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[AMERIQUEST LOGO]
Annual Report
1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------ TO ------------
COMMISSION FILE NO. 1-10397
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AMERIQUEST TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0244136
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
2465 MARYLAND ROAD 19090
WILLOW GROVE, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(215) 658-8900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
TITLE OF EACH CLASS
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 18, 1998 is approximately $2,500,000. For purposes
of making this calculation only, the Registrant has defined "affiliates" as
including all officers, directors and beneficial owners of more than 10% of the
outstanding Common Stock of the Registrant.
There were 66,881,906 shares of the Registrant's Common Stock outstanding
as of December 18, 1998.
The following document is incorporated by reference into Part III, Items
10, 11, 12, and 13 of this Annual Report on Form 10-K: the registrant's
definitive proxy statement for its 1999 Annual Meeting of Stockholders.
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PART I
FOREWORD
THE INFORMATION SET FORTH IN THIS ANNUAL REPORT IS BASED PRIMARILY ON
HISTORICAL INFORMATION. THIS ANNUAL REPORT ALSO CONTAINS SOME FORWARD-LOOKING
STATEMENTS RELATING TO FUTURE GROWTH PLANS AND OTHER MATTERS. TO THE EXTENT THAT
THIS ANNUAL REPORT INCLUDES FORWARD-LOOKING STATEMENTS, SUCH STATEMENTS INVOLVE
UNCERTAINTY AND RISK, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS. A LIST OF THOSE FACTORS WHICH
MANAGEMENT BELIEVES COULD ADVERSELY AFFECT THE ACTUAL RESULTS IS SET FORTH IN A
SECTION IMMEDIATELY FOLLOWING THE DESCRIPTION OF AMERIQUEST'S BUSINESS IN ITEM 1
UNDER THE CAPTION "SPECIAL FACTORS TO BE CONSIDERED."
ITEM 1. BUSINESS.
THE COMPANY
AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest" or the
"Company"), is a valued-added wholesale distributor of mid-range, Unix and NT
server systems, networking systems, storage sub-systems, printers and related
products to value-added resellers ("VARs") and systems integrators. Mid-range
computers and servers range in price from $5,000 to $800,000. AmeriQuest
markets, sells and supports a variety of products ranging from individual
components to complete systems that have been fully configured, assembled and
tested prior to delivery to the customer. AmeriQuest's strategy is to emphasize
the sale of complete solutions for its customers and to provide a high level of
value-added services, including consultation on component selection, system
assembly, configuration, testing and technical support services. AmeriQuest also
provides a variety of programs and seminars designed to enhance its customers'
technical capabilities.
AmeriQuest currently markets more than 13,000 products to VARs and systems
integrators throughout the United States. AmeriQuest focuses its marketing
efforts on the products of a limited number of key vendors in order to become
one of the leading distributors for each of its principal vendors. This enables
AmeriQuest to develop product-specific technical expertise that enhances its
value-added support services. AmeriQuest attempts to minimize competition among
vendors' products while maintaining some overlap to provide protection against
product shortages or discontinuations.
AmeriQuest historically conducted its business through its subsidiaries.
However, on July 31, 1996, all of its first-tier subsidiaries were merged into
AmeriQuest, except for AmeriQuest/Kenfil Inc., a distributor of entertainment
software ("Kenfil"), and AAG, Inc. (formerly "CMS Enhancements, Inc."). AAG, Inc
sold its business on June 19, 1997 and Kenfil sold its last operating businesses
in Asia early in the first quarter of fiscal 1998. Accordingly, the description
of AmeriQuest's business set forth below does not address the historical
business of its subsidiaries individually. During fiscal year 1996 and early
1997 AmeriQuest's sales operations were divided into five divisions, each
located in a different geographical section of the country, and three
international regions. By October, 1996, AmeriQuest had reorganized its domestic
standard distribution operations in Hollywood, Florida into specialized business
units based on the type of product assigned to each unit and one general sales
unit. In addition, the Advanced Systems Group was to be operated from Horsham,
Pennsylvania; and CMS Enhancements, Inc. operated from Costa Mesa, California.
AmeriQuest had exported from Miami, Florida to South American markets; and
foreign operations operated from Hong Kong and Malaysia with respect to Asian
markets. In April of 1997, AmeriQuest decided to focus its resources on building
the Advanced Systems Group ("ASG") in Pennsylvania and to close or sell all of
the other divisions. This reorganization was materially completed in November,
1997.
Following the reorganization, the Company has become a more focused
technical distributor of computer products providing value added solutions and
services rather than a fulfillment distributor that relies on broad product
lines and high volumes of commodity products.
The Company maintains its principal executive offices at 2465 Maryland
Road, Willow Grove, Pennsylvania 19090, and its telephone number is (215)
658-8900.
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CONTROL OF AMERIQUEST -- ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK
HOLDINGS BY SENIOR MANAGEMENT
In August, 1995, Computer 2000, Inc., a wholly-owned subsidiary of Computer
2000 AG (collectively referred to herein as "Computer 2000") acquired 36,349,878
shares of AmeriQuest's Common Stock representing approximately 54% of the issued
and outstanding shares of AmeriQuest Common Stock. On May 6, 1997 AmeriQuest
issued 300,000 shares of its Series H Cumulative Convertible Preferred Stock
(convertible into approximately 42 million shares, or 63% of the total
outstanding shares of AmeriQuest Common Stock prior to conversion) to Computer
2000 Inc. in consideration of the payment by Computer 2000 Inc. of $30,000,000
cash. In addition, COMPUTER 2000 held warrants and an option to purchase from
AmeriQuest 9,392,515 shares of AmeriQuest Common Stock or approximately 15% of
the total issued and outstanding shares of AmeriQuest Common Stock. On a
fully-diluted basis, all such securities, if converted and exercised, would have
constituted approximately 73% of the outstanding shares of AmeriQuest Common
Stock.
On July 20, 1998, Listen Group Partners, LLC, a group headed by
AmeriQuest's senior management, Alex Kramer (CEO) and Jon Jensen (CFO and COO),
acquired the 36,349,878 shares of AmeriQuest Common Stock owned by Computer
2000. The transaction was approved by the outside directors and by the full
Board of Directors of AmeriQuest.
In taking over majority control of AmeriQuest from Computer 2000,
AmeriQuest's management arranged for a new $10 million asset-backed bank credit
line for AmeriQuest, in part to release Computer 2000 from its guarantee of IBM
Credit Corporation (IBMCC). Management also obtained the release of Computer
2000 and its affiliates from all other guarantees of AmeriQuest obligations, and
agreed to pay certain transaction costs totaling approximately $220,000. As part
of the transaction, Computer 2000 contributed to the capital of AmeriQuest
approximately $28 million in intercompany debt obligations and an additional $3
million in cash. Computer 2000 further agreed to the redemption by AmeriQuest of
all of the outstanding AmeriQuest preferred stock, convertible into
approximately 42 million common shares, and to the cancellation of all
outstanding dividends, interest and AmeriQuest options and warrants held by
Computer 2000. As a result of the transaction, the number of outstanding shares
of AmeriQuest, on a fully diluted basis, was reduced from approximately 118
million to approximately 67 million. The Board of Directors of the Company
agreed to reserve 6.7 million shares of common stock for future issuance to
AmeriQuest employees as incentive compensation pursuant to terms to be approved
by outside directors of the board.
STRATEGY
The Company's current business focus is to continue second tier
distribution in areas which minimize direct competition with the Company's
largest competitors and to concentrate on selling higher-margin mid-range
computer and client server systems, networking products and storage systems
along with complementary and related individual computer components, and
maintenance and leasing services. In addition, AmeriQuest provides value-added
services such as engineering design and system configuration, installation
capability and technical support to its VAR and system integrator customer base,
which improves its margins as compared to the margins of those distributors who
provide for sale of equipment only. AmeriQuest has negotiated agreements with
several vendors that allow the Company to serve as the "silent partner" of the
Company's resellers by being able to sell products directly to the reseller's
end users when the reseller desires AmeriQuest to do so.
Although management believes that this strategy, when coupled with planned
increases in revenue, will return AmeriQuest to profitability, there are
numerous risks and uncertainties, including those described elsewhere in this
Annual Report, and no assurance can be given that the Company's strategy will
succeed or that the Company will become operationally profitable. Management
will periodically review the need to further reduce costs should sales for any
reason not materialize in amounts sufficient to cover the existing cost
structure.
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PRODUCTS
AmeriQuest seeks to sell products from nationally-recognized vendors that
provide all the components most VARs require to fully configure their computer
solutions. The following is a description of the major categories of products
currently sold by AmeriQuest and the principal current vendors of those
products:
CLIENT SERVER AND PERSONAL COMPUTERS -- AmeriQuest distributes laptop,
desktop and mini-tower personal computers and mid-range computer servers
manufactured by Acer, Hewlett Packard, IBM and Unisys, together with
software from IBM, including AIX and Lotus Notes, and connectivity products
from IBM, including routers, bridges and switches.
COMMUNICATIONS AND NETWORKS -- AmeriQuest distributes local and wide
area network ("LAN/ WAN") software and specialized hardware products
manufactured by IBM, D-Link, Novell, and Multi-Tech Systems. In addition,
the Company distributes modems and other communication products
manufactured by Digi International.
NETWORK STORAGE -- AmeriQuest distributes a broad line of channel and
network attached storage products from IBM, SMS and Unisys.
PERIPHERALS AND SUPPLIES -- AmeriQuest distributes a broad line of
laser, ink-jet and dot matrix printers, monitors, terminals, stand-by power
supplies, accessories and supplies manufactured by numerous companies
including Okidata, Lexmark, Citizen, Genicom, Wyse, Acer, IBM, American
Power, Imation(3M), Hansol and Hewlett Packard.
SOFTWARE -- AmeriQuest sells a variety of operating systems and LAN
software products generally as part of its client server systems sales.
AmeriQuest has also commenced the sale of certain applications software for
Unix and mid-range systems. Among the manufacturers of these software
products are IBM, SCO and Novell.
SERVICES -- AmeriQuest arranges for leasing and maintenance options
for all products to customers, at additional cost. AmeriQuest also provides
Engineering services to those customers who do not have the capability or
capacity to either design, configure or install system solutions with their
own resources. Increasing focus is being placed on this segment of the
business through the Company's "silent partner" program.
VENDOR RELATIONS
To maintain strong relationships with its principal vendors, AmeriQuest
focuses on marketing the products of a limited number of key vendors. AmeriQuest
selects its product lines to offer a total solution while minimizing competition
among vendors' products, but maintains overlap to provide protection against
product shortages or discontinuations. Accordingly, historical revenues from
sale of products of the five leading vendors, Acer, Hewlett Packard, IBM,
Okidata and Unisys, represent approximately 7.3%, 6.5%, 39.8%, 14.3% and 9.4%,
respectively, of the Company's revenue for the fiscal year ended September 30,
1998 (Hewlett Packard is 11.3% when including purchases from alternate
sourcing). The Company is focused on increasing its share of business
represented by each of Acer, Hewlett Packard, IBM, Okidata and Unisys and has
made increases in its sales force to achieve such objective.
AmeriQuest expanded its relationship with Unisys by negotiating a corporate
account reseller ("CAR") agreement which allows AmeriQuest to sell Unisys
products, that are not available to AmeriQuest's resellers, directly to end
users.
During 1998, AmeriQuest voluntarily scaled back its relationship with IBM,
although, as further discussed below, the Company retained the right to
distribute IBM's networking products and to sell IBM mid-range products,
including RS6000 and mass storage. AmeriQuest discontinued its second tier
relationship with IBM to distribute the RS6000 mid-range unix based computers on
June 30, 1998. As AmeriQuest had to obtain permission from IBM to authorize IBM
resellers ("IRAs") and to deal with contractual limitations in selling to
existing IRAs who may be dissatisfied with the service of a competitive
distributor, AmeriQuest's ability to expand its IBM revenue base was
constrained. IRAs are contractually precluded from purchasing
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IBM product except from their designated distributor, which limited the ability
of AmeriQuest to market its products to IRAs currently "assigned" to other
distributors. Also IBM does not authorize a new reseller to market IBM product
unless such reseller can meet minimum yearly revenue and certification
requirements. Accordingly, management determined that IBM's current policy of
defining and controlling their mid-range reseller channel, combined with
AmeriQuest's overhead cost required by IBM to maintain the IBM relationship, was
prohibitively expensive and unprofitable. Such limitations to the authorization
of resellers and the imposition of sales performance requirements do not exist
with respect to the Company's relationship with Acer, Hewlett Packard, Okidata
and Unisys products, nor with IBM's networking products.
AmeriQuest, like most hardware distributors, sells products throughout the
United States on behalf of its vendors on a nonexclusive basis without
geographic restriction. AmeriQuest has distribution agreements with most of its
vendors and believes they are in the form customarily used by each vendor and
generally contain provisions which allow termination by either party upon short
notice. Most of AmeriQuest's major distribution agreements provide price
protection by giving AmeriQuest a credit, subject to specified limitations, in
the amount of any price reductions by the vendor between the time of the initial
sale to AmeriQuest and the subsequent notice of price change to AmeriQuest. Most
of the major distribution agreements also give AmeriQuest qualified return
privileges on slow-moving inventory. AmeriQuest's distribution agreements do not
restrict AmeriQuest from selling similar products manufactured by competitors.
Any minimum purchase provisions in AmeriQuest's distribution agreements are at
levels that AmeriQuest believes do not impose significant risk that AmeriQuest
will not be able to achieve such minimum purchase requirements.
AmeriQuest has pursued a strategy since the beginning of the second half of
fiscal 1998 to reduce inventory of non-core vendors and to satisfy its
customer's needs for non-core, supplemental or complementary products by
concentrating its procurement efforts with one of the large, national
fulfillment distributors.
From time-to-time, the demand for certain products sold by AmeriQuest
exceeds the supply available from the vendor. AmeriQuest believes that its
ability to compete has not been adversely affected to a material extent by these
periodic shortages, although sales may be adversely affected for an interim
period. In order to limit the impact of such shortages, AmeriQuest generally
attempts to include comparable products from more than one vendor in its product
line and to have arrangements with one or more of the large national fulfillment
distributors to purchase products in short supply.
SALES AND MARKETING
The Company sells to more than 3,500 computer resellers. The Company's
customers include VARs, corporate resellers, systems integrators, and
consultants. AmeriQuest estimates that a majority of its sales are to VARs and
systems integrators. The Company's smaller customers often do not have the
resources to establish a large number of direct purchasing relationships or to
stock significant product inventories. Consequently, they tend to purchase a
high percentage of their products from distributors. Larger resellers often
establish direct relationships with manufacturers for their more popular
products, but utilize distributors for slower-moving products and for fill-in
orders of fast-moving products which may not be available on a timely basis from
manufacturers. As earlier mentioned, AmeriQuest has chosen to satisfy its
customer's needs for supplemental or complementary products by concentrating the
Company's procurement efforts with one of the large, national fulfillment
distributors. No customer has accounted for more than ten percent of
AmeriQuest's net sales during the 1998, 1997 or 1996 fiscal years. Sales by
AmeriQuest are not seasonal to any material extent.
During fiscal year 1998 AmeriQuest's sales operations were divided into
three domestic regions -- Northeast, Southeast and Western -- each covering a
geographical section of the country. It has only been since the change in
control in mid-July, that management of the Company has been able to fill
vacancies in the sales staff. During the cost and overhead reduction period that
lasted from April, 1997 to June of 1998, the sales force had declined to 12
people. The staff has been increased to 21 currently. Training and selection of
the staff is oriented toward the market, service and product focus earlier
described.
Compensation for sales personnel is largely based on the gross profits
generated from sales. All of AmeriQuest's sales personnel receive technical
training and are responsible for opening new accounts and
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\serving established accounts. AmeriQuest places some emphasis on telemarketing,
however, most of the Company's sales personnel operate in the field.
OPERATIONS AND CUSTOMER SERVICES
Through the Company's wholesale distribution business, customers are
offered a single source of supply, prompt delivery, financing programs,
engineering services, customer leasing and maintenance and customer support.
CUSTOMER ORDER ENTRY. Customer orders are generally made by a toll-free
telephone call with a sales representative in AmeriQuest's sales offices, and
the order is entered into AmeriQuest's computer system. The sales representative
has access to available information on inventory and customer credit status and,
upon reviewing this data, can enter the order immediately. Shipment is usually
made the same day, except on orders that require assembly and testing or
purchase from a vendor. Customers may also pick up their orders at the
designated warehouse. All orders are handled on a prepayment, C.O.D. or credit
basis depending on the customer's creditworthiness and previous payment history.
In addition, AmeriQuest assists some resellers in obtaining equipment financing
through third-party floor planning programs from Deutsche Financial Services,
IBM Credit Corporation, AT&T Capital, Leasetech (Unisys), the FINOVA Group, Inc.
and Transamerica Inventory Finance. Because of AmeriQuest's prompt delivery
times, it does not generally maintain a substantial order backlog.
PROMPT DELIVERY. In most geographic areas serviced by the Company, orders
received by 6:00 p.m. local time are typically shipped the same day, provided
the required inventory is in stock. AmeriQuest typically delivers products from
its Willow Grove, Pennsylvania warehouse via United Parcel Service and other
common carriers, with customers in key commercial regions of the United States
receiving orders within one to two working days of shipment. AmeriQuest also
will provide overnight air handling if requested and paid for by the customer.
These services allow computer resellers to minimize inventory investment yet
provide responsive service to their customers. For larger customers in the
United States, AmeriQuest is able to provide a fulfillment service so that
orders are shipped directly to the computer resellers' customer, thereby
reducing the need for computer resellers to maintain inventories of certain
products.
CUSTOMER SUPPORT. The Company currently offers computer resellers a single
source for over 13,000 competitively priced hardware and software products. By
purchasing from the Company, the reseller only needs to comply with a single set
of ordering, billing and product return procedures and may also benefit from
attractive volume pricing. The Company also provides training and product
information to its reseller customers.
AmeriQuest permits the return of products within certain time limits and
under certain conditions subject to a restocking charge, provided that the
products are unused. Products that are defective upon arrival are handled on a
manufacturers' warranty return basis without any restocking charge.
AmeriQuest offers its resellers warranty return rights that reflect those
that are offered by each manufacturer's individual warranty program. This
pass-through of manufacturers' warranties is one of the value-added services
that AmeriQuest provides to its customer base.
FINANCING PROGRAMS. AmeriQuest extends credit to qualified resellers,
thereby augmenting their ability to purchase products from a variety of sources.
Additionally, AmeriQuest arranges floor planning and lease financing through a
number of credit institutions and offers programs that permit credit card
purchases by qualified customers. To facilitate a reseller's ability to pursue
large purchase orders within the United States, the Company offers an
"assignment of proceeds" program. By instituting this practice AmeriQuest can,
based upon the credit worthiness of the end-user customer, assist its resellers
in securing purchase orders in excess of what their normal credit facilities
would otherwise allow.
COMPETITION
Competition in the technical, as opposed to fulfillment only, distribution
of mid-range computer systems is limited, but intense. Principal national
distributors in the technical distribution of mid-range, Unix and
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NT server systems, networking systems, storage sub-systems, printers and related
products with which the Company competes include Western Micro, Jones Business
Systems, and Westcon. Many of the technical distributors have greater financial
resources than the Company. Additionally it is reasonable to expect that the
large broad-line fulfillment distributors such as Ingram Micro Inc., Merisel,
Inc. and Tech Data Corporation, who have substantially greater financial
resources than AmeriQuest, may enter the market in pursuit of the substantially
greater gross profit margins of technical distribution.
Competition is primarily based upon availability of product, price,
technical support and other support services. AmeriQuest believes that it is
generally competitive with respect to each of these factors and that its
principal, competitive advantages are its personal sales relationships,
technical strength and other support services, and speed and accuracy of
delivery.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software programs are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries, or be
otherwise modified, to distinguish 21st century dates from 20th century dates.
As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with such Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. To date, AmeriQuest has made a preliminary assessment
of the Year 2000 readiness of mission critical third party software and hardware
used by the Company. The Company has taken steps to upgrade such software and
hardware used by the Company known to it not to be Year 2000 compliant or where
the manufacturer of such software or hardware has provided upgrades to the
Company. In addition, AmeriQuest has performed a Year 2000 simulation on all
such software and hardware. The Company has similarly tested all mission
critical software and hardware with respect to leap year calculations. The
Company believes that, based on upgrades performed to date and/or upgrades
provided by the manufacturer, all mission critical software and hardware used by
the Company is either Year 2000 compliant or the Company has taken steps to
upgrade or replace such systems so that they are Year 2000 compliant. Such
upgrades or replacements are expected to be completed by the second quarter of
fiscal 1999.
