-----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, BHXRrcefVg0lhaZcwu06YkLrNmvTpEeB4s0SF967ofXPrhfnIZoDKi4sPbTuzCmC R3oIrz8ZWqr5/MNqGNgayQ== 0000893220-99-001414.txt : 19991231 0000893220-99-001414.hdr.sgml : 19991231 ACCESSION NUMBER: 0000893220-99-001414 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERIQUEST TECHNOLOGIES INC CENTRAL INDEX KEY: 0000764864 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 330244136 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10397 FILM NUMBER: 99784162 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-K405 1 10-K 405 - AMERIQUEST TECHNOLOGIES, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 21, 1999 is approximately $6,525,000. 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 67,841,906 shares of the Registrant's Common Stock outstanding as of December 21, 1999. 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 2000 Annual Meeting of Stockholders to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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"), markets and sells products and services providing business information solutions for value-added resellers ("VARs") and systems integrators. AmeriQuest's strategy is to emphasize the sale of complete solutions for its clients and to provide a high level of value-added services, including consultation on component selection, system assembly, configuration, testing, logistics, start-up, installation and technical support services. 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 ultimate customer. AmeriQuest also provides a variety of programs and seminars designed to enhance its clients' technical, marketing, logistical and financial capabilities. AmeriQuest currently markets and sells mid-range Unix and NT server systems, networking systems, storage sub-systems, printers and related products to VARs and systems integrators throughout the United States. Mid-range computers and servers range in price from $5,000 to $800,000. 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, but in April, 1997, AmeriQuest decided to focus its resources on building the Advanced Systems Group 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 became a more focused technical distributor of services and computer products providing value added solutions 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. CONTROL OF AMERIQUEST -- ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR MANAGEMENT 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, Inc., a wholly-owned subsidiary of Computer 2000 AG (collectively referred to herein as "Computer 2000"), representing approximately 54% of total outstanding shares of AmeriQuest Common Stock following the redemption of certain Computer 2000 shares in connection with the transaction. 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. The Board -2- 3 of Directors of the Company also 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 increase the emphasis of providing value-added services such as engineering design and system configuration, installation capability, and marketing, financial and technical support, to its VAR and systems integrator client base, which improves its margins as compared to the margins of those distributors who provide for sale of equipment only. In addition, AmeriQuest will continue second tier product 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. 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 cannot do so itself or 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. PRODUCTS AmeriQuest seeks to sell products from nationally-recognized vendors that provide all the components most VARs and systems integrators require to fully configure their business information solutions. The following is a description of the major categories of products currently offered by AmeriQuest and the principal vendors of those products: CLIENT SERVERS AND PERSONAL COMPUTERS -- AmeriQuest offers a broad and diverse group of server, notebook, and desktop products manufactured by Acer, Compaq, Hewlett Packard, IBM and Unisys. COMMUNICATIONS AND NETWORKS -- AmeriQuest provides local and wide area network ("LAN/ WAN") certified engineering services, software and specialized hardware products manufactured by 3Com, Cisco, D-Link, Digi International, Hewlett Packard, IBM, Intel, Multi-Tech Systems and Nortel. CAS, NAS AND SAN STORAGE -- AmeriQuest offers a broad line of channel attached storage products, network attached storage products and storage attached network 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 Acer, American Power, Citizen, Genicom, Hansol, Hewlett Packard, Imation(3M), Lexmark, Okidata and Wyse. OPERATING SYSTEM AND APPLICATION 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 application software for Unix and mid-range systems. Among the manufacturers of these software products are Citrix, IBM, including AIX and Lotus Notes, Microsoft, Novell and SCO. -3- 4 SERVICES AmeriQuest seeks to sell its services by providing all the elements most VARs and systems integrators require to sell business information solutions. Technical, marketing, logistical, and financial services are marketed and sold as a part of the company's "Silent Partner"(TM) services. These services are focused around Internet e-commerce solutions, high availability servers, and thin client computing. The following is a description of the major categories of services currently offered by AmeriQuest: TECHNICAL SERVICES -- AmeriQuest provides Systems Engineering and Integration Services to those clients who do not have the capability or capacity to design, configure or install business information system solutions with their own resources. AmeriQuest also provides an Open Systems Technology Center in its Willow Grove, PA facility for its clients to explore and test new technologies and various configurations and applications. MARKETING SERVICES -- AmeriQuest offers its VAR and systems integrator clients a "virtual marketing department" to generate opportunities, plans to sell services, and capability to provide Internet marketing tools. LOGISTICAL SERVICES -- AmeriQuest offers logistical services to its VAR and systems integrator clients by managing the entire scope of a project from product selection, procurement and packaging to staging of multiple ship point delivery and installation at its client's end-user. FINANCIAL SERVICES -- AmeriQuest expands the financial capabilities of its VAR and System Integrator clients by providing customer risk analysis; bonding and insurance; financial and business planning assistance; and, through its subsidiary, provides end-user leasing and technology upgrade programs. AmeriQuest also arranges for leasing and maintenance options offered by IBM, Hewlett Packard and Unisys for all products to clients and ultimate customers. By arranging for multiple financing options, including floor planning through a number of credit institutions, credit card purchases and an "assignment of proceeds" program, AmeriQuest can assist its clients in securing purchase orders in excess of what their normal credit facilities would otherwise allow. 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, revenue from sale of products of our five leading vendors; Acer , Hewlett Packard (supplied by Pinacor), IBM (supplied by Pinacor), Okidata and Unisys, represented approximately 21%, 21.4%, 8.2%, 14.6%, and 5%, respectively, of the Company's revenue for the fiscal year ended September 30, 1999. The Company is focused on increasing its share of business represented by each of Acer, HP, IBM and Unisys and has made increases in its sales force to achieve such objective. AmeriQuest expanded its relationship with Unisys during fiscal 1999 by negotiating a corporate account reseller ("CAR") agreement which allows AmeriQuest to sell Unisys products that are not available to its resellers, directly to end users. During 1999, AmeriQuest scaled back its direct relationship with IBM to distribute IBM's networking products. The Company retained the right to sell IBM mid-range products, including RS6000, networking products and mass storage. 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 -4- 5 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 continued to pursue a strategy to reduce inventory of non-core vendors and to satisfy its client's needs for non-core, supplemental or complementary products by concentrating its procurement efforts with one or more of the 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 1,700 computer resellers. The Company's clients 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 clients 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. AmeriQuest has chosen to satisfy its client's needs for supplemental and complementary products by concentrating the Company's procurement efforts with one of the large, national fulfillment distributors. No client has accounted for more than ten percent of AmeriQuest's net sales during the 1999, 1998, or 1997 fiscal years. Sales by AmeriQuest are not seasonal to any material extent. Since the change in control in July, 1998, 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. On February 1, 1999 a very experienced executive, Michael J. McCarthy, was recruited to serve as the Vice President of Sales and Marketing. Under his leadership, the sales staff has been increased to 25 currently, with training and selection of such staff 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 developing new accounts and serving established accounts. AmeriQuest places some emphasis on telemarketing, but most of the Company's new sales personnel operate in the field. OPERATIONS AND CUSTOMER SERVICES Through the Company's business as a provider of services and quality products for business information solutions, clients are offered a single source of supply, prompt delivery, financing programs, engineering services, marketing assistance, logistical support, customer leasing and maintenance and client support. CUSTOMER ORDER ENTRY. Client 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 client 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. Clients 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 client's creditworthiness and previous payment history. In addition, AmeriQuest assists some resellers in obtaining equipment financing through leasing or third-party floor planning programs from Deutsche Financial -5- 6 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 5:00 p.m. local time are typically shipped the same day, provided the required inventory is in stock. AmeriQuest typically delivers products directly from its vendors, or its Willow Grove, Pennsylvania or Atlanta, Georgia warehouses via United Parcel Service and other common carriers, with customers in key commercial regions of the United States receiving orders within one to two business days of shipment. AmeriQuest also will provide overnight air handling if requested and paid for by the client. These services allow clients to minimize inventory investment yet provide responsive service to their customers. AmeriQuest is also able to provide a fulfillment service so that orders are shipped directly to a client's customer, thereby reducing the need for clients to maintain inventories of certain products. CUSTOMER SUPPORT. The Company currently offers clients a single source for competitively priced hardware and software products from numerous vendors. By purchasing from the Company, the client only needs to comply with a single set of ordering, billing and product return procedures. The Company also provides training and product information to its clients. 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 clients 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. COMPETITION Competition in the technical, as opposed to fulfillment only, distribution of services and mid-range computer systems is limited, but intense. 