-----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, Me+7Ni39OmiRV31iB1ebkJDOHHQnFc8M4hKmW+hCA9cuWbJ9hcAdGIhKNlhEx1Tz /telyOrXDAdjJm2JFsI+9w== 0000893220-98-001903.txt : 19981230 0000893220-98-001903.hdr.sgml : 19981230 ACCESSION NUMBER: 0000893220-98-001903 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 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-K SEC ACT: SEC FILE NUMBER: 001-10397 FILM NUMBER: 98777232 BUSINESS ADDRESS: STREET 1: 425 PRIVET RD CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2156759300 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-K 1 10-K AMERIQUEST TECHNOLOGIES, INC. 1 [AMERIQUEST LOGO] Annual Report 1998 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 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) 2465 MARYLAND ROAD 19090 WILLOW GROVE, PENNSYLVANIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(215) 658-8900 (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 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 [ ] 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 18, 1998 is approximately $2,500,000. 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. There were 66,881,906 shares of the Registrant's Common Stock outstanding as of December 18, 1998. The following document is incorporated by reference into Part III, Items 10, 11, 12, and 13 of this Annual Report on Form 10-K: the registrant's definitive proxy statement for its 1999 Annual Meeting of Stockholders. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 PART I FOREWORD THE INFORMATION SET FORTH IN THIS ANNUAL REPORT IS BASED PRIMARILY ON HISTORICAL INFORMATION. THIS ANNUAL REPORT ALSO CONTAINS SOME FORWARD-LOOKING STATEMENTS RELATING TO FUTURE GROWTH PLANS AND OTHER MATTERS. TO THE EXTENT THAT THIS ANNUAL REPORT 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 ITEM 1 UNDER THE CAPTION "SPECIAL FACTORS TO BE CONSIDERED." ITEM 1. BUSINESS. THE COMPANY AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest" or the "Company"), is a valued-added wholesale distributor of mid-range, Unix and NT server systems, networking systems, storage sub-systems, printers and related products to value-added resellers ("VARs") and systems integrators. Mid-range computers and servers range in price from $5,000 to $800,000. 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 solutions for its customers and to provide a high level of value-added services, including consultation on component selection, system assembly, 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 VARs 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. 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., a distributor of entertainment software ("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 early in the first quarter of fiscal 1998. Accordingly, the description of AmeriQuest's business set forth below does not address the historical business of its subsidiaries individually. During fiscal year 1996 and early 1997 AmeriQuest's sales operations were divided into five divisions, each located in a different 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 to close or sell all of the other divisions. This reorganization was materially completed in November, 1997. Following the reorganization, the Company has become a more focused technical distributor of computer products providing value added solutions and services rather than a fulfillment distributor that relies on broad product lines and high volumes of commodity products. The Company maintains its principal executive offices at 2465 Maryland Road, Willow Grove, Pennsylvania 19090, and its telephone number is (215) 658-8900. 2 4 CONTROL OF AMERIQUEST -- ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR MANAGEMENT In August, 1995, Computer 2000, Inc., a wholly-owned subsidiary of Computer 2000 AG (collectively referred to herein as "Computer 2000") acquired 36,349,878 shares of AmeriQuest's Common Stock representing approximately 54% of the issued and outstanding shares of AmeriQuest Common Stock. On May 6, 1997 AmeriQuest issued 300,000 shares of its Series H Cumulative Convertible Preferred Stock (convertible into approximately 42 million shares, or 63% of the total outstanding shares of 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, COMPUTER 2000 held warrants and an 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. On a fully-diluted basis, all such securities, if converted and exercised, would have constituted approximately 73% of the outstanding shares of AmeriQuest Common Stock. On July 20, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's senior management, Alex Kramer (CEO) and Jon Jensen (CFO and COO), acquired the 36,349,878 shares of AmeriQuest Common Stock owned by Computer 2000. The transaction was approved by the outside directors and by the full Board of Directors of AmeriQuest. In taking over majority control of AmeriQuest from Computer 2000, AmeriQuest's management arranged for a new $10 million asset-backed bank credit line for AmeriQuest, in part to release Computer 2000 from its guarantee of IBM Credit Corporation (IBMCC). Management also obtained the release of Computer 2000 and its affiliates from all other guarantees of AmeriQuest obligations, and agreed to pay certain transaction costs totaling approximately $220,000. As part of the transaction, Computer 2000 contributed to the capital of AmeriQuest approximately $28 million in intercompany debt obligations and an additional $3 million in cash. Computer 2000 further agreed to the redemption by AmeriQuest of all of the outstanding AmeriQuest preferred stock, convertible into approximately 42 million common shares, and to the cancellation of all outstanding dividends, interest and AmeriQuest options and warrants held by Computer 2000. As a result of the transaction, the number of outstanding shares of AmeriQuest, on a fully diluted basis, was reduced from approximately 118 million to approximately 67 million. The Board of Directors of the Company agreed to reserve 6.7 million shares of common stock for future issuance to AmeriQuest employees as incentive compensation pursuant to terms to be approved by outside directors of the board. STRATEGY The Company's current business focus is to continue second tier distribution in areas which minimize direct competition with the Company's largest competitors and to concentrate on selling higher-margin mid-range computer and client server systems, networking products and storage systems along with complementary and related individual computer components, and maintenance and leasing services. In addition, AmeriQuest provides value-added services such as engineering design and system configuration, installation capability and technical support to its VAR and system integrator customer base, which improves its margins as compared to the margins of those distributors who provide for sale of equipment only. AmeriQuest has negotiated agreements with several vendors that allow the Company to serve as the "silent partner" of the Company's resellers by being able to sell products directly to the reseller's end users when the reseller desires AmeriQuest to do so. Although management believes that this strategy, when coupled with planned increases in revenue, will return AmeriQuest to profitability, there are numerous risks and uncertainties, including those described elsewhere in this Annual Report, and no assurance can be given that the Company's strategy will succeed or that the Company will become operationally 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. 3 5 PRODUCTS AmeriQuest seeks to sell products from nationally-recognized vendors that provide all the components most VARs require to fully configure their computer solutions. The following is a description of the major categories of products currently sold by AmeriQuest and the principal current vendors of those products: CLIENT SERVER AND PERSONAL COMPUTERS -- AmeriQuest distributes laptop, desktop and mini-tower personal computers and mid-range computer servers manufactured by Acer, Hewlett Packard, IBM 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 and wide area network ("LAN/ WAN") software and specialized hardware products manufactured by IBM, D-Link, Novell, and Multi-Tech Systems. In addition, the Company distributes modems and other communication products manufactured by Digi International. NETWORK STORAGE -- AmeriQuest distributes a broad line of channel and network attached storage products from IBM, SMS and Unisys. 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, 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 client server systems sales. AmeriQuest has also commenced the sale of certain applications software for Unix and mid-range systems. Among the manufacturers of these software products are IBM, SCO and Novell. 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, configure or install system solutions with their own resources. Increasing focus is being placed on this segment of the business through the Company's "silent partner" program. 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 offer a total solution while minimizing competition among vendors' products, but maintains overlap to provide protection against product shortages or discontinuations. Accordingly, historical revenues from sale of products of the five leading vendors, Acer, Hewlett Packard, IBM, Okidata and Unisys, represent approximately 7.3%, 6.5%, 39.8%, 14.3% and 9.4%, respectively, of the Company's revenue for the fiscal year ended September 30, 1998 (Hewlett Packard is 11.3% when including purchases from alternate sourcing). The Company is focused on increasing its share of business represented by each of Acer, Hewlett Packard, IBM, Okidata and Unisys and has made increases in its sales force to achieve such objective. AmeriQuest expanded its relationship with Unisys by negotiating a corporate account reseller ("CAR") agreement which allows AmeriQuest to sell Unisys products, that are not available to AmeriQuest's resellers, directly to end users. During 1998, AmeriQuest voluntarily scaled back its relationship with IBM, although, as further discussed below, the Company retained the right to distribute IBM's networking products and to sell IBM mid-range products, including RS6000 and mass storage. AmeriQuest discontinued its second tier relationship with IBM to distribute the RS6000 mid-range unix based computers on June 30, 1998. As AmeriQuest had to obtain permission from IBM to authorize IBM resellers ("IRAs") and to deal with contractual limitations in selling to existing IRAs who may be dissatisfied with the service of a competitive distributor, AmeriQuest's ability to expand its IBM revenue base was constrained. IRAs are contractually precluded from purchasing 4 6 IBM product except from their designated distributor, which limited 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 yearly revenue and certification requirements. Accordingly, management determined that IBM's current policy of defining and controlling their mid-range reseller channel, combined with AmeriQuest's overhead cost required by IBM to maintain the IBM relationship, was prohibitively expensive and unprofitable. 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 Acer, Hewlett Packard, Okidata and Unisys products, nor with IBM's networking products. AmeriQuest, like most hardware distributors, sells products throughout the United States on behalf of its 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 short 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. 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. AmeriQuest has pursued a strategy since the beginning of the second half of fiscal 1998 to reduce inventory of non-core vendors and to satisfy its customer's needs for non-core, supplemental or complementary products by concentrating its procurement efforts with one of the large, national fulfillment distributors. 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 and to have arrangements with one or more of the large national fulfillment distributors to purchase products in short supply. SALES AND MARKETING 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. As earlier mentioned, AmeriQuest has chosen to satisfy its customer's needs for supplemental or complementary products by concentrating the Company's procurement efforts with one of the large, national fulfillment distributors. No customer has accounted for more than ten percent of AmeriQuest's net sales during the 1998, 1997 or 1996 fiscal years. Sales by AmeriQuest are not seasonal to any material extent. During fiscal year 1998 AmeriQuest's sales operations were divided into three domestic regions -- Northeast, Southeast and Western -- each covering a geographical section of the country. It has only been since the change in control in mid-July, that management of the Company has been able to fill vacancies in the sales staff. During the cost and overhead reduction period that lasted from April, 1997 to June of 1998, the sales force had declined to 12 people. The staff has been increased to 21 currently. Training and selection of the staff is oriented toward the market, service and product focus earlier described. 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 5 7 \serving established accounts. AmeriQuest places some emphasis on telemarketing, however, most of the Company's sales personnel operate in the field. OPERATIONS AND CUSTOMER SERVICES 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. CUSTOMER ORDER ENTRY. 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, Leasetech (Unisys), the FINOVA Group, Inc. and Transamerica Inventory Finance. Because of AmeriQuest's prompt delivery times, it does not generally maintain a substantial order backlog. PROMPT DELIVERY. In most geographic 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 Willow Grove, 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. 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. AmeriQuest offers its resellers warranty return rights 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, as opposed to fulfillment only, distribution of mid-range computer systems is limited, but intense. Principal national distributors in the technical distribution of mid-range, Unix and 6 8 NT server systems, networking systems, storage sub-systems, printers and related products with which the Company competes include Western Micro, Jones Business Systems, and Westcon. Many of the technical distributors have greater financial resources than the Company. Additionally it is reasonable to expect that the large broad-line fulfillment 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. YEAR 2000 COMPLIANCE Many currently installed computer systems and software programs are coded to accept or recognize only two digit entries in the date code field. These systems and software products will need to accept four digit entries, or be otherwise modified, to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded to comply with such Year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. State of Readiness. To date, AmeriQuest has made a preliminary assessment of the Year 2000 readiness of mission critical third party software and hardware used by the Company. The Company has taken steps to upgrade such software and hardware used by the Company known to it not to be Year 2000 compliant or where the manufacturer of such software or hardware has provided upgrades to the Company. In addition, AmeriQuest has performed a Year 2000 simulation on all such software and hardware. The Company has similarly tested all mission critical software and hardware with respect to leap year calculations. The Company believes that, based on upgrades performed to date and/or upgrades provided by the manufacturer, all mission critical software and hardware used by the Company is either Year 2000 compliant or the Company has taken steps to upgrade or replace such systems so that they are Year 2000 compliant. Such upgrades or replacements are expected to be completed by the second quarter of fiscal 1999. Costs. To date, AmeriQuest has not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues. Most of its expenses have related to, and are expected to continue to relate to, the operating costs associated with time spent by employees in the evaluation process and Year 2000 compliance matters generally. Although the Company does not anticipate that any such expenses incurred in the future will be material, such expenses, if higher than anticipated, could have a material adverse effect on the Company's business, results of operations and financial condition. Risks. Except where plans have been made to upgrade or replace software and hardware that is not Year 2000 compliant, AmeriQuest is not currently aware of any Year 2000 compliance problems relating to third party software, hardware and services used by the Company that would have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will not discover Year 2000 compliance problems in third party software, hardware and services used by the Company which will need to be addressed or replaced, any of which could be time consuming and expensive. The failure of the Company to identify, address and/or replace any such third party software, hardware or services used by the Company on a timely basis, if at all, that are not Year 2000 compliant could result in lost revenues, increased operating costs and other business interruptions, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company has not ascertained the Year 2000 compliance of hardware or software which may have been sold by the Company in the past. AmeriQuest is also not currently aware of any specific Year 2000 compliance problems relating to third party software and hardware currently sold by the Company to its customers which is supplied to the Company by its vendors. The Year 2000 compliance of software and hardware supplied to the Company by its vendors is outside the Company's control. The Company makes available to its customers the warranties offered by manufacturers whose products it sells. While the Company 7 9 believes that ultimate responsibility for claims arising from the Year 2000 compliance of the software and hardware it sells should be borne the products' manufacturer, there can be no assurance that the Company will have no liability for any such claims and any related liability could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, there can be no assurance that other third parties outside the Company's control, including, without limitation, governmental agencies, financial institutions, public utilities, other service providers with which the Company does business and others, will be Year 2000 compliant. The failure of any such entity to be Year 2000 compliant could result in systematic failures beyond the control of the Company which could have a material adverse effect on the Company's business, results of operations and financial condition. Contingency Plans. To date, the Company has not established a formal contingency plan for dealing with a failure by the Company, any of its vendors or others to achieve Year 2000 compliance. However, the Company recognizes the need to develop contingency plans and expects to have these plans in place, where applicable, by the end of fiscal 1999. EMPLOYEES As of September 30, 1998, AmeriQuest had 63 full-time employees in sales (increased to 69 currently), including 17 persons employed in sales (21 currently), 10 persons employed in sales support (12 currently) and 6 persons employed in marketing functions. None of AmeriQuest's employees are covered by a collective bargaining agreement. AmeriQuest considers its relations with its employees to be very good. 8 10 SPECIAL FACTORS TO BE CONSIDERED In addition to the other information in this Annual Report on Form 10K, the following factors should be carefully considered: CONTINUED OPERATING LOSSES While the Company has had net income of $747,000 during the fiscal year ended September 30, 1998, such income included a reversal of prior year restructuring accruals of $1,376,000. Additionally, the Company recorded a significant benefit due to the reversal of other previously established reserves. The Company has experienced significant losses during previous fiscal years. The fiscal 1995 net loss of $67.6 million 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. Although the Company has significantly reduced its operating losses as a result of the restructuring, in the event that operating losses were to continue at significant levels, 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. MARKET CONSIDERATIONS 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 operates on small gross margins. Further, the Company incurs 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 to achieve sustained operating profitability. The recent estimate by management, reported in the Form 10-Q for the period ended June 30, 1998, that a 25% increase in sales would be required in order for AmeriQuest to achieve a break-even level of operations as a result of the voluntary partial loss of a significant vendor, IBM, remains reliable. As earlier mentioned, it has only been since the change in control in mid-July, with the resultant appearance of viability and cessation of ownership uncertainty, that management of the Company has been able to competently fill vacancies in the sales staff. During the cost and overhead reduction period that lasted from April, 1997 to June of 1998, the sales force had declined to 12 people. The staff has been increased to 21 currently with internal plans to bring the level to 25. While the Company's management is attempting to increase sales and its share of business represented by such vendors as Acer, 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. 9 11 NEED TO MAINTAIN VENDOR BASE The Company principally distributes computer products manufactured by Acer, Hewlett Packard, IBM, Okidata and Unisys. Accordingly, the Company's relationships with these and its other 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. 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 networking products. IBM has indicated that they would terminate the right of AmeriQuest to distribute networking products if AmeriQuest did not meet the purchase levels of calendar 1998 or any future calendar years. 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 cost-competitive 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 phase 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. The Company believes it has instituted the necessary inventory and purchasing safeguards to prevent these difficulties in the future. 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 competition. Principal national distributors in the technical distribution of mid-range, Unix and NT server systems, networking systems, storage sub-systems, printers and related products with which the Company competes include Western Micro, Jones Business Systems, and Westcon, who have greater financial and technical resources than the Company.. 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 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. 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. These factors, among others, will likely cause continued competitive pressures on the Company in the future. MANAGEMENT FOCUS ON COMPLETION OF RESTRUCTURING AND CHANGE IN CONTROL Because of the restructuring during Fiscal 1997 and 1998 and the managerial disruption caused by the Computer 2000 merger with Tech Data and the related and resultant change in control of AmeriQuest, the Company has been unable until the end of July, 1998 to focus its management attention and marketing 10 12 expenditures to increase its market share and return the Company to focus on recapturing and sustaining the growth apparent in the market niche the Company has chosen. If the Company's sales for any reason in the near future do not materialize in amounts sufficient to cover the existing cost structure, management may again have to be diverted to considering restructuring alternatives. 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 previously 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. 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, 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 and services, (ii) completing current 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. 11 13 ITEM 2. PROPERTIES. AmeriQuest's principal offices are located in leased facilities in Willow Grove, Pennsylvania, which consists of approximately 17,500 square feet of office space and 25,000 square feet of warehouse space on a single level. The following table sets forth information regarding the principal and regional offices of AmeriQuest:
SQUARE FEET LEASE EXPIRATION YEAR OPENED ----------- ---------------- ----------- LOCATION Willow Grove, PA..................... 42,500 8/31/03 1998 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 Anaheim, CA.......................... 62,298 2/29/00 1995 Alpharetta, GA(1).................... 1,924 9/30/99 1994
- --------------- (1) Sub-lessee is in default. Proceedings are being undertaken to evict the current sub-lessee in preparation for release of the property to another sub-tenant, which is 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. Kenfil Inc. vs. RLI Insurance Company, Superior Court of the State of California, County of Los Angeles, No. BC 108564 filed July 12, 1994, which involved litigation instituted by Kenfil Inc. to recover additional monies for the damage it incurred in the Northridge earthquake of January 17, 1994 was settled on October 16, 1998 through payment of $150,000 by the Company. The defendant had 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. 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 Messrs. Bransky and Landman for the damages to Kenfil Inc. by their unauthorized and unratified criminal conduct. No assurance can be given as to the final outcome of this legal matter. Leading Edge Products, Inc. vs. AmeriQuest Technologies, Inc., which involved suit against AmeriQuest/ NCD Inc., one of the Company's predecessors in interest, wherein Leading Edge was asserting breach of contract and unjust enrichment, was settled on September 16, 1998 through payment of $770,000 by the Company. In its complaint Leading Edge alleged a $1,055,438 debt and sought double or triple damages, interest, attorney's fees, and costs. The Company obtained a full and final release as part of the settlement of this litigation on September 16, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of security holders during the fourth quarter of fiscal 1998. 12 14 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 through March 9, 1998, when the Company was de-listed. The prices reflect the high and low closing prices quoted on the NASDQ Exchange's OTC Bulletin Board for each calendar quarter since March 10, 1998. AMERIQUEST
HIGH LOW ---- ---- 1995 First Quarter.......................................... 3 1/4 2 1/2 Second Quarter......................................... 3 1/4 1 3/4 Third Quarter.......................................... 2 1/2 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 3/8 Third Quarter.......................................... 9/32 3/16 Fourth Quarter......................................... 5/16 7/32 1998 First Quarter.......................................... 13/64 3/64 Second Quarter......................................... 19/64 5/64 Third Quarter.......................................... 15/64 5/64 Fourth Quarter......................................... 1/8 4/64
On December 18, 1998, the stock of AmeriQuest closed at 5/64 (or approximately $0.078) per share. As of that date AmeriQuest had approximately 1,000 shareholders of record. The Company did not declare dividends on its Common Stock in 1998 and does not intend to declare dividends on its Common Stock in the foreseeable future. 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 13 15 "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).
