5) Represents the shares held of record by Computer 2000 Inc. (see footnote (2) above). Mr. Krischik is a Member of the Executive Board of Computer 2000 AG, and therefore may be deemed to have shared voting power over the shares of AmeriQuest held by Computer 2000 Inc. There are a total of five persons who serve as a Member of the Executive Board of Computer 2000 AG, of which Mr. Krischik is one. Mr. Krischik disclaims beneficial ownership of all shares of AmeriQuest held by Computer 2000 Inc. Mr. Krischik is a nominee of Computer 2000 AG, and serves as the Chairman of the Board of Directors of AmeriQuest. (6) Represents the shares held of record by Computer 2000, Inc. (see footnote (2) above). Mr. Guenzel is a Member of the Executive Board of Computer 2000 AG, and therefore may be deemed to have shared voting power over the shares of AmeriQuest held by Computer 2000 Inc. There are a total of five persons who serve as a Member of the Executive Board of Computer 2000 AG, of which Mr. Guenzel is one. -- Mr. Guenzel disclaims beneficial ownership of all shares of AmeriQuest held by Computer 2000 Inc. Mr. Guenzel is a nominee of Computer 2000 AG, and serves as a Director of AmeriQuest. (7) Represents the shares held of record by Computer 2000, Inc. (see footnote (2) above). Mr. Obermaier is an officer and director of Computer 2000 Inc., and therefore may be deemed to have shared voting power over the shares of AmeriQuest held by Computer 2000 Inc. Mr. Obermaier disclaims beneficial ownership of all shares of AmeriQuest held by Computer 2000 Inc. Mr. Obermaier is a nominee of Computer 2000 AG, and serves as a Director of AmeriQuest. (8) Mr. Roedl disclaims beneficial ownership of all shares of AmeriQuest held by Computer 2000 Inc., because although he is an employee of Computer 2000 AG, he is not an officer or director of Computer 2000 Inc. nor is he a member of the Executive Board of Computer 2000 AG, which is the level at Computer 2000 AG which would decide the manner in which AmeriQuest shares would be voted by Computer 2000 Inc. Mr. Roedl is a nominee of Computer 2000 AG, and serves as a Director of AmeriQuest. (9) Mr. Tonnison served as Chief Operating Officer during fiscal 1997, until he was replaced by Mr. Jon Jensen on October 8, 1997. (10) Includes 37,635 shares subject to stock options exercisable within 60 days after November 30, 1997. Mr. Kramer served as Vice President -- Advanced Systems Group during fiscal 1997, and is now serving as President. (11) Includes 20,000 shares of Common Stock held of record by Mr. Werner as custodian for certain of his children. (12) Mr. Iverson commenced service as a Director of AmeriQuest on July 10, 1996. (13) Mr. Lewis served as Controller of AmeriQuest during fiscal 1997. (14) Mr. McIntyre served as Vice President -- Sales until his severance from employment on May 31, 1997. (15) Mr. Hudson served as Vice President -- U.S. Sales until his severance from employment on September 30, 1997. (16) Includes 37,635 shares subject to stock options and warrants currently vested and issuable upon exercise of such options and warrants. (17) The address for the executive officers and directors and proposed directors is: 425 Privet Road, Horsham, Pennsylvania 19044. 21 23 (18) The executive officers of AmeriQuest at November 30, 1997 were Alexander C. Kramer, Jr. and Jon Jensen. The shares reflected in the table as owned by all officers and directors as a group includes the shares referred to in footnotes (5) through (12) above. (19) For purposes of determining the percentage of outstanding Common Stock held by each person or group set forth in the table, the number of shares held by a person or group is divided by the number of shares of AmeriQuest's Common Stock outstanding on November 30, 1997 (66,881,906) plus the number of shares of Common Stock subject to outstanding stock options and warrants exercisable currently or within 60 days of November 30, 1997 by such person or group, in accordance with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended. Percentages of less than 1% are represented by an asterisk. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In December 1995, Computer 2000 AG issued guarantees to certain lenders to secure up to $66 million of lines of credit such lenders might extend to AmeriQuest. In November 1996 Computer 2000 AG increased the $66 million of credit lines to $76 million. These borrowings were used in part to reduce the Company's interest-bearing indebtedness under its previously outstanding lines of credit from approximately $52 million to zero, resulting in a reduction, as of September 30, 1996, in the average interest rate on the Company's total outstanding indebtedness from approximately 11.0% per annum to approximately 6.4% per annum. In return for the guarantees, AmeriQuest agreed to pay Computer 2000 AG one-half of one percent (0.5%) per annum of the amounts guaranteed, on a weighted average basis, and provided Computer 2000 AG with a security interest in all of AmeriQuest's assets, and agreed to seek refinancing of its outstanding debt as soon as reasonably practicable. Computer 2000 AG's guarantees expired on September 30, 1997, at which time Computer 2000 AG paid the amounts guaranteed in full, totaling $27.7 million. AmeriQuest is now indebted to Computer 2000 AG in the amount of $27.7 million under the terms of the Reimbursement and Security Agreement of December 1995. This intercompany loan is non-interest bearing, and is guaranteed by all the assets of AmeriQuest, subordinate only to the security interests of IBMCC. Notwithstanding the agreement by C-2000 to defer payment of the loan prior to September 30, 1998, certain specified events such as, but not limited to, merger, sale or reorganization of the Company will make the loan immediately due and payable. In the opinion of management, this financing is more favorable to AmeriQuest than could have been obtained from unaffiliated third party lenders. Additionally, C-2000 has guaranteed certain amounts due to two of the Company's suppliers and $5 million to IBMCC. ------------------------------ On May 6, 1997, AmeriQuest issued and sold to Computer 2000 Inc. 300,000 shares of its Series H Cumulative Convertible Preferred Stock (the "Preferred Stock") (convertible as of November 30, 1997 at an exercise price of $.715 per share into 41,958,042 shares of AmeriQuest Common Stock) for a purchase price of $30 million. The proceeds of the sale were used to partially pay down AmeriQuest's existing bank credit lines. A preferred dividend of 7% per annum is being accrued pursuant to the terms of the Preferred Stock. In the opinion of management this financing is at least as favorable to AmeriQuest as could have been obtained from unaffiliated third party lenders. ------------------------------ On April 19, 1997, AmeriQuest and Computer 2000 AG entered into identical indemnification agreements with Board members Dr. Harry Krischik, Manfred Guenzel, Michael Dressen, Holger Heims, Robert H. Beckett, Marc L. Werner and J. R. Dick Iverson, and with John Tonnison. Subsequently, Computer 2000 AG entered into indemnification agreements identical to those executed on April 19, 1997 with newly elected Board members, Messrs. Richard Obermaier, Anton Roedl and Alexander C. Kramer, Jr. and executive officer Jon D. Jensen. The indemnification agreements so executed are referred to hereinafter as the "Indemnification Agreements." AmeriQuest's Certificate of Incorporation provides that AmeriQuest as a corporation will indemnify its directors and officers to the fullest extent permitted by law and shall advance expenses in connection therewith. 22 24 Among other things, each of the Indemnification Agreements provides that in the event an indemnitee becomes a party to certain specified legal proceedings by reason of an Indemnifiable Event (as defined below), AmeriQuest and Computer 2000 AG, jointly and severally, shall indemnify such indemnitee to the fullest extent permitted by law against Indemnifiable Expenses (as defined below) if the indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of AmeriQuest and, with respect to any criminal proceeding or investigation, had no reasonable cause to believe his conduct was unlawful. In the event an indemnitee becomes a party to a legal proceeding by or in the right of AmeriQuest to procure a judgment in its favor by reason of an Indemnifiable Event, AmeriQuest and Computer 2000 AG, jointly and severally, shall indemnify such indemnitee to the fullest extent permitted by law against Indemnifiable Expenses actually and reasonably incurred by the Indemnitee in connection with such legal proceeding or any appeal therefrom, if the indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of AmeriQuest, except that no indemnification shall be made in respect of any such legal proceeding as to which the indemnitee shall have been adjudged to be liable to AmeriQuest unless and only to the extent that the court in which such proceeding was brought shall determine that the indemnitee is fairly and reasonably entitled to indemnity for such Indemnifiable Expenses. All such indemnification will be subject to the terms and conditions set forth in the Indemnification Agreements. As used in each of the Indemnification Agreements, "Indemnifiable Expenses" means any and all costs, charges and expenses, including, without limitation, attorneys' fees and other fees, expenses in connection with the investigation, defense or appeal of any legal proceeding, judgments, fines and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of any such attorneys' fees and other fees and expenses, judgments, fines or amounts paid in settlement) actually and reasonably incurred by the Indemnitee in connection with the legal proceeding or any appear therefrom. The term "Indemnifiable Event" means any actual or asserted event or occurrence related to the fact that the indemnitee is or was a director, officer, employee, agent or fiduciary of AmeriQuest, or is or was serving at the request of AmeriQuest as a director, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other entity, or anything done or not done by the indemnitee in any such capacity. ------------------------------ AmeriQuest leases its facility in Horsham, Pennsylvania from Bowe 3 Partners at a lease rate of approximately $522,000 per year for 105,000 square feet of office and warehouse space. The Lease for this facility was first scheduled to terminate on December 31, 1996, but by mutual agreement of the parties was extended on September 10, 1996 through January 31, 1998 at the same rate as that in effect for September 1996. On December 5, 1997, the Lease was further extended to expire by its terms on March 31, 1998, with rent payable after January 31, 1998 at the current rate. Alexander C. Kramer, Jr., President and a Director of the Company, is a partner in Bowe 3 Partners. In the opinion of management, the terms of the Lease are as favorable to AmeriQuest as those which could be obtained from unaffiliated third parties. SEVERANCE ARRANGEMENTS WITH PRIOR MEMBERS OF MANAGEMENT During fiscal 1997 several officers terminated their employment with AmeriQuest as part of its efforts to reduce overhead expenses and retain personnel skilled enough to effect a turn-around of the Company. The following table sets forth the amounts of severance payments made and the names of the officers to whom such payments were made.
EMPLOYEE DATE OF SEVERANCE NAME AND POSITION SEVERANCE CONTRACT RIGHT PAID --------------------------------------- --------------- -------------- --------- Dennis Fairchild....................... January 7, 1997 $ 75,000 $75,000(1) Richard McIntyre....................... May 9, 1997 $ 75,000 $75,000(2) John Hudson............................ August 25, 1997 -0- $37,500(3)
- --------------- (1) Mr. Fairchild also received reimbursement of moving expenses totaling $65,000 and reimbursement of his home rental while in Florida of $12,000. (2) Mr. McIntyre also received a payment for adjustment of housing expenses incurred in reliance on promise of future employment of $126,220. (3) Mr. Hudson also received $20,000 as incentive pay to remain with AmeriQuest through the date of his termination and a relocation bonus of $20,000. 23 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements and Schedules
PAGE REFERENCE --------- (1) Financial Statements included in Part II of this Report: Report of Independent Certified Public Accountants.......... F-1 Consolidated Statements of Operations....................... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Stockholders' Deficit............ F-4 Consolidated Statements of Cash Flows....................... F-5 Notes to Consolidated Financial Statements.................. F-7 (2) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts and F-19 Reserves...................................................
(b) Reports on Form 8-K Current report on Form 8-K dated November 20, 1997 to report the dale of Kenfil Distribution (Far East), a Hong Kong Corporation and Kenfil Distribution (M) Sd. Bhd., a Malaysian corporation, formerly wholly owned subsidiaries of AmeriQuest/Kenfil Inc., a wholly owned subsidiary of the Registrant. (c) Exhibits EXHIBIT INDEX
EXHIBIT NO. TITLE OF DOCUMENT PAGE NO. LOCATION OF FILING - --------- ------------------------------------------- -------- ------------------------------ 3.01(a)* Certificate of Incorporation of AmeriQuest SEC File No. 1-10397 as amended through September 22, 1994. 10-K for June 30, 1994 3.01(b)* Amendment to the Certificate of SEC File No. 1-10397 Incorporation of AmeriQuest dated April 1, 10-K for September 30, 1996 1996 pursuant to which authorized Common Stock was increased to 200,000,000 shares and authorized Preferred Stock was restored to 5,000,000 shares 3.01(c) Certificate of Designations for Series H SEC File No. 1-10397 Preferred Stock issued and issuable to 10-K for September 30, 1997 Computer 2000. 3.02* By-laws of AmeriQuest 189 SEC File No. 33-81726 4.01* Reference is made to Exhibits 3.01 and 3.02, the Certificate of Incorporation and By-laws, which define the rights of security holders 4.02* Specimen Stock Certificate 274 SEC File No. 33-81726 10.01* Inventory and Working Capital Financing SEC File No. 1-10397 Agreement dated May 5, 1995 by and between 10-K for June 30, 1995 CDS Distribution, Inc. and IBM Credit Corporation, as amended. 10.02* Inventory and Working Capital Financing SEC File No. 0-18115 Agreement dated September 21, 1994 by and 8-K dated September 22, 1994 between Robec, Inc. and IBM Credit Corporation, as amended.
24 26
EXHIBIT NO. TITLE OF DOCUMENT PAGE NO. LOCATION OF FILING - --------- ------------------------------------------- -------- ------------------------------ 10.03 Reimbursement and Security Agreement dated SEC File No. 1-10397 December 20, 1995 by and between AmeriQuest 10-K for September 30, 1997 and Computer 2000 AG 10.05* Incentive Stock Option Plan SEC File No. 2-96539 10.06* Employee Stock Bonus Plan SEC File 33-23809 10.07* 1996 Equity Incentive Plan SEC File No. 1-10397 10.08* Employment Agreement for Michael Dressen SEC File No. 1-10397 10-K for September 30, 1996 10.09* Employment Agreement for Holger Heims SEC File No. 1-10397 10-K for September 30, 1996 10.10 Employment Agreement for Alexander C. SEC File No. 1-10397 Kramer, Jr. 10-K for September 30, 1997 10.11 Employment Agreement for Jon D. Jensen SEC File No. 1-10397 10-K for September 30, 1997 10.12 Form of Indemnification Agreement by and To be filed by Amendment between and among Computer 2000 AG and Officers and Directors Michael Dressen, Holger Heims, Harry Krischik, Manfred Guenzel, Richard Obermeier, Anton Roedl, Marc L. Werner, J. R. Dick Iverson, John Tonnison, Alexander C. Kramer, Jr. and Jon D. Jensen 10.13* Purchase Agreement dated August 7, 1995 by SEC File No. 1-10397 and between AmeriQuest and Computer 2000 AG 8-K dated August 7, 1995 10.14 Preferred Stock Purchase Agreement dated To be filed by Amendment April 28, 1997 by and between AmeriQuest and Computer 2000 AG 10.21* Lease Agreement dated January 1, 1994, as SEC File No. 1-10397 amended, by and between AmeriQuest as 10-K for September 30, 1996 successor in interest by merger to the interests of Robec, Inc. and Bowe 3 Partners 10.22 Lease Agreement dated September 8, 1997, by SEC File No. 1-10397 and between AmeriQuest and AP Southeast 10-K for September 30, 1997 Portfolio Partners LP d/b/a Highwoods Anderson. 10.23 Lease Agreement dated August 26, 1997, by SEC File No. 1-10397 and between AmeriQuest and Tall Oaks 10-K for September 30, 1997 Associates, LP 10.25* Lease Agreement dated January 25, 1995, as SEC File No. 1-10397 amended, by and between AmeriQuest and 10-K for September 30, 1996 Anaheim Technology Center 10.26* Sublease dated as of September 4, 1996 by SEC File No. 1-10397 and between AmeriQuest and Central Video, 10-K for September 30, 1996 Inc. 21.01 Subsidiaries of AmeriQuest SEC File No. 1-10397 10-K for September 30, 1997
25 27
EXHIBIT NO. TITLE OF DOCUMENT PAGE NO. LOCATION OF FILING - --------- ------------------------------------------- -------- ------------------------------ 23.01 Consent of Arthur Andersen LLP to the SEC File No. 1-10397 incorporation of their report included in 10-K for September 30, 1997 the Annual Report on Form 10-K of AmeriQuest for the fiscal year ended September 30, 1997 into certain of AmeriQuest's previously filed Registration Statements. 24.01 Powers of Attorney for Messrs. Harry SEC File No. 1-10397 Krischik, Manfred H. Guenzel, Anton Roedl, 10-K for September 30, 1997 Richard Obermaier, Alexander C. Kramer, Jr., Marc L. Werner and J.R. Dick Iverson 27.01 Financial Data Schedule (for SEC use only) SEC File No. 1-10397 10-K for September 30, 1997
- --------------- * Incorporated herein by reference to the indicated filing pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, and Rule 24 of the Commission's Rules of Practice. 26 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1933, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Horsham, State of Pennsylvania, on the 12th day of January, 1998. AmeriQuest Technologies, Inc. /s/ ALEXANDER C. KRAMER -------------------------------------- By: Alexander C. Kramer President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------ ------------------ /s/ ALEXANDER C. KRAMER President and a Director January 12, 1998 - ------------------------------------------ (Principal Executive Alexander C. Kramer Officer) /s/ JON D. JENSEN Chief Financial Officer, Chief January 12, 1998 - ------------------------------------------ Operating Officer and Jon D. Jensen Secretary (Principal Financial and Accounting Officer) /s/ DR. HARRY KRISCHIK Director January 12, 1998 - ------------------------------------------ Dr. Harry Krischik** /s/ MANFRED H. GUENZEL Director January 12, 1998 - ------------------------------------------ Manfred H. Guenzel** /s/ RICHARD OBERMAIER Director January 12, 1998 - ------------------------------------------ Richard Obermaier** /s/ ANTON ROEDL Director January 12, 1998 - ------------------------------------------ Anton Roedl** /s/ MARC L. WERNER Director January 12, 1998 - ------------------------------------------ Marc L. Werner** /s/ J. R. DICK IVERSON Director January 12, 1998 - ------------------------------------------ J. R. Dick Iverson** /s/ ALEXANDER C. KRAMER - ------------------------------------------ Alexander C. Kramer*, Attorney-in-Fact /s/ JON JENSEN - ------------------------------------------ Jon Jensen,** Attorney-in-Fact
27 29 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- TO AMERIQUEST TECHNOLOGIES, INC.: We have audited the accompanying consolidated balance sheets of AmeriQuest Technologies, Inc. (a Delaware corporation) and subsidiaries (AmeriQuest) as of September 30, 1997 and 1996 and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended and for the three months ended September 30, 1995 and for the year ended June 30, 1995. These financial statements are the responsibility of AmeriQuest's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Kenfil Distribution (Far East) Limited, which statements reflect total assets and total revenues of 24 percent and 11 percent in 1997, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of AmeriQuest Technologies, Inc. and subsidiaries, as of September 30, 1997 and 1996, and the results of their operations and their cash flows for the years then ended and for the three months ended September 30, 1995 and for the year ended June 30, 1995 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commissions rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Miami, Florida, December 16, 1997 (Except with respect to the matters discussed in Note 12, as to which the date is January 9, 1998). F-1 30 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 1997 1996 1995 1995 ------------- ------------- ------------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES............................. $ 218,877 $ 424,708 $ 100,723 $ 416,571 COST OF SALES......................... 203,199 401,165 93,308 400,820 ----------- ----------- ----------- ----------- Gross Profit..................... 15,678 23,543 7,415 15,751 OPERATING EXPENSES Selling, general and administrative................. 35,160 45,998 13,019 53,471 Intangibles write-off............ 9,036 -0- -0- 23,777 Restructuring, asset impairment and relocation costs........... 9,338 6,400 -0- -0- ----------- ----------- ----------- ----------- 53,534 52,398 13,019 77,248 ----------- ----------- ----------- ----------- Loss from operations............. (37,856) (28,855) (5,604) (61,497) Interest expense................. 3,455 4,754 1,437 6,069 ----------- ----------- ----------- ----------- Net loss......................... $ (41,311) $ (33,609) $ (7,041) $ (67,566) =========== =========== =========== =========== Net loss per common share and common share equivalent........ $ (0.63) $ (0.76) $ (0.30) $ (3.76) =========== =========== =========== =========== Weighted average shares outstanding.................... 66,881,906 44,208,983 23,786,127 17,993,440 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements F-2 31 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents....................................... $ 7,680 $ 2,300 Accounts receivable, net of allowances for doubtful accounts of $2,156 and $5,811 as of September 30, 1997 and September 30, 1996, respectively........................................... 9,006 56,492 Inventories..................................................... 7,066 38,019 Other current assets............................................ 935 2,837 --------- --------- Total current assets......................................... 24,687 99,648 PROPERTY AND EQUIPMENT, NET....................................... 1,272 6,134 INTANGIBLE ASSETS, net of accumulated amortization of $1,961 as of September 30, 1996.............................................. -0- 9,546 OTHER ASSETS...................................................... 120 1,044 --------- --------- 26,079 116,372 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable................................................ 9,492 36,152 Due to Computer 2000............................................ 27,664 -0- Lines of credit................................................. 3,064 77,446 Other current liabilities....................................... 9,251 10,858 --------- --------- Total current liabilities.................................... 49,471 124,456 LONG-TERM OBLIGATIONS............................................. -0- 3,122 COMMITMENTS AND CONTINGENCIES (NOTES 5, 7, 8 AND 12) STOCKHOLDERS' DEFICIT Preferred Stock, $.01 par value, 7% cumulative dividend, convertible into common, 300,000 shares authorized and outstanding; entitled to $30,000,000 in involuntary liquidation.................................................. 30,000 -0- Common stock, $.01 par value; authorized 200,000,000 shares; issued and outstanding 66,881,906 and 67,047,392 shares as of September 30, 1997 and September 30, 1996, respectively...... 669 670 Additional paid-in capital...................................... 111,145 111,144 Accumulated deficit............................................. (165,206) (123,020) --------- --------- Total stockholders' deficit.................................. (23,392) (11,206) --------- --------- $ 26,079 $ 116,372 ========= =========
The accompanying notes are an integral part of these consolidated financial statements F-3 32 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' DEFICIT
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- -------------------- PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ---------- ------- ---------- ------ ---------- --------- (DOLLARS IN THOUSANDS) BALANCES AT JUNE 30, 1995............. -0- -0- 22,966,711 $230 $ 56,196 $ (82,135) Conversion of subordinated note payable............................. 810,811 8 -0- -0- 17,992 Sale of subsidiary.................... -0- -0- (350,000) (4) (697) Common stock issued by private placement and other................. -0- -0- 1,229,429 12 1,719 Exercise of employee stock options.... -0- -0- 50,000 1 37 Sale of preferred stock............... 1,785,714 18 -0- -0- 31,229 Net loss for the three months ended September 30, 1995.................. -0- -0- -0- -0- -0- (7,041) ---------- ------- ---------- ---- -------- --------- BALANCES AT SEPTEMBER 30, 1995........ 2,596,525 $ 26 23,896,140 $239 $106,476 $ (89,176) Exercise of employee stock options.... -0- -0- 82,500 1 3 Preferred stock issued for acquisition......................... 25,830 -0- -0- -0- 1,603 Common stock issued for acquisition... -0- -0- 3,969,905 40 2,367 Exercise of warrants by Computer 2000................................ 301,249 3 -0- -0- 232 Common stock issued for legal settlement.......................... -0- -0- 500,000 5 305 Common stock issued for series G preferred stock dividend............ -0- -0- 197,958 2 233 (235) Preferred stock conversion............ (2,923,604) (29) 33,104,371 330 (302) Exercise of warrants by Computer 2000................................ -0- -0- 5,296,518 53 227 Net loss for the year ended September 30, 1996............................ -0- -0- -0- -0- -0- (33,609) ---------- ------- ---------- ---- -------- --------- BALANCES AT SEPTEMBER 30, 1996........ -0- -0- 67,047,392 $670 $111,144 $(123,020) Correction of outstanding shares that were authorized but never issued in connection with settlement of debt(1)............................. -0- -0- (165,486) (1) 1 Sale of preferred stock............... 300,000 30,000 Accrued Dividend on Preferred Stock... -0- -0- -0- -0- -0- (875) Net loss for the year ended September 30, 1997............................ -0- -0- -0- -0- -0- (41,311) ---------- ------- ---------- ---- -------- --------- BALANCES AT SEPTEMBER 30, 1997........ 300,000 $30,000 66,881,906 $669 $111,145 $(165,206) ========== ======= ========== ==== ======== =========