Costs. To date, AmeriQuest has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. Although the Company does
not anticipate that any such expenses incurred in the future will be material,
such expenses, if higher than anticipated, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Risks. Except where plans have been made to upgrade or replace software
and hardware that is not Year 2000 compliant, AmeriQuest is not currently aware
of any Year 2000 compliance problems relating to third party software, hardware
and services used by the Company that would have a material adverse effect on
the Company's business, results of operations and financial condition. There can
be no assurance that the Company will not discover Year 2000 compliance problems
in third party software, hardware and services used by the Company which will
need to be addressed or replaced, any of which could be time consuming and
expensive. The failure of the Company to identify, address and/or replace any
such third party software, hardware or services used by the Company on a timely
basis, if at all, that are not Year 2000 compliant could result in lost
revenues, increased operating costs and other business interruptions, any of
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company has not ascertained the Year 2000 compliance of hardware or
software which may have been sold by the Company in the past. AmeriQuest is also
not currently aware of any specific Year 2000 compliance problems relating to
third party software and hardware currently sold by the Company to its customers
which is supplied to the Company by its vendors. The Year 2000 compliance of
software and hardware supplied to the Company by its vendors is outside the
Company's control. The Company makes available to its customers the warranties
offered by manufacturers whose products it sells. While the Company
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believes that ultimate responsibility for claims arising from the Year 2000
compliance of the software and hardware it sells should be borne the products'
manufacturer, there can be no assurance that the Company will have no liability
for any such claims and any related liability could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, there can be no assurance that other third parties outside the
Company's control, including, without limitation, governmental agencies,
financial institutions, public utilities, other service providers with which the
Company does business and others, will be Year 2000 compliant. The failure of
any such entity to be Year 2000 compliant could result in systematic failures
beyond the control of the Company which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Contingency Plans. To date, the Company has not established a formal
contingency plan for dealing with a failure by the Company, any of its vendors
or others to achieve Year 2000 compliance. However, the Company recognizes the
need to develop contingency plans and expects to have these plans in place,
where applicable, by the end of fiscal 1999.
EMPLOYEES
As of September 30, 1998, AmeriQuest had 63 full-time employees in sales
(increased to 69 currently), including 17 persons employed in sales (21
currently), 10 persons employed in sales support (12 currently) and 6 persons
employed in marketing functions. None of AmeriQuest's employees are covered by a
collective bargaining agreement. AmeriQuest considers its relations with its
employees to be very good.
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SPECIAL FACTORS TO BE CONSIDERED
In addition to the other information in this Annual Report on Form 10K, the
following factors should be carefully considered:
CONTINUED OPERATING LOSSES
While the Company has had net income of $747,000 during the fiscal year
ended September 30, 1998, such income included a reversal of prior year
restructuring accruals of $1,376,000. Additionally, the Company recorded a
significant benefit due to the reversal of other previously established
reserves. The Company has experienced significant losses during previous fiscal
years. The fiscal 1995 net loss of $67.6 million included the write-off of
approximately $23.8 million of intangible assets and the liquidation of
inventory associated with the termination of the Company's entertainment
software business. In addition, the fiscal 1995 loss included costs associated
with the integration of the significant acquisitions which took place during
that fiscal year. The Company recorded a net loss of $33.6 million during fiscal
1996 (including lease termination and moving costs of $6.4 million). During the
year ended September 30, 1997, the Company had operating losses of $41.3 million
which included restructuring, asset impairment and relocation costs of $26.4
million associated with the close down of the unprofitable distribution
businesses.
Although the Company has significantly reduced its operating losses as a
result of the restructuring, in the event that operating losses were to continue
at significant levels, it is likely that the Company would need to raise
additional capital to cover those losses. There is no assurance that additional
capital is available, or if available, can be secured on terms favorable to the
Company.
MARKET CONSIDERATIONS
The price of the Company's Common Stock has been subject to significant
price fluctuations, and there can be no assurance that the price of the
Company's Common Stock will stabilize. In addition, the trading volume for the
Company's Common Stock has generally been relatively small. A large increase in
share trading volume in a short period of time could cause a significant change
in share trading prices.
NEED TO INCREASE SALES VOLUME
As a distributor, the Company operates on small gross margins. Further, the
Company incurs operating expenses to maintain a sufficient level of inventory,
facilities, sales staff and support personnel necessary to support sales of
products. Although the Company continues to explore possible cost reduction
measures, it believes that further significant reductions in its operating
expenses will be difficult to achieve without also reducing the sales volumes
currently being generated from operations. As a result of these and other
factors, the Company must achieve substantially greater sales volumes at
satisfactory margins to achieve sustained operating profitability. The recent
estimate by management, reported in the Form 10-Q for the period ended June 30,
1998, that a 25% increase in sales would be required in order for AmeriQuest to
achieve a break-even level of operations as a result of the voluntary partial
loss of a significant vendor, IBM, remains reliable. As earlier mentioned, it
has only been since the change in control in mid-July, with the resultant
appearance of viability and cessation of ownership uncertainty, that management
of the Company has been able to competently fill vacancies in the sales staff.
During the cost and overhead reduction period that lasted from April, 1997 to
June of 1998, the sales force had declined to 12 people. The staff has been
increased to 21 currently with internal plans to bring the level to 25.
While the Company's management is attempting to increase sales and its
share of business represented by such vendors as Acer, Hewlett Packard and
Unisys, there can be no assurance that sales will increase or that any increases
will be of sufficient magnitude or will occur soon enough to permit the Company
to achieve profitability without additional business or financial restructuring.
9
<PAGE> 11
NEED TO MAINTAIN VENDOR BASE
The Company principally distributes computer products manufactured by Acer,
Hewlett Packard, IBM, Okidata and Unisys. Accordingly, the Company's
relationships with these and its other existing vendors are critical to its
ability to purchase on a favorable basis the products that it resells. In
addition, from time-to-time the Company may need to initiate relationships with
additional vendors without jeopardizing the Company's existing vendor
relationships. The Company is also dependent upon its vendors' willingness or
ability to make timely shipment of the products ordered by the Company. The
failure of vendors to make shipments on a timely basis could cause a material
disruption of the Company's sales. In the past, the Company has at times
experienced delays in its ability to fill customer orders, due to the inability
of certain suppliers to meet their volume and schedule requirements and/or due
to the Company's shortages of cash resources. Delays in shipments from suppliers
can cause fluctuations in the Company's short-term results and contribute to
order cancellations. Additionally, AmeriQuest must meet certain purchase
requirements imposed by IBM to maintain its distributor status of IBM's
networking products. IBM has indicated that they would terminate the right of
AmeriQuest to distribute networking products if AmeriQuest did not meet the
purchase levels of calendar 1998 or any future calendar years. No assurance can
be given that AmeriQuest will be able to achieve purchases at levels required by
IBM.
RAPID CHANGES IN TECHNOLOGY AND MARKETS
The computer industry in general, and the specific markets in which the
Company competes, are characterized by rapidly changing technology, often
resulting in short product life cycles, rapid price declines, inventory
imbalances when compared with market demands, and significant shifts in market
dynamics. The Company believes its success is highly dependent upon its ability
to react to technological changes and shifts in market demand by continuing to
provide cost-competitive products that respond to current market needs. As a
value-added wholesale distributor, the Company is particularly vulnerable to
changes caused by technological innovation. The introduction of new products and
the phase out of old products requires the Company to carefully manage its
inventory to minimize inventory obsolescence. The Company has experienced
significant losses due to inventory obsolescence in the past and losses due to
selling products acquired as vendor surpluses. The Company believes it has
instituted the necessary inventory and purchasing safeguards to prevent these
difficulties in the future. Should the Company fail to provide new products on a
timely basis that respond to industry demands, the Company's operating results
would be adversely affected.
COMPETITION
The Company competes in an industry characterized by intense competition.
Principal national distributors in the technical distribution of mid-range, Unix
and NT server systems, networking systems, storage sub-systems, printers and
related products with which the Company competes include Western Micro, Jones
Business Systems, and Westcon, who have greater financial and technical
resources than the Company.. Additionally it is reasonable to expect that the
large broad-line distributors such as Ingram Micro Inc., Merisel, Inc. and Tech
Data Corporation, who have substantially greater financial resources than
AmeriQuest, may enter the market in pursuit of the substantially greater gross
profit margins of technical distribution. Competition in the computer products
distribution industry is based primarily on price, product availability, and
technical support services provided, and to a lesser extent on speed of
delivery, convenience and the level of marketing. As technological changes
occur, the Company's products have had shorter and shorter product life cycles,
and new competing products are introduced by other vendors and resellers.
Moreover, the manner in which computer products are distributed and sold is
changing, and new methods of distribution and sale may emerge or expand. These
factors, among others, will likely cause continued competitive pressures on the
Company in the future.
MANAGEMENT FOCUS ON COMPLETION OF RESTRUCTURING AND CHANGE IN CONTROL
Because of the restructuring during Fiscal 1997 and 1998 and the managerial
disruption caused by the Computer 2000 merger with Tech Data and the related and
resultant change in control of AmeriQuest, the Company has been unable until the
end of July, 1998 to focus its management attention and marketing
10
<PAGE> 12
expenditures to increase its market share and return the Company to focus on
recapturing and sustaining the growth apparent in the market niche the Company
has chosen. If the Company's sales for any reason in the near future do not
materialize in amounts sufficient to cover the existing cost structure,
management may again have to be diverted to considering restructuring
alternatives.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its key management, marketing, product development and
operational personnel and the Company's ability to retain and continue to
attract highly skilled personnel. Competition for employees in the computer
industry is intense, and there can be no assurance that the Company will be able
to attract and retain qualified employees. The Company has previously made a
number of management changes, and has had substantial layoffs and other employee
departures. If the Company continues to experience financial difficulties, it
may become increasingly difficult for it to hire new employees and retain
current employees. The Company does not carry any key person life insurance with
respect to any of its personnel.
FORWARD-LOOKING INFORMATION
Future operating results may be impacted by a number of factors that could
cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include worldwide
economic and political conditions, industry specific factors, the Company's
ability to maintain access to external financing sources, the Company's ability
to manage expense levels, the Company's ability to retain key vendors, the
continued financial strength of the Company's customers, and the Company's
ability to accurately anticipate customer demand and manage inventories.
This Annual Report on Form 10-K contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth above and elsewhere in
this Annual Report on Form 10-K, the inclusion of forward-looking information
herein should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved. The Company
may encounter competitive, technological, financial, legal and business
challenges making it more difficult than expected to continue as a value-added
wholesale distributor; competitive conditions within the computer industry may
change adversely; demand for the products distributed by the Company may weaken;
the Company may be unable to retain existing key vendors and existing key
management personnel; inventory risks may rise due to shifts in market demand;
the Company's forecasts may not accurately anticipate market demand; and there
may be other material adverse changes in the Company's operations or business.
Certain important presumptions affecting the forward-looking statements made
herein include, but are not limited to, (i) timely identifying and delivering
new products as well as enhancing existing products and services, (ii)
completing current plans, and (iii) accurately forecasting cash needs.
Assumptions relating to budgeting, marketing, advertising, product mix and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
cash expenditures or other budgets, which may in turn affect the Company's
financial position and results of operations.
11
<PAGE> 13
ITEM 2. PROPERTIES.
AmeriQuest's principal offices are located in leased facilities in Willow
Grove, Pennsylvania, which consists of approximately 17,500 square feet of
office space and 25,000 square feet of warehouse space on a single level.
The following table sets forth information regarding the principal and
regional offices of AmeriQuest:
<TABLE>
<CAPTION>
SQUARE FEET LEASE EXPIRATION YEAR OPENED
----------- ---------------- -----------
<S> <C> <C> <C>
LOCATION
Willow Grove, PA..................... 42,500 8/31/03 1998
Atlanta, GA.......................... 6,000 9/30/00 1997
Maple Shade, NJ...................... 1,400 8/31/00 1997
St. Louis,. MO....................... 1,400 11/30/00 1997
SUBLEASED
Anaheim, CA.......................... 62,298 2/29/00 1995
Alpharetta, GA(1).................... 1,924 9/30/99 1994
</TABLE>
- ---------------
(1) Sub-lessee is in default. Proceedings are being undertaken to evict the
current sub-lessee in preparation for release of the property to another
sub-tenant, which is yet to be located.
ITEM 3. LEGAL PROCEEDINGS.
AmeriQuest is both a plaintiff and defendant from time-to-time in lawsuits
incidental to its business. AmeriQuest management believes that none of such
current proceedings individually, or in the aggregate, will have a material
adverse effect on AmeriQuest's financial position and results of operations.
Kenfil Inc. vs. RLI Insurance Company, Superior Court of the State of
California, County of Los Angeles, No. BC 108564 filed July 12, 1994, which
involved litigation instituted by Kenfil Inc. to recover additional monies for
the damage it incurred in the Northridge earthquake of January 17, 1994 was
settled on October 16, 1998 through payment of $150,000 by the Company. The
defendant had cross-claimed on August 12, 1994 for return of the $840,000 it had
paid on claims submitted by Kenfil Inc., based on affidavits from former Kenfil
employees alleging that they had been instructed following the earthquake to
intentionally destroy additional inventory. Messrs. Irwin Bransky and Nelson
Landman, former officers of Kenfil Inc. at the time of the earthquake, have
pleaded guilty to mail fraud relating to the mailing of documents asserting the
destruction of inventory from the earthquake where such destruction actually
occurred in large part following the earthquake. However, their actions were not
attributed to Kenfil Inc. during the course of the criminal proceedings. Kenfil
Inc. has a continuing claim against the Messrs. Bransky and Landman for the
damages to Kenfil Inc. by their unauthorized and unratified criminal conduct. No
assurance can be given as to the final outcome of this legal matter.
Leading Edge Products, Inc. vs. AmeriQuest Technologies, Inc., which
involved suit against AmeriQuest/ NCD Inc., one of the Company's predecessors in
interest, wherein Leading Edge was asserting breach of contract and unjust
enrichment, was settled on September 16, 1998 through payment of $770,000 by the
Company. In its complaint Leading Edge alleged a $1,055,438 debt and sought
double or triple damages, interest, attorney's fees, and costs. The Company
obtained a full and final release as part of the settlement of this litigation
on September 16, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the fourth quarter of fiscal 1998.
12
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the market prices for the shares of Common
Stock of AmeriQuest. The prices reflect the high and low closing prices quoted
on the New York Stock Exchange for each calendar quarter since December 31, 1994
through March 9, 1998, when the Company was de-listed. The prices reflect the
high and low closing prices quoted on the NASDQ Exchange's OTC Bulletin Board
for each calendar quarter since March 10, 1998.
AMERIQUEST
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1995
First Quarter.......................................... 3 1/4 2 1/2
Second Quarter......................................... 3 1/4 1 3/4
Third Quarter.......................................... 2 1/2 1 1/8
Fourth Quarter......................................... 1 3/8 5/8
1996
First Quarter.......................................... 1 1/4 3/4
Second Quarter......................................... 1 1/2 3/4
Third Quarter.......................................... 15/16 1/2
Fourth Quarter......................................... 1 7/8 7/16
1997
First Quarter.......................................... 1 3/8 5/8
Second Quarter......................................... 3/4 3/8
Third Quarter.......................................... 9/32 3/16
Fourth Quarter......................................... 5/16 7/32
1998
First Quarter.......................................... 13/64 3/64
Second Quarter......................................... 19/64 5/64
Third Quarter.......................................... 15/64 5/64
Fourth Quarter......................................... 1/8 4/64
</TABLE>
On December 18, 1998, the stock of AmeriQuest closed at 5/64 (or
approximately $0.078) per share. As of that date AmeriQuest had approximately
1,000 shareholders of record.
The Company did not declare dividends on its Common Stock in 1998 and does
not intend to declare dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data has been derived from
and should be read in conjunction with the audited consolidated financial
statements of AmeriQuest, and the notes thereto, and with
13
<PAGE> 15
"Management's Discussion and Analysis of Results of Operations and Financial
Condition", included elsewhere herein and incorporated herein by this reference
(dollars in thousands, except share data).
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED QUARTER ENDED JUNE 30,
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------------
1998 1997 1996 1995 1995 1994
------------- ------------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 60,466 $ 218,877 $ 424,708 $ 100,723 $ 416,571 $ 87,593
Net income (loss).......... 747(1) (41,311)(2) (33,609)(2) (7,041)(2) (67,566) (7,971)
Net Income (loss) per
share.................... (0.01)(4) (0.63)(4) (0.76) (0.30) (3.76) (1.33)
Total assets............... 12,955 26,079 116,372 115,531 128,008 65,145
Long-term obligations...... 0 0 3,122 6,686 24,515(3) 3,442
Stockholders' equity
(deficit)................ 9,018 (23,392) (11,206) 17,565 (25,709) 12,875
Weighted average shares
outstanding.............. 66,881,906 66,881,906 44,208,983 23,786,127 17,993,440 5,973,511
</TABLE>
- ---------------
(1) While the Company had net income of $747,000, such income included a
reversal of prior year restructuring accruals of $1,376,000. Additionally,
the Company recorded a significant benefit due to the reversal of other
previously established reserves (See Notes 3, 5 and 9 to Notes to
Consolidated Financial Statements).
(2) The losses in 1997 were due principally to restructuring, asset impairment
and relocation costs of $26.4 million associated with the close down of the
unprofitable distribution businesses. The losses in 1996 included lease
termination costs and moving costs of $6.4 million. The losses in 1995 were
due principally to abandonment of U.S. software operations and the cost of
integrating prior acquisitions and the write-down of assets. Losses in 1994
related principally to corporate restructuring.
(3) For the year ended June 30, 1995. Includes the $18 million advance from
Computer 2000 related to its equity investment (see Note 11 to the
Consolidated Financial Statements) and $5.8 million associated with the
issuance of 6.8 million shares of the Company's common stock required to
complete the Robec merger.
(4) Net income (loss) per share includes a deduction for dividends on Preferred
Stock to arrive at net income (loss) available to Common Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
SIGNIFICANT EVENTS
On July 20, 1998, Listen Group Partners, LLC, a group headed by
AmeriQuest's senior management, Alex Kramer (CEO) and Jon Jensen (CFO and COO),
acquired the 36,349,878 shares of AmeriQuest common stock owned by Computer
2000. In taking over majority control of AmeriQuest from Computer 2000,
AmeriQuest's management arranged for a new $10 million asset-backed bank credit
line for AmeriQuest, in part to release Computer 2000 from its guarantee of
IBMCC, obtained the release of Computer 2000 and its affiliates from all other
guarantees of AmeriQuest obligations, and agreed to pay certain transaction
costs totaling approximately $220,000. As part of the transaction, Computer 2000
contributed to the capital of AmeriQuest approximately $28 million in
intercompany debt obligations and an additional $3 million in cash. Computer
2000 further agreed to the redemption by AmeriQuest of all of the outstanding
AmeriQuest preferred stock, convertible into approximately 42 million common
shares, and to the cancellation of all outstanding dividends, interest and
AmeriQuest options and warrants held by Computer 2000. As a result of the
transaction, the number of outstanding shares of AmeriQuest, on a fully diluted
basis, was reduced from approximately 118 million to approximately 67 million.
The Listen Group transaction completed a reorganization which began in
April, 1997.
On April 9, 1997 the Board approved a wide-ranging restructuring plan
encompassing head-count reductions and facility closures with the goal of
focusing on and strengthening the activities of its Advanced Systems Group
("ASG"), which had the highest gross margins of its distribution businesses, at
that time. The Company announced that projected losses for the year ending
September 30, 1997 could be in the range of approximately $45,000,000, partly as
the result of the planned restructuring. The restructuring measures were
14
<PAGE> 16
necessitated by the fact that revenues for the quarter ended March 31, 1997 were
substantially below expectations, primarily due to the inability of the Company
to compete effectively in the standard distribution of computer products.
Management also continued the investigation of possible other dispositions.
On May 6, 1997 AmeriQuest issued 300,000 shares of its Series H Cumulative
Convertible Preferred Stock (convertible into 41,958,042 shares of AmeriQuest
Common Stock) -- to Computer 2000 Inc. in consideration of the payment by
Computer 2000 Inc. of $30,000,000. This infusion fulfilled a previously
announced commitment from Computer 2000 Inc. to make such an investment.
On June 19,1997 CMS Enhancements Inc. sold substantially all of its assets
to CMS Peripherals Inc., a company formed by the former managing director of CMS
Enhancements Inc., Mr. Ken Burke. CMS Enhancements Inc., as part of the
transaction has changed its name to AAG Inc. AmeriQuest Technologies Inc. also
signed a non-competition agreement with CMS Peripherals with a term of five
years prohibiting use of the former name of the subsidiary and assembly or
manufacture of disk drives.
On September 30, 1997, Computer 2000 AG paid AmeriQuest's outstanding lines
of credit in the amount of $27.7 million (formerly guaranteed by Computer 2000
AG) and converted the loans to a non-interest bearing intercompany demand loan,
deferring demand of payment through September 30, 1998, but subordinated to the
Company's working capital lender.
Early in fiscal 1998, AmeriQuest/Kenfil Inc. sold its wholly-owned
subsidiaries Kenfil Distribution (Far East) Limited, a Hong Kong corporation and
Kenfil Distribution (M) Sdn. Bhd., a Malaysian corporation, to Regentland
Holdings Ltd. for proceeds of $2,939,062 pursuant to a Stock Purchase Agreement.
The purchase price was equivalent to repayment of a loan and the net book value
of the assets sold plus a premium of $450,000, and was paid by issuance of a
dividend from Kenfil Distribution (Far East) Limited to AmeriQuest/Kenfil Inc.
in the amount of $1,717,106, the loan repayment of $771,956 from Kenfil
Distribution (Far East) Limited to AmeriQuest/Kenfil Inc., and the payment of
$450,000 from Regentland Holdings Ltd. Regentland Holdings Ltd. was formed by
Mr. Simon Yip, the former Chief Executive Officer of Kenfil Distribution (Far
East) Limited to accommodate his purchase of such entities.
