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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 5)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1994
[ ] 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.
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(Exact name of Registrant as specified in its charter)
Delaware 33-0244136
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2722 Michelson Dr. Irvine, California 92715
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 222-6000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value New York Stock Exchange
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 .
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 22, 1994 is approximately $47,950,480. For purposes
of making this calculation only, the Registrant has defined "affiliates" as
including all officers, directors and beneficial owners of more than 10% of the
outstanding Common Stock of the Registrant.
The number of shares outstanding of the Registrant's Preferred and Common Stock
as of September 22, 1994: Common Stock, $.01 par value, 17,181,453 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Exhibit Index is on page 034. Page 001 of 75 pages.
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PART I
ITEM 1. BUSINESS.
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THE COMPANY
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AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest"),
maintains its principal executive offices at 2722 Michelson Drive, Irvine,
California, and its telephone number is (714) 222-6000. AmeriQuest conducts its
business through its subsidiaries.
CDS Distribution, Inc., a Delaware corporation ("CDS Distribution") and
Robec, Inc., a Pennsylvania corporation ("Robec") market and sell, as
distributors, hardware products for the personal computer market.
AmeriQuest/Kenfil Inc. ("Kenfil"), markets and sells, as a distributor, software
products for the personal computer market.
CMS Enhancements, Inc., a California corporation ("CMS Enhancements") is a
supplier of hard disk drive subsystems for IBM compatible and other leading
personal and business computers, including Apple, Compaq and others. Hard disk
drives allow personal computers, which otherwise often lack sufficient data
storage capacity, to perform many widely used, sophisticated business
applications. CMS Enhancements also offers disk array, magneto optical, CD-ROM,
floppy disk drives and magnetic tape back-up subsystems having a variety of data
storage capacities as well as personal computers, networking, graphics,
communications and connectivity and accessory products.
AmeriQuest currently markets more than 2,000 products to original equipment
manufacturers, value-added resellers and dealers throughout the United States
and in many foreign countries, including national and regional distributors and
large reseller computer chains such as ComputerLand, Intelligent Electronics and
InaCom.
RECENT DEVELOPMENTS
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On December 3, 1993, the Board of Directors resolved that AmeriQuest should
renew its efforts to pursue a direction of becoming a major distributor of
computers and related products in the United States. In pursuing this direction,
the Board of Directors realigned the management of AmeriQuest. On February 11,
1994 Mr. Jim Farooquee resigned as a Director and officer of AmeriQuest, and on
February 23, 1994 Mr. James D'Jen resigned as a Director.
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AmeriQuest acquired 51.9% ownership of Kenfil on June 6, 1994 pursuant to
the provisions of an Agreement and Plan of Reorganization dated March 31, 1994.
On September 12, 1994, the shareholders of Kenfil and AmeriQuest approved
the proposed merger of "AmeriQuest/Kenfil Inc.," a wholly-owned subsidiary of
AmeriQuest, with and into Kenfil (the "Merger"). The Merger became effective
shortly thereafter, and AmeriQuest is now the sole shareholder of
AmeriQuest/Kenfil Inc.
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Kenfil is a distributor of microcomputer software. Its key vendors include
Corel, Broderbund, Symantec, Quarterdeck Office Systems and IBM.
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On June 30, 1994, AmeriQuest effected a placement of 833,333 shares of its
Common Stock and 416,667 Warrants, as "Units", each comprised of two shares of
AmeriQuest Common Stock and one Warrant, to foreign nationals, at $4.80 per Unit
for total net proceeds of $2,000,000. The Warrants are exercisable at any time
and from time-to-time until June 30, 1996 at an exercise price of $5.00 per
share; and can only be exercised by persons who are foreign nationals.
-----------------------------
On August 31, 1994, AmeriQuest effected a placement of 532,000 shares of
its Common Stock to a person who is a foreign national at $2.50 per share for a
total of $1,330,000.
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AmeriQuest acquired 50.1 percent of the issued and outstanding shares of
Robec on September 22, 1994 upon the issuance of 1,402,805 shares of its Common
Stock in exchange for Common Stock held by certain principal shareholders of
Robec in a first-stage exchange pursuant to AmeriQuest's two phase acquisition
of Robec.
Subject to approval by Robec's shareholders, the remaining shares of Robec
Common Stock will be exchanged in a merger transaction (the "Merger") at the
same conversion ratio of 0.63075 shares of AmeriQuest for each share of Robec
Common Stock. The Merger is expected to be completed in December, 1994.
Robec is a national value-added distributor of microcomputer systems,
peripherals and accessories. Its key vendors include Acer, IBM, MultiTech,
Okidata, Unisys and Wyse.
-----------------------------
On September 25, 1994, AmeriQuest entered into a definitive Agreement and
Plan of Reorganization pursuant to which it will acquire 100% of the issued and
outstanding capital stock of Ross White Enterprises, Inc., a Florida corporation
d/b/a "National Computer Distributors" ("NCD"). NCD markets and sells, as a
distributor, hardware products for the personal computer market. AmeriQuest
will issue 1,864,767 shares of its Common Stock and pay approximately $3,473,120
cash in this transaction.
NCD is a national value-added distributor of microcomputer systems,
peripherals and accessories. Its key vendors include AST, CTX, Samsung, Leading
Edge, Western Digital, Panasonic, and Goldstar.
-----------------------------
AmeriQuest has also contracted with Mr. James D'Jen, a former director and
officer of AmeriQuest, to exchange all of the issued and outstanding shares of
CMS Enhancements (S) PTE
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Ltd., a Singapore corporation wholly-owned by AmeriQuest in exchange for 350,000
shares of AmeriQuest Common Stock. On July 8, 1994 Mr. D'Jen delivered 345,091
shares. Upon the receipt of the balance due, AmeriQuest will be divested of this
Singapore subsidiary. Sales for the Singapore subsidiary approximate $20 million
annually, with an approximate break-even on operations.
CDS DISTRIBUTION
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CDS Distribution is a national valued-added wholesale distributor of
microcomputers and related products to value-added resellers ("VARs"), dealers
and computer retailers, representing the aggregation of businesses of acquired
companies, i.e. Vitronix, Inc., Rhino Sales Company and Management Systems Group
("MSG"), all of which were acquired in December, 1993. CDS Distribution
markets, sells and supports a variety of products ranging from individual
components, which are typically sold in volume, to complete systems that have
been fully configured, assembled and tested prior to delivery to its customers.
CDS Distribution's historic strategy has been to emphasize the sale of these
complete systems and to provide a high level of value-added services, including
consultation on component selection and system configuration and provision of
system assembly and testing and technical support services. As a result of
competitive pressures, reduced profit margins and the way in which other,
similar distributors have changed their businesses, CDS Distribution is now
placing more emphasis on telemarketing as its primary sales method. CDS
Distribution also provides a variety of training programs and educational
seminars designed to enhance its customers' technical capabilities.
CDS Distribution's vendors include leading manufacturers such as IBM, AST,
NEC, Apple, Acer, Altos, SunSoft, Telebit, Novell and Multi-tech Systems. CDS
Distribution 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 CDS Distribution to develop product-specific
technical expertise that enhances its value-added support services. CDS
Distribution attempts to minimize competition among vendors' products while
maintaining some overlap to provide protection against product shortages or
discontinuations.
Price discounting by its competitors has forced CDS Distribution to reduce
its prices, resulting in deteriorating gross margins for commodity products.
The effects of such price discounting on the Company are reflected in the
periodic net sales and gross margins as reflected elsewhere herein. CDS
Distribution is pursuing a broad restructuring program which includes, among
other items cost reductions, the closing of certain offices and warehouse
locations, downsizing of the employee base, consolidation of inventory and a
change in emphasis among the methods by which sales are obtained.
PRODUCTS
CDS Distribution seeks to maintain products from nationally-recognized
vendors that provide all the components most VARs require to fully configure
their computer systems. All new products are extensively tested prior to
inclusion in CDS Distribution's distribution network.
The following is a description of the major categories of products
currently sold by CDS Distribution and the principal current vendors of those
products.
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Microcomputers--CDS Distribution distributes desktop and portable personal
computers and multiuser microcomputers manufactured by Acer, Altos, IBM, AST,
Apple, NEC and Leading Edge.
Printers--CDS Distribution distributes a broad line of dot matrix, laser
and ink-jet printers manufactured by Lexmark, Pennant, Canon, NEC and Genicom.
Monitors and Terminals--CDS Distribution distributes monitors and terminals
manufactured by CTX, Goldstar, Relisys and NEC.
Local Area Networks--A local area network ("LAN") permits microcomputers to
communicate with one another and to function on an integrated basis. CDS
Distribution distributes LAN software and specialized hardware products
manufactured by C Net, GVC, Novell and Oilcom.
Accessories and Supplies--CDS Distribution distributes hard and floppy disk
drives, board products, diskettes, stand-by power supplies, modems and other
communications products, accessories and supplies manufactured by numerous
companies including Boca Research, GVC, IBM, Turnhead, CMS and Epson.
Software--CDS Distribution sells a variety of operating system and LAN
software products generally as part of its systems sales. CDS Distribution has
also commenced the sale of certain applications software. Among the
manufacturers of these software products are IBM and SunSoft.
VENDOR RELATIONS
To maintain a strong relationship with its principal vendors, CDS
Distribution focuses on marketing the products of a limited number of key
vendors. CDS Distribution selects its product line to minimize competition among
vendors' products while maintaining some overlap to provide protection against
product shortages or discontinuations. In addition, CDS Distribution enhances
its relationship with its vendors by providing feedback on products, assisting
in new product development, working with vendors to develop marketing programs
and offering vendors the opportunity to provide seminars to CDS Distribution's
customers at CDS Distribution facilities.
CDS Distribution, like most hardware distributors, sells products
throughout the United States for vendors on a non-exclusive basis without
geographic restrictions. CDS Distribution has distribution agreements with most
of its vendors and believes they are in the form customarily used by each vendor
and generally contain provisions which allow termination by either party upon as
little as 30 days' notice. Most of CDS Distribution's major distribution
agreements provide price protection by giving CDS Distribution a credit, subject
to specified limitations, in the amount of any price reductions by the vendor
between the time of the initial sale to CDS Distribution and the subsequent sale
by CDS Distribution to its customer. Most of the major distribution agreements
also give CDS Distribution qualified return privileges on slow-moving inventory.
CDS Distribution's distribution agreements do not restrict CDS Distribution from
selling similar products manufactured by competitors. Any minimum purchase
provisions in CDS Distribution's distribution agreements are at levels that CDS
Distribution believes do not impose significant risk.
From time to time, the demand for certain products sold by CDS Distribution
exceeds the supply available from the vendor. CDS Distribution believes that its
ability to compete has not been adversely affected to a material extent by these
periodic shortages, although sales may be adversely
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affected for an interim period. In order to limit the impact of such shortages,
CDS Distribution generally attempts to include comparable products from more
than one vendor in its product line and endeavors to provide direction to its
customers in their selection of products.
SALES AND DISTRIBUTION
CDS Distribution has divided its sales operations into three regions.
Within each region, there are several branch offices, each supervised by a
branch manager and having one or more account managers who are teamed with an
inside sales assistant, generally on a one-to-one basis. Compensation of each
account manager and sales assistant is based, in part, on the profits generated
from sales to the account manager's customers. The account manager is a
technically-trained salesperson and is responsible for opening new accounts and
serving all established accounts in the branch manager's customer base. CDS
Distribution also utilizes volume sales specialists at its offices who sell
largely through telemarketing.
In three of CDS Distribution's branch offices, the account manager is
supported by a systems specialist who provides engineering and operating systems
technical support on more sophisticated systems. In addition, the systems
specialists are supported by technology managers located at CDS Distribution's
main offices in Irvine, California.
Customer orders are generally made by a toll-free telephone call to a sales
assistant in CDS Distribution's main offices or a branch office, and the order
is entered onto CDS Distribution's computer system. The sales assistant has
access to available information on inventory and customer credit status and,
upon reviewing this data, can enter the order immediately. Shipment is usually
made the same day, except on orders that require assembly and testing. Customers
also may pick up their orders at the main offices or at the Atlanta branch
office. All orders are handled on a prepayment, COD or credit basis depending on
the customer's creditworthiness and previous payment history. In addition, CDS
Distribution assists some resellers in obtaining equipment financing through
third-party floor planning programs.
CDS Distribution 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.
CDS Distribution estimates that a majority of its sales are to VARs and
value-added dealers. No customer has accounted for more than 10% of CDS
Distribution's net sales during 1994, 1993 or 1992. International sales are not
significant to CDS Distribution's operations. Sales by CDS Distribution are not
seasonal to any material extent. Because of CDS Distribution's prompt delivery
times, it maintains no substantial backlog of orders.
KENFIL
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Kenfil's principal executive offices are located at 2722 Michelson Drive,
Irvine, CA 92715 (714) 222-6000. Kenfil was formed as a partnership in 1983 and
was incorporated in California in 1984. In April 1992, Kenfil reincorporated in
the state of Delaware, and completed a 3,100 for 1 common stock split. Kenfil
completed its initial public offering in February, 1993.
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Kenfil is a distributor that focuses predominantly on microcomputer
software. Kenfil presently carries over 3,500 software titles from over 200
software publishers for sale to approximately 1,100 resellers. Kenfil's vendors
include many of the leading software publishers such as Symantec Corporation,
Quarterdeck Office Systems, Corel Systems Corporation, ChipSoft, Inc.,
Broderbund Software Inc., IBM Software, Maxis Software, The Learning Company
Inc., Walt Disney Computer Software, Inc. and Sierra On-Line, Inc. Kenfil's
reseller customers include superstores, software specialty retailers, mail order
companies, mass merchants and corporate resellers, such as CompUSA, Computer
City (part of Tandy Corp.), Software Etc., Inc., Micro Warehouse, Inc.,
Price/Costco, Inc. and Best Buy.
PRODUCTS
Kenfil presently offers over 3,500 software titles, most of which range in
suggested retail price from approximately $30 to $500. Kenfil primarily carries
products for the three most popular microcomputer operating systems: MS-DOS,
Microsoft Windows and Apple Macintosh. Kenfil focuses on software products in
the high growth categories such as the business application, utilities,
graphics, communications, consumer (education and entertainment) and
productivity segments. Kenfil also carries certain accessories. However, due to
such factors as new product launches and upgrades, the seasonal nature of
certain products and shifts in demand for software products, the list of
Kenfil's best selling products varies from time to time.
PUBLISHERS
Kenfil currently purchases software products from over 200 publishers.
Product purchasing decisions are based on profit potential, sales trends, cost,
availability and return privileges. Kenfil has contractual relationships with
many of its major publishers covering price, payment terms and return
privileges. These contracts are generally non-exclusive, and have terms of
between one and three years, many with automatic renewal provisions. The
agreements generally provide Kenfil with stock balancing and price protection
provisions which reduce in part Kenfil's risk of loss due to slow-moving
inventory or vendor price reductions. Kenfil has, from time to time, experienced
losses resulting from its inability to return obsolete inventory to publishers.
CUSTOMERS
Kenfil generally focuses on selling software to large software resellers.
Kenfil only sells products to resellers that meet Kenfil's financial and other
qualifications. Kenfil's customer base currently consists of approximately 1,100
resellers. For qualified resellers, Kenfil generally ships its products on net
30 day terms. Reseller customers include:
Superstores. These large stores sell hardware and software to both retail
and corporate end-users. Such customers of Kenfil include CompUSA, Computer
City, Fry's Electronics, Best Buy, Elek-Tek, and Micro Electronics Inc.
(MicroCenter).
Software Specialty Retailers. These reseller customers sell through their
own retail outlets to end-users and also may sell directly to corporate
customers. Such reseller customers of Kenfil include the Electronics Boutique,
Inc., Software etc. and Babbage's.