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. 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., Pinacor and Tech Data Corporation, which have substantially greater financial resources than AmeriQuest, may enter the market in pursuit of the 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 strengths and other support services offerrings, 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 an 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 -6- 7 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. 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 or 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 or 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 clients 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 clients the warranties offered by manufacturers whose products it sells. While the Company believes that ultimate responsibility for claims arising from the Year 2000 compliance of the software and hardware it sells should be borne by the products' manufacturers, there can be no assurance that the Company will not have liability for any such claims and any related liability could have a material adverse effect on the Company's business, results of operations or 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. The Company has established a formal contingency plan for dealing with a failure by the Company and its vendors or others to achieve Year 2000 compliance. EMPLOYEES As of September 30, 1999, AmeriQuest had 75 full-time employees sales (increased to 78 currently), including 21 persons employed in sales (23 currently), 10 persons employed in sales support (12 currently) and 5 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 good. -7- 8 SPECIAL FACTORS TO BE CONSIDERED In addition to the other information in this Annual Report on Form 10-K, the following factors should be carefully considered: CONTINUED OPERATING LOSSES While the Company had a loss of $1,909,000 during the fiscal year ended September 30, 1999, the Company experienced significantly greater losses during previous fiscal years other than fiscal 1998, and there is no assurance that the Company will become profitable in the future. The Company had net income of $747,000 during the fiscal year ended September 30, 1998, but 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. 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. The Company recorded a net loss of $33.6 million during fiscal 1996 (including lease termination and moving costs of $6.4 million). 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. 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 such additional capital would be available, or if available, could 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 has historically operated 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, and there can be no assurance that this will happen. It has only been since the change in control in mid-July of 1998, 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 23 currently with internal plans to bring the level to 25. In addition, the Company has begun a migration from exclusively being a distributor of micro, mini- and mid-range computers and related products to also selling value added services, such as engineering design and system configuration, installation capability, marketing, financial and technical support. While the Company's management is attempting to increase sales and its share of business represented by services and such manufacturers as Acer, Hewlett Packard, IBM 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. -8- 9 NEED TO MAINTAIN VENDOR BASE The Company principally provides 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 client orders, due to the inability of certain suppliers to meet their volume and schedule requirements and/or due to the Company's shortage of cash resources. Delays in shipments from suppliers can cause fluctuations in the Company's short-term results and contribute to order cancellations. 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, which have substantially greater financial resources than AmeriQuest, may enter the market in pursuit of the 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 was unable until the end of July, 1998 to focus management attention and marketing expenditures on increasing its market share and returning the Company to recapturing and sustaining the growth apparent in the market niche the Company has chosen. During fiscal 1999 the Company completed its reorganization of the sales and marketing function. If the Company's sales for any reason in the near future do not materialize in -9- 10 amounts sufficient to cover the existing cost structure, management may again have to consider 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 increase revenue, the Company's ability to manage expense levels, the Company's ability to retain key vendors, the continued financial strength of the Company's clients, 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) identifying new clients, and marketing the Company's services and products to those clients, (iii) maintaining good relationships with key vendors and (iv) 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. 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. -10- 11 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
ITEM 3. 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. 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. 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 1999. -11- 12 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 September 30, 1997 through March 9, 1998, when the Company was de-listed. The prices reflect the high and low closing prices reported on NASDAQ OTC Bulletin Board for each calendar quarter since March 10, 1998. AMERIQUEST
HIGH LOW ----- ----- 1997 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 1/16 1999 First Quarter............................................... 1/16 1/16 Second Quarter.............................................. 11/64 1/16 Third Quarter............................................... 1/8 5/64 Fourth Quarter.............................................. 1/4 5/64
On December 21, 1999, the stock of AmeriQuest closed at 3/16 (or approximately $0.19) per share. As of that date AmeriQuest had approximately 1,000 stockholders of record. The Company did not declare any dividends on its Common Stock in 1999 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 "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).
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- Net sales................ $ 56,865 $ 60,466 $ 218,877 $ 424,708 $ 100,723 Net income (loss)........ (1,909)(1) 747(2) (41,311)(2) (33,609)(2) (7,041) Net Income (loss) per share.................. (0.03)(4) (0.01)(4) (0.63) (0.76) (0.30) Total assets............. 14,168 12,955 26,079 116,372 115,531 Long-term obligations.... 0 0 0 3,122 6,686(3) Stockholders' equity (deficit).............. 7,169 9,018 (23,392) (11,206) 17,565 YEAR ENDED JUNE 30, 1995 ------------- Net sales................ $ 416,571 Net income (loss)........ (67,566) Net Income (loss) per share.................. (3.76) Total assets............. 128,008 Long-term obligations.... 24,515 Stockholders' equity (deficit).............. (25,709)
- --------------- (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, 7 and 10 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 -12- 13 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. (3) For the year ended June 30, 1995 includes the $18 million advance from Computer 2000 related to its equity investment and $5.8 million associated with the issuance of 6.8 million shares of the Company's common stock required to complete a 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 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. On October 20, 1997, 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 -13- 14 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:
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1997 ------------- ------------- ------------- Sales.......................................... 100.0% 100.0% 100.0% Gross Profit................................... 8.6 10.1 7.2 Selling, general and administrative............ 11.8 10.7 16.1 Intangible write-off........................... -- -- 4.1 Restructuring.................................. -- (2.3) 4.3 Interest....................................... 0.2 0.5 1.6 Net Income (Loss).............................. (3.4) 1.2 (18.9)
NET SALES During the fiscal year ended September 30, 1999 sales decreased 6% compared to the twelve months ended September 30, 1998. However, included in sales for fiscal 1998 were shipments to other IBM distributors of approximately $7,850,000 of IBM RS6000 product that represented liquidation of inventory that took place as AmeriQuest exited the IBM two tier distributor program. Sales attributable to the Company's ongoing business during fiscal 1998 were thus $52,616,000 representing an increase of 8%, or $4,249,000 over fiscal 1998. This increase resulted from the Company's decision to focus on business information solution selling during fiscal 1999. 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 in April of 1997 and sell or close all other divisions during the preceding fiscal year. Sales attributable to the Company's ongoing business during fiscal 1997 were $52,050,000. Accordingly, sales during the year ended September 30, 1998, as adjusted, increased by 1% 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. The Company has relationships with several key vendors as primary suppliers of computer products to the Company. For the years ended September 30, 1999, 1998 and 1997, sales derived from products from three, two and two vendors accounted for 65%, 54% and 23%, respectively, of the Company's sales. 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) decreased to 8.6% of sales for the fiscal year ended September 30, 1999 compared to 10.1% for the fiscal year ended September 30, 1998. The desired transition of the Company's sales force towards "solution" and services selling with its higher margins, while beginning to show quarterly improvement, has not yet increased sufficiently to offset either the lower margins of increasing revenue of low-end server, desktop and peripheral products or the loss of the margin associated with the IBM 2nd tier RS6000 program in the first half of fiscal -14- 15 1998. In addition, the Company recorded in fiscal 1999 and 1998 cost of sales benefits of approximately $400,000 related to reversal of certain previously established cost of sales reserves. Gross profit 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. The improvement was primarily attributable to the closing of the lower margin standard distribution businesses and continuation of the higher margin Advanced Systems division 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 $0.5 million, $0.3 million and $2.4 million for the years ended September 30, 1999, September 30, 1998 and September 30, 1997, respectively. AmeriQuest anticipates that it will continue to experience pressure on gross selling margins of open source hardware product revenues due to severe 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 operating expenses as a percent of sales, no assurance can be given as to whether such improvement in fact will occur or as to the actual amount of any such improvement. 