ANNUAL OPERATING RESULTS
The following table presents the Company's yearly results of operations as
a percent of sales:
<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Sales....................................... 100.0% 100.0% 100.0%
Gross Profit................................ 10.1 7.2 5.5
Selling, general and administrative......... 10.7 16.1 10.8
Intangible write-off........................ -- 4.1 --
Restructuring............................... (2.3) 4.3 1.5
Interest.................................... 0.5 1.6 1.1
Net Income (Loss)........................... 1.2 (18.9) (7.9)
</TABLE>
NET SALES
During the fiscal year ended September 30, 1998 sales decreased 72%
compared to the twelve months ended September 30, 1997. Sales decreases were
mainly attributable to the Company's decision to focus on the activities of its
Advanced Systems Group and sell or close all other divisions. During the fiscal
year ended September 30, 1997 sales decreased 48% compared to the twelve months
ended September 30, 1996. Sales decreases were mainly attributable to the
Company's decision to sell CMS Enhancements, Inc., to close the North American
and export distribution divisions and focus on and strengthen the activities of
its Advanced Systems Group.
The Company has relationships with several key vendors as primary suppliers
of computer products to the Company. For the years ended September 30, 1998,
1997 and 1996, sales derived from products from two, two and one vendors
accounted for 54%, 23%and 14%, respectively, of the Company's sales. However,
included in the sales for fiscal 1998 were shipments to other IBM distributors
of approximately $5,400,000 of IBM
15
<PAGE> 17
RS6000 product that represented liquidation of inventory as AmeriQuest exited
the IBM two tier program. Revenue attributable to the Company's business during
fiscal 1998 was thus $55,066,000. Revenue attributable to the Company's ongoing
business during fiscal 1997 was $52,050,000. Accordingly, sales during the year
ended September 30, 1998, as adjusted, increased by 4% over the prior year
despite both the Company's decision to terminate its 2nd tier IBM distribution
of Unix products, and its inability to hire and replace sales staff or recruit
additional resellers until the period following the change in control to the
senior management of the Company.
COST OF SALES AND GROSS PROFIT
Cost of sales includes primarily the cost of merchandise, freight expenses
and provisions for inventory losses and is reduced by vendor volume rebates and
other items. Gross profit (sales less cost of sales) increased to 10.1% of sales
for the fiscal year ended September 30, 1998 compared to 7.2% for the fiscal
year ended September 30, 1997. Gross profit increased to 7.2% of sales for the
fiscal year ended September 30, 1997 compared to 5.5% for the twelve months
ended September 30, 1996. The improvement in both years was primarily
attributable to the closing of the lower margin standard distribution businesses
and continuation of the higher margin Advanced Systems Group revenue and related
higher margin. The detrimental effect on gross profit of approximately
$1,300,000 caused by the liquidation of inventory purchased in fiscal 1998 was
offset by favorable settlements of approximately $1,300,000 of previously
established vendor debit loss reserves. In addition, in fiscal 1998 the Company
recorded a benefit of approximately $380,000 related to previously established
other cost of sales accruals.
The Company receives funds under incentive programs based upon volume sales
or purchase of the vendors products. The incentive funds reduce the cost of the
products sold. Incentive programs resulted in $0.3 million, $2.4 million and
$2.5 million for the years ended September 30, 1998, September 30, 1997 and
September 30, 1996, respectively.
AmeriQuest anticipates that it will continue to experience pressure on
gross selling margins due to industry competition. Although AmeriQuest expects
that it will be able to improve sales product mix toward those products and
services generating higher margins and reduce other cost of sale items, selling,
general and administrative expenses as a percent of sales, no assurance can be
given as to whether such reduction in fact will occur or as to the actual amount
of any such reductions. To the extent gross margins decline and the Company is
not successful in reducing selling, general and administrative expenses as a
percentage of sales, the Company will experience further negative operating
results.
OPERATING EXPENSES
For the fiscal years ended September 30, 1998, 1997 and 1996 operating
expenses, exclusive of the restructuring and the write-off of intangibles were
approximately 10.7%, 16.1%, and 10.8% of sales, respectively. Selling, general
and administrative expenses have declined during the periods as a result of the
closing of the lower margin standard distribution businesses and reductions in
bad debt expense. Additionally, the Company settled two lawsuits favorably and
in fiscal 1998 reversed $1.3 million of reserves in excess of settlement amounts
which served to offset certain general and administrative costs incurred during
the fiscal year that related to the withdrawal from business with certain
customers and vendors and residual expenses resulting from closing of the
Company's other divisions in fiscal 1997 and 1998. The Company also recorded the
benefit of approximately $400,000 in fiscal 1998 resulting from the reversal of
previously established accruals.
During the year ended September 30, 1997, the Company incurred significant
operating and personnel costs to close down the unprofitable distribution
businesses. During the 1997 fiscal year the Company recorded a $9.3 million
charge to expense the restructuring of the Company's sales and administrative
staffing and planned closing of rented facilities. During fiscal years 1996 and
1995 the Company incurred significant costs to resolve certain lawsuits and
complete an information systems conversion. In addition, bad debt expense was
significant in fiscal 1996 as the Company increased export sales to higher
credit risk Brazilian customers.
16
<PAGE> 18
During the year ended September 30, 1996 the Company also recorded a $6.4
million charge to expense for the sublease of its California headquarters
building and the cost to relocate its headquarters to Florida.
Operating expenses are reduced by advertising revenues and market
development funds received from vendors as subsidy for or incentive to market
their products. Funds received during the fiscal years ended September 30, 1998,
September 30, 1997 and September 30, 1996 totaled $0.6 million, $2.0 million and
$2.8 million, respectively.
INTANGIBLE WRITE-OFF
During the year ended September 30, 1997, the Company recorded an
intangible write-off of approximately $9 million (See Note 4 to Notes to
Consolidated Financial Statements).
RESTRUCTURING
During the years ended September 30, 1996 and 1997, the company recorded
restructuring costs of approximately $6.4 million and $9.3 million,
respectively.
During the year ended September 30, 1998, the company completed its
restructuring plan. Costs incurred to complete the restructuring plan were
charged against the related, previously established restructuring accruals.
Certain estimates made of the costs to complete the restructuring plan exceeded
the actual costs incurred. When the Company determined that the estimated costs
exceeded the actual costs, the remaining accruals were reversed into income.
During the year ended September 30, 1998, the Company reversed approximately
$1.4 million into income (See Note 3 to Notes to Consolidated Financial
Statements).
INTEREST EXPENSE
Interest expense, net, decreased from $3.5 million for the year ended
September 30, 1997 to $0.3 million for the year ended September 30, 1998 due to
(i) replacement of bank loans by intercompany loans Computer 2000 without
interest and (ii) the equity infusion of $3,000,000 from Computer 2000 on July
20, 1998. See "Liquidity and Capital Resources".
INCOME TAXES
In the period October 1, 1995 to September 30, 1998, no income tax expense
was recorded due to losses or the availability of tax-loss carryforwards. Due to
the acquisition by Listen Group Partners, LLC of the Company's stock held by
Computer 2000 (see Note 2 to the Notes to Consolidated Financial Statements),
there was a change in ownership as defined by section 382 of the Internal
Revenue Code ("Section 382 Limitations"). The Section 382 Limitation limits the
Company's ability to utilize its net operating loss carryforwards created prior
to the ownership change. The Company is currently analyzing the amount of the
limitation and estimates that the net operating loss carryforwards available to
offset future taxable income ranges between $0 and $12 million. The Company has
not benefited from these net operating carryforwards as of September 30, 1998.
QUARTERLY OPERATING RESULTS
The following tables present certain unaudited quarterly statement of
operations data for the quarters ended September 30 of the respective fiscal
year ended September 30. This unaudited quarterly information has been derived
from audited annual consolidated financial statements of the Company and, in the
opinion of management, includes all adjustments necessary for a fair
presentation of the information for the periods
17
<PAGE> 19
covered. The quarterly data should be read in conjunction with the audited
Financial Statements and the notes thereto:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales......................... $13,095 $19,237 $103,755 $100,723
Gross Profit...................... 1,326 904 2,330 7,415
Selling, general and
administrative.................. 1,818 2,388 12,346 13,019
Restructuring..................... (1,016) (2,063) 0 0
Interest.......................... 23 401 1,153 1,437
Net income (loss)................. 501 178 (11,169) (7,041)
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales............................. 100.0% 100.0% 100.0% 100.0%
Gross Profit...................... 10.1 4.7 2.2 7.4
Selling, general and
administrative.................. 13.9 12.4 11.9 13.0
Restructuring..................... (7.8) (10.7) -- --
Interest.......................... 0.2 2.1 1.1 1.4
Net income (loss)................. 3.8 0.9 (10.8) (7.0)
</TABLE>
NET SALES -- QUARTER
During the quarter ended September 30, 1998 sales decreased 32% compared to
the three months ended September 30, 1997. Sales decreases were solely
attributable to the Company's early in the first quarter of fiscal 1998 to sell
its wholly-owned Asian subsidiaries, whose revenue for the quarter ended
September 30, 1997 was $6,432,000. Revenue attributable to the Company's ongoing
business was $12,805,000. Accordingly, sales during the quarter ended September
30, 1998 increased by 2% over the year ago quarter despite the Company's
decision to terminate its 2nd tier IBM distribution of Unix products, and its
inability to hire and replace sales staff or recruit additional resellers until
the period following the change in control to the senior management of the
Company. Revenues from sale of products of the five leading vendors, Acer ,
Hewlett Packard, IBM, Okidata and Unisys, represent approximately 13%, 15%, 29%,
16% and 6%, respectively, of the Company's revenue for the fiscal quarter ended
September 30, 1998.
COST OF SALES AND GROSS PROFIT -- QUARTER
During the quarter ended September 30, 1998 gross profit increased to 10.1%
from 4.7% for the three months ended September 30, 1997. Gross profit increases
were solely attributable to the Company's decision early in fiscal 1998 to sell
its wholly-owned Asian subsidiaries. Gross profit attributable to the Company's
ongoing business during fiscal 1997 was $724,000. Accordingly, gross profit
during the quarter ended September 30, 1998 increased by $602,000 or 83% over
the year ago quarter despite the Company's decision to terminate its 2nd tier
IBM distribution of Unix products, and its inability to hire and replace sales
staff or recruit additional resellers until the period following the change in
control to the senior management of the Company.
OPERATING EXPENSES -- QUARTER
Operating expenses during the quarter ended September 30, 1998, without
benefit of the reversal of restructuring reserves of $1,016,000, was $1,818,000.
Accordingly, operating expenses during the quarter ended September 30, 1998
decreased by 24% over the year ago quarter. During the quarter ended September
30, 1998 operating expenses decreased by $572,000, but reflect an increase as a
percent of sales to 13.9% from 12.4% for the three months ended September 30,
1997. Operating expense decreases were attributable to the Company's decision
early in fiscal 1998 to sell its wholly-owned Asian subsidiaries.
18
<PAGE> 20
Additionally, the Company settled two lawsuits favorably and reversed $1.3
million of reserves in excess of settlement amounts which served to offset
certain general and administrative costs incurred during the fiscal quarter that
related to the withdrawal from business with certain vendors and residual
expenses resulting from closing of the Company's other divisions in fiscal 1997
and 1998.
OPERATING INCOME VARIABILITY
The annual and quarterly operating results of the domestic operations of
the Company have varied considerably due to the acquisition of distribution
companies, closure and sale of certain subsidiaries and operating units and a
reduced emphasis on manufacturing and assembly for all but mass storage assembly
products, which also ceased as of June 19, 1997. As earlier mentioned, the
Company experienced a net loss of $67.6 million in fiscal 1995, a net loss of
$33.6 million during fiscal 1996, a net loss of $41.3 million during fiscal
1997, and net income of $0.7 million during fiscal 1998. Included in the net
income for fiscal 1998 is reversal of restructuring accruals of $1.4 million and
other previously established reserves.
INFLATION
To date AmeriQuest has not been significantly affected by inflation.
Moreover, technological changes in the electronics industry have generally
resulted in price reductions, despite increases in certain costs which may be
affected by inflation.
SEASONALITY
Generally, the Company's sales volumes are not seasonal between quarters,
although historical monthly sales within various quarters have varied
considerably. For example, sales tend to decrease in November, primarily due to
industry attendance at Comdex, with a corresponding increase in December.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $0.7 million in cash and had not
borrowed against its line of credit. At September 30, 1997, the Company had
borrowed $3.1 million against lines of credit. The Company used $7.0 million in
cash from operating activities during the year ended September 30, 1998
primarily due to expenditures associated with the restructuring charges provided
in fiscal 1997, offset partially by reduction in inventory levels. The Company
generated $21.7 million in cash from operating activities during the year ended
September 30, 1997 compared to usage of cash of $28.8 million for the year ended
September 30, 1996. Cash generated by operations in fiscal 1997 resulted
primarily from collection of accounts receivable and liquidation of inventory
offset by full settlement of payment with discontinued vendors. Sale of assets
during fiscal 1997 generated an additional $3.5 million of cash. Cash receipts
were applied to reduce outstanding obligations under lines of credit during
fiscal 1997.
Accounts receivable days decreased during fiscal 1998 compared to fiscal
1997, representing shorter payment terms extended to customers. Inventory
turnover increased in both fiscal years 1997 and 1996, reflecting an intentional
reduction in stock carried in an effort to reduce obsolescence costs and
carrying costs necessary to support the business.
At September 30, 1998, the Company had a stockholders' equity of $9.0
million compared to a September 30, 1997 deficit of $23.4 million after
operating losses of $41.3 million in the year ended September 30, 1997 and $33.6
million in the year ended September 30, 1996. The improvement in stockholder's
equity resulted primarily from the recapitalization associated with the change
in control on July 20, 1998.
The Company had maintained bank lines of credit guaranteed by Computer 2000
with four German banks which totaled $27.7 million on September 30, 1997. The
interest rates on such lines of credit were Libor-based. On September 30, 1997,
Computer 2000 AG paid the outstanding bank lines of credit which totaled $27.7
million and converted the loans to a non-interest bearing intercompany demand
loan, and agreed to defer demand of payment through September 30, 1998 and
subordinate its loan to the working capital
19
<PAGE> 21
lender. See "Certain Relationships and Related Transactions." Notwithstanding
the agreement by Computer 2000 to defer demand of payment of the loan prior to
September 30, 1998, certain specified events such as, but not limited to, the
merger, sale or reorganization of the Company would have made the loan
immediately due and payable. The intercompany loan was contributed to capital as
a result of the change in control on July 20, 1998.
The Company maintains a $10 million line of credit with Fleet Financial
("Fleet") which is secured by substantially all of the Company's assets.
Interest rates on the Fleet line are prime plus 150 basis points or Libor plus
400 basis points. Borrowings under the Fleet line of credit are limited to a
contractual percentage of eligible inventories and receivables. The terms of the
line include restrictive covenants which require the maintenance of specific
levels of tangible net worth and cash flows. The Fleet line expires July 20,
2001. There were no borrowings under the Fleet line of credit at September 30,
1998. The Fleet line replaced a line of credit with IBM Credit Corporation
("IBMCC"). Borrowings under the IBMCC line of credit at September 30, 1997 and
1996 totaled $3.1 million and $12.3 million, respectively.
Management believes that the Company's current sources of external
financing are adequate to meet its current operating requirements through
September 30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates. Pursuant to the
Company's line of credit with Fleet, a change in either the lender's base rate
or LIBOR would affect the rate at which the Company could borrow funds
thereunder. The Company believes that the effect of any such change would be
minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, notes thereto, and the report of independent
public accountants thereon are included herein. Supplementary data, including
quarterly financial information, is included following the financial statements.
A list of the information so included is set forth in response to Item 14(a)
entitled "Exhibits, Financial Statement Schedules, and Reports on Form 8-K,"
which is incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See "Election of Directors" in the proxy statement for the 1999 annual
meeting of the stockholders of the Company, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
See "Executive Officers Compensation" in the proxy statement for the 1999
annual meeting of the stockholders of the Company, which is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See "Stock Ownership" in the proxy statement for the 1999 annual meeting of
the stockholders of the Company, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Other Information-Certain Relationships and Related Transactions" in
the proxy statement for the 1999 annual meeting of the stockholders of the
Company, which is incorporated herein by reference.
21
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C> <C>
(1) Financial Statements included in Part II of this Report:
Report of Independent Certified Public Accountants.......... F-1
Consolidated Statements of Operations....................... F-3
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Stockholders' Equity (Deficit)... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-7
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and
Reserve..................................................... F-17
</TABLE>
(b) Reports on Form 8-K
Current report on Form 8-K dated July 2, 1998 to report the change in
control of the Registrant.
(c) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE OF DOCUMENT LOCATION OF FILING
- ------- ----------------- ------------------
<C> <S> <C>
3.01 Restated Certificate of Incorporation of
AmeriQuest......................................
3.02* By-laws of AmeriQuest........................... SEC File No. 33-81726
4.01* Reference is made to Exhibits 3.01 and 3.02, the
Certificate of Incorporation and By-laws, which
define the rights of security holders...........
4.02* Specimen Stock Certificate...................... SEC File No. 33-81726
10.01* Inventory and Working Capital Financing SEC File No. 1-10397 8-K
Agreement dated July 20, 1998 by and between for July 30, 1998
AmeriQuest and Fleet Capital....................
10.02* 1996 Equity Incentive Plan...................... SEC File No. 1-10397
Exhibit 10.07
10K for September 30, 1997
10.03 Employment Agreement for Alexander C. Kramer, SEC File No. 1-10397
Jr. ............................................ Exhibit 10.10
10K for September 30, 1997
10.04 Employment Agreement for Jon D. Jensen.......... SEC File No. 1-10397
Exhibit 10.11
10K for September 30, 1997
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE OF DOCUMENT LOCATION OF FILING
- ------- ----------------- ------------------
<C> <S> <C>
10.05 Lease Agreement dated July 1, 1998 by and
between AmeriQuest and Merion Mills
Associates......................................
10.06* Lease Agreement dated January 25, 1995, as SEC File No. 1-10397
amended, by and between AmeriQuest and Anaheim Exhibit 10.25
Technology Center............................... 10-K for September 30, 1996
10.07* Sublease dated as of September 4, 1996 by and SEC File No. 1-10397
between AmeriQuest and Central Video, Inc. ..... Exhibit 10.26
10-K for September 30, 1996
21.01 Subsidiaries of AmeriQuest...................... SEC File No. 1-10397
10-K for September 30, 1997
27.01 Financial Data Schedule (for SEC use only)......
</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.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1933, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Willow
Grove, State of Pennsylvania, on the 22nd day of December, 1998.
AmeriQuest Technologies, Inc.