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Mail Order. These customers sell primarily through catalogs and
telemarketing to corporate accounts and end-users. These customers include Micro
Warehouse, Inc. and Multiple Zones International Inc.
Mass Merchants. These customers generally concentrate on high volume
software products, carry relatively few titles and emphasize entertainment and
educational programs. Kenfil's customers in this category include Price/Costco,
Inc.
Corporate Resellers. These resellers sell software to large corporate
accounts and provide higher levels of service, including software selection,
procurement services and technical support. Such reseller customers of Kenfil
include Corporate Software Inc., 800 Software, SoftMart, Inc. and Software
Spectrum, Inc.
Kenfil's general policy is to accept returns only of defective or
misshipped products or prior versions of products which have been upgraded.
However, as an accommodation to its customers Kenfil accepts returned products
outside of this policy where Kenfil believes it has the commensurate right of
return from the publisher. Kenfil maintains product return reserves which it
believes to be adequate.
SALES AND MARKETING
As of June 30, 1994 Kenfil had 13 salespeople. Kenfil's sales operations
are divided into two regions with each region managed by a regional manager who
reports to the vice president of sales. Kenfil's sales personnel have access to
Kenfil's management information system which provides them with on-line, real
time information regarding inventory levels, pricing, customer purchasing trends
and product sales trends, as well as the customer's available credit. Kenfil
provides customers with direct access to its sales personnel through dedicated
sales telephone and facsimile lines, in order to provide better service and
maximize sales opportunities. Members of Kenfil's sales staff initiate targeted
out-bound sales calls as well as take and enter customer orders and respond to
customer inquiries. Kenfil's sales personnel also negotiate additional marketing
and advertising funds from publishers for the benefit of Kenfil's customers.
Kenfil works on an ongoing basis with its publishers and resellers in
developing specific marketing and promotional programs. Kenfil, through its
marketing department, develops and publishes a broad array of brochures, pocket
guides, catalogs, posters and other marketing material designed to obtain shelf
space for its publishers, and assists publishers in developing complete
marketing strategies tailored to promote individual software products. Kenfil
also consults with and advises publishers on the design of their product
packaging and positioning and on advertising. Kenfil advertises on behalf of its
publishers in major industry publications such as Computer Reseller News and
Computer Retail Week, with advertising campaigns produced entirely by Kenfil's
marketing department. Kenfil also provides many of its reseller customers with
customized marketing materials which the resellers in turn utilize for their own
customers.
INTERNATIONAL OPERATIONS AND SALES
Kenfil currently has two wholly-owned subsidiaries in the Far East. Although
international sales represented approximately 5% or less of net sales in each of
the last three fiscal years, such sales
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make a significant contribution to pretax income. No assurances can be given
that international sales will continue at this level or make a significant
contribution to pretax income in future periods.
ROBEC
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The predecessor of Robec, Inc. ("Robec") was incorporated in Nevada in 1977.
On August 16, 1989, this predecessor company was merged into a new Pennsylvania
corporation to form Robec. The authorized capital stock of Robec consists of 10
million shares of Common Stock, $.01 par value per share, and 5 million shares
of Preferred Stock, $.01 par value per share. In October 1989, Robec completed
the initial public offering of its Common Stock, receiving net proceeds of
approximately $12.7 million through the sale of 1,350,000 shares of Common
Stock. The net proceeds of the public offering were used to repay bank
borrowings, part of which were incurred to fund a dividend paid to shareholders
of record prior to the offering in connection with the termination of Robec's
status as a corporation subject to taxation under Subchapter S of the Code. In
February 1990, Robec acquired certain assets and assumed certain liabilities of
J. Crew, Inc., doing business as Electronic Marketing Specialists, Inc., which
was engaged in the distribution of microcomputers.
Robec is primarily a national valued-added wholesale distributor of
microcomputers and related products to value-added resellers (''VARs''), dealers
and computer retailers and primarily operates in this one business segment.
Robec markets, sells and supports a variety of products ranging from individual
components, which are typically sold in volume, to complete systems that have
been fully configured, assembled and tested prior to delivery to its customers.
Robec's historic strategy has been to emphasize the sale of these complete
systems and to provide a high level of value-added services, including
consultation on component selection and system configuration and provision of
system assembly and testing and technical support services. As a result of
competitive pressures, reduced profit margins and the way in which other,
similar distributors have changed their businesses, Robec is now placing more
emphasis on telemarketing as its primary sales method. Robec also provides a
variety of training programs and educational seminars designed to enhance its
customers' technical capabilities. In March 1994, Robec began, in respect to new
customers, to discontinue its maintenance services and sales of spare parts and
supplies for microcomputers and related products. Robec believes that the
discontinuation of these services will not have a material effect on its
inventory or results of operations.
Robec's vendors include leading manufacturers such as Acer, Altos, Digi-Board,
Fujitsu, IBM, Okidata, Multi-tech Systems, Samsung, Texas Instruments, Unisys,
Wyse and Zenith. Robec 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 Robec to develop product-
specific technical expertise that enhances its value-added support services.
Robec attempts to minimize competition among vendors' products while maintaining
some overlap to provide protection against product shortages or
discontinuations.
PRODUCTS
Robec seeks to maintain products from nationally-recognized vendors that
provide all the components most VARs require to fully configure their computer
systems. All new products are extensively tested prior to inclusion in Robec's
distribution network.
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The following is a description of the major categories of products currently
sold by Robec and the principal current vendors of those products.
Microcomputers--Robec distributes desktop and portable personal computers and
multiuser microcomputers manufactured by Acer, Altos, IBM, Samsung, Texas
Instruments, Unisys, Wyse and Zenith.
Printers--Robec distributes a broad line of dot matrix, laser and ink-jet
printers manufactured by Citizen, Fujitsu, Okidata and Texas Instruments.
Monitors and Terminals--Robec distributes monitors and terminals manufactured
by CTX, Qume, Relisys, Samsung, Sony, Unisys and Wyse.
Local Area Networks--A LAN permits microcomputers to communicate with one
another and to function on an integrated basis. Robec distributes LAN software
and specialized hardware products manufactured by Digi-Board, D-Link, Proteon,
Samsung, Unisys and Western Digital. Many of these products are offered with
Novell, Moses Computers or EMEX software.
Accessories and Supplies--Robec distributes hard and floppy disk drives, board
products, diskettes, stand-by power supplies, modems and other communications
products, accessories and supplies manufactured by numerous companies including
Boca Research, Colorado Memory Systems, Mountain Computer, Multi-Tech Systems,
Sony, UDS and 3M.
Software--Robec sells a variety of operating system and LAN software products
generally as part of its systems sales. Robec has also commenced the sale of
certain applications software. Among the manufacturers of these software
products are Data Access and Novell.
VENDOR RELATIONS
To maintain a strong relationship with its principal vendors, Robec focuses on
marketing the products of a limited number of key vendors. Robec selects its
product line to minimize competition among vendors' products while maintaining
some overlap to provide protection against product shortages or
discontinuations. In addition, Robec enhances its relationship with its vendors
by providing feedback on products, assisting in new product development, working
with vendors to develop marketing programs and offering vendors the opportunity
to provide seminars to Robec's customers at Robec facilities.
Robec, like most hardware distributors, sells products throughout the United
States for vendors on a non-exclusive basis without geographic restrictions.
Robec has distribution agreements with most of its vendors and believes they are
in the form customarily used by each vendor and generally contain provisions
which allow termination by either party upon as little as 30 days' notice. Most
of Robec's major distribution agreements provide price protection by giving
Robec a credit, subject to specified limitations, in the amount of any price
reductions by the vendor between the time of the initial sale to Robec and the
subsequent sale by Robec to its customer. Most of the major distribution
agreements also give Robec qualified return privileges on slow-moving inventory.
Robec's distribution agreements do not restrict Robec from selling similar
products manufactured
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by competitors. Any minimum purchase provisions in Robec's distribution
agreements are at levels that Robec believes do not impose significant risk.
From time to time, the demand for certain products sold by Robec exceeds the
supply available from the vendor. Robec 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, Robec generally attempts to include
comparable products from more than one vendor in its product line and endeavors
to provide direction to its customers in their selection of products.
COMPETITION
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Competition in the distribution of microcomputer products is intense.
Principal national distributors are Ingram Micro D, Inc., Merisel, Inc. and Tech
Data Corporation. CDS Distribution and Robec also compete with numerous
manufacturers, resellers, retailers and regional distributors. Most of CDS
Distribution's and Robec's major competitors have substantially greater
financial resources than CDS Distribution or Robec, even on a combined basis.
Competition is primarily based upon availability of product, price, speed of
delivery, convenience, technical support and other support services. CDS
Distribution believes that it is generally competitive with respect to each of
these factors and that its principal, competitive advantages are its technical
support and other support services, and speed of delivery.
The software distribution industry is highly competitive. Competition within
the industry is based primarily on price and product availability, and to a
lesser extent on the speed of delivery and the level of marketing and other
services provided. Certain of Kenfil's competitors have substantially greater
financial resources than Kenfil. Kenfil's principal competitors include national
distributors such as Ingram Micro Inc. and Merisel, Inc., both of which
distribute hardware products in addition to software. In addition, Kenfil
competes with regional distributors and certain publishers that sell their
products directly to resellers. Because of the intense competition within the
industry, software distributors, including Kenfil, have low gross and operating
margins. Consequently, Kenfil's profitability is highly dependent upon effective
management and control of costs.
The manner in which microcomputer software products are distributed and sold
is changing, and new methods of distribution may emerge or expand. Software
publishers have sold, and may intensify their efforts to sell, their products
directly to resellers and end-users, including certain major reseller customers
of Kenfil. From time to time certain publishers have instituted programs for the
direct sale of large-order quantities of software to major corporate accounts,
and these types of programs may continue to be used by various publishers. In
addition, certain major publishers have implemented programs for master copy
distribution of software (site licensing). These programs generally grant an
organization the right to make any number of copies of software for distribution
within the organization provided that the organization pays a fee to the
publisher for each copy made. Also, publishers may attempt to increase the
volume of software products distributed electronically to end-user's
microcomputers. If these programs become more common or if other methods of
distribution of software become accepted, Kenfil's business and financial
results could be materially adversely affected. Kenfil believes that the total
range of services it provides to its customers cannot be easily substituted by
publishers, particularly because publishers do not offer the scope of services
or product offerings required by most of Kenfil's reseller customers. However,
there
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can be no assurance that publishers will not increase their efforts to sell
substantial quantities of software directly to resellers and end-users. Kenfil
believes that inflation has not had a material effect on its operations.
EMPLOYEES
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As of August 31, 1994, CDS Distribution had 190 full-time employees, including
90 persons employed in sales, sales support and marketing functions. None of CDS
Distribution's employees are covered by a collective bargaining agreement. CDS
Distribution considers its relations with its employees to be good.
As of June 30, 1994, Kenfil had 130 full-time employees. On July 5, 1994, the
operations of Kenfil were consolidated with those of CDS Distribution and the
number of Kenfil's employees was reduced to 38, including 11 temporary
employees, all 38 of whom are sales/marketing personnel or
administration/accounting personnel.
As of June 30, 1994, Robec had 195 full-time employees, including 79 persons
employed in sales, sales support and marketing functions. None of Robec's
employees are covered by a collective bargaining agreement. Robec considers its
relations with its employees to be good.
ITEM 2. PROPERTIES.
----------
AMERIQUEST
AmeriQuest's principal offices are located in leased facilities in Irvine,
California. AmeriQuest, CDS Distribution, Kenfil and CMS Enhancements are all
housed primarily in this facility, which consists of approximately 161,000
square feet of office and warehouse space. This facility will be lost to
AmeriQuest on December 31, 1994, at which time it will move its executive and
accounting offices to new office space. Although AmeriQuest has not yet
committed itself to a given location, in the opinion of management there is
sufficient office space readily available in the Irvine area to accommodate its
needs.
AmeriQuest and Kenfil's distribution facilities were consolidated at its
present location in Wilmington, Ohio. However, with the acquisition of Robec it
is likely that East Coast facilities will be maintained in Robec's facility in
Horsham, Pennsylvania, while only a small returns warehouse will be maintained
in California.
ROBEC
Robec's executive, administrative and main sales offices are located in
Robec's facility in suburban Philadelphia, Pennsylvania. This facility consists
of 36,000 square feet of office space and 69,000 square feet of warehouse space.
The current owner of this facility is a partnership affiliated with the
management of Robec.
Robec's branch offices generally consist of between 900 and 10,200 square feet
of office space, depending on market size. The Atlanta branch contains 19,200
square feet, including both
12
<PAGE>
office and warehouse space. Robec's branch offices are equipped with
standardized telephone, security and computer systems which Robec installs and
programs.
Robec leases all of its offices, four of which are leased from partnerships
affiliated with the management of Robec. The leases generally provide for a
base minimum rental per square foot. In addition, Robec is generally responsible
for its pro rata share of maintenance expenses for common areas, real estate
taxes and insurance. Robec is evaluating its current needs for branch offices
and expects to reduce both the number and sizes of its branch offices during
1994. Robec's current leases generally permit the early termination of the lease
upon payment of a penalty equal to the amount of one year's rent. If Robec
should desire to extend any of the current leases, Robec believes that
extensions on satisfactory terms, or alternative locations, generally would be
available, although there can be no assurance that Robec would be able to
negotiate further extensions of any particular lease.
Summary Table
- -------------
The following table sets forth information regarding the regional offices of
AmeriQuest and its subsidiaries.
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASE EXPIRATION YEAR OPENED
- --------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
AMERIQUEST
Irvine, CA 161,000 12/31/94 1990
Norcross, GA 2,050 mo.-mo. 1994
ROBEC
Asheville, NC(1) 10,200 9/09/94 1985
Atlanta, GA 19,200 1/31/95(2) 1985
Boston, MA 15,100 4/30/94(3) 1984
Chicago, IL 1,775 12/31/98(2) 1988
Denver, CO 2,300 10/31/95 1986
Kansas City, KS 977 9/30/98(2) 1988
Los Angeles, CA 4,169 6/30/98 1990
Orlando, FL 8,100 4/22/95 1990
Horsham, PA(1) 111,000 12/31/96 1978
Phoenix, AZ 27,500 9/30/94 1988
Salt Lake City, UT 2,300 12/31/95 1990
San Francisco, CA 1,680 5/6/98 1990
Seattle, WA 2,100 8/30/94 1990
Washington, DC(1) 7,600 12/31/95 1983
Youngstown, OH(1) 6,700 11/30/96 1983
- --------------
</TABLE>
(1) The Robec offices, which include the main offices and warehouse facility in
Horsham, Pennsylvania, are leased from partnerships affiliated with the
management of Robec. The main offices and warehouse facility in Horsham,
Pennsylvania contain 105,000 square feet, and the additional 6,000 square
feet included in the foregoing table reflects space in a
13
<PAGE>
warehouse that was closed in the first quarter of 1994 and formerly was
leased from an affiliated partnership. During the first quarter of 1994,
Robec entered into a lease with an affiliated partnership for 6,000 square
feet of retail space located in suburban Philadelphia.
(2) These leases have renewal options to extend the lease term for five years,
with rent based upon the then market rate or a specified formula.