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 continue to experience negative operating results. OPERATING EXPENSES For the fiscal years ended September 30, 1999, 1998 and 1997, operating expenses, exclusive of restructuring and the write-off of intangibles were approximately 11.8%, 10.7%, and 16.1% of sales, respectively. Selling, general and administrative expenses increased during fiscal 1999 as the Company expanded and rebuilt its sales force with a focus on consultative selling and providing services and quality products for business information solutions to VARs and systems integrators. In addition, the Company recorded a benefit of approximately $600,000 in fiscal 1999 resulting from the reversal of previously established accruals. AmeriQuest's strategy is to emphasize the sale of complete solutions for its clients and to provide a high level of value-added services, including consultation on component selection, system assembly, configuration, testing and technical support services. During the year ended September 30, 1998, 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 year that related to the withdrawal from business with certain clients 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. Operating expenses also declined during fiscal 1998, compared to fiscal 1997, as a result of the closing of the lower margin standard distribution businesses. 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. 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, 1999, September 30, 1998 and September 30, 1997 totaled $0.3 million, $0.6 million and $2.0 million, respectively. -15- 16 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 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). During the year ended September 30, 1997, the company recorded a restructuring cost of approximately $9.3 million. INTEREST EXPENSE Interest expense, net, decreased from $0.3 million for the year ended September 30, 1998 to $0.1 million for the year ended September 30, 1999 due to the elimination of debt associated with the change in control on July 20, 1998. Borrowings on the bank credit line did not occur until April, 1999 as revenue increases were achieved. Net interest expense 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 from 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, 1996 to September 30, 1999, 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 Limitations limits the Company's ability to utilize its net operating loss carryforwards created prior to the ownership change. The Company has calculated that the net operating loss carryforwards available to offset future taxable income is $17.4 million (see Note 9 to the Notes to Consolidated Financial Statements). The Company had not benefited from these net operating carryforwards as of September 30, 1999. 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, net income of $0.7 million during fiscal 1998 and a net loss of $1.9 million during fiscal 1999. 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. -16- 17 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, 1999, the Company had $0.7 million in cash and had borrowed $2.4 million against its line of credit. The Company used $2.5 million in cash during the year ended September 30, 1999 primarily to finance capital expenditures and the growth in sales and related accounts receivable. At September 30, 1998, the Company had $0.7 million in cash and had not borrowed against its line of credit. The Company used $7.0 million in cash from operating activities during the year ended September 30, 1998 primarily to finance expenditures associated with the restructuring charges provided in fiscal 1997, offset partially by reduction in inventory levels. At September 30, 1997, the Company had borrowed $3.1 million against lines of credit. The Company generated $21.7 million in cash from operating activities during the year ended September 30, 1997. 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 increased slightly during fiscal 1999 compared to fiscal 1998 and decreased during fiscal 1998 compared to fiscal 1997, representing shorter payment terms extended to clients. Inventory turnover increased in fiscal years 1999, 1998 and 1997, reflecting an intentional reduction in stock carried in an effort to reduce obsolescence costs and carrying costs necessary to support the restructured business. At September 30, 1999, the Company had a stockholders' equity of $7.2 million compared to September 30, 1998 stockholders' equity of $9.0 million. At September 30, 1997, the Company had a stockholders' deficit of $23.4 million. The improvement in stockholder's equity at September 30, 1998 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 of borrowings at September 30, 1997. On September 30, 1997, Computer 2000 AG paid the outstanding bank lines of credit and converted the loans to a $27.7 million non-interest bearing intercompany demand loan, and agreed to defer demand of payment through September 30, 1998 and subordinate its loan to the working capital lender. See "Certain Relationships and Related Transactions." Notwithstanding the agreement by 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. Borrowings under the Fleet line of credit at September 30, 1999 and September 30, 1998 were $2,443,000 and $0 respectively. The Fleet line replaced a line of credit with IBM Credit Corporation ("IBMCC"). Borrowings under the IBMCC line of credit at September 30, 1997 totaled $3.1 million. On December 22, 1999, the Company amended its Fleet facility. The amendment waived defaults of the minimum tangible net worth and minimum cash flow covenants, as defined, as of September 30, 1999 and reset certain financial covenants effective October 1, 1999. -17- 18 Management believes that the Company's existing capital resources and other alternative sources of financing are adequate to meet its current operating requirements through September 30, 2000 and beyond. Management believes the Company's operating performance will meet the reset financial covenants under the Fleet facility during fiscal 2000. Although management believes that the Company's 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. 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. Management estimates that had either the lenders base rate or Libor increased by one percent, the Company's interest expense for the year ended September 30, 1999 would have increased by approximately $6,000. 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 -18- 19 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 will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and 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 will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and 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 will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and 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 will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference. -19- 20 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 Public Accountants.................... F-1 Consolidated Balance Sheets................................. F-2 Consolidated Statements of Operations....................... F-3 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-16
(b) Reports on Form 8-K None (c) Exhibits EXHIBIT INDEX
EXHIBIT NO. TITLE OF DOCUMENT LOCATION OF FILING - ------- ----------------- ------------------ 3.01* Restated Certificate of Incorporation of AmeriQuest...................................... SEC File No. 1-10397 Exhibit 3.01 10-K for September 30, 1998 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 Agreement dated July 20, 1998 by and between AmeriQuest and Fleet Capital.................... SEC File No. 1-10397 8-K for July 30, 1998 10.02* 1996 Equity Incentive Plan...................... SEC File No. 1-10397 Exhibit 10.07 10-K for September 30, 1997 10.03* Employment Agreement for Alexander C. Kramer, Jr.............................................. SEC File No. 1-10397 Exhibit 10.10 10-K for September 30, 1997
-20- 21
EXHIBIT NO. TITLE OF DOCUMENT LOCATION OF FILING - ------- ----------------- ------------------ 10.04* Employment Agreement for Jon D. Jensen.......... SEC File No. 1-10397 Exhibit 10.11 10-K for September 30, 1997 10.05 Employment Agreement for Michael J. McCarthy.... 10.06* Lease Agreement dated July 1, 1998 by and between AmeriQuest and Merion Mills Associates...................................... SEC File No. 1-10397 Exhibit 10.05 10-K for September 30, 1998 10.07* Lease Agreement dated January 25, 1995, as amended, by and between AmeriQuest and Anaheim Technology Center............................... SEC File No. 1-10397 Exhibit 10.25 10-K for September 30, 1996 10.08* Sublease dated as of September 4, 1996 by and between AmeriQuest and Central Video, Inc....... SEC File No. 1-10397 Exhibit 10.26 10-K for September 30, 1996 10.09 1998 Equity Incentive Plan...................... 21.01 Subsidiaries of AmeriQuest...................... 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. -21- 22 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, 1999. 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, 1999 - --------------------------------------------------- (Principal Executive Alexander C. Kramer Officer) /s/ JON D. JENSEN Chief Financial Officer, December 22, 1999 - --------------------------------------------------- Chief Operating Officer, Jon D. Jensen Secretary and a Director (Principal Financial and Accounting Officer) /s/ EDWARD B. CLOUES, II Director December 22, 1999 - --------------------------------------------------- Edward B. Cloues, II /s/ WALTER A. REIMANN Director December 22, 1999 - --------------------------------------------------- Walter A. Reimann /s/ CHARLES W. SOLTIS Director December 22, 1999 - --------------------------------------------------- Charles W. Soltis
-22- 23 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, 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, November 23, 1999 (except with respect to matters discussed in Note 8, as to which the date is December 22, 1999). F-1 24 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, ---------------------- 1999 1998 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 667 $ 755 Accounts receivable, net of allowances for doubtful accounts of $264 and $609.............................. 8,323 6,535 Inventories............................................... 3,565 4,191 Other current assets...................................... 319 354 --------- --------- Total current assets.............................. 12,874 11,835 PROPERTY AND EQUIPMENT, NET................................. 961 799 OTHER ASSETS................................................ 333 321 --------- --------- $ 14,168 $ 12,955 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit............................................ $ 2,443 $ Accounts payable.......................................... 3,709 2,132 Accrued expenses and other................................ 847 1,805 --------- --------- Total current liabilities......................... 6,999 3,937 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 10) STOCKHOLDERS' EQUITY Common stock, $.01 par value, 200,000,000 shares authorized; 67,841,906 and 66,881,906 shares issued and outstanding, respectively.............................. 679 669 Additional paid-in capital................................ 174,433 174,383 Accumulated deficit....................................... (167,943) (166,034) --------- --------- Total stockholders' equity........................ 7,169 9,018 --------- --------- $ 14,168 $ 12,955 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-2 25 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, -------------------------------- 1999 1998 1997 -------- -------- -------- NET SALES................................................... $56,865 $60,466 $218,877 COST OF SALES............................................... 51,990 54,323 203,199 ------- ------- -------- Gross profit........................................... 4,875 6,143 15,678 OPERATING EXPENSES Selling, general and administrative....................... 6,693 6,499 35,160 Intangibles write-off..................................... -- -- 9,036 Restructuring costs....................................... -- (1,376) 9,338 ------- ------- -------- Income (loss) from operations........................ (1,818) 1,020 (37,856) INTEREST EXPENSE, NET....................................... 91 273 3,455 ------- ------- -------- NET INCOME (LOSS)........................................... (1,909) 747 (41,311) DIVIDENDS ON PREFERRED STOCK................................ -- (1,575) (875) ------- ------- -------- NET LOSS TO COMMON STOCKHOLDERS............................. $(1,909) $ (828) $(42,186) ======= ======= ======== BASIC AND DILUTED NET LOSS PER SHARE........................ $ (0.03) $ (0.01) $ (0.63) ======= ======= ======== SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE..................................................... 67,329 66,882 66,882 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 26 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, 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 Issuance of shares to executive management............................... -- -- 960,000 10 50 -- 60 Net loss................................... -- -- -- -- -- (1,909) (1,909) -------- -------- ---------- ---- -------- --------- -------- Balances at September 30, 1999............. -- $ -- 67,841,906 $679 $174,433 $(167,943) $ 7,169 ======== ======== ========== ==== ======== ========= ========
