ITEM 1. BUSINESS.
THE COMPANY
AmeriQuest Technologies, Inc., a Delaware corporation ("AmeriQuest" or the "Company"), markets and sells products and services providing business information solutions for value-added resellers ("VARs"), systems integrators and, beginning in fiscal 2000, corporate clients. AmeriQuest's strategy is to emphasize the sale of complete solutions for its clients and to provide a high level of value-added services, including consultation on component selection, system assembly, configuration, testing, logistics, operational start-up, installation and technical support services. AmeriQuest markets, sells and supports a variety of applications and products ranging from individual components to complete systems that have been fully configured, assembled and tested prior to delivery to the ultimate customer. AmeriQuest also provides programs and seminars designed to support and enhance its clients' technical, marketing, logistical and financial capabilities.
AmeriQuest currently markets and sells mid-range Unix and NT server systems, networking systems, storage sub-systems, printers and related products to VARs, systems integrators and corporate clients throughout the United States. Mid-range computers and servers range in price from $5,000 to $800,000. AmeriQuest focuses its marketing efforts on the products of a limited number of key vendors in order to become one of the leading distributors for each of its principal vendors. This enables AmeriQuest to develop product-specific technical expertise that enhances its value-added support services. AmeriQuest attempts to minimize competition among vendors' products while maintaining some overlap to provide protection against product shortages or discontinuations.
AmeriQuest historically conducted its business through its subsidiaries but, in April of 1997, AmeriQuest decided to focus its resources on building what was then known as its Advanced Systems Group in Pennsylvania and to close or sell all of the other divisions. Following the reorganization, the Company became a more focused technical distributor of services and computer products providing value added solutions rather than a fulfillment distributor that relies on broad product lines and high volumes of commodity products. During fiscal 2000, AmeriQuest began to refocus its outside sales force to sell application solutions directly to larger corporate clients and to focus on selling its higher margin products and services to its VAR and systems integrator clients. The Company is now organized in three divisions: fulfillment distribution, solutions and leasing.
The Company maintains its principal executive offices at 2465 Maryland Road, Willow Grove, Pennsylvania 19090, and its telephone number is (215) 658-8900.
STRATEGY
During Fiscal 2000, the Company continued to de-emphasize low margin hardware product distribution. The Company's current business strategy is to increase the emphasis on providing application solutions and implementation to corporate clients while providing value-added services such as engineering design and system configuration, installation capability, and marketing, financial and technical support to its VAR and systems integrator client base. The goal of this new focus is to improve the Company's margins as compared to the margins of distributors who provide for sale of equipment only. In addition, AmeriQuest will continue second tier product distribution only in areas which minimize direct competition with the Company's largest competitors and concentrate on selling higher-margin mid-range computer and client server systems, networking products and storage systems along with complementary and related individual computer components, and maintenance and leasing services. AmeriQuest has negotiated agreements with several vendors that allow the Company to serve as the "silent partner" of the Company's resellers by being able to sell services and products directly to the reseller's end users when the reseller cannot do so itself or desires AmeriQuest to do so. The Company has also developed a division known as Consultants Group Commercial Funding Corporation("CG Commercial"), which facilitates customers in obtaining lease financing through third parties.
Historically, approximately 30% of the Company's top 500 customers have represented approximately 80% of the monthly gross profit and approximately 40% of the monthly sales. The remaining approximately 70% of the top 500 customers represent approximately 60% of the average monthly sales but only approximately 20% of the gross profit. The majority of the senior debt from the bank line of credit is used to finance the accounts receivable from customers who provide less than 5% gross margin contribution to the Company and, net of incremental operating costs and interest expense, are unprofitable. Therefore, the Company's action to increase the minimum margins may cause most of the unprofitable customers to decide to acquire their products from another distribution source. This strategy of phasing out low gross profit customers will result in lower sales and accounts receivable, thereby reducing the line of credit from the senior bank debt lender.
The Company also intends to continue to reduce expenses, including focusing on reducing outside consulting expenses, payroll expenses and communications expenses. In summary, the Company's strategy is to increase gross profit even if lower sales result, and simultaneously to decrease monthly expenses and borrowings under the bank line of credit used to finance accounts receivable.