(3) This lease has a renewal option to extend the lease term for two years,
with rent based upon the then market rate.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
AmeriQuest is both a plaintiff and defendant from time-to-time in lawsuits
incidental to its business. The management of AmeriQuest believes that none of
such current proceedings individually or in the aggregate, will have a material
adverse effect on AMERIQUEST. While not expected to be of material effect to
the Company, Kenfil Inc. vs. RLI Insurance Company, Superior Court of the State
-------------------------------------
of California, County of Los Angeles, No. BC 108564 filed July 12, 1994,
involves litigation instituted by Kenfil Inc. to recover additional monies for
the damage it incurred in the Northridge earthquake of January 17, 1994. The
defendant cross-claimed on August 12, 1994 for return of the $840,000 it had
paid on claims submitted by Kenfil Inc., based on affidavits from former Kenfil
employees alleging that they had been instructed following the earthquake to
intentionally destroy additional inventory. The defendant's theory is that it
is not obligated to even cover that portion of the damage cause by the
earthquake because of the possible fraud involved with such actions; while the
management of Kenfil maintains that only that portion of damages actually
incurred by the earthquake were submitted as claimed losses. There exists a
question of fact as to whether the actions of Kenfil's employees were instigated
by upper-level management and a question of law as to whether the lower-level
managers of Kenfil are able to take ultra vires actions which can be attributed
to Kenfil. The testimony to date appears fragmented and uncorroborated, such
that a close examination of the evidence deduced to date reveals no clear
evidence that would allow one to conclude that the defendant was in any way
defrauded. Additionally, it appears that the defendant insurance company failed
to terminate the contract upon discovery of the alleged "fraud," and merely
chose to not renew the contract upon its expiration. Although there are pictures
available to prove the actual damage immediately following the earthquake, no
assurance can be given that the defendant will not ultimately prevail. The
ability of Kenfil Inc. to satisfy any possible future judgement is dependent on
the results of its future operations. However, such a judgement would not
directly impact the other subsidiaries of AmeriQuest nor AmeriQuest itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
On September 12, 1994, the shareholders of Kenfil and AmeriQuest approved
the proposed merger of "AmeriQuest/Kenfil Inc.," a wholly-owned subsidiary of
AmeriQuest, with and into Kenfil Inc. (the "Merger"). The Merger has since
become effective, and AmeriQuest is now the sole shareholder of
AmeriQuest/Kenfil Inc. In connection with the Merger, AmeriQuest issued
1,046,252 shares of its Common Stock to the Kenfil minority shareholders,
1,894,360 shares to the holders of Kenfil Inc's subordinated debt and 2,788,353
shares to Kenfil Inc's vendors. The vote on this matter was 6,636,184 shares
FOR, 21,000 shares AGAINST and 2,815 shares ABSTAINED.
In order to accommodate the Merger, the shareholders of AmeriQuest also
approved an amendment to AmeriQuest's Certificate of Incorporation to increase
the number of authorized shares of Common Stock of AmeriQuest from 10,000,000
shares to 30,000,000 shares. The vote on this matter was 6,875,775 shares FOR,
25,129 shares AGAINST and 3,997 shares ABSTAINED. A total of 11,005,625 shares
were outstanding and entitled to vote on the record date.
14
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following table sets forth certain information regarding the current
officers of AmeriQuest.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Harold L. Clark 58 Director, Co-Chairman and Chief Executive Officer
Gregory A. White* 42 Director*, President* and Chief Operating Officer*
Stephen G. Holmes 48 Director, Secretary/Treasurer and Chief Financial Officer
Carol L. Miltner 52 Executive Vice President--Sales & Marketing
Howard B. Crystal 49 Senior Vice President - Marketing and Purchasing
Peter D. Lytle 37 Senior Vice President--Operations
William F. Gibson III 40 Vice President and Comptroller
Peter S. H. Grubstein 39 Senior Vice President
Irwin A. Bransky 43 President and Chief Executive Officer of AmeriQuest/Kenfil Inc.
Robert H. Beckett** 61 Director** and President of Robec, Inc.
- --------------
</TABLE>
* Mr. White will be appointed to the Board of Directors and elected President
and Chief Operating Officer upon the acquisition of NCD.
** Mr. Beckett will be appointed to the Board of Directors at its next
meeting.
The officers are elected by the Board of Directors and serve at the
discretion of the Board of Directors, subject, however, to the provisions of
their Employment Agreements, which provide for severance payments in the event
of termination for other than "cause," as defined in each employment agreement.
The severance rights range from one to two years of salary, during which time
they are prohibited from competing with AmeriQuest or its subsidiaries.
Harold L. Clark was named President and Chief Executive Officer of
AmeriQuest on December 3, 1993. He was appointed to serve as a Director on March
4, 1994. Prior to December 1993 he served as President and Chief Executive
Officer of CDS Distribution, Inc., a subsidiary of AmeriQuest, from April 1993
to December 1993. From February 1991 to December 1992, he served as President,
Chief Operating Officer and Director of Everex Systems, Inc. ("Everex"). From
1989 through 1991, he served as a computer industry consultant. From 1984 to
1989, he served as the President of Ingram Micro, Inc. Dr. Clark received a B.S.
Degree from Bryant College, an MBA from Pepperdine University, and has earned a
Doctor of Education Degree from Nova University.
*Gregory A. White will join AmeriQuest upon the acquisition of NCD by
AmeriQuest as a Director and as President and Chief Operating Officer. Mr.
White has served as President and Chief Executive Officer of NCD for more than
the last five years. Mr. White holds a Master of Science degree in Management
Sciences from the University of South Florida.
Stephen G. Holmes joined AmeriQuest as its Chief Financial Officer,
Secretary and Treasurer in January 1992, after serving as a general partner and
a managing partner of Arthur Andersen & Co. from 1978 until 1992. Mr. Holmes was
appointed to serve as a Director on March 4, 1994. Mr. Holmes was educated at
the University of Colorado and the University of Rochester, from which he
received a B.S. degree, and is licensed to practice as a certified public
accountant in the State of California and other states.
15
<PAGE>
Carol L. Miltner joined AmeriQuest in December 1993 as Executive Vice
President--Sales & Marketing. From April 1991 to December 1993, she conducted
her own consulting and seminar business on sales techniques in the computer
industry. From April 1989 to April 1991 she served as Senior Vice President of
Sales for Merisel. From 1985 to April 1989 she served as Senior Vice President
of Sales for Micro D, Inc.
Howard B. Crystal joined AmeriQuest in July, 1994 as Senior Vice President
- - Marketing and Purchasing. From October 1992 to July 1994 he served as
President of AmeriWats, Inc., a telecommunications company. From February 1991
to July 1993 he served as Senior Vice President - Sales and Marketing for
Everex, Inc. From May 1989 to February 1991 he served as Senior Vice President
- - Sales and Marketing for TechData. Mr. Crystal holds a Bachelor of Science in
Electrical Engineering from the New Jersey Institute of Technology and an MBA
from Rutgers University.
Peter D. Lytle joined AmeriQuest in December 1993 as Senior Vice President-
- -Operations. From 1983 to September 1993 he was employed by InaCom Corporation
and its predecessors, where his last position was Regional President/General
Manager--California. Mr. Lytle is a Certified Public Accountant and holds a
Bachelor of Arts degree in Business Administration with an emphasis in
accounting from Western Michigan University.
William F. Gibson III joined AmeriQuest in June 1988, and since January,
1994 has been the Vice President and Comptroller of AmeriQuest. He is a
Certified Public Accountant and holds a Bachelor of Science degree from
University of California--Berkeley in Business Administration.
Peter S. H. Grubstein served as Chief Operating Officer of Kenfil Inc. from
January 1994 until its acquisition was completed on September 12, 1994. Prior
to his involvement with Kenfil Inc., he served as President of Grubstein
Holdings Ltd., a private equity investment firm for more than five years. Mr.
Grubstein holds a bachelor's degree from Yale College.
Irwin A. Bransky founded Kenfil Inc. in 1983 and has been President and
Chief Executive Officer of Kenfil Inc. since that time. Mr. Bransky holds a
B.S. degree in Business Administration and a master's diploma in Personnel
Administration from the Graduate School of University of Witwaterstrand, South
Africa.
Robert H. Beckett has served as the President and Chief Executive Officer
of Robec, Inc. for more than the last five years. Mr. Beckett holds a Bachelor
of Science degree in Mechanical Engineering from Worcester Polytechnic
Institute.
16
<PAGE>
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The following table sets forth the market prices for the shares of Common
Stock of AmeriQuest. The prices reflect the high and low closing prices quoted
on the New York Stock Exchange for each calendar quarter since December 31,
1991.
<TABLE>
<CAPTION>
AMERIQUEST
----------
1992 High Low
- ---------------------- ------ ------
<S> <C> <C>
First Quarter $3 3/4 $2 3/8
Second Quarter 3 1 1/2
Third Quarter 2 1/4 1 1/4
Fourth Quarter 3 5/8 2
1993
- ----------------------
First Quarter 3 3/8 2
Second Quarter 3 5/8 2
Third Quarter 3 1/4 2
Fourth Quarter 5 3/4 2 1/2
1994
- ----------------------
First Quarter 6 4 1/8
Second Quarter 4 1/8 3
Third Quarter 4 1/4 3 1/8
- --------------------------------------------
</TABLE>
On September 30, 1994, the stock of AmeriQuest closed at $3.25 per share on the
New York Stock Exchange.
As of August 22, 1994 AmeriQuest had approximately 531 shareholders of record
and Kenfil had approximately 117 shareholders of record.
17
<PAGE>
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 per share data).
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1994 1993 1992 1991 1990
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales (1) $ 87,593 $ 73,082 $ 115,053 $ 130,062 $ 187,724
Income (loss) before taxes (7,971) 236 (9,623) (12,027) 652
Net income (loss)(2) (7,971) 236 (8,893) (8,501) 405
Earnings (loss) per share (1.33) 0.08 (3.04) (2.89) 0.13
Total assets 65,145 20,274 23,522 40,747 41,084
Long-term obligations 3,442 1,817 274 1,851 1,134
Stockholders' equity 12,875 8,644 7,952 16,806 26,065
Weighted average
shares outstanding 5,973,511 3,060,908 2,921,588 2,941,666 3,155,756
</TABLE>
(1) The sales increase in 1994 compared to 1993 was largely due to the
initiation of a broader distribution strategy. Year to year sales declines
from 1991 to 1993 were principally due to an eroding customer base and
reduced emphasis on commodity products.
(2) Losses in 1994, 1992 and 1991 related principally to corporate
restructurings in 1994 and 1992 and erosion of the customer base in 1991 to
1993 not offset by operating cost decreases.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Business Strategy
AmeriQuest is following a business strategy of growth by acquisition,
consistent with the consolidation that is occurring in the maturing personal
computer market place. This strategy creates the following risks involving the
ability to successfully:
- Consolidate the operations of previously unaffiliated businesses, some of
which were unprofitable
- Combine the business cultures of diverse operations
- Obtain adequate capital resources to complete acquisitions and working
capital required for continuing operations
The following reflects the net changes in each specified account as regards the
implementation of the business strategy of the Company:
18
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) During the Period
------------------------------------------------------
Quarter Ended Year Ended Year Ended
September 30, June 30, 1994, June 30, 1993,
1994, Compared to Compared to Compared to
Quarter Ended Year Ended Year Ended
June 30, 1994 June 30, 1993 June 30, 1992
------------------ --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Sales
Due to acquisitions $20,817 $14,267 $ 3,102
Continuing operations 4,042 244 (28,637)
Restructuring - - (16,436)
Net change 24,859 14,511 (41,971)
Gross Profit
Due to acquisitions 1,913 771 434
Continuing operations (79) 256 1,855
Restructuring - - (1,792)
Net change 1,834 1,027 497
Operating Expenses
Due to acquisition 1,845 2,598 547
Continuing operations (2,483) 490 (3,009)
Restructuring (700) 5,700 (6,575)
Net change (1,338) 8,788 (9,037)
Other (income) Expense
Due to acquisition 357 544 38
Continuing operations (57) (98) 367
Net change 300 446 (325)
Net Income
Due to acquisition (289) (2,371) (151)
Continuing operations 2,461 (136) 4,497
Restructuring charge 700 (5,700) 4,783
Net change 2,782 (8,207) 9,129
</TABLE>
The working capital for these changes has generally been provided by bank credit
line facilities and the issuance of common stock as to acquisitions.
Net Sales
AmeriQuest is in a single line of business, namely the distribution of
personal and other computing hardware and software products. AmeriQuest has
also emphasized value-added assembly of certain products, limited in fiscal year
1994 to mass storage devices. In prior years, operations emphasized the
assembly of personal computers, which efforts have been discontinued with
restructured operations focusing on broader based distribution of the products
of others.
19
<PAGE>
During the year ended June 30, 1994, with emphasis upon a broader based
distribution strategy net sales increased 20% as contrasted with the prior year.
For the year ended June 30, 1993, net sales decreased 36% from the prior year
due primarily to erosion of the then customer base of AmeriQuest and reduced
emphasis on commodity products. In fiscal year 1994 the customer erosion
experienced in the prior year was more than offset by the operational activities
of the acquired entities.
Sales returns and allowances are not a significant economic risk to
AmeriQuest, and generally average less than 10% percent of sales. Separately,
an integral aspect of AmeriQuest's business is to exchange products sold to
customers which are either incompatible units or do not work for a variety of
technical and other reasons. If such products are ultimately determined to be
defective, AmeriQuest, under contract terms with its vendors, is able to return
such products to its vendors. Under such exchange arrangements AmeriQuest's
economic risk is nominal and generally limited to the costs of freight and
technical services, both current period charges to expense. Price concessions
to larger customers are generally arranged under pre-determined contractual
provisions and are not significant. An aggregate warranty and returns reserve
of approximately $1 million is reflected in the balance sheet of AmeriQuest at
June 30, 1994.
Inasmuch as the Company began its distribution operations in December 1993,
the effect of market development funds received through June 30, 1994, was not
significant.
The Company manages its inventories by maintaining sufficient quantities to
achieve high order fill rates while at the same time attempting to stock only
those products in high demand with a rapid turnover rate. Inventory balances
will fluctuate as the Company adds new product lines and when appropriate, makes
large purchases and cash purchases from manufacturers when the terms of such
purchases are considered advantageous. The Company's contracts with most of its
vendors provide price protection and stock return privileges to reduce the risk
of loss to the Company due to manufacturer price reductions and slow moving or
obsolete inventory. In the event of a vendor price reduction, the Company
generally receives a credit for products in inventory. In addition, the Company
has the right to return a certain percentage of purchases, subject to certain
limitations. Historically, price protection and stock return privileges as well
as the Company's inventory management procedures have helped to reduce the risk
of loss of carrying inventory.
Cost of Sales and Gross Profit
During the year ended June 30, 1994, cost of sales was 86% of net sales due
principally to intense price competition for AmeriQuest's products, combined
with reserves established to reflect the price erosion on certain products. For
fiscal 1993, cost of sales was approximately 84%, also due principally to
intense price competition for AmeriQuest's products, combined with reserves
established to reflect the price erosion on certain products. Cost of sales for
the year ended June 30, 1992 was approximately 90% reflecting the effect of
reserves to adjust the cost of AmeriQuest's inventories to market price.
AmeriQuest has operated to more than offset the otherwise adverse effects of
declining gross margins in its industry by emphasizing higher value-added
products, however, while margins per se have been maintained and even increased,
such margin pressures served to reduce the breadth of AmeriQuest's commodity
product lines and the net sales level achieved historically.
20
<PAGE>
Operating Expenses
For the years ended June 30, 1994, 1993 and 1992, selling, general and
administrative expenses were approximately 16%, 14% and 12% of net sales, as
AmeriQuest beginning in 1992 expanded its employee base and acquired new
facilities to support additional product lines to accommodate revenue growth.