YEARS ENDED YEAR ENDED YEAR ENDED YEAR ENDED QUARTER ENDED JUNE 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ------------------------- 1998 1997 1996 1995 1995 1994 ------------- ------------- ------------- ------------- ----------- ---------- Net sales.................. $ 60,466 $ 218,877 $ 424,708 $ 100,723 $ 416,571 $ 87,593 Net income (loss).......... 747(1) (41,311)(2) (33,609)(2) (7,041)(2) (67,566) (7,971) Net Income (loss) per share.................... (0.01)(4) (0.63)(4) (0.76) (0.30) (3.76) (1.33) Total assets............... 12,955 26,079 116,372 115,531 128,008 65,145 Long-term obligations...... 0 0 3,122 6,686 24,515(3) 3,442 Stockholders' equity (deficit)................ 9,018 (23,392) (11,206) 17,565 (25,709) 12,875 Weighted average shares outstanding.............. 66,881,906 66,881,906 44,208,983 23,786,127 17,993,440 5,973,511
- --------------- (1) While the Company had net income of $747,000, such income included a reversal of prior year restructuring accruals of $1,376,000. Additionally, the Company recorded a significant benefit due to the reversal of other previously established reserves (See Notes 3, 5 and 9 to Notes to Consolidated Financial Statements). (2) The losses in 1997 were due principally to restructuring, asset impairment and relocation costs of $26.4 million associated with the close down of the unprofitable distribution businesses. The losses in 1996 included lease termination costs and moving costs of $6.4 million. The losses in 1995 were due principally to abandonment of U.S. software operations and the cost of integrating prior acquisitions and the write-down of assets. Losses in 1994 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 11 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. (4) Net income (loss) per share includes a deduction for dividends on Preferred Stock to arrive at net income (loss) available to Common Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. SIGNIFICANT EVENTS On July 20, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's senior management, Alex Kramer (CEO) and Jon Jensen (CFO and COO), acquired the 36,349,878 shares of AmeriQuest common stock owned by Computer 2000. In taking over majority control of AmeriQuest from Computer 2000, AmeriQuest's management arranged for a new $10 million asset-backed bank credit line for AmeriQuest, in part to release Computer 2000 from its guarantee of IBMCC, obtained the release of Computer 2000 and its affiliates from all other guarantees of AmeriQuest obligations, and agreed to pay certain transaction costs totaling approximately $220,000. As part of the transaction, Computer 2000 contributed to the capital of AmeriQuest approximately $28 million in intercompany debt obligations and an additional $3 million in cash. Computer 2000 further agreed to the redemption by AmeriQuest of all of the outstanding AmeriQuest preferred stock, convertible into approximately 42 million common shares, and to the cancellation of all outstanding dividends, interest and AmeriQuest options and warrants held by Computer 2000. As a result of the transaction, the number of outstanding shares of AmeriQuest, on a fully diluted basis, was reduced from approximately 118 million to approximately 67 million. The Listen Group transaction completed a reorganization which began in April, 1997. 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 the planned restructuring. The restructuring measures were 14 16 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. 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. Early in fiscal 1998, 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. 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. ANNUAL OPERATING RESULTS The following table presents the Company's yearly results of operations as a percent of sales:
YEARS ENDED YEARS ENDED YEARS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 ------------- ------------- ------------- Sales....................................... 100.0% 100.0% 100.0% Gross Profit................................ 10.1 7.2 5.5 Selling, general and administrative......... 10.7 16.1 10.8 Intangible write-off........................ -- 4.1 -- Restructuring............................... (2.3) 4.3 1.5 Interest.................................... 0.5 1.6 1.1 Net Income (Loss)........................... 1.2 (18.9) (7.9)
NET SALES During the fiscal year ended September 30, 1998 sales decreased 72% compared to the twelve months ended September 30, 1997. Sales decreases were mainly attributable to the Company's decision to focus on the activities of its Advanced Systems Group and sell or close all other divisions. During the fiscal year ended September 30, 1997 sales decreased 48% compared to the twelve months ended September 30, 1996. Sales decreases were mainly attributable to the Company's decision to sell CMS Enhancements, Inc., to close the North American and export distribution divisions and focus on and strengthen the activities of its Advanced Systems Group. The Company has relationships with several key vendors as primary suppliers of computer products to the Company. For the years ended September 30, 1998, 1997 and 1996, sales derived from products from two, two and one vendors accounted for 54%, 23%and 14%, respectively, of the Company's sales. However, included in the sales for fiscal 1998 were shipments to other IBM distributors of approximately $5,400,000 of IBM 15 17 RS6000 product that represented liquidation of inventory as AmeriQuest exited the IBM two tier program. Revenue attributable to the Company's business during fiscal 1998 was thus $55,066,000. Revenue attributable to the Company's ongoing business during fiscal 1997 was $52,050,000. Accordingly, sales during the year ended September 30, 1998, as adjusted, increased by 4% over the prior year despite both the Company's decision to terminate its 2nd tier IBM distribution of Unix products, and its inability to hire and replace sales staff or recruit additional resellers until the period following the change in control to the senior management of the Company. COST OF SALES AND GROSS PROFIT Cost of sales includes primarily the cost of merchandise, freight expenses and provisions for inventory losses and is reduced by vendor volume rebates and other items. Gross profit (sales less cost of sales) increased to 10.1% of sales for the fiscal year ended September 30, 1998 compared to 7.2% for the fiscal year ended September 30, 1997. 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 in both years was primarily attributable to the closing of the lower margin standard distribution businesses and continuation of the higher margin Advanced Systems Group revenue and related higher margin. The detrimental effect on gross profit of approximately $1,300,000 caused by the liquidation of inventory purchased in fiscal 1998 was offset by favorable settlements of approximately $1,300,000 of previously established vendor debit loss reserves. In addition, in fiscal 1998 the Company recorded a benefit of approximately $380,000 related to previously established other cost of sales accruals. 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 $0.3 million, $2.4 million and $2.5 million for the years ended September 30, 1998, September 30, 1997 and September 30, 1996, respectively. AmeriQuest anticipates that it will continue to experience pressure on gross selling margins due to industry competition. Although AmeriQuest expects that it will be able to improve sales product mix toward those products and services generating higher margins and 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, 1998, 1997 and 1996 operating expenses, exclusive of the restructuring and the write-off of intangibles were approximately 10.7%, 16.1%, and 10.8% of sales, respectively. Selling, general and administrative expenses have declined during the periods as a result of the closing of the lower margin standard distribution businesses and reductions in bad debt expense. Additionally, the Company settled two lawsuits favorably and in fiscal 1998 reversed $1.3 million of reserves in excess of settlement amounts which served to offset certain general and administrative costs incurred during the fiscal year that related to the withdrawal from business with certain customers and vendors and residual expenses resulting from closing of the Company's other divisions in fiscal 1997 and 1998. The Company also recorded the benefit of approximately $400,000 in fiscal 1998 resulting from the reversal of previously established accruals. 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. 16 18 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. 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 years ended September 30, 1998, September 30, 1997 and September 30, 1996 totaled $0.6 million, $2.0 million and $2.8 million, respectively. INTANGIBLE WRITE-OFF During the year ended September 30, 1997, the Company recorded an intangible write-off of approximately $9 million (See Note 4 to Notes to Consolidated Financial Statements). RESTRUCTURING During the years ended September 30, 1996 and 1997, the company recorded restructuring costs of approximately $6.4 million and $9.3 million, respectively. During the year ended September 30, 1998, the company completed its restructuring plan. Costs incurred to complete the restructuring plan were charged against the related, previously established restructuring accruals. Certain estimates made of the costs to complete the restructuring plan exceeded the actual costs incurred. When the Company determined that the estimated costs exceeded the actual costs, the remaining accruals were reversed into income. During the year ended September 30, 1998, the Company reversed approximately $1.4 million into income (See Note 3 to Notes to Consolidated Financial Statements). INTEREST EXPENSE Interest expense, net, decreased from $3.5 million for the year ended September 30, 1997 to $0.3 million for the year ended September 30, 1998 due to (i) replacement of bank loans by intercompany loans Computer 2000 without interest and (ii) the equity infusion of $3,000,000 from Computer 2000 on July 20, 1998. See "Liquidity and Capital Resources". INCOME TAXES In the period October 1, 1995 to September 30, 1998, no income tax expense was recorded due to losses or the availability of tax-loss carryforwards. Due to the acquisition by Listen Group Partners, LLC of the Company's stock held by Computer 2000 (see Note 2 to the Notes to Consolidated Financial Statements), there was a change in ownership as defined by section 382 of the Internal Revenue Code ("Section 382 Limitations"). The Section 382 Limitation limits the Company's ability to utilize its net operating loss carryforwards created prior to the ownership change. The Company is currently analyzing the amount of the limitation and estimates that the net operating loss carryforwards available to offset future taxable income ranges between $0 and $12 million. The Company has not benefited from these net operating carryforwards as of September 30, 1998. QUARTERLY OPERATING RESULTS The following tables present certain unaudited quarterly statement of operations data for the quarters ended September 30 of the respective fiscal year ended September 30. This unaudited quarterly information has been derived from audited annual consolidated financial statements of the Company and, in the opinion of management, includes all adjustments necessary for a fair presentation of the information for the periods 17 19 covered. The quarterly data should be read in conjunction with the audited Financial Statements and the notes thereto:
THREE MONTHS ENDED ------------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 1995 ------------- ------------- ------------- ------------- Net sales......................... $13,095 $19,237 $103,755 $100,723 Gross Profit...................... 1,326 904 2,330 7,415 Selling, general and administrative.................. 1,818 2,388 12,346 13,019 Restructuring..................... (1,016) (2,063) 0 0 Interest.......................... 23 401 1,153 1,437 Net income (loss)................. 501 178 (11,169) (7,041)
AS A PERCENTAGE OF NET SALES ------------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1996 1995 ------------- ------------- ------------- ------------- Sales............................. 100.0% 100.0% 100.0% 100.0% Gross Profit...................... 10.1 4.7 2.2 7.4 Selling, general and administrative.................. 13.9 12.4 11.9 13.0 Restructuring..................... (7.8) (10.7) -- -- Interest.......................... 0.2 2.1 1.1 1.4 Net income (loss)................. 3.8 0.9 (10.8) (7.0)
NET SALES -- QUARTER During the quarter ended September 30, 1998 sales decreased 32% compared to the three months ended September 30, 1997. Sales decreases were solely attributable to the Company's early in the first quarter of fiscal 1998 to sell its wholly-owned Asian subsidiaries, whose revenue for the quarter ended September 30, 1997 was $6,432,000. Revenue attributable to the Company's ongoing business was $12,805,000. Accordingly, sales during the quarter ended September 30, 1998 increased by 2% over the year ago quarter despite the Company's decision to terminate its 2nd tier IBM distribution of Unix products, and its inability to hire and replace sales staff or recruit additional resellers until the period following the change in control to the senior management of the Company. Revenues from sale of products of the five leading vendors, Acer , Hewlett Packard, IBM, Okidata and Unisys, represent approximately 13%, 15%, 29%, 16% and 6%, respectively, of the Company's revenue for the fiscal quarter ended September 30, 1998. COST OF SALES AND GROSS PROFIT -- QUARTER During the quarter ended September 30, 1998 gross profit increased to 10.1% from 4.7% for the three months ended September 30, 1997. Gross profit increases were solely attributable to the Company's decision early in fiscal 1998 to sell its wholly-owned Asian subsidiaries. Gross profit attributable to the Company's ongoing business during fiscal 1997 was $724,000. Accordingly, gross profit during the quarter ended September 30, 1998 increased by $602,000 or 83% over the year ago quarter despite the Company's decision to terminate its 2nd tier IBM distribution of Unix products, and its inability to hire and replace sales staff or recruit additional resellers until the period following the change in control to the senior management of the Company. OPERATING EXPENSES -- QUARTER Operating expenses during the quarter ended September 30, 1998, without benefit of the reversal of restructuring reserves of $1,016,000, was $1,818,000. Accordingly, operating expenses during the quarter ended September 30, 1998 decreased by 24% over the year ago quarter. During the quarter ended September 30, 1998 operating expenses decreased by $572,000, but reflect an increase as a percent of sales to 13.9% from 12.4% for the three months ended September 30, 1997. Operating expense decreases were attributable to the Company's decision early in fiscal 1998 to sell its wholly-owned Asian subsidiaries. 18 20 Additionally, the Company settled two lawsuits favorably and reversed $1.3 million of reserves in excess of settlement amounts which served to offset certain general and administrative costs incurred during the fiscal quarter that related to the withdrawal from business with certain vendors and residual expenses resulting from closing of the Company's other divisions in fiscal 1997 and 1998. OPERATING INCOME VARIABILITY 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 also ceased as of June 19, 1997. As earlier mentioned, the Company experienced a net loss of $67.6 million in fiscal 1995, a net loss of $33.6 million during fiscal 1996, a net loss of $41.3 million during fiscal 1997, and net income of $0.7 million during fiscal 1998. Included in the net income for fiscal 1998 is reversal of restructuring accruals of $1.4 million and other previously established reserves. 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. SEASONALITY Generally, the Company's sales volumes are not seasonal between quarters, although historical monthly sales within various quarters have varied considerably. For example, sales tend to decrease in November, primarily due to industry attendance at Comdex, with a corresponding increase in December. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had $0.7 million in cash and had not borrowed against its line of credit. At September 30, 1997, the Company had borrowed $3.1 million against lines of credit. The Company used $7.0 million in cash from operating activities during the year ended September 30, 1998 primarily due to expenditures associated with the restructuring charges provided in fiscal 1997, offset partially by reduction in inventory levels. 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 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 during fiscal 1997. Accounts receivable days decreased during fiscal 1998 compared to fiscal 1997, representing shorter payment terms extended to customers. 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, 1998, the Company had a stockholders' equity of $9.0 million compared to a September 30, 1997 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 improvement in stockholder's equity resulted primarily from the recapitalization associated with the change in control on July 20, 1998. The Company had maintained bank lines of credit guaranteed by Computer 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 19 21 lender. See "Certain Relationships and Related Transactions." Notwithstanding the agreement by Computer 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 would have made the loan immediately due and payable. The intercompany loan was contributed to capital as a result of the change in control on July 20, 1998. The Company maintains a $10 million line of credit with Fleet Financial ("Fleet") which is secured by substantially all of the Company's assets. Interest rates on the Fleet line are prime plus 150 basis points or Libor plus 400 basis points. Borrowings under the Fleet 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 and cash flows. The Fleet line expires July 20, 2001. There were no borrowings under the Fleet line of credit at September 30, 1998. The Fleet line replaced a line of credit with IBM Credit Corporation ("IBMCC"). Borrowings under the IBMCC line of credit at September 30, 1997 and 1996 totaled $3.1 million and $12.3 million, respectively. Management believes that the Company's current sources of external financing are adequate to meet its current operating requirements through September 30, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the Company's line of credit with Fleet, a change in either the lender's base rate or LIBOR would affect the rate at which the Company could borrow funds thereunder. The Company believes that the effect of any such change would be minimal. 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 20 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. See "Election of Directors" in the proxy statement for the 1999 annual meeting of the stockholders of the Company, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. See "Executive Officers Compensation" in the proxy statement for the 1999 annual meeting of the stockholders of the Company, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See "Stock Ownership" in the proxy statement for the 1999 annual meeting of the stockholders of the Company, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. See "Other Information-Certain Relationships and Related Transactions" in the proxy statement for the 1999 annual meeting of the stockholders of the Company, which is incorporated herein by reference. 21 23 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-3 Consolidated Balance Sheets................................. F-2 Consolidated Statements of Stockholders' Equity (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 Reserve..................................................... F-17
(b) Reports on Form 8-K Current report on Form 8-K dated July 2, 1998 to report the change in control of the Registrant. (c) Exhibits EXHIBIT INDEX
EXHIBIT NO. TITLE OF DOCUMENT LOCATION OF FILING - ------- ----------------- ------------------ 3.01 Restated Certificate of Incorporation of AmeriQuest...................................... 3.02* By-laws of AmeriQuest........................... 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...................... SEC File No. 33-81726 10.01* Inventory and Working Capital Financing SEC File No. 1-10397 8-K Agreement dated July 20, 1998 by and between for July 30, 1998 AmeriQuest and Fleet Capital.................... 10.02* 1996 Equity Incentive Plan...................... SEC File No. 1-10397 Exhibit 10.07 10K for September 30, 1997 10.03 Employment Agreement for Alexander C. Kramer, SEC File No. 1-10397 Jr. ............................................ Exhibit 10.10 10K for September 30, 1997 10.04 Employment Agreement for Jon D. Jensen.......... SEC File No. 1-10397 Exhibit 10.11 10K for September 30, 1997
22 24
EXHIBIT NO. TITLE OF DOCUMENT LOCATION OF FILING - ------- ----------------- ------------------ 10.05 Lease Agreement dated July 1, 1998 by and between AmeriQuest and Merion Mills Associates...................................... 10.06* Lease Agreement dated January 25, 1995, as SEC File No. 1-10397 amended, by and between AmeriQuest and Anaheim Exhibit 10.25 Technology Center............................... 10-K for September 30, 1996 10.07* Sublease dated as of September 4, 1996 by and SEC File No. 1-10397 between AmeriQuest and Central Video, Inc. ..... Exhibit 10.26 10-K for September 30, 1996 21.01 Subsidiaries of AmeriQuest...................... SEC File No. 1-10397 10-K for September 30, 1997 27.01 Financial Data Schedule (for SEC use only)......