Although management believes that this change in strategy, which is expected to significantly decrease low margin sales, when coupled with planned decreases in expenses, 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 gross profits for any reason not materialize in amounts sufficient to cover the existing cost structure.
PRODUCTS
AmeriQuest seeks to sell applications and products from nationally-recognized vendors that provide all the components most VARs and systems integrators require to fully configure their business information solutions. Some of the products are offered only to VARs and systems integrators and others are offered only to corporate clients. The following is a description of the major categories of products currently offered by AmeriQuest and the principal vendors of those products:
CLIENT SERVERS AND PERSONAL COMPUTERS -- AmeriQuest offers a broad and diverse group of server, notebook and desktop products manufactured by Acer, Compaq, Hewlett Packard, IBM and Unisys.
COMMUNICATIONS AND NETWORKS -- AmeriQuest provides local and wide area network ("LAN/WAN") certified engineering services, software and specialized hardware products manufactured by 3Com, Alcatel, Cisco, D-Link, Digi International, Hewlett Packard, IBM, Intel, Multi-Tech Systems and Nortel.
CAS, NAS AND SAN STORAGE -- AmeriQuest offers a broad line of channel attached storage products, network attached storage products and storage attached network products from IBM, SMS and Unisys.
PERIPHERALS AND SUPPLIES -- AmeriQuest distributes a broad line of laser, ink-jet and dot matrix printers, monitors, terminals, stand-by power supplies, accessories and supplies manufactured by numerous companies including Acer, American Power, Citizen, Genicom, Hansol, Hewlett Packard, Imation(3M), Lexmark, Okidata and Wyse.
OPERATING SYSTEM AND APPLICATION SOFTWARE -- AmeriQuest sells a variety of operating systems and LAN software products, generally as part of its client server systems sales. AmeriQuest has also commenced the sale of certain application software for NT, Unix and mid-range systems. Among the manufacturers of these software products are Citrix, IBM, including AIX and Lotus Notes, Microsoft, Novell, Perigrine and SCO.
SERVICES
AmeriQuest seeks to sell its services by providing all the elements most VARs and systems integrators require to sell business information solutions. Technical, marketing, logistical, and financial services are marketed and sold as a part of the Company's "Silent Partner"(TM) services. AmeriQuest also seeks to sell applications that satisfy certain needs of large corporate clients. These services and applications are focused around asset management, distribution management, systems, and network infrastructure solutions, including e-commerce, high availability servers, security, and thin client computing. The following is a description of the major categories of services currently offered by AmeriQuest:
TECHNICAL SERVICES -- AmeriQuest provides systems engineering, integration, implementation and project management services to those clients who do not have the capability or capacity to design, configure or install business information system solutions with their own resources. AmeriQuest also provides an Open Systems Technology Center in its Willow Grove, Pennsylvania facility for its clients to explore and test new technologies and various configurations and applications.
MARKETING SERVICES -- AmeriQuest offers its VAR and systems integrator clients a "virtual marketing department" to generate opportunities, develop materials and programs to sell services and provide Internet marketing tools.
LOGISTICAL SERVICES -- AmeriQuest offers logistical services to its VAR, systems integrator and large corporate clients by managing the entire scope of a project from product selection, procurement and packaging, to staging of multiple ship point deliveries to installation and implementation at the end-user.
LEASING SERVICES -- AmeriQuest expands the financial capabilities of its VAR, system integrator and corporate clients by providing customer risk analysis and financial and business planning assistance and, through its subsidiary, CG Commercial, it assists customers in obtaining equipment leasing and technology upgrade programs through third parties. AmeriQuest also arranges for leasing and maintenance options offered by IBM, Hewlett Packard and Unisys for all products to clients and ultimate customers. By arranging for multiple financing options, including floor planning through a number of credit institutions, credit card purchases and an "assignment of proceeds" program, AmeriQuest can assist its clients in securing purchase orders in excess of their normal credit facilities.
VENDOR RELATIONS
To maintain strong relationships with its principal manufacturers, AmeriQuest focuses on marketing the products of a limited number of key manufacturers. AmeriQuest selects its product lines to offer a total solution while minimizing competition among manufacturers' products, but maintains overlap to provide protection against product shortages or discontinuations. Accordingly, sales of products of AmeriQuest's four leading manufacturers, Acer, Hewlett Packard, Okidata and Unisys, represented approximately 28%, 18%, 10%, and 9%, respectively, of the Company's sales for the fiscal year ended September 30, 2000.