- --------------- (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 27 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, -------------------------------- 1999 1998 1997 -------- -------- -------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss)........................................... $(1,909) $ 747 $(41,311) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 301 307 2,664 Gain on sale of division assets........................ -- (184) (385) Restructuring costs.................................... -- (1,376) 13,849 Changes in operating assets and liabilities: Net (increase) decrease in accounts receivable......... (1,788) (415) 43,625 Decrease in inventories................................ 626 2,450 29,613 Decrease in other assets............................... 23 229 2,704 Increase (decrease) in accounts payable and accrued expenses and other................................... 679 (8,757) (29,027) ------- ------- -------- Net cash provided by (used in) operating activities...................................... (2,068) (6,999) 21,732 ------- ------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from sale of division assets..................... -- 450 3,550 Capital expenditures, net of disposals.................... (463) (312) (62) ------- ------- -------- Net cash provided by (used in) investing activities...................................... (463) 138 3,488 ------- ------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Net borrowings (repayments) under lines of credit......... 2,443 (3,064) (77,504) 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 ------- ------- -------- Net cash provided by (used in) financing activities...................................... 2,443 (64) (19,840) ------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (88) (6,925) 5,380 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 755 7,680 2,300 ------- ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 667 $ 755 $ 7,680 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 28 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS) Interest: During the fiscal years ended September 30, 1999, September 30, 1998 and September 30, 1997, the Company paid cash for interest of approximately $128, $499, and $3,614, respectively. Income taxes: During the fiscal years ended September 30, 1999, September 30, 1998 and September 30, 1997, the Company made no income tax payments. Noncash investing and financing activities: 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. Issuance of Common Stock: During the fiscal year ended September 30, 1999, the Company issued 960,000 shares of its common stock to certain members of executive management as settlement for bonuses accrued for at September 30, 1998. The accompanying notes are an integral part of these consolidated financial statements. F-6 29 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 a provider of products and services for business information solutions 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, during 1998 and 1999, the Company recorded significant benefits to its Statements of Operations due to the reversal of previously established reserves (See Notes 3, 5, 7 and 10). Basis of Presentation. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Through September 30, 1997, The Company incurred significant losses. In fiscal 1998 and 1999, excluding the reversal of previously established reserves (See Notes 3, 5, 7 and 10), the Company continued to incur losses. In addition, the Company generated negative cash flow from operations in fiscal 1998 and 1999, respectively. As of September 30, 1999, the Company was not in compliance with its bank line of credit. Such non-compliance was waived by the bank and new covenants were established effective October 1, 1999 (see Note 8). Management believes the Company's operating performance will meet these covenants during fiscal 2000. Following the change of ownership to the Company's senior management in fiscal 1998, management continued to focus on reducing working capital requirements and monitoring overall cost control programs. In addition, the Company has begun a migration from exclusively being a distributor of micro, mini- and mid-range computers and related products to also selling value added services, such as engineering design and system configuration, installation capability, marketing, financial and technical support. Management believes the Company's existing capital resources and other alternative sources of financing will be adequate to fund the Company's operations throughout fiscal 2000 and beyond. If necessary, management believes it has the ability to reduce operating expenses so the Company will have adequate cash flow to sustain operations. 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, the competitive market for computers and computer related equipment, dependence on key vendors, dependence on key personnel and risks associated with rapidly changing technology and markets. F-7 30 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 Computer Hardware and Software.............................. 3 years 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 F-8 31 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1999, 1998 and 1997 are the same, as all common stock equivalents are anti-dilutive due to the loss to common shareholders. Recently issued accounting pronouncements. The Company adopted FASB 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. The adoption of SFAS 131 did not have an effect on the Company's financial statements. Concentration of credit risks. Financial instruments that potentially subject the Company to concentrations of credit risk 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 clients. At September 30, 1997, 1998 and 1999, no one client 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, 1999, 1998 and 1997, sales derived from products from three, two and two vendors accounted for 65%, 54%, and 23%, 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 Jon Jensen (CFO), signed an agreement to acquire the 36,349,878 shares of AmeriQuest common stock owned by Computer 2000. The transaction was approved by the outside directors of AmeriQuest and by the full Board of Directors of AmeriQuest. In taking over majority control of AmeriQuest from Computer 2000, AmeriQuest's management arranged for a new $10 million asset-backed bank credit line for AmeriQuest (see Note 8), 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 F-9 32 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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): 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 $-- ====== ====== ====== ==
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. 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. All of the Company's acquisitions were accounted for in accordance with the purchase method of accounting. Intangible assets associated with these acquisitions were primarily related to acquired distribution F-10 33 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 finished goods and are reflected net of reserves for excess and obsolete inventory. 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 1999 and 1998, the Company recorded cost of sales benefits of approximately $400,000 and $1.7 million, respectively, related principally to the reversal of previously established vendor debit reserves. 6. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands):
SEPTEMBER 30, -------------------- 1999 1998 -------- -------- Equipment................................................ $ 270 $ 202 Computer Hardware and Software........................... 1,831 1,593 Furniture and fixtures................................... 193 189 Leasehold improvements................................... 332 196 Less accumulated depreciation and amortization........... (1,665) (1,381) ------- ------- $ 961 $ 799 ======= =======
7. ACCRUED EXPENSES AND OTHER: Accrued expenses and other consist of approximately $377,000 of accrued payroll and related expenses and approximately $470,000 of deferred income and other accrued expenses at September 30, 1999. 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. In fiscal 1999 and 1998, the Company recorded operating expense benefits of approximately $600,000 and $400,000, respectively, related to the reversal of previously established accruals and reserves. 8. LINES OF CREDIT: In connection with the purchase, in fiscal 1998, 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 F-11 34 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 during fiscal 1998 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 of available borrowing under the Credit Facility. As of September 30, 1999, the Company has borrowed $2.4 million on the Credit Facility and has outstanding letters of credit of $300,000. On December 22, 1999, the Company amended its credit facility. The amendment waived defaults of the minimum tangible net worth and minimum cash flow covenants, as defined, as of September 30, 1999 and reset certain financial covenants effective October 31, 1999. Prior to July, 1998, the Company had entered into various credit arrangements with certain domestic and international financial institutions. During fiscal 1997 and 1998, the Company was in default on these arrangements. On September 30, 1997, Computer 2000 paid certain 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 1998 and subordinated any of the remaining loan balance to the remaining financial institution. The loan balance to the remaining financial institution as of September 30, 1997 was approximately $3.1 million. On July 20, 1998, Computer 2000 contributed the non-interest bearing demand loan to the capital of the Company and also contributed $3 million, which was used to repay the then outstanding loan to this financial institution (see Note 2). 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. The tax effect of significant temporary differences consist of the following (in thousands):
YEAR ENDED SEPTEMBER 30, ---------------------------- 1999 1998 1997 ------- ------- -------- Inventory reserves............................... $ 68 $ 282 $ 498 Allowance for doubtful accounts.................. 106 209 868 Other, including restructuring charge............ 148 677 8,964 Net operating loss carryforwards................. 5,920 4,556 46,163 Valuation allowance.............................. (6,242) (5,724) (56,493) ------- ------- -------- $ -- $ -- $ -- ======= ======= ========