- --------------- * 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. 23 25 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 Willow Grove, State of Pennsylvania, on the 22nd day of December, 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. Each Person, in so signing, also causes and appoints Alexander C. Kramer and Jon D. Jensen, and each of them acting alone, as his true and lawful attorney-in-fact, in his name, place and stead, to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ALEXANDER C. KRAMER President and a Director December 22, 1998 - --------------------------------------------------- (Principal Executive Alexander C. Kramer Officer) /s/ JON D. JENSEN Chief Financial Officer, December 22, 1998 - --------------------------------------------------- Chief Operating Officer, Jon D. Jensen Secretary and a Director (Principal Financial and Accounting Officer) /s/ EDWARD B. CLOUES, II Director December 22, 1998 - --------------------------------------------------- Edward B. Cloues, II /s/ WALTER A. REIMANN Director December 22, 1998 - --------------------------------------------------- Walter A. Reimann /s/ CHARLES W. SOLTIS Director December 22, 1998 - --------------------------------------------------- Charles W. Soltis Director - --------------------------------------------------- Marc L. Werner /s/ J. R. DICK IVERSON Director December 22, 1998 - --------------------------------------------------- J. R. Dick Iverson /s/ ALEXANDER C. KRAMER - --------------------------------------------------- Alexander C. Kramer**, Attorney-in-Fact /s/ JON JENSEN - --------------------------------------------------- Jon Jensen**, Attorney-in-Fact
24 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AmeriQuest Technologies, Inc.: We have audited the accompanying consolidated balance sheets of AmeriQuest Technologies, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. 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 provide a reasonable basis for our opinion. In our opinion, 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, 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 Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania, December 8, 1998 F-1 27 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 755 $ 7,680 Accounts receivable, net of allowances for doubtful accounts of $609 and $2,156............................ 6,535 9,006 Inventories............................................... 4,191 7,066 Other current assets...................................... 354 935 --------- --------- Total current assets.............................. 11,835 24,687 PROPERTY AND EQUIPMENT, NET................................. 799 1,272 OTHER ASSETS................................................ 321 120 --------- --------- $ 12,955 $ 26,079 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable.......................................... $ 2,132 $ 9,492 Due to Computer 2000...................................... -- 27,664 Lines of credit........................................... -- 3,064 Accrued expenses and other................................ 1,805 9,251 --------- --------- Total current liabilities......................... 3,937 49,471 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 10) STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, $.01 par value, 5,000,000 shares authorized and 300,000 shares issued and outstanding at September 30, 1997; no shares issued and outstanding at September 30, 1998..................................... -- 30,000 Common stock, $.01 par value, 200,000,000 shares authorized, 66,881,906 shares issued and outstanding... 669 669 Additional paid-in capital................................ 174,383 111,145 Accumulated deficit....................................... (166,034) (165,206) --------- --------- Total stockholders' equity (deficit).............. 9,018 (23,392) --------- --------- $ 12,955 $ 26,079 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-2 28 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- NET SALES........................................... $ 60,466 $ 218,877 $ 424,708 COST OF SALES....................................... 54,323 203,199 401,165 ----------- ----------- ----------- Gross profit................................... 6,143 15,678 23,543 OPERATING EXPENSES Selling, general and administrative............... 6,499 35,160 45,998 Intangibles write-off............................. -- 9,036 -- Restructuring costs............................... (1,376) 9,338 6,400 ----------- ----------- ----------- Income (loss) from operations................ 1,020 (37,856) (28,855) INTEREST EXPENSE, NET............................... 273 3,455 4,754 ----------- ----------- ----------- NET INCOME (LOSS)................................... 747 (41,311) (33,609) DIVIDENDS ON PREFERRED STOCK........................ (1,575) (875) -- ----------- ----------- ----------- NET LOSS TO COMMON STOCKHOLDERS..................... $ (828) $ (42,186) $ (33,609) =========== =========== =========== Basic and diluted net loss per share................ $ (0.01) $ (0.63) $ (0.76) =========== =========== =========== Basic and diluted shares outstanding................ 66,881,906 66,881,906 44,208,983 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 29 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- ------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- -------- ---------- ------ ---------- ----------- -------- Balances at September 30, 1995............ 2,596,525 $ 26 23,896,140 $239 $106,476 $ (89,176) $ 17,565 Exercise of employee stock options........ -- -- 82,500 1 3 4 Preferred stock issued for acquisition.... 25,830 -- -- -- 1,603 1,603 Common stock issued for acquisition....... -- -- 3,969,905 40 2,367 2,407 Exercise of warrants by Computer 2000..... 301,249 3 -- -- 232 235 Common stock issued for legal settlement.............................. -- -- 500,000 5 305 310 Common stock issued for series G preferred stock dividend.......................... -- -- 197,958 2 233 (235) 0 Preferred stock conversion................ (2,923,604) (29) 33,104,371 330 (302) (1) Exercise of warrants by Computer 2000..... -- -- 5,296,518 53 227 280 Net loss.................................. -- -- -- -- -- (33,609) (33,609) ---------- -------- ---------- ---- -------- --------- -------- Balances at September 30, 1996............ -- -- 67,047,392 670 111,144 (123,020) (11,206) Correction of outstanding shares that were authorized but never issued in connection with settlement of debt(1)... -- -- (165,486) (1) 1 0 Sale of preferred stock................... 300,000 30,000 30,000 Accrued dividend on preferred stock....... -- -- -- -- -- (875) (875) Net loss.................................. -- -- -- -- -- (41,311) (41,311) ---------- -------- ---------- ---- -------- --------- -------- Balances at September 30, 1997............ 300,000 30,000 66,881,906 669 111,145 (165,206) (23,392) Accrued dividend on preferred stock....... -- -- -- -- -- (1,575) (1,575) Contribution of cash, preferred stock, accrued dividends and debt by Computer 2000 (see Note 2)....................... (300,000) (30,000) -- -- 63,238 -- 33,238 Net income................................ -- -- -- -- -- 747 747 ---------- -------- ---------- ---- -------- --------- -------- Balances at September 30, 1998............ -- $ -- 66,881,906 $669 $174,383 $(166,034) $ 9,018 ========== ======== ========== ==== ======== ========= ========
- --------------- (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 30 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30 ------------------------------- 1998 1997 1996 ------- -------- -------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 747 $(41,311) $(33,609) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 307 2,664 3,235 Gain on sale of division assets........................ (184) (385) -- Restructuring costs.................................... (1,376) 13,849 956 Changes in operating assets and liabilities: Net (increase) decrease in accounts receivable......... (415) 43,625 (4,903) Decrease in inventories................................ 2,450 29,613 2,454 Decrease in other assets............................... 229 2,704 1,305 Increase (decrease) in accounts payable and accrued expenses and other................................... (8,757) (29,027) 1,728 ------- -------- -------- Net cash provided by (used in) operating activities........................................ (6,999) 21,732 (28,834) ------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from sale of division assets..................... 450 3,550 -- Capital expenditures, net of disposals.................... (312) (62) (1,798) ------- -------- -------- Net cash provided by (used in) investing activities........................................ 138 3,488 (1,798) CASH FLOW FROM FINANCING ACTIVITIES: Net borrowings (repayments) under lines of credit......... (3,064) (77,504) 32,202 Net borrowings from Computer 2000......................... -- 27,664 -- Contribution to capital from Computer 2000................ 3,000 -- -- Proceeds from sale of preferred and common stock.......... -- 30,000 520 ------- -------- -------- Net cash provided by (used in) financing activities........................................ (64) (19,840) 32,722 ------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (6,925) 5,380 2,090 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................................. 7,680 2,300 210 ------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 755 $ 7,680 $ 2,300 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 31 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS) Interest on lines of credit: During the fiscal years ended September 30, 1998, September 30, 1997 and September 30, 1996, the Company paid cash for interest of approximately $499, $3,614 and $4,774, respectively. Income taxes: During the fiscal years ended September 30, 1998, September 30, 1997 and September 30, 1996, 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. Contribution of non-interest bearing demand loan and preferred stock to capital: During the fiscal year ended September 30, 1998, Computer 2000 contributed to the capital of the Company a non-interest bearing demand loan due Computer 2000 and preferred stock of approximately $28 million and $30 million, respectively. Dividends on Preferred Stock: During the fiscal years ended September 30, 1998 and 1997, the Company had accrued $1,575 and $875, respectively, in dividends payable to preferred stockholders. The accrued dividends of $2,450 were contributed to capital on July 20, 1998. The accompanying notes are an integral part of these consolidated financial statements. F-6 32 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 (the "Company" or "AmeriQuest"), a Delaware corporation, 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. During fiscal 1998, the Company's senior management acquired all of the Company's common stock held by Computer 2000, the then current majority stockholder. Computer 2000 also contributed cash, preferred stock, accrued dividends and obligations due Computer 2000 to the Company's equity (see Note 2). Restructuring 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 significantly reduced and all remaining employees are in the US. The Company also closed its corporate headquarters in Florida. The restructuring plan was implemented, but not completed, throughout fiscal year 1997. At September 30, 1997, the Company has accrued $3,738,000 of cost related to the restructuring plan. The plan 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 closed were approximately $126 million. The Company completed this restructuring plan during fiscal year 1998. Costs incurred to complete the restructuring plan were charged against the related restructuring accruals. Certain estimates made of the costs to complete the restructuring plan exceeded the actual costs incurred. When the Company determined that the estimated costs exceeded the actual costs, the remaining accruals were reversed into income. During fiscal 1998, the Company reversed $1,376,000 into income, which is recorded in restructuring costs in the accompanying consolidated statement of operations (see Note 3). In addition, the Company recorded a significant benefit due to the reversal of other previously established reserves (See Notes 5 and 9). 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. 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. Cash and Cash Equivalents. The Company considers cash on deposit with financial institutions and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company generally limits its investments in cash equivalents to certificates of deposit. 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. Amounts due from vendors for price protection and stock rotations are recorded as an offset to the amounts due vendors in accounts payable. Management assesses the realizable value of these amounts and reserves for potential uncollectable balances. F-7 33 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 to 7 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. 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. 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. The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," effective the year ended September 30, 1998. This statement requires the disclosure of both basic and diluted earnings per share as well as the retroactive restatement of prior years' per share disclosures. Basic and dilutive shares outstanding for the fiscal years ended September 30, 1998, 1997 and 1996 are the same, as all common stock equivalents are anti-dilutive due to the loss to common shareholders. Recently Issued Accounting Pronouncements. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management believes that SFAS 130 will not have a material effect on the Company's financial statements. In June 1997, the FASB issued Statement No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. Management believes that SFAS 131 will not have a material effect on the Company's financial statements. F-8 34 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Risks and Uncertainties. The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, the Company's historical operating losses before the benefit of excess restructuring costs and other accruals and reserves taken into income in fiscal 1998 (see Notes 3, 5 and 10), the competitive market for computers and computer related equipment, dependence on key vendors, dependence on key personnel and risks associated with rapidly changing technology. Financial instruments that potentially subject the Company to concentrations of credit risk (see Note 1) consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable are not significant due to the large number of customers. At September 30, 1996, 1997 and 1998, no one customer represented greater than 10% of accounts receivable or greater than 10% of sales for the periods then ended. Dependence on Vendors. The Company has relationships with several key vendors as primary suppliers of computer products to the Company. For the years ended September 30, 1998, 1997 and 1996, sales derived from products from two, two and one vendors accounted for 54%, 23% and 14%, respectively, of the Company's sales. There can be no assurance that the Company will maintain its relationship with these vendors, or that it will be able to find alternative vendors capable of providing product on terms satisfactory to the Company should its relationship with its current vendors terminate. 2. ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR MANAGEMENT: On July 2, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's senior management, Alex Kramer (CEO) and John Jensen (CFO), signed an agreement to acquire the 36,349,878 shares of AmeriQuest common stock owned by Computer 2000. The transaction was approved by the outside directors of AmeriQuest and by the full Board of Directors of AmeriQuest. In taking over majority control of AmeriQuest from Computer 2000, AmeriQuest's management arranged for a new $10 million asset-backed bank credit line for AmeriQuest (see Note 6), in part to release Computer 2000 from its guarantee of IBMCC, obtained the release of Computer 2000 and its affiliates from all other guarantees of AmeriQuest obligations, and agreed to pay certain transaction costs totaling approximately $220,000. As part of the transaction, completed on July 20, 1998, Computer 2000 contributed to the capital of AmeriQuest approximately $28 million in intercompany debt obligations and an additional $3 million in cash. Computer 2000 further agreed to the redemption by AmeriQuest of all of the outstanding AmeriQuest preferred stock, convertible into approximately 42 million common shares, and to the cancellation of all outstanding dividends of $2,450,000, interest of $124,000 and AmeriQuest options and warrants held by Computer 2000. As a result of the transaction, the number of outstanding shares of AmeriQuest on a fully diluted basis, was reduced from approximately 118 million to approximately 67 million. The Board of Directors of the Company agreed to reserve 6.7 million shares of common stock for future issuance to AmeriQuest employees as incentive compensation pursuant to terms to be approved by outside directors of the board. F-9 35 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. RESTRUCTURING COSTS AND ASSET IMPAIRMENT: The components of the restructuring costs and asset impairment for the year ended September 30, 1997 were as follows (in thousands):
1997 ------- 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 ------- Intangible write off........................................ 9,036 ------- Restructuring 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 Other............................................. 2,848 ------- Total classified as restructuring costs...... 9,338 ------- Total costs relating to restructuring and asset impairment for the years ended September 30, 1997............................................. $26,351 =======
The components of the remaining restructuring accruals as of September 30, 1997 and the 1998 activity are as follows (in thousands):
RESTRUCTURING RESTRUCTURING ACCRUALS CHARGED REVERSED INTO ACCRUALS SEPTEMBER 30, AGAINST INCOME DUE TO SEPTEMBER 30, 1997 ACCRUAL CHANGE IN ESTIMATE 1998 ------------- ------- ------------------ ------------- Lease payments in excess of sublease income............... $ 618 $ 533 $ 85 $-- Severance costs................. 448 378 70 -- Other........................... 2,672 1,451 1,221 -- ------ ------ ------ -- $3,738 $2,362 $1,376 $-- ====== ====== ====== ==
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 (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 ======