- --------------- (1) Correction of Outstanding Shares -- The number of outstanding shares of Common Stock was corrected to account for shares that were authorized but never issued in connection with settlement of debt, and the elimination of duplicate shares erroneously issued upon exercise of an employee stock option. The accompanying notes are an integral part of these consolidated financial statements F-4 33 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 1997 1996 1995 1995 ------------- ------------- ------------- ---------- CASH FLOW FROM OPERATING ACTIVITIES: Net loss.................................. $ (41,311) $ (33,609) $ (7,041) $(67,566) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........... 2,664 3,235 691 4,723 Gain on sale of division assets......... (385) -0- -0- -0- Restructuring, asset impairment and relocation costs..................... 13,849 956 -0- 25,317 Provision for losses on accounts receivable........................... 4,970 1,661 758 5,787 Provision for losses on inventory....... 4,032 7,482 462 17,039 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable......................... 38,655 (6,564) 3,995 (3,016) (Increase) decrease in inventories... 25,581 (5,028) 6,304 (390) (Increase) decrease in other assets............................. 2,704 1,305 868 (189) Increase (decrease) in accounts payable and other.................. (29,027) 1,728 (10,050) (25,312) -------- -------- -------- -------- Net cash provided by (used in) operating activities.............................. 21,732 (28,834) (4,013) (43,607) CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from sale of division assets... 3,550 -0- -0- -0- Net cash paid for acquisition of businesses, net of cash acquired..... -0- -0- -0- (1,973) Capital expenditures, net of disposals............................ (62) (1,798) (1,361) (4,316) -------- -------- -------- -------- Net cash provided by (used in) investing activities............... 3,488 (1,798) (1,361) (6,289) CASH FLOW FROM FINANCING ACTIVITIES: Net borrowings (repayment) under lines of credit............................ (77,504) 32,202 (27,701) 20,926 Increase in due to Computer 2000........ 27,664 -0- -0- -0- Proceeds from subordinated debt......... -0- -0- -0- 18,000 Proceeds from sale of Preferred and Common Stock......................... 30,000 520 32,315 8,740 -------- -------- -------- -------- Net cash provided by (used in) financing activities............... (19,840) 32,722 4,614 47,666 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.......................... 5,380 2,090 (760) (2,230) Cash and cash equivalents at beginning of period............................ 2,300 210 970 3,200 -------- -------- -------- -------- Cash and cash equivalents at end of period............................... $ 7,680 $ 2,300 $ 210 $ 970 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements F-5 34 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS) Interest on lines of credit:..... During the fiscal year ended September 30, 1997, September 30, 1996, the three months ended September 30, 1995, and the fiscal year ended June 30, 1995, the Company paid interest costs of approximately $3,614, $4,774, $1,886, and $5,974, respectively. Income taxes:.................... During the fiscal years ended September 30, 1997 and September 30, 1996, the three months ended September 30, 1995, and the fiscal year ended June 30, 1995, the Company made no income tax payments. Noncash investing and financing activities: Acquisition of Robec minority interest:........................ During the fiscal year ended September 30, 1996, the Company issued 6,750,874 shares of common stock valued at $4,245 in exchange for the remaining minority interest of Robec, Inc. Legal settlement:................ During the fiscal year ended September 30, 1996, the Company issued 500,000 shares of common stock for full settlement of an accrued legal liability of $310. Conversion of subordinated note payable and preferred stock into common stock:.................... During the fiscal year ended September 30, 1996, the Company converted 2,923,604 shares of preferred stock into 33,104,371 shares of the Company's common stock. During the three months ended September 30, 1995, the Company issued 810,811 shares of preferred stock upon conversion of an $18,000 subordinated note payable. Intangible write-off:............ During the quarter ended March 31, 1997, the Company wrote-off $9,036 of intangibles related to the termination of its standard distribution business. During the fiscal year ended June 30, 1995, the Company wrote-off $23,777 of intangibles related to the termination of its entertainment software business and impairment of intangible assets at certain acquired regional distributors. Dividends on Preferred Stock:.... During the fiscal year ended September 30, 1997, the Company has accrued $875 in dividends payable to preferred stock convertible into shares of common stock at the Company's election. The accompanying notes are an integral part of these consolidated financial statements F-6 35 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business. AmeriQuest Technologies, Inc. and subsidiaries ("Company" or "AmeriQuest") is primarily a national valued-added wholesale distributor of micro, mini and mid-range computers and related products to value-added resellers ("VARs") and systems integrators. The Company's current business focus is to continue second tier distribution in areas which minimize direct competition with the largest competitors, and to concentrate on selling higher-margin mid-range computer systems, complementary and related individual computer components, and arrangements for maintenance and leasing services. AmeriQuest provides value-added services and technical support to its customer base. AmeriQuest focuses on marketing the products of a limited number of key vendors. AmeriQuest selects its product lines to minimize competition among vendors' products while maintaining some overlap to provide protection against product shortages or discontinuations. Historical revenues from sale of products of the three leading vendors, IBM, Hewlett Packard and Unisys, represent approximately 22%, 7% and 14%, respectively, of the ASG segment of the Company's overall revenue. No other vendor represents 10% or more of the Company's purchases. In addition, no one customer represents more than 10% of consolidated revenues. Restructuring, Asset Impairment and Relocation Costs. On April 9, 1997, the Board approved a wide-ranging restructuring plan with the goal of focusing on the Company's Advanced Systems Group ("ASG"). The plan included closure of all warehouse facilities, other than ASG, which is based in Horsham, Pennsylvania. The restructuring has resulted in the closure of warehouse facilities in Visalia, California, Miami, Florida, Dallas, Texas, and Chicago, Illinois. In addition the number of employees has been reduced to 84 employees in the US. The Company has also closed its corporate headquarters in Florida and moved two employees to Horsham. At September 30, 1997, the Company has accrued $3,738,000 of cost related to the restructuring plan which may be incurred from litigation, closing of facilities and other restructuring costs. The restructuring plan was implemented, but not completed, throughout fiscal year 1997 and resulted in a substantial reduction in sales revenue with the goal of returning the Company to profitability in future years. Sales, for the year ended September 30, 1997, of the businesses to be closed were approximately $126 million. The components of the restructuring, asset impairment and relocation costs for the year ended September 30, 1997 are as follows (dollars in thousands): Impairment of intangible assets............................................ $ 9,036 ------- Restructuring, Asset Impairment and Relocation Costs: Abandonment of leasehold improvements and other property and equipment... 2,448 Lease payments in excess of sublease income.............................. 1,362 Employee severance costs................................................. 2,680 Relocation costs........................................................... 670 Other...................................................................... 2,178 ------- Total classified as restructuring, asset impairment and relocation costs................................................ $ 9,338 Provision for losses on inventory and vendors (included in cost of sales)................................................................... 4,032 Provision for losses on accounts receivable (included in SG&A expenses).... 3,945 ------- Total costs relating to restructuring, asset impairment and relocation for the year ended September 30, 1997................ $26,351 =======
F-7 36 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During fiscal year 1996, the Company closed its corporate headquarters in California and moved its operations to Florida. The components of the loss on sublease and relocation costs are as follows (dollars in thousands): Abandonment of leasehold improvements............................... $ 956 Lease payments in excess of sublease income......................... 2,744 Personnel costs..................................................... 1,455 Other............................................................... 1,245 ------ $6,400 ======
Basis of consolidation. The consolidated financial statements include the accounts of AmeriQuest and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Accounting period. Effective September 30, 1995, the Company changed its fiscal year end to September 30. The Company's 1995 fiscal year ended on the Saturday closest to June 30, 1995. The year end dates for the past three fiscal years were September 30, 1997, September 30, 1996 and July 1, 1995. For presentation purposes, fiscal year end 1995 is referred to as June 30. Inventories. Inventories consist principally of computer hardware and software held for resale and are stated at the lower of first-in, first-out or market. Reserves for inventory obsolescence and slow moving product are provided based upon specified criteria, such as recent sales activity and date of purchase. Property and equipment. Property and equipment are stated at cost. Depreciation and amortization are computed using straight line method over estimated useful lives as follows: Equipment............................... 5 years Furniture and fixtures.................. 5 years Leasehold improvements.................. Lease term Vehicles................................ 3 to 5 years
Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and betterments to property and equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in operations. Intangible assets. Intangible assets relate primarily to acquired distribution channels and related vendor relationships and market positions. Intangibles are amortized using the straight-line method from the date of acquisition over the expected period to be benefited, initially estimated at 10 years. In determining the appropriate amortization period, the Company considered the historical length of the acquiree's vendor relationships and the overall size and quality of the vendors and their product offerings. On a quarterly basis, the Company assesses the recoverability of intangible assets based upon consideration of past performance and future expectations of undiscounted cash flow on an acquisition by acquisition basis to the extent separately identifiable, in accordance with Statement of Financial Accounting Standards No.121 "Accounting for the Impairment of Long-Lived Assets and For Long Lived Assets to be Disposed of." To the extent separate assessment of such acquired intangibles is no longer feasible (i.e. as a result of integrating multiple acquisitions into a single business unit), such assessment is performed on a combined basis as appropriate. As a result of these assessments, during the quarter ended March 31, 1997, the Company wrote-off approximately $9 million of intangibles related to the termination of its standard distribution business. During the year ended June 30, 1995, in anticipation of the completion of Computer 2000 AG's (Computer 2000) equity investment, the Company, with input from Computer 2000 management, terminated its entertainment software business to focus its management efforts and capital in the higher margin, value- F-8 37 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) added products, application software and computer hardware distribution businesses. Management determined that future operating cash flow from certain regional acquisitions were not sufficient to recover the related intangible assets. As a result of these assessments, the Company wrote-off approximately $23.8 million of intangibles related to the termination of its software business and the impairment of intangibles related to acquired regional distributors. Market development funds and volume incentive rebates. In general, vendors provide various incentive programs to the Company. The funds received under these programs are determined based on purchases and/or sales of the vendors' product and the performance of certain training, advertising and other market development activities. Revenue associated with these funds is recorded when earned either as a reduction of selling, general and administrative expenses or product cost, according to the specific nature of the program. Sales recognition. Sales are recorded as of the date shipments are made to customers. Sales returns and allowances are reflected as a reduction in sales and recorded in inventory at expected net realizable value. The Company permits the return of products within certain time limits and will exchange returned products. Products that are defective upon arrival are handled on a warranty return basis with the Company's vendors. The Company provides for product warranty and return obligations at the point of sale based on estimates of expected future costs. Translation of foreign currencies. Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments and foreign currencies gains and losses resulting from transactions denominated in foreign currencies were not material. Income taxes. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109), which requires an asset and liability approach in accounting for income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements and as measured by the provisions of enacted laws. Additionally, SFAS 109 requires that deferred tax assets be evaluated and a valuation allowance be established if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. Net loss per common share and common share equivalent. Net loss per common share and common share equivalent is computed by dividing net loss and dividends applicable to preferred stock by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents that increase earnings per share or decrease loss per share are excluded from the computation. In February, 1997, the Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share" effective for fiscal years ending after December 15, 1997. SFAS 128 simplifies the calculation of earnings per share to measure the performance of an entity over a reporting period for both basic earnings per share and diluted earnings per share. SFAS 128 does not currently have an impact on the Company's earnings per share as the Company is incurring net losses. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Reclassifications: Certain amounts in the prior periods have been reclassified to conform to the current year's presentation. 2. ACQUISITIONS AND DISPOSITIONS AmeriQuest/Kenfil Inc. sold its wholly-owned subsidiaries Kenfil Distribution (Far East) Limited, a Hong Kong corporation and Kenfil Distribution (M) Sdn. Bhd., a Malaysian corporation, to Regentland Holdings Ltd. for proceeds of $2,939,062, pursuant to a Stock Purchase Agreement dated November 20, 1997. The purchase price was equivalent to repayment of a loan and the net book value of the assets sold plus a premium of $450,000, and was paid by issuance of a dividend from Kenfil Distribution (Far East) Limited to AmeriQuest/Kenfil Inc. in the amount of $1,717,106, the loan repayment of $771,956 from Kenfil F-9 38 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Distribution (Far East) Limited to AmeriQuest/Kenfil Inc., and the payment of $450,000 from Regentland Holdings Ltd. Regentland Holdings Ltd. was formed by Mr. Simon Yip, the former Chief Executive Officer of Kenfil Distribution (Far East) Limited to accommodate his purchase of such entities. Concurrent with the closing, the Board of Directors of AmeriQuest/Kenfil Inc. received an opinion from Chase Securities, Inc. to the effect that the terms of the sale were fair to AmeriQuest Technologies, Inc. as the sole stockholder of AmeriQuest/Kenfil Inc. from a financial point of view. On June 19, 1997 CMS Enhancements Inc. sold substantially all of its assets to CMS Peripherals Inc., a company formed by the former managing director of CMS Enhancements Inc., Mr. Ken Burke. CMS Enhancements Inc., as part of the transaction has changed its name to AAG Inc. AmeriQuest Technologies Inc. also signed a non-competition agreement with CMS Peripherals with a term of five years. Proceeds from the sale of the assets of CMS Enhancements, Inc. was $3.55 million, with a gain of $385,000, which was classified as a reduction of selling, general and administrative expenses in the accompanying Statement of Operations. The Company had previously pursued a strategy of growth through acquisition by acquiring regional distributors with the goal of creating a national distributor of value-added computers, subsystems and peripherals. The success of this strategy was dependent upon the ability of the Company to effectively consolidate and integrate the operations of the acquired businesses, combine different cultures and obtain adequate financing to complete acquisitions and fund working capital requirements. All of the Company's acquisitions completed during fiscal years June 30, 1994 through September 30, 1996 have been accounted for in accordance with the purchase method of accounting. The Company's consolidated financial statements include acquiree's results of operations from the effective acquisition dates. The per share valuation of the Company's common stock issued in connection with the following acquisitions represents a discount from the quoted market price, based upon the weighted average discounts received on recently completed private equity cash transactions. Management believes this method of valuation is the best indication of fair value due to the Company's thin stock trading value and small public float. AmeriQuest/Kenfil, Inc. ("Kenfil"). As of June 30, 1994, the Company acquired 51% of the outstanding common stock of Kenfil for common stock of the Company. Kenfil distributed microcomputer software in both the U.S. and Asia. As of September 1994, the Company acquired the remaining 49% of the outstanding common stock of Kenfil and converted certain trade and subordinated debt of Kenfil for common and preferred stock, subsequently converted to common stock of the Company. During the fiscal year ended June 30, 1995, the former U.S. operations of Kenfil, including principally educational and entertainment software distribution, were terminated by the Company. Total consideration given for the Kenfil acquisition was 5,846,162 shares of the Company's common stock valued at approximately $14 million, plus transaction costs of $785,000. Robec, Inc. ("Robec"). As of September 1994, the Company acquired 50.1% of the outstanding common stock of Robec for common stock of the Company. Robec was a distributor of computer products and services, specializing in systems and UNIX applications based in Horsham, Pennsylvania. In November 1995, the Company acquired the remaining 49.9% of Robec outstanding common stock not owned by the Company. The Robec merger agreement required the Company to issue additional common shares to provide former and current Robec shareholders participating in the merger with a minimum value associated with the Company's common stock issued or to be issued to complete the merger transaction. Based upon the exchange ratio included in the Robec merger agreement, 1,402,805 shares of the Company's common stock valued at $2.7 million were issued in exchange for 50.1% of Robec's common stock in September 1994. Due to the minimum value provisions and adjustments to the exchange ratio included in the amended Robec merger F-10 39 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) agreement, an additional 3,969,905 shares of the Company's common stock, 25,830 shares of Series G convertible preferred stock, (convertible into 2,583,011 shares of common stock) and a related preferred stock dividend of 197,958 shares of common stock were issued to complete the Robec merger. The additional common and preferred shares issued were valued at $4.2 million. Total consideration, after conversion of the Series G convertible preferred stock into common stock, was 8,153,679 shares of the Company's common stock valued at $6.9 million, plus transaction costs of $265,000. National Computer Distributors. In November 1994, the Company acquired all of the outstanding common stock of Ross White Enterprises, Inc. d/b/a "National Computer Distributors" ("NCD") for cash and common stock of the Company. NCD was a distributor of computer products and services, specializing in systems and connectivity applications. Total consideration given in the NCD acquisition was 1,864,767 shares of the Company's common stock valued at $4.1 million and cash of $3.4 million. Management believed that distribution channel access represented the most significant intangible acquired in connection with the acquisitions discussed above. Management initially assigned a 10 year economic life to this intangible asset as that is the period in which management expects to derive benefit from the existing vendor relationships and market positions. Management determined that 10 years was an appropriate economic life based upon the historical length of the acquiree's vendor relationships and the overall size and quality of the acquiree's vendors and their product offerings. See Note 1 for a discussion of the Company's policy for evaluating the realization of the intangible assets, the termination of the standard distribution business, the termination of the entertainment software business and the related write-off of intangibles. The following unaudited pro forma combined information shows the results of the Company's operations for the fiscal year ended June 30, 1995, as though the acquisitions and the Computer 2000 equity investment (see Note 9) all had occurred as of the beginning of the fiscal year (in thousands except per share data):
YEAR ENDED JUNE 30, 1995 ------------- Revenues........................................................ $ 520,134 Net loss........................................................ (70,020) Net loss per share.............................................. (1.33) Weighted average shares......................................... 52,729,000
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place at the beginning of the indicated period or the results that may occur in the future. Furthermore, the pro forma results do not give effect to cost savings or incremental costs which may occur as a result of the integration and consolidation of the acquired companies. The entertainment software business of Kenfil contributed revenues of $25 million and incurred net losses of $25.9 million on a pro forma basis during fiscal year 1995. 3. INVENTORIES Inventories consist of the following (in thousands):
SEPTEMBER 30 ------------------- 1997 1996 ------- -------- Finished goods............................................ $ 6,927 $ 36,684 Raw materials and subassemblies........................... 139 1,335 ------ ------- $ 7,066 $ 38,019 ====== =======
F-11 40 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventories are reflected net of reserves of approximately $1.3 million, and $6.8 million at September 30, 1997 and 1996, respectively. In estimating the inventory reserves, management relied upon its knowledge of the industry, projected sales volumes, current inventory levels, and aging of product on-hand. Because of the assumptions used, the amounts the Company will ultimately realize could differ materially in the near term from the net inventory balances as included in the accompanying financial statements. Inventories do not contain any labor or overhead. The Company manages its inventories by maintaining sufficient quantities to achieve high order fill rates while at the same time attempting to stock only those products in high demand with a rapid turnover rate. Inventory balances will fluctuate as the Company adds new product lines and when appropriate, makes large purchases from manufacturers when the terms of such purchases are considered advantageous. Short product life years and rapid technological obsolescence significantly increases the risk of declines in inventory value and the lack of recovery of inventory balances at recorded values. The Company's contracts with most of its vendors provide price protection and stock return privileges to reduce to some degree the risk of loss to the Company due to manufacturer price reductions and slow moving or obsolete inventory. 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
SEPTEMBER 30 ------------------- 1997 1996 ------- ------- Equipment................................................ $ 3,224 $ 8,362 Furniture and fixtures................................... 1,497 3,391 Leasehold improvements................................... 329 2,266 Less accumulated depreciation and amortization........... (3,778) (7,885) ------ ------ $ 1,272 $ 6,134 ====== ======
5. LINES OF CREDIT As of September 30, 1997, the Company maintained floor planning arrangements with IBM Credit Corporation (IBMCC) for a maximum credit line of $20 million, bearing interest at the lender's prime rate plus two and five-eighths percent (11.625 percent at September 30, 1997). The borrowing base under the IBMCC facility is limited to a contractual percentage of eligible inventories and receivables, which totaled approximately $7.2 million at September 30, 1997. At September 30, 1997, all inventories and accounts receivable were pledged as collateral under this facility and IBMCC holds liens on substantially all other assets owned by the Company. The amount outstanding under this arrangement at September 30, 1997 was approximately $3.1 million. At September 30, 1997, the terms of the IBMCC lending agreement included certain restrictive covenants which required the maintenance of specified financial ratios generally related to tangible net worth, working capital and total debt to tangible net worth. At various dates during fiscal years 1996 and 1997 and at September 30, 1997, the Company was in default with certain financial covenants. In December 1997, the Company received a waiver to its credit agreement with IBMCC, which waived the financial covenants the Company was not in compliance with at September 30, 1997. The IBMCC line of credit expires February 28, 1998. (See note 12). In December 1995, the Company obtained lines of credit with four Germany-based financial institutions at Libor-based interest rates which, in the aggregate, provided for revolving credit totaling $66 million as of September 30, 1996. In October 1996, the total credit granted under these credit facilities was increased by $10 million to allow a maximum extension of financing to the Company of $76 million. All of the aforementioned German lines of credit were guaranteed by Computer 2000 at September 30, 1996. Computer F-12 41 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2000's guarantees expired on September 30, 1997. On September 30, 1997, Computer 2000, paid the outstanding bank lines of credit which totaled $27.7 million and converted the loans to a noninterest bearing demand loan, agreed to defer demand of payment through September 30, 1998, and subordinate its loan to the working capital lender. Notwithstanding the agreement by C-2000 to defer demand of payment of the loan prior to September 30, 1998, certain specified events such as, but not limited to, the merger, sale or reorganization of the Company will make the loan immediately due and payable. Additionally, C-2000 has guaranteed $5 million to IBMCC (see Note 12) and certain amounts due to two of the Company's suppliers. The weighted average interest rate for all borrowings under the above credit facilities was 6.3%, 6.4%, 11.0%, and 11.2% at September 30 of 1997, 1996 and 1995 and June 30, 1995, respectively. 6. INCOME TAXES The deferred tax assets, net of the valuation allowance, of the Company consist of the following (in thousands):
SEPTEMBER 30 ---------------------------------- 1997 1996 1995 -------- -------- -------- Inventory reserves......................... $ 498 $ 2,694 $ 5,420 Allowance for doubtful accounts............ 868 2,253 3,440 Other, including restructuring charge...... 8,964 5,780 2,110 Net operating loss carryforwards........... 46,163 38,663 25,619 Valuation allowance........................ (56,493) (49,390) (36,589) -------- -------- -------- $ -0- $ -0- $ -0- ======== ======== ========
The valuation allowances at September 30, 1997, 1996 and 1995 were provided because it is not more likely than not, as defined in SFAS 109, that the deferred tax benefits will be realized through operations. The valuation allowances recorded against deferred tax assets are based on management's estimates related to the Company's ability to realize these benefits. Appropriate adjustments will be made to the valuation allowances if circumstances warrant in future periods. Such adjustments may have a significant impact on the Company's financial statements. The principal elements accounting for the difference between income taxes computed at the statutory rate and the effective rate are as follows (in thousands):
SEPTEMBER 30 --------------------------------- 1997 1996 1995 -------- -------- ------- Tax credit computed at statutory rate....... $(15,492) $(13,444) $(2,816) Intangible write-offs and amortization...... 7,992 400 83 Net operating losses not benefited.......... 7,500 13,044 2,733 -------- -------- ------- $ -0- $ -0- $ -0- ======== ======== =======
At September 30, 1997, Company had an income tax operating loss carry-forward of approximately $117 million, which is available to offset earnings in future periods through 2012, subject to Internal Revenue Code section 382 limitations discussed below. The Company experienced ownership changes in 1994 and 1995. For income tax purposes, this results in future annual limitations on the utilization of net operating loss carry-forwards generated prior to these ownership changes in August 1995 to approximately $2.6 million per year. Losses incurred subsequent to the changes in ownership in August 1995 of $54.8 million are not subject to this limitation and are available to offset earnings in future periods through 2012, unless there is a subsequent change in control. F-13 42 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES The Company leases its corporate office, warehouse space and certain equipment under operating leases. Future minimum rental commitments for all non-cancelable operating leases at September 30, 1997 are as follows (in thousands): Year ended September 30, 1998............................................................ $ 862,600 1999............................................................ 467,000 2000............................................................ 243,900 2001............................................................ 16,200