In 1994 and 1992 AmeriQuest restructured its operations and related charges
aggregated $5.7 million and $4.5 million. The components of the restructuring
charges for each period presented follow (dollars in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
<S> <C> <C>
1994 1992
------ ------
Employee terminations $ 500 $1,100
Facilities abandonment 300 --
Discontinued product lines 4,900 3,400
------ ------
$5,700 $4,500
====== ======
</TABLE>
Inasmuch as these restructurings were initiated in the middle of each respective
fiscal year, the efforts were largely completed by each year end and the related
expenditures were largely incurred at those dates. The discontinued product
lines related to the then direct manufacture of both personal computers and tape
drive storage units utilizing proprietary designs with open architecture to the
myriad of compatible personal computing hardware and software available in the
marketplace. Such discontinuance was part and parcel to the current emphasis on
distribution per se of products generally manufactured and assembled by others.
The quantification of the components of the restructurings follows:
<TABLE>
<CAPTION>
Tape Drive
Personal Computer Storage Unit
Manufacture Manufacture
----------------- -------------
<S> <C> <C>
Employee terminations
Number 40 130
Location Irvine, CA Singapore;
Irvine, CA
Facilities abandonment
Square footage 20,000 Sublet
Continuing lease
obligations
Amount per month $10,000 -
Product discontinuance
Capitalized software 1,700 -
Equipment - 200
Loss on inventory
disposition 1,800 3,200
Contractual obligations
Manufacturing 1,100 -
Marketing, other 300 -
</TABLE>
21
<PAGE>
All related costs were largely incurred prior to each fiscal year end, except
for the following accruals as to the 1994 restructuring:
Date Amount
---- ------
Lease obligations Through 1995 $200
Accruals Through 1994 $200
The benefits that inurred to AmeriQuest apart from the discontinuance of
unprofitable manufacturing per se, were related to refocusing upon distribution
and the core strengths inherent within AmeriQuest. Losses reported by AmeriQuest
in 1992 and 1994, apart from restructuring charges, were largely related to
these former manufacturing operations.
Operating Results
Annual and quarterly operating results for Far Eastern activities of the
Company are relatively consistent from period to period in 1994, 1993 and 1992,
without regard to the discontinuance of the tape drive assembly operation in
Singapore in 1992. The annual and quarterly operating results of the domestic
operations of the Company during the three years ended June 30, 1994, have
varied considerably during the transition over which the former emphasis on
manufacturing was largely phased out for all but mass storage assembly of disk
drives, in favor of an increased emphasis on broad line distribution of the
products of many manufacturers and other suppliers. During this transition
period revenue as well as cost variations are largely a function of manufactured
product line discontinuances offset by revenue increases from acquired
distribution operations.
Research and Development
AmeriQuest significantly curtailed its research and development expenditures
beginning in fiscal year 1993 as AmeriQuest began to emphasize its distribution
capabilities and thus reliance upon the products of others. Such research and
development expenditures aggregated .03% of net sales in fiscal 1994 and in
excess of 1% of net sales in 1993 and 1992 and relate to the assembled storage
products of AmeriQuest. The decreased emphasis on research and development may
ultimately limit any competitive advantages of the Company as regards mass
storage product development.
Interest Expense
Interest expense increased during the fiscal year ended June 30, 1994, to .8%
of net sales, as contrasted to prior year costs, as a result of AmeriQuest's
reliance on its bank line of credit to finance increased accounts receivable and
inventories. During the year ended June 30, 1992, interest expense decreased to
.4% of net sales from .5% for fiscal year 1993.
Income Taxes
In the years ended June 30, 1994 and 1993 no income tax expense resulted due
to losses or the availability of tax operating loss carry forwards. For the
year ended June 30, 1992, AmeriQuest reported a tax benefit of approximately 8%
of pretax losses, resulting from the carryback of AmeriQuest's tax losses to
prior periods.
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
22
<PAGE>
certain costs which may be affected by inflation. In addition, many electronic
components of comparable quality can currently be purchased outside of the
United States at favorable prices.
Liquidity and Capital Resources
Beginning in 1993 and reaching a much greater activity level in mid 1994 and
continuing thereafter, acquisitions have largely been funded through the direct
issuance of Common Stock of AmeriQuest, coupled with supplemental cash proceeds
from private placement offerings to unrelated parties. This profile is expected
to continue for future acquisitions.
In July 1994, the Company entered into an agreement to sell its Singapore
subsidiary, CMS Enhancements (S) PTE Ltd., ("CMS Singapore") to a former officer
and director of the Company. The Company expects to exchange all of the stock of
CMS Singapore for 350,000 shares of the Company's previously issued common
stock, of which approximately 345,000 shares were received by the Company as of
September 1994. The book value of CMS Singapore is approximately $.7 million and
thus no appreciable gain or loss was expected to result upon completion of the
transaction. CMS Singapore is expected to generate revenues of approximately $20
million with break-even operating results for fiscal 1995. The disposition, if
completed, will not have a material effect on either the Company's Far East
segment or consolidated results of operations. CMS Singapore is a segment of the
Company's continuing line of business and, as a result, any disposition will not
be accounted for as a discontinued operation. This transaction is the subject of
potential litigation, the ultimate resolution of which is not determinable. Such
potential litigation would be between the Company and the purchaser and would
relate to whether full consideration was received for the proposed transaction.
In the opinion of management such litigation would not have a materially adverse
effect on the Company's future results of operations and financial position.
In fiscal years 1994 and 1992 AmeriQuest initiated a restructuring to focus
the scope of its operations on distribution. Such restructuring spanned
organizational aspects of joint venture operations, product and production
alignment, market channel and customer delineation, vendor arrangements and
personnel capabilities. Generally the restructuring involved reducing the
emphasis on assembly operations, other than for storage devices, and focusing on
distribution operations. As previously stated, aggregate charges of this effort
which was substantially completed in each respective period, approximated $4.5
million in fiscal 1992 and $5.7 million in fiscal 1994. The concurrent use of
cash resources for these charges was largely provided by proceeds from the
liquidation of inventories and the issuance of Common Stock.
As AmeriQuest introduced products which carry higher gross margins than do the
commodity products which historically accounted for much of AmeriQuest's
revenues, available working capital was invested in higher levels of inventories
in fiscal year 1994. During the years ended June 30, 1993 and 1992, AmeriQuest
concentrated on reducing levels of inventories. In this regard AmeriQuest
liquidated a significant percentage of its cost reserved inventory in those
years.
<TABLE>
<CAPTION>
Year ended June 30,
(Dollars in thousands)
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Inventory at June 30,
net of reserve $24,165 $ 7,000 $ 8,586
======= ======= =======
Beginning balance $ 3,096 $ 7,425 $ 8,657
Charged to expense 1,714 633 3,388
Deductions from
disposition (2,177) (4,962) (4,620)
------- ------- -------
Ending balance $ 2,633 $ 3,096 $ 7,425
======= ======= =======
</TABLE>
Thus the inventory reserve decreased significantly during fiscal years 1992 to
1994 due to the liquidation of aged inventory and at the same time inventories
increased appreciably in fiscal 1994
23
<PAGE>
related to the inventory stock of acquired businesses, recorded net of any
valuation reserve and thus any former reserves are not reflected per se. As to
--- --
receivables, those accounts of acquired businesses are reflected at the date of
acquisition at amounts expected to be collected, without reserves established as
a separate item and thus during fiscal year 1994 the appreciable increase in
acquired accounts receivable is not matched with a proportionate increase in the
collectibility reserve. Inasmuch as the acquisitions of AmeriQuest have occurred
throughout fiscal year 1994, a determination of inventory turns and days' sales
in receivables at June 30, 1994 is not meaningful based upon aggregate fiscal
year 1994 reported sales by AmeriQuest.
In the distribution segment of its operations, AmeriQuest and its competitors
are subject to continual technological changes and relatively short product
marketing cycles, generally less than a year in duration. As such, AmeriQuest,
in order to be competitive,, must maintain efficient sales and marketing staffs.
AmeriQuest monitors the average daily sales of its current product lines and
provides reserves generally as it experiences price erosion approaching the net
realizable value of each product class and deterioration in its prior sales
volumes of each product cycle.
As to its storage products, AmeriQuest is subject to component availability
and thus the need to stock sufficient raw materials to effect a continuous flow
of finished goods. The liquidation of component parts other than in the
ordinary course of business as finished products, is a speculative arena and
typically the liquidating value of components is at substantial discounts (up to
90% discount by brokerage) and thus the realization of inventory costs is highly
dependent upon continued business operations.
Cash utilized in operations was approximately $8.4 million in 1994. During
1993 cash generated from operations exceeded $1.2 million and the restructuring
in 1992 was offset by operating asset decreases resulting in cash generated from
operations of approximately $2.7 million. In 1994, 1993 and 1992 property
purchases were limited to approximately $1.5 million, $1.3 million and $.3
million, respectively. Bank borrowings increased by approximately $23 million
in 1994 (of which, approximately $19 million was assumed in acquisitions of
businesses), principally utilized to fund acquired assets. Borrowings in 1993
and 1992 were highly variable and did not exceed $3.6 million and $7.6 million,
respectively, during those years. In 1994 stock issuances supplemented borrowed
resources and were largely required to complete the business acquisitions of
AmeriQuest and fund the restructuring. The net effect of these operating,
investing and financing cash flows over the three year period ended June 30,
1994 was a positive cash flow, with net cash generated in 1994 and 1993 of $2.2
million and approximately $.3 million, respectively, and with a net cash use of
$.9 million in 1992.
The management of the Company expects to implement a cost reduction and
efficiency program for its core distribution operations during fiscal year 1995
in an effort to eliminate the continuing impact of those attributes which
created the cash loss from operations of $8.4 million realized in 1994. This
program will focus on centralized administrative operations, product procurement
efficiencies and a continuing cost/benefit analysis of resource allocation.
At September 1994, AmeriQuest has working capital lines of credit of over $50
million, including a $20 million facility extended to Robec, Inc. Borrowings
under these accounts bear interest at from 1 to 3 percent over the prime rate
and are limited to specified percentages of AmeriQuest's eligible accounts
receivable (a borrowing base in excess of $20 million) and inventories (a
borrowing base of over $20 million).
24
<PAGE>
AmeriQuest has leased facilities for its U.S. operations with aggregate
monthly rental expense of approximately $100,000 at June 30, 1994. Other lease
obligations of AmeriQuest aggregate approximately $30,000 per month at June 30,
1994. No material commitments are in place as to required capital expenditures
at June 30, 1994.
In November 1994 the Company entered into an agreement to sell a controlling
interest, 51%, of it's common stock to Computer 2000 A.G., a publicly held
German company in the same line of business. The aggregate proceeds of $50
million are scheduled for injection to the Company in late 1994 as to $18
million and in September 1995 as to the remaining $32 million. Such proceeds,
when coupled with the existing cash and credit resources of the Company, should
allow for reasonable continued expansion of the operations of the Company.
Management believes that its existing product lines will enable AmeriQuest to
generate sufficient cash through operations, supplemented by the periodic use of
its lines of credit, to finance a continuation of AmeriQuest's existing business
over the next twelve months. However, as AmeriQuest continues planned
acquisitions, significant cash resources will be required to effect this effort.
There is no assurance that required funds for planned acquisitions will be
available, or that sufficient funds can either be obtained or if available, that
such funds can be secured at commercially acceptable rates or costs.
Proposed Accounting Standards
The Financial Accounting Standards Board has proposed certain accounting
standards which may impact the financial reporting of AmeriQuest in future
periods. If adopted, and principally related to post retirement and employment
benefits, such proposed standards would not have a material impact on the
financial statements of AmeriQuest.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The following table sets forth certain information regarding the current
directors and officers of AmeriQuest.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Marc L. Werner* 37 Chairman of the Board of Directors
Eric J. Werner* 32 Director
Terren S. Peizer 35 Director
William N. Silvis 67 Director
William T. Walker, Jr. 63 Director
Robert H. Beckett** 61 Director**, President of Robec, Inc.
Harold L. Clark 58 Director, Co-Chairman and Chief Executive Officer
Gregory A. White*** 42 Director***, President*** and Chief Operating Officer***
Stephen G. Holmes 48 Director, Secretary/Treasurer and Chief Financial Officer
Carol L. Miltner 52 Executive Vice President--Sales & Marketing
Howard B. Crystal 49 Senior Vice President - Marketing and Purchasing
Peter D. Lytle 37 Senior Vice President--Operations
William F. Gibson III 40 Vice President and Comptroller
Peter S. H. Grubstein 39 Senior Vice President
Irwin A. Bransky 43 President and Chief Executive Officer of AmeriQuest/Kenfil Inc.
- --------------
</TABLE>
* Messrs. Marc L. Werner and Eric J. Werner are first cousins.
** Mr. Robert H. Beckett will be appointed to the Board at its next meeting
pursuant to the Amended and Restated Agreement and Plan of Reorganization
dated as of August 11, 1994 (the "Robec Acquisition Agreement") pursuant to
which AmeriQuest will acquire Robec, Inc. AmeriQuest is also obligated
under the Robec Acquisition Agreement to nominate Mr. Beckett for
reelection to the Board of Directors each of the next two years.
*** Mr. White will be appointed to the Board of Directors and elected President
and Chief Operating Officer pursuant to the Agreement and Plan of
Reorganization dated September 26, 1994 (the "NCD Acquisition Agreement")
pursuant to which AmeriQuest will acquire NCD. AmeriQuest is also
obligated under the NCD Acquisition Agreement to nominate Mr. White for
reelection to the Board of Directors so long as Mr. White is employed by
AmeriQuest.
Marc L. Werner has been employed by Werner Co. since 1986, and currently
serves as Treasurer, Chief Financial Officer and Director for Werner Co. and
various companies affiliated with Werner Co. Mr. Werner is a Certified Public
Accountant, and holds a Bachelor of Science degree in Accounting from Northern
Illinois University.
Eric J. Werner has been employed by Werner Co. since 1988, and currently
serves as Secretary, General Counsel and Director for Werner Co. and various
companies affiliated with Werner Co. Mr. Werner holds a Bachelor of Science
degree in Industrial Engineering from Pennsylvania State University and a
Jurisprudence Doctorate degree from Boston University--School of Law.
26
<PAGE>
Terren S. Peizer is an independent, full-time investor. For the last five
years he has been engaged in his investment activities first as President of
Financial Group Holdings, Inc. and subsequently as President of Beachwood
Financial Company, Inc. Mr. Peizer also serves as a Director of Urethane
Technologies, Inc.
William N. Silvas joined AmeriQuest's Board of Directors in December 1988. He
has served as General Manager, Commercial Products Division, of Research and
Development Laboratory, Inc. from 1987 to the present. From 1986 to 1987, Mr.
Silvis was self-employed as a management consultant for various companies,
including AmeriQuest. From 1984 to 1986, Mr. Silvas was Senior Vice President
of Sales and Marketing for Gateway Computer, a retail computer products chain.
Previously, he had been employed by IBM for 31 years in various sales and
management positions.
William T. Walker, Jr. has been the principal of Walker Associates, a
corporate financial consultant for investment banking, since 1985. From 1969
through 1985, he was employed by Bateman Eichler, Hill Richards, a Los Angeles
based investment banker, in various capacities, including serving on its Board
of Directors and Executive Committee, and as Executive Vice President, Manager
of Investment Banking and Chairman of the Underwriting Committee. Mr. Walker has
been a Member of the Board of Directors of the Securities Industry Association,
a Governor of the Pacific Coast Stock Exchange and has served on the American
Stock Exchange Advisory Committee. Mr. Walker also serves as a Director of Go-
Video, Inc. and Fortune Petroleum.
Robert H. Beckett has served as the President and Chief Executive Officer of
Robec, Inc. for more than the last five years. Mr. Beckett holds a Bachelor of
Science degree in Mechanical Engineering from Worcester Polytechnic Institute.
Harold L. Clark was named President and Chief Executive Officer of AmeriQuest
on December 3, 1993. He was appointed to serve as a Director on March 4, 1994.