4. ACQUISITIONS AND DISPOSITIONS: Early in the first quarter of fiscal 1998, 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 (collectively, "Kenfil Asia"). Proceeds from the sale of Kenfil Asia were $450,000, with a gain of $184,000, which was classified as a reduction of selling, general and administrative expenses in the accompanying Statement of Operations. F-10 36 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On June 19, 1997, CMS Enhancements Inc., a subsidiary of AmeriQuest, sold substantially all of its assets to CMS Peripherals Inc., a company formed by the former managing director of CMS Enhancements Inc. CMS Enhancements Inc., as part of the transaction has changed its name to AAG Inc. AmeriQuest also signed a non-competition agreement with CMS Peripherals with a term of five years. 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 were accounted for in accordance with the purchase method of accounting. Intangible assets associated with these acquisitions were primarily related to acquired distribution channels, associated vendor relationships and market positions. These intangibles were being amortized over ten years. Subsequent to these acquisitions, the Company assessed the recoverability of these intangibles in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." As a result of these assessments, the Company recorded goodwill impairment charges of approximately $9 million and $23.8 million in fiscal 1997 and fiscal 1995, respectively. Such charges were required due to the Company's significant operating losses ($165 million accumulated deficit as of September 30, 1997) and expectation of future operating performance. 5. INVENTORIES: Inventories consist of the following (in thousands):
SEPTEMBER 30, ---------------- 1998 1997 ------ ------ Finished goods............................................. $4,191 $6,927 Raw materials and subassemblies............................ -- 139 ------ ------ $4,191 $7,066 ====== ======
Inventories are reflected net of reserves for excess and obsolete inventory of approximately $0.7 million and $1.3 million at September 30, 1998 and 1997, 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'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. In fiscal 1998, the Company was able to realize approximately $1.3 million of amounts due from vendors previously thought to be uncollectable. Accordingly, the related $1.3 million of reserves were reversed into income in fiscal 1998 and recorded as an offset to cost of goods sold in the accompanying statement of operations. F-11 37 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands):
SEPTEMBER 30, ------------------ 1998 1997 ------- ------- Equipment................................................ $ 1,795 $ 3,224 Furniture and fixtures................................... 189 1,497 Leasehold improvements................................... 196 329 Less accumulated depreciation and amortization........... (1,381) (3,778) ------- ------- $ 799 $ 1,272 ======= =======
7. ACCRUED EXPENSES AND OTHER: Accrued expenses and other consist of approximately $819,000 of accrued payroll and related expenses and approximately $986,00 of other accrued expenses at September 30, 1998. 8. LINES OF CREDIT: During fiscal 1996 and 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. The borrowing base under the IBMCC facility was limited to a contractual percentage of eligible inventories and receivables and was secured by all inventories and accounts receivable of the Company and liens on substantially all other assets of the Company. The amount outstanding under this arrangement at September 30, 1997 was approximately $3.1 million. The IBMCC lending agreement included certain financial covenants which were required to be maintained by the Company. At various dates during fiscal years 1996, 1997 and 1998, the Company was in default with certain of these covenants. In December 1997, the Company received an amendment to its credit agreement with IBMCC, which waived the financial covenants the Company was not in compliance with as of September 30, 1997. Prior to September 30, 1997, the Company had outstanding borrowings of $77.4 million under lines of credit with four Germany-based financial institutions at Libor-based interest rates, which were guaranteed by Computer 2000. On September 30, 1997, Computer 2000 paid the outstanding bank lines of credit which totaled $27.7 million and converted the loans to a non-interest bearing demand loan, agreed to defer payment of this loan through September 30, 1998 and subordinated the loan to the working capital lender. On July 20, 1998, Computer 2000 contributed the non-interest bearing demand loan to the capital of AmeriQuest (see Note 2). In connection with the purchase by the Company's management of the Company's stock held by Computer 2000 (see Note 2), the Company entered into a three year credit facility with a bank (the "Credit Facility") to provide additional working capital for the Company. The Company can borrow on the Credit Facility up to the lesser of $10 million or 80% of eligible accounts receivable plus the lesser of $3.5 million or 50% of eligible inventory, as defined. The Credit Facility bears interest at either the banks prime rate plus 150 basis points or Libor plus 400 basis points. The Credit Facility also provides for various covenants including a minimum tangible net worth and minimum cash flows, as defined. The Company paid a $100,000 commitment fee and is obligated to pay fees of 0.5% per annum of unused available borrowings and 2% per annum on outstanding letters of credit. The Credit Facility can be utilized for letters of credit in an aggregate amount not to exceed $5 million. Outstanding letters of credit are a reduction F-12 38 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of available borrowing under the Credit Facility. As of September 30, 1998, the Company has not borrowed on the Credit Facility and has outstanding letters of credit of $1.7 million. 9. INCOME TAXES: The Company has historically incurred significant operating losses and has recorded a valuation allowance against its net deferred tax asset, as the Company believed that it was more likely than not that the net deferred tax asset would not be realized through operations. The valuation allowance recorded against the net deferred tax asset is based on management's estimates related to the Company's ability to realize these benefits. Appropriate adjustments will be made to the valuation allowance if circumstances warrant in future periods. Such adjustments may have a significant impact on the Company's financial statements. As of September 30, 1997, the tax effect of significant temporary differences consist of the following (in thousands):
SEPTEMBER 30, 1997 ------------- Inventory reserves.......................................... $ 498 Allowance for doubtful accounts............................. 868 Other, including restructuring charge....................... 8,964 Net operating loss carryforwards............................ 46,163 Valuation allowance......................................... (56,493) -------- $ -- ========
As of September 30, 1998, the tax effect of significant temporary differences excluding net operating loss carry forwards consist of $282,000 in inventory reserves, $209,000 in allowance for doubtful accounts and $677,000 in other reserves and accruals not currently deductible for tax purposes. These deferred tax assets have been fully reserved by the Company. Due to the acquisition by the Company's management of the Company's stock held by Computer 2000 (see Note 2), there was a change in ownership as defined by section 382 of the Internal Revenue Code ("Section 382 Limitations"). The Section 382 Limitation limits the Company's ability to utilize its net operating loss carryforwards created prior to the ownership change. The Company is currently analyzing the amount of the limitation and estimates that the net operating loss carryforwards available to offset future taxable income ranges between $0 and $12 million. The Company has not benefited from these net operating carryforwards as of September 30, 1998. 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, ----------------------------- 1998 1997 1996 ----- -------- -------- Tax expense (benefit) computed at statutory rate...... $ 300 $(15,492) $(13,444) Intangible write-offs, amortization and other nondeductable amounts............................... 46 7,992 400 Net operating losses not benefited.................... -- 7,500 13,044 Benefit of net operating losses previously reserved... (346) -- -- ----- -------- -------- $ -- $ -- $ -- ===== ======== ========
F-13 39 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES: The Company leases its corporate office, warehouse space and certain equipment under operating leases. Future minimum rental commitments (net of contractual sub-rental income for fiscal 1999 and 2000 of $295,416 and $192,326, respectively) for all non-cancelable operating leases at September 30, 1998 are as follows (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------ 1999........................................................ $ 616,414 2000........................................................ 483,366 2001........................................................ 239,938 2002........................................................ 233,670 2003........................................................ 200,050 ---------- $1,773,438 ==========
Total rental expense net of sub-rental income under non-cancelable agreements for the periods ending September 30, 1998, September 30, 1997, and September 30, 1996 was approximately $589,000, $4,298,000 and $3,759,000, respectively. 11. LEGAL PROCEEDINGS: In fiscal 1998, the Company settled two law suits: Kenfil Inc. vs. RLI Insurance Company and Leading Edge Products, Inc. vs. AmeriQuest. Total amounts due for the settlements were $920,000. At September 30, 1997, the Company had reserves in excess of the settlement amounts of approximately $1.3 million, which were taken into income during fiscal 1998 as an offset to selling, general and administrative expense in the accompanying consolidated statement of operations. The Company is a party to various legal matters. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's future financial position or its results of operations. 12. 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 F-14 40 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Options no longer available for grant......... (365,953) -- -- Options cancelled -- Robec exchange shares.... 114,697 (114,697) 0.45 - 1.32 Options cancelled............................. 322,666 (322,666) 1.50 - 4.50 Options granted............................... (1,910,000) 1,910,000 0.08 ---------- ---------- ------------ Balances at September 30, 1998................ 90,000 2,038,141 $0.08 - 0.45 ========== ========== ============
The following table summarizes information about stock options outstanding at September 30, 1998:
NUMBER OF OPTIONS OUTSTANDING AS OF WEIGHTED RANGE OF SEPTEMBER 30, REMAINING AVERAGE OPTIONS EXERCISE PRICE 1998 CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE -------------- ----------------- ---------------- -------------- ----------- $ 0.45 128,141 8 months $0.45 128,141 0.08 1,910,000 119 months 0.08 -- ----------- --------- ----- ------- $0.08 - .45 2,038,141 $0.10 128,141 =========== ========= ===== =======
The Company accounts for its option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees." In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value based method of accounting for stock-based compensation plans. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan. Had the Company recognized compensation cost for its F-15 41 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock option plans consistent with the provisions of SFAS 123, the following pro forma net loss to common stockholders for the year ended September 30, 1998 would have resulted:
YEAR ENDED SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS, EXCEPT SHARE DATA) Net loss to common stockholders: As reported............................................... $ 828 =========== As calculated in accordance with SFAS 123................. $ 829 =========== Net income/(loss) per Common Share: As reported............................................... $ (0.01) =========== As calculated............................................. $ (0.01) =========== Shares used in calculating net income per diluted common share..................................................... 66,801,906
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with a risk-free interest rate of 4.96%, no expected dividend yield, an expected life of five years and a volatility factor of 50%. As of September 30, 1998, the weighted average fair value of the options outstanding is $0.05 per option. No options or warrants were granted in fiscal years 1997 or 1996. Accordingly, no compensation cost had been recorded or proforma disclosures are required under the provisions of SFAS 123. 13. FOREIGN SALES INFORMATION: A summary of the Company's operations by geographic area is as follows (in thousands):
U.S. FAR EAST ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ Year Ended September 30, 1998 Sales to unaffiliated customers....... $ 60,466 -- -- $ 60,466 Loss (income) from operations......... (747) -- -- (747) Identifiable assets................... 12,955 -- -- 12,955 Year Ended September 30 1997 Sales to unaffiliated customers....... $194,342 $24,535 -- $218,877 Loss (income) from operations......... 37,887 (31) -- 37,856 Identifiable assets................... 19,799 6,280 -- 26,079 Year Ended September 30 1996 Sales to unaffiliated customers....... $404,151 $20,557 -- $424,708 Loss (income) from operations......... 29,231 (376) -- 28,855 Identifiable assets................... 110,955 5,417 -- 116,372
United States sales include export sales of $0, $5.3 million, and $41.9 million, made principally to Europe, Latin America, the Far East and Canada during the fiscal years ended September 30, 1998, September 30, 1997, September 30, 1996, respectively. See Footnote 4 for disposition of the Far East operations. F-16 42 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 OF PERIOD EXPENSE WRITTEN-OFF OTHER OF PERIOD ---------- ---------- ----------- ----- --------- Description Allowance for Doubtful Accounts: 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 October 1, 1997 to September 30, 1998................................ 2,156 -- 1,547 -- 609 Restructuring Accounts October 1, 1996 to September 30, 1997................................ -- 9,338 5,600 -- 3,738 October 1, 1997 to September 30, 1998................................ 3,738 -- 2,362 1,376(1) --
- --------------- (1) Reversed into income due to change in estimate. See Note 1 to Notes to Consolidated Financial Statements. F-17 43 [AMERIQUEST LOGO] 2465 Maryland Road Willow Grove, PA 19090 800-223-7081 215-658-8900 Fax 215-658-8968 EX-3.01 2 RESTATED CERTIFICATE OF INCORPORATION AMERIQUEST 1 EXHIBIT 3.01(a) RESTATED CERTIFICATE OF INCORPORATION OF AMERIQUEST TECHNOLOGIES, INC. AMERIQUEST TECHNOLOGIES, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "General Corporation Law"), hereby certifies as follows: FIRST: The name of the Corporation is AmeriQuest Technologies, Inc. The Certificate of Incorporation of the Corporation was originally filed by the Corporation with the Secretary of State of the State of Delaware on April 24, 1987 under the name "CMS Enhancements, Inc." SECOND: This Restated Certificate of Incorporation restates and integrates and does not further amend the provisions of the Certificate of Incorporation of the Corporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. This Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 245 of the General Corporation Law. THIRD: The text of Certificate of Incorporation of the Corporation as in effect on the date hereof is hereby restated to read in its entirety as follows: ARTICLE FIRST The name of the Corporation is AmeriQuest Technologies, Inc. ARTICLE SECOND The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THIRD The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law. ARTICLE FOURTH The total number of shares which the Corporation shall have authority to issue is 205,000,000, of which 200,000,000 shares shall be Common Stock, $.01 par value ("Common"), and 5,000,000 shares shall be Preferred Stock, $.01 par value ("Preferred Stock"). 2 The Board of Directors is authorized, subject to the limitations prescribed by law and the provisions of this Article FOURTH, to provide for the issuance of the Preferred Stock in series, and by filing a certificate pursuant to the applicable laws of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each such series shall include, but not be limited to, the determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate, if any, on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights expressly required by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in the case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of a voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences and limitations of that series. ARTICLE FIFTH The Board of Directors of the Corporation is expressly authorized to make, alter or repeal the By-laws of the Corporation, but the stockholders may make additional By-laws and may alter or repeal any by-law whether adopted by them or otherwise. - 2 - 3 ARTICLE SIXTH Elections of directors need not be by written ballot except to the extent provided in the By-laws of the Corporation. ARTICLE SEVENTH A director of the Corporation shall not be liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law as the same exists or may hereafter be amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE EIGHTH The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provisions contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article Eighth. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be signed by its Chief Financial Officer, Chief Operating Officer and Secretary this 8th day of December, 1998. AMERIQUEST TECHNOLOGIES, INC. By: /s/ JON D. JENSEN ---------------------------- Jon D. Jensen Chief Financial Officer, Chief Operating Officer and Secretary - 3 - EX-10.05 3 LEASE AGREEMENT DATED JULY 1, 1998 1 EXHIBIT 10.05 No. 50 - Revised Uniform Lease Lease Agreement THIS AGREEMENT, MADE THE 1st day of July one thousand nine hundred and Ninety-eight (1998), by and between Merion Mills Associates, a Pennsylvania partnership with a mailing address at P.O. Box 128, Ambler, PA 19002 1. Parties ------------------------------------------------------------------------------------------------------ (hereinafter called Lessor) of the one part, and AmeriQuest Technologies, Inc. a Delaware Corporation ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ (hereinafter called Lessee), of the other part. 2. Premises WITNESSTH THAT: Lessor does hereby demise and let unto Lessee all that certain Approximately 42,640 square foot portion of a light Industrial building known as 2445-2465 Maryland Rd., Willow Grove, and shown as Units A and C on the attached diagram, such building being located in the Township of Upper Moreland State of Pennsylvania, to be used and occupied as office, light assembly for the term of five (5) years 3. Term beginning the 1st day of August, one thousand nine hundred and Ninety-eight (1998), and ending the 31st day of July, two thousand three (2003), 4. Minimum Rent for the minimum Annual gross rental of Two Hundred Ten Thousand Two Hundred Sixteen dollars ($210,216.00) lawful money of the United States of America, payable in monthly installments in advance during the said term of this lease, or any renewal hereof, in sums of Seventeen Thousand Five Hundred- dollars ($17,518) on the first day of each month, rent to begin from the 1st day of August, 1998, the first installment to be paid at the time of signing this lease. The first rental payment to be made during the occupancy of the premises shall be adjusted to pro-rate a partial month of occupancy, if any, at the inception of this lease. ** and other related non-hazardous uses consistent with Lessee's initial use of the demised premises as described above. 5. Inability to Give If Lessor is unable to give Lessee possession of the demised premises, as herein Possession provided, by reason of the holding over of a previous occupant, or by reason of any cause beyond the control of the Lessor, the Lessor shall not be liable in damages to the Lessee therefore, and during the period that the Lessor is unable to give possession, all rights and remedies of both parties hereunder shall be suspended. See Paragraph 29 (a) of the attached Addendum regarding the timing of Lessee's initial use of the demised premises. 6. Additional Rent (a) Lessee agrees to pay as rent in addition to the minimum rental herein reserved (a) Damages for any and all sums which may become due by reason of the failure of Lessee to comply with Default all of the covenants of this lease and any and all damages, costs and expenses which the Lessor may suffer or incur by reason of any default of the Lessee or failure on his part (b) Sewer Rent to comply with the covenants of this lease, and each of them, and also any and all damages to the demised premises caused by any act or neglect of the Lessee. 7. Place of All rent shall be payable without prior notice or demand at the office of Lessor, P.O. BOX Payment 128, AMBLER, PA. 19002, or such other place as Lessor may from time to time designate by notice in writing. 8. Affirmative Lessee covenants and agrees that he will without demand: Covenants (a) Pay the rent and all other charges herein reserved as rent at the times and at the (a) Payment of Rent place that the same are payable, without fail; and if Lessor shall at any time or times accept said rent or rent charges after the same shall have become delinquent, such acceptance shall not excuse delay upon subsequent occasions, or constitute or be construed as a waiver of any of Lessor's rights. Lessee agrees that any charge or payment herein reserved, included, or agreed to be treated or collected as rent and/or any other charges, expenses, or costs herein agreed to be paid by Lessee may be proceeded for and recovered by Lessor by legal process in the same manner as rent due and in arrears. (b) Cleaning (b) Keep the demised premises clean and free from all ashes, dirt and other refuse matter; Repairing, etc. replace all glass windows, doors, etc., broken; keep all waste and drain pipes open; repair all damage to plumbing and to the premises in general; keep the same in good order and repair as they are now, damage by accidental fire or other casualty not occurring through negligence of Lessee or those employed by or acting for Lessee alone excepted. The Lessee agrees to surrender the demised premises in the same condition in which Lessee has herein agreed to keep the same during the continuance of this lease. (c) Requirements of (c) Comply with any requirements of any of the constituted public authorities, and with Public the terms of any state or federal statute or local ordinance or regulation applicable to Lessee Authorities or his use of the demised premises, and save Lessor harmless from penalties, fines, costs or damages resulting from failure so to do. (d) Fire (d) Use every reasonable precaution against fire. (e) Rules & Regulations (e) Comply with rules and regulations of Lessor promulgated as hereinafter provided. (f) Surrender of (f) Peaceably deliver up and surrender possession of the demised premises to the Possession Lessor at the expiration or sooner termination of this lease, promptly delivering to Lessor at his office all keys for the demised premises. (g) Notice of (g) Give to Lessor prompt written notice of any accident, fire, or damage occurring Fire, etc. on or to the demised premises. (h) Condition of (h) Lessee shall be responsible for the condition of the sidewalks, steps, and landings Payment during the term of this lease; shall keep the same free from snow and ice; and shall be and hereby agrees that Lessee is solely liable for any accidents, due or alleged to be due to their defective condition, or to any accumulations of snow and ice. (i) The Lessee agrees that if, with the permission in writing of Lessor, Lessee shall (i) Agency on vacate or decide at any time during the term of this lease, or any renewal thereof, to vacate Removal the herein demised premises prior to the expiration of this lease, or any renewal hereof, Lessee will not cause or allow any other agent to represent Lessee in any sub-letting or reletting of the demised premises other than an agent approved by the Lessor and that should Lessee do so, or attempt to do so, the Lessor may remove any signs that may be placed on or about the demised premises by such other agent without any liability to Lessor or to said agent, the Lessee assuming all responsibility for such action. ....such approval not to be unreasonably withheld or delayed. (j) Indemnify and save Lessor harmless from any and all loss occasioned by Lessee's breach of (j) Indemnification any of the covenants, terms and conditions of this lease, or caused by his family, guests, visitors, agents and employees. 9. Negative Lessee covenants and agrees that he will do none of the following things without first obtaining Covenants of the consent, in writing of Lessor, which consent Lessor shall not unreasonably withhold, and without Lessee providing Lessor with reimbursement for any expenses incurred or incidental to Lessee's proposed action. Or delay (a) Use of Premises (a) Occupy the demised premises in any other manner or for any other purpose than as above set forth. (b) Assignment and (b) Assign, mortgage or pledge this lease or under-let or sub-lease the demised premises, or any part Subletting thereof, or permit any other person, firm or corporation to occupy the demised premises, or any part thereof; nor shall any assignee or sub-Lessee assign, mortgage or pledge this lease or such sub-lease, without an additional written consent by the Lessor, and without such consent no such assignment, mortgage or pledge shall be valid. If the Lessee insolvent, or makes an assignment for the benefit of creditors, or if a petition in bankruptcy is filed by or against the Lessee or a bill in equity or other proceeding for the appointment of a receiver for the Lessee is filed, or if the real or personal property of the Lessee shall be sold or levied upon by any Sheriff, Marshal or Constable, the same shall be a violation of this covenant. (c) Signs (c) Place or allow to be placed any stand, booth, sign or show case upon the doorsteps, vestibules or outside walls or pavements of said premises, or paint, place, erect or cause to be painted, placed or erected any sign, projection or device on or in any part of the premises. Lessee shall remove any sign, projection or device painted, placed or erected, if permission has been granted and restore the walls, etc., to their former conditions, at or prior to the expiration of this lease. In case of the breach of this covenant (in addition to all other remedies given to Lessor in case of the breach of any conditions or covenants of this lease) Lessor shall have the privilege of removing said stand, booth, sign, show case, projection or device, and restoring said walls, etc., to their former condition, and Lessee, at Lessor's option, shall be liable to Lessor for any and all expenses so incurred by Lessor. (d) Alterations (d) Make any alterations, improvements, or additions to the demised premises. All alterations, Improvements improvements, additions or fixtures, whether installed before or after the execution of this lease, shall remain upon the premises at the expiration or sooner determination of this lease and become the property of Lessor, unless Lessor shall, prior to the determination of this lease, have given written notice to Lessee to remove the same, in which event Lessee will remove such alterations, improvements and additions and restore the premises to the same good order and condition in which they now are. Should Lessee fail so to do, Lessor may do so, collecting, at Lessor's option, the cost and expense thereof from Lessee as additional rent. (e) Machinery (e) Use or operate any machinery that, in Lessor's opinion, is harmful to the building or disturbing to other tenants occupying other parts thereof.
2 (f) Weights (f) Place any weights in any portion of the demised premises beyond the safe carrying capacity of the structure. (g) Fire Insurance (g) Do or suffer to be done, any act, matter or thing objectionable to the fire insurance companies whereby the fire insurance or any other insurance now in force or hereafter to be placed on the demised premises, or any part thereof, or on the building of which the demised premises may be a part, shall become void or suspended, or whereby the same shall be rated as a more hazardous risk than at the date of execution of this lease, or employ any person or persons objectionable to the fire insurance companies or carry or have any hazardous materials or explosive matter of any kind in and about the demised premises. In case of a breach of this covenant (in addition to all other remedies given to Lessor in case of the breach of any of the conditions or covenants of this lease) Lessee agrees to pay to lessor as additional rent any and all increase or increases of premiums on insurance carried by Lessor on the demised premises, or any part thereof, or on the building of which the demised premises may be a part, caused in any way by the occupancy of Lessee. (h) Removal of (h) Remove, attempt to remove or manifest an intention to remove Lessee's goods or property from or Goods out of the demised premises otherwise than in the ordinary and usual course of business, without having first paid and satisfied Lessor for all rent which may become due during the entire term of this lease. (i) Vacate or desert said premises during the term of this lease, or permit the same to be empty and (i) Vacate Premises unoccupied. 10. Lessor's Right Lessee covenants and agrees that Lessor shall have the right to do the following things and matters in and about the demised premises: (a) Inspection of (a) At all reasonable times by himself or his duly authorized agents to go upon and inspect the Premises demised premises and every part thereof, and/or at his option to make repairs, alterations and additions to the demised premises or the building of which the demised premises is a part. (b) Rules and (b) At any time or times and from time to time make such reasonable rules and regulations as may be Regulations necessary or desirable for the safety, care, and cleanliness of the demised premises and/or of the building of which the demised premises is a part and of real and personal property contained therein and for the preservation of good order. Such rules and regulations shall, when communicated in writing to Lessee, form a part of this lease. (c) Sale or Rent (c) To display a "For Sale" sign at any time, and also, after notice from either party of intention Sign, to determine this lease, or at anytime within six months prior to the expiration of this lease, a "For Rent" Prospective sign, or both "For Rent" and "For Sale" signs; and all of said signs shall be placed upon such part of the Purchasers premises as Lessor may elect and may contain such matter as Lessor shall require. Persons authorized by or Tenants Lessor may inspect the premises at reasonable hours during the said periods. (d) Discontinue (d) Lessor may discontinue at any time, any or all facilities furnished and services rendered by Facilities Lessor not expressly covenanted for herein or required to be furnished or rendered by law; it being and Service understood that they constitute no part of the consideration for this lease. 11. Responsibility (a) Lessee agrees to relieve and hereby relieves the Lessor from all liability by reason of any of Lessee injury or damage to any person or property in the demised premises, whether belonging to the Lessee or any other person caused by any fire, breakage, or leakage in any part or portion of the building of which the demised premises is a part or from water, rain or snow that may leak into, issue or flow from any part of the said premises, or of the building of which the demised premises is a part, from the drains, pipes or plumbing work of the same, or from any place or quarter, unless such breakage, leakage, injury or damage be caused by or result from the negligence of Lessor or its servants or agents. (b) Lessee also agrees to relieve and hereby relieves Lessor from all liability by reason of any damage or injury to any property or to Lessee or Lessee's guests, servants, or employees which may arise from or be due to the use , misuse or abuse of all or any of the elevators, hatches, openings, stairways, hallways of any kind whatsoever which may exist or hereafter be erected or constructed on the said premises or the sidewalks surrounding the building of which may arise from defective construction, failure of water supply, light, power, electric wiring, plumbing, or machinery, wind, lighting, storm or any other cause whatsoever on the said premises or the building of which the demised premises is a part, unless such damage, injury, use, misuse or abuse be caused by or result from the negligence of Lessor, its servants or agents. 12. Responsibility of Lessor (a) In the event the demised premises are totally destroyed or so damaged by fire or other casualty (a) Total Destruction that, in the opinion of a licensed architect retained by Lessor, the same cannot be repaired and restored of Premises within ninety days from the happening of such injury this lease shall absolutely cease and determine, and the rent shall abate for the balance of the term. (b) Partial (b) If the damage be only partial and such that the premises can be restored, in the opinion of a Destruction of licensed architect retained by Lessor, to approximately their former condition within ninety days from the Premises date of the casualty loss Lessor may, at Lessor's option, restore the same with reasonable promptness, reserving the right to enter upon the demised premises for that purpose. Lessor also reserves the right to enter upon the demised premises whenever necessary to repair damage caused by fire or other casualty to the building of which the demised premises is a part, even though the effect of such entry be to render the demised premises or a part thereof untenantable. In either event the rent shall be apportioned and suspended during the time Lessor is in possession, taking into account the proportion of the demised premises rendered untenantable and the duration of Lessor's possession. If a dispute arises as to the amount of rent due under this clause, Lessee agrees to pay the full amount claimed by Lessor, but Lessee shall have the right to proceed by law to recover the excess payment, if any. (c) Repairs by Lessor (c) Lessor shall make such election to repair the premises or terminate this lease by giving notice thereof to Lessee at the leased premises within thirty days from the day Lessor received notice that the demised premises had been destroyed or damaged by fire or other casualty. (d) Damage for (d) Except to the extent hereinbefore provided, Lessor shall not be liable for any damage, Interruption compensation, or claim by reason of the necessity of repairing any portion of the building, the interruption of use in the use of the premises, any inconvenience or annoyance arising as a result of such repairs or interruption, or the termination of this lease by reason of damage to or destruction of the premises. (e) Representation of (e) Lessor has let the demised premises in their present "as is" condition and without any Condition of representations, other than those specifically endorsed hereon by Lessor, through its officers, employees, Premises servants and/or agents. It is understood and agreed that Lessor is under no duty to make repairs, alterations, or decorations at the inception of this lease or at any time thereafter unless such duty of Lessor shall be set forth in writing endorsed hereon. (f) Zoning (f) It is understood and agreed that the Lessor hereof does not warrant or undertake that the Lessee shall be able to obtain a permit under any Zoning Ordinance or Regulation for such use as Lessee intends to make of the said premises, and nothing in this lease contained shall obligate the Lessor to assist Lessee in obtaining said permit; the Lessee further agrees that in the event a permit cannot be obtained by Lessee under any Zoning Ordinance or Regulation, this lease shall not terminate without Lessor's consent, and the Lessee shall use the premises only in a manner permitted under such Zoning Ordinance or Regulation. 