Total rental expense under non-cancelable agreements for the periods ending September 30, 1997, September 30, 1996, and September 30, 1995 was approximately $4,298,000, $3,759,000, and $1,232,000, respectively. The Company is contingently liable at September 30, 1997 under the terms of repurchase agreements with financial institutions providing inventory financing for dealers of the Company's products. The contingent liability under those agreements approximates the amount financed, reduced by the resale value of any products which may be repurchased, and the risk of loss is spread over numerous dealers and financial institutions. Losses under these agreements have been immaterial in the past. Sales under these agreements during the years ended September 30, 1997, 1996, for the three months ended September 30, 1995 and for the year ended June 30, 1995 were approximately $18 million, $16 million, $2 million and $17 million, respectively. 8. LEGAL PROCEEDINGS While not expected to be of material effect to the Company, Kenfil Inc. vs. RLI Insurance Company, Superior Court of the State of California, County of Los Angeles, No. BC 108564 filed July 12, 1994, involves litigation instituted by Kenfil Inc. to recover additional monies for the damage it incurred in the Northridge earthquake of January 17, 1994. The defendant cross-claimed on August 12, 1994 for return of the $840,000 it had paid on claims submitted by Kenfil, Inc., based on affidavits from former Kenfil employees alleging that they had been instructed following the earthquake to intentionally destroy additional inventory. The defendant's theory is that the policy was voided ab initio by the fraudulent actions of Kenfil Inc.'s employees; while Kenfil Inc.'s position is that the fraud unauthorized by the corporation but committed by a few employees does not operate to void the contract. The defendant's theory is premised on the language of the contract, while Kenfil Inc.'s position is supported by a case from the California Supreme Court. Messrs. Irwin Bransky and Nelson Landman, former officers of Kenfil Inc. at the time of the earthquake, have pleaded guilty to mail fraud relating to the mailing of documents asserting the destruction of inventory from the earthquake where such destruction actually occurred in large part following the earthquake. However, their actions were not attributed to Kenfil Inc. during the course of the criminal proceedings. Kenfil Inc. has a continuing claim against the defendant for additional amounts never paid under the contract for the interruption of the business of Kenfil Inc. and claims against Messrs. Bransky and Landman for the damages occasioned to Kenfil Inc. by their unauthorized and unratified criminal conduct. No assurance can be given as to the final outcome of this legal matter. While not expected to be of material effect to the Company, Leading Edge Products, Inc. vs. AmeriQuest Technologies, Inc. involves suit against AmeriQuest/NCD Inc., one of the Company's predecessors in interest, wherein Leading Edge is asserting breach of contract and unjust enrichment. In its complaint Leading Edge alleges a $1,055,438 debt and seeks double or triple damages, interest, attorney's fees, and costs. The Company responded to the complaint by denying liability and asserted counterclaims for breach of contract, breach of implied covenant of good faith and fair dealing, breach of warranty, and unjust enrichment. F-14 43 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In its counterclaim the Company seeks to recover money damages in the amount determined by the court, double or triple damages, interest, attorney's fees, and costs. The case is in its early stages and the accounting information has yet to be exchanged. The Company's accounting information indicates that the Company owes Leading Edge a total of $451,852. The information received to date, however, indicates that the Company's potential exposure is at least $451,852 and may be as high as $678,597. No assurance can be given as to the final outcome of this legal matter. The Company is also a party to various other legal matters. Based upon discussions with counsel, management believes that the ultimate outcome of these matters and the litigation described above will not have a material adverse effect on the Company's future financial position or its results of operations. 9. COMPUTER 2000 PURCHASE AGREEMENT AND RELATED BUSINESS TRANSACTIONS In August 1995, Computer 2000 exchanged the $18 million subordinated note for 810,811 shares of AmeriQuest's Series A preferred stock (convertible into 8,108,110 shares of common stock). In addition, Computer 2000 purchased from AmeriQuest, for $31.2 million, 1,785,714 shares of Series B preferred stock (convertible into 17,857,140 shares of common stock). In April 1996, the 810,811 shares of Series A preferred stock and the 1,785,714 shares of Series B preferred stock, noted above, were converted into 8,108,110 and 17,857,140 shares of common stock, respectively. In connection with the conversion of the $18 million subordinated note, the capital infusion of $31.2 million, the completion of the Robec merger and various private placements throughout the fiscal year, Computer 2000 was issued warrants to purchase additional shares of common stock at prices ranging from $.05 to $.53 per common share. During fiscal year ended September 30, 1996, warrants were exercised by Computer 2000 to purchase 7,868,518 shares of common stock. Assuming the exercise of the remaining warrants, Computer 2000 will hold approximately 58% of the outstanding voting stock of the Company. In March 1996, the shareholders approved an increase in the authorized common stock of the Company from 30 to 200 million shares. During November 1996, Computer 2000 had obligated itself to provide AmeriQuest with additional financing early in calendar 1997 in the amount of $30 million. Computer 2000 fulfilled this obligation in full through the purchase of preferred stock from the Company, as described in the following paragraph. In May 1997, Computer 2000 invested $30 million in the Company for which it received 300,000 shares of Series H Cumulative Convertible Preferred Stock. The proceeds received were used to partially pay down the outstanding lines of credit. All of the Company's bank lines of credit were at that time guaranteed by Computer 2000 AG. These convertible preferred shares carry a 7% per annum cumulative dividend right, payable at the choice of AmeriQuest in either shares or cash until June 30, 1998. Thereafter such dividends must be paid in cash. The shares are convertible into Common Stock at a conversion price of $0.715 per share of Common Stock. F-15 44 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. STOCK OPTION PLANS The Company has instituted various stock option plans which authorize the granting of options to key employees, directors, officers, vendors and customers to purchase shares of the Company's common stock. All grants of options during the years presented have been to employees or directors and were granted at the then quoted market price. A summary of shares available for grant and the options outstanding under the plans is as follows:
SHARES AVAILABLE OPTIONS PRICE FOR GRANT OUTSTANDING RANGE ---------- ---------- ------------- BALANCES AT JUNE 30, 1995............................ 519,693 56,901 $1.50 - 4.50 Increase in shares available for grant............... 2,000,000 Options granted...................................... (2,795,000) 2,795,000 0.05 - 4.50 Options cancelled.................................... 429,327 (429,327) 1.50 - 2.00 ---------- ---------- ------------ BALANCES AT SEPTEMBER 30, 1995....................... 154,020 2,422,574 $0.05 - 4.50 Options exchanged in Robec acquisition............... (301,978) 301,978 0.45 - 2.00 Options exercised.................................... (82,500) 0.05 Options cancelled.................................... 447,561 (447,561) 0.45 - 4.50 ---------- ---------- ------------ BALANCES AT SEPTEMBER 30, 1996....................... 299,603 2,194,491 $0.05 - 4.50 Options cancelled.................................... 1,628,987 (1,628,987) 0.05 - 3.50 ---------- ---------- ------------ BALANCES AT SEPTEMBER 30, 1997....................... 1,928,590 565,504 $0.45 - 4.50 ========== ========== ============
The following table summarizes information about fixed stock options outstanding at September 30, 1997:
RANGE OF NUMBER OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISE PRICE AS OF SEPTEMBER 30, 1997 CONTRACTUAL LIFE EXERCISE PRICE - -------------- ------------------------ ---------------- ---------------- $0.453 181,907 20 months $0.453 1.325 60,931 6 months 1.325 1.500 152,666 3 months 1.500 3.150 20,000 3 months 3.150 4.500 150,000 18 months 4.500 - -------------- ------- --------- ------ $0.453 - 4.500 565,504 13 months $1.998 ============== ======= ========= ======
The Company applies APB Opinion 25 and related interpretations in accounting for its plans. No stock options or warrants were granted in fiscal years 1997 or 1996. Accordingly, no compensation cost has been recorded or proforma disclosures are required under the provisions of SFAS 123, "Accounting for Stock-Based Compensation". Of the 565,504 options outstanding, 529,123 options are currently exercisable. F-16 45 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. FOREIGN SALES INFORMATION A summary of the Company's operations by geographic area is as follows (in thousands):
FAR U.S. EAST ELIMINATIONS CONSOLIDATED --------- ------- ------------ -------- YEAR ENDED SEPTEMBER 30, 1997 Sales to unaffiliated customers................ $ 194,342 $24,535 -0- $218,877 Loss (income) from operations.................. 37,887 (31) -0- 37,856 Identifiable assets............................ 19,799 6,280 -0- 26,079 YEAR ENDED SEPTEMBER 30, 1996 Sales to unaffiliated customers................ $ 404,151 $20,557 -0- $424,708 Loss (income) from operations.................. 29,231 (376) -0- 28,855 Identifiable assets............................ 110,955 5,417 -0- 116,372 THREE MONTHS ENDED SEPTEMBER 30, 1995 Sales to unaffiliated customers................ $ 94,742 $ 5,981 -0- $100,723 Loss from operations........................... 5,541 63 -0- 5,604 Identifiable assets............................ 109,419 6,112 -0- 115,531 YEAR ENDED JUNE 30, 1995 Sales to unaffiliated customers................ $ 374,552 $42,019 -0- $416,571 Loss from operations........................... 60,746 751 -0- 61,497 Identifiable assets............................ 122,548 5,460 -0- 128,008
United States sales include export sales of approximately $5.3 million, $41.9 million, $1.6 million, and $6.4 million made principally to Europe, Latin America, the Far East and Canada during the fiscal years ended September 30, 1997, September 30, 1996, the three months ended September 30, 1995 and the fiscal year ended June 30, 1995, respectively. See Footnote 2 for disposition of the Far East operations. 12. LIQUIDITY AND SUBSEQUENT EVENTS At September 30, 1997, the Company had borrowed $3.1 million against its secured line of credit with IBMCC. On September 30, 1997, the Company was not in compliance with various financial covenants of the agreement. IBMCC has subsequently issued a waiver to the Agreement which waived prior defaults. The IBMCC line of credit was scheduled to expire on February 28, 1998. On January 9, 1998, the Company obtained a commitment letter from IBMCC (the Commitment Letter) to extend its credit line through September 30, 1998, subject to certain modifications and conditions. Under the terms of the Commitment Letter, the credit line will be reduced from $20 million to $5 million on March 1, 1998. The $5 million credit line is guaranteed by Computer 2000 and any amounts owed by the Company to Computer 2000 is subordinated to the credit line. The Company's collateral advance rates are 100% (or as may be determined by audit) of IBMCC financed inventory and 80% (50% of which will be used to compute the maximum advance amount) of eligible accounts receivable. The Commitment Letter is subject to certain conditions, including a satisfactory audit of the collateral by IBMCC scheduled to commence on January 12, 1998. In addition, certain financial statement covenants of the IBMCC credit line will be revised based upon management's estimate of future results. F-17 46 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1997 the Company's indebtedness to IBMCC was $12,353,000. During December 1997 the Company purchased $6 million of IBM products, primarily to meet the minimum purchase commitment needed to retain IBM MIR distribution rights. Under the terms of the IBM vendor agreement, the Company may return a significant portion of these IBM products and may be required to do so in order to reduce the IBMCC line of credit from $20 million to $5 million at February 28, 1998. The Company's distribution agreement with IBM requires the Company to achieve certain purchase levels for IBM's mid-range computer systems. There is no assurance that the Company will be able to meet the purchase requirements that might be imposed upon it in the future by IBM. Nor has the Company received confirmation from IBM that it has met the required purchase levels for calendar 1997. Through September 30, 1997, Computer 2000 guaranteed lines of credit with four German banks. Such guarantees expired on September 30, 1997, at which time Computer 2000 paid the outstanding bank lines of credit that totaled $27.7 million and converted the loans to a non-interest bearing demand loan. Computer 2000 has agreed to defer demand of payment through September 30, 1998 and subordinate its loan to IBMCC (See Note 5). It is unlikely that the Company will have the ability to repay the loan if payment was demanded by Computer 2000. The Company has no commitment from Computer 2000 to provide additional funding to the Company, although Computer 2000 has guaranteed $5 million to IBMCC and certain amounts due to two of the Company's suppliers. Management believes that its existing cash, the non-interest bearing $27.7 million loan from Computer 2000, the supplier guarantees and the $5 million line of credit from IBMCC will be adequate for the Company to continue in business and meet its financial obligations on a timely basis through September 30, 1998. The New York Stock Exchange ("NYSE") has repeatedly informed the Company that it is not in compliance with certain of the NYSE's requirements for continued listing on the NYSE. The NYSE could delist the Company's common stock at any time, thereby adversely affecting the public market for such securities. The Company is considering various strategic alternatives, including possible merger or sale of the Company. F-18 47 SCHEDULE II AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND ACCOUNTS AT END DESCRIPTIONS OF PERIOD EXPENSE WRITTEN-OFF OTHER OF PERIOD - --------------------------------------- ---------- ---------- ---------- ------ --------- Allowance for Doubtful Accounts: July 1, 1995 to September 30, 1995... 9,572 758 2,150 8,180 October 1, 1995 to September 30, 1996.............................. 8,180 1,661 4,030 5,811 October 1, 1996 to September 30, 1997.............................. 5,811 4,970 8,625 2,156 Inventory Reserves: July 1, 1995 to September 30, 1995... 13,779 462 929 13,312 October 1, 1995 to September 30, 1996.............................. 13,312 7,482 13,966 6,828 October 1, 1996 to September 30, 1997.............................. 6,828 4,032 9,537 1,323
F-19 EX-3.01(C) 2 CERTIFICATE OF DESIGNATIONS FOR SERIES H PREFERRED 1 Exhibit 3.01(c) CERTIFICATE OF DESIGNATIONS OF THE SERIES H CUMULATIVE CONVERTIBLE PREFERRED STOCK (PAR VALUE $.01 PER SHARE) OF AMERIQUEST TECHNOLOGIES, INC. --------------------- PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE --------------------- The undersigned, does hereby certify that the following resolution was duly adopted by the Board of Directors of AmeriQuest Technologies, Inc., a Delaware corporation (the "Corporation"), at a meeting duly convened and held on April 23, 1997, at which a quorum was present and acting throughout: RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation (the "Board of Directors") by Article FOURTH of the Certificate of Incorporation of the Corporation, as amended by that certain Certificate of Amendment effective as of April 1, 1996, (the "Certificate of Incorporation") the Board of Directors hereby authorizes and approves the creation and issuance of a new series of Preferred Stock of this Corporation upon the terms and conditions set forth in these resolutions which fix the powers, designation, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such new series, in addition to those set forth in the Certificate of Incorporation, as follows: (A) Series H Cumulative Convertible Preferred Stock. The new series of Preferred Stock of the Corporation authorized hereby shall be designated the "Series H Cumulative Convertible Preferred Stock" (hereinafter referred to as the "Series H Preferred Stock"), and shall consist of 300,000 shares, $.01 par value per share; provided, however, that the Board of Directors may decrease (but not increase) the number of authorized shares in such series subsequent to the date of original issuance of shares in such series (the "Original Issuance Date"), but not below the number of shares of such series then outstanding. The Series H Preferred Stock is issuable solely in whole shares that shall entitle the holder thereof to exercise the voting rights, to participate in the distributions and to have the benefit of all other rights of holders of Series H Preferred Stock as set forth herein and in the Certificate of Incorporation. (B) Rights, Preferences and Restrictions of Series H Preferred Stock. The Series H Preferred Stock shall have the voting power, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as set forth below. For purposes of this Certificate of Designations, the terms "Common Stock" and "Preferred Stock" shall have the meanings set forth in the Certificate of Incorporation in effect as of the Original Issuance Date. 1. Dividend Provisions. The holders of shares of Series H Preferred Stock shall be entitled to receive dividends payable in cash (or, through and including the dividend payable on June 30, 1998, at the option of the Corporation, payable in whole or in part in Common Stock valued as set forth below), out of any funds legally available therefor, prior and in preference to any declaration or payment of any dividend (other than a dividend payable in shares of Common Stock of the Corporation) on the Common Stock and to any declaration or payment of any dividend on any other series of Preferred Stock of the Corporation (other than dividends payable in Preferred Stock of the same series and class upon which such dividend is declared and paid), at the rate of $7.00 per share of Series H Preferred Stock per annum (as adjusted for any stock dividends, combinations or splits with respect to such shares), payable quarterly on the last day of March, June, September and December of each year, commencing June 30, 1997. Such dividends shall accrue on each share and accrue from day to day, whether or not earned or declared, and shall be cumulative so that if such dividends with respect to any previous quarter dividend period at said rate per share per annum shall not 1 2 have been paid on or declared and set apart for all shares of Series H Preferred Stock at the time outstanding, the deficiency shall be fully paid on or declared and set apart for such shares before the Corporation makes any distribution (as such term is hereinafter defined) to the holders of Common Stock or any other series of Series H Preferred Stock. The term "distribution" as used in this paragraph shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise (except a dividend in shares of the Corporation which are junior to the Series H Preferred Stock as to dividends and assets and except as contemplated by this Certificate of Designations) or the purchase or redemption of shares of the Corporation for cash or property (except for the repurchase of Common Stock from employees, directors, consultants and advisers pursuant to the terms of stock purchase agreements existing on the Original Issuance Date under which such shares are issued), including any such transfer, purchase or redemption by a subsidiary of the Corporation. The time of any distribution by way of dividend shall be the date of declaration thereof and the time of any distribution by purchase or redemption of shares shall be the day cash or property is transferred by the Corporation, whether or not pursuant to a contract of an earlier date; provided that, where a negotiable debt security is issued in exchange for shares the time of the distribution is the date when the Corporation acquires the shares in such exchange. In the event the Corporation exercises its option to pay any dividend in whole or in part in Common Stock, such Common Stock shall be valued as follows: (a) if the Corporation's Common Stock is trading on the New York Stock Exchange (the "NYSE"), at the closing price on the day such dividend accrues (whether or not declared); (b) if the Corporation's stock is not trading on the NYSE but is trading in any other domestic public market, at the price of the last reported bona fide trade in such market; or (c) if the Corporation's stock is not trading in any public market, at a price to be determined by an investment banking firm of national reputation that has not in the prior twelve (12) months performed any investment banking services for the Corporation or any holder of Series H Preferred Stock. 2. Liquidation Preference. (a) Series H Liquidation Preference. In the event of any Liquidation Event (as defined below), either voluntary or involuntary, the holders of Series H Preferred Stock shall be entitled to receive by reason of their ownership thereof, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock, or to any other series of Preferred Stock that may be issued by the Corporation from time to time, an amount per share in cash equal to the sum of (i) $100.00 for each outstanding share of Series H Preferred Stock, as adjusted for any stock dividends, combinations or splits with respect to such share (the "Original Series H Issue Price"), and (ii) an amount equal to all accrued but unpaid dividends (whether or not declared) on each such share (the "Liquidation Preference"). (b) Participation. After the distributions described in subsection (a) above have been paid, the entire remaining assets of the Corporation legally available for distribution to the stockholders of the Corporation shall be distributed to the holders of any other series of Preferred Stock then outstanding, if any, having a liquidation preference over the Common Stock (to the extent of and in accordance with the liquidation preference rights of such other series of Preferred Stock) and then among the holders of the Common Stock pro rata based on the number of shares of Common Stock held by each holder. (c) Insufficient Funds. If in connection with any Liquidation Event the Corporation's cash funds legally available for distribution to the holders of the Series H Preferred Stock are not sufficient to pay the full Series H Preferred Stock liquidation preference in cash, then any deficiency in the cash payment of the Series H Preferred Stock liquidation preference shall be paid in non-cash assets of the Corporation legally available for distribution to the holders of Series H Preferred Stock. If the cash and non-cash assets legally available for distribution to the holders of the Series H Preferred Stock shall be insufficient to permit the full payment to such holders of the full Series H Preferred Stock liquidation preference, then the entire cash and non-cash assets of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series H Preferred Stock in proportion to the number of such shares owned by each such holder. In connection with the distribution of any non-cash assets in payment of the Series H Preferred Stock liquidation preference, the non-cash assets will be valued at their fair market value, as determined by independent appraisal by an appraiser selected in good faith by the Board of Directors. 2 3 (d) Liquidation Event. For purposes of this Section 2, a "Liquidation Event" shall mean any Reorganization Transaction (as defined below), liquidation, dissolution, or winding up of the Corporation. A reorganization of the Corporation, for purposes of this Certificate of Designations, shall mean any consolidation or merger of the Corporation with or into another corporation, or other entity or person or any other corporate reorganization, or the sale of all or substantially all of the Corporation's assets to another person, or any transaction by the Corporation in which an excess of 50% of the Corporation's voting power is transferred (each, a "Reorganization Transaction"). 3. Redemption. Shares of the Series H Preferred Stock shall not be subject to redemption, either mandatorily or at the option of the Corporation or the holder thereof. 4. Conversion. The holders of Series H Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Subject to subsection (c), each share of Series H Preferred Stock shall be convertible (subject to approval by the holders of the Corporation's Common Stock of the issuance of the common stock issuable upon such conversion as required by the NYSE), at the option of the holder thereof, at any time after the Original Issuance Date at the office of the Corporation or any transfer agent for the Series H Preferred Stock, into such number of fully paid and nonassessable shares of the Corporation's Common Stock as is determined by dividing the Liquidation Preference by the Series H Conversion Price then in effect. The Series H Conversion Price per share is set forth in subsection 4(c). (b) Mechanics of Conversion. Before any holder of Series H Preferred Stock shall be entitled to convert any Shares into shares of Common Stock, such holder shall deliver the certificate or certificates therefor, with a duly executed election to convert, to the principal executive office of the Corporation or of any transfer agent for the Series H Preferred Stock and shall give written notice to the Corporation at its principal executive office (which notice and delivery shall be deemed given when received by the Corporation) of the election to convert some or all of its Shares and shall state therein the number of Shares to be converted and the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series H Preferred Stock or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series H Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. Following the conversion of shares of Series H Preferred Stock into Common Stock, as contemplated by this paragraph (b), the Corporation shall promptly prepare and deliver a new certificate or new certificates to the holder of Series H Preferred Stock representing the remaining number or shares of Series H Preferred Stock still held by such holder following such conversion. (c) Series H Conversion Price and Adjustments. (i) Series H Conversion Price. The Series H Conversion Price shall be $0.715 (Seventy One and One-Half Cents) per share, which amount is equal to 110% of the average of the daily closing price per share of the Common Stock for the 20 consecutive trading days immediately preceding April 28, 1997. (ii) Series H Conversion Price Adjustments. (1) Subdivision, Combination or Reclassification. In the event that the Corporation at any time or from time to time after the Original Issuance Date shall declare or pay, without consideration, any dividend on the Common Stock payable in shares of Common Stock or in any right to acquire shares of Common Stock for no consideration, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or in the event the outstanding shares of Common 3 4 Stock shall be combined or consolidated, by reclassification, reverse stock split or otherwise, into a lesser number of shares of Common Stock, then the Series H Conversion Price in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that the Corporation shall declare or pay, without consideration, any dividend on the shares of Common Stock payable in any right to acquire Common Stock for no consideration, then the Corporation shall be deemed to have made a dividend payable in shares of Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire shares of Common Stock. (2) Issuance of Additional Shares. If at any time after the Original Issuance Date and while there are any shares of Series H Preferred Stock outstanding, the Corporation shall issue or sell Additional Shares of Common Stock at a Price Per Share less than the Series H Conversion Price in effect immediately prior to such issuance or sale, then the Series H Conversion Price then in effect shall be adjusted to an amount determined by multiplying the Series H Conversion Price in effect immediately prior to the new issuance by a fraction, (A) the numerator of which is equal to the sum of (x) the number of shares of Outstanding Common Stock immediately prior to the issuance of such Additional Shares, and (y) the amount determined by (i) dividing the aggregate consideration received by the Corporation upon the issuance of such Additional Shares, by (ii) the Series H Conversion Price in effect immediately prior to the issuance of the Additional Shares, and (B) the denominator of which is the number of shares of Outstanding Common Stock immediately after the issuance of such Additional Shares. For the purposes of this Section 4(c)(ii), the issuance of any Convertible Securities shall be deemed an issuance at such time of the Common Stock issuable upon exercise, conversion, or exchange of the such Convertible Securities if the Price Per Share shall be less than the Series H Conversion Price in effect at the time of such issuance. No adjustment of the Series H Conversion Price shall be made under this Section 4(c)(ii) upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion, or exchange of any Convertible Securities if any adjustment shall previously have been made upon the issuance of any such Convertible Securities as above provided. Any adjustment of the Series H Conversion Price made with respect to the issuance of Convertible Securities shall be reversed if and when any such Convertible Securities expire or are canceled without being exercised, converted, or exchanged so that the Series H Conversion Price in effect immediately upon such cancellation or expiration shall be equal to the Series H Conversion Price which would have been in effect had the expired or canceled Convertible Securities never been issued (but any such reversal of an adjustment shall only apply as to the portion of the Convertible Security which has expired or been canceled), with such additional adjustments as would have been made to the Series H Conversion Price which would have been in effect had such expired or canceled Convertible Securities never been issued. The provisions of this Section 4(c)(ii) shall not apply to any issuance or distribution of Additional Shares if by reason of any other provision of this Section 4 an adjustment of the Series H Conversion Price results with respect to such issuance of Additional Shares or if the holders of Series H Preferred Stock are entitled to receive a distribution of such Additional Shares. For purposes of this Section 4(c)(ii), the following definitions apply: "Additional Shares" shall mean shares of Common Stock (including Common Stock deemed issued upon the issuance of Convertible Securities), other than Excluded Additional Shares (the issuance of which shall not result in any adjustment of the Series H Conversion Price). "Convertible Securities" shall mean any securities (whether debt or equity) issued by the Corporation which are exercisable, convertible, or exchangeable into or for shares of Common Stock. 