Prior to December 1993 he served as President and Chief Executive Officer of CDS
Distribution, Inc., a subsidiary of AmeriQuest, from April 1993 to December
1993. From February 1991 to December 1992, he served as President, Chief
Operating Officer and Director of Everex Systems, Inc. ("Everex"). From 1989
through 1991, he served as a computer industry consultant. From 1984 to 1989, he
served as the President of Ingram Micro, Inc. Dr. Clark received a B.S. Degree
from Bryant College, an MBA from Pepperdine University, and has earned a Doctor
of Education Degree from Nova University.
*Gregory A. White will join AmeriQuest upon the acquisition of NCD by
AmeriQuest as a Director and as President and Chief Operating Officer. Mr.
White has served as President and Chief Executive Officer of NCD for more than
the last five years. Mr. White holds a Master of Science degree in Management
Sciences from the University of South Florida.
Stephen G. Holmes joined AmeriQuest as its Chief Financial Officer, Secretary
and Treasurer in January 1992, after serving as a general partner and a managing
partner of Arthur Andersen & Co. from 1978 until 1992. Mr. Holmes was appointed
to serve as a Director on March 4, 1994. Mr. Holmes was educated at the
University of Colorado and the University of Rochester, from which he received a
B.S. degree, and is licensed to practice as a CPA in the State of California and
other states.
27
<PAGE>
Carol L. Miltner joined AmeriQuest in December 1993 as Executive Vice
President--Sales & Marketing. From April 1991 to December 1993, she conducted
her own consulting and seminar business on sales techniques in the computer
industry. From April 1989 to April 1991 she served as Senior Vice President of
Sales for Merisel. From 1985 to April 1989 she served as Senior Vice President
of Sales for Micro D, Inc.
Howard B. Crystal joined AmeriQuest in July, 1994 as Senior Vice President -
Marketing and Purchasing. From October 1992 to July 1994 he served as President
of AmeriWats, Inc., a telecommunications company. From February 1991 to July
1993 he served as Senior Vice President - Sales and Marketing for Everex, Inc.
From May 1989 to February 1991 he served as Senior Vice President - Sales and
Marketing for TechData. Mr. Crystal holds a Bachelor of Science in Electrical
Engineering from the New Jersey Institute of Technology and an MBA from Rutgers
University.
Peter D. Lytle joined AmeriQuest in December 1993 as Senior Vice President--
Operations. From 1983 to September 1993 he was employed by InaCom Corporation
and its predecessors, where his last position was Regional President/General
Manager--California. Mr. Lytle is a Certified Public Accountant and holds a
Bachelor of Arts degree in Business Administration with an emphasis in
accounting from Western Michigan University.
William F. Gibson III joined AmeriQuest in June 1988, and since January, 1994
has been the Vice President and Comptroller of AmeriQuest. He is a Certified
Public Accountant and holds a Bachelor of Science degree from University of
California--Berkeley in Business Administration.
Irwin A. Bransky founded Kenfil Inc. in 1983 and has been President and Chief
Executive Officer of Kenfil Inc. since that time. Mr. Bransky holds a B.S.
degree in Business Administration and a master's diploma in Personnel
Administration from the Graduate School of University of Witwaterstrand, South
Africa.
Peter S. H. Grubstein served as Chief Operating Officer of Kenfil Inc. from
January 1994 until its acquisition was completed on September 12, 1994. Prior
to his involvement with Kenfil Inc., he served as President of Grubstein
Holdings Ltd., a private equity investment firm. Mr. Grubstein holds a
bachelor's degree from Yale College.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The following table provides information concerning the annual and long-term
compensation of the Chief Executive Officer of AmeriQuest and each of the four
other highest paid executive officers who served as such at the end of fiscal
year 1994 for services rendered to AmeriQuest and its subsidiaries in all
capacities during the fiscal years 1994, 1993 and 1992.
<TABLE>
<CAPTION>
Long-Term All Other
Annual Compensation/(1)/ Compensation Compensation
------------------------- -------------------- ------------
Name and Stock Option
Principal Position Year Salary Bonus Awards (shares)/(2)/
- -------------------------- --------- -------------- -------- --------------------
<S> <C> <C> <C> <C> <C>
Harold L. Clark, 1994 $134,861/(3)/ -0- 250,000 shs. -0-
President and 1993 $ 18,000/(3)/ -0- -0- -0-
Chief Executive 1992 -0- -0- -0- -0-
Officer
Carol L. Miltner, 1994 $ 75,000 $28,125 100,000 shs. -0-
Executive Vice 1993 -0- -0- -0- -0-
President - 1992 -0- -0- -0- -0-
Sales and Marketing
Stephen G. Holmes, 1994 $130,819 -0- 100,000 shs. -0-
Secretary/Treasurer 1993 $100,000 -0- -0- -0-
Chief Financial 1992 $ 43,590 -0- -0-
Officer
Michael J. Rusert/(4)/, 1994 $130,050 -0- 100,000 shs.(4) 136,762(4)
Executive Vice 1993 $104,200 $15,000 -0- -0-
President and 1992 $ 63,859 -0- -0- -0-
Chief Operating Officer
Peter D. Lytle, 1994 $ 56,139 -0- 40,000 shs. -0-
Senior Vice 1993 -0- -0- -0- -0-
President - 1992 -0- -0- -0- -0-
Operations
Jim Farooquee/ (5)/ 1994 $ 36,717 -0- -0- $611,602
Former President 1993 $160,000 -0- -0- -0-
and Chief 1992 $160,700 -0- -0- -0-
Executive
Officer
</TABLE>
_________________________________
(1) In fiscal years 1994 and 1993, no executive officer received perquisites or
other personal benefits, securities or property which exceeded the lesser of
$50,000 or 10% of such executive officer's salary and bonus. Information
with respect to such types of compensation for years prior to fiscal year
1993 is not required to be provided.
(2) Stock options awarded in fiscal 1994 were non-qualified stock options
exercisable at $2.00 per share and are subject to the approval of
shareholders.
(3) Includes compensation received as a consultant in the applicable period in
the amounts of $59,861 and $18,000, respectively.
29
<PAGE>
(4) Michael J. Rusert left AmeriQuest on October 4, 1994. Upon his departure he
received a severance payment equal to nine months of salary ($112,500),
accrued but unpaid vacation pay ($12,262), the forgiveness of indebtedness
($12,000) and vested, non-qualified stock options exercisable at $2.00 per
shares (50,000 options). He was entitled to receive salary for two-years,
but elected to forego that right for the severance compensation described
above. He will be replaced by Mr. Gregory A. White, currently the President
of NCD. See "Item 4A. Executive Officers of the Registrant."
(5) On February 11, 1994, Mr. James Farooquee resigned his position as President
and Chief Executive Officer of AmeriQuest in lieu of $750,000 of severance
pay, Mr. Farooquee received $200,000 cash and forgiveness of his
indebtedness to AmeriQuest in the amount of $411,602. Mr Farooquee also
cancelled his claims for continuation of stock options earlier granted and
payment of accrued but unpaid vacation time. The parties also executed a
Mutual Release of All Claims.
OPTION GRANTS
The following table provides, as to the Chief Executive Officer and each of
the four other highest paid executive officers who served as such at the end of
fiscal year 1994, information concerning individual grants of stock options made
during fiscal year 1994.
<TABLE>
<CAPTION>
% of Total
No. of Options Potential Realizable Value
Securities Granted to at Assumed Annual Rates
Underlying Employees Exercise of Stock Price Appreciation
Options in Fiscal Price Expiration for Option Term(1)(2)(3)
-----------------------------
Name Granted Year 1994 (per share) Date 0% 5% 10%
- ----------------------------- ---------- --------------- ------------- ------------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Harold L. Clark 250,000 100% $2.00 12/3/99 $0 $170,000 $385,000
Carol L. Miltner 100,000 100% $2.00 12/3/99 $0 $ 68,000 $154,000
Stephen G. Holmes 100,000 100% $2.00 12/3/99 $0 $ 68,000 $154,000
Michael J. Rusert(4) 100,000 100% $2.00 12/3/99 $0 $ 68,000 $154,000
Peter D. Lytle 40,000 100% $2.00 12/3/99 $0 $ 27,000 $ 62,000
- -----------------------------
</TABLE>
(1) The options granted are non-qualified stock options which vest in 25%
increments every 14 months, with the first 25% to vest on February 3, 1995,
and every 14 months thereafter.
(2) The potential realizable values shown in these columns illustrate the
results of hypothetical annual rates of appreciation compounded annually
from the date of grant until the end of the option term, assuming an
initial investment equal to the aggregate exercise price shown for the
option grant. These amounts are reported net of the option exercise price
(which may be paid by delivery of already-owned shares of Common Stock),
but before any taxes associated with the exercise or subsequent sale of the
underlying shares.
(3) The dollar amounts in these columns are based on the hypothetical annual
rates of appreciation noted and are therefore not intended to forecast
possible future appreciation, if any, of the price of AmeriQuest's Common
Stock. Alternative formulas for determining potential realizable value
have not been utilized because AmeriQuest is not aware of any formula which
will determine with reasonable accuracy a present value based on future
unknown or volatile factors. There can be no assurance that the dollar
amounts reflected in these columns will be achieved. Actual gains, if any,
on stock option exercises are dependent on the future performance of the
Common Stock and overall market conditions, as well as the executive
officer's continued employment through the vesting period.
(4) Michael J. Rusert left AmeriQuest on October 4, 1994. He will be replaced
by Mr. Gregory A. White, currently the President of NCD. See "Item 4A.
Executive Officers of the Registrant."
30
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides, as to the Chief Executive Officer of
AmeriQuest and each of the four other highest paid executive officers who served
as such at the end of fiscal year 1994, information concerning unexercised stock
options at June 30, 1994. None of the executive officers exercised any stock
options during fiscal year 1994.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options at
at June 30, 1994 June 30, 1994/(1)/
------------------------------------------ -----------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Harold L. Clark, -0- 250,000 shs. -0- $343,750
Carol L. Miltner -0- 100,000 shs. -0- $137,500
Stephen G. Holmes 6,667 100,000 shs. $13,334 $137,500
Michael J. Rusert/(2)/ -0- 100,000 shs. -0- $137,500
Peter D. Lytle -0- 40,000 shs. -0- $ 55,000
- -----------------------------
</TABLE>
(1) Based on the closing price of AmeriQuest's Common Stock on the New York
Stock Exchange on June 30, 1994.
(2) Michael J. Rusert left AmeriQuest on October 4, 1994. He will be replaced
by Mr. Gregory A. White, currently the President of NCD. See "Item 4A.
Executive Officers of the Registrant."
COMPENSATION OF OUTSIDE DIRECTORS
AmeriQuest pays non-employee Directors $500 per quarter. In addition, non-
employee Directors receive $1,000 per year for each committee of which they are
a member. AmeriQuest has and will continue to pay the expenses of its non-
employee Directors in attending Board meetings. All directors are also eligible
to receive stock options as a form of compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended June 30, 1993, AmeriQuest granted options to each of
Messrs. Walker and Silvis to purchase 5,000 shares of AmeriQuest's Common Stock
at $1.50 per share. Such options were originally due to vest over a three-year
period; however, on December 3, 1993 the Board resolved that such options should
immediately vest, and be increased to 20,000 shares each exercisable at $1.875
per share. Mr. Silvas has exercised his option in full, but Mr. Walker still
holds his option. The proposal to adjust the stock options arrangements in favor
of Messrs. Walker and Silvis was proposed by the new directors without regard to
any compensation that might be paid to others pursuant to recommendation of the
Compensation Committee.
On March 4, 1994, the independent members of the Board of Directors
authorized AmeriQuest to grant five-year, non-qualified stock options to Mr.
Terren S. Peizer and Manufacturers Indemnity and Insurance Company of America in
the amounts of 400,000 shares and 150,000 shares, respectively, as additional
incentive for Messrs. Terren S. Peizer and Marc L. Werner to assist AmeriQuest
with its avowed policy of growth by acquisition. The options do not vest until
such time as AmeriQuest's operations attain a sales "run rate" of $300 Million
per year. The exercise price is $4.50 per share.
31
<PAGE>
Messrs. Marc L. Werner, Terren S. Peizer and William N. Silvis serve on the
Compensation Committee. While there are no "interlocks" between such
individuals and other companies with which they are affiliated or associated,
AmeriQuest granted options during fiscal 1994 to Mr. Terren S. Peizer and
Manufacturers Indemnity and Insurance Company of America, a company affiliated
with Mr. Werner, to secure the services of Messrs. Peizer and Werner in
connection with the projected efforts they were to expend in assisting
AmeriQuest in its acquisition of other companies. For additional information
see "Item 13. Certain Relationships and Related Transactions." below, which is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The following table sets forth, as of September 22, 1994, information
relating to the beneficial ownership of AmeriQuest's Common Stock by (i) each
person known to AmeriQuest to be the beneficial owner of more than five percent
of the outstanding shares of Common Stock of AmeriQuest, (ii) each director,
(iii) each of the executive officers for which executive compensation
information is provided, and (iv) all directors and executive officers as a
group. AmeriQuest knows of no agreements among its shareholders which relate to
voting or investment power over its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership as of September 22, 1994
---------------------------------------------
Number of Shares Percent of Class(8)
---------------- -------------------
Name and Address of Beneficial Owner
- ------------------------------------
<S> <C> <C>
Chrysler Capital Corporation 1,452,919 8.45%
225 High Ridge Road
Stamford, Connecticut 06905
Robert H. Beckett 900,656 5.24%
425 Privet Road
Horsham, PA 19044
DIRECTORS AND OFFICERS(6)(7)
- --------------------------------
Marc L. Werner 615,273(1)* 3.58%
Eric J. Werner 541,273(1)* 3.15%
Terren S. Peizer 496,000(2) 2.89%
William N. Silvis --0-- *
William T. Walker, Jr. 20,000(3)* *
Harold L. Clark --0-- *
Stephen G. Holmes 6,667(4)* *
Carol L. Miltner --0-- *
Howard B. Crystal --0-- *
Peter D. Lytle --0-- *
William F. Gibson, III 5,100(4) *
Irwin A. Bransky 471,579 2.74%
Peter S.H. Grubstein 559,595(5) 3.23%
All officers and directors as
a group (13 persons)(9) 2,180,214(1) 12.69%
- --------------------------------
</TABLE>
* Denotes less than 1%
32
<PAGE>
(1) The Board of Directors of Manufacturers Indemnity and Insurance Company of
America is vested with the voting and investment powers relating to the shares
of AmeriQuest's Common Stock held by Manufacturers Indemnity and Insurance
Company of America. Messrs. Marc L. Werner and Eric J. Werner are also directors
of Manufacturers Indemnity and Insurance Company of America, and may accordingly
be deemed to have shared voting and investment powers over the 535,273 shares of
AmeriQuest Common Stock held by Manufacturers Indemnity and Insurance Company of
America. Such shares are reflected in both of their names individually, but are
not duplicated in the caption relating to "All Officers and Directors as a
Group."
(2) Mr. Terren S. Peizer is the sole shareholder of the corporate general
partner of Wendover Financial Company L.P., and may be deemed to have sole
voting and investment powers over the 496,000 shares of AmeriQuest Common Stock
held by Wendover Financial Company L.P. All such shares are included in the
foregoing table.
(3) All of the shares reflected in the name of Mr. Walker are issuable upon
exercise of currently exercisable options to purchase Common Stock at $1.50 per
share granted to Walker Associates, of which Mr. Walker is the President and
Chairman. The shares subject of the option were increased on December 3, 1993
from 10,000 shares to 20,000 shares, and afforded immediate vesting.
(4) Represents stock options currently vested and issuable upon exercise of
such options.