Due to the acquisition by the Company's management of the Company's stock held by Computer 2000 on July 20, 1998 (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. As of the date of ownership change (July 20, 1998), the Company had net operating loss carryforwards available to offset future taxable income of up to approximately $11.9 million. Such carryforwards may be subject to further limitation. Subsequent to July 20, 1998, the Company has generated additional net operating loss carryforwards of F-12 35 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) approximately $1.5 million and $4.0 million in fiscal 1998 and 1999, respectively. The Company has not benefited from these net operating carryforwards as of September 30, 1999. The principal elements accounting for the difference between income taxes computed at the statutory rate and the effective rate are as follows (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------- 1999 1998 1997 ----- ---- -------- Tax expense (benefit) computed at statutory rate......... (764) 300 $(15,492) Intangible write-offs, amortization and other nondeductible amounts.................................... 6 46 7,992 Net operating losses not benefited....................... 758 -- 7,500 Benefit of net operating losses previously reserved...... -- (346) -- ----- ---- -------- $ -- $ -- $ -- ===== ==== ========
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 2000 of $192,326) for all non-cancelable operating leases at September 30, 1999 are as follows (in thousands):
YEAR ENDED SEPTEMBER 30, - ------------------------ 2000........................................................ 483,366 2001........................................................ 239,938 2002........................................................ 233,670 2003........................................................ 200,050 2004........................................................ -- ---------- $1,157,024 ==========
Total rental expense net of sub-rental income under non-cancelable agreements for the years ending September 30, 1999, September 30, 1998, and September 30, 1997 was approximately $355,000, $589,000, and $4,298,000, respectively. 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 arising in the ordinary course of business. 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. 11. STOCK OPTION PLANS: The Company has instituted various stock option plans, which authorize the granting of options to key employees, directors, officers, vendors and clients 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-13 36 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 September 30, 1995................ 154,020 2,422,574 $0.05 - 4.50 Options exchanged in an 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............................. 437,363 (437,363) 0.45 - 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 Increase in shares available for grant........ 4,700,000 -- -- Options no longer available for grant......... (128,141) -- -- Options cancelled............................. 318,141 (318,141) 0.08 - 0.45 Options granted............................... (150,000) 150,000 0.06 - 0.11 ---------- ---------- ------------ Balances at September 30, 1999................ 4,830,000 1,870,000 $0.06 - 0.11 ========== ========== ============
The following table summarizes information about stock options outstanding at September 30, 1999:
NUMBER OF OPTIONS OUTSTANDING AS OF WEIGHTED RANGE OF SEPTEMBER 30, REMAINING AVERAGE OPTIONS EXERCISE PRICE 1999 CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE -------------- ----------------- ---------------- -------------- ----------- $ 0.08 1,720,000 107 months $0.08 688,000 0.06 50,000 113 months 0.06 10,000 0.11 100,000 119 months 0.11 -- ------------ --------- ----- ------- $0.06 - 0.11 1,870,000 $0.08 698,000 ============ ========= ===== =======
The Company accounts for its option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company follows the disclosure requirements of Financial Accounting Standards Board 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 stock option F-14 37 AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) plans consistent with the provisions of SFAS 123, the following pro forma net loss to common stockholders for each of the three years in the period ended September 30, 1999 would have resulted:
YEAR ENDED SEPTEMBER 30, --------------------- 1999 1998 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss to common stockholders: As reported............................................... $1,909 $ 828 ====== ====== As calculated in accordance with SFAS 123................. $1,923 $ 829 ====== ====== Net income/(loss) per Common Share: As reported............................................... $(0.03) $(0.01) ====== ====== As calculated............................................. $(0.03) $(0.01) ====== ====== Shares used in calculating net income per diluted common share..................................................... 67,329 66,882 ====== ======
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with risk-free interest rates of 4.96% to 5.99%, no expected dividend yield, an expected life of five years and a volatility factor of 50%. As of September 30, 1999, the weighted average fair value of the options outstanding is $0.04 per option. No options were granted in fiscal year 1997. Accordingly, no compensation cost had been recorded or proforma disclosures are required under the provisions of SFAS 123. 12. 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, 1999 Sales to unaffiliated clients......... $ 56,865 -- $ 56,865 Loss (income) from operations......... (1,909) -- -- (1,909) Identifiable assets................... 14,168 -- -- 14,168 Year Ended September 30, 1998 Sales to unaffiliated clients......... $ 60,466 -- -- $ 60,466 Loss (income) from operations......... (747) -- -- (747) Identifiable assets................... 12,955 -- -- 12,955 Year Ended September 30, 1997 Sales to unaffiliated clients......... $194,342 $24,535 -- $218,877 Loss (income) from operations......... 37,887 (31) -- 37,856 Identifiable assets................... 19,799 6,280 -- 26,079
United States sales include export sales of $5.3 million, made principally to Europe, Latin America, the Far East and Canada during the fiscal year ended September 30, 1997. See Footnote 4 for disposition of the Far East operations. F-15 38 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, 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 October 1, 1998 to September 30, 1999................................ 609 -- 137 208(2)-- 264 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 3 to Notes to Consolidated Financial Statements. (2) Reversed into income due to change in estimate. See Note 7 to Notes to Consolidated Financial Statements. F-16 EX-10.05 2 EMPLOYMENT AGREEMENT AGREEMENT MICHAEL MCCARTHY 1 EXHIBIT 10.05 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of February 1, 1999 (the "Effective Date") between AmeriQuest Technologies, Inc., a Delaware corporation with its principal offices located at 2465 Maryland Road, Willow Grove, PA 19090 ("Company"), and Michael D. McCarthy, a resident of Georgia ("Employee"). In consideration of the promises and the terms and conditions set forth in this Agreement, the parties agree as follows: 1. POSITION. During the term of this Agreement, Company will employ Employee, and Employee will serve Company as the Company's Vice President, Sales and Marketing and as an Officer of the Company. Employee will report directly to the Chief Executive Officer. 2. DUTIES. Employee will serve Company in such capacities and with such duties and responsibilities as the Chief Executive Officer of Company may from time to time determine. Employee will be bound by Company' operating policies, procedures, and practices from time to time in effect during Employee's employment. Employee will perform his duties under this Agreement at the offices of Company, provided, that Employee may be required to do extensive traveling in connection with the performance of his duties hereunder. Employee hereby represents and warrants that he is free to enter into and fully perform this Agreement and the agreements referred to herein without breach of any agreement or contract to which he is a party or by which he is bound. 3. EXCLUSIVE SERVICE. During his employment with Company, Employee will devote his full time and efforts exclusively to this employment and all his skill and experience to the performance of his duties and advancing of the Company's interests in accordance with Employee's experience and skills. In addition, during his employment with Company, Employee will not engage in any consulting activity except with the prior written approval of the Company or at the direction of Company, and Employee will otherwise do nothing inconsistent with the performance of his duties hereunder. 4. OBLIGATION NOT TO COMPETE. Employee hereby agrees that while he is employed by Company (the "Restricted Period"), Employee shall within the territory of the United States not engage in or provide services to any business that is competitive with or detrimental to any present or contemplated business of Company known to Employee. Employee also agrees that, during the Restricted Period, he shall not in any manner attempt to induce or assist others to attempt to induce any customer or client of Company to terminate his association with Company, nor do anything directly or indirectly to interfere with the relationship between Company and any such persons or concerns in the territory of the United States. Each of the following activities shall, without limitation, be 2 Page 2 Employment Agreement Michael D. McCarthy deemed to constitute engaging in business within the meaning of Section 3 and 4: to engage in, work with, have an interest or concern in, advise, lend money to, guarantee the debts or obligations of, or permit one's name or any party thereof to be used in connection with, an enterprise of endeavor, either individually, in partnership or in conjunction with any person or persons, firms, associations, companies or corporations, whether as a principal, agent, shareholder, employee, officer, director, partner, consultant or in any other manner whatsoever; provided, however, that Employee shall retain the right to invest in or have an interest in entities traded on any public market or offered by any national brokerage house, provided that said interest does not exceed ten percent (10%) of the voting control of said entity. In addition, Employee may make passive investments in privately held entities that are determined by the Board of Directors of Company not to be competitors of Company. Company may elect to extend the term of this non-competition clause for a maximum period of six months following the termination according to Section 8.1. (b) and 8.1. (c) provided that a monthly fee in the amount of the last applicable monthly base salary is paid to Employee. 5. TERM OF AGREEMENT. This Agreement will commence on the Effective Date, and will continue for a period of twelve (12) months and thereafter unless terminated pursuant to Section 8 thereof. 6. COMPENSATION AND BENEFITS. 6.1. BASE SALARY. Company agrees to pay Employee a base salary of $5,769 bi-weekly (or $150,000 annualized). Employee's salary will be payable as earned in accordance with Company' customary payroll practice. 6.2. PERFORMANCE BONUS. - Employee will be eligible to earn a bonus of up to $150,000 (the "Performance Bonus") annually during his employment with Company. The performance criteria and terms and conditions relative to the Performance Bonus shall be in accordance with the attached "Incentive Plan" (Attachment 1). 6.3. ADDITIONAL BENEFITS. Employee will be eligible to participate in Company's employee benefit plans of general application, including without limitation those plans covering profit sharing, executive bonuses, stock options, and those plans covering life, health, an dental insurance in accordance with the rules established for individual participation in any such plan and applicable law. Employee shall receive such other benefits, including vacation, holidays, and sick leave, as Company generally provides to its employee holding similar positions as that of Employee. 