4 5 "Excluded Additional Shares" shall mean: (1) Any Existing Securities, excluding any increase in the Common Stock or Convertible Securities which may be issued pursuant to Existing Securities as a result of any modifications or amendments to Existing Securities occurring after the Original Issuance Date. (2) Any Common Stock or Convertible Securities issued after the Original Issuance Date to any employee, consultant, advisor, officer, or director of the Corporation or any subsidiary thereof pursuant to any incentive or compensation agreement, arrangement, or plan approved by the Board of Directors. (3) Any Common Stock issued in connection with any stock dividend on the Common Stock which is also payable to the Series H Preferred Stock pursuant to any provision of Section 4 hereof. (4) Any Common Stock issued upon conversion of the Series H Preferred Stock. "Existing Securities" shall mean any Common Stock or Convertible Securities issued with respect to any options, notes, rights, warrants, or other securities of the Corporation outstanding as of the Original Issuance Date, and shall include all shares of Series H Preferred Stock issued as of the Original Issuance Date. "Outstanding Common Stock" shall mean all shares of Common Stock of the Corporation outstanding (on a fully diluted basis) at the time of a calculation under Section 4(c)(ii), assuming for this purpose that all then-outstanding Convertible Securities are then deemed exercised, converted, or exchanged into shares of Common Stock. "Price Per Share" shall be determined as follows: (1) In the case of an issuance of shares of Common Stock for cash, the Price Per Share shall mean the per share cash consideration received by the Corporation for such shares. (2) The Price Per Share for purposes of Convertible Securities shall mean the amount equal to the consideration received by the Corporation upon the issuance of such Convertible Securities, plus the amount of consideration payable to the Corporation upon exercise, conversion, or exchange thereof, divided by the aggregate number of shares of Common Stock that would be issued if all such Convertible Securities were exercised, exchanged, or converted. (3) The Price Per Share for purposes of Convertible Securities shall be determined in each instance as of the date of issuance of the Convertible Securities without giving effect to any possible future price adjustments or rate adjustments pursuant to the provisions of such Convertible Securities which may result from any adjustments in the Series H Conversion Price pursuant to the provisions of this Section 4. (4) If a part or all of the consideration received by the Corporation in connection with the issuance of securities consists of property other than cash, the value of such consideration shall be the fair market value of such property as determined by the Board of Directors in good faith. (d) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, in evidences of indebtedness issued by the Corporation or other persons or in assets (excluding cash dividends) or in rights not referred to in Section 4(c)(ii), then, in each such case for the purpose of this Section 4(d), the holders of Series H Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series H Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such a distribution. (e) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or reclassification) provision shall be made so that the holders of Series H Preferred Stock shall thereafter be entitled to receive, upon conversion of 5 6 their Series H Preferred Stock, the number of shares of stock or other securities or property of the Corporation, or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled in such recapitalization as if converted immediately prior to such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Series H Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Series H Conversion Price, if applicable, then in effect and the number of shares receivable upon conversion of Series H Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (f) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series H Preferred Stock against impairment. (g) Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon conversion of the Series H Preferred Stock pursuant to the provisions of this Section 4. In lieu of fractional shares, the Corporation shall pay in cash the fair market value of any fractional shares as determined by the Board of Directors in good faith. The determination of the fractional shares for which a cash payment will be made shall be determined on the basis of the total number of shares of the Series H Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Series H Conversion Price pursuant to this Section 4, the Corporation, at its expense, shall within a reasonable time compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series H Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, within a reasonable time following a written request of any holder of Series H Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Series H Conversion Price at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series H Preferred Stock. (h) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series H Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series H Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all of the then outstanding shares of Series H Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series H Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (i) No Minor Adjustments to Series H Conversion Price. No adjustment of the Series H Conversion Price shall be made pursuant to this Section 4 in an amount less than one cent ($.01) per share. Adjustment amounts under one cent ($.01) per share shall be carried forward and taken into account in any subsequent adjustment calculations. 6 7 5. Notices. (a) Required Notices. (i) In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; the Corporation shall mail to each holder of Series H Preferred Stock, at least thirty (30) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (ii) The Corporation shall give each holder of record of Series H Preferred Stock written notice of any impending Reorganization Transaction not later than thirty (30) days prior to the stockholders' meeting called to approve such transaction, or thirty (30) days prior to the closing of any such Reorganization Transaction, whichever is earlier. Such notice shall describe the material terms and conditions of the impending Reorganization Transaction, describe the consideration per share to be received by the holders of the Common Stock and by the holders of the Series H Preferred Stock as a result of such Reorganization Transaction, and the date upon which the conversion rights of the Series H Preferred Stock terminate in connection with such Reorganization Transaction, and the Corporation shall thereafter give such holders prompt notice of any material changes in the information contained in such notice. (b) Notice Procedures. Any notice required by the provisions of this Section 5 to be given to a holder of shares of Series H Preferred Stock shall be given in writing and shall be deemed given if addressed to the holder of record of such shares at such holder's address appearing on the books of the Corporation or such other address given in writing by the holder to the Corporation for the purpose of notice and deposited in the United States mail, postage prepaid, or with a courier which guaranteed delivery of the notice within three business days after deposit with such courier, and in either case, such notice shall be deemed given on the third business day after such deposit. 6. Voting Rights. The holder of each share of Series H Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series H Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share). Shares of Series H Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation. Subject to the provisions of Paragraph 7 below, Shares of Series H Preferred Stock shall vote with holders of Common Stock as a single class with respect to any question upon which holders of Common Stock have the right to vote; provided, however, that (a) the holders of Series H Preferred Stock will vote as a class on matters as to which a class vote is required under Delaware law and (b) the holders of the Series H Preferred Stock shall not vote with the holders of Common Stock or otherwise with respect to the approval required by the NYSE as set forth in Section 4(a) above, as to which approval the holders of Series H Preferred Stock shall have no vote. 7. Restrictions and Limitations. Without the vote or written consent of the holders of at least eighty percent (80%) of the then outstanding shares of Series H Preferred Stock, the Corporation will not: (a) Authorize or issue, or obligate itself to issue, any other equity security (including any security convertible into or exercisable for any equity security) senior to or at parity with the Series H Preferred Stock as to dividend rights, redemption rights or liquidation preferences or which have voting rights as to matters upon which the holders of Common Stock are entitled to vote that provide for more votes in any such matters than one vote for each share of Common Stock into which such equity security could then be converted into Common Stock in accordance with the conversion rights of such equity security; (b) Amend its Certificate of Incorporation (including this Certificate of Designations) if such amendment would adversely affect any of the rights, preferences or privileges provided for therein or herein for the benefit of the shares of Series H Preferred Stock; or 7 8 (c) Engage in a Reorganization Transaction that would adversely affect any of the rights, preferences or privileges of the Series H Preferred Stock. 8. Status of Converted Stock. In the event any shares of Series H Preferred Stock shall be converted pursuant to Section 4 hereof, or are otherwise acquired by the Corporation, the shares so converted or acquired shall resume the status of authorized but unissued shares of Series H Preferred Stock. 9. No Preemptive Rights. The holders of the Series H Preferred Stock shall not have any preemptive rights. 10. Severability of Provisions. Whenever possible, each provision hereof shall be interpreted in a manner as to be effective an valid under applicable law, but if any provision hereof should to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. IN WITNESS WHEREOF, this Certificate of Designations is executed on this 25th day of April, 1997. AMERIQUEST TECHNOLOGIES, INC. By: /s/ HOLGER HEIMS ------------------------------------ Name: Holger Heims Title:. Executive Vice President and Corporate Secretary 8 9 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 05/16/1997 971160022 - 2124585 CERTIFICATE OF CORRECTION OF THE CERTIFICATE OF DESIGNATIONS OF THE SERIES H CUMULATIVE CONVERTIBLE PREFERRED STOCK OF AMERIQUEST TECHNOLOGIES, INC. AmeriQuest Technologies, Inc. a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that: 1. The name of the corporation is: AmeriQuest Technologies, Inc. 2. The Certificate of Designations of the Corporation, which was filed with the Secretary of State of Delaware on April 28, 1997 (the "Certificate"), is hereby corrected. 3. The ambiguity to be corrected in said instrument is as follows: The correction is to clarify any ambiguity that may exist in paragraphs (B)(4)(a) and (B)(6) in describing the fact that the holders of Series H Cumulative Convertible Preferred Stock do not have any right to vote with the holders of Common Stock on an as-converted basis or otherwise in connection with the vote required pursuant to paragraph (B)(4)(a) of the Certificate. 4. The portion of the instrument in corrected form is as follows: Corrections to paragraph (B)(4)(a) (a) Right to Convert. Subject to subsection (c), each share of Series H Preferred Stock shall be convertible (subject to approval by the holders of the Corporation Common Stock of the issuance of the Common Stock issuable upon such conversion as required by the NYSE), at the option of the holder thereof, at any time after the Original Issuance Date at the office of the Corporation or any transfer agent for the Series H Preferred Stock, into such number of fully paid and nonassessable shares of the Corporation's Common Stock as is determined by dividing the Liquidation Preference by the Series H Conversion Price then in effect. The Series H Conversion Price per share is set forth in subsection 4(c). Corrections to paragraph (B)(6): 10 6. Voting Rights. The holder of each share of Series H Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series H Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share). Shares of Series H Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of the Corporation. Subject to the provisions of Paragraph 7 below, shares of Series H Preferred Stock shall vote with holders of Common Stock as a single class with respect to any question upon which holders of Common Stock have the right to vote; provided, however, that (a) the holders of Series H Preferred Stock will vote as a class on matters as to which a class vote is required under Delaware law and (b) the holders of Series H Preferred Stock shall not vote with the holders of Common Stock or otherwise with respect to the approval required by the NYSE as set forth in Section 4(a) above, as to which approval the holders of Series H Preferred Stock shall have no vote. Executed on this 15th day of May, 1997. By: /s/ Holger Heims ------------------------------------ Name: Holger Heims Title: Executive Vice President and Corporate Secretary 2 EX-10.03 3 REIMBURSEMENT AND SECURITY AGREEMENT 1 EXHIBIT 10.03 REIMBURSEMENT AND SECURITY AGREEMENT The undersigned companies (individually, a "Company" and collectively, the "Companies") jointly and severally unconditionally agree to pay C2000 AG ("C2000"), immediately and without demand, any amounts that C2000 may pay, from time to time, on account of guaranties or other assurances of payment that C2000 enters into for the benefit of any of the Companies. To secure this reimbursement obligation, each of the Companies grants C2000 a security interest in the following property of each Company, now owned or hereafter acquired: inventory, accounts, equipment, general intangibles, securities (including all capital stock of subsidiaries), deposit accounts and the proceeds thereof. The Companies will execute and deliver such financing statements, and take such other actions, as C2000 requests to perfect these security interests. The Companies agree to negotiate in good faith with C2000 to put in place an Amended and Restated Reimbursement and Security Agreement within a reasonable period after the date hereof, which agreement will contain covenants and other terms typically included in secured credit facilities entered into with third parties and consistent with the discussion between AmeriQuest Technologies, Inc. and C2000. This Agreement shall be governed by the internal laws of the State of California. This Agreement may be executed in two or more counterparts, each of which shall constitute one instrument. IN WITNESS WHEREOF the undersigned have executed this Agreement as of December 20, 1995. COMPUTER 2000 AG By: /s/ Manfred Guenzel ------------------------------- Title: Co-President AMERIQUEST TECHNOLOGIES, INC. By: /s/ Mark Mulford ------------------------------- Title: President AMERIQUEST NCD INC. By: /s/ Mark Mulford ------------------------------- Title: President 2 ROBEC, INC. By: /s/ Mark Mulford ------------------------------- Title: President AMERIQUEST / KENFIL, INC. By: /s/ Mark Mulford ------------------------------- Title: President KENFIL DISTRIBUTION (FAR EAST) LTD. By: /s/ Mark Mulford ------------------------------- Title: President KENFIL DISTRIBUTION (M) SDN.BHD By: /s/ Mark Mulford ------------------------------- Title: President CDS DISTRIBUTION INC. By: /s/ Mark Mulford ------------------------------- Title: President CMS ENHANCEMENTS INC. By: /s/ Mark Mulford ------------------------------- Title: President CMS ENHANCEMENT SYSTEMS, INC. By: /s/ Mark Mulford ------------------------------- Title: President ANYBUS TECHNOLOGY CORPORATION By: /s/ Mark Mulford ------------------------------- Title: President CMS ENHANCEMENTS (AUST.) PTY LTD. By: /s/ Mark Mulford ------------------------------- Title: President EX-10.10 4 EMPLOYMENT AGREEMENT FOR ALEXANDER C. 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of October 1, 1997 (the "Effective Date") between AmeriQuest Technologies, Inc., a Delaware corporation with its principal offices located at 425 Privet Road, Horsham, PA 19044 ("Company"), and Alex C. Kramer, a resident of Pennsylvania ("Employee"). In consideration of the promises and the terms and conditions set forth in this Agreement, the parties agree as follows: 1. POSITION. During the term of this Agreement, Company will employ Employee, and Employee will serve Company as the Company's President and Chief Executive Officer. Employee will report directly to the AmeriQuest Board of Directors. 2. DUTIES. Employee will serve Company in such capacities and with such duties and responsibilities as the President and Chief Executive Officer of Company may from time to time determine. Employee will be bound by Company' operating policies, procedures, and practices from time to time in effect during Employee's employment. Employee will perform his duties under this Agreement at the offices of Company, provided, that Employee may be required to do extensive traveling in connection with the performance of his duties hereunder. Employee hereby represents and warrants that he is free to enter into and fully perform this Agreement and the agreements referred to herein without breach of any agreement or contract to which he is a party or by which he is bound. 3. EXCLUSIVE SERVICE. During his employment with Company, Employee will devote his full time and efforts exclusively to this employment and all his skill and experience to the performance of his duties and advancing Company's interests in accordance with Employee's experience and skills. In addition, during his employment with Company, except for the current Partnerships of which the Company is aware, Employee will not engage in any consulting activity except with the prior written approval of Company or at the direction of Company, and Employee will otherwise do nothing inconsistent with the performance of his duties hereunder. 2 Page 2 Employment Agreement Alex C. Kramer 4. OBLIGATION NOT TO COMPETE. Employee hereby agrees that while he is employed by Company (the "Restricted Period"), Employee shall within the territory of the United States not engage in or provide services to any business that is competitive with or detrimental to any present or contemplated business of Company known to Employee. Employee also agrees that, during the Restricted Period, he shall not in any manner attempt to induce or assist others to attempt to induce any customer or client of Company to terminate his association with Company, nor do anything directly or indirectly to interfere with the relationship between Company and any such persons or concerns in the territory of the United States. Each of the following activities shall, without limitation, be deemed to constitute engaging in business within the meaning of Section 3 and 4: to engage in, work with, have an interest or concern in, advise, lend money to, guarantee the debts or obligations of, or permit one's name or any party thereof to be used in connection with, an enterprise of endeavor, either individually, in partnership or in conjunction with any person or persons, firms, associations, companies or corporations, whether as a principal, agent, shareholder, employee, officer, director, partner, consultant or in any other manner whatsoever; provided, however, that Employee shall retain the right to invest in or have an interest in entities traded on any public market or offered by any national brokerage house, provided that said interest does not exceed ten percent (10%) of the voting control of said entity. In addition, Employee may make passive investments in privately held entities that are determined by the Board of Directors of Company not to be competitors of Company. Company may elect to extend the term of this non-competition clause for a maximum period of six months following the termination according to Section 8.1. (b) and 8.1. (c) provided that a monthly fee in the amount of the last applicable monthly base salary is paid to Employee. 5. TERM OF AGREEMENT. This Agreement will commence on the Effective Date, and will continue for a period of twelve (12) months and thereafter unless terminated pursuant to Section 8 thereof. 6. COMPENSATION AND BENEFITS. 6.1. BASE SALARY. Company agrees to pay Employee a base salary of $ 16.667 per month (or $ 200.000 annualized). Employee's salary will be payable as earned in accordance with Company' customary payroll practice. 6.2. PERFORMANCE BONUS. - Employee will be eligible to earn a bonus of up to $ 229.000 (the "Performance Bonus") annually during his employment with Company. The performance criteria and terms and conditions relative to the Performance Bonus shall be in accordance with the attached "Incentive Plan" (Attachment 1). 3 Page 3 Employment Agreement Alex C. Kramer 6.3. ADDITIONAL BENEFITS. Employee will be eligible to participate in Company's employee benefit plans of general application, including without limitation those plans covering profit sharing, executive bonuses stock options, and those plans covering life, health, an dental insurance in accordance with the rules established for individual participation in any such plan and applicable law. Employee shall receive such other benefits, including vacation, holidays, and sick leave, as Company generally provides to its employee holding similar positions as that of Employee. 6.4. VACATION. Four (4) weeks. 6.5. EXPENSES. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with Company's business, provided that such expenses are deductible to Company, are in accordance with Company's applicable policy and are properly documented and accounted for in accordance with the requirements of the Internal Revenue Service. 7. PROPRIETARY RIGHTS. Employee hereby agrees to execute an Employee Confidentiality Agreement with Company in substantially the form attached hereto as Attachment 2. 8. TERMINATION. 8.1 EVENTS OF TERMINATION. Employee's employment with the Company shall terminate upon any one of the following: a) the Company's determination made in good faith that it is terminating Employee for "cause" as defined under Section 8.2 below ("Termination for Cause"); b) six months after the effective date of a written notice sent to Employee stating that Company is terminating his employment, without cause, which notice can be given by Company at any time after the Effective Date at Company's sole discretion, for any reason or for no reason; or c) six months after the effective date of a written notice sent to Company from Employee stating that Employee is electing to terminate his employment with Company. 4 Page 4 Employment Agreement Alex C. Kramer d) If a change of control occurs and the employee's responsibilities are reduced within the following twelve (12) months thereafter. This termination on the part of the employee must be effected within six (6) months of the significant reduction in responsibilities. A "change in control" is deemed to have taken place when any of the following events occurs: (1) shareholder approval of a merger or consolidation of the Company with any other corporation resulting in a change in fifty percent (50%) or more of the total voting power of the Company; (2) shareholder approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition of all or substantially all of the Company" assets; or (3) any person becomes the beneficial owner of more than fifty percent (50%) of the Company's total outstanding securities); and such reduction in responsibilities is not for cause. Any resignation of employment by Alex C. Kramer as a consequence of such reduction in responsibilities will be treated as a termination of employment without cause. 8.2 "CAUSE" DEFINED. For purposes of this Agreement, "cause" for Employee's termination will exist any time after the happening of one or more of the following events; a) a failure or refusal to comply in any material respect with the reasonable policies, standards or regulations of the Company; b) a failure or a refusal in any material respect, faithfully or diligently, to perform his duties determined by the Company in accordance with this Agreement or the customary duties of Employee's employment; c) unprofessional, unethical or fraudulent conduct or conduct that materially discredits the Company or is materially detrimental to the reputation, character or standing of the Company; d) dishonest conduct or a deliberate attempt to do an injury to the Company; e) Employee's material breach of a term of this Agreement; f) an unlawful or criminal act which would reflect badly on the Company in the Company's reasonable judgment; or g) employee's death. 5 Page 5 Employment Agreement Alex C. Kramer 9. EFFECT OF TERMINATION. 9.1 TERMINATION FOR CAUSE. In the event of any termination of this Agreement pursuant to Sections 8.1(a) or 8.1( c), the Company shall pay Employee the compensation and benefits otherwise payable to Employee under Section 6 through the effective date of termination. Employee's rights under the Company's benefit plans of general application shall be determined under the provisions of those plans. 9.2 TERMINATION WITHOUT CAUSE OR VOLUNTARY TERMINATION. In the event of any termination of this Agreement pursuant to Section 8.1(b), the Company shall pay Employee the compensation and benefits according to Section 6 through the last day of the six (6) months period following the effective date that the notice referred to in Section 8.1(b) is given. 9.3 TERMINATION WITHOUT CAUSE DUE TO CHANGE IN CONTROL. In the event of any termination of this Agreement pursuant to Section 8.1(d), the Company shall pay Employee the compensation and benefits according to Section 6 through the last day of the twelve (12) months period following the date that the notice referred to in Section 8.1(d) is given. 10. MISCELLANEOUS. 10.1 ARBITRATION. Employee and Company shall submit to mandatory binding arbitration in any controversy or claim arising out of, or relating to, this Agreement or any breach hereof, provided, however, that Company retains its right to, and shall not be prohibited, limited or in any other way restricted from, seeking or obtaining equitable relief from a court having jurisdiction over the parties. Such arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association in effect at that time, and judgment upon the determination or award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 6 Page 6 Employment Agreement Alex C. Kramer 10.2 SEVERABILITY. If any provision of this Agreement shall be found by any arbitrator or court of competent jurisdiction to be invalid or unenforceable, then the parties hereby waive such provision to the extent that it is found to be invalid or unenforceable and to the extend that do so would not deprive one of the parties of the substantial benefit of its bargain. Such provision shall, to the extend allowable by the law and the preceding sentence be modified by such arbitrator or court so that it becomes enforceable and, as modified, shall be enforced as any other provision hereof, all the other provisions continuing in full force and effect. 10.3. REMEDIES. Company and Employee acknowledge that the service to be provided by Employee is of a special, unique, unusual, extraordinary, and intellectual character, which give it peculiar value the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, Employee hereby consents and agrees that for any breach or violation by Employee of any of the provisions of this Agreement including, without limitation, Section 3, restraining order and/or injunction may be issued against Employee, in addition to any other rights and remedies Company may have, at law equity, including without limitation the recovery of money damages. 10.4. NO WAIVER. The failure by either party at any time to require performance or compliance by the other of any of its obligations or agreements shall in no way affect the right to require such performance or compliance at any time thereafter. The waiver by either party of a breach of such provision hereof shall not be taken or held to be a waiver or any preceding or succeeding breach of such provision or as a waiver of the provision itself. No waiver of any kind shall be effective or binding, unless it is in writing and is signed by the party against whom such waiver is sought to be enforced. 10.5. ASSIGNMENT. This Agreement and all rights hereunder are personal to Employee and may not be transferred or assigned by Employee at any time. Company may assign its rights, together with its obligations thereunder, to any parent, subsidiary affiliate or successor or in connection with any sale, transfer or other disposition of all or substantially all of its business and assets, provided, however, that any such assignee assumes Company's obligations hereunder. 7 Page 7 Employment Agreement Alex C. Kramer 10.6 WITHHOLDING. All sums payable to Employee thereunder shall be reduced by all federal, state, local, and other withholding and similar taxes and payments required by applicable law. 10.7 ENTIRE AGREEMENT. This Agreement and the Employee Confidentiality Agreement constitute the entire and only agreements between the parties relating to employment of Employee with Company, and this Agreement supersedes and cancels any and all previous contracts, arrangements or understandings with respect thereto. 