(5) The number of shares listed for Mr. Grubstein includes 107,000 shares of
AmeriQuest Common Stock issuable in consequence of the assumption by AmeriQuest
of Kenfil's obligation under a Warrant issued to Corporate Efficiency
Consulting, L.P., a New Jersey limited partnership ("CEC") for 315,000 shares of
Kenfil Common Stock.
(6) The address for the executive officers and directors and proposed directors
is: 2722 Michelson Drive, Irvine, California 92715.
(7) Each executive officer and director has sole voting and investment power
with respect to the shares listed, unless otherwise indicated.
(8) For purposes of determining the percentage of outstanding Common Stock held
by each person or group set forth in the table, the number of shares is divided
by the sum of the number of shares of AmeriQuest's Common Stock outstanding on
September 22, 1994 (17,181,453 shares) plus the number of shares of Common Stock
subject to outstanding stock options and warrants exercisable currently or
within 60 days of September 22, 1994 by such person or group, in accordance with
Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended.
Percentages of less than 1% are represented by an asterisk.
(9) Includes 138,667 shares currently vested and issuable upon exercise of
outstanding options and warrants.
33
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
On March 4, 1994, the independent members of the Board of Directors
authorized AmeriQuest to grant five-year, non-qualified stock options to Mr.
Terren S. Peizer and Manufacturers Indemnity and Insurance Company of America in
the amounts of 400,000 shares and 150,000 shares, respectively, as additional
incentive for Messrs. Terren S. Peizer and Marc L. Werner to assist AmeriQuest
with its avowed policy of growth by acquisition. The options do not vest until
such time as AmeriQuest's operations attain a sales "run rate" of $300 Million
per year. The Stock Option Agreements do not define "run rate," but management
believes that AmeriQuest has already achieved a level of sales which would
satisfy such a test. The exercise price is $4.50 per share.
SEVERANCE ARRANGEMENTS WITH PRECEDING MANAGEMENT
On February 11, 1994, Mr. James Farooquee resigned his position as President
and Chief Executive Officer of AmeriQuest. In lieu of $750,000 of severance pay,
Mr. Farooquee received $200,000 cash and forgiveness of his indebtedness to
AmeriQuest in the amount of $411,602. Mr. Farooquee also cancelled his claims
for continuation of stock options earlier granted and payment of accrued but
unpaid vacation time. The parties also executed a Mutual Release of All Claims.
_________________________________
On February 23, 1994, Mr. James D'Jen entered into an Amendment to Employment
Agreement which amended his earlier Employment Agreement with AmeriQuest. The
Amendment provided for the payment of $150,000 per year through June 30, 1994,
only, the immediate vesting of all options earlier granted to Mr. D'Jen (but
with a proviso that all such options must be exercised on or before December 31,
1994), and payment of eight weeks of accrued and unpaid vacation time. Such
arrangements were in lieu of $495,000 in severance pay.
AmeriQuest also contracted with Mr. D'Jen to exchange all of the issued and
outstanding shares of CMS Enhancements (S) PTE Ltd., a Singapore corporation
wholly-owned by AmeriQuest in exchange for 350,000 shares of AmeriQuest Common
Stock. On July 8, 1994 Mr. D'Jen delivered 345,091 shares. Upon the receipt of
the balance due, AmeriQuest will be divested of this Singapore subsidiary. Sales
for the Singapore subsidiary approximate $20 million annually, but do not
effectively contribute to AmeriQuest's current strategy where the Singaporean
subsidiary had gross margins which averaged only 3% of sales with an approximate
break-even on operations.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a) Financial Statements and Schedules
(1) Financial Statements included in Part II of this Report:
Page Reference
--------------
Report of Independent Public Accountants......... 40
Balance Sheets at June 30, 1994 and 1993......... 41
Statements of Operations for each of the
three years ended June 30, 1994................ 42
Statements of Stockholders' Equity for
each of the three years ended June 30, 1994... 43
Statements of Cash Flows for each of
the three years ended June 30, 1994........... 39
Notes to Financial Statements.................... 46
(2) Financial Statement Schedules
Schedule VIII - Valuation and Qualifying
Accounts and Reserves......................... 52
Schedule IX - Short-term Borrowings.............. 52
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 18, 1994
reporting the pending disposition of the
Registrant's Singapore subsidiary.
Current Report on Form 8-K dated September 12, 1994
reporting the acquisition of Kenfil and 50.1% of Robec.
35
<PAGE>
(c) Exhibits
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Location of
Exhibit No. Title of Document Page No. Filing
- ----------- ------------------------------------------------------- ------------------ ------------------------
<S> <C> <C> <C>
2.01* Amended and Restated Agreement and Plan of 7 SEC File 0-18115
Reorganization dated as of August 11, 1994 by, Current Report on Form
between and among AmeriQuest, Robec and 8-K dated Sept. 22, 1994
certain principal shareholders of Robec
2.02* Agreement and Plan of Reorganization dated September 50 Original Form
26, 1994 by, between and among AmeriQuest, Ross White 10-K for June 30, 1994
Enterprises, Inc. d/b/a "National Computer Distributors
("NCD") and the shareholders of NCD
3.01* Certificate of Incorporation of AmeriQuest 85 SEC File 1-10397
as amended Original Form
10-K for June 30, 1994
3.02* By-laws of AmeriQuest 189 SEC File 33-81726
4.01* Reference is made to Exhibits 3.01 and 3.02,
the Certificate of Incorporation and Bylaws,
which define the rights of security holders
4.02* Specimen Stock Certificate 274 SEC File 33-81726
10.01* Loan and Security Agreement dated, 283 SEC File 33-81726
August 19, 1993, as amended, between
AmeriQuest and certain of its subsidiaries
and Silicon Valley Bank
10.02* Addendum to Agreement for Wholesale 365 SEC File 33-81726
Financing - Flexible Payment
Plan dated September 30, 1993 between
CDS Distribution Inc. and IBM Credit
Corporation
10.03* Standard Industrial Lease - Net dated 402 SEC File 33-81726
July 26, 1990, as amended, between AmeriQuest
and Varian Associates (successor-in-interest
to Koll Center Irvine East)
10.04* Amended and Restated Loan and Security Agreement 118 Original Form
dated as of July 1, 1992 by and between AmeriQuest/ 10-K for June 30, 1994
Kenfil Inc. and American National Bank and Trust
Company of Chicago
10.05* Incentive Stock Option Plan SEC File 2-96539
10.06* Employee Stock Bonus Plan SEC File 33-23809
10.07 Form of Employment Agreement for Messrs. Harold L. 332 Original Form
Clark, Stephen G. Holmes, Peter Lytle, William 10-K for June 30, 1994
F. Gibson, Howard B. Crystal and Ms. Carol L.
Miltner
10.08 Stock Option Agreement dated March 4, 1994 53 Amendment No. 4 to
between AmeriQuest and Terren S. Peizer 10-K/A for June 30, 1994
10.09 Stock Option Agreement dated March 4, 1994 58 Amendment No. 4 to
between AmeriQuest and Manufacturers Indemnity 10-K/A for June 30, 1994
and Insurance Company of America
10.10 Exchange Agreement between AmeriQuest and Mr. 62 Amendment No. 4 to
James D'Jen for the disposition of CMS Enhancements 10-K/A for June 30, 1994
21.01 Subsidiaries of AmeriQuest 351 Original Form
10-K for June 30, 1994
27.01 Financial Data Schedule 66
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C>
24.01 Powers of Attorney for Messrs. 50 First Form 10-K/A filed
Marc L. Werner, Eric J. Werner October 26, 1994
Terren S. Peizer, William
T. Walker, Jr. and William N. Silvis
</TABLE>
_________________________________
* 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.
37
<PAGE>
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 Santa
Ana, State of California, on the 4th day of April, 1995.
AMERIQUEST TECHNOLOGIES, INC.
By:/s/ Harold L. Clark
-------------------------------------
Harold L. Clark, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Harold L. Clark Co-Chairman of the Board, Chief April 4, 1995
- ------------------------------------------- Executive Officer and Director
Harold L. Clark (Principal Executive Officer)
/s/ Gregory A. White President, Chief Operating April 4, 1995
- ---------------------------------------- Officer and Director
Gregory A. White
/s/ Stephen G. Holmes Secretary, Treasurer, Chief April 4, 1995
- ---------------------------------------- Financial Officer and Director
Stephen G. Holmes (Principal Financial and
Accounting Officer)
/s/ Marc L. Werner Chairman of the Board April 4, 1995
- -----------------------------------------
Marc L. Werner**
/s/ Eric J. Werner Director April 4, 1995
- -------------------------------------------
Eric J. Werner**
/s/ Terren S. Peizer Director April 4, 1995
- -------------------------------------------
Terren S. Peizer**
/s/ William T. Walker, Jr. Director April 4, 1995
- -----------------------------------------
William T. Walker, Jr.**
/s/ William N. Silvis Director April 4, 1995
- -------------------------------------------
William N. Silvis**
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Robert H. Beckett Director April 4, 1995
- ----------------------------------------
Robert H. Beckett
/s/ Harold L. Clark /s/ Stephen G. Holmes
- ------------------------------------------- ------------------------------------------
Harold L. Clark,* Stephen G. Holmes,**
Attorney-in-Fact Attorney-in-Fact
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AmeriQuest Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of AmeriQuest
Technologies, Inc. (a Delaware corporation, formerly CMS Enhancements, Inc.) and
subsidiaries (AmeriQuest) as of June 30, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1994. These financial
statements and the schedules referred to below are the responsibility of
AmeriQuest's management. Our responsibility is to express an opinion on these
financial statements and schedules 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 June 30, 1994 and 1993 and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1994 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 a whole. The schedules listed in the index on page
35 are presented for purposes of complying with the Securities and Exchange
Commissions rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, fairly state 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
ARTHUR ANDERSEN LLP
Orange County, California
September 30, 1994
40
<PAGE>
AmeriQuest Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
(Dollars in thousands) 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,200 $ 1,020
Accounts receivable, less allowances
for doubtful accounts of $477 and
$253 as of June 30, 1994 and 1993,
respectively 24,708 7,247
Inventories 24,165 7,000
Other current assets 1,627 450
-------- --------
Total current assets 53,700 15,717
-------- --------
PROPERTY AND EQUIPMENT, NET 4,078 2,285
INTANGIBLE ASSETS, NET 6,490 --
OTHER ASSETS 877 2,272
-------- --------
$ 65,145 $ 20,274
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,408 $ 9,138
Notes payable 23,059 --
Other current liabilities 2,361 675
-------- --------
Total current liabilities 48,828 9,813
-------- --------
SUBORDINATED NOTES PAYABLE TO
SHAREHOLDERS 3,175 1,550
-------- --------
DEFERRED INCOME TAXES 267 267
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized 10,000,000 shares;
no shares issued and outstanding -- --
Common stock, $.01 par value;
authorized 30,000,000 shares; issued
and outstanding, 9,857,779 and
3,180,710, shares, as of June 30, 1994
and 1993, respectively 99 32
Additional paid-in capital 27,345 15,210
-------- --------
Accumulated deficit (14,569) (6,598)
-------- --------
Total stockholders' equity 12,875 8,644
$ 65,145 $ 20,274
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
41
<PAGE>
AmeriQuest Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Year Ended June 30,
- --------------------------------------------------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 87,593 $ 73,082 $ 115,053
COST OF SALES 75,023 61,539 104,007
--------- --------- ---------
Gross profit 12,570 11,543 11,046
--------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative 14,119 10,274 14,085
Restructuring charge 5,700 -- 4,500
Research and development 25 782 1,508
--------- --------- ---------
19,844 11,056 20,093
--------- --------- ---------
Income (loss) from operations (7,274) 487 (9,047)
--------- --------- ---------
OTHER (INCOME) EXPENSE
Other income (31) (26) (6)
Interest expense 728 277 582
--------- --------- ---------
697 251 576
--------- --------- ---------
Income (loss) before taxes (7,971) 236 (9,623)
BENEFIT FOR INCOME TAXES -- -- (730)
--------- --------- ---------
Net income(loss) $ (7,971) $ 236 $ (8,893)
========= ========= =========
Net income (loss) per common share
and common share equivalent $ (1.33) $ 0.08 $ (3.04)
========= ========= =========
Weighted average shares outstanding 5,973,511 3,060,908 2,921,588
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
AmeriQuest Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In (Deficit)
-------------------
(Dollars in thousands) Shares Amount Capital Earnings
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at June 30, 1991 2,910,149 $ 29 $ 14,718 $ 2,059
Exercise of employee stock options (Note 9) 11,374 -- 33 --
Common stock issued to employees 4,000 -- 6 --
Net loss for the year ended
June 30, 1992 -- -- -- (8,893)
- -------------------------------------------------------------------------------------------------------
Balances at June 30, 1992 2,925,523 29 14,757 (6,834)
Common stock issued to
unrelated parties (Note 9) 143,000 2 286 --
Common stock issued for
assets (Note 2) 100,000 1 149 --
Exercise of employee stock options (Note 9) 12,187 -- 18 --
Net income for the year ended
June 30, 1993 -- -- -- 236
- -------------------------------------------------------------------------------------------------------
Balances at June 30, 1993 3,180,710 32 15,210 (6,598)
Common stock issued to
unrelated parties (Note 9) 4,905,072 49 9,054 --
Common stock issued for
businesses acquired (Note 2) 1,730,330 17 3,011 --
Exercise of employee stock options (Note 9) 41,667 1 70 --
Net loss for the year ended
June 30, 1994 -- -- -- (7,971)
- -------------------------------------------------------------------------------------------------------
Balances at June 30, 1994 9,857,779 $ 99 $ 27,345 $ (14,569)
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
AmeriQuest Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
(Dollars in thousands) 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,200 $ 1,020
Accounts receivable, less allowances
for doubtful accounts of $477 and
$253 as of June 30, 1994 and 1993,
respectively 24,708 7,247
Inventories 24,165 7,000
Other current assets 1,627 450
-------- --------
Total current assets 53,700 15,717
-------- --------
PROPERTY AND EQUIPMENT, NET 4,078 2,285
INTANGIBLE ASSETS, NET 6,490 --
OTHER ASSETS 877 2,272
-------- --------
$ 65,145 $ 20,274
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,408 $ 9,138
Notes payable 23,059 --
Other current liabilities 2,361 675
-------- --------
Total current liabilities 48,828 9,813
-------- --------
SUBORDINATED NOTES PAYABLE TO
SHAREHOLDERS 3,175 1,550
-------- --------
DEFERRED INCOME TAXES 267 267
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized 10,000,000 shares;
no shares issued and outstanding -- --
Common stock, $.01 par value;
authorized 30,000,000 shares; issued
and outstanding, 9,857,779 and
3,180,710, shares, as of June 30, 1994
and 1993, respectively 99 32
Additional paid-in capital 27,345 15,210
-------- --------
Accumulated deficit (14,569) (6,598)
-------- --------
Total stockholders' equity 12,875 8,644
$ 65,145 $ 20,274
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
44
<PAGE>
AmeriQuest Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
(Dollars in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (7,971) $ 236 $ (8,893)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,107 1,013 1,428
Minority interest - - (798)
Provision for losses on accounts receivable 577 328 591
Provision for losses on inventories 1,714 633 3,388
Benefit for income taxes - - (731)
(Gain) loss on sale of equipment - 33 (3)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,698) 3,302 (584)
(Increase) decrease in inventories and other (1,447) 953 8,219
(Increase) decrease in other assets 1,500 (1,449) 3,544
Decrease in accounts payable and other (2,190) (3,776) (3,443)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (8,408) 1,273 2,718
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (1,546) (1,260) (318)
Net cash received from acquisition of businesses 769 - -
Proceeds from sale of equipment - 17 21
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (777) (1,243) (297)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of common stock for assets - 150 -
Proceeds from subordinated note payable - 1,505 -
Proceeds from notes payable borrowings 59,381 55,403 104,523
Principal payments on notes payable and capital leases (55,640) (57,072) (107,923)
Proceeds from sale of common stock 7,624 306 33
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,365 292 (3,367)
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 2,180 322 (946)
Cash-beginning of the year 1,020 698 1,644
- ----------------------------------------------------------------------------------------------------------------------------------
Cash-end of the year $ 3,200 $ 1,020 $ 698
==================================================================================================================================
</TABLE>
Supplemental Disclosures of Cash Flow Information:
Interest on lines of credit: During 1994, 1993 and 1992 the Company paid
interest costs of approximately $728, $277 and
$582, respectively.