13. Miscellaneous (a) No contract entered into or that may be subsequently entered into by Lessor with Lessee, Agreements & relative to any alterations, additions, improvements or repairs, nor the failure of Lessor to make such Conditions alterations, additions, improvements or repairs as required by any such contract, nor the making by Lessor (a) Effect of or his agents or contractors of such alterations, additions, improvements or repairs shall in any way affect Repairs on the payment of the rent or said other charges at the time specified in this lease, except to the extent and Rental in the manner hereinbefore provided. (b) Agency (b) It is hereby expressly agreed and understood that the said _Cushman & Wakefield __ is acting as agent only and shall not in any event be held liable to the owner or to Lessee for the fulfillment or nonfullfillment of any of the terms or conditions of this lease, or for any action or proceedings that may be taken by the owner against Lessee, or by Lessee against the owner. (c) Waiver of (c) It is hereby covenanted and agreed, any law, usage or custom to the contrary notwithstanding, Custom that Lessor shall have the right at all times to enforce the covenants and provisions of this lease in strict accordance with the terms hereof, notwithstanding any conduct or custom on the part of the Lessor in refraining from so doing at any time or times; and, further, that the failure of Lessor at any time or times to enforce his rights under said covenants and provisions strictly in accordance with the same shall not be construed as having created a custom in any way or manner contrary to the specific terms, provisions and covenants of this lease or as having in any way or manner modified the same. (d) Conduct of (d) This lease is granted upon the express condition that Lessee and/or the occupants of the Lease premises herein leased shall not conduct themselves in a manner which is improper or objectionable, and if at any time during the term of this lease or any extension or continuation thereof Lessee or any occupier of the said premises shall have conducted himself in a manner which is improper or objectionable, Lessee shall be taken to have broken the covenants and conditions of this lease, and Lessor will be entitled to all of the rights and remedies granted and reserved herein, for the Lessee's failure to observe all of the covenants and conditions of this lease. (e) Failure of (e) In the event of the failure of Lessee promptly to perform the covenants of Section 8 (b) hereof, Lessee to Lessor may go upon the demised premises and perform such covenants, the cost thereof, at the sole option of Repair Lessor, to be charged to Lessee as additional and delinquent rent. (f) Waiver of (f) Lessor and Lessee hereby agree that all insurance policies which each of them shall carry to Subrogation insure the demised premises and the contents therein against casualty loss, and all liability policies which they shall carry pertaining to the use and occupancy of the demised premises shall contain waivers of the right of subrogation against Lessor and Lessee herein, their heirs, administrators, successors, and assigns. 14. Remedies of If the Lessee: (specifically subject to the notice and cure provisions of the Addendum) Lessor (a) Does not pay in full when due any and all installments of rent and/or any other charge or payment herein reserved, included, or agreed to be treated or collected as rent and/or any other charge, expense, or cost herein agreed to be paid by the Lessee, or (b) Violates or fails to perform or otherwise breaks any covenant or agreement herein contained; or (c) Vacates the demised premises or removes or attempts to remove or manifests an intention to remove any goods or property therefrom otherwise than in the ordinary and usual course of business without having first paid and satisfied the Lessor in full for all rent and other charges then due or that may thereafter become due until the expiration of the then current term, above mentioned; or (d) or makes an assignment for the benefit of creditors, or if a petition in bankruptcy is filed by or against Lessee or a complaint in equity or other proceedings for the appointment of a receiver for Lessee is filed, or if proceedings for reorganization or for composition with creditors under any State or Federal Law be instituted by or against Lessee, or if the real or personal property of Lessee shall be levied upon or be sold, thereupon: (1) The whole balance of rent and other charges, payments, costs, and expenses herein agreed to be paid by Lessee, or any part thereof, and also all costs and officers' commissions including watchmen's wages shall be taken to be due and payable and in arrears as if by the terms and provisions of this lease said balance of rent and other charges, payment, taxes, costs and expenses were on that date, payable in advance. Further, if this lease or any part thereof is assigned, or if the premises, or any part thereof is sub-let, Lessee hereby irrevocably constitutes and appoints Lessor as Lessee's agent to collect the rents due from such assignee or sub-Lessee and apply the same to the rent due hereunder without in any way affecting Lessee's obligation to pay any unpaid balance of rent due hereunder; or (2) At the option of Lessor, this lease and the terms hereby created shall determine and become absolutely void without any right on the part of Lessee to reinstate this lease by payment of any sum due or by other performance of any condition, term, or covenant broken; whereupon, Lessor shall be entitled to recover damages for such breach in an amount equal to the amount of rent reserved for the balance of the term of this lease, less the fair rental value of the said demised premises for the remainder of the lease term. 15. Further Remedies In the event of any default as above set forth in Section 14, Lessor, or anyone acting on Lessor's behalf, of Lessor at Lessor's option: (a) May let said premises or any part or parts thereof to such person or persons as may, in Lessor's discretion, be best; and Lessee shall be liable for any loss of rent for the balance of the then current term. Any such re-entry or re-letting by Lessor under the terms hereof shall be without prejudice to Lessor's claim for actual damages, and shall under no circumstances, release Lessee from liability for such damages arising out of the breach of any of the covenants, terms, and conditions of this lease. (b) May proceed as a secured party under the provisions of the Uniform Commercial Code against the goods in which Lessor has been granted a security interest pursuant to Section 13 (g) hereof; and (c) May have and exercise any and all other rights and/or remedies granted or allowed landlords by any existing or future Statute, Act of Assembly, or other law of this state in cases where a landlord seeks to enforce rights arising under a lease agreement against a tenant who has defaulted or otherwise breached the terms of such lease agreement; subject, however, to all of the rights granted or created by any such Statute, Act of Assembly, or other law of this state existing for the protection and benefit of tenants; and
3 (d) Alterations Improvements 16. Confession of Lessee covenants and agrees that if the rent and/or any charges reserved in this lease as rent Judgement for (including all accelerations of rent permissible under the provisions of this lease) shall remain unpaid Money five (5) days after the same is required to be paid, then and in that event, Lessor may cause Judgment to be entered against Lessee, and for that purpose Lessee hereby authorizes and empowers Lessor or any Prothonotary, Clerk of Court or Attorney of any Court of Record to appear for and confess judgment against Lessee and agrees that Lessor may commence an action pursuant to Pennsylvania Rules of Civil Procedure No. 2950 et seq. for the recovery from Lessee of all rent hereunder (including all accelerations of rent permissible under the provisions of this lease)and/or for all charges reserved hereunder as rent, as well as for interest and costs and Attorney's commission, for which authorization to confess judgment, this lease, or a true and correct copy thereof, shall be sufficient warrant. Such Judgment may be confessed against Lessee for the amount of rent in arrears (including all accelerations of rent permissible under the provisions of this lease) and/or for all charges reserved hereunder as rent, as well as for interest and costs; together with an attorney's commission of five percent (5%) of the full amount of Lessor's claim against Lessee. Neither the right to institute an action pursuant to Pennsylvania Rules of Civil Procedure No. 2950 et seq. nor the authority to confess judgment granted herein shall be exhausted by one or more exercises thereof, but successive complaints may be filed and successive judgements may be entered for the aforedescribed sums five days or more after they become due as well as after the expiration of the original term and/or during or after expiration of any extension or renewal of this lease. 17. Confession of Lessee covenants and agrees that if this lease shall be terminated (either because of condition broken Judgement for during the term of this lease or any renewal or extension thereof and/or when the term hereby created or any Possession of extension thereof shall have expired) then, and in that event, Lessor may cause a judgment in ejectment to Real Property be entered against Lessee for possession of the demised premises, and for that purpose Lessee hereby authorizes and empowers any Prothonotary, Clerk of Court or Attorney of any Court of Record to appear for Lessee and to confess judgment against Lessee in Ejectment for possession of the herein demised premises, and agrees that Lessor may commence an action pursuant to Pennsylvania Rules of Procedure No. 2970 et seq. for the entry of an order in Ejectment for the possession of real property, and Lessee further agrees that a Writ of Possession pursuant thereto may issue forthwith, for which authorization to confess judgment and for the issuance of a writ or writs of possession pursuant thereto, this lease, or a true and correct copy thereof, shall be sufficient warrant. Lessee further covenants and agrees, that if for any reason whatsoever, after said action shall have commenced the action shall be terminated and the possession of the premises demised hereunder shall remain in or be restored to Lessee. Lessor shall have the right upon any subsequent default or defaults, or upon the termination of this lease as above set forth to commence successive actions for possession of real property and to cause the entry of successive judgments by confession in Ejectment for possession of the premises demised hereunder. 18. Affidavit of In any procedure or action to enter Judgment by Confession for Money pursuant to Section 16 hereof, or Default to enter Judgment by Confession in Ejectment for possession of real property pursuant to Section 17 hereof, if Lessor shall first cause to be filed in such action an affidavit or averment of the facts constituting the default or occurrence of the condition precedent, or event, the happening of which default, occurrence, or event authorizes and empowers Lessor to cause the entry of judgment by confession, such affidavit or averment shall be conclusive evidence of such facts, defaults, occurrences, conditions precedent, or events; and if a true copy of this lease (and of the truth of which such affidavit or averment shall be sufficient evidence) be filed in such procedure or action, it shall not be necessary to file the original as a Warrant of Attorney, any rule of court, custom, or practice to the contrary notwithstanding. 19. Waivers by Lessee Lessee hereby releases to Lessor and to any and all attorneys who may appear for Lessee all errors in of Error, Right of any procedure or action to enter Judgment by Confession by virtue of the warrants of attorney contained in Appeal, Stay, this lease, and all liability therefore. Lessee further authorizes the Prothonotary or any Clerk of any Exemption, Court of Record to issue a Writ of Execution or other process, and further agrees that real estate may be Inquisition sold on a Writ of Execution or other process. If proceedings shall be commenced to recover possession of the demised premises either at the end of the term or sooner termination of this lease, or for non-payment of rent or for any other reason, Lessee specifically waives the right to the three (3) months' notice to quit and/or the fifteen (15) or thirty (30) days notice to quit required by the Act of April 6, 1951, P.L. 69, as amended, and agrees that five (5) days' notice shall be sufficient in either or any such case. 20. Right of Assignee The right to enter judgment against Lessee by confession and to enforce all of the other provisions of Lessor of this lease herein provided for may at the option of any assignee of this lease, be exercised by any assignee of the Lessor's right, title and interest in this lease in his, her, or their own name, any statute, rule of court, custom, or practice to the contrary notwithstanding. 21. Remedies All of the remedies hereinbefore given to Lessor and all rights and remedies given to it by law and Cumulative equity shall be cumulative and concurrent. No determination of this lease or the taking or recovering possession of the premises shall deprive Lessor of any of its remedies or actions against the Lessee for rent due at the time or which, under the terms hereof would in the future become due as if there had been no determination, nor shall the bringing of any action for rent or breach of covenant, or the resort to any other remedy herein provided for the recovery of rent be construed as a waiver of the right to obtain possession of the premises. 22. Condemnation In the event that the premises demised herein, or any part thereof, is taken or condemned for a public or quasi-public use, this lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor, and rent shall abate in proportion to the square feet of leased space taken or condemned or shall cease if the entire premises be so taken. In either event the Lessee waives all claims against the Lessor by reason of the complete or partial taking of the demised premises. 23. Subordination This Agreement of Lease and all its terms, covenants and provisions are and each of them is subject and subordinate to any lease or other arrangement or right to possession, under which the Lessor is in Control of the demised premises, to the rights of the owner or owners of the demised premises and of the land or buildings of which the demised premises are a part, to all rights of the Lessor's landlord and to any and all mortgages and other encumbrances now or hereafter placed upon the demised premises or upon the land and/or the buildings containing the same; and Lessee expressly agrees that if Lessor's tenancy, control, or right to possession shall terminate either by expiration, forfeiture or otherwise,then this lease shall thereupon immediately terminate and the Lessee shall, thereupon, give immediate possession; and Lessee hereby waives any and all claims for damages or otherwise by reason of such termination as aforesaid. 24. Termination of It is hereby mutually agreed that either party hereto may determine this lease at the end of said term Lease by giving to the other party written notice thereof at least ninety (90) days prior thereto, but in default of such notice, this lease shall continue upon the same terms and conditions in force immediately prior to the expiration of the term hereof as are herein contained for a further period of one (1) month and so on from month to month unless or until terminated by either party hereto, giving the other thirty (30) days written notice for removal previous to expiration of the then current term; PROVIDED, however, that should this lease be continued for a further period under the terms hereinabove mentioned, any allowances given Lessee on the rent during the original term shall not extend beyond such original term, and further provided, however, that if Lessor shall have given such written notice prior to the expiration of any term hereby created, of his intention to change the terms and conditions of this lease, and Lessee shall not within ten (10) days from such notice notify Lessor of Lessee's intention to vacate the demised premises at the end of the then current term, Lessee shall be considered as Lessee under the terms and conditions mentioned in such notice for a further term as above provided, or for such further term as may be stated in such notice. In the event that Lessee shall give notice, as stipulated in this lease, of intention to vacate the demised premises at the end of the present term, or any renewal or extension thereof, and shall fail or refuse so to vacate the same on the date designated by such notice, then it is expressly agreed that Lessor shall have the option either (a) to disregard the notice so given as having no effect, in which case all the terms and conditions of this lease shall continue thereafter with full force precisely as if such notice had not been given, or (b) Lessor may, at any time within thirty days after the present term or any renewal or extension thereof, as aforesaid, give the said Lessee ten days written notice of his intention to terminate the said lease; whereupon the Lessee expressly agrees to vacate said premises at the expiration of the said period of ten days specified in said notice. All powers granted to Lessor by this lease may be exercised and all obligations imposed upon Lessee by this lease shall be performed by Lessee as well during any extension of the original term of this lease as during the original term itself. 25. Notices All notices must be given by certified mail, return receipt requested. 26. Lease Contains It is expressly understood and agreed by and between the parties hereto that this lease and the riders All Agreements and/or addendums attached hereto and forming a part hereof set forth all the promises, agreements, conditions and understandings between Lessor or his Agent and Lessee relative to the demised premises, and that there are no promises, agreements, conditions or understandings, either oral or written, between them other than herein set forth. It is further understood and agreed that, except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this lease shall be binding upon Lessor or Lessee unless reduced to writing and signed by them. 27. Heirs & All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend Assignees to and bind the several and respective heirs, executors, administrators, successors and assigns of said parties; and if there shall be more than one Lessee, they shall all be bound jointly and severally by the terms, covenants and agreements herein, and the word "Lessee" shall be deemed and taken to mean each and every person or party mentioned as a Lessee herein, be the same one or more; and if there shall be more than one Lessee, any notice required or permitted by the terms of this lease may be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. The words "his" and "him" wherever stated herein, shall be deemed to refer to the "Lessor" or "Lessee" whether such Lessor or Lessee be singular or plural and irrespective of gender. No rights, however, shall inure to the benefit of any assignee of Lessee unless the assignment to such assignee has been approved by Lessor in writing as aforesaid. 28. Security Deposit Lessee does herewith deposit with Lessor the sum of _______________________________________ Dollars, to be held as security for the full and faithful performance by Lessee of Lessee's obligations under this Lease and for the payment of damages to the demised premises. 29. Headings no part Any headings preceding the text of the several paragraphs and sub-paragraphs hereof are inserted solely for of part of lease convenience of reference and shall not constitute a part of this lease nor shall they affect its meaning, construction or effect.