During fiscal 2000, AmeriQuest continued its relationship with IBM as a Solutions Provider. Pinacor initially served as an IBM mid-range distributor to AmeriQuest, and AmeriQuest has since executed a solution provider agreement with SupportNet to be its mid-range product distributor.
AmeriQuest expanded its relationship with Unisys during fiscal 1999 and fiscal 2000 by negotiating a corporate account reseller ("CAR") agreement which allows AmeriQuest to sell, directly to end users, Unisys mid-range products that are not available to the Company's resellers.
Also, during fiscal 2000 one of the Company's primary suppliers of hardware products experienced financial difficulty which caused AmeriQuest to switch to a secondary source with less favorable prices and terms. This change resulted in a reduction to the Company's gross margin during the second and third fiscal quarters.
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 continued to pursue a strategy to reduce inventory of non-core vendors and to satisfy its clients' needs for non-core, supplemental or complementary products by concentrating its procurement efforts with one or more 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 national fulfillment distributors to purchase products in short supply.
SALES AND MARKETING
The Company sells to more than 1,700 computer resellers and directly to over 300 end-users. The Company's clients include corporations, VARs, corporate resellers, systems integrators, and consultants. AmeriQuest estimates that a majority of its sales are to VARs and systems integrators. The Company's smaller clients often do not have the resources to establish a large number of direct purchasing relationships or to stock significant product inventories. Consequently, they tend to purchase a high percentage of their products from distributors. Larger resellers often establish direct relationships with manufacturers for their more popular products, but utilize distributors for slower-moving products and for fill-in orders of fast-moving products which may not be available on a timely basis from manufacturers. AmeriQuest has chosen to satisfy its clients' needs for supplemental and complementary products by concentrating the Company's procurement efforts with two of the national fulfillment distributors. No client has accounted for more than 10% of AmeriQuest's net sales during fiscal 2000, 1999, or 1998. Sales by AmeriQuest are not seasonal to any material extent.
Recently, the sales staff had been increased to 25, with training and selection of such staff oriented toward the markets, services and products earlier described. Management has elected to refocus the outside, or solutions, sales force on corporate end user opportunities. This change in emphasis resulted in a 70% turnover of the solutions sales staff since the beginning of fiscal 2000, including the resignation of Michael J. McCarthy, Vice President of Sales and Marketing, in December, 2000. The outside sales force is currently focused on selling asset management, distribution management, and network infrastructure solutions. There is a higher cost structure maintaining the new solutions and outside sales force compared with the inside distribution product sales force.
The inside, or product, sales staff has also experienced high turnover as a result of the Company's continued emphasis on reducing lower margin commodity hardware product sales. The sales staff turnover is primarily a result of the Company's requirement to have a more consultative and solutions oriented approach to selling. Management believes that the current staff is more aligned with the needs of the Company and, therefore, turnover during fiscal 2001 is expected to be lower. The inside sales force is expected to decline in importance and a significant decline in low-margin revenues is also expected during fiscal 2001, as compared to prior fiscal years. While increased performance is expected from the outside sales force, the Company believes that lower overall revenues will likely result, although the goal is to markedly increase gross profits per revenue dollar.
Compensation for sales personnel is largely based on the gross profits generated from sales. All of AmeriQuest's sales personnel receive technical training and are responsible for developing new accounts and serving established accounts. AmeriQuest places some emphasis on telemarketing, but most of the Company's new sales personnel operate in the field and directly with end-users.
OPERATIONS AND CUSTOMER SERVICES
The Company offers its clients a single source of supply, prompt delivery, financing programs, engineering services, marketing assistance, logistical support, customer leasing and maintenance and client support.