Income taxes: During 1994, 1993 and 1992 the Company made no tax
payments.
Noncash investing and financing activities:
Capital leases: During 1994, the Company entered into capital
leases for computer equipment totaling
approximately $180.
Subordinated note
payable conversion: During 1994, the Company issued approximately
522,000 shares of common stock upon the conversion
of a $1,550 subordinated note payable.
Businesses acquired: During 1994, the Company acquired three businesses
summarized as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 43,537
Liabilities assumed (40,459)
Common stock issued (3,028)
-------
Cash paid 50
Less cash acquired (819)
-------
Net cash received from acquisitions $ (769)
=======
</TABLE>
The accompany notes are an integral part of these consolidated financial
statements.
<PAGE>
AmeriQuest Technologies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Basis of consolidation
The consolidated financial statements include the accounts of AmeriQuest
Technologies, Inc., a Delaware corporation, (formerly CMS Enhancements, Inc.)
and its majority and wholly-owned subsidiaries, collectively referred to as the
Company. All significant intercompany accounts and transactions have been
eliminated.
Inventories
Inventories consist principally of computer hardware and software held for
resale and are stated at the lower of first-in, first-out cost or market.
Reserves for inventory obsolescence and slow moving product are provided based
upon specified criteria, such as recent sales activity and date of purchase.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight line method over estimated useful lives as follows:
Equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements Lease term
Vehicles 3 to 5 years
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and betterments to property and equipment are capitalized.
When assets are disposed of, the related cost and accumulated depreciation
thereon are removed from the accounts and any resulting gain or loss is included
in operations.
Intangible assets
The excess of the cost to acquire businesses over the fair value of the net
assets acquired and other acquired intangibles are amortized using the straight-
line method over ten years from the date of acquisition. The amortization of
intangible assets generally relates to the expectation that the underlying value
will benefit the Company over a period of years. On a quarterly basis, the
Company assesses the recoverabiliy of intangible assets based upon consideration
of past performance and future expectations as to undiscounted cash flow on an
acquisition by acquisition basis to the extent seperately identifiable. To the
extent separate assessment of such acquired intangibles is no longer feasible
(i.e. as a result of integrating multiple acquisitions into a single business
unit) such assessment will be performed on a combined basis as appropriate.
Market development funds
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.
Restructuring charge
The costs of transitioning the operations of the Company and thereby
substantially altering the ongoing business of the Company are accrued at the
time the related decision is made and implementation begun.
Accounting period
In 1994, the Company adopted a policy whereby the Company's fiscal year ends on
the Friday closest to June 30. The year ending dates for the past three fiscal
years were July 1, 1994, June 30, 1993 and June 30, 1992, respectively. For
presentation purposes, all of the aforementioned fiscal year ends are referred
to as June 30. The adoption of this new accounting period had no material effect
on the accompanying consolidated financial statements.
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 reflected 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 estimated and expected future costs
for which a reserve of approximately $1 million was in place at June 30, 1994.
Income taxes
Effective July 1, 1993, the Company changed its method of accounting for income
taxes from the deferred method to the liability method required by Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." As
permitted under these rules, prior year financial statements have not been
restated. The change to the liability method of accounting for income taxes had
no material effect on the accompanying consolidated financial statements.
Net income (loss) per common share and common share equivalent
Net income (loss) per common share and common share equivalent is computed by
dividing net income (loss) by the weighted average number of shares of common
stock and common stock equivalents outstanding. Common stock equivalents that
increase earnings per share or decrease loss per share were excluded from the
computation.
Minority interest
Effective June 6, 1994, the Company acquired 51 percent of the outstanding
common stock of Kenfil, Inc. Kenfil, Inc. had a equity deficit at the date of
acquisition and therefore no amounts have been reflected as minority interest in
the accompanying consolidated financial statements.
46
<PAGE>
- --------------------------------------------------------------------------------
In process at June 30, 1994 (completed by September 1994)
Proposed Accounting Standard
The Financial Accounting Standards Board has proposed certain accounting
standards which may impact the financial reporting of AmeriQuest in future
periods. If adopted, and as principally related to post retirement and
employment benefits, such proposed standards would not have a material impact on
the financial statements of AmeriQuest.
Reclassifications
Certain amounts in the prior periods have been reclassified to conform to the
current year's presentation.
2. Acquisitions
The Company is pursuing a growth through acquisition strategy of acquiring
regional distributors with the ultimate goal of creating a national distributor
of value added computers, subsystems and peripherals.
The success of this strategy is dependent upon the ability of the Company to
effectively consolidate and integrate the operations of the acquired
businesses, combine different cultures and obtain adequate financing to
complete acquisitions and fund working capital requirements.
Since 1993, the acquisitions of the Company have included:
Completed by June 30, 1993
Vitronix, Inc. ("Vitronix")
As of March 1993, the Company acquired certain assets of Vitronix for common
stock of the Company. Vitronix is a distributor computer products and
services, specializing in UNIX applications, and is based in Boston,
Massachusetts.
Completed by June 30, 1994
Management Systems Group("MSG")
As of December 1993, the Company acquired certain assets and assumed certain
liabilities of MSG for common stock of the Company and certain contingent
consideration. MSG is a distributor of computer products and services,
specializing in systems and networking applications, and is based in Long
Island, New York.
Rhino Sales Company ("Rhino")
As of December 1993, the Company acquired the outstanding common stock of Rhino
for a combination of cash and common stock of the Company. Rhino is a
distributor of computer products and services, specializing in UNIX
applications, and is based in Fenton, Michigan.
Kenfil Inc. ("Kenfil")
As of June 1994, the Company acquired 51% of the outstanding common stock of
Kenfil for common stock of the Company. Kenfil distributes microcomputer
software and is based in Southern California.
Kenfil Inc. ("Kenfil")
As of September 1994, the Company acquired the remaining outstanding 49% of the
common stock of Kenfil and converted certain trade and subordinated debt of
Kenfil for common and convertible preferred stock of the Company.
Robec, Inc. ("Robec")
As of September 1994, the Company acquired 51% of the outstanding common stock
of Robec for common stock of the Company. Robec is a distributor of computer
products and services, specializing in systems and UNIX applications, and is
based in Horsham, Pennsylvania.
In process at September 1994
Robec, Inc. ("Robec")
The Company proposes to acquire the remaining 49% of outstanding common stock of
Robec during 1995.
National Computer Distributors ("NCD")
As of September 1994, the Company entered into an agreement to acquire the
outstanding common stock of NCD for cash and common stock of the Company. NCD
is a distributor of computer products and services, specializing in systems and
connectivity applications, and is based in Fort Lauderdale, Florida. This
proposed transaction is expected to be completed in November 1994.
The following summarizes the cost of the Company's acquisitions (dollars in
thousands):
<TABLE>
<CAPTION>
Common Common Stock Cash
Company Shares Issued Consideration Consideration
------- ------------- ------------- -------------
<S> <C> <C> <C>
Completed by June 30, 1993
Vitronix 100,000 $ 150
--------- -----
Completed by June 30, 1994
MSG 400,000 700
Rhino 200,000 350 $ 50
Kenfil,51% 1,130,330 1,978
--------- -----
1,730,330 3,028
--------- -----
Completed by September 1994 (Unaudited)
Kenfil, 49% 1,046,254 1,831
Robec, 51% 1,402,800 2,455
In process at September 1994 (Unaudited)
Robec, 49% 1,397,195
NCD 1,864,767
</TABLE>
The accompanying consolidated financial statements do not include the effects of
those transactions not completed by June 30, 1994.
The acquisitions were accounted for using the purchase method and, accordingly,
the financial statements include the results of their operations from the
effective acquisition dates. As to
47
<PAGE>
- --------------------------------------------------------------------------------
common stock consideration, all such acquisitions are reflected utilizing a per
share valuation of $1.75, representing management's estimate of the fair value
of the Company's common stock. This valuation is based upon prices obtained for
large blocks of the Company's common stock in recently completed private equity
placement transactions. This valuation represents a significant discount from
quoted market prices due to the thin public trading volume and small public
float of AmeriQuest common stock.
The contingent consideration granted to certain of the former owners of the
acquired businesses is dependent upon the attainment of certain defined profit
objectives of the acquired companies and consists of the right to acquire common
stock of the Company at previously agreed upon prices, additional cash
consideration or the issuance of additional common stock. Additional contingent
consideration earned in connection with the attainment of the profit objectives,
if any, will be reflected as an increase in the excess of cost over the fair
value of net assets acquired. As to the specific acquisitions of the Company,
such potential contingent common stock and cash consideration is less than
$400,000 in the aggregate and is limited to the MSG and Rhino acquisitions.
Management believes that the most significant intangible acquired is that of the
distribution channels. Management has assigned a 10 year economic life to this
intangible asset as that is the period of time that management expects to derive
benefit from the existing vendor relationships and market position. Management
determined that 10 years is an appropriate economic life based upon the
historical length of the acquiree's vendor relationships and the overall size
and quality of the acquiree's vendors and their product offerings.
The purchase price allocation associated with the Kenfil acquisition is based
upon the Company's preliminary estimates of the fair value of net assets
acquired. The Company is currently in the process of completing its detailed
analysis of the fair value of Kenfil net assets acquired and therefore the
related intangible assets included in the accompanying financial statements may
change as a result of the completed analysis.
The following unaudited pro forma combined information shows the results of the
Company's operations for the fiscal years ended June 30, 1994 and 1993 as
though the MSG, Rhino and Kenfil acquisitions had occurred as of the beginning
of those periods (in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended June 30, 1994 1993
<S> <C> <C>
Revenues $ 241,350 $ 289,863
Net income (loss) (28,541) 1,920
Net income (loss) per share (2.44) .24
Weighted average shares 11,702,467 8,031,710
</TABLE>
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisitions taken place at the beginning of the indicated period or the results
that may occur in the future. Furthermore, the pro forma results do not give
effect to cost savings which may occur as a result of the consolidation of the
acquired companies.
3. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 19,977 $ 2,747
Raw materials and subassemblies 4,188 4,253
- --------------------------------------------------------------------------------
$ 24,165 $ 7,000
================================================================================
</TABLE>
Inventories are reflected net of reserves of approximately $2.6 million and $3.1
million at June 30, 1994 and 1993, respectively. Inventories do not contain any
labor or overhead.
The Company manages its inventories by maintaining sufficient quantities to
achieve high order fill rates while at the same time attempting to stock only
those products in high demand with a rapid turnover rate. Inventory balances
will fluctuate as the Company adds new product lines and when appropriate, makes
large purchases and cash purchases from manufacturers when the terms of such
purchases are considered advantageous. The Company's contracts with most of its
vendors provide price protection and stock return privileges to reduce the risk
of loss to the Company due to manufacturer price reductions and slow moving or
obsolete inventory. In the event of a vendor price reduction, the Company
generally receives a credit for products in inventory. In addition, the Company
has the right to return a certain percentage of purchases, subject to certain
limitations. Historically, price protection and stock return privileges as well
as the Company's inventory management procedures have helped to reduce the risk
of loss of carrying inventory.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 5,106 $ 4,908
Furniture and fixtures 5,563 2,597
Leasehold improvements 433 724
11,102 8,229
Less accumulated depreciation and
amortization 7,024 5,944
- --------------------------------------------------------------------------------
$ 4,078 $ 2,285
================================================================================
</TABLE>
5. Intangible Assets
Intangible assets consists of the following (in thousands):
<TABLE>
<CAPTION>
================================================================================
June 30, 1994
<S> <C>
Excess of cost of businesses
over fair value of net assets
acquired $ 4,091
Distribution rights 2,400
Other 210
Accumulated amortization 211
- --------------------------------------------------------------------------------
$ 6,490
================================================================================
</TABLE>
Represented as to acquiree by (in thousands):
<TABLE>
<CAPTION>
June 30, 1994
- --------------------------------------------------------------------------------
<S> <C>
Kenfil $ 4,308
MSG 2,205
Rhino 188
- --------------------------------------------------------------------------------
$ 6,701
================================================================================
</TABLE>
The life of each intangible asset category is presumed to be 10 years.
6. Notes Payable
The Company maintains lines of credit with financial institutions which in the
aggregate provide for revolving credit of over $30 million at June 30, 1994.
Under these facilities approximately $23 million was drawn at June 30, 1994 with
then available but undrawn funds of approximately $7 million. Interest on these
credit facilities is based on the published prime rate plus a specified
percentage ranging from 1% to 3% (at June 30, 1994 the prime rate was 7.25%).
Borrowings under these facilities are
48
<PAGE>
- --------------------------------------------------------------------------------
limited to a contractual percentage of eligible inventories and receivables. At
June 30, 1994, all inventories and accounts receivable were pledged as
collateral under these facilities and the lenders hold liens on substantially
all of the other assets owned by the Company. The terms of the lending
agreements include certain restrictive covenants which require the maintenance
of specified financial covenants generally related to tangible net worth,
working capital attributes and total debt to tangible net worth. As of June 30,
1994, the Company was in compliance with these covenants.
As part of the acquisition of Kenfil, the Company assumed certain subordinated
note payable obligations of Kenfil totaling $3,175,000 as of June 30, 1994. This
amount includes a note payable to a financial institution and notes payable to
two stockholders of the Company. Such notes bear interest ranging from 9.5% to
13.91% and were originally payable at various dates through September 22, 1997.
These obligations were settled subsequent to June 30, 1994 through the issuance
of the Company's common stock in conjunction with the purchase of the remaining
49% of Kenfil in September 1994.
7. Income Taxes
The benefit for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30, 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable-
Federal $ -- $ -- $ (129)
State -- -- (2)
- --------------------------------------------------------------------------------
-- -- (131)
- --------------------------------------------------------------------------------
Deferred taxes-
Current -- 7 (124)
Long-term -- (7) (475)
- --------------------------------------------------------------------------------
-- -- (599)
- --------------------------------------------------------------------------------
$ -- $ -- $ (730)
================================================================================
</TABLE>
The deferred tax asset (liability) of the Company consists of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Inventory reserves $ 481 $ 150
Depreciation 331 300
Allowance for doubtful accounts 153 100
Other (487) (267)
Net operating loss carryforwards 4,800 1,800
Valuation allowance (5,545) (2,350)
- --------------------------------------------------------------------------------
$ (267) $ (267)
================================================================================
</TABLE>
The principal elements accounting for the difference between income taxes
computed at the statutory rate and the effective rate are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended June 30, 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax expense
(credit) computed at
statutory rate $ (3,200) $ 80 $ (3,272)
State taxes, net of
federal benefit -- 15 2
Tax (benefit from) earnings of
foreign operations -- (24) --
Effect of U.S. and foreign
net operating losses 3,200 (71) 2,540
- --------------------------------------------------------------------------------
$ -- $ -- $ (730)
- --------------------------------------------------------------------------------
</TABLE>
At June 30, 1994, the Company had an income tax operating loss carryforward of
in excess of $12 million, which is available to offset earnings in future
periods through 2008. The Company acquired approximately $10 million of net
operating losses upon completing the acquisition of Kenfil in September 1994, as
well as Kenfil's deferred tax assets and liabilities. The benefit of Kenfil's
tax attributes are not available until June 1995. The Company and Kenfil
experienced "ownership changes" in 1994 for income tax purposes, which changes
will result in future annual limitations on the utilization of net operating
loss carryforwards.