/s/ ALEXANDER C. KRAMER
--------------------------------------
By: Alexander C. Kramer
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Each Person, in so signing, also causes and appoints Alexander C. Kramer
and Jon D. Jensen, and each of them acting alone, as his true and lawful
attorney-in-fact, in his name, place and stead, to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALEXANDER C. KRAMER President and a Director December 22, 1998
- --------------------------------------------------- (Principal Executive
Alexander C. Kramer Officer)
/s/ JON D. JENSEN Chief Financial Officer, December 22, 1998
- --------------------------------------------------- Chief Operating Officer,
Jon D. Jensen Secretary and a Director
(Principal Financial and
Accounting Officer)
/s/ EDWARD B. CLOUES, II Director December 22, 1998
- ---------------------------------------------------
Edward B. Cloues, II
/s/ WALTER A. REIMANN Director December 22, 1998
- ---------------------------------------------------
Walter A. Reimann
/s/ CHARLES W. SOLTIS Director December 22, 1998
- ---------------------------------------------------
Charles W. Soltis
Director
- ---------------------------------------------------
Marc L. Werner
/s/ J. R. DICK IVERSON Director December 22, 1998
- ---------------------------------------------------
J. R. Dick Iverson
/s/ ALEXANDER C. KRAMER
- ---------------------------------------------------
Alexander C. Kramer**,
Attorney-in-Fact
/s/ JON JENSEN
- ---------------------------------------------------
Jon Jensen**,
Attorney-in-Fact
</TABLE>
24
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AmeriQuest Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of AmeriQuest
Technologies, Inc. (a Delaware corporation) and subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AmeriQuest Technologies,
Inc. and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania,
December 8, 1998
F-1
<PAGE> 27
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 755 $ 7,680
Accounts receivable, net of allowances for doubtful
accounts of $609 and $2,156............................ 6,535 9,006
Inventories............................................... 4,191 7,066
Other current assets...................................... 354 935
--------- ---------
Total current assets.............................. 11,835 24,687
PROPERTY AND EQUIPMENT, NET................................. 799 1,272
OTHER ASSETS................................................ 321 120
--------- ---------
$ 12,955 $ 26,079
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable.......................................... $ 2,132 $ 9,492
Due to Computer 2000...................................... -- 27,664
Lines of credit........................................... -- 3,064
Accrued expenses and other................................ 1,805 9,251
--------- ---------
Total current liabilities......................... 3,937 49,471
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 5,000,000 shares
authorized and 300,000 shares issued and outstanding at
September 30, 1997; no shares issued and outstanding at
September 30, 1998..................................... -- 30,000
Common stock, $.01 par value, 200,000,000 shares
authorized, 66,881,906 shares issued and outstanding... 669 669
Additional paid-in capital................................ 174,383 111,145
Accumulated deficit....................................... (166,034) (165,206)
--------- ---------
Total stockholders' equity (deficit).............. 9,018 (23,392)
--------- ---------
$ 12,955 $ 26,079
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 28
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES........................................... $ 60,466 $ 218,877 $ 424,708
COST OF SALES....................................... 54,323 203,199 401,165
----------- ----------- -----------
Gross profit................................... 6,143 15,678 23,543
OPERATING EXPENSES
Selling, general and administrative............... 6,499 35,160 45,998
Intangibles write-off............................. -- 9,036 --
Restructuring costs............................... (1,376) 9,338 6,400
----------- ----------- -----------
Income (loss) from operations................ 1,020 (37,856) (28,855)
INTEREST EXPENSE, NET............................... 273 3,455 4,754
----------- ----------- -----------
NET INCOME (LOSS)................................... 747 (41,311) (33,609)
DIVIDENDS ON PREFERRED STOCK........................ (1,575) (875) --
----------- ----------- -----------
NET LOSS TO COMMON STOCKHOLDERS..................... $ (828) $ (42,186) $ (33,609)
=========== =========== ===========
Basic and diluted net loss per share................ $ (0.01) $ (0.63) $ (0.76)
=========== =========== ===========
Basic and diluted shares outstanding................ 66,881,906 66,881,906 44,208,983
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 29
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ---------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1995............ 2,596,525 $ 26 23,896,140 $239 $106,476 $ (89,176) $ 17,565
Exercise of employee stock options........ -- -- 82,500 1 3 4
Preferred stock issued for acquisition.... 25,830 -- -- -- 1,603 1,603
Common stock issued for acquisition....... -- -- 3,969,905 40 2,367 2,407
Exercise of warrants by Computer 2000..... 301,249 3 -- -- 232 235
Common stock issued for legal
settlement.............................. -- -- 500,000 5 305 310
Common stock issued for series G preferred
stock dividend.......................... -- -- 197,958 2 233 (235) 0
Preferred stock conversion................ (2,923,604) (29) 33,104,371 330 (302) (1)
Exercise of warrants by Computer 2000..... -- -- 5,296,518 53 227 280
Net loss.................................. -- -- -- -- -- (33,609) (33,609)
---------- -------- ---------- ---- -------- --------- --------
Balances at September 30, 1996............ -- -- 67,047,392 670 111,144 (123,020) (11,206)
Correction of outstanding shares that were
authorized but never issued in
connection with settlement of debt(1)... -- -- (165,486) (1) 1 0
Sale of preferred stock................... 300,000 30,000 30,000
Accrued dividend on preferred stock....... -- -- -- -- -- (875) (875)
Net loss.................................. -- -- -- -- -- (41,311) (41,311)
---------- -------- ---------- ---- -------- --------- --------
Balances at September 30, 1997............ 300,000 30,000 66,881,906 669 111,145 (165,206) (23,392)
Accrued dividend on preferred stock....... -- -- -- -- -- (1,575) (1,575)
Contribution of cash, preferred stock,
accrued dividends and debt by Computer
2000 (see Note 2)....................... (300,000) (30,000) -- -- 63,238 -- 33,238
Net income................................ -- -- -- -- -- 747 747
---------- -------- ---------- ---- -------- --------- --------
Balances at September 30, 1998............ -- $ -- 66,881,906 $669 $174,383 $(166,034) $ 9,018
========== ======== ========== ==== ======== ========= ========
</TABLE>
- ---------------
(1) Correction of Outstanding Shares -- The number of outstanding shares of
Common Stock was corrected to account for shares that were authorized but
never issued in connection with settlement of debt, and the elimination of
duplicate shares erroneously issued upon exercise of an employee stock
option.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 30
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 747 $(41,311) $(33,609)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 307 2,664 3,235
Gain on sale of division assets........................ (184) (385) --
Restructuring costs.................................... (1,376) 13,849 956
Changes in operating assets and liabilities:
Net (increase) decrease in accounts receivable......... (415) 43,625 (4,903)
Decrease in inventories................................ 2,450 29,613 2,454
Decrease in other assets............................... 229 2,704 1,305
Increase (decrease) in accounts payable and accrued
expenses and other................................... (8,757) (29,027) 1,728
------- -------- --------
Net cash provided by (used in) operating
activities........................................ (6,999) 21,732 (28,834)
------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of division assets..................... 450 3,550 --
Capital expenditures, net of disposals.................... (312) (62) (1,798)
------- -------- --------
Net cash provided by (used in) investing
activities........................................ 138 3,488 (1,798)
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit......... (3,064) (77,504) 32,202
Net borrowings from Computer 2000......................... -- 27,664 --
Contribution to capital from Computer 2000................ 3,000 -- --
Proceeds from sale of preferred and common stock.......... -- 30,000 520
------- -------- --------
Net cash provided by (used in) financing
activities........................................ (64) (19,840) 32,722
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (6,925) 5,380 2,090
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD................................................. 7,680 2,300 210
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 755 $ 7,680 $ 2,300
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 31
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(DOLLARS IN THOUSANDS)
Interest on lines of
credit: During the fiscal years ended September 30, 1998,
September 30, 1997 and September 30, 1996, the
Company paid cash for interest of approximately
$499, $3,614 and $4,774, respectively.
Income taxes: During the fiscal years ended September 30, 1998,
September 30, 1997 and September 30, 1996, the
Company made no income tax payments.
Noncash investing and financing activities:
Acquisition of Robec
minority interest:
During the fiscal year ended September 30, 1996,
the Company issued 6,750,874 shares of common stock
valued at $4,245 in exchange for the remaining
minority interest of Robec, Inc.
Legal settlement: During the fiscal year ended September 30, 1996,
the Company issued 500,000 shares of common stock
for full settlement of an accrued legal liability
of $310.
Conversion of subordinated
note payable and
preferred
stock into common stock:
During the fiscal year ended September 30, 1996,
the Company converted 2,923,604 shares of preferred
stock into 33,104,371 shares of the Company's
common stock.
Contribution of
non-interest bearing
demand
loan and preferred stock
to
capital:
During the fiscal year ended September 30, 1998,
Computer 2000 contributed to the capital of the
Company a non-interest bearing demand loan due
Computer 2000 and preferred stock of approximately
$28 million and $30 million, respectively.
Dividends on Preferred
Stock: During the fiscal years ended September 30, 1998
and 1997, the Company had accrued $1,575 and $875,
respectively, in dividends payable to preferred
stockholders. The accrued dividends of $2,450 were
contributed to capital on July 20, 1998.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 32
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business. AmeriQuest Technologies, Inc. and subsidiaries
(the "Company" or "AmeriQuest"), a Delaware corporation, is primarily a national
valued-added wholesale distributor of micro, mini and mid-range computers and
related products to value-added resellers ("VARs") and systems integrators.
During fiscal 1998, the Company's senior management acquired all of the
Company's common stock held by Computer 2000, the then current majority
stockholder. Computer 2000 also contributed cash, preferred stock, accrued
dividends and obligations due Computer 2000 to the Company's equity (see Note
2).
Restructuring Costs. On April 9, 1997, the Board approved a wide-ranging
restructuring plan with the goal of focusing on the Company's Advanced Systems
Group ("ASG"). The plan included closure of all warehouse facilities, other than
ASG, which is based in Horsham, Pennsylvania. The restructuring has resulted in
the closure of warehouse facilities in Visalia, California, Miami, Florida,
Dallas, Texas, and Chicago, Illinois. In addition, the number of employees has
been significantly reduced and all remaining employees are in the US. The
Company also closed its corporate headquarters in Florida. The restructuring
plan was implemented, but not completed, throughout fiscal year 1997. At
September 30, 1997, the Company has accrued $3,738,000 of cost related to the
restructuring plan. The plan resulted in a substantial reduction in sales
revenue with the goal of returning the Company to profitability in future years.
Sales, for the year ended September 30, 1997, of the businesses closed were
approximately $126 million.
The Company completed this restructuring plan during fiscal year 1998.
Costs incurred to complete the restructuring plan were charged against the
related restructuring accruals. Certain estimates made of the costs to complete
the restructuring plan exceeded the actual costs incurred. When the Company
determined that the estimated costs exceeded the actual costs, the remaining
accruals were reversed into income. During fiscal 1998, the Company reversed
$1,376,000 into income, which is recorded in restructuring costs in the
accompanying consolidated statement of operations (see Note 3). In addition, the
Company recorded a significant benefit due to the reversal of other previously
established reserves (See Notes 5 and 9).
Basis of consolidation. The consolidated financial statements include the
accounts of AmeriQuest and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
Reclassifications: Certain amounts in the prior periods have been
reclassified to conform to the current year's presentation.
Cash and Cash Equivalents. The Company considers cash on deposit with
financial institutions and all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
generally limits its investments in cash equivalents to certificates of deposit.
Inventories. Inventories consist principally of computer hardware and
software held for resale and are stated at the lower of first-in, first-out or
market. Reserves for inventory obsolescence and slow moving product are provided
based upon specified criteria, such as recent sales activity and date of
purchase. Amounts due from vendors for price protection and stock rotations are
recorded as an offset to the amounts due vendors in accounts payable. Management
assesses the realizable value of these amounts and reserves for potential
uncollectable balances.
F-7
<PAGE> 33
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using straight-line method over
estimated useful lives as follows:
<TABLE>
<S> <C>
Equipment................................................... 5 to 7 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... Lease term
Vehicles.................................................... 3 to 5 years
</TABLE>
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and betterments to property and equipment are capitalized.
When assets are disposed of, the related cost and accumulated depreciation
thereon are removed from the accounts and any resulting gain or loss is included
in operations.
Market development funds and volume incentive rebates. In general, vendors
provide various incentive programs to the Company. The funds received under
these programs are determined based on purchases and/or sales of the vendors'
product and the performance of certain training, advertising and other market
development activities. Revenue associated with these funds is recorded when
earned either as a reduction of selling, general and administrative expenses or
product cost, according to the specific nature of the program.
Sales recognition. Sales are recorded as of the date shipments are made to
customers. Sales returns and allowances are reflected as a reduction in sales
and recorded in inventory at expected net realizable value. The Company permits
the return of products within certain time limits and will exchange returned
products. Products that are defective upon arrival are handled on a warranty
return basis with the Company's vendors. The Company provides for product
warranty and return obligations at the point of sale based on estimates of
expected future costs.
Income taxes. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109),
which requires an asset and liability approach in accounting for income taxes
payable or refundable at the date of the financial statements as a result of all
events that have been recognized in the financial statements and as measured by
the provisions of enacted laws. Additionally, SFAS 109 requires that deferred
tax assets be evaluated and a valuation allowance be established if it is "more
likely than not" that all or a portion of the deferred tax asset will not be
realized.
Net loss per common share and common share equivalent. The Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
effective the year ended September 30, 1998. This statement requires the
disclosure of both basic and diluted earnings per share as well as the
retroactive restatement of prior years' per share disclosures. Basic and
dilutive shares outstanding for the fiscal years ended September 30, 1998, 1997
and 1996 are the same, as all common stock equivalents are anti-dilutive due to
the loss to common shareholders.
Recently Issued Accounting Pronouncements. In June 1997, the FASB issued
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
requires companies to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130 is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. Management believes that SFAS 130 will not have a material
effect on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
Management believes that SFAS 131 will not have a material effect on the
Company's financial statements.
F-8
<PAGE> 34
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Risks and Uncertainties. The Company's future results of operations
involve a number of risks and uncertainties. Factors that could affect the
Company's future operating results and cause actual results to vary materially
from expectations include, but are not limited to, the Company's historical
operating losses before the benefit of excess restructuring costs and other
accruals and reserves taken into income in fiscal 1998 (see Notes 3, 5 and 10),
the competitive market for computers and computer related equipment, dependence
on key vendors, dependence on key personnel and risks associated with rapidly
changing technology.
Financial instruments that potentially subject the Company to
concentrations of credit risk (see Note 1) consist principally of cash and
accounts receivable. The Company places its cash with high credit quality
financial institutions. Concentrations of credit risk with respect to accounts
receivable are not significant due to the large number of customers. At
September 30, 1996, 1997 and 1998, no one customer represented greater than 10%
of accounts receivable or greater than 10% of sales for the periods then ended.
Dependence on Vendors. The Company has relationships with several key
vendors as primary suppliers of computer products to the Company. For the years
ended September 30, 1998, 1997 and 1996, sales derived from products from two,
two and one vendors accounted for 54%, 23% and 14%, respectively, of the
Company's sales. There can be no assurance that the Company will maintain its
relationship with these vendors, or that it will be able to find alternative
vendors capable of providing product on terms satisfactory to the Company should
its relationship with its current vendors terminate.
2. ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR MANAGEMENT:
On July 2, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's
senior management, Alex Kramer (CEO) and John Jensen (CFO), signed an agreement
to acquire the 36,349,878 shares of AmeriQuest common stock owned by Computer
2000. The transaction was approved by the outside directors of AmeriQuest and by
the full Board of Directors of AmeriQuest.
In taking over majority control of AmeriQuest from Computer 2000,
AmeriQuest's management arranged for a new $10 million asset-backed bank credit
line for AmeriQuest (see Note 6), in part to release Computer 2000 from its
guarantee of IBMCC, obtained the release of Computer 2000 and its affiliates
from all other guarantees of AmeriQuest obligations, and agreed to pay certain
transaction costs totaling approximately $220,000.
As part of the transaction, completed on July 20, 1998, Computer 2000
contributed to the capital of AmeriQuest approximately $28 million in
intercompany debt obligations and an additional $3 million in cash. Computer
2000 further agreed to the redemption by AmeriQuest of all of the outstanding
AmeriQuest preferred stock, convertible into approximately 42 million common
shares, and to the cancellation of all outstanding dividends of $2,450,000,
interest of $124,000 and AmeriQuest options and warrants held by Computer 2000.
As a result of the transaction, the number of outstanding shares of
AmeriQuest on a fully diluted basis, was reduced from approximately 118 million
to approximately 67 million. The Board of Directors of the Company agreed to
reserve 6.7 million shares of common stock for future issuance to AmeriQuest
employees as incentive compensation pursuant to terms to be approved by outside
directors of the board.
F-9
<PAGE> 35
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. RESTRUCTURING COSTS AND ASSET IMPAIRMENT:
The components of the restructuring costs and asset impairment for the year
ended September 30, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Provision for losses on inventory and vendors (included in
cost of sales)............................................ $ 4,032
-------
Provision for losses on accounts receivable (included in
SG&A expenses)............................................ 3,945
-------
Intangible write off........................................ 9,036
-------
Restructuring Costs:
Abandonment of leasehold improvements and other
property and equipment........................... 2,448
Lease payments in excess of sublease income....... 1,362
Employee severance costs.......................... 2,680
Other............................................. 2,848
-------
Total classified as restructuring costs...... 9,338
-------
Total costs relating to restructuring and asset
impairment for the years ended September 30,
1997............................................. $26,351
=======
</TABLE>
The components of the remaining restructuring accruals as of September 30,
1997 and the 1998 activity are as follows (in thousands):
<TABLE>
<CAPTION>
RESTRUCTURING RESTRUCTURING
ACCRUALS CHARGED REVERSED INTO ACCRUALS
SEPTEMBER 30, AGAINST INCOME DUE TO SEPTEMBER 30,
1997 ACCRUAL CHANGE IN ESTIMATE 1998
------------- ------- ------------------ -------------
<S> <C> <C> <C> <C>
Lease payments in excess of
sublease income............... $ 618 $ 533 $ 85 $--
Severance costs................. 448 378 70 --
Other........................... 2,672 1,451 1,221 --
------ ------ ------ --
$3,738 $2,362 $1,376 $--
====== ====== ====== ==
</TABLE>
During fiscal year 1996, the Company closed its corporate headquarters in
California and moved its operations to Florida. The components of the loss on
sublease and relocation costs are as follows (in thousands):
<TABLE>
<S> <C>
Abandonment of leasehold improvements....................... $ 956
Lease payments in excess of sublease income................. 2,744
Personnel costs............................................. 1,455
Other....................................................... 1,245
------
$6,400
======
</TABLE>
4. ACQUISITIONS AND DISPOSITIONS:
Early in the first quarter of fiscal 1998, AmeriQuest/Kenfil Inc. sold its
wholly owned subsidiaries Kenfil Distribution (Far East) Limited, a Hong Kong
corporation and Kenfil Distribution (M) Sdn. Bhd., a Malaysian corporation
(collectively, "Kenfil Asia"). Proceeds from the sale of Kenfil Asia were
$450,000, with a gain of $184,000, which was classified as a reduction of
selling, general and administrative expenses in the accompanying Statement of
Operations.
F-10
<PAGE> 36
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 19, 1997, CMS Enhancements Inc., a subsidiary of AmeriQuest, sold
substantially all of its assets to CMS Peripherals Inc., a company formed by the
former managing director of CMS Enhancements Inc. CMS Enhancements Inc., as part
of the transaction has changed its name to AAG Inc. AmeriQuest also signed a
non-competition agreement with CMS Peripherals with a term of five years.
The Company had previously pursued a strategy of growth through acquisition
by acquiring regional distributors with the goal of creating a national
distributor of value-added computers, subsystems and peripherals. The success of
this strategy was dependent upon the ability of the Company to effectively
consolidate and integrate the operations of the acquired businesses, combine
different cultures and obtain adequate financing to complete acquisitions and
fund working capital requirements. All of the Company's acquisitions completed
during fiscal years June 30, 1994 through September 30, 1996 were accounted for
in accordance with the purchase method of accounting. Intangible assets
associated with these acquisitions were primarily related to acquired
distribution channels, associated vendor relationships and market positions.
These intangibles were being amortized over ten years. Subsequent to these
acquisitions, the Company assessed the recoverability of these intangibles in
accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." As a result of these assessments, the
Company recorded goodwill impairment charges of approximately $9 million and
$23.8 million in fiscal 1997 and fiscal 1995, respectively. Such charges were
required due to the Company's significant operating losses ($165 million
accumulated deficit as of September 30, 1997) and expectation of future
operating performance.
5. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Finished goods............................................. $4,191 $6,927
Raw materials and subassemblies............................ -- 139
------ ------
$4,191 $7,066
====== ======
</TABLE>
Inventories are reflected net of reserves for excess and obsolete inventory
of approximately $0.7 million and $1.3 million at September 30, 1998 and 1997,
respectively. In estimating the inventory reserves, management relied upon its
knowledge of the industry, projected sales volumes, current inventory levels and
aging of product on-hand. Because of the assumptions used, the amounts the
Company will ultimately realize could differ materially in the near term from
the net inventory balances as included in the accompanying financial statements.
Inventories do not contain any labor or overhead. The Company's contracts with
most of its vendors provide price protection and stock return privileges to
reduce to some degree the risk of loss to the Company due to manufacturer price
reductions and slow moving or obsolete inventory.
In fiscal 1998, the Company was able to realize approximately $1.3 million
of amounts due from vendors previously thought to be uncollectable. Accordingly,
the related $1.3 million of reserves were reversed into income in fiscal 1998
and recorded as an offset to cost of goods sold in the accompanying statement of
operations.
F-11
<PAGE> 37
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Equipment................................................ $ 1,795 $ 3,224
Furniture and fixtures................................... 189 1,497
Leasehold improvements................................... 196 329
Less accumulated depreciation and amortization........... (1,381) (3,778)
------- -------
$ 799 $ 1,272
======= =======
</TABLE>
7. ACCRUED EXPENSES AND OTHER:
Accrued expenses and other consist of approximately $819,000 of accrued
payroll and related expenses and approximately $986,00 of other accrued expenses
at September 30, 1998.
8. LINES OF CREDIT:
During fiscal 1996 and 1997, the Company maintained floor planning
arrangements with IBM Credit Corporation (IBMCC) for a maximum credit line of
$20 million, bearing interest at the lender's prime rate plus two and
five-eighths percent. The borrowing base under the IBMCC facility was limited to
a contractual percentage of eligible inventories and receivables and was secured
by all inventories and accounts receivable of the Company and liens on
substantially all other assets of the Company. The amount outstanding under this
arrangement at September 30, 1997 was approximately $3.1 million.
The IBMCC lending agreement included certain financial covenants which were
required to be maintained by the Company. At various dates during fiscal years
1996, 1997 and 1998, the Company was in default with certain of these covenants.
In December 1997, the Company received an amendment to its credit agreement with
IBMCC, which waived the financial covenants the Company was not in compliance
with as of September 30, 1997.
Prior to September 30, 1997, the Company had outstanding borrowings of
$77.4 million under lines of credit with four Germany-based financial
institutions at Libor-based interest rates, which were guaranteed by Computer
2000. On September 30, 1997, Computer 2000 paid the outstanding bank lines of
credit which totaled $27.7 million and converted the loans to a non-interest
bearing demand loan, agreed to defer payment of this loan through September 30,
1998 and subordinated the loan to the working capital lender. On July 20, 1998,
Computer 2000 contributed the non-interest bearing demand loan to the capital of
AmeriQuest (see Note 2).
In connection with the purchase by the Company's management of the
Company's stock held by Computer 2000 (see Note 2), the Company entered into a
three year credit facility with a bank (the "Credit Facility") to provide
additional working capital for the Company. The Company can borrow on the Credit
Facility up to the lesser of $10 million or 80% of eligible accounts receivable
plus the lesser of $3.5 million or 50% of eligible inventory, as defined. The
Credit Facility bears interest at either the banks prime rate plus 150 basis
points or Libor plus 400 basis points. The Credit Facility also provides for
various covenants including a minimum tangible net worth and minimum cash flows,
as defined.