10.8 AMENDMENT. This Agreement may be amended, modified, superseded, cancelled, renewed or extended only by an agreement in writing executed by both parties hereto. 10.9 NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing and hand-delivered, sent by Fax, sent by certified first-class mail, postage pre-paid, or sent by nationally recognized express courier service. Such notices and other communications shall be effective upon receipt if hand-delivered or sent by Fax, five (5) days after mailing if sent by mail, and one (1) day after dispatch if sent by express courier, to the following address, or such other addresses as any party shall notify the other parties: If to the Company: AmeriQuest Technologies, Inc. 425 Privet Road Horsham, PA 19044 Fax Number: (215) 675-7027 Attention: Mr. Harold Streets Human Resources Manager If to the Employee: Alex C. Kramer 17 Maude Circle Paoli, PA 19301 Fax Number: (610) 647-3743 10.10 BINDING NATURE. This Agreement shall be binding upon, and inure to the benefit of the successors and personal representatives of the respective parties hereto. 10.11 HEADINGS. The headings contained in this Agreement are for reference purposes only and shall in no way affect the meaning or interpretation of this Agreement. In 1 8 Page 7 Employment Agreement Alex C. Kramer this Agreement, the singular includes the plural, the plural includes the singular, the masculine gender includes both male and female referents, and the word "or" is used in the inclusive sense. 10.12 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which, taken together, constitute one and the same agreement. 10.13 GOVERNING LAW. This Agreement and rights and obligations of the parties hereto shall be construed in accordance with the laws of the State of Pennsylvania, without giving effect tot he principles of conflict of laws. IN WITNESS WHEREOF, Company and Employee have executed this Agreement as of the date first above written. "COMPANY" "EMPLOYEE" AMERIQUEST TECHNOLOGIES, INC. Signature: _________________________ Name: Dr. Harry Krischik Title: Member of the Compensation Committee Signature: _________________________ Signature ____________________ Name: Marc Werner Name: Alex C. Kramer Title: Member of the Compensation Title: President and CEO Committee EX-10.11 5 EMPLOYMENT AGREEMENT FOR JON D. JENSEN 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of October 1, 1997 (the "Effective Date") between AmeriQuest Technologies, Inc., a Delaware corporation with its principal offices located at 425 Privet Road, Horsham, PA 19044 ("Company"), and Jon D. Jensen, a resident of Pennsylvania ("Employee"). In consideration of the promises and the terms and conditions set forth in this Agreement, the parties agree as follows: 1. POSITION. During the term of this Agreement, Company will employ Employee, and Employee will serve Company as the Company's Vice President, Finance and Chief Operating Officer. Employee will report directly to the Chief Executive Officer. 2. DUTIES. Employee will serve Company in such capacities and with such duties and responsibilities as the Chief Executive Officer of Company may from time to time determine. Employee will be bound by Company' operating policies, procedures, and practices from time to time in effect during Employee's employment. Employee will perform his duties under this Agreement at the offices of Company, provided, that Employee may be required to do extensive traveling in connection with the performance of his duties hereunder. Employee hereby represents and warrants that he is free to enter into and fully perform this Agreement and the agreements referred to herein without breach of any agreement or contract to which he is a party or by which he is bound. 3. EXCLUSIVE SERVICE. During his employment with Company, Employee will devote his full time and efforts exclusively to this employment and all his skill and experience to the performance of his duties and advancing Company's interests in accordance with Employee's experience and skills. In addition, during his employment with Company, except for the current Directorship of which the Company is aware, Employee will not engage in any consulting activity except with the prior written approval of Company or at the direction of Company, and Employee will otherwise do nothing inconsistent with the performance of his duties hereunder. The employee may continue to serve as a member of the Board of Directors of The Fredericks Company. 2 Page 2 Employment Agreement Jon D. Jensen 4. OBLIGATION NOT TO COMPETE. Employee hereby agrees that while he is employed by Company (the "Restricted Period"), Employee shall within the territory of the United States not engage in or provide services to any business that is competitive with or detrimental to any present or contemplated business of Company known to Employee. Employee also agrees that, during the Restricted Period, he shall not in any manner attempt to induce or assist others to attempt to induce any customer or client of Company to terminate his association with Company, nor do anything directly or indirectly to interfere with the relationship between Company and any such persons or concerns in the territory of the United States. Each of the following activities shall, without limitation, be deemed to constitute engaging in business within the meaning of Section 3 and 4: to engage in, work with, have an interest or concern in, advise, lend money to, guarantee the debts or obligations of, or permit one's name or any party thereof to be used in connection with, an enterprise of endeavor, either individually, in partnership or in conjunction with any person or persons, firms, associations, companies or corporations, whether as a principal, agent, shareholder, employee, officer, director, partner, consultant or in any other manner whatsoever; provided, however, that Employee shall retain the right to invest in or have an interest in entities traded on any public market or offered by any national brokerage house, provided that said interest does not exceed ten percent (10%) of the voting control of said entity. In addition, Employee may make passive investments in privately held entities that are determined by the Board of Directors of Company not to be competitors of Company. Company may elect to extend the term of this non-competition clause for a maximum period of six months following the termination according to Section 8.1. (b) and 8.1. (c) provided that a monthly fee in the amount of the last applicable monthly base salary is paid to Employee. 5. TERM OF AGREEMENT. This Agreement will commence on the Effective Date, and will continue for a period of twelve (12) months and thereafter unless terminated pursuant to Section 8 thereof. 6. COMPENSATION AND BENEFITS. 6.1. BASE SALARY. Company agrees to pay Employee a base salary of $ 13.125 per month (or $ 157.500 annualized). Employee's salary will be payable as earned in accordance with Company' customary payroll practice. 6.2. PERFORMANCE BONUS. - Employee will be eligible to earn a bonus of up to $ 180.000 (the "Performance Bonus") annually during his employment with Company. The performance criteria and terms and conditions relative to the Performance Bonus shall be in accordance with the attached "Incentive Plan" (Attachment 1). 3 Page 3 Employment Agreement Jon D. Jensen 6.3. ADDITIONAL BENEFITS. Employee will be eligible to participate in Company's employee benefit plans of general application, including without limitation those plans covering profit sharing, executive bonuses stock options, and those plans covering life, health, an dental insurance in accordance with the rules established for individual participation in any such plan and applicable law. Employee shall receive such other benefits, including vacation, holidays, and sick leave, as Company generally provides to its employee holding similar positions as that of Employee. 6.4. VACATION. Four (4) weeks. 6.5. EXPENSES. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with Company's business, provided that such expenses are deductible to Company, are in accordance with Company's applicable policy and are properly documented and accounted for in accordance with the requirements of the Internal Revenue Service. 7. PROPRIETARY RIGHTS. Employee hereby agrees to execute an Employee Confidentiality Agreement with Company in substantially the form attached hereto as Attachment 2. 8. TERMINATION. 8.1 EVENTS OF TERMINATION. Employee's employment with the Company shall terminate upon any one of the following: a) the Company's determination made in good faith that it is terminating Employee for "cause" as defined under Section 8.2 below ("Termination for Cause"); b) six months after the effective date of a written notice sent to Employee stating that Company is terminating his employment, without cause, which notice can be given by Company at any time after the Effective Date at Company's sole discretion, for any reason or for no reason; or c) six months after the effective date of a written notice sent to Company from Employee stating that Employee is electing to terminate his employment with Company. 4 Page 4 Employment Agreement Jon D. Jensen d) If a change of control occurs and the employee's responsibilities are reduced within the following twelve (12) months thereafter. This termination on the part of the employee must be effected within six (6) months of the significant reduction in responsibilities. A "change in control" is deemed to have taken place when any of the following events occurs: (1) shareholder approval of a merger or consolidation of the Company with any other corporation resulting in a change in fifty percent (50%) or more of the total voting power of the Company; (2) shareholder approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition of all or substantially all of the Company" assets; or (3) any person becomes the beneficial owner of more than fifty percent (50%) of the Company's total outstanding securities); and such reduction in responsibilities is not for cause. Any resignation of employment by Jon D. Jensen as a consequence of such reduction in responsibilities will be treated as a termination of employment without cause. 8.2 "CAUSE" DEFINED. For purposes of this Agreement, "cause" for Employee's termination will exist any time after the happening of one or more of the following events; a) a failure or refusal to comply in any material respect with the reasonable policies, standards or regulations of the Company; b) a failure or a refusal in any material respect, faithfully or diligently, to perform his duties determined by the Company in accordance with this Agreement or the customary duties of Employee's employment; c) unprofessional, unethical or fraudulent conduct or conduct that materially discredits the Company or is materially detrimental to the reputation, character or standing of the Company; d) dishonest conduct or a deliberate attempt to do an injury to the Company; e) Employee's material breach of a term of this Agreement; f) an unlawful or criminal act which would reflect badly on the Company in the Company's reasonable judgment; or g) employee's death. 5 Page 5 Employment Agreement Jon D. Jensen 9. EFFECT OF TERMINATION. 9.1 TERMINATION FOR CAUSE. In the event of any termination of this Agreement pursuant to Sections 8.1(a) or 8.1( c), the Company shall pay Employee the compensation and benefits otherwise payable to Employee under Section 6 through the effective date of termination. Employee's rights under the Company's benefit plans of general application shall be determined under the provisions of those plans. 9.2 TERMINATION WITHOUT CAUSE OR VOLUNTARY TERMINATION. In the event of any termination of this Agreement pursuant to Section 8.1(b), the Company shall pay Employee the compensation and benefits according to Section 6 through the last day of the six (6) months period following the effective date that the notice referred to in Section 8.1(b) is given. 9.3 TERMINATION WITHOUT CAUSE DUE TO CHANGE IN CONTROL. In the event of any termination of this Agreement pursuant to Section 8.1(d), the Company shall pay Employee the compensation and benefits according to Section 6 through the last day of the twelve (12) months period following the date that the notice referred to in Section 8.1(d) is given. 10. MISCELLANEOUS. 10.1 ARBITRATION. Employee and Company shall submit to mandatory binding arbitration in any controversy or claim arising out of, or relating to, this Agreement or any breach hereof, provided, however, that Company retains its right to, and shall not be prohibited, limited or in any other way restricted from, seeking or obtaining equitable relief from a court having jurisdiction over the parties. Such arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association in effect at that time, and judgment upon the determination or award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 6 Page 6 Employment Agreement Jon D. Jensen 10.2 SEVERABILITY. If any provision of this Agreement shall be found by any arbitrator or court of competent jurisdiction to be invalid or unenforceable, then the parties hereby waive such provision to the extent that it is found to be invalid or unenforceable and to the extend that do so would not deprive one of the parties of the substantial benefit of its bargain. Such provision shall, to the extend allowable by the law and the preceding sentence be modified by such arbitrator or court so that it becomes enforceable and, as modified, shall be enforced as any other provision hereof, all the other provisions continuing in full force and effect. 10.3. REMEDIES. Company and Employee acknowledge that the service to be provided by Employee is of a special, unique, unusual, extraordinary, and intellectual character, which give it peculiar value the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, Employee hereby consents and agrees that for any breach or violation by Employee of any of the provisions of this Agreement including, without limitation, Section 3, restraining order and/or injunction may be issued against Employee, in addition to any other rights and remedies Company may have, at law equity, including without limitation the recovery of money damages. 10.4. NO WAIVER. The failure by either party at any time to require performance or compliance by the other of any of its obligations or agreements shall in no way affect the right to require such performance or compliance at any time thereafter. The waiver by either party of a breach of such provision hereof shall not be taken or held to be a waiver or any preceding or succeeding breach of such provision or as a waiver of the provision itself. No waiver of any kind shall be effective or binding, unless it is in writing and is signed by the party against whom such waiver is sought to be enforced. 10.5. ASSIGNMENT. This Agreement and all rights hereunder are personal to Employee and may not be transferred or assigned by Employee at any time. Company may assign its rights, together with its obligations thereunder, to any parent, subsidiary affiliate or successor or in connection with any sale, transfer or other disposition of all or substantially all of its business and assets, provided, however, that any such assignee assumes Company's obligations hereunder. 7 Page 7 Employment Agreement Jon D. Jensen 10.6 WITHHOLDING. All sums payable to Employee thereunder shall be reduced by all federal, state, local, and other withholding and similar taxes and payments required by applicable law. 10.7 ENTIRE AGREEMENT. This Agreement and the Employee Confidentiality Agreement constitute the entire and only agreements between the parties relating to employment of Employee with Company, and this Agreement supersedes and cancels any and all previous contracts, arrangements or understandings with respect thereto. 10.8 AMENDMENT. This Agreement may be amended, modified, superseded, cancelled, renewed or extended only by an agreement in writing executed by both parties hereto. 10.9 NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing and hand-delivered, sent by Fax, sent by certified first-class mail, postage pre-paid, or sent by nationally recognized express courier service. Such notices and other communications shall be effective upon receipt if hand-delivered or sent by Fax, five (5) days after mailing if sent by mail, and one (1) day after dispatch if sent by express courier, to the following address, or such other addresses as any party shall notify the other parties: If to the Company: AmeriQuest Technologies, Inc. 425 Privet Road Horsham, PA 19044 Fax Number: (215) 675-7027 Attention: Mr. Harold Streets Human Resources Manager If to the Employee: Jon D. Jensen 291 Tulip Tree Court Blue Bell, PA 19422 Fax Number: (215) 646-1469 10.10 BINDING NATURE. This Agreement shall be binding upon, and inure to the benefit of the successors and personal representatives of the respective parties hereto. 10.11 HEADINGS. The headings contained in this Agreement are for reference purposes only and shall in no way affect the meaning or interpretation of this Agreement. In 8 Page 8 Employment Agreement Jon D. Jensen this Agreement, the singular includes the plural, the plural includes the singular, the masculine gender includes both male and female referents, and the word "or" is used in the inclusive sense. 10.12 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which, taken together, constitute one and the same agreement. 10.13 GOVERNING LAW. This Agreement and rights and obligations of the parties hereto shall be construed in accordance with the laws of the State of Pennsylvania, without giving effect tot he principles of conflict of laws. IN WITNESS WHEREOF, Company and Employee have executed this Agreement as of the date first above written. "COMPANY" "EMPLOYEE" AMERIQUEST TECHNOLOGIES, INC. Signature: _________________________ Name: Dr. Harry Krischik Title: Member of the Compensation Committee Signature: __________________________ Signature ____________________ Name: Marc Werner Name: Jon D. Jensen Title: Member of the Compensation Title: Vice President, Finance Committee EX-10.22 6 LEASE AGREEMENT DATED SEPTEMBER 8, 1997 1 Exhibit 10.22 COVER PAGE The capitalized terms in this Lease shall have the meanings ascribed to them below, and each reference to such term in the Lease shall incorporate such meaning therein as if fully set forth therein TERMS: LANDLORD: AP Southeast Portfolio Partners, LP d/b/a Highwoods Anderson with its principal office at 2200 Century Parkway, Suite 800, Atlanta, Georgia 30345. TENANT: AmeriQuest Technologies, Inc. a corporation duly organized and existing under the laws in the state of Pennsylvania with his principal office at 5600 Oakbrook Parkway, Suite 230, Norcross, GA 30093. PREMISES: (a) Suite: 230 (b) Rentable Area: 6,011 square feet (c) See Floor Plan attached hereto as Exhibit "A." BUILDING: 5600 Oakbrook Parkway, Dekalb County Georgia, which is located within the Project. PROJECT: Those certain tracts or parcels of land owned by Landlord from time to time and being more particularly described on Exhibit "B," together with all improvements located thereon or which may hereafter be constructed thereon. COMMENCEMENT DATE: September 15, 1997 TERMINATION DATE: September 30, 2000 BASE TAXES AND ASSESSMENTS: $ * per square foot BASE INSURANCE: $ * per square foot PERMITTED USES: General office and warehouse FIRST LEASE YEAR BASE RENT (PER YEAR): $40,574.25 FIRST MONTHS RENT: $ 3,381.19 SECURITY DEPOSIT: $ 3,656.69 AGENT: Lavista Associates, Inc. - Ivan Smith *The estimated base 1997 taxes and assessments on a per square foot basis based on annual Gwinnett county building property tax assessment. Landlord will provide copy of tax notice and resulting per square foot calculation when available. The base year for insurance will also be 1997. 1 2 LEASE AGREEMENT THIS LEASE AGREEMENT, made and entered into as of this 8th day of September, 1997, by and between AP Southeast Portfolio Partners, LP d/b/a Highwoods Anderson a Delaware limited partnership ("Landlord"), and AmeriQuest Technologies, Inc. a Pennsylvania corporation ("Tenant"). In consideration of the premises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. PREMISES. Landlord does hereby rent and lease to Tenant, and Tenant does hereby rent and hire from Landlord, during the Lease Term (as hereinafter defined), that certain space shown on the floor plan attached hereto as Exhibit "A" and made a part hereof ("Premises"), located in Building 5600 ("Building") of Oakbrook ("Project"), Dekalb County, Georgia, as more particularly described on Exhibit "B" attached hereto and made a part hereof. The Premises are deemed to contain 6,011 rentable square feet ("Rentable Area"). The Project is deemed to contain 106,680 rentable square feet. As used herein, "Tenant's Share" shall mean a fraction, the numerator of which shall be the Rentable Area, and the denominator of which shall be the gross rentable area of the Project. No easement for light and air is included in the Premises. For purposes of this Lease, Tenant's Share is deemed to be five point six percent (5.6%). 2. POSSESSION. a. "Lease Term" means a term commencing on the Commencement Date (as hereinafter defined) and continuing for 36.5 full calendar months (plus any partial calendar month if the Commencement Date is not the first day of a month), unless sooner terminated or extended hereunder. b. "Commencement Date" means the earlier of the date Tenant first occupies the Premises or September 15, 1997. If by the Commencement Date Landlord has not substantially completed the improvements to the Premises required to be made by Landlord pursuant to Exhibit "D" attached hereto and made a part hereof (if any), or if Landlord, for any other reason whatsoever, cannot deliver possession of the Premises to Tenant by the Commencement Date, then the Commencement Date shall be postponed (and the rent herein provided shall not commence) until the earlier of either (I) the date of actual occupancy of the Premises by Tenant or (ii) the date immediately following the day Landlord has achieved substantial completion of such improvements. Landlord and Tenant shall each have the option to terminate this lease by written notice to the other if the Commencement Date has not occurred within six (6) months from the date hereof. Provided, further, this lease shall automatically terminate without action on the part of any party hereto if the Commencement Date has not occurred within twelve (12) months from the date hereof. Landlord shall have no liability for any delay in delivering possession of the Premises to Tenant. c. If, and to the extent, Landlord's substantial completion of the improvements to the Premises pursuant to Exhibit "D" attached hereto is delayed due to any act or omission of Tenant or anyone acting under or for Tenant (any such delay being hereinafter referred to as "Tenant's Delay"), then the Commencement Date shall be the date specified in subsection (b) above, subject to adjustment as provided therein, but without extension as a result of Tenant's Delay; provided that from the Commencement Date, as so determined, until the earlier of (I) the date of actual occupancy of the Premises by Tenant or (ii) the date immediately following the date Landlord would have achieved substantial completion of such improvements but for Tenant's Delay, Tenant's obligations under this Lease shall be limited to the payment of any and all Rent due hereunder. 2 3 d. Within five (5) days of written request by Landlord, Tenant agrees to execute and deliver to Landlord a commencement date agreement setting forth the exact Commencement Date of the Lease Term and stating that all tenant improvements to be constructed by Landlord have been substantially completed, subject to the completion of any outstanding punchlist items. 3. BASE RENT. a. Tenant shall pay to Landlord at AP Southeast Portfolio Partners, LP, P.O. Box 100730 Atlanta. Georgia 30384-0730 or at such other place as Landlord may designate, from and after the Commencement Date, an initial annual Base Rent of $40,574.25 plus sales tax, if applicable, to be paid without notice, demand, deduction, or set-off on the first day of each month, in advance. The Base Rent shall be payable during the Lease Term and shall be adjusted as set forth in the Special Stipulations attached hereto. b. As used in this Lease, the term "Rent" shall include Base Rent, Additional Rent, and all other sums and obligations due Landlord hereunder. c. Payments of Rent not received by Landlord within five (5) calendar days of the due date thereof shall be subject to a late charge due and payable by Tenant to Landlord on the sixth (6th) calendar day after the due date thereof in an amount equal to twenty five dollars ($25.00) or five percent (5%) of such past due amount, whichever amount is greater. 4. ADDITIONAL RENT. Additional Rent for any calendar year shall equal the sum of the following amounts: a. Tenant's Proportionate Share of any increase in Taxes on the Property over the amount payable therefor for the calendar year in which the Commencement Date occurs (the "Base Year"). "Taxes" means all real estate taxes, assessments (whether for drainage, sewage, or other public improvements), taxes on rent or on occupancy or use of the Property, and similar governmental impositions now or hereafter levied or assessed, whether general or special, and whether imposed by any governmental entity or special taxing or assessment district (excluding, however, any income, franchise, or similar tax imposed directly on Landlord or Landlord's net income from the Property), together with all costs incurred by Landlord in contesting same. b. Tenant's Proportionate Share of any increase in premiums for casualty and for liability insurance coverage carried by Landlord for the Property (including any endorsements or additional coverages that Landlord may reasonably elect to carry) over the amount payable therefor for the Base Year; excluding, however, any increased premium attributable solely to a particular hazardous use of the Property by another tenant. c. Tenant's Proportionate Share of all costs payable by Landlord for (a) operating and maintaining (including routine repairs and replacements) the common areas, facilities, and equipment of the Property, including landscaping, irrigation systems, parking and loading areas, driveways, sidewalks, exterior lighting, common signs, garbage collection and disposal, common water, sewer, plumbing, gas, electric facilities and equipment, common area security services and equipment (if furnished by Landlord), and other areas, facilities, or equipment shared by the various tenants in the Building, (b) assessments, fees, or similar charges imposed on the Property for its share of the cost of operating and maintaining common areas and facilities of the business park in which the Property is located, (c) unless separately metered and payable directly by Tenant, charges by public or private utility companies for water and sewer usage, and (d) administrative costs, management 3 4 fees and costs and *The estimated base 1997 taxes and assessments on a per square foot basis based on annual Gwinnett county building property tax assessment. Landlord will provide copy of tax notice and resulting per square foot calculation when available. The base year for insurance will also be 1997. expenses of providing accounting and bookkeeping services with respect to the operation and maintenance of the Property. Common Area Maintenance charges will not reflect major replacements or capital improvements such as roof, parking lots, and structures. 5. To the extent attributable to the Premises, the entire amount of any costs payable by Landlord for pest control and vermin extermination in the Premises. Landlord shall attempt in good faith (without litigation) to keep such costs reasonably consistent with those of comparable properties in the same market area. Additional Rent shall be calculated and appropriately adjusted for each calendar year (including the Base Year) to reflect costs that would have been incurred for a full calendar year with the entire rentable area of the Building occupied. The base year for all additional rent calculations contained in paragraph 1 & 2 of this Exhibit E shall be 1997. 6. UTILITIES. Tenant shall promptly pay the cost of all utility services furnished to the Premises, including, but not limited to, gas, water, electricity, garbage collection and other sanitary services, and any initiation or connection fees for any of the foregoing. Landlord may furnish any utility service to the Premises, and Tenant shall promptly pay Tenant's Share of the cost of any such utility to Landlord within ten (10) days of receiving a statement showing any amount due. Landlord may adjust Tenant's Share for purposes of this paragraph if Landlord determines that Tenant's use of the Premises justifies a disproportionate allocation of utility cost to Tenant. 7. SECURITY DEPOSIT. Tenant shall deliver to Landlord a Security Deposit in the amount of $3,656.69 ("Security Deposit") which sum may be held by Landlord in a regular business checking account, without any obligation to accrue interest. The Security Deposit shall be held by Landlord as security for performance by Tenant of Tenant's covenants and obligations under the Lease and the Security Deposit shall not constitute, or be considered, an advance of payment of rent, or a measure of Landlord's damages in the case of default by Tenant. Without waiving or releasing any liability or obligation of Tenant to perform under the terms of the Lease, Landlord may from time to time without prejudice to or waiving or releasing any of the other remedies, use such deposit to the extent necessary to offset any arrearages of rent or any other damages, injury, expense, or liability incurred by Landlord as a result of any event of default by Tenant. Upon receipt of notice from the Landlord that the Security Deposit or any portion of the Security Deposit has been so applied, Tenant shall pay to Landlord the amount of the Security Deposit so applied in order to restore the Security Deposit to its original amount. Within a reasonable time after termination of the Lease, if Tenant is not then in default under the terms of the Lease, any remaining balance of the Security Deposit shall be returned by Landlord to Tenant. 