6.4. VACATION. Four (4) weeks. 6.5. EXPENSES. Company will reimburse Employee for all reasonable and necessary expenses incurred by Employee in connection with Company's business, provided that such expenses are deductible to Company, are in 3 Page 3 Employment Agreement Michael D. McCarthy accordance with Company's applicable policy and are properly documented and accounted for in accordance with the requirements of the Internal Revenue Service. 7. PROPRIETARY RIGHTS. Employee hereby agrees to execute an Employee Confidentiality Agreement with Company in substantially the form attached hereto as Attachment 2. 8. TERMINATION. 8.1 EVENTS OF TERMINATION. Employee's employment with the Company shall terminate upon any one of the following: a) the Company's determination made in good faith that it is terminating Employee for "cause" as defined under Section 8.2 below ("Termination for Cause"); b) six months after the effective date of a written notice sent to Employee stating that Company is terminating his employment, without cause, which notice can be given by Company at any time after the Effective Date at Company's sole discretion, for any reason or for no reason; or c) six months after the effective date of a written notice sent to Company from Employee stating that Employee is electing to terminate his employment with Company. d) If a change of control occurs and the employee's responsibilities are reduced within the following twelve (12) months thereafter. This termination on the part of the employee must be effected within six (6) months of the significant reduction in responsibilities. A "change in control" is deemed to have taken place when any of the following events occurs: (1) shareholder approval of a merger or consolidation of the Company with any other corporation resulting in a change in fifty percent (50%) or more of the total voting power of the Company; (2) shareholder approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition of all or substantially all of the Company assets; or (3) any person becomes the beneficial owner of more than fifty percent (50%) of the Company's total outstanding securities); and such reduction in responsibilities is not for cause. Any resignation of employment by Michael D. McCarthy as a consequence of such reduction in responsibilities will be treated as a termination of employment without cause. 8.2 "CAUSE" DEFINED. For purposes of this Agreement, "cause" for Employee's termination will exist any time after the happening of one or more of the following events; 4 Page 4 Employment Agreement Michael D. McCarthy a) a failure or refusal to comply in any material respect with the reasonable policies, standards or regulations of the Company; b) a failure or a refusal in any material respect, faithfully or diligently, to perform his duties determined by the Company in accordance with this Agreement or the customary duties of Employee's employment; c) unprofessional, unethical or fraudulent conduct or conduct that materially discredits the Company or is materially detrimental to the reputation, character or standing of the Company; d) dishonest conduct or a deliberate attempt to do an injury to the Company; e) Employee's material breach of a term of this Agreement; f) an unlawful or criminal act which would reflect badly on the Company in the Company's reasonable judgment; or g) employee's death. 9. EFFECT OF TERMINATION. 9.1 TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION. In the event of any termination of this Agreement pursuant to Sections 8.1(a) or 8.1( c), the Company shall pay Employee the compensation and benefits otherwise payable to Employee under Section 6 through the effective date of termination. Employee's rights under the Company's benefit plans of general application shall be determined under the provisions of those plans. 9.2 TERMINATION WITHOUT CAUSE. In the event of any termination of this Agreement pursuant to Section 8.1(b), the Company shall pay Employee the compensation and benefits according to Section 6 through the last day of the six (6) months period following the effective date that the notice referred to in Section 8.1(b) is given. 9.3 TERMINATION WITHOUT CAUSE DUE TO CHANGE IN CONTROL. In the event of any termination of this Agreement pursuant to Section 8.1(d), the Company shall pay Employee the compensation and benefits according to Section 6 through the last day of the twelve (12) months period following the date that the notice referred to in Section 8.1(d) is given. 10. MISCELLANEOUS. 10.1 ARBITRATION. Employee and Company shall submit to mandatory binding arbitration in any controversy or claim arising out of, or relating to, this Agreement or any breach hereof, provided, however, that Company retains its right to, and shall not be prohibited, limited or in any other way restricted from, seeking or obtaining equitable relief from a court having jurisdiction over the parties. Such arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association in effect at that time, and judgment upon the determination or award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 5 Page 5 Employment Agreement Michael D. McCarthy 10.2 SEVERABILITY. If any provision of this Agreement shall be found by any arbitrator or court of competent jurisdiction to be invalid or unenforceable, then the parties hereby waive such provision to the extent that it is found to be invalid or unenforceable and to the extent that do so would not deprive one of the parties of the substantial benefit of its bargain. Such provision shall, to the extent allowable by the law and the preceding sentence be modified by such arbitrator or court so that it becomes enforceable and, as modified, shall be enforced as any other provision hereof, all the other provisions continuing in full force and effect. 10.3. REMEDIES. Company and Employee acknowledge that the service to be provided by Employee is of a special, unique, unusual, extraordinary, and intellectual character, which give it peculiar value the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, Employee hereby consents and agrees that for any breach or violation by Employee of any of the provisions of this Agreement including, without limitation, Section3, a restraining order and/or injunction may be issued against Employee, in addition to any other rights and remedies Company may have, at law equity, including without limitation the recovery of money damages. 10.4. NO WAIVER. The failure by either party at any time to require performance or compliance by the other of any of its obligations or agreements shall in no way affect the right to require such performance or compliance at any time thereafter. The waiver by either party of a breach of such provision hereof shall not be taken or held to be a waiver or any preceding or succeeding breach of such provision or as a waiver of the provision itself. No waiver of any kind shall be effective or binding, unless it is in writing and is signed by the party against whom such waiver is sought to be enforced. 10.5. ASSIGNMENT. This Agreement and all rights hereunder are personal to Employee and may not be transferred or assigned by Employee at any time. Company may assign its rights, together with its obligations thereunder, to any parent, subsidiary affiliate or successor or in connection with any sale, transfer or other disposition of all or substantially all of its business and assets, provided, however, that any such assignee assumes Company's obligations hereunder. 10.6 WITHHOLDING. All sums payable to Employee thereunder shall be reduced by all federal, state, local, and other withholding and similar taxes and payments required by applicable law. 10.7 ENTIRE AGREEMENT. This Agreement and the Employee Confidentiality Agreement constitute the entire and only agreements between the parties relating to employment of Employee with Company, and this Agreement 6 Page 6 Employment Agreement Michael D. McCarthy supersedes and cancels any and all previous contracts, arrangements or understandings with respect thereto. 10.8 AMENDMENT. This Agreement may be amended, modified, superseded, cancelled, renewed or extended only by an agreement in writing executed by both parties hereto. 10.9 NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing and hand-delivered, sent by Fax, sent by certified first-class mail, postage pre-paid, or sent by nationally recognized express courier service. Such notices and other communications shall be effective upon receipt if hand-delivered or sent by Fax, five (5) days after mailing if sent by mail, and one (1) day after dispatch if sent by express courier, to the following address, or such other addresses as any party shall notify the other parties: If to the Company: AmeriQuest Technologies, Inc. 2465 Maryland Road Willow Grove, PA 19090 Fax Number: (215) 658-8968 Attention: Mr. Jon D. Jensen Corporate Secretary If to the Employee: Michael D. McCarthy 1084 Tennyson Place Atlanta, GA 30319 Fax Number: (404) 250-9905 10.10 BINDING NATURE. This Agreement shall be binding upon, and inure to the benefit of the successors and personal representatives of the respective parties hereto. 10.11 HEADINGS. The headings contained in this Agreement are for reference purposes only and shall in no way affect the meaning or interpretation of this Agreement. In this Agreement, the singular includes the plural, the plural includes the singular, the masculine gender includes both male and female referents, and the word "or" is used in the inclusive sense. 10.12 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which, taken together, constitute one and the same agreement. 7 Page 7 Employment Agreement Michael D. McCarthy 10.13 GOVERNING LAW. This Agreement and rights and obligations of the parties hereto shall be construed in accordance with the laws of the State of Pennsylvania, without giving effect to the principles of conflict of laws. IN WITNESS WHEREOF, Company and Employee have executed this Agreement as of the date first above written. "COMPANY" "EMPLOYEE" AMERIQUEST TECHNOLOGIES, INC. Signature: Signature ----------------------------- -------------------------- Name: Jon D. Jensen Name: Michael D. McCarthy Title: COO, CFO and Secretary Title: V. P., Sales and Marketing Signature: ----------------------------- Name: Alexander C. Kramer Title: President and CEO 8 Page 8 Employment Agreement Michael D. McCarthy "INCENTIVE PLAN" (ATTACHMENT 1) 1) The Employee shall be entitled to a payment under the Incentive Plan for the financial year commencing 1st October, 1998 ("the incentive scheme") calculated in accordance with and subject to the conditions set out below ("the incentive payments"). The incentive payments shall comprise the variable compensation parts determined in accordance with paragraph 4. Subject to paragraph 3 below, the achievements shall form the basis of the calculation of the variable compensation parts. All references in this incentive scheme are to gross figures. The Compensation Committee of the Board of Directors of AmeriQuest Technologies ("the Committee") reserves the right in its absolute discretion to change the base salary and variable compensation parts for future years and/or to terminate the incentive scheme at the end of the fiscal year commencing October 1, 1998. 