The Company paid a $100,000 commitment fee and is obligated to pay fees of
0.5% per annum of unused available borrowings and 2% per annum on outstanding
letters of credit. The Credit Facility can be utilized for letters of credit in
an aggregate amount not to exceed $5 million. Outstanding letters of credit are
a reduction
F-12
<PAGE> 38
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of available borrowing under the Credit Facility. As of September 30, 1998, the
Company has not borrowed on the Credit Facility and has outstanding letters of
credit of $1.7 million.
9. INCOME TAXES:
The Company has historically incurred significant operating losses and has
recorded a valuation allowance against its net deferred tax asset, as the
Company believed that it was more likely than not that the net deferred tax
asset would not be realized through operations. The valuation allowance recorded
against the net deferred tax asset is based on management's estimates related to
the Company's ability to realize these benefits. Appropriate adjustments will be
made to the valuation allowance if circumstances warrant in future periods. Such
adjustments may have a significant impact on the Company's financial statements.
As of September 30, 1997, the tax effect of significant temporary
differences consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Inventory reserves.......................................... $ 498
Allowance for doubtful accounts............................. 868
Other, including restructuring charge....................... 8,964
Net operating loss carryforwards............................ 46,163
Valuation allowance......................................... (56,493)
--------
$ --
========
</TABLE>
As of September 30, 1998, the tax effect of significant temporary
differences excluding net operating loss carry forwards consist of $282,000 in
inventory reserves, $209,000 in allowance for doubtful accounts and $677,000 in
other reserves and accruals not currently deductible for tax purposes. These
deferred tax assets have been fully reserved by the Company.
Due to the acquisition by the Company's management of the Company's stock
held by Computer 2000 (see Note 2), there was a change in ownership as defined
by section 382 of the Internal Revenue Code ("Section 382 Limitations"). The
Section 382 Limitation limits the Company's ability to utilize its net operating
loss carryforwards created prior to the ownership change. The Company is
currently analyzing the amount of the limitation and estimates that the net
operating loss carryforwards available to offset future taxable income ranges
between $0 and $12 million. The Company has not benefited from these net
operating carryforwards as of September 30, 1998.
The principal elements accounting for the difference between income taxes
computed at the statutory rate and the effective rate are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1998 1997 1996
----- -------- --------
<S> <C> <C> <C>
Tax expense (benefit) computed at statutory rate...... $ 300 $(15,492) $(13,444)
Intangible write-offs, amortization and other
nondeductable amounts............................... 46 7,992 400
Net operating losses not benefited.................... -- 7,500 13,044
Benefit of net operating losses previously reserved... (346) -- --
----- -------- --------
$ -- $ -- $ --
===== ======== ========
</TABLE>
F-13
<PAGE> 39
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
The Company leases its corporate office, warehouse space and certain
equipment under operating leases. Future minimum rental commitments (net of
contractual sub-rental income for fiscal 1999 and 2000 of $295,416 and $192,326,
respectively) for all non-cancelable operating leases at September 30, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
<S> <C>
1999........................................................ $ 616,414
2000........................................................ 483,366
2001........................................................ 239,938
2002........................................................ 233,670
2003........................................................ 200,050
----------
$1,773,438
==========
</TABLE>
Total rental expense net of sub-rental income under non-cancelable
agreements for the periods ending September 30, 1998, September 30, 1997, and
September 30, 1996 was approximately $589,000, $4,298,000 and $3,759,000,
respectively.
11. LEGAL PROCEEDINGS:
In fiscal 1998, the Company settled two law suits: Kenfil Inc. vs. RLI
Insurance Company and Leading Edge Products, Inc. vs. AmeriQuest. Total amounts
due for the settlements were $920,000. At September 30, 1997, the Company had
reserves in excess of the settlement amounts of approximately $1.3 million,
which were taken into income during fiscal 1998 as an offset to selling, general
and administrative expense in the accompanying consolidated statement of
operations.
The Company is a party to various legal matters. Management believes that
the ultimate outcome of these matters will not have a material adverse effect on
the Company's future financial position or its results of operations.
12. STOCK OPTION PLANS:
The Company has instituted various stock option plans, which authorize the
granting of options to key employees, directors, officers, vendors and customers
to purchase shares of the Company's common stock. All grants of options during
the years presented have been to employees or directors and were granted at the
then
F-14
<PAGE> 40
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quoted market price. A summary of shares available for grant and the options
outstanding under the plans is as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING RANGE
---------- ----------- ------------
<S> <C> <C> <C>
Balances at June 30, 1995..................... 519,693 56,901 $1.50 - 4.50
Increase in shares available for grant........ 2,000,000
Options granted............................... (2,795,000) 2,795,000 0.05 - 4.50
Options cancelled............................. 429,327 (429,327) 1.50 - 2.00
---------- ---------- ------------
Balances at September 30, 1995................ 154,020 2,422,574 $0.05 - 4.50
Options exchanged in Robec acquisition........ (301,978) 301,978 0.45 - 2.00
Options exercised............................. -- (82,500) 0.05
Options cancelled............................. 447,561 (447,561) 0.45 - 4.50
---------- ---------- ------------
Balances at September 30, 1996................ 299,603 2,194,491 $0.05 - 4.50
Options cancelled............................. 1,628,987 (1,628,987) 0.05 - 3.50
---------- ---------- ------------
Balances at September 30, 1997................ 1,928,590 565,504 $0.45 - 4.50
Options no longer available for grant......... (365,953) -- --
Options cancelled -- Robec exchange shares.... 114,697 (114,697) 0.45 - 1.32
Options cancelled............................. 322,666 (322,666) 1.50 - 4.50
Options granted............................... (1,910,000) 1,910,000 0.08
---------- ---------- ------------
Balances at September 30, 1998................ 90,000 2,038,141 $0.08 - 0.45
========== ========== ============
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
OUTSTANDING AS OF WEIGHTED
RANGE OF SEPTEMBER 30, REMAINING AVERAGE OPTIONS
EXERCISE PRICE 1998 CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE
-------------- ----------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
$ 0.45 128,141 8 months $0.45 128,141
0.08 1,910,000 119 months 0.08 --
----------- --------- ----- -------
$0.08 - .45 2,038,141 $0.10 128,141
=========== ========= ===== =======
</TABLE>
The Company accounts for its option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 established a
fair value based method of accounting for stock-based compensation plans. SFAS
123 requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for the plan. Had the Company recognized compensation cost for
its
F-15
<PAGE> 41
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock option plans consistent with the provisions of SFAS 123, the following pro
forma net loss to common stockholders for the year ended September 30, 1998
would have resulted:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
Net loss to common stockholders:
As reported............................................... $ 828
===========
As calculated in accordance with SFAS 123................. $ 829
===========
Net income/(loss) per Common Share:
As reported............................................... $ (0.01)
===========
As calculated............................................. $ (0.01)
===========
Shares used in calculating net income per diluted common
share..................................................... 66,801,906
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with a risk-free interest rate of 4.96%,
no expected dividend yield, an expected life of five years and a volatility
factor of 50%. As of September 30, 1998, the weighted average fair value of the
options outstanding is $0.05 per option. No options or warrants were granted in
fiscal years 1997 or 1996. Accordingly, no compensation cost had been recorded
or proforma disclosures are required under the provisions of SFAS 123.
13. FOREIGN SALES INFORMATION:
A summary of the Company's operations by geographic area is as follows (in
thousands):
<TABLE>
<CAPTION>
U.S. FAR EAST ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Year Ended September 30, 1998
Sales to unaffiliated customers....... $ 60,466 -- -- $ 60,466
Loss (income) from operations......... (747) -- -- (747)
Identifiable assets................... 12,955 -- -- 12,955
Year Ended September 30 1997
Sales to unaffiliated customers....... $194,342 $24,535 -- $218,877
Loss (income) from operations......... 37,887 (31) -- 37,856
Identifiable assets................... 19,799 6,280 -- 26,079
Year Ended September 30 1996
Sales to unaffiliated customers....... $404,151 $20,557 -- $424,708
Loss (income) from operations......... 29,231 (376) -- 28,855
Identifiable assets................... 110,955 5,417 -- 116,372
</TABLE>
United States sales include export sales of $0, $5.3 million, and $41.9
million, made principally to Europe, Latin America, the Far East and Canada
during the fiscal years ended September 30, 1998, September 30, 1997, September
30, 1996, respectively. See Footnote 4 for disposition of the Far East
operations.
F-16
<PAGE> 42
SCHEDULE II
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND ACCOUNTS AT END
OF PERIOD EXPENSE WRITTEN-OFF OTHER OF PERIOD
---------- ---------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Description
Allowance for Doubtful Accounts:
October 1, 1995 to September 30,
1996................................ 8,180 1,661 4,030 -- 5,811
October 1, 1996 to September 30,
1997................................ 5,811 4,970 8,625 -- 2,156
October 1, 1997 to September 30,
1998................................ 2,156 -- 1,547 -- 609
Restructuring Accounts
October 1, 1996 to September 30,
1997................................ -- 9,338 5,600 -- 3,738
October 1, 1997 to September 30,
1998................................ 3,738 -- 2,362 1,376(1) --
</TABLE>
- ---------------
(1) Reversed into income due to change in estimate. See Note 1 to Notes to
Consolidated Financial Statements.
F-17
<PAGE> 43
[AMERIQUEST LOGO]
2465 Maryland Road
Willow Grove, PA 19090
800-223-7081 215-658-8900
Fax 215-658-8968
<PAGE> 1
EXHIBIT 3.01(a)
RESTATED CERTIFICATE OF INCORPORATION
OF
AMERIQUEST TECHNOLOGIES, INC.
AMERIQUEST TECHNOLOGIES, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of
the State of Delaware (the "General Corporation Law"), hereby certifies as
follows:
FIRST: The name of the Corporation is AmeriQuest Technologies,
Inc. The Certificate of Incorporation of the Corporation was originally filed
by the Corporation with the Secretary of State of the State of Delaware on
April 24, 1987 under the name "CMS Enhancements, Inc."
SECOND: This Restated Certificate of Incorporation restates and
integrates and does not further amend the provisions of the Certificate of
Incorporation of the Corporation as heretofore amended or supplemented, and
there is no discrepancy between those provisions and the provisions of this
Restated Certificate of Incorporation. This Restated Certificate of
Incorporation was duly adopted in accordance with the provisions of Section 245
of the General Corporation Law.
THIRD: The text of Certificate of Incorporation of the Corporation
as in effect on the date hereof is hereby restated to read in its entirety as
follows:
ARTICLE FIRST
The name of the Corporation is AmeriQuest Technologies, Inc.
ARTICLE SECOND
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle
19801. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE THIRD
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law.
ARTICLE FOURTH
The total number of shares which the Corporation shall have
authority to issue is 205,000,000, of which 200,000,000 shares shall be Common
Stock, $.01 par value ("Common"), and 5,000,000 shares shall be Preferred
Stock, $.01 par value ("Preferred Stock").
<PAGE> 2
The Board of Directors is authorized, subject to the limitations
prescribed by law and the provisions of this Article FOURTH, to provide for the
issuance of the Preferred Stock in series, and by filing a certificate pursuant
to the applicable laws of the State of Delaware, to establish from time to time
the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof. The authority of
the Board of Directors with respect to each such series shall include, but not
be limited to, the determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series; (b) The dividend rate,
if any, on the shares of that series, whether dividends shall
be cumulative, and, if so, from which date or dates, and the
relative priority, if any, of payment of dividends on shares
of that series; (c) Whether that series shall have voting
rights, in addition to the voting rights expressly required by
law, and, if so, the terms of such voting rights; (d) Whether
that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provisions
for adjustment of the conversion rate in such events as the
Board of Directors shall determine; (e) Whether or not the
shares of that series shall be redeemable, and, if so, the
terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the
amount per share payable in the case of redemption, which
amount may vary under different conditions and at different
redemption dates; (f) Whether that series shall have a sinking
fund for the redemption or purchase of shares of that series,
and, if so, the terms and amount of such sinking fund for the
redemption or purchase of shares of that series, and, if so,
the terms and amount of such sinking fund; (g) The rights of
the shares of that series in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of
payment of shares of that series; and (h) Any other relative
rights, preferences and limitations of that series.
ARTICLE FIFTH
The Board of Directors of the Corporation is expressly authorized
to make, alter or repeal the By-laws of the Corporation, but the stockholders
may make additional By-laws and may alter or repeal any by-law whether adopted
by them or otherwise.
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ARTICLE SIXTH
Elections of directors need not be by written ballot except to the
extent provided in the By-laws of the Corporation.
ARTICLE SEVENTH
A director of the Corporation shall not be liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from
liability or limitation thereof is not permitted under the General Corporation
Law as the same exists or may hereafter be amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation in respect of any act or omission
occurring prior to the time of such repeal or modification.
ARTICLE EIGHTH
The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provisions contained in this
Certificate of Incorporation in the manner now or hereafter prescribed by law,
and all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article Eighth.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed by its Chief Financial Officer, Chief
Operating Officer and Secretary this 8th day of December, 1998.
AMERIQUEST TECHNOLOGIES, INC.
By: /s/ JON D. JENSEN
----------------------------
Jon D. Jensen
Chief Financial Officer,
Chief Operating
Officer and Secretary
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EXHIBIT 10.05
No. 50 - Revised Uniform Lease
Lease Agreement
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THIS AGREEMENT, MADE THE 1st day of July one thousand nine hundred and
Ninety-eight (1998), by and between Merion Mills Associates, a Pennsylvania partnership with a mailing
address at P.O. Box 128, Ambler, PA 19002
1. Parties
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(hereinafter called Lessor) of the one part, and AmeriQuest Technologies, Inc. a Delaware Corporation
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(hereinafter called Lessee), of the other part.
2. Premises WITNESSTH THAT: Lessor does hereby demise and let unto Lessee all that certain Approximately 42,640
square foot portion of a light Industrial building known as 2445-2465 Maryland Rd., Willow Grove, and
shown as Units A and C on the attached diagram, such building being located in the Township of Upper
Moreland State of Pennsylvania, to be used and occupied as office, light assembly for the term of five
(5) years
3. Term beginning the 1st day of August, one thousand nine hundred and Ninety-eight (1998),
and ending the 31st day of July, two thousand three (2003),
4. Minimum Rent for the minimum Annual gross rental of Two Hundred Ten Thousand Two Hundred Sixteen
dollars ($210,216.00) lawful money of the United States of America, payable in
monthly installments in advance during the said term of this lease, or any renewal
hereof, in sums of Seventeen Thousand Five Hundred- dollars ($17,518) on the first
day of each month, rent to begin from the 1st day of August, 1998, the first
installment to be paid at the time of signing this lease. The first rental payment
to be made during the occupancy of the premises shall be adjusted to pro-rate a
partial month of occupancy, if any, at the inception of this lease.
** and other related non-hazardous uses consistent with Lessee's initial use of the
demised premises as described above.
5. Inability to Give If Lessor is unable to give Lessee possession of the demised premises, as herein
Possession provided, by reason of the holding over of a previous occupant, or by reason of any
cause beyond the control of the Lessor, the Lessor shall not be liable in damages to
the Lessee therefore, and during the period that the Lessor is unable to give
possession, all rights and remedies of both parties hereunder shall be suspended.
See Paragraph 29 (a) of the attached Addendum regarding the timing of Lessee's initial
use of the demised premises.
6. Additional Rent (a) Lessee agrees to pay as rent in addition to the minimum rental herein reserved
(a) Damages for any and all sums which may become due by reason of the failure of Lessee to comply with
Default all of the covenants of this lease and any and all damages, costs and expenses which the
Lessor may suffer or incur by reason of any default of the Lessee or failure on his part
(b) Sewer Rent to comply with the covenants of this lease, and each of them, and also any and all damages
to the demised premises caused by any act or neglect of the Lessee.
7. Place of All rent shall be payable without prior notice or demand at the office of Lessor, P.O. BOX
Payment 128, AMBLER, PA. 19002, or such other place as Lessor may from time to time designate by
notice in writing.
8. Affirmative Lessee covenants and agrees that he will without demand:
Covenants (a) Pay the rent and all other charges herein reserved as rent at the times and at the
(a) Payment of Rent place that the same are payable, without fail; and if Lessor shall at any time or times
accept said rent or rent charges after the same shall have become delinquent, such acceptance
shall not excuse delay upon subsequent occasions, or constitute or be construed as a waiver
of any of Lessor's rights. Lessee agrees that any charge or payment herein reserved, included,
or agreed to be treated or collected as rent and/or any other charges, expenses, or costs
herein agreed to be paid by Lessee may be proceeded for and recovered by Lessor by legal
process in the same manner as rent due and in arrears.
(b) Cleaning (b) Keep the demised premises clean and free from all ashes, dirt and other refuse matter;
Repairing, etc. replace all glass windows, doors, etc., broken; keep all waste and drain pipes open; repair all
damage to plumbing and to the premises in general; keep the same in good order and repair as they
are now, damage by accidental fire or other casualty not occurring through negligence of Lessee
or those employed by or acting for Lessee alone excepted. The Lessee agrees to surrender the
demised premises in the same condition in which Lessee has herein agreed to keep the same during
the continuance of this lease.
(c) Requirements of (c) Comply with any requirements of any of the constituted public authorities, and with
Public the terms of any state or federal statute or local ordinance or regulation applicable to Lessee
Authorities or his use of the demised premises, and save Lessor harmless from penalties, fines, costs or
damages resulting from failure so to do.
(d) Fire (d) Use every reasonable precaution against fire.
(e) Rules &
Regulations (e) Comply with rules and regulations of Lessor promulgated as hereinafter provided.
(f) Surrender of (f) Peaceably deliver up and surrender possession of the demised premises to the
Possession Lessor at the expiration or sooner termination of this lease, promptly delivering to Lessor
at his office all keys for the demised premises.
(g) Notice of (g) Give to Lessor prompt written notice of any accident, fire, or damage occurring
Fire, etc. on or to the demised premises.
(h) Condition of (h) Lessee shall be responsible for the condition of the sidewalks, steps, and landings
Payment during the term of this lease; shall keep the same free from snow and ice; and shall be and
hereby agrees that Lessee is solely liable for any accidents, due or alleged to be due to
their defective condition, or to any accumulations of snow and ice.
(i) The Lessee agrees that if, with the permission in writing of Lessor, Lessee shall
(i) Agency on vacate or decide at any time during the term of this lease, or any renewal thereof, to vacate
Removal the herein demised premises prior to the expiration of this lease, or any renewal hereof,
Lessee will not cause or allow any other agent to represent Lessee in any sub-letting or
reletting of the demised premises other than an agent approved by the Lessor and that should
Lessee do so, or attempt to do so, the Lessor may remove any signs that may be placed on or
about the demised premises by such other agent without any liability to Lessor or to said agent,
the Lessee assuming all responsibility for such action. ....such approval not to be unreasonably
withheld or delayed.
(j) Indemnify and save Lessor harmless from any and all loss occasioned by Lessee's breach of
(j) Indemnification any of the covenants, terms and conditions of this lease, or caused by his family, guests, visitors,
agents and employees.
9. Negative Lessee covenants and agrees that he will do none of the following things without first obtaining
Covenants of the consent, in writing of Lessor, which consent Lessor shall not unreasonably withhold, and without
Lessee providing Lessor with reimbursement for any expenses incurred or incidental to
Lessee's proposed action. Or delay
(a) Use of Premises (a) Occupy the demised premises in any other manner or for any other purpose than as above set forth.
(b) Assignment and (b) Assign, mortgage or pledge this lease or under-let or sub-lease the demised premises, or any part
Subletting thereof, or permit any other person, firm or corporation to occupy the demised premises, or any part
thereof; nor shall any assignee or sub-Lessee assign, mortgage or pledge this lease or such sub-lease,
without an additional written consent by the Lessor, and without such consent no such assignment, mortgage
or pledge shall be valid. If the Lessee insolvent, or makes an assignment for the benefit of creditors, or
if a petition in bankruptcy is filed by or against the Lessee or a bill in equity or other proceeding for
the appointment of a receiver for the Lessee is filed, or if the real or personal property of the Lessee
shall be sold or levied upon by any Sheriff, Marshal or Constable, the same shall be a violation of this
covenant.
(c) Signs (c) Place or allow to be placed any stand, booth, sign or show case upon the doorsteps, vestibules or
outside walls or pavements of said premises, or paint, place, erect or cause to be painted, placed or
erected any sign, projection or device on or in any part of the premises. Lessee shall remove any sign,
projection or device painted, placed or erected, if permission has been granted and restore the walls, etc.,
to their former conditions, at or prior to the expiration of this lease. In case of the breach of this
covenant (in addition to all other remedies given to Lessor in case of the breach of any conditions or
covenants of this lease) Lessor shall have the privilege of removing said stand, booth, sign, show case,
projection or device, and restoring said walls, etc., to their former condition, and Lessee, at Lessor's
option, shall be liable to Lessor for any and all expenses so incurred by Lessor.