8. USE. The Premises shall be used by Tenant for general office and warehouse and related purposes and no other. The Premises shall not be used for any illegal purposes, nor shall the Premises be used in violation of any governmental regulation, in any manner which would be deemed an extra-hazardous use by any insurance company insuring the Premises or the Building or would otherwise vitiate or increase the rate of insurance carried by either Landlord or Tenant on the Premises or the Building. Tenant shall not do or permit anything to be done in 4 5 or about the Premises which would in any way obstruct or interfere with the rights of other tenants of the Building. Tenant hereby agrees to comply with any and all municipal, county, state and federal statutes, regulations, and ordinances, all restrictive covenants to which the Building is subject, and other legal requirements applicable or in any way relating to the use and occupancy of the Premises. 9. ACCEPTANCE OF PREMISES. Tenant accepts the Premises in their present condition and as suited for the uses intended by Tenant, subject only to Landlord's agreement to construct tenant improvements pursuant to Exhibit "D" attached hereto, if any. 10. ALTERATIONS BY TENANT. Tenant shall make no alterations, additions or improvements to the Premises without first obtaining the written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall conduct any permitted work in such a manner as not to interfere with the operation of the Building or the business of other tenants and shall, prior to commencement of the work, submit to Landlord copies of all necessary permits. Landlord reserves the right to have final approval of the contractors hired by Tenant. All alterations, additions or improvements, whether temporary or permanent in character, made in or upon the Premises, either by Landlord or Tenant, shall be Landlord's property and at the end of the Lease Term shall remain in or upon the Premises without compensation to Tenant. If, however, Landlord shall request in writing, Tenant will, prior to termination of this Lease, remove any and all alterations, additions and improvements placed or installed by Tenant in the Premises, and will repair any damage caused by such removal. 11. TENANT'S EQUIPMENT. Any trade fixtures, equipment and other personal property of Tenant not permanently affixed to the Premises ("Personal Property") shall remain the property of Tenant. Tenant shall have the right, provided Tenant is not in default hereunder, to remove the same so long as such removal does not adversely affect the operation of tenant's business in the Premises. Subject to any lien rights of Landlord, Tenant shall remove all of the Personal Property from the Premises prior to any expiration or any termination of this Lease. Any Personal Property remaining on the Premises after expiration or termination of this Lease shall be deemed abandoned and may be removed and disposed of by Landlord, all costs for which shall be paid by Tenant. Tenant at its sole expense shall immediately repair any damage occasioned to the Premises by reason of the installation or removal of any Personal Property. Tenant assumes the risk of any and all damage from any casualty whatsoever to, or theft or any other loss of, its improvements to, and the Personal Property within, the Premises. 12. MAINTENANCE AND REPAIR BY LANDLORD a. Landlord shall, except as provided elsewhere herein and subject to the negligence of Tenant, its agents or employees, make necessary repairs to the foundation, exterior walls (excluding windows, window glass, plate glass and doors) and roof of the Building. Tenant shall promptly report to Landlord any defective condition in the Premises known to Tenant which Landlord is required to repair hereunder, and failure to so report shall relieve Landlord of liability for damages to any personal property, fixtures or Tenant Improvements located in the Premises resulting from or in connection with such defective condition. b. Landlord shall maintain the common areas of the Project, including parking and landscaped areas. 13. MAINTENANCE AND REPAIR BY TENANT Tenant shall, at its sole expense, repair, maintain and replace as necessary and keep in good, clean and safe condition all portions of the Premises which are not, pursuant to Paragraph 11 hereof, specifically the responsibility of Landlord as set forth herein, including, without limitation, 5 6 all windows, doors, partitions, and utility and HVAC systems. Tenant shall maintain in force at all times a maintenance contract for the HVAC systems in a form and with a contractor acceptable to Landlord. A copy of the maintenance agreement shall be given to Landlord within the first 60 days of Tenant's occupancy. Tenant is responsible for all repairs to the mechanical systems. Landlord may, at its option, and without relieving any duty or obligation of Tenant to perform under the Lease, and after appropriate notice to Tenant, perform any duty of Tenant hereunder and Tenant shall pay the cost thereof to Landlord as Additional Rent and shall be subject to any other remedy or right Landlord may have should the failure to perform constitute a default under the Lease. Tenant will not injure the Premises, or commit or allow to be committed any waste therein. Tenant shall repair any damage to the Premises or the Building caused by Tenant or Tenant's agents, contractors, employees, invitees and visitors. 14. MECHANIC'S LIENS. Tenant shall keep the Premises, the Building and the Project free from liens for any work performed, material furnished or obligations incurred by or for Tenant. Upon the filing of any such lien, Tenant will cause such lien to be removed within ten (10) days after filing; if not so removed, Landlord may cause same to be discharged and any amount paid by Landlord shall bear interest at the rate of eighteen percent (18%) per annum from the date of payment by Landlord and shall be payable by Tenant to Landlord upon demand. 15. INSURANCE. a. Tenant shall obtain and maintain in force throughout the Lease Term comprehensive general liability, premises and operations insurance in the amount of not less than $1,000,000.00 for any one injury (including death) and not less than $2,000,000.00 for any bodily injury (including death) annual aggregate and not less than $1,000,000.00 for property damage. Said policy shall name both Landlord and Tenant as insured and shall contain a provision requiring the insurer to give Landlord at least fifteen (15) calendar days prior written notice before any termination or expiration of said policy for any reason. Prior to occupancy of the Premises and prior to the expiration of each term on such policy Tenant shall deliver to Landlord the original of such policy or a proper certificate from the insurer. b. Tenant shall, at its own cost and expense, obtain and keep in force during the Lease term all risk coverage on its improvements, fixtures, furnishings, equipment and inventory in and upon the Premises for the full replacement value thereof. c. Tenant understands that Landlord may furnish the Insurance Questionnaire attached hereto as Exhibit "C" and made a part hereof to Landlord's insurance carrier. Landlord's execution hereof shall not constitute acknowledgment, approval or the acceptance of responsibility for the materials and conditions stated therein, nor vitiate any of Tenant's obligations hereunder. Tenant shall promptly notify Landlord of any change to the truth or accuracy of the information contained therein promptly upon learning of same. The operation by Tenant of its business on the Premises other than in accordance with the information contained in the Insurance Questionnaire shall be a default hereunder. If any information contained in the Insurance Questionnaire is or becomes false or inaccurate, or if a use not revealed by Tenant in the Insurance Questionnaire causes Landlord's insurance costs to increase, Tenant shall be liable to Landlord for any such increase in cost arising from or in connection therewith and shall be deemed to be in default under the Lease. 16. WAIVER OF SUBROGATION. All policies of casualty insurance obtained by Landlord or Tenant with respect to the Premises, the Building, or the contents thereof shall contain a waiver by the insurer of all right of subrogation in connection with any loss or damage insured against by such policy. Landlord and Tenant, to the 6 7 fullest extent permitted by law, each waive all right of recovery against the other for, and agree to hold the other harmless from liability, for all losses or damages to the extent of insurance proceeds actually available or that would have been available (if such policies are not obtained in accordance with the provisions hereof) under policies required hereby. If such waiver of subrogation shall not be obtainable or shall be obtainable only at a premium over that charged without such waiver, the party seeking such waiver shall so notify the other in writing, and the latter party shall have ten (10) days in which either (I) to procure on behalf and at the cost of the notifying party insurance with such waiver from a company or companies reasonably satisfactory to the notifying party or (ii) to agree to pay such additional premium (in each case, in equitable proportions). 17. CASUALTY. If the Premises are damaged by fire or other casualty or the elements to the extent that, in the judgment of Landlord, the damage cannot be repaired within one hundred twenty (120) days, or if the Building is so damaged that Landlord shall decide to demolish, rebuild or reconstruct the Building, this Lease shall, at the option of Landlord, terminate as of the date of such casualty, and Tenant shall immediately surrender the Premises to Landlord and pay Rent up to the date of such surrender. If this Lease is not so terminated, Landlord shall, within a reasonable time, rebuild or repair the Premises to substantially the same condition in which they existed prior to such damage; provided, however, Landlord's obligation hereunder shall be limited to the insurance proceeds available, and paid1 to Landlord on account of such damage and to improvements initially constructed at Landlord's cost. Promptly upon completion of Landlord's repairs, Tenant shall repair and replace all other alterations and improvements installed in the Premises by or for Tenant and the Personal Property of Tenant. After any casualty to the Premises, Tenant shall continue to owe and pay Rent, but, subject to the next succeeding sentence, Rent shall be equitably abated until the earlier of the date possession of the entire reconstructed Premises is restored to Tenant or the Lease terminates. If the Premises or any other portion of the Building is damaged by fire or other casualty resulting from the negligent or willful acts or omissions of Tenant or any of Tenant's agents, contractors, employees, or invitees, the Rent shall not be so abated. Landlord shall not be liable to Tenant for inconvenience, annoyance, loss of profits, expenses or other type of injury or damage resulting from the repair of any such damage, or any delay in making such repairs, or for the termination of this Lease as herein provided. Landlord may terminate this Lease upon any damage or destruction to the Premises occurring during the final two (2) years of the Lease Term. 18. CONDEMNATION. a. In the event of a taking of all of the Premises, or such portion thereof as to substantially impair the use thereof in the sole judgment of Landlord, then this Lease shall automatically terminate on, and all Rent payable by Tenant shall be apportioned and paid through, the date of such taking. Tenant shall have no right or claim to any part of any award made to or received by Landlord for such taking. b. In the event of a partial taking for which this Lease is not terminated, the Rent hereunder shall be equitably reduced, and Landlord shall restore and reconstruct the Premises (to the extent of the improvements initially constructed at Landlord's cost) to the extent necessary to make it reasonably tenantable, but Landlord shall not be required to spend for such work an amount in excess of the amount received by Landlord for such restoration. 19. INDEMNITY. Tenant shall indemnify and hold harmless Landlord and Landlord's partners, officers, employees and agents from and against any and all liabilities, damages, losses, and expenses (including attorney's fees) arising in 7 8 whole or in part by reason of or in connection with: (i) any injury to or death of persons or damage to property (a) on the Premises, or (b) in any manner arising out of, by reason of or in connection with, the use, non-use or occupancy of the Premises; (ii)the violation or breach of, or the failure of Tenant to fully and completely observe and satisfy, any term or condition of this Lease; or thereof. (iii) the violation of any law affecting the Premises or the use or occupancy This contract provision notwithstanding, Tenant shall in no way be liable to Landlord for any of the foregoing proximately caused by gross negligence or willful malfeasance or misconduct of Landlord. 20. SUBLETTING AND ASSIGNMENT a. Tenant shall not assign this Lease or sublet the Premises or any portion thereof without obtaining in each instance the prior written consent of Landlord. Landlord's consent to Tenant's request to an assignment or sublease shall not be unreasonably withheld; provided, however, in determining whether or not to give or withhold its approval of any proposed assignee or subleassee hereunder, Landlord shall be entitled to consider, without limitation, the creditworthiness of such proposed assignee or subleassee, the character and/or type of business of such proposed assignee or subleassee, the impact of such assignee or subleassee and its business on the image of the Project, and whether or not such assignee or subleassee will favorably coexist and mix with and not detract from the character and quality of the Project. b. If Tenant should desire to assign this Lease or sublet the Premises or any part thereof, Tenant shall make prior written request to Landlord, which request shall specify (I) the name and business of the proposed assignee or subleassee, (ii) the size and location of the space affected, (iii) the proposed effective date and duration of the assignment or sublease and (iv) the proposed rental or other consideration to be paid to Tenant by such assignee or subleassee. Landlord shall have a period of thirty (30) days following receipt of such notice within which to notify Tenant of its decision regarding the proposed assignment or sublease. Tenant agrees to reimburse Landlord for Landlord's reasonable attorney's fees and costs incurred in connection with the processing and documentation of any request made pursuant to this section. c. The occupancy of the Premises by any division, subsidiary, affiliate or other related entity of Tenant or by any successor firm of Tenant or by any firm into which or with which Tenant may become merged or consolidated shall be deemed an assignment of this Lease requiring the prior written consent of Landlord in accordance with this section. d. Any consent to subletting or assignment shall not be deemed a waiver of Landlord's right to withhold its consent to any further subletting or assignment. Notwithstanding any permitted subletting or assignment, Tenant shall remain obligated to Landlord to discharge all the obligations of Tenant herein contained and Landlord shall be afforded all remedies provided hereunder in the event of an uncured default by Tenant. In the event of any permitted assignment of the Lease or any permitted subletting of the Premises by Tenant, in addition to Tenant's other obligations hereunder, Tenant shall pay to Landlord the excess, if any, of (I) the rentals 8 9 and all other charges or consideration of any nature actually received by Tenant from Tenant's assignee or subtenant under the terms and provisions of such assignment or sublease or in any manner connected therewith at the time such rentals and other charges are paid thereunder, over (ii) the total Rent paid by Tenant to Landlord hereunder, pro-rated based upon the number of square feet assigned or subleased, in the case of an assignment or a sublease of a portion, but not all, of the Premises. 21. SUBORDINATION. a. This Lease is, and shall be, subordinate to any mortgage or deed to secure debt ("Mortgage") which might now or hereafter constitute a lien upon the Building or the Project. This provision shall be self-operative, and shall not require any further documentation to evidence or effectuate this subordination. Upon request by Landlord or the holder of any Mortgage, Tenant shall execute such documentation as may be requested to evidence the foregoing subordination and, failing to do so within ten (10) days after request therefor, does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact and in Tenant's name, place and stead so to do. Notwithstanding the foregoing, however, any holder of a Mortgage may elect that this Lease shall be superior to its Mortgage, and upon written notification of such election this Lease shall automatically be superior to said Mortgage whether this Lease is dated prior to or subsequent to the date of the Mortgage. b. Upon any assignment of this Lease by Landlord, or upon a foreclosure of any Mortgage or sale in lieu of foreclosure and at the election of the purchaser at such foreclosure sale or sale in lieu of foreclosure, Tenant shall be bound to said assignee or any such purchaser under all of the terms, covenants and conditions of this Lease for the balance of the Lease Term. Tenant hereby attorns to such succeeding party as its landlord under this Lease, and agrees to execute all instruments required by such purchaser affirming such attornrnent. 22. DEFAULTS. Tenant shall be in default under this Lease upon the occurrence of any one or more of the following events or occurrences, each of which shall be deemed to be a material default: a. Tenant fails to pay the full amount of Rent or any other sum due hereunder punctually on the due date thereof, which failure is not cured within five (5) days after written demand by Landlord. b. Tenant fails to fully and punctually observe or perform any of the terms, conditions or covenants of this Lease, which failure is not cured within five (5) days after written demand by Landlord; provided, that if such failure is impossible to cure within such five-day period and Tenant is diligently pursuing such cure, Tenant shall have an additional period, as determined by Landlord in its reasonable discretion, not to exceed thirty (30) days to cure such failure. c. Tenant fails to take possession or occupancy of, or deserts or abandons the Premises or the Premises become vacant. d. Any representation, statement, or warranty made by Tenant Lease, or in any information sheet or document furnished by Tenant or any guarantor with respect to the net worth, liabilities, assets, or financial condition of Tenant guarantor hereof, or any other matter, shall be or prove to be untrue or misleading. e. The filing or execution or occurrence of; (a) a petition by or against Tenant or any guarantor hereof in bankruptcy or seeking any reorganization, arrangement, composition, readjustment, 9 10 liquidation, dissolution or similar relief under any bankruptcy or insolvency statute or law, (bb) adjudication of Tenant or any guarantor hereof as a bankrupt or insolvent, or insolvencyin the bankruptcy or equity sense, (cc) an assignment by Tenant or any guarantor hereof for the benefit or creditors, (dd) a petition or proceeding by or against Tenant or any guarantor hereof for, or the appointment of a trustee, receiver, guardian, conservator or liquidator with respect to any portion of Tenant's or guarantor's property, (ee) any levy, execution or attachment against Tenant or any guarantor hereof, or (ff) any transfer or passage of any interest of Tenant under this Lease by operation of law. (i) Tenant fails to fully and punctually observe or perform any of the terms, conditions or covenants of this Lease, for which Tenant has already received a written notice and effected cure within the preceding six months. 23. REMEDIES. a. Upon occurrence of any one or more of the aforesaid events of default, Landlord shall have the option to pursue any one or more of the following remedies without any demand or notice whatsoever (except as expressly provided in this Lease): b. Terminate this Lease by giving Tenant notice of termination, in which event this Lease shall expire and terminate on the date specified in such notice of termination, and Tenant shall remain liable for all obligations under this Lease arising up to the date of such termination, and Tenant shall surrender the Premises to Landlord on the date specified in such notice. c. Terminate this Lease as provided in subparagraph (a) (I) hereof and recover from tenant all obligations arising up to the date of such termination and all damages Landlord may incur by reason of Tenant's default, including, without limitation, a sum which, at the date of such termination represents the present value (discounted at a rate equal to the greater of eight percent (8%) per annum or the then applicable rate of interest as specified in the financing outstanding on the Project) of the excess, if any, of (aa) the Rent and all other sums which would have been payable hereunder by Tenant for the period commencing with the day following the date of such termination and ending with the date hereinbefore set for the expiration of the full term hereby granted, over (bb) the aggregate reasonable rental value of the Premises for the same period, all of which present value of such excess sum shall be deemed immediately due and payable; provided, however, that such sum shall not be deemed a penalty or forfeiture, actual damages being difficult or impossible to measure, and such sum represents the parties' reasonable best estimate of the damages which would be incurred by Landlord in the event of a breach by Tenant. d. Without terminating this Lease, declare immediately due and payable all Rent and other amounts due and coming due under this Lease for the entire remaining Term hereof, together with all other amounts previously due, at once, which total amount shall be discounted to the present value (at a rate equal to the greater of eight percent (8%) per annum or the then applicable rate of interest specified in the financing outstanding on the Project); provided, however, that such payment shall not be deemed a penalty or liquidated damages but shall merely constitute payment in advance for Rent for the remainder of said Term. Upon making such payment, Tenant shall be entitled to receive from Landlord all rents received by Landlord from other assignees, tenants, and subtenants on account of said Premises during the Term of this Lease provided that the monies to which Tenant shall so become entitled shall in no event exceed the entire amount actually paid by Tenant to Landlord pursuant to the preceding sentence less all costs, including refurbishing the Premises and new 10 11 lease commissions, expenses and attorney's fees of Landlord incurred in connection with the reletting of the Premises. e. Without terminating this Lease, and with or without notice to Tenant, Landlord may in Landlord's own name, but as agent for Tenant, enter into and upon and take possession of the Premises or any part thereof, and, at Landlord's option, remove persons and property therefrom, and such property, if any, may be removed and stored in a warehouse or elsewhere at the cost of, and for the account of, Tenant, all without being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby, and Landlord may rent the Premises or any portion thereof as the agent of Tenant with or without advertisement, and by private negotiations and for any term upon such terms and conditions as Landlord may deem necessary or desirable in order to relet the Premises. Landlord shall in no way be responsible or liable for any part thereof, or for any failure to collect any rent due upon such reletting. Upon each such reletting, all rentals received by Landlord from such reletting shall be applied: first, to the payment of any indebtedness (other than any Rent due hereunder) from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including without limitation, brokerage fees and attorneys' fees and costs of alterations and repairs; third, to the payment of Rent and other charges then due and unpaid hereunder; and the residue, if any, shall be held by Landlord to the extent and for application in payment of future Rent as the same may become due and payable hereunder. If the rentals received from such reletting shall at any time or from time to time be less than sufficient to pay to Landlord the entire sums then due from Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall, at Landlord's option, be calculated and paid monthly. f. Without liability to Tenant or any other party and without constituting a constructive or actual eviction, suspend or discontinue furnishing or rendering to Tenant any property, material, labor, utilities or other service, which Landlord is obligated to furnish or render, so long as Tenant is in default under this Lease. g. Pursue such other remedies as are available at law or in equity. h. Landlord's pursuit of any remedy or remedies, including, without limitation, any one or more of the remedies stated in the foregoing subparagraph (a), shall not (I) constitute an election of remedies provided in this Lease or any other remedy or remedies provided by law or in equity, separately or concurrently or in any combination, or (ii) serve as the basis for any claim of actual or constructive eviction, or allow Tenant to withhold any payments under this Lease. i. No termination of this Lease prior to the normal expiration thereof, by lapse of time or otherwise, shall affect Landlord's right to collect Rent for the period prior to termination thereof. No surrender of the Premises or any part thereof by delivery of keys or otherwise shall operate to terminate this Lease unless and until expressly accepted in writing by an authorized officer of Landlord. j. The foregoing provisions shall apply to any renewal or extension of this Lease. 24. NOTICE TO MORTGAGEE. Prior to the exercise by Tenant of any remedy afforded for Landlord's default hereunder, Tenant shall give the holder of any Mortgage written notification of such default by Landlord and thirty (30) days within which to cure the same; provided, Tenant's obligation hereunder is limited to those Mortgage holders of which it has received written notice. 11 12 25. HAZARDOUS SUBSTANCES. Tenant represents and warrants that it will not, on or about the Premises, make, store, use, treat, transport or dispose of any hazardous or toxic waste, contaminants, oil, radioactive or other materials the removal of which is required or the maintenance of which is prohibited, regulated (unless such regulations are adhered to and Landlord is notified thereof) or penalized by any local, state or federal agency, authority or governmental unit. 26. SIGNAGE. Tenant shall not install or maintain any signs visible from outside the Premises except in accordance with the Rules and Regulations. Tenant shall be responsible to Landlord for any damage caused by the installation, use or removal of any sign. 27. ATTORNEY'S FEES. In the event that litigation results from an attempt by either party hereto to enforce its rights under this Lease, the prevailing party in such litigation shall be entitled to reimbursement by the non-prevailing party for any and all reasonable attorneys' fees, and expenses incurred in connection with such enforcement. Provided, further, in the event that Landlord utilizes services of an attorney to collect rent due and payable hereunder Landlord shall further be entitled to collect from Tenant fifteen percent (15%) of the Rent so collected as attorney's fees. Additionally, Tenant agrees to reimburse Landlord for any and all reasonable costs and expenses (including attorneys' fees) which Landlord may incur or pay in connection with negotiations in which Landlord shall become involved through or on account of the Lease or in connection with any request by Tenant for review or approval by Landlord, provided, however, that this obligation shall not apply to any negotiations between Landlord and Tenant respecting this agreement or any renewals thereof. 28. TIME OF ESSENCE. Time is of the essence of this Lease. 29. LANDLORD AND TENANT RELATIONSHIP. This Lease shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord; and Tenant has only a usufruct not subject to levy and sale. 30. SALE BY LANDLORD. In the event of any sale, conveyance, transfer or assignment by Landlord of its interest in and to the Premises, all obligations and liabilities under this Lease of the party so selling, conveying, transferring or assigning the Premises arising after the date of such disposition shall terminate. Tenant shall thereafter look only and solely to the party to whom or which the Premises were sold, conveyed, transferred, or assigned for performance of all of Landlord's duties and obligations under this Lease, including the return of any Security Deposit. 31. SURRENDER OF THE PREMISES. At the termination of this Lease; Tenant shall surrender the Premises and keys thereof to Landlord in at least as good a condition as on the Commencement Date, excepting only ordinary wear and tear and damage arising from any cause not required to be repaired by Tenant. 