2) The following incentive scheme applies for the fiscal year ended September 30, 1999: a) The TARGET COMPENSATION (100% compensation) amounts to US$300,000. b) 50% of the target compensation (US$150,000) is fixed as the BASE SALARY which is payable bi-weekly. c) The MAXIMUM COMPENSATION amounts to 100% of the target compensation. d) The variable compensation parts are: i) Target Incentive: up to 50% of the target compensation, depending on the achievement of the targets in paragraph 3b. 3) Basis for calculation: The targets for the 1999 fiscal year and the weights of the individual targets are quantified below. The target achievement will be calculated for each individual target. The total target achievement will be calculated, depending on the given weights. a) The TARGETS for the 1999 fiscal year are: i) REVENUE target for the year ended September 30, 1999 = US$80,000,000. (1) SIX MONTH CUMULATIVE target for the quarter ended March 31=$37,600,000. (2) NINE MONTH CUMULATIVE target for the quarter ended June 30 = $58,200,000. ii) GROSS PROFIT target for the year ended September 30, 1999 = US$7,200,000. (1) SIX MONTH CUMULATIVE target for the quarter ended March 31=$3,300,000. (2) NINE MONTH CUMULATIVE target for the quarter ended June 30 = $5,100,000. b) The WEIGHTING of each target in 3a above is 50% equally. 9 Page 9 Employment Agreement Michael D. McCarthy c) The audited financial statements of the Company will form the basis of the actual target achievement ("the calculation"). The Committee may, in its absolute discretion, exclude extraordinary events from the calculation. 4) The variable compensation parts will be determined by comparing the actual cumulative quarterly target achievement referred to at paragraph 3d above with the cumulative quarterly targets shown in paragraph 3a. Any incentive payments for the fiscal year 1999 shall comprise the following parts and each shall be determined as follows: a) If the total target achievement is less than 65%, no incentive payment will be made, except that, a minimum payment of $25,000 is guaranteed and payable for the quarter ended March 31, 1999 in accordance with paragraph 6. b) If the total target achievement is more than 65% but less than 90%, the incentive payment will be US$5,000 for each percentage point above 65%, but not less than the minimum guaranteed payment of $25,000 in 4a above (equal to 70% achievement). c) If the total target achievement is between 90% and 100%, the incentive payment will be $125,00 plus US$2,500 for each percentage point above 90%. 5) In the event that the Employee shall be employed by the Company for only part of the remainder of the fiscal year, the Employee shall be entitled to have the incentive payments referred to at paragraph 4 above calculated on a pro rata basis by reference to that part of the fiscal year during which he/she was employed by the Company. 6) The variable compensation part will be calculated quarterly by the Chief Financial Officer and approved by the Committee. a) For 1999 only, one third of the above paragraph 4 determined incentive payment or $25,000, whichever is greater, will be made for the quarter ended March 31. Two thirds of the above paragraph 4 determined incentive payment less the previous quarterly payment, will be made for the quarter ended June 30. All of the above paragraph 4 determined incentive less the previous quarterly payments, will be made for the year ended September 30. b) In future fiscal years, 25%, 50%, 75% and 100% of the above paragraph 4 determined incentive less the previous quarterly payments, will be made for the respective quarters. c) They becomes payable to the Employee on the first bi-weekly pay period following approval by the Committee. 7) In the event there is disagreement as to the calculation of the variable compensation parts, the parties will try to come to an amicable solution. Should such an amicable solution not be possible, the decision of the outside auditor of the Company will be final and binding. EX-10.09 3 1998 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.09 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 AMERIQUEST TECHNOLOGIES, INC. 1998 EQUITY COMPENSATION PLAN The purpose of the AmeriQuest Technologies, Inc. 1998 Equity Compensation Plan (the "Plan") is to provide (i) designated employees of AmeriQuest Technologies, Inc. (the "Company") and its subsidiaries, (ii) certain consultants and advisors who perform services for the Company or its subsidiaries and (iii) non-employee members of the Board of Directors of the Company (the "Board") with the opportunity to receive grants of incentive stock options, nonqualified stock options and stock of the Company. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefitting the Company's shareholders, and will align the economic interests of the participants with those of the shareholders. 1. Administration (a) Committee. The Plan shall be administered and interpreted by a committee appointed by the Board (the "Committee"), which may consist of "outside directors" as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and related Treasury regulations and "non-employee directors" as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) Committee Authority. The Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability and (iv) deal with any other matters arising under the Plan. (c) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2. Grants Awards under the Plan may consist of grants of incentive stock options ("Incentive Stock Options") and nonqualified stock options ("Nonqualified Stock Options") as described in Section 5 (Incentive Stock Options and Nonqualified Stock Options are collectively referred to as "Options") and stock grants as described in Section 6 ("Stock Grants") (Options and Stock Grants are hereinafter collectively referred to as "Grants"). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument or an amendment to the grant instrument (the "Grant Instrument"). The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees. 3. Shares Subject to the Plan (a) Shares Authorized. Subject to adjustment as described below, the aggregate number of shares of common stock of the Company ("Company Stock") that may be issued or transferred under the Plan is 4,700,000 shares. After a Public Offering, the maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any individual during any calendar year shall be 800,000 shares, subject 2 to adjustment as described below. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised or if any shares subject to a Stock Grant are forfeited, the shares subject to such Grants shall again be available for purposes of the Plan. (b) Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spinoff or the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the price per share of such Grants may be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. Any adjustments determined by the Committee shall be final, binding and conclusive. 4. Eligibility for Participation (a) Eligible Persons. All employees of the Company and its subsidiaries ("Employees"), including Employees who are officers or members of the Board, and members of the Board who are not Employees ("Non-Employee Directors") shall be eligible to participate in the Plan. Consultants and advisors who perform services for the Company or any of its subsidiaries ("Key Advisors") shall be eligible to participate in the Plan if the Key Advisors render bona fide services and such services are not in connection with the offer or sale of securities in a capital-raising transaction. (b) Selection of Grantees. The Committee shall select the Employees, Non-Employee Directors and Key Advisors to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant in such manner as the Committee determines. Employees, Key Advisors and Non-Employee Directors who receive Grants under this Plan shall hereinafter be referred to as "Grantees". 5. Granting of Options (a) Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees, Non-Employee Directors and Key Advisors. (b) Type of Option and Price. (i) The Committee may grant Incentive Stock Options that are intended to qualify as "incentive stock options" within the meaning of section 422 of the Code or Nonqualified Stock Options that are not intended so to qualify or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. Incentive Stock Options may be granted only to Employees. Nonqualified Stock Options may be granted to Employees, Non-Employee Directors and Key Advisors. (ii) The purchase price (the "Exercise Price") of Company Stock subject to an Option shall be determined by the Committee and may be equal to, greater than, or less than the Fair Market Value (as defined below) of a share of Company Stock on the date the Option is granted; provided, however, that (x) the Exercise Price of an Incentive Stock Option shall be equal to, or greater than, the Fair Market Value of a share of Company Stock on the date the Incentive Stock Option is granted and (y) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns stock possessing more than 10% of the total combined 3 voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant. (iii) If the Company Stock is publicly traded, then the Fair Market Value per share shall be determined as follows: (x) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported, or (y) if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not publicly traded or, if publicly traded, is not subject to reported transactions or "bid" or "asked" quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee. (c) Option Term. The Committee shall determine the term of each Option. The term of any Option shall not exceed ten years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant. (d) Exercisability of Options. Options shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding Options at any time for any reason. (e) Termination of Employment, Disability or Death. (i) Except as provided below, an Option may only be exercised while the Grantee is employed by, or providing service to, the Company as an Employee, Key Advisor or member of the Board. In the event that a Grantee ceases to be employed by, or provide service to, the Company for any reason other than a "disability", death, or termination for "cause", any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (ii) In the event the Grantee ceases to be employed by, or provide service to, the Company on account of a termination for "cause" by the Company, any Option held by the Grantee shall terminate as of the date the Grantee ceases to be employed by, or provide service to, the Company. In addition, notwithstanding any other provisions of this Section 5, if the Committee determines that the Grantee has engaged in conduct that constitutes "cause" at any time while the Grantee is employed by, or providing service to, the Company or after the Grantee's termination of employment or service, any Option held by the Grantee shall immediately terminate, and the Grantee shall automatically forfeit all shares underlying any exercised portion of an Option for which the Company has not yet delivered the share certificates, upon refund by the Company of the Exercise Price paid by the Grantee for such shares. (iii) In the event the Grantee ceases to be employed by, or provide service to, the Company because the Grantee is "disabled", any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. 