8. Commitments and Contingencies
The Company leases its corporate office, warehouse space and certain equipment
under operating leases. Future minimum rental commitments for all
non-cancellable operating leases at June 30, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
- --------------------------------------------------------------------------------
<S> <C>
1995 $ 1,049
1996 365
1997 70
1998 18
1999 & thereafter 21
- --------------------------------------------------------------------------------
$ 1,523
================================================================================
</TABLE>
Total rental expense under non-cancellable agreements for the years ended June
30, 1994, 1993 and 1992 was approximately $1,083,000, $694,000 and $925,000,
respectively.
The Company is from time to time involved in various lawsuits generally
incidental to its business operations, primarily collection actions and vendor
disputes. In the opinion of management, the outcome of these matters will not
have a material adverse effect on the financial statements.
The Company is contingently liable at June 30, 1994 under the terms of
repurchase agreements with financial institutions providing inventory financing
for dealers of the Company's products. The contingent liability under those
agreements approximates the amount financed, reduced by the resale value of any
products which may be repurchased, and the risk of loss is spread over numerous
dealers and financial institutions. Losses under these agreements have been
immaterial in the past. Sales under these agreements during the years ended
June 30, 1994, 1993 and 1992 were approximately $7 million, $6 million, and $12
million, respectively.
9. Common Stock
Common stock issued to unrelated parties in fiscal 1993 and 1994 follows:
<TABLE>
<CAPTION>
Net
Date Description Shares Proceeds
- ---- ----------- ------ --------
<S> <C> <C> <C>
February, 1993 Regulation S 143,000 $ 288
August, 1993 Regulation S 150,000 348
December, 1993 Change of control 3,400,000 5,305
December, 1993 Debt conversion 521,739 1,500
June, 1994 Regulation S 833,333 1,950
--------- ------
4,905,072 $9,103
========= ======
</TABLE>
In fiscal 1994, warrants to acquire common stock of the Company were issued to
unrelated parties aggregating 416,667 shares, are exercisable at $5 per share
(the then quoted market price) and expire in June 1996. Additionally, in fiscal
year 1994, the Company issued to a financial institution, warrants to acquire
60,000 shares of common stock of the Company at $2.75 per
49
<PAGE>
- --------------------------------------------------------------------------------
share (the then quoted market price), expiring in August 1998. The Company has
instituted various stock option plans which authorize the granting of options to
key employees, directors, officers, vendors and customers to purchase shares of
the Company's common stock. All grants of options during the years presented
have been to employees or directors and were granted at the then quoted market
price. A summary of shares available for grant and the options outstanding under
the plans are as follows:
<TABLE>
<CAPTION>
Shares Available Options Price
for Grant Outstanding Range
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, June 30, 1991 193,115 91,544 $ 3.00
Options granted (100,000) 100,000 1.50
Options exercised -- (11,374) 3.00
Cancelled 41,385 (41,385) --
- --------------------------------------------------------------------------------
Balances, June 30, 1992 134,500 138,782 1.50-3.00
1993 stock option plan 140,000 -- --
Options granted (73,000) 73,000 2.00-2.50
Options exercised -- (12,187) 1.50
Cancelled 6,750 (6,750) 2.50
- --------------------------------------------------------------------------------
Balances, June 30, 1993 208,250 192,845 1.50-2.50
1994 stock option plan 250,000 -- --
Options granted (20,000) 20,000 2.38-4.50
Options exercised -- (41,667) 1.50-2.00
Cancelled 78,818 (78,818) --
- --------------------------------------------------------------------------------
Balances June 30, 1994 517,068 92,360 $ 1.50-4.50
================================================================================
</TABLE>
The 92,360 options outstanding are exercisable at varying periods, 72,360
currently and 20,000 through 1996.
Also, during fiscal year 1994 and subject to shareholder approval, the Company
granted new management and certain directors options to acquire an aggregate of
650,000 and 550,000 shares of common stock of the Company at exercise prices of
$2 and $4.50 (the then quoted market price), respectively. Management options
are exercisable at the rate of 25% each 14 months and director options are
exercisable upon achievement of a sales run rate of $300 million.
In September 1994, the shareholders approved an increase in the authorized
common stock of the Company from 10 to 30 million shares, the effect of which is
reflected herein.
10. Settlement with Former Officer
During 1994, in conjunction with the resignation of the Company's president, the
Company paid the former president $125,000 in settlement of severance, unpaid
vacation pay and other benefits. In addition, the Company also forgave
approximately $360,000 in amounts receivable from such officer which represented
prior advances and accrued interest.
11. Investments
During 1994, the Company acquired 40% of the common stock of a California based
computer distributor in exchange for certain development rights to one of the
Company's former product lines. As part of this acquisition the Company is
required to make capital contributions up to $200,000 of which $25,000 has been
made as of June 30, 1994. The operating activities of such company have not been
significant and the Company's investment is recorded under the cost method
inasmuch as the Company does not exercise significant influence over the
investee company. Specifically, the Company has no seat on the Board of
Directors and there is no officer or employee of the Company who serves the
investee company in any capacity.
12. Operations
During fiscal years 1992 and 1994, the Company restructured certain of its
activities in order to emphasize and streamline its operations, consistent with
its core capabilities in value-added distribution. Such restructuring spanned
organizational aspects of product and production alignment, market channel and
customer delineation, vendor arrangements and personnel capabilities. In 1994
and 1992 AmeriQuest restructured its operations and related charges aggregated
$5.7 million and $4.5 million. The components of the restructuring charges for
each period presented follow (dollars in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------
1994 1992
---- ----
<S> <C> <C>
Employee terminations $ 500 $1,100
Facilities abandonment 300 --
Discontinued product lines 4,900 3,400
----- -----
$5,700 $4,500
===== =====
</TABLE>
Inasmuch as these restructurings were initiated in the middle of each respective
fiscal year, the efforts were largely completed by each year end and the related
expenditures were largely incurred at those dates. The discontinued product
lines related to the then direct manufacture of both personal computers and tape
drive storage units utilizing proprietary designs with open architecture to the
myriad of compatible personal computing hardware and software available in the
marketplace. The restructuring charges consisted of incremental direct costs and
such costs were largely incurred and paid in each respective fiscal year, other
than for approximately $400,000 which extended through 1995 for the fiscal year
1994 charge.
The quantification of the components of the restructurings follows:
<TABLE>
<CAPTION>
Tape Drive
Personal Computer Storage Unit
Manufacture Manufacture
----------------- -------------
<S> <C> <C>
Employee terminations
Number 40 130
Location Irvine, CA Singapore;
Irvine, CA
Facilities abandonment
Square footage 20,000 Sublet
Continuing lease
obligations
Amount per month $10,000 -
Product discontinuance
Capitalized software 1,700 -
Equipment - 200
Loss on inventory
disposition 1,800 3,200
Contractual obligations
Manufacturing 1,100 -
Marketing, other 300 -
</TABLE>
All related costs were largely incurred prior to each fiscal year end, except
for the following accruals as to the 1994 restructuring:
Date Amount
---- ------
Lease obligations Through 1995 $200
Accruals Through 1994 $200
The benefits that accrue to AmeriQuest apart from the discontinuance of
unprofitable manufacturing per se, were related to refocusing upon the
distribution portion of the business. Losses reported by AmeriQuest
in 1992 and 1994, apart from restructuring charges, were largely related to
these former manufacturing operations. These restructuring activities in 1994
and 1992 impacted the Company's results of operations as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
September 30, 1994 June 30, 1993
------------------ -------------
(Dollars in thousands)
<S> <C> <C>
Sales reduction as contrasted
to prior year $ - $16,436
Gross profit reduction as
contrasted to prior year - 1,792
Operating expense reduction
as contrasted to prior year 700 6,575
</TABLE>
The benefits from the 1992 restructuring improved profits in 1993 by
appoximately $4.8 million. As to the 1994 restructuring charge, 1995 operations
are impacted by expense reductions only since sales of the proprietary personal
computer developed in 1993 and 1994 never reached material levels. Consolidated
expenses were reduced by approximately $700,000 during the quarter ended
September 30, 1994 as a result of the discontinuance of the personal computer
operations. Management expects a similar level of quarterly expense savings to
benefit the Company through the remainder of fiscal 1995.
13. Foreign Sales Information
A summary of the Company's operations by geographic area for the last three
years is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
June 30, 1994 U.S. Far East Elimination Consolidated
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 62,089 $ 25,504 $ -- $ 87,593
Transfers between geographic areas 4,107 298 (4,405) --
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 66,196 $ 25,802 $ (4,405) $ 87,593
- -------------------------------------------------------------------------------------------------------------------
Loss from operations $ (7,182) $ (92) $ -- $ (7,274)
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 62,584 $ 2,561 $ -- $ 65,145
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
June 30, 1993 U.S. Far East Elimination Consolidated
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 50,342 $ 22,740 $ -- $ 73,082
Transfers between geographic areas -- 3,086 (3,086) --
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 50,342 $ 25,826 $ (3,086) $ 73,082
- -------------------------------------------------------------------------------------------------------------------
(Loss) income from operations $ 647 $ (160) $ -- $ 487
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 17,170 $ 3,104 $ -- $ 20,274
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended
June 30, 1992 U.S. Far East Elimination Consolidated
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 106,710 $ 8,343 $ -- $ 115,053
Transfers between geographic areas -- 10,022 (10,022) --
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 106,710 $ 18,365 $ (10,022) $ 115,053
- -------------------------------------------------------------------------------------------------------------------
Loss from operations $ (4,792) $ (4,418) $ 163 $ (9,047)
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 29,848 $ 5,850 $ (12,176) $ 23,522
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
United States sales include export sales of approximately $2.3 million, $2
million and $14.4 million made principally to Europe, Latin America, the Far
East and Canada in fiscal years 1994, 1993 and 1992, respectively.
50
<PAGE>
14. Vendor Transactions
The Company's largest inventory vendor accounted for approximately 20% of the
Company's inventory purchases during the year ended June 30, 1994. At June 30,
1994, the Company owed that vendor approximately $4 million. Another vendor
accounted for approximately 25% and 22% of purchases for fiscal years 1993 and
1992, respectively. A third vendor accounted for approximately 14% of inventory
purchases in fiscal year 1993.
15. Disposition
In July 1994, the Company entered into an agreement to sell its Singapore
subsidiary, CMS Enhancements (S) PTE Ltd., ("CMS Singapore") to a former officer
and director of the Company. The Company expects to exchange all of the stock of
CMS Singapore for 350,000 shares of the Company's previously issued common
stock, of which approximately 345,000 shares were received by the Company as of
September 1994. The book value of CMS Singapore is approximately $1.5 million
and thus no appreciable gain or loss was expected to result upon completion of
the transaction. CMS Singapore is a segment of the Company's continuing
line of business and, as a result, any disposition will not be accounted for as
a discontinued operation. This transaction is the subject of potential
litigation, the ultimate resolution of which is not determinable. Such potential
litigation would be between the Company and the purchaser and would relate to
whether full consideration was received for the proposed transaction. In the
opinion of management such litigation would not have a materially adverse effect
on the Company's future results of operations and financial position.
CMS Singapore is a distributor of commodity disk drives. Sales of this Asian
subsidiary approximated $20 million for the year ended June 30, 1994. In the
opinion of management, the terms of the transaction were negotiated at
"arm's-length" at a point in time that the former officer and director was
estranged from the Company.
Results by Quarter (Unaudited)
(In thousands, except per share data)
Fiscal year ended June 30, 1994
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 19,560 $ 20,286 $ 23,130 $ 24,617
Operating income (loss) $ 138 $ (4,878) $ 392 $ (2,926)
Net income (loss) 62 (4,950) 203 (3,286)
Net income (loss) per common share $ 0.02 $ (0.63) $ 0.03 (0.33)
Common shares outstanding 3,330,710 7,862,516 7,865,916 9,857,779
</TABLE>
(In thousands, except per share data)
Fiscal year ended June 30, 1993
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 20,570 $ 18,890 $ 15,701 $ 17,921
Operating Income $ 129 $ 125 $ 121 $ 112
Net income $ 51 $ 61 $ 83 $ 41
Net income per common share $ 0.02 $ 0.02 $ 0.03 $ 0.01
Common shares outstanding 2,925,523 2,989,593 2,997,754 3,180,710
</TABLE>
Shareholder Information
A copy of the Company's Annual Report on Form 10-K, filed each year with the
Securities and Exchange Commission, may be obtained by shareholders without
charge. Such request or any additional request for financial information should
be addressed to Investor Relations Department, AmeriQuest Technologies, Inc.,
2722 Michelson Drive, Irvine, CA 92715, 714/222-6000.
Market Information
The Company's common stock is traded on the New York Stock Exchange under the
symbol AQS. The range of high and low transaction prices for the common stock as
reported by the New York Stock Exchange for fiscal 1994 and 1993, are as
follows:
<TABLE>
<CAPTION>
Fiscal 1994
Quarter
Ended High Low
<S> <C> <C>
Sep. 30, 1993 3 1/4 2
Dec. 31, 1993 5 3/4 2 1/2
Mar. 31, 1994 6 4 1/8
Jun. 30, 1994 4 1/8 3
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1993
Quarter
Ended High Low
<S> <C> <C>
Sep. 30, 1992 2 1/4 1 1/4
Dec. 31, 1992 3 3/4 1 1/2
Mar. 31, 1993 3 3/8 2
Jun. 30, 1993 3 5/8 2
</TABLE>
There were 849 shareholders of record as of June 30, 1994. The Company has not
paid cash dividends and does not expect to declare or pay cash dividends in the
foreseeable future.
Annual Meeting of Shareholders
Monday, December 12, 1994, 2:00 p.m.
AmeriQuest Technologies, Inc.
2722 Michelson Drive, Irvine, CA 92715, 714/222-6000
51
<PAGE>
SCHEDULE VIII
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions- Balance
Beginning Cost and Accounts at End
Descriptions of Period Expenses Written Off of Period
------------ ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
July 1, 1991 to June 30, 1992 $ 441 $ 591 $ 629 $ 403
========== ========== =========== =========
July 1, 1992 to June 30, 1993 $ 403 $ 328 $ 478 $ 253
========== ========== =========== =========
July 1, 1993 to June 30, 1994 $ 253 $ 577 $ 353 $ 477
========== ========== =========== =========
Inventory Reserve:
July 1, 1991 to June 30, 1992 $ 8,657 $ 3,388 $ 4,620 $ 7,425
========== ========== =========== =========
July 1, 1992 to June 30, 1993 $ 7,425 $ 633 $ 4,962 $ 3,096
========== ========== =========== =========
July 1, 1993 to June 30, 1994 $ 3,096 $ 1,714 $ 2,177 $ 2,633
========== ========== =========== =========
</TABLE>
SCHEDULE IX
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Weighted
Maximum Average Average
Category of Weighted Amount Amount Interest
Aggregate Balance Average Outstanding Outstanding Rate
Short-term at End of Interest During the During the During the
Borrowings Period Rate Period Period Period
----------- --------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Bank Notes Payable:
July 1, 1991 to June 30, 1992 $ 1,714 10.99% $ 7,570 $ 3,494 14.38%
========= ====== =========== =========== ======
July 1, 1992 to June 30, 1993 $ 0 10.04% $ 3,610 $ 714 34.08%
========= ====== =========== =========== ======
July 1, 1993 to June 30, 1994 $ 23,059 8.05% $ 24,652 $ 12,144 6.79%
========= ====== =========== =========== ======
</TABLE>