32. PARTIES. "Landlord" as used in this Lease shall include Landlord's assigns and successors in title to the Premises. "Tenant" shall include Tenant and, if this Lease shall be validly assigned or the Premises sublet, shall include such assignee or subtenant, it's successors and permitted assigns. "Landlord" and "Tenant" shall include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 12 13 33. ESTOPPEL CERTIFICATE. At any time and from time to time, Tenant, within ten (10) days of written request therefore, shall execute, acknowledge and deliver to Landlord a certificate evidencing whether or not (i)this Lease is in full force and effect; (ii) this Lease has been amended in any way; (iii) there are any existing defaults on the part of Landlord hereunder, to the knowledge of Tenant, and specifying the nature of such defaults, if any; (iv) the date to which Rent and other amounts due hereunder, if any, have been paid; and (v) such other matters requested by Landlord. Each certificate delivered pursuant to this paragraph may be relied on by any prospective purchaser of the Building or transferee of Landlord's interest hereunder or by any holder or prospective holder of any mortgage instrument or deed to secure debt now or hereafter encumbering the Building. Tenant's failure to deliver such statement, in addition to being a default hereunder, shall be deemed to establish conclusively that this Lease is in full force and effect except as declared by Landlord, that Landlord is not in default of any of its obligations under this Lease, and that Landlord has not received more than one month's rent in advance. 34. RELOCATION. If the Premises have a rentable area of less than 25% of the Building floor area, at Landlord's option, to be exercised by notice to Tenant specifying the date of relocation, Landlord may designate any other space in the Building or the Project to be occupied by Tenant in lieu of the Premises, provided that said other space is of substantially equal size and area. Landlord shall be responsible for the reasonable costs and expenses related to Tenant's move as well as the expense of any renovation or alterations necessary to make the new space substantially conform to layout and appointment with the original Premises. 35. SUCCESSORS AND ASSIGNS. The provisions of this Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective successors, heirs, legal representatives and assigns, subject, however, in the case of Tenant, to the restrictions on assignment and subletting contained in this Lease. 36. LIMITATION OF LIABILITY. Landlord's obligations and liability to Tenant with respect to this Lease shall be limited solely to Landlord's interest in the Project, and neither Landlord, nor any joint venturer, partner, officer, director or shareholder of Landlord or any of the joint venturers of Landlord shall have any personal liability whatsoever with respect to this Lease. 37. RULES AND REGULATIONS. Tenant accepts the Premises subject to and hereby agrees with Landlord to abide by the Rules and Regulations attached to this Lease and incorporated herein by reference, together with such additional Rules and Regulations or amendments thereto as may hereafter from time to time be reasonably established by Landlord, and such additions or amendments shall be binding on Tenant upon receipt of same by Tenant. 38. RIGHT OF ENTRY. Landlord shall have the right, but not the obligation, to enter the Premises at reasonable hours to exhibit same to prospective purchasers or tenants; to inspect the Premises to see that Tenant is complying with all Tenant's obligations hereunder; to make repairs required of Landlord under the terms of this Lease or repairs or modifications to any adjoining space; and for any other reasonable purpose. 39. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and either personally delivered, sent by U.S. Certified or Registered Mail, return receipt requested, postage prepaid, or sent by Federal Express, or any similar service, to the party being given such notice at the following addresses: 13 14 LANDLORD: AP Southeast Portfolio Partners, LP 2200 Century Parkway, Suite 800 Atlanta, Georgia 30345 TENANT: AmeriQuest Technologies, Inc. 5600 Oakbrook Parkway, Suite 230 Norcross, GA 30093 The time period in which a response to any notice, demand or request must be given, if any, shall commence to run from the date of receipt of the notice, demand or request by the addressee thereof. Rejection or failure to claim delivery of any such notice, demand or request, or the inability to deliver because of changed address of which no notice was given, shall be deemed to be receipt of the notice, demand or request as of the date of deposit in the United States Mail or the date of attempted personal delivery, as the case may be. By giving at least thirty (30) days written notice thereof, any party shall have the right from time to time and at any time to change their respective addresses. 40. HOLDING OVER. If Tenant remains in possession of the Premises after expiration of the Lease Term, with Landlord's acquiescence and without any distinct agreement of the parties, Tenant shall be a tenant at will at a rental rate equal to two times the rate in effect at the end of this Lease (in addition to all Additional Rent). There shall be no renewal of the Lease by operation of law. 41. MISCELLANEOUS. This Lease contains the entire agreement of Landlord and Tenant and no representations or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. No failure of Landlord to exercise any power given Landlord hereunder, or to insist upon strict compliance by Tenant of any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Landlord's right to exercise any right hereunder or demand exact compliance with the terms hereof. If any clause or provision of this Lease is illegal, invalid or unenforceable under applicable present or future laws or regulations effective during the term of this Lease, the remainder of this Lease shall not be affected. In lieu of each clause or provision of this Lease which is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as nearly identical as may be possible and as may be legal, valid and enforceable. This Lease shall be governed by, construed under and interpreted and enforced in accordance with the laws of the State of Georgia. Neither this Lease, nor any memorandum of this Lease or reference hereto, shall be recorded by Tenant without Landlord's consent endorsed thereon. Landlord shall be excused from the performance of any of its obligations under this Lease for the period of any delay resulting from any cause beyond its control, including, without limitation, all labor disputes, governmental regulations or controls, fires or other casualties, inability to obtain any material or services or acts of God. 42. DISCLAIMER. Tenant has made its own independent inspection and review of the premises and the terms and conditions of this Lease and acknowledges and agrees that Tenant has not, in any way, relied upon any brochure, literature, representation, guaranty or warranty (whether express or implied, oral or written) made by Landlord or any agent or representative or employee or attorney on behalf of Landlord in connection with any aspect of the Leased Premises or the Project or the terms and conditions of the Lease. 14 15 43. SPECIAL STIPULATIONS. In the event any Special Stipulations are attached to this the terms thereof shall control in the event of a conflict between the provisions of this and the provisions thereof. IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed, under seal, in their respective names and on their behalf by their duly authorized officials, the day and year indicated below. "LANDLORD" AP Southeast Portfolio Partners, By: Highwoods Properties, Inc., general partner ______________________________________ ______________________________________ "TENANT" AmeriQuest Technologies, Inc. By: _________________________________ Its: _________________________ Attest: ______________________ Its: _________________________ _______________________________ (CORPORATE SEAL) 15 16 RULES AND REGULATIONS SIGN DISPLAY. Tenant will provide its own signage for the Premises. Such signage will be coordinated throughout the park for uniformity and attractiveness. No sign, tag, label, picture, advertisement or notice shall be displayed, distributed, inscribed, painted or affixed by Tenant on any part of the outside or inside of the Building or of the Premises without the prior written consent of Landlord. All permitted signage shall be maintained in compliance with applicable governmental rules and regulations, and all restrictive covenants, governing such signs. Tenant shall be responsible for any damage caused by the installation, use or removal of any sign. Landlord may require Tenant to remove all signage at the termination of the Lease and to repair any damage occasioned by such removal. DRIVES AND PARKING AREAS. All parking shall be within the property boundaries and within marked parking spaces. There shall be no on-street parking and at no time shall any Tenant obstruct drives and loading areas intended for the use of all Tenants. The drives and parking areas are for the joint and nonexclusive use of Landlord's tenants, and their agents, customers and invitees, unless specifically marked. In the event Tenant, its agents, customers, and/or invitees use a disproportionate portion of the parking, Landlord shall have the right to restrict Tenant, its agents, customers and/or invitees to certain parking areas. Tenant shall not permit any fleet trucks to park overnight in the Building's parking areas. STORAGE AND LOADING AREAS. Unless specifically approved by Landlord in writing, no materials, supplies or equipment shall be stored anywhere except inside the Premises. In no event shall Tenant cause or allow any outside storage of trash, refuse or debris, whether in the area of the dumpster or otherwise. LOCKS. No additional locks shall be placed on the doors of the Premises by Tenant nor shall any existing locks be changed unless Landlord is immediately furnished with two keys thereto. Landlord will, without charge, furnish Tenant with two keys for each lock on the entrance doors when Tenant assumes possession, with the understanding that at the termination or expiration of the term of the Lease the keys shall be returned. CONTRACTORS AND SERVICE MAINTENANCE. Tenant will refer all contractors, contractor's representatives and installation technicians rendering any service on or to the Premises for Tenant to Landlord for its approval and supervision before performance of any service. This provision shall apply to all work performed in the Building, including, but not limited to, installation of electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment or any other physical portion of the Building. LODGING. No Tenant shall at any time occupy any part of the Building as sleeping or lodging quarters. REGULATION OF OPERATION AND USE. Tenant shall not place, install or operate on the Premises or in any part of Building, any engine, stove or machinery, or conduct mechanical operations or cook thereon or therein, or place or use in or about the Premises any explosives, gasoline, kerosene, oil, acids, caustics or any other flammable, explosive or hazardous material without the prior written consent of Landlord. WINDOW COVERINGS. Windows facing the Building exterior shall at all times be wholly clear and uncovered (except for such blinds or curtains or other window coverings Landlord may provide or approve) so that a full unobstructed view of the interior of the Premises may be had from outside the Building. 16 17 MODIFICATIONS. Landlord shall have the right from time to time to modify, add to or delete any of these Rules and Regulations at Landlord's sole discretion. 17 18 SPECIAL STIPULATIONS RENTAL SCHEDULE The following schedule is the Base Rent payable per Paragraph 3a. of this lease: Beginning September 15, 1997 through September 30, 1997 the sum of one thousand four hundred sixty five and 19/100 Dollars ($1,465.18). Beginning October 1, 1997 through September 30, 1998 the monthly sum of three thousand three hundred eighty one and 19/100 Dollars ($3,381.19) for a total annual base rental of forty thousand five hundred seventy-four and 25/100 Dollars ($40,574.25). Beginning October 1, 1998 through September 30, 1999 the monthly sum of three thousand five hundred sixteen and 44/100 Dollars ($3,516.44) for a total annual base rental of forty two thousand one hundred ninety-seven and 22/100 Dollars ($42,197.22). Beginning October 1, 1999 through September 30, 2000 the monthly sum of three thousand six hundred fifty-six and 69/100 Dollars ($3,656.69) for a total annual base rental of forty three thousand eight hundred eighty and 30/100 Dollars ($43,880.30). AS-IS CONDITION Except for the items detailed on Exhibit "D" attached hereto, Tenant agrees to accept the leased premises in an "as-is" condition. Landlord agrees that the HVAC, doors, electrical and plumbing fixtures will be in a satisfactory working condition at the time of occupancy and warrants their condition for ninety (90) days. DISCLOSURE STATEMENT REAL ESTATE BROKERS AND AGENTS. Tenant warrants and represents that Tenant has had no dealings with any real estate broker or agent, other than AP SOUTHEAST PORTFOLIO PARTNERS, LP and LAVISTA ASSOCIATES, in connection with the negotiation or execution of this Lease. LAVISTA ASSOCIATES has represented Tenant in this transaction and will be paid a commission by Landlord. Tenant agrees to indemnify and hold Landlord harmless from and against any and all cost, expense or liability for commissions or other compensation or fees claimed by any other broker or agent acting or claiming to act for Tenant with respect to this Lease. 18 19 EXHIBIT "B" Legal Description 19 20 EXHIBIT "D" LANDLORD IMPROVEMENTS It is understood and agreed by both parties that the following improvements will be provided by the Landlord: Landlord will provide a $3.OO/psf allowance for paint, carpet and minor modifications that conform to the building standards. 20 EX-10.23 7 LEASE AGREEMENT DATED AUGUST 26, 1997 1 Exhibit 10.23 LEASE AGREEMENT LANDLORD and TENANT agree to lease the premises for the term, at the rent stated herein, and subject to the following terms and conditions ("LANDLORD" and "TENANT" include all landlords and all tenants under this Lease): DATE OF LEASE: August 26, 1997 LANDLORD: TALL OAKS TENANT: AMERIQUEST SYSTEMS ASSOCIATES, L.P. GROUP c/o Needleman Mgmt Co., Inc. Computer 2000 Group 1060 N. Kings Highway - #250 425 Privet Road Cherry Hill, NJ 08034 Horsham, PA 19044 LEASED PREMISES: 1000 Lenola Road -- Building Two -- Maple Shade, NJ--08052 SUITE: 203 SIZE: 1400 RSF TERM: Three (3)years SECURITY DEP.: $1690.00 Beginning: 9/15/97 % OF BUILDING: 07.25 Ending: 8/31/00 BASE YEAR: 1997 RENT FOR THE TERM IS: $60,840.00 Rent is payable in advance on the first day of each month as follows: 9/5/97-8/31/00-- $20,280.00 per annum -- $1,690.00 per month JANITORIAL SERVICES ARE INCLUDED IN BASE RENT. UTILITY USE CHARGES ARE NOT INCLUDED IN BASE RENT. SEE SECTION 32 FOR OPTION TERMS. PLEASE MAKE CHECKS PAYABLE TO: TALL OAKS ASSOCIATES, LP. FORWARD TO: Needleman Management Co., Inc. 1060 N. Kings Highway --#250 Cherry Hill, NJ 08034 LIABILITY INSURANCE: Minimum amount for each person injured: $1,000,000.00 Minimum amount for any accident: $1,000,000.00 Minimum amount for property damage: $1,000,000.00 BROKER: Landlord and Tenant recognize NO ONE as the Broker who brought about this Lease. USE OF RENTAL SPACE: Administrative/sales office. -1- 2 1. ADDITIONAL RENT. As additional rent, Tenant to pay pro rata share (7.25%)of increases over the Base Year (l997) of real estate and related taxes, and the aggregate cost of maintaining and operating the Building and its common areas. Costs of operating and maintaining the Building will include by way of example rather than limitation, costs of snow and ice removal; maintenance of elevator and elevator equipment if applicable, and parking lot and lighting equipment; cleaning and trash removal; repair and maintenance of storm and sewer system; electricity used in common areas, where applicable; repainting and maintenance of signs and light standards; exterior painting, landscaping, materials and services; and, insurance (general liability, loss of rent, fire and additional hazard insurance, and other insurance as Landlord deems necessary) which benefit all tenants in the Building. Notwithstanding the foregoing, costs of maintaining and operating the Building will exclude capital improvements, leasing improvements, and tenant improvement work. The first billing for any of these escalation costs will be presented for payment in early 1997 and will be calculated by taking 1998 expenses in excess of the 1997 Base Year Expenses. Sums billed under this paragraph will be due and payable by Tenant within 20 days after receipt of bills from Landlord for the first occurring year, and are to be paid monthly (estimated amount) for subsequent years. In addition to the initial billing, Tenant will begin paying 1/12 of this amount toward the l999 estimated escalation billing. This amount will then be adjusted annually based upon an actual accounting of the completed year's experience. All sums or some or any of them, may become due by reason of the failure of tenant to comply with the terms and conditions of this Lease, and all damages, costs and expenses Landlord may suffer or incur by reason of any default by Tenant, and any damages to the demised premises caused by any act or omission of Tenant, will be payable within fifteen (15) days after receipt of bills from Landlord. 2. LATE CHARGE. If the Minimum Rent or any Additional Rent is not paid within ten (10) days from the date same is due, Landlord, at its option, may charge a late fee of five percent (5%) of the amount due. 3. INSURANCE. Tenant will obtain and keep in effect throughout the Term insurance policy or policies, issued by any insurance carrier reasonably satisfactory to Landlord, providing general comprehensive public liability insurance against claims for personal injury (including death) and property damage in amounts as stated on Page 1 of this Lease. 4. WAIVER OF SUBROGATION. Each party hereto waives any cause of action it might have against the other party on account of any loss or damage insured against under any insurance policy including without limitation liability insurance policies (to the extent such loss or damage is recoverable under such insurance policy) that covers the Building, the Leased Premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements or business, and which names Landlord or Tenant, as the case may be, as a party insured. All insurance policies maintained by Landlord or Tenant will, at such parties cost and expenses, if any, contain provisions, waiving the carrier's rights of recovery under subrogation or otherwise against the other party. 5. BUILDING SERVICES: MAINTENANCE. (A) Landlord will provide, within professional standards on each item, the following services and facilities: (1) cleaning and maintenance of common areas in the building; (2) Water and sewer service; (3) Janitorial service (five business days per week); (4) Landlord will undertake, at its sole cost and expense, any and all repairs necessary to maintain the heating, plumbing, air conditioning and electrical systems, as well as windows, floors (excluding carpeting) and all other structural items which constitute a part of the Building and Leased Premises and are installed or furnished by Landlord; provided, however, Landlord will not be obligated to undertake any of such repairs until the expiration of a reasonable period of time following notice from Tenant that such repair is needed, and will use best efforts to resume service. In no event will Landlord be obligated under this subparagraph to repair any damage caused by any act, omission or negligence of Tenant or its employees, agents, invitees, licensees, subtenants, or contractors. (B) Landlord does not warrant the services and facilities provided for in subparagraph (A) above will be free from slowdown, interruption or stoppage pursuant to voluntary agreement by and between Landlord and governmental bodies and regulatory agencies, or caused by the maintenance, repair, substitution, renewal, replacement or improvements of any of the equipment, involved in the furnishing of any such services or facilities, or caused by changes of services, alterations, -2- 3 strikes, lockouts, labor controversies, fuel shortages, accidents, acts of God or the elements or any other cause beyond the reasonable control of Landlord; and specifically, no such slowdown, interruption or stoppage will cause any abatement of Rent or Additional Rent payable hereunder or in any manner or for any purpose relieves Tenant from any of its obligations hereunder, and in no event will Landlord be liable for damage to persons or property or be in default hereunder as a result of such slowdown, interruption or stoppage. Landlord agrees to use reasonable diligence to resume the affected service upon any cessation of such slowdowns, interruption or stoppage. (C) Except to the extent Landlord is obligated to undertake repairs as provided hereinabove, Tenant will keep the Leased Premises and the fixtures contained therein in good, neat and orderly condition, reasonable wear and tear excepted. (D) Landlord will not be liable by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations, additions or improvements to the Leased Premises or the Building or to any appurtenances or equipment therein. It being understood, though, Landlord will cooperate with Tenant and interfere as little as reasonably practicable with the conduct of Tenant's business. There will be no abatement of Rent because of such repairs, alterations, additions or improvements, until after the completion of fourteen (14) business days from the original problem. 6. ALTERATIONS AFTER COMMENCEMENT OF LEASE. Tenant will not make or permit to be made any alterations, improvements or additions to the Leased Premises without, on each occasion, first presenting to Landlord plans and specifications therefor and obtaining Landlord's prior written consent thereto, which consent will not be unreasonably withheld. If Landlord will consent to such proposed alterations, improvements and additions, Tenant will make the proposed alterations, improvements and additions at Tenant's sole cost and expense; provided, however: (i) all such alterations will be performed in a good and workmanlike manner, in accordance with all applicable laws, ordinances, codes, rules and regulations, including but not limited to the ADA Code; (ii) such alterations, improvements, and additions will not impair the structural integrity of the Building or any other improvements or reduce the value of the Leased Premises; (iii) Tenant will take or cause to be taken all steps as required or permitted by law in order to avoid the impositions of any mechanic's, laborer's or materialman's lien(s) upon the Leased Premises or Building; and, (iv) the occupants of the Building and of any adjoining real estate owned by Landlord will not be disturbed in any respect with their use and occupancy by reason thereof. All alterations, improvements and additions to the Leased Premises which are constructed, installed or otherwise made by Tenant will be the property of Tenant until the expiration or sooner termination of this Lease, at which time all such alterations, improvements and additions will remain on the Leased Premises and become the property of Landlord without payment therefor by Landlord, unless prior to the termination of this Lease, Landlord will give notice to Tenant to remove the same; in which event Tenant will remove such alterations, improvements and additions, and repair and restore any damage to the Leased Premises caused by the installation and removal thereof. 7. COMPLIANCE WITH LAWS; PERMITTED ACTIVITIES. Tenant, at its sole cost and expense, will comply with all laws, ordinances and regulations of federal, state and local authorities and with any direction of any public officer or officers, which will impose any violation, order or duty upon Tenant with respect to the Leased Premises or the use and occupancy thereof, including, but not limited to, obtaining any and all licenses and permits required for the conduct of its business within the terms and conditions of this Lease. Tenant will not do or permit anything to be done in or about the Leased Premises nor bring or keep anything therein which will in any way increase the existing rate of fire or other insurance policy covering the Leased Premises or any part thereof. In the event of any such increase of an existing rate of insurance, or cancellation of any insurance policy, Tenant will bear the full cost of said increase upon presentation by Landlord. 8. LANDLORD'S RIGHT TO ENTRY Landlord and persons authorized by Landlord may enter the Leased Premises at all reasonable times for the purpose of making such inspections, repairs, alterations to adjoining space, appraisals as Landlord may require or for other reasonable purposes including, but not limited to, exhibiting the Leased Premises to prospective purchasers, tenants and/or mortgagees and enforcement of Landlord's rights under this Lease. Landlord will not be liable for inconvenience to, or disturbance of Tenant by reason of any such entry. Notwithstanding the foregoing, Landlord will use reasonable efforts, during such entry to not unreasonably interfere with Tenant's use of the Leased Premises, and will provide Tenant with advance notice, whenever possible. 9. DAMAGE BY FIRE OR OTHER CASUALTY. In the event of any damage or loss to the Leased Premises by reason of fire or other casualty, Tenant will give immediate -3- 4 notice thereof to Landlord. If the Leased Premises are partially damaged or destroyed by fire or other casualty, Landlord will notify Tenant within thirty (30) days after the fire or casualty, whether or not the Leased Premises can be restored within one hundred twenty (120) days from such notice. In the Landlord's sole judgment, if the Leased Premises can be restored within one hundred twenty (120) days, Landlord will restore the same at Landlord's expense and will use its best efforts to complete restoration within said time period. In the event the damage cannot be restored within one hundred twenty (120) days, either party, by written notice to the other within five (5) days after receipt of such notice, to be effective thirty (30) days after receipt of such notice, may terminate this Lease and all obligations hereunder. Notwithstanding the foregoing, in no event will Landlord be obligated to expend for any repairs or restoration an amount in excess of the insurance proceeds recovered by Landlord on account of such damage or destruction. In the event of repair or restoration as herein provided, Minimum Rent and Additional Rent will be abated equitably, in a manner proportionate with the degree in which Tenant's use of the Leased Premises is impaired commencing from the date of destruction and continuing during the period of such restoration. Tenant will continue operation of its business in the Leased Premises during any such period to the extent commercially reasonably practicable and the obligation of Tenant hereunder to pay all other charges set forth herein will remain in full force and effect. Tenant will not be entitled to any actual or consequential damages or other compensation or damages from Landlord for loss of the use of the whole or any part of the Leased Premises, or the Building which forms a part of the Leased Premises, Tenant's personal property or any inconvenience or annoyance occasioned by such damage or reconstruction. Notwithstanding the foregoing to the contrary, if any such fire or other casualty is as a result of the negligence or willful acts of Tenant, Tenant will not have the right to terminate this Lease as aforesaid, and Tenant will, at Tenant's sole cost and expense, promptly repair and restore the Leased Premises, and any portion of the Building so damaged as a result of Tenant's conduct. 10. INDEMNIFICATION. Tenant will defend, indemnify and hold Landlord harmless from and against any and all loss, cost, liabilities, penalties, damages, expenses (including reasonable attorneys' fees) and judgments, which may be imposed upon, incurred by, or asserted against Landlord by reason of any violation by Tenant of the provisions of this Lease, or any injury to persons or property of any nature and however caused, arising out of the use, occupancy and control of the Leased Premises at any time during the Term of this Lease or any extension thereof, unless caused by the willful act or gross negligence of Landlord. Landlord will defend, indemnify and hold Tenant harmless from and against any and all loss, cost, liabilities, penalties, damages, expenses (including reasonable attorneys' fees) and judgments, which may be imposed upon, incurred by, or asserted against Tenant by reason of any violation by Landlord of the provisions of this Lease, or any injury to persons or property of any nature and however caused, arising out of the use, occupancy and control of the Leased Premises at any time during the Term of this Lease or any extension thereof, unless caused by the willful act or gross negligence of Tenant. 