4 (iv) If the Grantee dies while employed by, or providing service to, the Company or within 90 days after the date on which the Grantee ceases to be employed or provide service on account of a termination specified in Section 5(e)(i) above (or within such other period of time as may be specified by the Committee), any Option that is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (v) For purposes of this Section 5(e) and Section 6: (A) The term "Company" shall mean the Company and its parent and subsidiary corporations. (B) "Employed by, or provide service to, the Company" shall mean employment or service as an Employee, Key Advisor or member of the Board (so that, for purposes of exercising Options and satisfying conditions with respect to Stock Grants, a Grantee shall not be considered to have terminated employment or service until the Grantee ceases to be an Employee, Key Advisor and member of the Board), unless the Committee determines otherwise. (C) "Disability" shall mean a Grantee's becoming disabled within the meaning of section 22(e)(3) of the Code. (D) "Cause" shall mean, except to the extent specified otherwise by the Committee, a finding by the Committee that the Grantee (i) has breached his or her employment or service contract with the Company, (ii) has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment or service, (iii) has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information, or (iv) has engaged in such other conduct detrimental to the interests of the Company as the Committee considers to be "cause." (f) Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option as specified by the Committee (x) in cash, (y) with the approval of the Committee, by delivering shares of Company Stock owned by the Grantee (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price or (z) by such other method as the Committee may approve, including payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section 7) at the time of exercise. (g) Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the Option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of section 424(f) of the Code). 6. Stock Grants The Committee may issue or transfer shares of Company Stock to an Employee, Non-Employee Director or Key Advisor under a Stock Grant of restricted or unrestricted stock, upon such terms as the Committee deems appropriate. The following provisions are applicable to Stock Grants: 5 (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Stock Grants may be issued or transferred for consideration or for no consideration, such as pursuant to a bonus program, as determined by the Committee. The Committee may establish conditions under which restrictions on shares of Company Stock shall lapse over a period of time or according to such performance or other criteria as the Committee deems appropriate. The period of time during which the Company Stock will remain subject to restrictions will be designated in the Grant Instrument as the "Restriction Period." (b) Number of Shares. The Committee shall determine the number of shares of Company Stock to be issued or transferred pursuant to a Stock Grant and any restrictions applicable to such shares. (c) Requirement of Employment or Service. If the Grantee ceases to be employed by, or provide service to, the Company (as defined in Section 5(e)) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Stock Grant shall terminate as to all shares covered by the Grant as to which the restrictions have not lapsed, and those shares of Company Stock must be immediately returned to the Company. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. (d) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of restricted stock covered by the Stock Grant except to a Successor Grantee under Section 8(a). Each certificate for a share of restricted Company Stock shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to have the legend removed from the stock certificate covering the shares subject to restrictions when all restrictions on such shares have lapsed. The Committee may determine that the Company will not issue certificates for shares of restricted Company Stock until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for such shares until all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Dividends. Unless the Committee determines otherwise, during the Restriction Period, the Grantee shall have the right to vote shares of restricted Company Stock and to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed on restricted Company Stock shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions imposed by the Committee. The Committee may determine, as to any or all restricted Stock Grants, that the restrictions shall lapse without regard to any Restriction Period. 7. Withholding of Taxes (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company may require that the Grantee or other person receiving or exercising Grants pay to the Company the amount of any federal, state or local taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants. (b) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company's income tax withholding obligation with respect to a Grant by having shares withheld up to an amount that does not exceed the Grantee's minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee. 8. Transferability of Grants (a) Nontransferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee's lifetime. A Grantee may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Grants other than Incentive Stock Options, if permitted in any 6 specific case by the Committee, pursuant to a domestic relations order (as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder). When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members, one or more trusts for the benefit of family members, or one or more partnerships of which family members are the only partners, according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer. 9. Change of Control of the Company As used herein, a "Change of Control" shall be deemed to have occurred if: (a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the voting power of the then outstanding securities of the Company (other than pursuant to a merger or consolidation of the Company where the shareholders of the Company, immediately prior to the merger or consolidation, will beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the surviving corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote); (b) The shareholders of the Company approve (or, if shareholder approval is not required, the Committee approves) an agreement providing for (i) the merger or consolidation of the Company with another corporation where the shareholders of the Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the surviving corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote), (ii) the sale or other disposition of all or substantially all of the assets of the Company, or (iii) a liquidation or dissolution of the Company; (c) Any person has commenced a tender offer or exchange offer for 30% or more of the voting power of the then outstanding shares of the Company; or (d) After the date this Plan is approved by the shareholders of the Company, directors are elected such that a majority of the members of the Board shall have been members of the Board for less than two years, unless the election or nomination for election of each new director who was not a director at the beginning of such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 10. Consequences of a Change of Control (a) Notice and Acceleration. Upon a Change of Control, unless the Committee determines otherwise, (i) the Company shall provide each Grantee with outstanding Grants written notice of such Change of Control, (ii) all outstanding Options shall automatically accelerate and become fully exercisable and (iii) the restrictions and conditions on all outstanding Stock Grants shall immediately lapse. (b) Assumption of Grants. Upon a Change of Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Committee determines otherwise, all outstanding Options that are not exercised shall be assumed by, or replaced with comparable options by, the surviving corporation. 7 (c) Other Alternatives. Notwithstanding the foregoing, subject to subsection (d) below, in the event of a Change of Control, the Committee may take one or both of the following actions: the Committee may (i) require that Grantees surrender their outstanding Options in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's unexercised Options exceeds the Exercise Price of the Options, or (ii) after giving Grantees an opportunity to exercise their outstanding Options, terminate any or all unexercised Options at such time as the Committee deems appropriate. Such surrender or termination shall take place as of the date of the Change of Control or such other date as the Committee may specify. (d) Limitations. Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control, the Committee shall not have the right to take any actions described in the Plan (including without limitation actions described in Subsection (c) above) that would make the Change of Control ineligible for pooling of interests accounting treatment or that would make the Change of Control ineligible for desired tax treatment if, in the absence of such right, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 11. Requirements for Issuance or Transfer of Shares. No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. 12. Amendment and Termination of the Plan (a) Amendment. The Committee may amend or terminate the Plan at any time; provided, however, that the Committee shall not amend the Plan without shareholder approval if such approval is required in order for Incentive Stock Options granted or to be granted under the Plan to meet the requirements of section 422 of the Code or such approval is required in order to exempt compensation under the Plan from the deduction limit under section 162(m) of the Code. (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by the Committee or is extended by the Committee with the approval of the shareholders. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents or unless the Committee acts under Section 18(b). The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended under Section 18(b) or may be amended by agreement of the Company and the Grantee consistent with the Plan. (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. (e) Funding of the Plan This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. 8 14. Rights of Participants Nothing in this Plan shall entitle any Employee, Key Advisor, Non-Employee Director or other person to any claim or right to be granted a Grant under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights. 15. No Fractional Shares No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 16. Headings Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control. 17. Effective Date of the Plan. Subject to approval by the Company's shareholders, the Plan shall be effective on January 28, 1999. 18. Miscellaneous (a) Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or restricted stock grant made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute grants. (b) Compliance with Law. The Plan, the exercise of Options and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. In addition, it is the intent of the Company that the Plan and applicable Grants under the Plan comply with the applicable provisions of section 162(m) of the Code and section 422 of the Code. To the extent that any legal requirement of section 16 of the Exchange Act or section 162(m) or 422 of the Code as set forth in the Plan ceases to be required under section 16 of the Exchange Act or section 162(m) or 422 of the Code, that Plan provision shall cease to apply. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section. (c) Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall be governed and construed by and determined in accordance with the laws of the State of Delaware, without giving effect to the conflict of laws provisions thereof. EX-21.01 4 SUBSIDIARIES OF AMERIQUEST 1 EXHIBIT 21.01 ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 SUBSIDIARIES OF AMERIQUEST TECHNOLOGIES, INC.
NAME FEIN DOMICILE STATE - ---- ---- -------------- Ameriquest/Kenfil, Inc. 95-3973756 Delaware AAG, Inc. 95-3873075 California CG Commercial Funding Corp. 33-0855753 California
EX-27.01 5 FINANCIAL DATA SCHEDULE
5 THIS 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-30-1999 SEP-30-1998 667 0 8,323 0 3,565 12,874 961 0 14,168 6,999 0 0 0 679 174,433 14,168 56,865 56,865 51,990 6,693 0 0 91 (1,909) 0 (1,909) 0 0 0 (1,909) (0.03) (0.03)
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