4 SEE ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF In Witness Whereof, the parties hereto have executed these presents the day and year first above written, and intend to be legally bound thereby. SEALED AND DELIVERED IN THE PRESENCE OF : Agent - ------------------------------------- --------------------------------- [sig] 7/1/98 [sig] [Seal] - ------------------------------------- --------------------------------- Witness/Attest Date AMERIQUEST TECHNOLOGIES, INC. President [Seal] - ------------------------------------- --------------------------------- [Seal] - ------------------------------------- --------------------------------- [sig] 7/1/98 [sig] [Seal] - ------------------------------------- --------------------------------- Witness/Attest Date MERION MILLS ASSOCIATES ===== LEASE ===== ---------------------------------------------- ---------------------------------------------- TO ---------------------------------------------- Premises -------------------------------------- ---------------------------------------------- Rent ------------------------------------------ Dated ----------------------------------------- Term ------------------------------------------ ============================================== P51939 FOR VALUE RECEIVED______________________hereby assign, transfer and set over unto - ----------------------------------------------------------------------------------------- Executors, Administrators and assigns all________right, title and interest in the within - ----------------------------------------------------------------------------------------- and all benefit and advantages to be derived therefrom. Witness__________hand and seal this____________day of_______________A.D. 19______ SEALED IN THE PRESENCE OF) ) ----------------------------------------- )
5 ADDENDUM TO LEASE AGREEMENT BETWEEN : AMERIQUEST TECHNOLOGIES, INC. ("Lessee") AND : MERION MILLS ASSOCIATES ("Lessor") DATED : July 1st, 1998 29(a) Notwithstanding anything in this Lease to the contrary, it is specifically agreed that Lessee shall have the option to immediately terminate this Lease without penalty by sending written notice of such termination to Lessor on or before July 7th, 1998 of its intent to so terminate, which shall only be allowed for one or more of the following specific reasons (which must be listed in any such notice): 1) The consummation of the transactions by which Jon Jensen and Alex Kramer are to acquire all shares in Ameriquest Technologies, Inc. owned by Computer 2000, Inc. has not occurred on or prior to July 7th, 1998. 2) Lessee is not satisfied that the existing HVAC and electrical equipment serving the demised premises is in reasonable operating condition, which condition Lessor shall allow Lessee to inspect prior to July 7th, 1998. 3) Lessee is not satisfied or confident that it will be able to receive a use and occupancy permit for the demised premises upon its application therefor. Upon receipt of a timely early termination notice from Lessee, Lessor will return to Lessee any monies previously deposited with or paid to Lessor hereunder. If such notice is not sent by Lessee on or before July 7th, 1998, then Lessee's early termination option shall be extinguished and this Lease shall continue in full force and effect throughout the full term hereof. 29(b). It is hereby acknowledged that upon execution of this lease, no other tenant is in occupancy of the approximately 40,000 sqaure foot Unit A portion of the demised premises and that Lessor is able to deliver possession of the Unit A space to Lessee on or before August 1st, 1998. However, upon the execution date of this Lease, one other tenant is in occupancy of the approximately 2,640 square foot Unit C portion of the demised premises under a month-to-month lease which 1 6 requires 60 days advance notice from Lessor in order to terminate that lease as of the last day of a given month. Upon execution of this Lease, Lessor agrees to promptly give the required notice to the existing tenant currently occupying Unit C and to use its best efforts to remove that tenant from Unit C on or before the last day of such tenant's lease term, or as soon thereafter as reasonably possible if such tenant holds over beyond the end of its lease term. Lessee agrees that while this lease will begin with respect to the approximately 40,000 square foot Unit A portion of the demised premises on August 1st, 1998, this lease will begin with respect to the Unit C portion of the demised premises immediately upon the completion of the existing tenant's final move out of the Unit C space and of landlord's renovation work within that space as further described herein (i.e. carpeting, painting, ceiling tile work as necessary). Lessee's rental payments and other lease charges due under this lease will be pro-rated by Lessor, based on square footage, during the period in which Lessee is unable to occupy the Unit C portion of the demised premises while Lessee awaits the availablility of that space. 29(c). Lessor agrees to, at the request of Lessee or its lender(s), execute a landlord's subordination document in the form attached hereto as Exhibit "A". 30. Upon execution of this Lease, Lessee shall pay to Lessor a non-interest-bearing security deposit of Forty Thousand Dollars ($40,000.00), along with the full Seventeen Thousand Five Hundred Eighteen Dollar ($17,518.00) amount of the first month's rent and the full Nine Hundred Sixty Four and 07/100 Dollar ($964.07) amount of the first month's Common Area Expenses charge (as hereinafter defined) (pro-rated, if for a partial month or if necesary to reflect Lessor's inability to deliver immediate possession of the Unit C space, as discussed above), for a total payment of Fifty Eight Thousand Four Hundred Eighty Two and 07/100 Dollars ($58,482.07). In the event Lessee fails to pay to Lessor when due any charges payable under this Lease, Lessor shall have the right (but not the obligation) to deduct the amount of such unpaid charges from the security deposit and to apply those funds to such unpaid charges, in which case Lessee shall immediately remit to Lessor the full amount of the funds so deducted in order to restore the security deposit to the original amount required hereunder. IT IS SPECIFICALLY UNDERSTOOD THAT THE SECURITY DEPOSIT MAY NOT BY USED BY LESSEE AS ALL OR A PORTION OF LESSEE'S LAST MONTHS' RENTAL PAYMENTS DUE HEREUNDER. 2 7 31. Lessee agrees to maintain good housekeeping practices whereby all waste and discharge are satisfactorily disposed of by an authorized collection agency and whereby all applicable governmental regulations regarding waste disposal are complied with at Lessee's expense. All trash is to be retained inside an enclosed (i.e. not open topped) metal dumpster which is to be routinely monitored by Lessee for overfilling and spillage. All areas of the demised premises (including the outside loading areas) must be kept clean at all times. Lessee shall also be responsible for its own pest control in and around the demised premises and for keeping its entrance area, exterior walkways, docks and steps clear of ice and snow at all times. It shall be Lessee's responsibility to insure that Lessee's business operations do not create any excessive, extraordinary or unreasonable noise, odor, dust or debris or any other disturbance to any neighboring tenant and are not otherwise injurious to Lessor's property. If Lessee is in default under the provisions of this paragraph and such default is not promptly cured after request by Lessor, then Lessor may remedy such default on behalf of Lessee and Lessee shall be responsible for the costs thereof. 32. No outside storage of any kind (including, but not limited to, storage trailers and vehicles not currently in use) shall be permitted on the demised premises or on any other portion of Lessor's property. Lessee agrees that Lessee's loading docks shall be used for active loading only, that no unattended trailers or other vehicles will be parked in this loading area, and that Lessee will cooperate with neighboring tenants in not blocking any tenant's loading area for any unreasonable or extended period of time. In addition, Lessee agrees that it shall not restrict the access of Lessor, of any tenant or other occupant of Lessor's property, or of any agent or visitor of the same, to those areas of Lessor's property not occupied exclusively by Lessee including, but not limited to, the roof and exterior grounds, nor shall Lessee restrict the access of Lessor or of Lessor's agents, employees or contractors to portions of the demised premises at which Lessor desires to perform repairs, replacements, alterations, improvements or any other work, provided, however, that none of the foregoing will unreasonably interfere with Lessee's use and enjoyment of the demised premises. 33. Lessor agrees that, prior to the August 1st, 1998 starting date of this Lease or, with respect to the Unit C portion of the demised premises, as soon as reasonably 3 8 possible following the existing tenant's move out of that space, Lessor will complete the following office renovations at Lessor's sole expense: a) install standard low pile, direct glue down carpeting in all office areas shown on the attached diagram in which Lessor has not already installed new carpeting within the past three (3) month period, b) repaint all office drywall and trim in the office areas shown on the attached diagram which has not already been repainted within the last three (3) month period, c) replace any missing, stained, or damaged ceiling tiles in the office areas shown on the attached diagram, d) clean and repaint the basement locker room shown on the attached diagram. Lessee will be consulted as to color choice for any new carpeting still to be installed by Lessor in connection with the above requirements. Except for the above described items, Lessee agrees to accept the demised premises in "as-is" condition and without representation from Lessor that the demised premises is fit or zoned for any particular purpose or adheres to any particular governmental or non-governmental requirements. Throughout the term of this Lease, Lessor shall, at its sole cost and expense, be responsible for all roof maintenance, repairs and replacements and for all structural maintenance, repairs and replacements of exterior walls, foundations and load-bearing walls. Notwithstanding the above, Lessor will not be responsible for any maintenance, repairs or replacements to areas of the roof, exterior walls, foundations and load-bearing walls which are altered or damaged by Lessee, who shall thereafter assume the responsibility therefor. All other maintenance, replacements and/or repairs to the demised premises and to all equipment or fixtures serving any portion thereof, including but not limited to the heating, ventilating and air-conditioning ("HVAC"), plumbing (including preventing frozen pipes), sewer, electrical, lighting (including bulbs and lighting fixtures), fire/emergency and (if added) sprinkler systems, the portion of the building containing the demised premises, its fixtures, including any and all drive-in, tailgate and personnel doors and any dock seals, plates, bumpers or other equipment surrounding such doors, or to areas of the grounds which 4 9 are altered or damaged by Lessee, will be the responsibility of Lessee. Lessee specifically acknowledges that the existing transformers, switch gear and other electrical equipment serving the demised premises are the property of Lessor and not of any utility or of any other party, and that such equipment will solely serve the demised premises and Lessee's use thereof. Accordingly, Lessee understands and agrees that any maintenance, replacements and/or repairs that may be required with respect to such electrical equipment during the term of the Lease shall be Lessee's sole responsibility, in accordance with Lessee's normal maintenance responsibilities mentioned above. If any portion of the demised premises is served by a sprinkler system, then whether or not Lessor maintains the sprinkler system as part of the Common Area Expenses of its property, Lessee will have the operation of the sprinkler system which serves the demised premises central-station-monitored by a qualified alarm company at Lessee's expense. 34. In the event Lessee does not satisfactorily keep the demised premises in good repair and maintain good housekeeping practices throughout the Lease term, including preventing any outside storage, then Lessor may at any time elect to perform said repairs or cleaning and Lessee agrees to promptly reimburse Lessor for all costs thereof. 35. Lessee agrees to obtain a service contract and to have a certified contractor perform at least semi-annual (i.e. at least twice per year) inspections on all HVAC units, boilers, hot water heaters, and any sprinkler equipment that may be added to the demised premises, and their components, in their entirety, and to perform all necessary maintenance, repairs, and replacements (including, but not limited to, replacement of any filters and normal cleaning) as may be required. A copy of the contractor's inspection report is to be submitted to Lessor's office upon completion of each semi-annual inspection. If Lessee fails to adhere to the above requirements, Lessor shall have the right to obtain such service contract and/or to have the required work performed on such equipment as specified above, with Lessee to promptly reimburse Lessor for the costs thereof. Lessee shall not be obligated to totally replace any of the equipment mentioned in the preceding paragraph that is beyond repair through normal wear and tear and which has been properly inspected, maintained, and repaired by 5 10 Lessee as specifically required herein as long as Lessee promptly furnishes to Lessor documentary proof of Lessee's adherence to the above inspection, maintenance, and repair requirements. Lessee shall also not be responsible for replacing any of the above mentioned (in Pargraphs 33 and 35) equipment which is damaged or destroyed in a casualty or loss covered by Lessor's property insurance on the demised premises. Prior to vacating the demised premises, Lessee shall submit to Lessor a copy of the most recent inspection report covering all of the equipment mentioned above, along with copies of documentation describing all maintenance, repair, and replacement work that was performed on such equipment during the term of the Lease. If Lessee does not submit to Lessor an inspection report dated no more than one (1) month prior to the date on which Lessee vacates the demised premises which details a full inspection of all of the above equipment and which shows that all necessary maintenance, repair, and replacement work (including, but not limited to, replacement of any filters and normal cleaning) has been performed, Lessor may secure a certified contractor to perform such work and Lessee shall promptly reimburse Lessor for the cost thereof. 36. Any repairs to any portion of the demised premises or to Lessor's other property that are required because of damage or neglect by Lessee, must be completed prior to the termination date of this Lease and at the sole expense of Lessee. Should Lessee not complete all or substantially all repairs prior to the termination date of this Lease, then Lessee agrees that Lessee will, at Lessor's option, remain as a tenant and rent will continue to be due and payable until all repairs are properly completed. Notwithstanding the above, Lessee shall at all times be responsible for the cost of any repairs that may be required due to damage that is discovered either during the term of the Lease or upon Lessee's vacating the demised premises, whether or not such items are brought to Lessee's attention at any pre-termination inspection which may be performed as described above. 37. Lessee agrees that before any alterations or improvements to the demised premises are begun or any equipment intended to be installed therein is added, Lessee must submit detailed plans and specifications to Lessor and receive written permission from Lessor for the same, which written permission shall not be unreasonably withheld or delayed. All alterations, improvements, or equipment (whether temporary or permanent in character and whether desired by either party to this Lease or mandated by any governmental 6 11 entity), which may be made upon or added to the demised premises by either Lessor or Lessee, except furniture or movable trade fixtures installed at the expense of Lessee, shall be maintained by Lessee throughout the term of the Lease in accordance with the same requirements that exist under this Lease for Lessee's maintenance of existing portions of the demised premises, shall become at the sole discretion of Lessor the property of Lessor and shall remain upon and be surrendered with the demised premises as part thereof at the termination of this Lease, without compensation to Lessee. Lessee further agrees that if Lessor determines that all or a portion of said alterations, improvements, or equipment are not acceptable, then Lessee will, prior to the termination of this Lease and at Lessee's sole expense, remove (all, or portions designated by Lessor, of) such alterations, improvements, or equipment, restore the demised premises to its original condition immediately prior to the inception of this Lease, and repair any damage to the demised premises caused by either the presence or the removal of such items. Notwithstanding the above, upon specific written request by Lessee prior to Lessee's installation of any particular improvements, alterations or new equipment, Lessor shall inform Lessee whether Lessee will be required to restore the affected areas of the demised premises to their previous condition at the end of the Lease term. 38. Lessee must secure a signed Waiver of Liens from all contractors before any maintenance, repairs, construction, improvements, or alterations of any kind are commenced on or about the demised premises. Lessee further agrees that Lessee shall hold Lessor harmless from any debt incurred by Lessee from contractors brought in to do any such work. 39. In addition to its normal monthly rental payments, Lessee will be responsible for paying all utility costs that are attributable to the demised premises including, but not limited to, electric, gas, water and sewer (all of which items are, upon execution of this Lease, separately metered for the demised premises), and for Lessee's proportionate share of all other common area expenses for all of Lessor's property of which the demised premises is a part (2445-2465 Maryland Road) including, but not limited to, snow plowing, lawn and landscaping care, pavement and driveway maintenance, exterior lighting operation and maintenance, common area utilities, common area HVAC, common area electrical and/or plumbing lines and other equipment operation, maintenance and repairs, common area alarm and/or security (if provided), exterior pest control (if provided), property management fees and any other common 7 12 area or common service expenses for all of Lessor's property of which the demised premises is a part (hereinafter, collectively, "Common Area Expenses"). These charges shall be due upon presentation of an invoice by Lessor if a bill is not received by Lessee directly from the supplier of such service. If no separate meter connection is available for any such service, billing will be apportioned by the Lessor. It is understood and agreed that Lessee may pay its own electic and gas service bills for the demised premises directly to the supplier of those utilities. With respect to water and sewer billings for the demised premises, Lessor will initially pay all bills for these services directly to the supplier of these services and be reimbursed by Lessee for the same as part of its Common Area Expense payments, but Lessor may at a later date choose to have Lessee also pay for these items directly to the suppliers thereof and remove such items from the Common Area Expense calculation. Lessor agrees that it shall not "mark up" or otherwise make a profit from Lessee on its billing of these water and sewer charges. As an alternative to sending Lessee individual invoices for Lessee's portion of certain Common Area Expenses as Lessor receives bills for such items from the suppliers thereof, Lessor shall have the option of estimating the total annual Common Area Expenses for such items for Lessor's property and of requiring Lessee to pay one twelfth (1/12th) of its portion of such annual estimate on a monthly basis, due and payable each month, in advance and without invoicing, on the same day on which the monthly rental is due hereunder, and with periodic or annual adjustments by Lessor as necessary to reflect actual versus estimated cost for such items. Lessor may choose to estimate the annual cost of certain items of the Common Area Expenses in accordance with the above billing format and to also send individual invoices for certain other items of the Common Area Expenses as charges are incurred for such particular items. It is understood and agreed that the current estimate of total Common Area Expenses for calendar year 1998 is $15,676.00, and that Lessee shall pay its proportionate monthly share of this annual estimate (currently $964/07 per month), along with each normal monthly rental payment until such monthly Common Area Expenses estimate is adjusted in accordance with the previous paragraph. Upon reasonable advance notice to Lessor, Lessee shall have the right to periodically review Lessor's records 8 13 with respect to the Common Area Expenses which Lessee pays hereunder at a mutually convenient time and at Lessor's offices in Ambler, Pennsylvania. If any such review reveals that Lessor has been dishonest or grossly negligent in overstating the actual Common Area Expenses charged to Lessee and such action has resulted in an overstatement of more than ten percent (10%) of actual Common Area Expenses, then Lessor shall reimburse Lessee for the reasonable costs of Lessee's review of such expenses at Lessor's offices. Notwithstanding the above, Lessor's annual Common Area Expense estimates for upcoming lease years shall not be considered overstatements as long as periodic adjustments (i.e. refunds or credits) are made by Lessor for estimated vs. actual Common Area Expenses following a particular year. 40. Lessee and Lessor agree that the obligation of Lessee to pay the rent and all other miscellaneous lease charges required under this Lease shall be absolute, and that Lessee shall have no right to set off or deduct from the amounts otherwise due from Lessee hereunder the amount of any claim Lessee may believe it has against Lessor or any other party. 41. It shall be Lessee's responsibility, prior to occupancy and at Lessee's sole expense, to apply for, make payment for, and obtain all permits and fees, including but not limited to any certificates of occupancy, required by any Federal, State, or Local authorities to conduct Lessee's business on the demised premises. Upon request, Lessee shall promptly provide Lessor with copies of all such permits secured from such governmental authorities. Should any Federal, State or Local law, rule, ordinance, or other regulation affect the demised premises or mandate certain alterations or improvements thereto (if, and only if, the same is specifically relating to Lessee's business and/or specific use of the demised premises), then Lessee shall pay for all costs to institute such regulation on or about the demised premises. In all other instances, the foregoing shll be Lessor's sole responsibility. 