11. CONDEMNATION. (A) If more than twenty-five percent (25%) of the floor area of the Leased Premises is taken or condemned for a public or quasi-public use (a sale in lieu of condemnation to be deemed a taking or condemnation for purposes of this Lease), this Lease will at either party's option, upon written notice to the other within fifteen (15) days of the date of such taking or condemnation, terminate as of the date the right of possession in the Leased Premises or portion thereof terminates, and the Minimum Rent and Additional Rent herein reserved will be apportioned and paid in full by Tenant to Landlord to that date and all Minimum Rent and Additional Rent prepaid for periods beyond that date will forthwith be repaid by Landlord to Tenant and neither party will thereafter have any liability hereunder. (B) If less than twenty-five percent (25%) of the floor area of the Leased Premises is taken, or if neither Landlord nor Tenant has elected to terminate this Lease pursuant to subparagraph (A), Minimum Rent and Additional Rent will be equitably reduced in proportion to the area of the Leased Premises which has been taken for the balance of the Term. (C) If all or part of the Leased Premises are taken or condemned, Landlord will be entitled to all compensation awarded upon such condemnation or taking, and Tenant will have no claim thereto, and Tenant hereby expressly waives, relinquishes and releases to Landlord any claim for damages or other compensation to which Tenant might otherwise be entitled because of any such taking or limitation of the leasehold estate hereby created, and irrevocably assigns and transfers to Landlord -4- 5 any right to compensation or damages to which Tenant may be entitled by reason of the condemnation of all or a part of the Leased Premises, or the leasehold estate. Notwithstanding the foregoing, Tenant will have the right to make a claim for removal and moving expenses and business dislocation damages which may be separately payable to tenants in general under New Jersey law, provided such payment does not reduce the award otherwise payable to Landlord. 12. MECHANICS LIENS. Tenant will promptly pay all contractors and materialmen for work ordered by Tenant or performed for Tenant's account, so as to minimize the possibility of a lien attaching to the Leased Premises. In the event of any such lien is created or filed, Tenant will bond against or discharge the same within ten (10) days after written request by Landlord. Nothing herein contained will be construed as a consent on the part of the Landlord to subject the fee or the estate of Landlord to liability under the Mechanics Lien Law of New Jersey for work ordered other than by Landlord, it being expressly understood that Landlord has not consented to any such work and Landlord's estate will not be subject to such liability. 13. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS. If Tenant will any time fail to pay any charge or imposition or perform any other act on its part to be performed, then Landlord, after ten (10) days' written notice to Tenant and without waiving or releasing Tenant from any obligations hereunder, may pay such charge or sum of money or make any other payment or perform any other act on Tenant's part to be made or performed, and may enter upon the Leased Premises for any such purpose, and take all such action thereon as may be necessary therefor. All sums so paid by Landlord and all costs and expenses incurred by Landlord in connection with the performance of any such act, together with interest thereon at a rate which is one percent (1%) per annum higher than "New York Prime" as announced from time to time in the Wall Street Journal or similar publication, from the respective dates of Landlord's making of each such payment or incurring of each such cost and expense, will constitute Additional Rent payable by Tenant thereof or otherwise as in the case of default in the payment of Minimum Rent or Additional Rent reserved in this Lease. 14. SUBORDINATION: RIGHTS OF MORTGAGEE. This Lease will be subject and subordinate at all times to the lien of any mortgages and/or ground leases now or hereafter placed upon the Leased Premises or Building which forms a part of the Leased Premises, without the necessity of any further instrument or act on the part of Tenant to effectuate such subordination. Tenant agrees to execute and deliver, upon demand, such further instrument or instruments evidencing such subordination of this Lease to the lien of any such mortgage and/or ground lease and such further instrument or instruments of attornment as will be desired by any mortgagee or proposed mortgagee or by any other person. 15. TENANT'S CERTIFICATE. Tenant agrees at any time and from time-to-time, within five (5) days after Landlord's written request, to execute, acknowledge and deliver to Landlord a written instrument in recordable form certifying the Lease is unmodified and in full force and effect (or if there have been modifications, it is in full force and effect as modified and stating the modifications); the dates to which Minimum Rent, Additional Rent, or other charges have been paid in advance, if any; whether or not, to the best knowledge of the signer of such certificate, Landlord is in default in the performance of any covenant, agreement or condition contained in the Lease and, if so, specifying each such default of which the signer may have knowledge, and such other information as Landlord may request. It is intended that any such certification and statement delivered pursuant to this Paragraph 15 may be relied upon by any prospective purchaser or any mortgagee of the Leased Premises or Building or any part thereof or interest thereon or any assignee of Landlord's interest in this Lease. 16. DEFAULTS BY Landlord will provide Tenant advance written notice in the event of any default. Tenant will have ten (10) days to cure in the event of a monetary default, and thirty (30) days to cure in the event of a non-monetary default. Any one or more of the following will constitute a default by Tenant hereunder, if Tenant during the original Term of this Lease, or any renewal or extension thereof: (A) Does not pay in full within ten (10) days after notice is given of all Minimum Rent, Additional Rent, expenses and charges under this Lease; or, (B) Violates, fails to perform, or otherwise breaches any term, covenant or condition of this Lease and same is not cured after notice thereof; or, (C) Permits leasehold estate or any property of Tenant to be exposed for sale or judgment or execution process by sheriff, marshall, or constable; or, (D) Becomes insolvent, makes an assignment for the benefit of creditors, is adjudicated, files a bill in equity, otherwise initiates proceedings for the -5- 6 appointment of a receiver of its assets, files a voluntary petition under the provisions of the United States Bankruptcy Court or under the insolvency laws of any state, which involuntary petition is not discharged within sixty (60) days of filing. In such instances, Landlord may immediately have the rights set forth in Section 17 below, without any further notice; or, (E) Records or attempts to record this Lease in any office of public recording; or, (F) Assigns or sublets this Lease, except as permitted herein; or, (G) Fails to move into or take possession of the Leased Premises upon commencement of the Term. 17. REMEDIES OF LANDLORD. This Lease and term of the estate hereby granted are subject to the conditional limitation that in the event of a default by Tenant, then, at the sole option of Landlord, Landlord may in addition to all other rights and remedies available to it by law or equity or by any other provision of this Lease, at any time pursue once or more often any or all of the following remedies: (A) Acceleration of Rent: Minimum Rent for the entire balance of the Term hereof and any Additional Rent, expenses and charges payable under the Lease, together with all costs and expenses, will become immediately due and payable as if by the terms and provisions of this Lease said balance of Minimum Rent, Additional Rent and other expense and charges and every part thereof were on that date payable in advance; and, (B) Termination: Whether or not Landlord has accelerated Minimum Rent and Additional Rent, this Lease and the Term hereby created will, at the sole option of Landlord and without waiver of any other rights of Landlord contained herein, terminate and become absolutely void without any right on the part of Tenant to save the forfeiture by payment of any sum due or by the performance of any provisions of this Lease and Tenant will thereupon quit and surrender possession of the Leased Premises to Landlord in the condition required herein and Tenant will remain liable to Landlord as herein required; and, (C) Suit for Possession/Reletting of Leased Premises: In any case in which this Lease will have been terminated, or in any case in which Landlord will have elected to accelerate the Minimum Rent and/or Additional Rent and any portion of such sums will remain unpaid, Landlord may, without further notice, enter upon and repossess the Leased Premises, by due process of law, by summary proceedings, ejectment or otherwise, and may dispossess Tenant and remove Tenant and all other persons and property from the Leased Premises and may have, hold and enjoy the Leased Premises and rents and profits therefrom. Landlord may, in its own name, as agent for Tenant, if this Lease has not been terminated, or in its own behalf, if this Lease has been terminated, relet the Leased Premises, or any part thereof, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such terms (which may include concessions or free Minimum Rent) as Landlord in its sole discretion and good faith may determine. Landlord may, in connection with any such reletting, cause the Leased Premises to be decorated, altered, divided, consolidated with other space or otherwise changed or prepared for reletting. No reletting will be deemed a surrender and acceptance of the Leased Premises. (D) Measure of Damages: Tenant will, with respect to all periods of time up to and including the 'expiration of the Term (or what would have been the expiration date in the absence of default or breach) remain liable to Landlord as follows: (1) In the event of termination of this Lease on account of Tenant's default or breach, Tenant will remain liable to Landlord as agreed for liquidated damages (and not as a penalty) an amount equal to the Minimum Rent, Additional Rent and other charges payable under this Lease by Tenant as if this Lease were still in effect, less the net proceeds of any reletting actually collected, after deducting all costs incident thereto (including, without limitation, all repossession costs, brokerage and management commissions, operating and legal expenses and fees, alteration costs and expenses of preparation for reletting), and to the extent such liquidated damages will not have been recovered by Landlord by virtue of payment by Tenant of any accelerated Minimum Rent and/or Additional Rent (but without prejudice to the right of Landlord to demand and receive such Minimum Rent and/or Additional Rent), such liquidated damages will be payable to Landlord monthly upon presentation to Tenant of a bill for the amount due. (2) In the event and so long as this Lease will not have been terminated after default or breach by Tenant, Minimum Rent, Additional Rent and all other charges payable under this Lease will be reduced by the net proceeds of any reletting by Landlord (after deducting all costs incident thereto as above set forth) and by any portion of the accelerated Minimum Rent, Additional Rent and other -6- 7 charges paid by Tenant to Landlord, and any amount due to Landlord will be payable monthly upon presentation to Tenant of a bill for the amount due. (E) No Responsibility to Relet: Landlord will in no event be responsible or liable for any failure to relet the Leased Premises, or any part thereof, or for any failure to collect any Minimum Rent, Additional Rent or other sum due upon a reletting. However, Landlord agrees to use best efforts to relet the Leased Premises, and to mitigate any losses. (F) Remedies Cumulative: All of the remedies herein given to Landlord and all rights and remedies given to Landlord by law and equity will be cumulative and concurrent. It is understood and agreed that termination of this Lease or the taking or recovering of the Leased Premises will not deprive Landlord of any of Landlord's remedies or actions against Tenant for Minimum Rent and Additional Rent due at the time or which, under terms hereof, would in the future become due as if there had been no termination, nor will the bringing of any action for Minimum Rent, Additional Rent, or other charges, or breach of covenant, or resorting to any other remedy herein provided the recovery of Minimum Rent or Additional Rent be construed as a waiver of the right to obtain possession of the Leased Premises. 18. LIMITED LIABILITY OF LANDLORD. Tenant agrees the obligations of Landlord under and with respect to this Lease do not constitute personal obligations of Landlord, or any of its principals, and shall not create or involve any claim against, or personal liability on the part of any of them, and Tenant shall look solely to Landlord's interest in the Leased Premises for satisfaction of any liability of Landlord in respect to this Lease. 19. SECURITY DEPOSIT. Tenant will pay Landlord a sum as indicated on the first page of Lease as collateral security for payment of Minimum Rent and Additional Rent and for the faithful performance by Tenant of all other terms, covenants and conditions of this Lease. The amount of said deposit (less such portion thereof as Landlord will have retained to make good any default by Tenant with respect to any of Tenant's aforesaid obligations) will be repaid to Tenant, without, interest, within sixty (60) days after Tenant provides landlord with written request to return said Security Deposit and Landlord has inspected the Leased premises after Tenant has vacated same; provided, however, Tenant will have made all such payments and performed all such terms, covenants and conditions of this Lease. Upon any default by Tenant hereunder, all or part of said deposit may, at any time and in Landlord's sole discretion and without prejudice to any rights Landlord has hereunder, be applied on account of such default, and thereafter Tenant will restore the resulting deficiency in said deposit within ten (10) days notice of Landlord's application. Tenant's failure to restore said deficiency will constitute a default hereunder. In the event of any sale or transfer of Landlord's interest in the Building, Landlord will have the right to transfer the security deposit to the purchaser or transferee and upon such transfer Tenant will look only to the new landlord for the return of the security deposit and Landlord will thereupon be released from all liability for the return of the security deposit. 20. ASSIGNMENT OR SUBLEASE BY TENANT. Tenant will not assign this Lease or sublease all or any part of the Leased Premises without Landlord's prior written consent, excluding wholly owned subsidiaries of the Tenant, which will not be unreasonably withheld, it being understood and agreed however it will not be unreasonable for Landlord to withhold its consent if the reputation, financial responsibility, or business of a proposed assignee or subtenant is unsatisfactory to Landlord. Any sum received by Tenant as a result of such subletting or assignment which exceeds the total sums Tenant is obligated to pay Landlord under this Lease will be payable to Landlord as additional rent. The consent by Landlord to sublet or assignment will not constitute consent to any further sublease or assignment. Any subleassee or assignee must agree to be bound by all of the terms and provisions of this Lease. In addition, any permitted assignment or subleasing will not relieve Tenant from its liability under the terms and conditions of this Lease. Tenant will give Landlord a copy of the sublease, both prior to, and upon execution thereof. 21. SUCCESSORS. Except as otherwise provided, all rights and liabilities herein given to or imposed upon the respective parties will extend to and be binding upon their heirs, legal representatives, successors and assigns, if permitted under Section 20. 22. WAIVER. Failure of Landlord to insist upon strict performance of any of the covenants or conditions of this Lease or to exercise any option herein conferred in any one or more instances. will not be construed as a waiver or relinquishment for the future of any such covenants, conditions or options but the same will be and remain in full force and effect. 23. ENTIRE AGREEMENT. This Lease sets forth all the terms, covenants and conditions between Landlord and Tenant concerning the Leased Premises and there are no terms, covenants and conditions, either oral or written, between the parties -7- 8 other than herein set forth. Except as otherwise provided1 no subsequent alteration, amendment, change or addition to this Lease will be binding upon Landlord or Tenant unless reduced to writing and signed by them. 24. LANDLORD'S COVENANT OF OUIET ENJOYMENT. Landlord covenants and agrees that, upon Tenant's payment of Minimum Rent and any Additional Rent and observing and performing all of the terms, covenants and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Leased Premises for the Term of this Lease, without hindrance or molestation by anyone claiming by or though Landlord; subject, nevertheless to the terms, covenants and conditions of this Lease. 26. NO RECORDATION. Tenant will not record or attempt to record this Lease or any memorandum thereof in any office of public recording. 27. ENVIRONMENTAL CONCERNS. (A) Other than normal office storage, Tenant will not store, handle, spill or discharge any hazardous or toxic substances or wastes at, on or about the Leased Premises or the Building, and will indemnify, defend and save harmless the Landlord from all fines, suits, procedures, claims, actions, damages and liability of any kind (including attorneys' fees) arising out of or in any way connected with the storage or handling by the Tenant of, or any spills or discharges by the Tenant of, hazardous or toxic substances or wastes at, on or about the Leased Premises or the Building during the term of this Lease. Landlord to be responsible for any preexisting conditions within the Building, and, to the best of Landlord's knowledge, assures Tenant there are no known hazardous materials, including asbestos, within the Building. (B) Tenant's obligations and liabilities under this paragraph will survive the term of this Lease, and will continue so long as Landlord may remain responsible for any spills or discharges of hazardous substances or wastes at the Leased Premises which occur during the term of this Lease. Tenant's failure to abide by the terms of this paragraph will be restrainable by injunction. 28. SIGNS. Landlord will obtain all door and directory signs for Tenant after Tenant has indicated in writing to Landlord how each sign should read. Landlord will bill Tenant for all signage Tenant so desires once it has been received and installed. All signs will conform with all applicable municipal ordinances and regulations. Should Tenant request further signage over and above the customary signage at said location, Landlord agrees to assist Tenant with any applications of any municipal filings, etc., to be born by Tenant herein. No sign will be installed by Tenant without prior approval of Landlord herein. 29. NOTICE OF TERMINATION. It is hereby mutually agreed that either party hereto may terminate this Lease at the end of said term or option term or any extension by giving the other party written notice thereof at least ninety (90) days prior thereto. If such written notice is not given by either party, this Lease will continue upon the same terms and conditions in force except that Minimum Rent will be increased in the manner set forth below for a period of one (1) year and so on from year to year unless or until terminated by either party hereto, giving the other party a ninety (90) day written notice for the vacation of the Leased Premises before the expiration of the then current term. In the event Tenant will give notice, as stipulated above, of its intention to reuse the Leased Premises at the end of the present term or any renewal or extension thereof, and will fail or refuse so to vacate the same on the date designated by such notice, Landlord, at its option, may treat Tenant as a holdover tenant, in which event Tenant will pay Landlord (I) as agreed liquidation damages (and not as a penalty) for such wrongful retention, an amount equal to twice the Minimum Rent and twice the Additional Rent then in effect for the time Tenant thus remains in possession, and (II) all other damages, costs and expenses sustained by Landlord by reason of Tenant's wrongful retention. If Tenant remains in possession with the consent of Landlord all the terms and conditions of this Lease will continue thereafter with full force precisely as if such notice had not been given, and Minimum Rent will be adjusted as set forth in this Section. 30. UTILITIES & SERVICES. Tenant herein will be solely responsible for payment of all utilities used within the Leased Premises with the exception of water and sewer and will make all arrangements for activating same. 31. TENANT IMPROVEMENTS. Landlord to construct suite per floorplan attached hereto, paint interior walls, clean and/or replace existing carpet as agreed, and present Tenant with a clean, fully functioning business office. 32. OPTION TO RENEW. Tenant shall have the right, at its option, to renew the Term for one (1) additional period of three (3) years (the "Renewal Term"), on all of the same conditions as are in force immediately prior to the expiration of the Term, except that the Minimum Rent payable during the Renewal Term shall be: -8- 9 9/1/00 - 8/31/03 --- $22,380.00 per annum --- $1,865.00 per month Tenant shall only have such option to renew the Term if Tenant at the time of Tenant's Notice (as hereinafter defined) and at the end of the Term is not in default under any of the terms, covenants, provisions, agreements and conditions of this Lease. Tenant shall exercise its option of renewal by giving Landlord notice of such notice of such exercise ("Tenant's Notice") at least ninety (90) days prior to the expiration of the Term. Tenant understands and agrees that time, whenever mentioned is of the essence. 33. EARLY TERMINATION. Tenant shall have the right, at its option, to terminate this Lease upon completion of the second year, by providing the Landlord with ninety (90) days written notice in advance of 8/31/00, and with a penalty equal to 50% of the costs of the Tenant Improvements notes in Paragraph 31. Tenant may relocate to larger space within any building managed by Needleman Management Company, Inc. at any time during the Lease Term, at no penalty or obligation to this Lease. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written. LANDLORD: TALL OAKS ASSOCIATES. LP BY: _______________________________ DATE:________________ TENANT: AMERIQUEST SYSTEMS GROUP BY: _______________________________ DATE:________________ -9- EX-21.01 8 SUBSIDIARIES OF AMERIQUEST 1 Exhibit 21.01 --------------------------------- AMERIQUEST TECHNOLOGIES, INC. A DELAWARE CORPORATION --------------------------------- | --------------------------- | | -------------------------- -------------------------- AMERIQUEST/KENFIL INC. AAG, INC. A DELAWARE CORPORATION A CALIFORNIA CORPORATION -------------------------- -------------------------- EX-23.01 9 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report dated December 16, 1997 (except with respect to the matters discussed in Note 12, as to which the date is January 9, 1998), included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-23809, 33-85752, 33-74034 and 333-2745. ARTHUR ANDERSEN LLP Miami, Florida January 12, 1998 EX-24.01 10 POWERS OF ATTORNEY 1 Exhibit 24.01 APPOINTMENT OF ATTORNEY-IN-FACT AND CONSENT OF DIRECTOR I hereby authorize, as a director of AmeriQuest Technologies, Inc. (the "Corporation"), the filing with the Securities and Exchange Commission of the Corporation's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Annual Report"), and any and all amendments thereto as management deems advisable in response to SEC comments or otherwise, inasmuch as the Annual Report is deemed to be incorporated by reference in the Corporation's Registration Statements on Forms S-3, S-4 and S-8. I hereby consent to the filing by the Corporation of such Annual Report, and to reference to my name in the Annual Report as a "Director" of the Corporation. I hereby appoint Alexander C. Kramer, Jr. and Jon Jensen as my attorneys-in-fact with power to either of them to sign any and all amendments or documents required to complete any amendments to the Annual Report filed on behalf of the Corporation. DATED the 21st day of November, 1997. /s/ Dr. Harry Krischik ---------------------------------- Dr. Harry Krischik 2 APPOINTMENT OF ATTORNEY-IN-FACT AND CONSENT OF DIRECTOR I hereby authorize, as a director of AmeriQuest Technologies, Inc. (the "Corporation"), the filing with the Securities and Exchange Commission of the Corporation's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Annual Report"), and any and all amendments thereto as management deems advisable in response to SEC comments or otherwise, inasmuch as the Annual Report is deemed to be incorporated by reference in the Corporation's Registration Statements on Forms S-3, S-4 and S-8. I hereby consent to the filing by the Corporation of such Annual Report, and to reference to my name in the Annual Report as a "Director" of the Corporation. I hereby appoint Alexander C. Kramer, Jr. and Jon Jensen as my attorneys-in-fact with power to either of them to sign any and all amendments or documents required to complete any amendments to the Annual Report filed on behalf of the Corporation. DATED the 21st day of November, 1997. /s/ MANFRED H. GUENZEL ---------------------------------- Manfred H. Guenzel 3 APPOINTMENT OF ATTORNEY-IN-FACT AND CONSENT OF DIRECTOR I hereby authorize, as a director of AmeriQuest Technologies, Inc. (the "Corporation"), the filing with the Securities and Exchange Commission of the Corporation's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Annual Report"), and any and all amendments thereto as management deems advisable in response to SEC comments or otherwise, inasmuch as the Annual Report is deemed to be incorporated by reference in the Corporation's Registration Statements on Forms S-3, S-4 and S-8. I hereby consent to the filing by the Corporation of such Annual Report, and to reference to my name in the Annual Report as a "Director" of the Corporation. I hereby appoint Alexander C. Kramer, Jr. and Jon Jensen as my attorneys-in-fact with power to either of them to sign any and all amendments or documents required to complete any amendments to the Annual Report filed on behalf of the Corporation. DATED the 21st day of November, 1997. /s/ Richard Obermaier ---------------------------------- Richard Obermaier 4 APPOINTMENT OF ATTORNEY-IN-FACT AND CONSENT OF DIRECTOR I hereby authorize, as a director of AmeriQuest Technologies, Inc. (the "Corporation"), the filing with the Securities and Exchange Commission of the Corporation's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Annual Report"), and any and all amendments thereto as management deems advisable in response to SEC comments or otherwise, inasmuch as the Annual Report is deemed to be incorporated by reference in the Corporation's Registration Statements on Forms S-3, S-4 and S-8. I hereby consent to the filing by the Corporation of such Annual Report, and to reference to my name in the Annual Report as a "Director" of the Corporation. I hereby appoint Alexander C. Kramer, Jr. and Jon Jensen as my attorneys-in-fact with power to either of them to sign any and all amendments or documents required to complete any amendments to the Annual Report filed on behalf of the Corporation. DATED the 21st day of November, 1997. /s/ Anton Roedl ---------------------------------- Anton Roedl 5 APPOINTMENT OF ATTORNEY-IN-FACT AND CONSENT OF DIRECTOR I hereby authorize, as a director of AmeriQuest Technologies, Inc. (the "Corporation"), the filing with the Securities and Exchange Commission of the Corporation's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Annual Report"), and any and all amendments thereto as management deems advisable in response to SEC comments or otherwise, inasmuch as the Annual Report is deemed to be incorporated by reference in the Corporation's Registration Statements on Forms S-3, S-4 and S-8. I hereby consent to the filing by the Corporation of such Annual Report, and to reference to my name in the Annual Report as a "Director" of the Corporation. I hereby appoint Alexander C. Kramer, Jr. and Jon Jensen as my attorneys-in-fact with power to either of them to sign any and all amendments or documents required to complete any amendments to the Annual Report filed on behalf of the Corporation. DATED the 4th day of November, 1997. /s/ Marc L. Werner ---------------------------------- Marc L. Werner 6 APPOINTMENT OF ATTORNEY-IN-FACT AND CONSENT OF DIRECTOR I hereby authorize, as a director of AmeriQuest Technologies, Inc. (the "Corporation"), the filing with the Securities and Exchange Commission of the Corporation's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "Annual Report"), and any and all amendments thereto as management deems advisable in response to SEC comments or otherwise, inasmuch as the Annual Report is deemed to be incorporated by reference in the Corporation's Registration Statements on Forms S-3, S-4 and S-8. I hereby consent to the filing by the Corporation of such Annual Report, and to reference to my name in the Annual Report as a "Director" of the Corporation. I hereby appoint Alexander C. Kramer, Jr. and Jon Jensen as my attorneys-in-fact with power to either of them to sign any and all amendments or documents required to complete any amendments to the Annual Report filed on behalf of the Corporation. DATED the 1st day of November, 1997. /s/ J. R. Dick Iverson ---------------------------------- J. R. Dick Iverson EX-27.01 11 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the balance sheet and income statement and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS SEP-30-1997 SEP-30-1997 7,680 0 9,006 0 7,066 24,687 1,272 0 26,079 49,471 0 0 30,000 669 111,145 26,079 218,877 218,877 203,199 203,199 53,534 0 3,455 (41,311) 0 (41,311) 0 0 0 41,311 (0.63) (0.63)
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