(d) Alterations (d) Make any alterations, improvements, or additions to the demised premises. All alterations,
Improvements improvements, additions or fixtures, whether installed before or after the execution of this
lease, shall remain upon the premises at the expiration or sooner determination of this lease
and become the property of Lessor, unless Lessor shall, prior to the determination of this
lease, have given written notice to Lessee to remove the same, in which event Lessee will
remove such alterations, improvements and additions and restore the premises to the same good
order and condition in which they now are. Should Lessee fail so to do, Lessor may do so,
collecting, at Lessor's option, the cost and expense thereof from Lessee as additional rent.
(e) Machinery (e) Use or operate any machinery that, in Lessor's opinion, is harmful to the building or disturbing
to other tenants occupying other parts thereof.
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(f) Weights (f) Place any weights in any portion of the demised premises beyond the safe carrying capacity of the
structure.
(g) Fire Insurance (g) Do or suffer to be done, any act, matter or thing objectionable to the fire insurance companies
whereby the fire insurance or any other insurance now in force or hereafter to be placed on the demised
premises, or any part thereof, or on the building of which the demised premises may be a part, shall become
void or suspended, or whereby the same shall be rated as a more hazardous risk than at the date of execution
of this lease, or employ any person or persons objectionable to the fire insurance companies or carry or
have any hazardous materials or explosive matter of any kind in and about the demised premises. In case of a
breach of this covenant (in addition to all other remedies given to Lessor in case of the breach of any of
the conditions or covenants of this lease) Lessee agrees to pay to lessor as additional rent any and all
increase or increases of premiums on insurance carried by Lessor on the demised premises, or any part
thereof, or on the building of which the demised premises may be a part, caused in any way by the occupancy
of Lessee.
(h) Removal of (h) Remove, attempt to remove or manifest an intention to remove Lessee's goods or property from or
Goods out of the demised premises otherwise than in the ordinary and usual course of business, without having
first paid and satisfied Lessor for all rent which may become due during the entire term of this lease.
(i) Vacate or desert said premises during the term of this lease, or permit the same to be empty and
(i) Vacate Premises unoccupied.
10. Lessor's Right Lessee covenants and agrees that Lessor shall have the right to do the following things and matters in
and about the demised premises:
(a) Inspection of (a) At all reasonable times by himself or his duly authorized agents to go upon and inspect the
Premises demised premises and every part thereof, and/or at his option to make repairs, alterations and additions to
the demised premises or the building of which the demised premises is a part.
(b) Rules and (b) At any time or times and from time to time make such reasonable rules and regulations as may be
Regulations necessary or desirable for the safety, care, and cleanliness of the demised premises and/or of the building
of which the demised premises is a part and of real and personal property contained therein and for the
preservation of good order. Such rules and regulations shall, when communicated in writing to Lessee, form a
part of this lease.
(c) Sale or Rent (c) To display a "For Sale" sign at any time, and also, after notice from either party of intention
Sign, to determine this lease, or at anytime within six months prior to the expiration of this lease, a "For Rent"
Prospective sign, or both "For Rent" and "For Sale" signs; and all of said signs shall be placed upon such part of the
Purchasers premises as Lessor may elect and may contain such matter as Lessor shall require. Persons authorized by
or Tenants Lessor may inspect the premises at reasonable hours during the said periods.
(d) Discontinue (d) Lessor may discontinue at any time, any or all facilities furnished and services rendered by
Facilities Lessor not expressly covenanted for herein or required to be furnished or rendered by law; it being
and Service understood that they constitute no part of the consideration for this lease.
11. Responsibility (a) Lessee agrees to relieve and hereby relieves the Lessor from all liability by reason of any
of Lessee injury or damage to any person or property in the demised premises, whether belonging to the Lessee or any
other person caused by any fire, breakage, or leakage in any part or portion of the building of which the
demised premises is a part or from water, rain or snow that may leak into, issue or flow from any part of
the said premises, or of the building of which the demised premises is a part, from the drains, pipes or
plumbing work of the same, or from any place or quarter, unless such breakage, leakage, injury or damage be
caused by or result from the negligence of Lessor or its servants or agents.
(b) Lessee also agrees to relieve and hereby relieves Lessor from all liability by reason of any
damage or injury to any property or to Lessee or Lessee's guests, servants, or employees which may arise
from or be due to the use , misuse or abuse of all or any of the elevators, hatches, openings, stairways,
hallways of any kind whatsoever which may exist or hereafter be erected or constructed on the said premises
or the sidewalks surrounding the building of which may arise from defective construction, failure of water
supply, light, power, electric wiring, plumbing, or machinery, wind, lighting, storm or any other cause
whatsoever on the said premises or the building of which the demised premises is a part, unless such damage,
injury, use, misuse or abuse be caused by or result from the negligence of Lessor, its servants or agents.
12. Responsibility
of Lessor (a) In the event the demised premises are totally destroyed or so damaged by fire or other casualty
(a) Total Destruction that, in the opinion of a licensed architect retained by Lessor, the same cannot be repaired and restored
of Premises within ninety days from the happening of such injury this lease shall absolutely cease and determine, and
the rent shall abate for the balance of the term.
(b) Partial (b) If the damage be only partial and such that the premises can be restored, in the opinion of a
Destruction of licensed architect retained by Lessor, to approximately their former condition within ninety days from the
Premises date of the casualty loss Lessor may, at Lessor's option, restore the same with reasonable promptness,
reserving the right to enter upon the demised premises for that purpose. Lessor also reserves the right to
enter upon the demised premises whenever necessary to repair damage caused by fire or other casualty to the
building of which the demised premises is a part, even though the effect of such entry be to render the
demised premises or a part thereof untenantable. In either event the rent shall be apportioned and suspended
during the time Lessor is in possession, taking into account the proportion of the demised premises rendered
untenantable and the duration of Lessor's possession. If a dispute arises as to the amount of rent due under
this clause, Lessee agrees to pay the full amount claimed by Lessor, but Lessee shall have the right to
proceed by law to recover the excess payment, if any.
(c) Repairs by Lessor (c) Lessor shall make such election to repair the premises or terminate this lease by giving notice
thereof to Lessee at the leased premises within thirty days from the day Lessor received notice that the
demised premises had been destroyed or damaged by fire or other casualty.
(d) Damage for (d) Except to the extent hereinbefore provided, Lessor shall not be liable for any damage,
Interruption compensation, or claim by reason of the necessity of repairing any portion of the building, the interruption
of use in the use of the premises, any inconvenience or annoyance arising as a result of such repairs or
interruption, or the termination of this lease by reason of damage to or destruction of the premises.
(e) Representation of (e) Lessor has let the demised premises in their present "as is" condition and without any
Condition of representations, other than those specifically endorsed hereon by Lessor, through its officers, employees,
Premises servants and/or agents. It is understood and agreed that Lessor is under no duty to make repairs,
alterations, or decorations at the inception of this lease or at any time thereafter unless such duty of
Lessor shall be set forth in writing endorsed hereon.
(f) Zoning (f) It is understood and agreed that the Lessor hereof does not warrant or undertake that the Lessee
shall be able to obtain a permit under any Zoning Ordinance or Regulation for such use as Lessee intends to
make of the said premises, and nothing in this lease contained shall obligate the Lessor to assist Lessee in
obtaining said permit; the Lessee further agrees that in the event a permit cannot be obtained by Lessee
under any Zoning Ordinance or Regulation, this lease shall not terminate without Lessor's consent, and the
Lessee shall use the premises only in a manner permitted under such Zoning Ordinance or Regulation.
13. Miscellaneous (a) No contract entered into or that may be subsequently entered into by Lessor with Lessee,
Agreements & relative to any alterations, additions, improvements or repairs, nor the failure of Lessor to make such
Conditions alterations, additions, improvements or repairs as required by any such contract, nor the making by Lessor
(a) Effect of or his agents or contractors of such alterations, additions, improvements or repairs shall in any way affect
Repairs on the payment of the rent or said other charges at the time specified in this lease, except to the extent and
Rental in the manner hereinbefore provided.
(b) Agency (b) It is hereby expressly agreed and understood that the said _Cushman & Wakefield __ is acting as
agent only and shall not in any event be held liable to the owner or to Lessee for the fulfillment or
nonfullfillment of any of the terms or conditions of this lease, or for any action or proceedings that may
be taken by the owner against Lessee, or by Lessee against the owner.
(c) Waiver of (c) It is hereby covenanted and agreed, any law, usage or custom to the contrary notwithstanding,
Custom that Lessor shall have the right at all times to enforce the covenants and provisions of this lease in
strict accordance with the terms hereof, notwithstanding any conduct or custom on the part of the Lessor in
refraining from so doing at any time or times; and, further, that the failure of Lessor at any time or times
to enforce his rights under said covenants and provisions strictly in accordance with the same shall not be
construed as having created a custom in any way or manner contrary to the specific terms, provisions and
covenants of this lease or as having in any way or manner modified the same.
(d) Conduct of (d) This lease is granted upon the express condition that Lessee and/or the occupants of the
Lease premises herein leased shall not conduct themselves in a manner which is improper or objectionable, and if
at any time during the term of this lease or any extension or continuation thereof Lessee or any occupier of
the said premises shall have conducted himself in a manner which is improper or objectionable, Lessee shall
be taken to have broken the covenants and conditions of this lease, and Lessor will be entitled to all of
the rights and remedies granted and reserved herein, for the Lessee's failure to observe all of the
covenants and conditions of this lease.
(e) Failure of (e) In the event of the failure of Lessee promptly to perform the covenants of Section 8 (b) hereof,
Lessee to Lessor may go upon the demised premises and perform such covenants, the cost thereof, at the sole option of
Repair Lessor, to be charged to Lessee as additional and delinquent rent.
(f) Waiver of (f) Lessor and Lessee hereby agree that all insurance policies which each of them shall carry to
Subrogation insure the demised premises and the contents therein against casualty loss, and all liability policies which
they shall carry pertaining to the use and occupancy of the demised premises shall contain waivers of the
right of subrogation against Lessor and Lessee herein, their heirs, administrators, successors, and assigns.
14. Remedies of If the Lessee: (specifically subject to the notice and cure provisions of the Addendum)
Lessor (a) Does not pay in full when due any and all installments of rent and/or any other charge or
payment herein reserved, included, or agreed to be treated or collected as rent and/or any other charge,
expense, or cost herein agreed to be paid by the Lessee, or
(b) Violates or fails to perform or otherwise breaks any covenant or agreement herein contained; or
(c) Vacates the demised premises or removes or attempts to remove or manifests an intention to
remove any goods or property therefrom otherwise than in the ordinary and usual course of business without
having first paid and satisfied the Lessor in full for all rent and other charges then due or that may
thereafter become due until the expiration of the then current term, above mentioned; or
(d) or makes an assignment for the benefit of creditors, or if a petition in bankruptcy is filed by
or against Lessee or a complaint in equity or other proceedings for the appointment of a receiver for Lessee
is filed, or if proceedings for reorganization or for composition with creditors under any State or Federal
Law be instituted by or against Lessee, or if the real or personal property of Lessee shall be levied upon
or be sold, thereupon:
(1) The whole balance of rent and other charges, payments, costs, and expenses herein agreed to be
paid by Lessee, or any part thereof, and also all costs and officers' commissions including watchmen's wages
shall be taken to be due and payable and in arrears as if by the terms and provisions of this lease said
balance of rent and other charges, payment, taxes, costs and expenses were on that date, payable in advance.
Further, if this lease or any part thereof is assigned, or if the premises, or any part thereof is sub-let,
Lessee hereby irrevocably constitutes and appoints Lessor as Lessee's agent to collect the rents due from
such assignee or sub-Lessee and apply the same to the rent due hereunder without in any way affecting
Lessee's obligation to pay any unpaid balance of rent due hereunder; or
(2) At the option of Lessor, this lease and the terms hereby created shall determine and become
absolutely void without any right on the part of Lessee to reinstate this lease by payment of any sum due or
by other performance of any condition, term, or covenant broken; whereupon, Lessor shall be entitled to
recover damages for such breach in an amount equal to the amount of rent reserved for the balance of the
term of this lease, less the fair rental value of the said demised premises for the remainder of the lease
term.
15. Further Remedies In the event of any default as above set forth in Section 14, Lessor, or anyone acting on Lessor's behalf,
of Lessor at Lessor's option:
(a) May let said premises or any part or parts thereof to such person or persons as may, in Lessor's
discretion, be best; and Lessee shall be liable for any loss of rent for the balance of the then current
term. Any such re-entry or re-letting by Lessor under the terms hereof shall be without prejudice to
Lessor's claim for actual damages, and shall under no circumstances, release Lessee from liability for such
damages arising out of the breach of any of the covenants, terms, and conditions of this lease.
(b) May proceed as a secured party under the provisions of the Uniform Commercial Code against the
goods in which Lessor has been granted a security interest pursuant to Section 13 (g) hereof; and
(c) May have and exercise any and all other rights and/or remedies granted or allowed landlords by
any existing or future Statute, Act of Assembly, or other law of this state in cases where a landlord seeks
to enforce rights arising under a lease agreement against a tenant who has defaulted or otherwise breached
the terms of such lease agreement; subject, however, to all of the rights granted or created by any such
Statute, Act of Assembly, or other law of this state existing for the protection and benefit of tenants; and
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(d) Alterations Improvements
16. Confession of Lessee covenants and agrees that if the rent and/or any charges reserved in this lease as rent
Judgement for (including all accelerations of rent permissible under the provisions of this lease) shall remain unpaid
Money five (5) days after the same is required to be paid, then and in that event, Lessor may cause Judgment to be
entered against Lessee, and for that purpose Lessee hereby authorizes and empowers Lessor or any
Prothonotary, Clerk of Court or Attorney of any Court of Record to appear for and confess judgment against
Lessee and agrees that Lessor may commence an action pursuant to Pennsylvania Rules of Civil Procedure No.
2950 et seq. for the recovery from Lessee of all rent hereunder (including all accelerations of rent
permissible under the provisions of this lease)and/or for all charges reserved hereunder as rent, as well as
for interest and costs and Attorney's commission, for which authorization to confess judgment, this lease,
or a true and correct copy thereof, shall be sufficient warrant. Such Judgment may be confessed against
Lessee for the amount of rent in arrears (including all accelerations of rent permissible under the
provisions of this lease) and/or for all charges reserved hereunder as rent, as well as for interest and
costs; together with an attorney's commission of five percent (5%) of the full amount of Lessor's claim
against Lessee. Neither the right to institute an action pursuant to Pennsylvania Rules of Civil Procedure
No. 2950 et seq. nor the authority to confess judgment granted herein shall be exhausted by one or more
exercises thereof, but successive complaints may be filed and successive judgements may be entered for the
aforedescribed sums five days or more after they become due as well as after the expiration of the original
term and/or during or after expiration of any extension or renewal of this lease.
17. Confession of Lessee covenants and agrees that if this lease shall be terminated (either because of condition broken
Judgement for during the term of this lease or any renewal or extension thereof and/or when the term hereby created or any
Possession of extension thereof shall have expired) then, and in that event, Lessor may cause a judgment in ejectment to
Real Property be entered against Lessee for possession of the demised premises, and for that purpose Lessee hereby
authorizes and empowers any Prothonotary, Clerk of Court or Attorney of any Court of Record to appear for
Lessee and to confess judgment against Lessee in Ejectment for possession of the herein demised premises,
and agrees that Lessor may commence an action pursuant to Pennsylvania Rules of Procedure No. 2970 et seq.
for the entry of an order in Ejectment for the possession of real property, and Lessee further agrees that a
Writ of Possession pursuant thereto may issue forthwith, for which authorization to confess judgment and for
the issuance of a writ or writs of possession pursuant thereto, this lease, or a true and correct copy
thereof, shall be sufficient warrant. Lessee further covenants and agrees, that if for any reason
whatsoever, after said action shall have commenced the action shall be terminated and the possession of the
premises demised hereunder shall remain in or be restored to Lessee. Lessor shall have the right upon any
subsequent default or defaults, or upon the termination of this lease as above set forth to commence
successive actions for possession of real property and to cause the entry of successive judgments by
confession in Ejectment for possession of the premises demised hereunder.
18. Affidavit of In any procedure or action to enter Judgment by Confession for Money pursuant to Section 16 hereof, or
Default to enter Judgment by Confession in Ejectment for possession of real property pursuant to Section 17 hereof,
if Lessor shall first cause to be filed in such action an affidavit or averment of the facts constituting
the default or occurrence of the condition precedent, or event, the happening of which default, occurrence,
or event authorizes and empowers Lessor to cause the entry of judgment by confession, such affidavit or
averment shall be conclusive evidence of such facts, defaults, occurrences, conditions precedent, or events;
and if a true copy of this lease (and of the truth of which such affidavit or averment shall be sufficient
evidence) be filed in such procedure or action, it shall not be necessary to file the original as a Warrant
of Attorney, any rule of court, custom, or practice to the contrary notwithstanding.
19. Waivers by Lessee Lessee hereby releases to Lessor and to any and all attorneys who may appear for Lessee all errors in
of Error, Right of any procedure or action to enter Judgment by Confession by virtue of the warrants of attorney contained in
Appeal, Stay, this lease, and all liability therefore. Lessee further authorizes the Prothonotary or any Clerk of any
Exemption, Court of Record to issue a Writ of Execution or other process, and further agrees that real estate may be
Inquisition sold on a Writ of Execution or other process. If proceedings shall be commenced to recover possession of the
demised premises either at the end of the term or sooner termination of this lease, or for non-payment of
rent or for any other reason, Lessee specifically waives the right to the three (3) months' notice to quit
and/or the fifteen (15) or thirty (30) days notice to quit required by the Act of April 6, 1951, P.L. 69, as
amended, and agrees that five (5) days' notice shall be sufficient in either or any such case.
20. Right of Assignee The right to enter judgment against Lessee by confession and to enforce all of the other provisions
of Lessor of this lease herein provided for may at the option of any assignee of this lease, be exercised by any
assignee of the Lessor's right, title and interest in this lease in his, her, or their own name, any
statute, rule of court, custom, or practice to the contrary notwithstanding.
21. Remedies All of the remedies hereinbefore given to Lessor and all rights and remedies given to it by law and
Cumulative equity shall be cumulative and concurrent. No determination of this lease or the taking or recovering
possession of the premises shall deprive Lessor of any of its remedies or actions against the Lessee for
rent due at the time or which, under the terms hereof would in the future become due as if there had been no
determination, nor shall the bringing of any action for rent or breach of covenant, or the resort to any
other remedy herein provided for the recovery of rent be construed as a waiver of the right to obtain
possession of the premises.
22. Condemnation In the event that the premises demised herein, or any part thereof, is taken or condemned for a public
or quasi-public use, this lease shall, as to the part so taken, terminate as of the date title shall vest in
the condemnor, and rent shall abate in proportion to the square feet of leased space taken or condemned or
shall cease if the entire premises be so taken. In either event the Lessee waives all claims against the
Lessor by reason of the complete or partial taking of the demised premises.
23. Subordination This Agreement of Lease and all its terms, covenants and provisions are and each of them is subject
and subordinate to any lease or other arrangement or right to possession, under which the Lessor is in
Control of the demised premises, to the rights of the owner or owners of the demised premises and of the
land or buildings of which the demised premises are a part, to all rights of the Lessor's landlord and to
any and all mortgages and other encumbrances now or hereafter placed upon the demised premises or upon the
land and/or the buildings containing the same; and Lessee expressly agrees that if Lessor's tenancy,
control, or right to possession shall terminate either by expiration, forfeiture or otherwise,then this
lease shall thereupon immediately terminate and the Lessee shall, thereupon, give immediate possession; and
Lessee hereby waives any and all claims for damages or otherwise by reason of such termination as aforesaid.
24. Termination of It is hereby mutually agreed that either party hereto may determine this lease at the end of said term
Lease by giving to the other party written notice thereof at least ninety (90) days prior thereto, but in default
of such notice, this lease shall continue upon the same terms and conditions in force immediately prior to
the expiration of the term hereof as are herein contained for a further period of one (1) month and so on
from month to month unless or until terminated by either party hereto, giving the other thirty (30) days
written notice for removal previous to expiration of the then current term; PROVIDED, however, that should
this lease be continued for a further period under the terms hereinabove mentioned, any allowances given
Lessee on the rent during the original term shall not extend beyond such original term, and further
provided, however, that if Lessor shall have given such written notice prior to the expiration of any term
hereby created, of his intention to change the terms and conditions of this lease, and Lessee shall not
within ten (10) days from such notice notify Lessor of Lessee's intention to vacate the demised premises at
the end of the then current term, Lessee shall be considered as Lessee under the terms and conditions
mentioned in such notice for a further term as above provided, or for such further term as may be stated in
such notice. In the event that Lessee shall give notice, as stipulated in this lease, of intention to vacate
the demised premises at the end of the present term, or any renewal or extension thereof, and shall fail or
refuse so to vacate the same on the date designated by such notice, then it is expressly agreed that Lessor
shall have the option either (a) to disregard the notice so given as having no effect, in which case all the
terms and conditions of this lease shall continue thereafter with full force precisely as if such notice had
not been given, or (b) Lessor may, at any time within thirty days after the present term or any renewal or
extension thereof, as aforesaid, give the said Lessee ten days written notice of his intention to terminate
the said lease; whereupon the Lessee expressly agrees to vacate said premises at the expiration of the said
period of ten days specified in said notice. All powers granted to Lessor by this lease may be exercised and
all obligations imposed upon Lessee by this lease shall be performed by Lessee as well during any extension
of the original term of this lease as during the original term itself.