42. Any rental payment not received by Lessor in Lessor's office by the tenth (10th) day of any month will be subject to a late charge equal to five (5%) percent of such overdue amount, plus any legal fees and collection costs of Lessor. If said rent remains unpaid until the tenth (10th) day of the following month, then an additional five (5%) percent late charge shall be applied for such following month and also for each succeeding month that the rent remains unpaid. This same five percent (5%) late charge procedure shall apply to any other payments required by this Lease that are not received by Lessor within ten (10) days of the date 9 14 of the invoice under which they are assessed. All late charges assessed shall be considered additional rent and shall be payable immediately. 43. Lessee agrees to pay its proportionate share (currently 73.8% for Units A and C - which percentage shall remain constant unless Lessee leases a different amount of space from Lessor or the size of Lessor's improvements at the 2445-2465 Maryland Road property is altered) of all increases in real estate taxes and property insurance premiums for all of Lessor's property at 2445-2465 Maryland Road that are above current amounts at the signing of this Lease. Property insurance shall include all building (fire and other casualty), liability and loss of rents insurance with respect to all of Lessor's property at 2445-2465 Maryland Road. It is understood and agreed that at the signing of this Lease, based on the most recent invoices received by Lessor to date, the current annual real estate taxes on Lessor's property are $22,828.40 for school taxes and $8,693.32 for county/township and other miscellaneous real estate taxes (including, but not limited to, any mercantile, business privilege, or other tax based on rental income), the current annual property insurance premiums on Lessor's property are $7,921.00, and that Lessee's gross monthly rental payments under the Lease include this $.68 per square foot base tax and insurance cost. 44. Notwithstanding anything herein to the contrary, in the event that any tax or property insurance increase, or the necessity for any additional insurance coverage, is due solely to the occupancy or use (or misuse) of, or improvements to, the demised premises by Lessee, then Lessee shall pay for the entire cost of such increased tax or insurance cost. 45. In the event ad valorem real estate taxes are abolished during the term hereof and/or a substitute, alternate, or additional tax on the use and enjoyment of real estate or on the ownership or rental of real estate (including, but not limited to, any sales, mercantile, business privilege, or other tax based on rental income) is adopted in lieu thereof or in addition thereto (no matter how such tax is computed), then Lessee shall be obligated to pay such substitute, alternate, or additional tax in the same manner and to the same extent as Lessee is required to pay real estate taxes hereunder. 46. In the event Lessee does not fulfill any of Lessee's obligations under this Lease and Lessor is required to take legal action, Lessee will be responsible for Lessor's resulting costs, including, but not limited to, attorneys' fees. 10 15 47. Lessee agrees that if a sublease is secured on the demised premises and the rental rate under such sublease is greater than the rental rate hereunder, then Lessor shall have the right to receive 50% of this increased rental, after subtraction of any reasonable real estate broker's commission paid by Lessee on such sublease and after subtraction for any subtenant improvements made by Lessee on such subtenant's behalf which Lessor specifically agrees are also of material benefit to Lessor. Lessee will remain responsible for all terms and conditions of this Lease following the execution of any and all sublease or assignment agreements. All sublease agreements or assignments must be approved by Lessor in advance. If a sublease or assignment is executed, then any options to extend this Lease shall be voided. 48. Should Lessee desire to place a sign on the demised premises or on any other property of Lessor, Lessee agrees that before actual installation takes place, Lessee shall submit to Lessor, and obtain approval of (such approval not to be unreasonably withheld or delayed), an exterior sign layout with the exact location of such proposed sign and a detailed description of how the sign will be installed. Lessee must file for, obtain, and pay for any and all governmental permits or other applications required for such sign and must install such sign at Lessee's expense. Unless Lessor directs otherwise, Lessee must remove the sign prior to the expiration of this Lease and must restore the area at which the sign had been placed to its original condition prior to the installation of the sign. Lessor shall retain the right to maintain one or more signs on or about the demised premises throughout the term of this Lease. If Lessor chooses to maintain a directory sign on Lessor's property with panels for individual tenant names, then if Lessee wishes to be included on such sign, Lessee shall be permitted to be so included. Lessor shall have the right to charge Lessee for Lessor's reasonable costs incurred for including and maintaining Lessee's name on such sign and for Lessee's proportionate share of any applicable governmental permitting fees that may be incurred by Lessor for such sign, as well as for Lessee's proportionate share of maintaining the sign in reasonable condition. Notwithstanding the above, in the event that applicable governmental regulations limit the total amount of signage available for the property of which the demised premises is a part and Lessee does not lease the entire property from Lessor, then Lessee shall only be entitled 11 16 to its proportionate share (currently 73.8%, based on the size of the demised premises vs. the total building square footage on Lessor's property at 2445-2465 Maryland Road) of such signage limit, as reasonably allocated by Lessor after taking into account any directory signs or other signs not specific to any single tenant that may be present on the property or planned by Lessor. Throughout the Lease term, Lessee shall have the right, at Lessee's sole expense and upon prior consultation with and approval by Lessor (such approval not to be unreasonably withheld or delayed), to have a qualified landscaper perform additional trimming of trees and shrubs along the front portion of Lessor's property in order to maximize turnpike exposure to Lessee's permitted signage. 49. Lessor represents and warrants as follows: (i) Lessor is aware of no environmental contamination with respect to the demised premises and the property of which the demised premises is a part and, to the best of Lessor's knowledge, there are no "hazardous materials" or "hazardous substances" (as such terms are defined in federal, state and local laws, rules and regulations) on, beneath or about the demised premises or the property of which the demised premises is a part other than in accordance with applicable laws, rules and regulations, and (ii) there are no title restrictions or other title encumbrances which would interfere with Lessee's use and enjoyment of the demised premises as described herein. Lessee warrants that Lessee will not use or allow any environmentally hazardous materials, in tanks, drums or otherwise, on the demised premises or on any other property of Lessor, nor will Lessee perform or allow any environmentally hazardous activity on the demised premises or on any other property of Lessor, including, but not limited to, placing or allowing any potentially hazardous materials or discharges in the building's sanitary sewer system or floor drains (if any), or in the storm sewer system or any other body of water adjacent to the demised premises, or on any ground surrounding the demised premises. It is specifically understood that in the event Lessee or any person or entity under Lessee's control or direction creates any environmental contamination or causes the need for any clean-up of hazardous materials at, on, in, around, or off-site of the demised premises or any other portion of Lessor's property, then Lessee shall be held responsible to Lessor for all costs of such inspection and/or clean-up as well as any other 12 17 liabilities that may occur and will indemnify, save, defend, and hold Lessor harmless from and against any and all actions, suits, or expenses in connection therewith. 50. Lessee shall have a graduated rental schedule as follows: A. Lessee will pay Minimum Annual Gross Rental of Two Hundred Ten Thousand Two Hundred Sixteen Dollars ($210,216.00) in monthly installments of Seventeen Thousand Five Hundred Eighteen Dollars ($17,518.00) commencing August 1st, 1998 and ending July 31st, 1999. B. Lessee will pay Minimum Annual Gross Rental of Two Hundred Seventeen Thousand Four Hundred Sixty Four Dollars ($217,464.00) in monthly installments of Eighteen Thousand One Hundred Twenty Two Dollars ($18,122.00) commencing August 1st, 1999 and ending July 31st, 2000. C. Lessee will pay Minimum Annual Gross Rental of Two Hundred Twenty Four Thousand Seven Hundred Twelve Dollars ($224,712.00) in monthly installments of Eighteen Thousand Seven Hundred Twenty Six Dollars ($18,726.00) commencing August 1st, 2000 and ending July 31st, 2001. D. Lessee will pay Minimum Annual Gross Rental of Two Hundred Thirty Two Thousand Three Hundred Ninety Two Dollars ($232,392.00) in monthly installments of Nineteen Thousand Three Hundred Sixty Six Dollars ($19,366.00) commencing August 1st, 2001 and ending July 31st, 2002. E. Lessee will pay Minimum Annual Gross Rental of Two Hundred Forty Thousand Sixty Dollars ($240,060.00) in monthly installments of Twenty Thousand Five Dollars ($20,005.00) commencing August 1st, 2002 and ending July 31st, 2003. 51. So long as Lessee is not in default under this Lease and Lessee has and continues to faithfully fulfill all obligations of Lessee hereunder, Lessor agrees that when Lessor becomes aware of the date on which the tenant that is currently occupying the adjoining approximately 15,120 square foot rental Unit B (Abington Memorial Hospital) will vacate that rental unit, Lessor will promptly notify Lessee of the availability of such adjoining rental unit and of Lessor's then current market rental rate to lease such space upon its vacancy. Lessor agrees that such market rental rate will not in any case exceed 20% above the rental rates that Lessee 13 18 will pay for the demised premises during its then remaining term of this Lease. Lessee shall have fifteen (15) days from receipt of such notice within which to notify Lessor in writing as to whether Lessee wishes to lease the entire adjoining rental unit, beginning on the day after it is fully vacated by such neighboring tenant and continuing throughout the remainder of the term of this Lease and any option or extension periods, as discussed above, for the rental rates listed in the above mentioned notice from Lessor to Lessee, on an "as-is, where-is" basis, and otherwise according to the same terms and conditions under which Lessee has leased the demised premises hereunder. If Lessor receives such written notice from Lessee, within the time period prescribed above, of Lessee's willingness to lease the adjoining rental unit upon such terms and conditions, then this Lease shall thereafter be considered to be amended by such notice, and Lessor shall then deliver to Lessee a letter confirming the revised total rental rates for the combined area leased by Lessee that shall thereafter be due. If Lessor does not receive such notice from Lessee within the time frame prescribed above, then Lessee's opportunity to lease the adjoining rental unit shall be extinguished, and Lessor shall be free to market such adjoining rental space to other potential tenants. 52. Lessor shall at all times retain the sole authority to choose which utility companies will service Lessor's property and/or the demised premises, and Lessee shall have no recourse against Lessor as a consequence of any decision by Lessor to change utility providers at any particular time. Notwithstanding the foregoing, Lessor shall consult with Lessee prior to changing any utility provider servicing the demised premises, and Lessee shall have the right to select its own voice and communications systems and providers, as long as such selections do not adversely affect Lessor or any other tenant at Lessor's property at 2445-2465 Maryland Road. Lessor shall be held harmless from any loss or damage suffered due to any failure of a utility service or loss of a utility function for any reason. 53. Notwithstanding anything in this Lease to the contrary, in the event of any conflict or contradiction between the terms of this Lease and the waiver of subrogation provisions set forth herein, the waiver of subrogation provisions shall in all instances prevail. 54. It is specifically understood that Lessor does not and will not carry insurance covering items owned or controlled by Lessee, persons visiting Lessee's business at Lessor's property, or covering Lessee's business 14 19 itself, and that Lessor shall not be responsible for any damage or injury to such items, persons or business. Lessee shall be responsible for its own security in and around the demised premises. If an insurance claim is filed under Lessor's property insurance policy relating to the Lessee's use (or misuse) of, or improvements to, the demised premises, or any act of vandalism at the demised premises, then in addition to any other liability of Lessee hereunder, Lessee shall be responsible for paying the deductible amount due for such insurance claim. Such deductible payment will be no greater than Ten Thousand Dollars ($10,000.00). 55. Lessee will carry and keep in full force and effect at all times during the term of this Lease and any extensions hereof, for the protection of Lessor and Lessee, the following insurance at Lessee's expense: (i) Comprehensive general public liability and personal injury insurance with a combined single limit coverage of at least One Million Dollars ($1,000,000.00) per occurrence, and a combined single limit aggregate coverage of not less than Three Million Dollars ($3,000,000.00). Such liability policies shall specifically include Lessor as a named insured, and shall cover all happenings and occurrences in or about the demised premises and on or about all roads, driving areas and other areas used by Lessee in common with others at Lessor's property. In addition, Lessee shall also continually maintain property damage insurance in sufficient amounts to properly cover all personal property owned or stored by Lessee at the demised premises, and shall also continually maintain at least the statutory minimum of workmen's compensation insurance covering Lessee's employees and business operations at the demised premises. (ii) Any and all such insurance policies shall provide that the policies will not be cancellable without at least thirty (30) days prior written notice to Lessor, and shall be issued and kept in effect by insurers of continuing recognized responsibility licensed to do business in the Commonwealth of Pennsylvania. (iii) Certificates of all insurance required to be carried by Lessee hereunder shall be delivered by Lessee to Lessor at least fifteen (15) days prior to the commencement of the term of this Lease; and at least thirty (30) days before any such policy shall expire Lessee shall deliver to Lessor a renewal endorsement of such policy or replacement policy. Within ten (10) days 15 20 after the premium on any such policy shall become due and payable, Lessee shall provide Lessor with a receipt demonstrating payment thereof. Upon request, Lessee shall deliver to Lessor full and accurate copies of all insurance policies required herein, along with any endorsements to those policies. 56. In the event Lessee does not vacate the demised premises and/or does not restore the demised premises to the condition required in the Lease by completing all or substantially all repairs required under the terms of this Lease on or before the termination date of this Lease or any extension hereof, then Lessee shall be responsible for all damages incurred by Lessor as a result of such default, and Lessee shall also thereafter be liable for monthly rental at a holdover rate equal to twice the amount due for the previous month under the Lease. 57. Notwithstanding any other provision of this Lease and, in addition to any other rights granted to Lessor hereunder, Lessor shall have the right, throughout the term of this Lease and any extensions hereof, to enter the demised premises during normal business hours for sales, leasing, or any other lawful purpose. Lessor shall attempt to give reasonable advance notice to Lessee of intended visits to the demised premises, except in cases of emergency or when Lessee is in default hereunder. Notwithstanding the above, Lessor will not have the right to enter the demised premises for re-leasing purposes unless Lessee is in default hereunder or unless such visits occur within the last nine (9) months of the Lease term. 58. Lessee's official address for notices under this Lease shall be 2445-2465 Maryland Road, Willow Grove, PA 19090. Attention: Mr. Alex Kramer. Lessor's official address for notices under this Lease shall be P.O. Box 128, Ambler, PA 19002. Attention: Mr. Robert Bown. Except as otherwise specifically allowed herein, all notices must be given by certified mail, return receipt requested. 59. Unless a specific time period for a particular type of default is specified elsewhere in this Lease, Lessee shall not be considered to be in default hereunder unless and until Lessor has sent Lessee written notice specifying in reasonable detail the default involved and such default has continued unremedied by Lessee for a period of twenty (20) days (ten (10) days in the case of a payment default) thereafter. Notwithstanding the foregoing, the late charge remedies provided to Lessor in this Lease may be applied by Lessor on any late 16 21 payment due from Lessee regardless of the above notice provisions. 60. In the event of any conflict or inconsistency between the terms contained in the printed provisions of the Lease Agreement and the terms contained in any typewritten or handwritten provisions thereof or of this Addendum, the terms contained in the typewritten or handwritten provisions shall govern. 61. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania and any disputes hereunder will be adjudicated in the courts of the Commonwekth of Pennsylvania. Lessee and Lessor hereby expressly waive their rights to a jury trail in any dispute that may arise between them in connection with this Lease. 62. The persons executing this Lease hereby represent and warrant to each other that they each have full power, right and authority to enter into this Lease on behalf of their respective companies and to cause such companies to perform each and all of their respective obligations provided herein. 63. Submission by Lessor of this Lease for review and execution by Lessee shall neither confer any rights nor impose any obligations upon either party unless and until both Lessor and Lessee have executed this Lease in its final form. Upon proper execution, this Lease constitutes the entire understanding between the parties with respect to its subject matter and, except as otherwise provided herein, may not be cancelled, amended or modified in any respect unless the same shall be in writing and signed by or on behalf of the parties. Notwithstanding the foregoing, Lessee and Lessor hereby agree that a fully-executed, faxed copy of any future addendum to this Lease may serve as an original thereof. 17 22 EXHIBIT "A" LANDLORD'S SUBORDINATION AGREEMENT ______________________, a __________________ ("Landlord") is the owner of certain premises located or known as ____________, (the "Premises"). To induce ______________ ("Bank") to extend or continue to extend credit to ___________ ("Tenant"), Landlord does hereby covenant and agree with Bank, its successors and assigns, as follows: 1. Any ______________________________________________________________________ (collectively, the "Collateral") owned by Tenant and in which Bank may now have or hereafter acquire a security interest, and which may now or hereafter be placed upon the Premises, shall at all times be considered to be personal property and shall not constitute fixtures or become part of the Premises. As between Landlord and Bank, Landlord's interest in the Collateral is and shall be subordinate and inferior to the rights therein of Bank and its successors and assigns. Notwithstanding the foregoing, Landlord shall not subordinate or waive as to Bank any interest Landlord may have or acquire in any of the Collateral that is attached to the Premises and thereby could be considered a permanent fixture including, but not limited to, any offices (but not any office furniture or equipment) or other structures constructed within the Premises, and any electrical, gas, oil, HVAC or plumbing fixtures installed within the Premises which serve the occupants thereof. 2. In the event that it becomes necessary for Bank to take possession of the Collateral or any part thereof, Landlord will make no objection to the removal of such Collateral from the Premises by Bank or Bank's agent, as long as: 1) prior written notice of such removal is received by Landlord, 2) such removal is performed in a workmanlike manner and without damage to the Premises, 3) prior to such removal Bank reimburses Landlord for any amounts overdue from Tenant to Landlord under the terms of Tenant's lease for the Premises as of the date of such removal, and 4) promptly following such removal Bank reimburses Landlord for any costs of repair for any damage that may be done to the Premises as a result of such removal. 3. As long as Landlord is supplied in writing by Bank or Tenant with Bank's then current notice address, Landlord will endeavor to give at least ten (10) days prior notice to bank of any intention to terminate Tenant's lease by reason of any Tenant default thereunder and will allow 1 23 IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. LESSEE: AMERIQUEST TECHNOLOGIES, INC., a Delaware corporation [sig] 7/1/98 by: /s/ ALEXANDER C. KRAMER - ------------------------- --------------------------- Witness/Attest Date Name: Title: President LESSOR: MERION MILLS ASSOCIATES, a Pennsylvania partnership [sig] 7/1/98 by: /s/ ROBERT A. BROWN - ------------------------- --------------------------- Witness/Attest Date Name: Robert A. Brown Title: Property Manager 18 24 Bank twenty (20) days time in which to remove any of Tenant's property upon which Bank has a lien or in which Bank has a security interest provided, however, that in no event shall Bank have the right to leave such property on the Premises after the termination date of Tenant's lease without incurring storage costs for the same. If any of the Collateral which has been claimed by Bank is left on the Premises after the termination of Tenant's lease therefor Bank shall be responsible for promptly paying to Landlord the rent and other tenant charges last provided thereunder on a per diem basis for as long as such Collateral remains on the Premises and shall, upon request from Landlord, promptly remove the same after satisfying all outstanding charges due to Landlord hereunder. 4. The laws of the Commonwealth of Pennsylvania shall govern the validity, interpretation and enforcement of this agreement. This agreement may not be recorded in any office of public records. IN WITNESS WHEREOF, intending to be legally bound, Landlord has, for Landlord and Landlord's successors and assigns, caused this Landlord's Subordination Agreement to be duly executed this ____ day of _____, 199_. LANDLORD: , ------------------------- a -------------------- By: - -------------------------- ----------------------- Witness/Attest Name: Title: Bank's Notice Address: Landlord's Notice Address: llsubord 2 25 [MAP] EX-27 4 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-30-1998 SEP-30-1997 755 0 6,535 0 4,191 11,835 799 0 12,955 3,937 0 0 0 669 174,383 12,955 60,466 60,466 54,323 5,123 0 0 273 747 0 747 0 0 0 747 (0.01) (0.01)
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