25. Notices All notices must be given by certified mail, return receipt requested.
26. Lease Contains It is expressly understood and agreed by and between the parties hereto that this lease and the riders
All Agreements and/or addendums attached hereto and forming a part hereof set forth all the promises, agreements,
conditions and understandings between Lessor or his Agent and Lessee relative to the demised premises, and
that there are no promises, agreements, conditions or understandings, either oral or written, between them
other than herein set forth. It is further understood and agreed that, except as herein otherwise provided,
no subsequent alteration, amendment, change or addition to this lease shall be binding upon Lessor or Lessee
unless reduced to writing and signed by them.
27. Heirs & All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend
Assignees to and bind the several and respective heirs, executors, administrators, successors and assigns of said
parties; and if there shall be more than one Lessee, they shall all be bound jointly and severally by the
terms, covenants and agreements herein, and the word "Lessee" shall be deemed and taken to mean each and
every person or party mentioned as a Lessee herein, be the same one or more; and if there shall be more than
one Lessee, any notice required or permitted by the terms of this lease may be given by or to any one
thereof, and shall have the same force and effect as if given by or to all thereof. The words "his" and
"him" wherever stated herein, shall be deemed to refer to the "Lessor" or "Lessee" whether such Lessor or
Lessee be singular or plural and irrespective of gender. No rights, however, shall inure to the benefit of
any assignee of Lessee unless the assignment to such assignee has been approved by Lessor in writing as
aforesaid.
28. Security Deposit Lessee does herewith deposit with Lessor the sum of _______________________________________ Dollars, to be
held as security for the full and faithful performance by Lessee of Lessee's obligations under this Lease
and for the payment of damages to the demised premises.
29. Headings no part Any headings preceding the text of the several paragraphs and sub-paragraphs hereof are inserted solely for
of part of lease convenience of reference and shall not constitute a part of this lease nor shall they affect its meaning,
construction or effect.
</TABLE>
<PAGE> 4
SEE ADDENDUM ATTACHED HERETO AND MADE A PART HEREOF
In Witness Whereof, the parties hereto have executed these presents the
day and year first above written, and intend to be legally bound thereby.
SEALED AND DELIVERED IN THE PRESENCE OF :
<TABLE>
<S> <C>
Agent
- ------------------------------------- ---------------------------------
[sig] 7/1/98 [sig] [Seal]
- ------------------------------------- ---------------------------------
Witness/Attest Date AMERIQUEST TECHNOLOGIES, INC.
President [Seal]
- ------------------------------------- ---------------------------------
[Seal]
- ------------------------------------- ---------------------------------
[sig] 7/1/98 [sig] [Seal]
- ------------------------------------- ---------------------------------
Witness/Attest Date MERION MILLS ASSOCIATES
=====
LEASE
=====
----------------------------------------------
----------------------------------------------
TO
----------------------------------------------
Premises
--------------------------------------
----------------------------------------------
Rent
------------------------------------------
Dated
-----------------------------------------
Term
------------------------------------------
==============================================
P51939
FOR VALUE RECEIVED______________________hereby assign, transfer and set over unto
- -----------------------------------------------------------------------------------------
Executors, Administrators and assigns all________right, title and interest in the within
- -----------------------------------------------------------------------------------------
and all benefit and advantages to be derived therefrom.
Witness__________hand and seal this____________day of_______________A.D. 19______
SEALED IN THE PRESENCE OF)
) -----------------------------------------
)
</TABLE>
<PAGE> 5
ADDENDUM TO LEASE AGREEMENT
BETWEEN : AMERIQUEST TECHNOLOGIES, INC. ("Lessee")
AND : MERION MILLS ASSOCIATES ("Lessor")
DATED : July 1st, 1998
29(a) Notwithstanding anything in this Lease to the contrary, it is
specifically agreed that Lessee shall have the option to immediately
terminate this Lease without penalty by sending written notice of such
termination to Lessor on or before July 7th, 1998 of its intent to so
terminate, which shall only be allowed for one or more of the following
specific reasons (which must be listed in any such notice):
1) The consummation of the transactions by which Jon Jensen and Alex
Kramer are to acquire all shares in Ameriquest Technologies, Inc. owned
by Computer 2000, Inc. has not occurred on or prior to July 7th, 1998.
2) Lessee is not satisfied that the existing HVAC and electrical equipment
serving the demised premises is in reasonable operating condition,
which condition Lessor shall allow Lessee to inspect prior to July 7th,
1998.
3) Lessee is not satisfied or confident that it will be able to receive a
use and occupancy permit for the demised premises upon its application
therefor.
Upon receipt of a timely early termination notice from Lessee, Lessor will
return to Lessee any monies previously deposited with or paid to Lessor
hereunder. If such notice is not sent by Lessee on or before July 7th,
1998, then Lessee's early termination option shall be extinguished and this
Lease shall continue in full force and effect throughout the full term
hereof.
29(b). It is hereby acknowledged that upon execution of this lease, no other
tenant is in occupancy of the approximately 40,000 sqaure foot Unit A
portion of the demised premises and that Lessor is able to deliver
possession of the Unit A space to Lessee on or before August 1st, 1998.
However, upon the execution date of this Lease, one other tenant is in
occupancy of the approximately 2,640 square foot Unit C portion of the
demised premises under a month-to-month lease which
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<PAGE> 6
requires 60 days advance notice from Lessor in order to terminate that
lease as of the last day of a given month. Upon execution of this Lease,
Lessor agrees to promptly give the required notice to the existing tenant
currently occupying Unit C and to use its best efforts to remove that
tenant from Unit C on or before the last day of such tenant's lease term,
or as soon thereafter as reasonably possible if such tenant holds over
beyond the end of its lease term.
Lessee agrees that while this lease will begin with respect to the
approximately 40,000 square foot Unit A portion of the demised premises on
August 1st, 1998, this lease will begin with respect to the Unit C portion
of the demised premises immediately upon the completion of the existing
tenant's final move out of the Unit C space and of landlord's renovation
work within that space as further described herein (i.e. carpeting,
painting, ceiling tile work as necessary). Lessee's rental payments and
other lease charges due under this lease will be pro-rated by Lessor, based
on square footage, during the period in which Lessee is unable to occupy
the Unit C portion of the demised premises while Lessee awaits the
availablility of that space.
29(c). Lessor agrees to, at the request of Lessee or its lender(s), execute a
landlord's subordination document in the form attached hereto as Exhibit
"A".
30. Upon execution of this Lease, Lessee shall pay to Lessor a
non-interest-bearing security deposit of Forty Thousand Dollars
($40,000.00), along with the full Seventeen Thousand Five Hundred Eighteen
Dollar ($17,518.00) amount of the first month's rent and the full Nine
Hundred Sixty Four and 07/100 Dollar ($964.07) amount of the first month's
Common Area Expenses charge (as hereinafter defined) (pro-rated, if for a
partial month or if necesary to reflect Lessor's inability to deliver
immediate possession of the Unit C space, as discussed above), for a total
payment of Fifty Eight Thousand Four Hundred Eighty Two and 07/100 Dollars
($58,482.07). In the event Lessee fails to pay to Lessor when due any
charges payable under this Lease, Lessor shall have the right (but not the
obligation) to deduct the amount of such unpaid charges from the security
deposit and to apply those funds to such unpaid charges, in which case
Lessee shall immediately remit to Lessor the full amount of the funds so
deducted in order to restore the security deposit to the original amount
required hereunder. IT IS SPECIFICALLY UNDERSTOOD THAT THE SECURITY
DEPOSIT MAY NOT BY USED BY LESSEE AS ALL OR A PORTION OF LESSEE'S LAST
MONTHS' RENTAL PAYMENTS DUE HEREUNDER.
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<PAGE> 7
31. Lessee agrees to maintain good housekeeping practices whereby all waste
and discharge are satisfactorily disposed of by an authorized collection
agency and whereby all applicable governmental regulations regarding waste
disposal are complied with at Lessee's expense. All trash is to be
retained inside an enclosed (i.e. not open topped) metal dumpster which is
to be routinely monitored by Lessee for overfilling and spillage. All
areas of the demised premises (including the outside loading areas) must
be kept clean at all times. Lessee shall also be responsible for its own
pest control in and around the demised premises and for keeping its
entrance area, exterior walkways, docks and steps clear of ice and snow at
all times.
It shall be Lessee's responsibility to insure that Lessee's business
operations do not create any excessive, extraordinary or unreasonable
noise, odor, dust or debris or any other disturbance to any neighboring
tenant and are not otherwise injurious to Lessor's property. If Lessee is
in default under the provisions of this paragraph and such default is not
promptly cured after request by Lessor, then Lessor may remedy such
default on behalf of Lessee and Lessee shall be responsible for the costs
thereof.
32. No outside storage of any kind (including, but not limited to, storage
trailers and vehicles not currently in use) shall be permitted on the
demised premises or on any other portion of Lessor's property. Lessee
agrees that Lessee's loading docks shall be used for active loading only,
that no unattended trailers or other vehicles will be parked in this
loading area, and that Lessee will cooperate with neighboring tenants in
not blocking any tenant's loading area for any unreasonable or extended
period of time.
In addition, Lessee agrees that it shall not restrict the access of
Lessor, of any tenant or other occupant of Lessor's property, or of any
agent or visitor of the same, to those areas of Lessor's property not
occupied exclusively by Lessee including, but not limited to, the roof and
exterior grounds, nor shall Lessee restrict the access of Lessor or of
Lessor's agents, employees or contractors to portions of the demised
premises at which Lessor desires to perform repairs, replacements,
alterations, improvements or any other work, provided, however, that none
of the foregoing will unreasonably interfere with Lessee's use and
enjoyment of the demised premises.
33. Lessor agrees that, prior to the August 1st, 1998 starting date of this
Lease or, with respect to the Unit C portion of the demised premises, as
soon as reasonably
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<PAGE> 8
possible following the existing tenant's move out of that space, Lessor
will complete the following office renovations at Lessor's sole expense:
a) install standard low pile, direct glue down carpeting in all office
areas shown on the attached diagram in which Lessor has not already
installed new carpeting within the past three (3) month period,
b) repaint all office drywall and trim in the office areas shown on the
attached diagram which has not already been repainted within the last
three (3) month period,
c) replace any missing, stained, or damaged ceiling tiles in the office
areas shown on the attached diagram,
d) clean and repaint the basement locker room shown on the attached
diagram.
Lessee will be consulted as to color choice for any new carpeting still to
be installed by Lessor in connection with the above requirements.
Except for the above described items, Lessee agrees to accept the demised
premises in "as-is" condition and without representation from Lessor that
the demised premises is fit or zoned for any particular purpose or adheres
to any particular governmental or non-governmental requirements.
Throughout the term of this Lease, Lessor shall, at its sole cost and
expense, be responsible for all roof maintenance, repairs and replacements
and for all structural maintenance, repairs and replacements of exterior
walls, foundations and load-bearing walls. Notwithstanding the above,
Lessor will not be responsible for any maintenance, repairs or
replacements to areas of the roof, exterior walls, foundations and
load-bearing walls which are altered or damaged by Lessee, who shall
thereafter assume the responsibility therefor.
All other maintenance, replacements and/or repairs to the demised premises
and to all equipment or fixtures serving any portion thereof, including
but not limited to the heating, ventilating and air-conditioning ("HVAC"),
plumbing (including preventing frozen pipes), sewer, electrical, lighting
(including bulbs and lighting fixtures), fire/emergency and (if added)
sprinkler systems, the portion of the building containing the demised
premises, its fixtures, including any and all drive-in, tailgate and
personnel doors and any dock seals, plates, bumpers or other equipment
surrounding such doors, or to areas of the grounds which
4
<PAGE> 9
are altered or damaged by Lessee, will be the responsibility of Lessee.
Lessee specifically acknowledges that the existing transformers, switch
gear and other electrical equipment serving the demised premises are the
property of Lessor and not of any utility or of any other party, and that
such equipment will solely serve the demised premises and Lessee's use
thereof. Accordingly, Lessee understands and agrees that any maintenance,
replacements and/or repairs that may be required with respect to such
electrical equipment during the term of the Lease shall be Lessee's sole
responsibility, in accordance with Lessee's normal maintenance
responsibilities mentioned above.
If any portion of the demised premises is served by a sprinkler system,
then whether or not Lessor maintains the sprinkler system as part of the
Common Area Expenses of its property, Lessee will have the operation of
the sprinkler system which serves the demised premises
central-station-monitored by a qualified alarm company at Lessee's
expense.
34. In the event Lessee does not satisfactorily keep the demised premises in
good repair and maintain good housekeeping practices throughout the Lease
term, including preventing any outside storage, then Lessor may at any
time elect to perform said repairs or cleaning and Lessee agrees to
promptly reimburse Lessor for all costs thereof.
35. Lessee agrees to obtain a service contract and to have a certified
contractor perform at least semi-annual (i.e. at least twice per year)
inspections on all HVAC units, boilers, hot water heaters, and any
sprinkler equipment that may be added to the demised premises, and their
components, in their entirety, and to perform all necessary maintenance,
repairs, and replacements (including, but not limited to, replacement of
any filters and normal cleaning) as may be required. A copy of the
contractor's inspection report is to be submitted to Lessor's office upon
completion of each semi-annual inspection. If Lessee fails to adhere to
the above requirements, Lessor shall have the right to obtain such service
contract and/or to have the required work performed on such equipment as
specified above, with Lessee to promptly reimburse Lessor for the costs
thereof.
Lessee shall not be obligated to totally replace any of the equipment
mentioned in the preceding paragraph that is beyond repair through normal
wear and tear and which has been properly inspected, maintained, and
repaired by
5
<PAGE> 10
Lessee as specifically required herein as long as Lessee promptly
furnishes to Lessor documentary proof of Lessee's adherence to the above
inspection, maintenance, and repair requirements. Lessee shall also not be
responsible for replacing any of the above mentioned (in Pargraphs 33 and
35) equipment which is damaged or destroyed in a casualty or loss covered
by Lessor's property insurance on the demised premises.
Prior to vacating the demised premises, Lessee shall submit to Lessor a
copy of the most recent inspection report covering all of the equipment
mentioned above, along with copies of documentation describing all
maintenance, repair, and replacement work that was performed on such
equipment during the term of the Lease. If Lessee does not submit to
Lessor an inspection report dated no more than one (1) month prior to the
date on which Lessee vacates the demised premises which details a full
inspection of all of the above equipment and which shows that all
necessary maintenance, repair, and replacement work (including, but not
limited to, replacement of any filters and normal cleaning) has been
performed, Lessor may secure a certified contractor to perform such work
and Lessee shall promptly reimburse Lessor for the cost thereof.
36. Any repairs to any portion of the demised premises or to Lessor's other
property that are required because of damage or neglect by Lessee, must be
completed prior to the termination date of this Lease and at the sole
expense of Lessee. Should Lessee not complete all or substantially all
repairs prior to the termination date of this Lease, then Lessee agrees
that Lessee will, at Lessor's option, remain as a tenant and rent will
continue to be due and payable until all repairs are properly completed.
Notwithstanding the above, Lessee shall at all times be responsible for
the cost of any repairs that may be required due to damage that is
discovered either during the term of the Lease or upon Lessee's vacating
the demised premises, whether or not such items are brought to Lessee's
attention at any pre-termination inspection which may be performed as
described above.
37. Lessee agrees that before any alterations or improvements to the demised
premises are begun or any equipment intended to be installed therein is
added, Lessee must submit detailed plans and specifications to Lessor and
receive written permission from Lessor for the same, which written
permission shall not be unreasonably withheld or delayed. All
alterations, improvements, or equipment (whether temporary or permanent in
character and whether desired by either party to this Lease or mandated by
any governmental
6
<PAGE> 11
entity), which may be made upon or added to the demised premises by either
Lessor or Lessee, except furniture or movable trade fixtures installed at
the expense of Lessee, shall be maintained by Lessee throughout the term
of the Lease in accordance with the same requirements that exist under
this Lease for Lessee's maintenance of existing portions of the demised
premises, shall become at the sole discretion of Lessor the property of
Lessor and shall remain upon and be surrendered with the demised premises
as part thereof at the termination of this Lease, without compensation to
Lessee. Lessee further agrees that if Lessor determines that all or a
portion of said alterations, improvements, or equipment are not
acceptable, then Lessee will, prior to the termination of this Lease and
at Lessee's sole expense, remove (all, or portions designated by Lessor,
of) such alterations, improvements, or equipment, restore the demised
premises to its original condition immediately prior to the inception of
this Lease, and repair any damage to the demised premises caused by either
the presence or the removal of such items. Notwithstanding the above, upon
specific written request by Lessee prior to Lessee's installation of any
particular improvements, alterations or new equipment, Lessor shall inform
Lessee whether Lessee will be required to restore the affected areas of
the demised premises to their previous condition at the end of the Lease
term.
38. Lessee must secure a signed Waiver of Liens from all contractors before
any maintenance, repairs, construction, improvements, or alterations of
any kind are commenced on or about the demised premises. Lessee further
agrees that Lessee shall hold Lessor harmless from any debt incurred by
Lessee from contractors brought in to do any such work.
39. In addition to its normal monthly rental payments, Lessee will be
responsible for paying all utility costs that are attributable to the
demised premises including, but not limited to, electric, gas, water and
sewer (all of which items are, upon execution of this Lease, separately
metered for the demised premises), and for Lessee's proportionate share of
all other common area expenses for all of Lessor's property of which the
demised premises is a part (2445-2465 Maryland Road) including, but not
limited to, snow plowing, lawn and landscaping care, pavement and driveway
maintenance, exterior lighting operation and maintenance, common area
utilities, common area HVAC, common area electrical and/or plumbing lines
and other equipment operation, maintenance and repairs, common area alarm
and/or security (if provided), exterior pest control (if provided),
property management fees and any other common
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<PAGE> 12
area or common service expenses for all of Lessor's property of which the
demised premises is a part (hereinafter, collectively, "Common Area
Expenses"). These charges shall be due upon presentation of an invoice by
Lessor if a bill is not received by Lessee directly from the supplier of
such service. If no separate meter connection is available for any such
service, billing will be apportioned by the Lessor.
It is understood and agreed that Lessee may pay its own electic and gas
service bills for the demised premises directly to the supplier of those
utilities. With respect to water and sewer billings for the demised
premises, Lessor will initially pay all bills for these services directly
to the supplier of these services and be reimbursed by Lessee for the same
as part of its Common Area Expense payments, but Lessor may at a later
date choose to have Lessee also pay for these items directly to the
suppliers thereof and remove such items from the Common Area Expense
calculation. Lessor agrees that it shall not "mark up" or otherwise make a
profit from Lessee on its billing of these water and sewer charges.
As an alternative to sending Lessee individual invoices for Lessee's
portion of certain Common Area Expenses as Lessor receives bills for such
items from the suppliers thereof, Lessor shall have the option of
estimating the total annual Common Area Expenses for such items for
Lessor's property and of requiring Lessee to pay one twelfth (1/12th) of
its portion of such annual estimate on a monthly basis, due and payable
each month, in advance and without invoicing, on the same day on which the
monthly rental is due hereunder, and with periodic or annual adjustments
by Lessor as necessary to reflect actual versus estimated cost for such
items. Lessor may choose to estimate the annual cost of certain items of
the Common Area Expenses in accordance with the above billing format and
to also send individual invoices for certain other items of the Common
Area Expenses as charges are incurred for such particular items.
It is understood and agreed that the current estimate of total Common Area
Expenses for calendar year 1998 is $15,676.00, and that Lessee shall pay
its proportionate monthly share of this annual estimate (currently $964/07
per month), along with each normal monthly rental payment until such
monthly Common Area Expenses estimate is adjusted in accordance with the
previous paragraph.
Upon reasonable advance notice to Lessor, Lessee shall have the right to
periodically review Lessor's records
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<PAGE> 13
with respect to the Common Area Expenses which Lessee pays hereunder at a
mutually convenient time and at Lessor's offices in Ambler, Pennsylvania.
If any such review reveals that Lessor has been dishonest or grossly
negligent in overstating the actual Common Area Expenses charged to Lessee
and such action has resulted in an overstatement of more than ten percent
(10%) of actual Common Area Expenses, then Lessor shall reimburse Lessee
for the reasonable costs of Lessee's review of such expenses at Lessor's
offices. Notwithstanding the above, Lessor's annual Common Area Expense
estimates for upcoming lease years shall not be considered overstatements
as long as periodic adjustments (i.e. refunds or credits) are made by
Lessor for estimated vs. actual Common Area Expenses following a
particular year.
40. Lessee and Lessor agree that the obligation of Lessee to pay the rent and
all other miscellaneous lease charges required under this Lease shall be
absolute, and that Lessee shall have no right to set off or deduct from
the amounts otherwise due from Lessee hereunder the amount of any claim
Lessee may believe it has against Lessor or any other party.
41. It shall be Lessee's responsibility, prior to occupancy and at Lessee's
sole expense, to apply for, make payment for, and obtain all permits and
fees, including but not limited to any certificates of occupancy, required
by any Federal, State, or Local authorities to conduct Lessee's business
on the demised premises. Upon request, Lessee shall promptly provide
Lessor with copies of all such permits secured from such governmental
authorities. Should any Federal, State or Local law, rule, ordinance, or
other regulation affect the demised premises or mandate certain
alterations or improvements thereto (if, and only if, the same is
specifically relating to Lessee's business and/or specific use of the
demised premises), then Lessee shall pay for all costs to institute such
regulation on or about the demised premises. In all other instances, the
foregoing shll be Lessor's sole responsibility.
42. Any rental payment not received by Lessor in Lessor's office by the tenth
(10th) day of any month will be subject to a late charge equal to five
(5%) percent of such overdue amount, plus any legal fees and collection
costs of Lessor. If said rent remains unpaid until the tenth (10th) day
of the following month, then an additional five (5%) percent late charge
shall be applied for such following month and also for each succeeding
month that the rent remains unpaid. This same five percent (5%) late
charge procedure shall apply to any other payments required by this Lease
that are not received by Lessor within ten (10) days of the date
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<PAGE> 14
of the invoice under which they are assessed. All late charges assessed
shall be considered additional rent and shall be payable immediately.
43. Lessee agrees to pay its proportionate share (currently 73.8% for Units A
and C - which percentage shall remain constant unless Lessee leases a
different amount of space from Lessor or the size of Lessor's improvements
at the 2445-2465 Maryland Road property is altered) of all increases in
real estate taxes and property insurance premiums for all of Lessor's
property at 2445-2465 Maryland Road that are above current amounts at the
signing of this Lease. Property insurance shall include all building
(fire and other casualty), liability and loss of rents insurance with
respect to all of Lessor's property at 2445-2465 Maryland Road. It is
understood and agreed that at the signing of this Lease, based on the most
recent invoices received by Lessor to date, the current annual real estate
taxes on Lessor's property are $22,828.40 for school taxes and $8,693.32
for county/township and other miscellaneous real estate taxes (including,
but not limited to, any mercantile, business privilege, or other tax based
on rental income), the current annual property insurance premiums on
Lessor's property are $7,921.00, and that Lessee's gross monthly rental
payments under the Lease include this $.68 per square foot base tax and
insurance cost.
44. Notwithstanding anything herein to the contrary, in the event that any tax
or property insurance increase, or the necessity for any additional
insurance coverage, is due solely to the occupancy or use (or misuse) of,
or improvements to, the demised premises by Lessee, then Lessee shall pay
for the entire cost of such increased tax or insurance cost.
45. In the event ad valorem real estate taxes are abolished during the term
hereof and/or a substitute, alternate, or additional tax on the use and
enjoyment of real estate or on the ownership or rental of real estate
(including, but not limited to, any sales, mercantile, business privilege,
or other tax based on rental income) is adopted in lieu thereof or in
addition thereto (no matter how such tax is computed), then Lessee shall
be obligated to pay such substitute, alternate, or additional tax in the
same manner and to the same extent as Lessee is required to pay real
estate taxes hereunder.
46. In the event Lessee does not fulfill any of Lessee's obligations under
this Lease and Lessor is required to take legal action, Lessee will be
responsible for Lessor's resulting costs, including, but not limited to,
attorneys' fees.
10
<PAGE> 15
47. Lessee agrees that if a sublease is secured on the demised premises and
the rental rate under such sublease is greater than the rental rate
hereunder, then Lessor shall have the right to receive 50% of this
increased rental, after subtraction of any reasonable real estate broker's
commission paid by Lessee on such sublease and after subtraction for any
subtenant improvements made by Lessee on such subtenant's behalf which
Lessor specifically agrees are also of material benefit to Lessor. Lessee
will remain responsible for all terms and conditions of this Lease
following the execution of any and all sublease or assignment agreements.
All sublease agreements or assignments must be approved by Lessor in
advance. If a sublease or assignment is executed, then any options to
extend this Lease shall be voided.
48. Should Lessee desire to place a sign on the demised premises or on any
other property of Lessor, Lessee agrees that before actual installation
takes place, Lessee shall submit to Lessor, and obtain approval of (such
approval not to be unreasonably withheld or delayed), an exterior sign
layout with the exact location of such proposed sign and a detailed
description of how the sign will be installed. Lessee must file for,
obtain, and pay for any and all governmental permits or other applications
required for such sign and must install such sign at Lessee's expense.
Unless Lessor directs otherwise, Lessee must remove the sign prior to the
expiration of this Lease and must restore the area at which the sign had
been placed to its original condition prior to the installation of the
sign. Lessor shall retain the right to maintain one or more signs on or
about the demised premises throughout the term of this Lease.
If Lessor chooses to maintain a directory sign on Lessor's property with
panels for individual tenant names, then if Lessee wishes to be included
on such sign, Lessee shall be permitted to be so included. Lessor shall
have the right to charge Lessee for Lessor's reasonable costs incurred for
including and maintaining Lessee's name on such sign and for Lessee's
proportionate share of any applicable governmental permitting fees that
may be incurred by Lessor for such sign, as well as for Lessee's
proportionate share of maintaining the sign in reasonable condition.
Notwithstanding the above, in the event that applicable governmental
regulations limit the total amount of signage available for the property
of which the demised premises is a part and Lessee does not lease the
entire property from Lessor, then Lessee shall only be entitled
11
<PAGE> 16
to its proportionate share (currently 73.8%, based on the size of the
demised premises vs. the total building square footage on Lessor's
property at 2445-2465 Maryland Road) of such signage limit, as reasonably
allocated by Lessor after taking into account any directory signs or other
signs not specific to any single tenant that may be present on the
property or planned by Lessor.
Throughout the Lease term, Lessee shall have the right, at Lessee's sole
expense and upon prior consultation with and approval by Lessor (such
approval not to be unreasonably withheld or delayed), to have a qualified
landscaper perform additional trimming of trees and shrubs along the front
portion of Lessor's property in order to maximize turnpike exposure to
Lessee's permitted signage.
49. Lessor represents and warrants as follows: (i) Lessor is aware of no
environmental contamination with respect to the demised premises and the
property of which the demised premises is a part and, to the best of
Lessor's knowledge, there are no "hazardous materials" or "hazardous
substances" (as such terms are defined in federal, state and local laws,
rules and regulations) on, beneath or about the demised premises or the
property of which the demised premises is a part other than in accordance
with applicable laws, rules and regulations, and (ii) there are no title
restrictions or other title encumbrances which would interfere with
Lessee's use and enjoyment of the demised premises as described herein.
Lessee warrants that Lessee will not use or allow any environmentally
hazardous materials, in tanks, drums or otherwise, on the demised premises
or on any other property of Lessor, nor will Lessee perform or allow any
environmentally hazardous activity on the demised premises or on any other
property of Lessor, including, but not limited to, placing or allowing any
potentially hazardous materials or discharges in the building's sanitary
sewer system or floor drains (if any), or in the storm sewer system or any
other body of water adjacent to the demised premises, or on any ground
surrounding the demised premises.
It is specifically understood that in the event Lessee or any person or
entity under Lessee's control or direction creates any environmental
contamination or causes the need for any clean-up of hazardous materials
at, on, in, around, or off-site of the demised premises or any other
portion of Lessor's property, then Lessee shall be held responsible to
Lessor for all costs of such inspection and/or clean-up as well as any
other
12
<PAGE> 17
liabilities that may occur and will indemnify, save, defend, and hold
Lessor harmless from and against any and all actions, suits, or expenses
in connection therewith.
50. Lessee shall have a graduated rental schedule as follows:
A. Lessee will pay Minimum Annual Gross Rental of Two Hundred Ten
Thousand Two Hundred Sixteen Dollars ($210,216.00) in monthly
installments of Seventeen Thousand Five Hundred Eighteen Dollars
($17,518.00) commencing August 1st, 1998 and ending July 31st, 1999.
B. Lessee will pay Minimum Annual Gross Rental of Two Hundred
Seventeen Thousand Four Hundred Sixty Four Dollars ($217,464.00) in
monthly installments of Eighteen Thousand One Hundred Twenty Two
Dollars ($18,122.00) commencing August 1st, 1999 and ending July
31st, 2000.
C. Lessee will pay Minimum Annual Gross Rental of Two Hundred Twenty
Four Thousand Seven Hundred Twelve Dollars ($224,712.00) in monthly
installments of Eighteen Thousand Seven Hundred Twenty Six Dollars
($18,726.00) commencing August 1st, 2000 and ending July 31st,
2001.
D. Lessee will pay Minimum Annual Gross Rental of Two Hundred Thirty
Two Thousand Three Hundred Ninety Two Dollars ($232,392.00) in
monthly installments of Nineteen Thousand Three Hundred Sixty Six
Dollars ($19,366.00) commencing August 1st, 2001 and ending July
31st, 2002.
E. Lessee will pay Minimum Annual Gross Rental of Two Hundred Forty
Thousand Sixty Dollars ($240,060.00) in monthly installments of
Twenty Thousand Five Dollars ($20,005.00) commencing August 1st,
2002 and ending July 31st, 2003.
51. So long as Lessee is not in default under this Lease and Lessee has and
continues to faithfully fulfill all obligations of Lessee hereunder,
Lessor agrees that when Lessor becomes aware of the date on which the
tenant that is currently occupying the adjoining approximately 15,120
square foot rental Unit B (Abington Memorial Hospital) will vacate that
rental unit, Lessor will promptly notify Lessee of the availability of
such adjoining rental unit and of Lessor's then current market rental rate
to lease such space upon its vacancy. Lessor agrees that such market
rental rate will not in any case exceed 20% above the rental rates that
Lessee
13
<PAGE> 18
will pay for the demised premises during its then remaining term of this
Lease. Lessee shall have fifteen (15) days from receipt of such notice
within which to notify Lessor in writing as to whether Lessee wishes to
lease the entire adjoining rental unit, beginning on the day after it is
fully vacated by such neighboring tenant and continuing throughout the
remainder of the term of this Lease and any option or extension periods,
as discussed above, for the rental rates listed in the above mentioned
notice from Lessor to Lessee, on an "as-is, where-is" basis, and otherwise
according to the same terms and conditions under which Lessee has leased
the demised premises hereunder. If Lessor receives such written notice
from Lessee, within the time period prescribed above, of Lessee's
willingness to lease the adjoining rental unit upon such terms and
conditions, then this Lease shall thereafter be considered to be amended
by such notice, and Lessor shall then deliver to Lessee a letter
confirming the revised total rental rates for the combined area leased by
Lessee that shall thereafter be due. If Lessor does not receive such
notice from Lessee within the time frame prescribed above, then Lessee's
opportunity to lease the adjoining rental unit shall be extinguished, and
Lessor shall be free to market such adjoining rental space to other
potential tenants.
52. Lessor shall at all times retain the sole authority to choose which
utility companies will service Lessor's property and/or the demised
premises, and Lessee shall have no recourse against Lessor as a
consequence of any decision by Lessor to change utility providers at any
particular time. Notwithstanding the foregoing, Lessor shall consult with
Lessee prior to changing any utility provider servicing the demised
premises, and Lessee shall have the right to select its own voice and
communications systems and providers, as long as such selections do not
adversely affect Lessor or any other tenant at Lessor's property at
2445-2465 Maryland Road.
Lessor shall be held harmless from any loss or damage suffered due to any
failure of a utility service or loss of a utility function for any reason.
53. Notwithstanding anything in this Lease to the contrary, in the event of
any conflict or contradiction between the terms of this Lease and the
waiver of subrogation provisions set forth herein, the waiver of
subrogation provisions shall in all instances prevail.
54. It is specifically understood that Lessor does not and will not carry
insurance covering items owned or controlled by Lessee, persons visiting
Lessee's business at Lessor's property, or covering Lessee's business
14
<PAGE> 19
itself, and that Lessor shall not be responsible for any damage or injury
to such items, persons or business. Lessee shall be responsible for its
own security in and around the demised premises.
If an insurance claim is filed under Lessor's property insurance policy
relating to the Lessee's use (or misuse) of, or improvements to, the
demised premises, or any act of vandalism at the demised premises, then in
addition to any other liability of Lessee hereunder, Lessee shall be
responsible for paying the deductible amount due for such insurance claim.
Such deductible payment will be no greater than Ten Thousand Dollars
($10,000.00).
55. Lessee will carry and keep in full force and effect at all times during
the term of this Lease and any extensions hereof, for the protection of
Lessor and Lessee, the following insurance at Lessee's expense:
(i) Comprehensive general public liability and personal injury
insurance with a combined single limit coverage of at least One Million
Dollars ($1,000,000.00) per occurrence, and a combined single limit
aggregate coverage of not less than Three Million Dollars ($3,000,000.00).
Such liability policies shall specifically include Lessor as a named
insured, and shall cover all happenings and occurrences in or about the
demised premises and on or about all roads, driving areas and other areas
used by Lessee in common with others at Lessor's property. In addition,
Lessee shall also continually maintain property damage insurance in
sufficient amounts to properly cover all personal property owned or stored
by Lessee at the demised premises, and shall also continually maintain at
least the statutory minimum of workmen's compensation insurance covering
Lessee's employees and business operations at the demised premises.
(ii) Any and all such insurance policies shall provide that the
policies will not be cancellable without at least thirty (30) days prior
written notice to Lessor, and shall be issued and kept in effect by
insurers of continuing recognized responsibility licensed to do business
in the Commonwealth of Pennsylvania.
(iii) Certificates of all insurance required to be carried by Lessee
hereunder shall be delivered by Lessee to Lessor at least fifteen (15)
days prior to the commencement of the term of this Lease; and at least
thirty (30) days before any such policy shall expire Lessee shall deliver
to Lessor a renewal endorsement of such policy or replacement policy.
Within ten (10) days
15
<PAGE> 20
after the premium on any such policy shall become due and payable, Lessee
shall provide Lessor with a receipt demonstrating payment thereof. Upon
request, Lessee shall deliver to Lessor full and accurate copies of all
insurance policies required herein, along with any endorsements to those
policies.
56. In the event Lessee does not vacate the demised premises and/or does not
restore the demised premises to the condition required in the Lease by
completing all or substantially all repairs required under the terms of
this Lease on or before the termination date of this Lease or any
extension hereof, then Lessee shall be responsible for all damages
incurred by Lessor as a result of such default, and Lessee shall also
thereafter be liable for monthly rental at a holdover rate equal to twice
the amount due for the previous month under the Lease.
57. Notwithstanding any other provision of this Lease and, in addition to any
other rights granted to Lessor hereunder, Lessor shall have the right,
throughout the term of this Lease and any extensions hereof, to enter the
demised premises during normal business hours for sales, leasing, or any
other lawful purpose. Lessor shall attempt to give reasonable advance
notice to Lessee of intended visits to the demised premises, except in
cases of emergency or when Lessee is in default hereunder. Notwithstanding
the above, Lessor will not have the right to enter the demised premises
for re-leasing purposes unless Lessee is in default hereunder or unless
such visits occur within the last nine (9) months of the Lease term.
58. Lessee's official address for notices under this Lease shall be 2445-2465
Maryland Road, Willow Grove, PA 19090. Attention: Mr. Alex Kramer.
Lessor's official address for notices under this Lease shall be P.O. Box
128, Ambler, PA 19002. Attention: Mr. Robert Bown.
Except as otherwise specifically allowed herein, all notices must be given
by certified mail, return receipt requested.
59. Unless a specific time period for a particular type of default is
specified elsewhere in this Lease, Lessee shall not be considered to be in
default hereunder unless and until Lessor has sent Lessee written notice
specifying in reasonable detail the default involved and such default has
continued unremedied by Lessee for a period of twenty (20) days (ten (10)
days in the case of a payment default) thereafter. Notwithstanding the
foregoing, the late charge remedies provided to Lessor in this Lease may
be applied by Lessor on any late
16
<PAGE> 21
payment due from Lessee regardless of the above notice provisions.
60. In the event of any conflict or inconsistency between the terms contained
in the printed provisions of the Lease Agreement and the terms contained
in any typewritten or handwritten provisions thereof or of this Addendum,
the terms contained in the typewritten or handwritten provisions shall
govern.
61. This Lease shall be governed by and construed in accordance with the laws
of the Commonwealth of Pennsylvania and any disputes hereunder will be
adjudicated in the courts of the Commonwekth of Pennsylvania. Lessee and
Lessor hereby expressly waive their rights to a jury trail in any dispute
that may arise between them in connection with this Lease.
62. The persons executing this Lease hereby represent and warrant to each
other that they each have full power, right and authority to enter into
this Lease on behalf of their respective companies and to cause such
companies to perform each and all of their respective obligations provided
herein.
63. Submission by Lessor of this Lease for review and execution by Lessee
shall neither confer any rights nor impose any obligations upon either
party unless and until both Lessor and Lessee have executed this Lease in
its final form. Upon proper execution, this Lease constitutes the entire
understanding between the parties with respect to its subject matter and,
except as otherwise provided herein, may not be cancelled, amended or
modified in any respect unless the same shall be in writing and signed by
or on behalf of the parties.
Notwithstanding the foregoing, Lessee and Lessor hereby agree that a
fully-executed, faxed copy of any future addendum to this Lease may serve
as an original thereof.
17
<PAGE> 22
EXHIBIT "A"
LANDLORD'S SUBORDINATION AGREEMENT
______________________, a __________________ ("Landlord") is the owner of
certain premises located or known as ____________, (the "Premises").
To induce ______________ ("Bank") to extend or continue to extend credit
to ___________ ("Tenant"), Landlord does hereby covenant and agree with Bank,
its successors and assigns, as follows:
1. Any ______________________________________________________________________
(collectively, the "Collateral") owned by Tenant and in which Bank may now
have or hereafter acquire a security interest, and which may now or
hereafter be placed upon the Premises, shall at all times be considered to
be personal property and shall not constitute fixtures or become part of
the Premises. As between Landlord and Bank, Landlord's interest in the
Collateral is and shall be subordinate and inferior to the rights therein
of Bank and its successors and assigns. Notwithstanding the foregoing,
Landlord shall not subordinate or waive as to Bank any interest Landlord
may have or acquire in any of the Collateral that is attached to the
Premises and thereby could be considered a permanent fixture including,
but not limited to, any offices (but not any office furniture or
equipment) or other structures constructed within the Premises, and any
electrical, gas, oil, HVAC or plumbing fixtures installed within the
Premises which serve the occupants thereof.
2. In the event that it becomes necessary for Bank to take possession of the
Collateral or any part thereof, Landlord will make no objection to the
removal of such Collateral from the Premises by Bank or Bank's agent, as
long as: 1) prior written notice of such removal is received by Landlord,
2) such removal is performed in a workmanlike manner and without damage to
the Premises, 3) prior to such removal Bank reimburses Landlord for any
amounts overdue from Tenant to Landlord under the terms of Tenant's lease
for the Premises as of the date of such removal, and 4) promptly following
such removal Bank reimburses Landlord for any costs of repair for any
damage that may be done to the Premises as a result of such removal.
3. As long as Landlord is supplied in writing by Bank or Tenant with
Bank's then current notice address, Landlord will endeavor to give at
least ten (10) days prior notice to bank of any intention to terminate
Tenant's lease by reason of any Tenant default thereunder and will allow
1
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and
year first above written.
LESSEE:
AMERIQUEST TECHNOLOGIES, INC.,
a Delaware corporation
[sig] 7/1/98 by: /s/ ALEXANDER C. KRAMER
- ------------------------- ---------------------------
Witness/Attest Date Name:
Title: President
LESSOR:
MERION MILLS ASSOCIATES,
a Pennsylvania partnership
[sig] 7/1/98 by: /s/ ROBERT A. BROWN
- ------------------------- ---------------------------
Witness/Attest Date Name: Robert A. Brown
Title: Property Manager
18
<PAGE> 24
Bank twenty (20) days time in which to remove any of Tenant's property
upon which Bank has a lien or in which Bank has a security interest
provided, however, that in no event shall Bank have the right to leave
such property on the Premises after the termination date of Tenant's lease
without incurring storage costs for the same. If any of the Collateral
which has been claimed by Bank is left on the Premises after the
termination of Tenant's lease therefor Bank shall be responsible for
promptly paying to Landlord the rent and other tenant charges last
provided thereunder on a per diem basis for as long as such Collateral
remains on the Premises and shall, upon request from Landlord, promptly
remove the same after satisfying all outstanding charges due to Landlord
hereunder.
4. The laws of the Commonwealth of Pennsylvania shall govern the validity,
interpretation and enforcement of this agreement. This agreement may not
be recorded in any office of public records.
IN WITNESS WHEREOF, intending to be legally bound, Landlord has, for
Landlord and Landlord's successors and assigns, caused this Landlord's
Subordination Agreement to be duly executed this ____ day of _____, 199_.
LANDLORD:
,
-------------------------
a
--------------------
By:
- -------------------------- -----------------------
Witness/Attest Name:
Title:
Bank's Notice Address:
Landlord's Notice Address:
llsubord
2
<PAGE> 25
[MAP]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 755
<SECURITIES> 0
<RECEIVABLES> 6,535
<ALLOWANCES> 0
<INVENTORY> 4,191
<CURRENT-ASSETS> 11,835
<PP&E> 799
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,955
<CURRENT-LIABILITIES> 3,937
<BONDS> 0
0
0
<COMMON> 669
<OTHER-SE> 174,383
<TOTAL-LIABILITY-AND-EQUITY> 12,955
<SALES> 60,466
<TOTAL-REVENUES> 60,466
<CGS> 54,323
<TOTAL-COSTS> 5,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273
<INCOME-PRETAX> 747
<INCOME-TAX> 0
<INCOME-CONTINUING> 747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 747
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