CUSTOMER ORDER ENTRY. Client orders are generally made by a toll-free telephone call to a sales representative in AmeriQuest's sales offices, and the order is entered into AmeriQuest's computer system. The sales representative has access to available information on inventory and client credit status and, upon reviewing this data, can enter the order immediately. The Company's e-Commerce facility allows clients to search inventory, place product orders and determine order status via the internet at any time. Orders are handled on a prepayment, C.O.D. or credit basis depending on the client's creditworthiness and previous payment history. In addition, AmeriQuest assists some clients in obtaining equipment financing through leasing or 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 product delivery times, it historically has not maintained a substantial order backlog. Greater emphasis on end-user application solutions, with longer lead times, is expected to create an increase in backlog in fiscal 2001.
PROMPT DELIVERY. In most geographic areas serviced by the Company, orders received by 5:00 p.m. local time are shipped the same day, provided the required inventory is in stock, except on orders that require assembly and testing or purchase from a vendor. Clients may also pick up their orders at the designated warehouse. AmeriQuest typically delivers products directly from its vendors or 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 business days of shipment. AmeriQuest also will provide overnight air handling if requested and paid for by the client. These services allow clients to minimize inventory investment yet provide responsive service to their customers. AmeriQuest is also able to provide a fulfillment service so that orders are shipped directly to a client's customer, thereby reducing the need for clients to maintain inventories of certain products.
CUSTOMER SUPPORT. The Company currently offers clients a single source for competitively priced hardware and software products from numerous vendors. By purchasing from the Company, the client only needs to comply with a single set of ordering, billing and product return procedures. A part of the Company's strategy is to use its system engineers and technicians to provide training and product information to its clients. The systems engineers also provide on-site service and support for a fee to its clients. The Company also provides training and product information to its clients.
AmeriQuest permits the return of products within certain time limits and under certain conditions subject to a restocking charge, provided that the products are unused. Products that are defective upon arrival are handled on a manufacturer's warranty return basis without any restocking charge. AmeriQuest offers its clients warranty return rights that reflect those that are offered by each manufacturer's individual warranty program. This pass-through of manufacturers' warranties is one of the value-added services that AmeriQuest provides to clients.
COMPETITION
Competition in the technical, as opposed to fulfillment only, distribution of services and mid-range computer systems is limited but intense and focuses on mid-range, Unix and NT server systems, networking systems, storage sub-systems, printers and related products. Many of the national and regional technical distributors with which the Company competes 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. and Tech Data Corporation, which have substantially greater financial resources than AmeriQuest, may enter the market in pursuit of the greater gross profit margins of technical distribution and end-user sales.
Competition in the distribution business is primarily based upon availability of product, price, technical support and other support services. AmeriQuest believes that it is generally competitive with respect to each of these factors and that its principal, competitive advantages are its personal sales relationships, technical strengths and other support services offerings, and speed and accuracy of delivery.
Competition in the solutions business is primarily from independent solutions providers and, at times, large national consulting firms, depending on the magnitude of the opportunity. Many of these competitors have substantially greater financial resources than AmeriQuest.
Competition in the leasing business comes primarily from financial institutions and specialty equipment leasing companies. Virtually all of these competitors have substantially greater financial resources than AmeriQuest, but few have greater technical competence.
EMPLOYEES
As of September 30, 2000, AmeriQuest had 83 full-time employees. None of AmeriQuest's employees are covered by a collective bargaining agreement. AmeriQuest considers its relations with its employees to be good.
SPECIAL FACTORS TO BE CONSIDERED
In addition to the other information in this Annual Report on Form 10-K, the following factors should be carefully considered:
CONTINUED LOSSES
The Company had a loss of $4,709,000 during the fiscal year ended September 30, 2000 and has had substantial losses in prior years. During the year ended September 30, 1999, the Company had a loss of $1,909,000. The Company had net income of $747,000 during the fiscal year ended September 30, 1998, but such income included a reversal of prior year restructuring
accruals of $1,376,000. Additionally, the Company recorded a significant benefit due to the reversal of other previously established reserves.
There is no assurance that the Company will become profitable in the future. In the event that losses were to continue at significant levels, the Company will need to raise additional equity capital to cover those losses or liquidate one or more operating units. There is no assurance that such additional capital would be available, or if available, could be secured on terms favorable to the Company. If the Company's efforts to raise additional equity capital were unsuccessful, there is no assurance that the Company could continue as a going concern.
UNCERTAIN BANK LINE OF CREDIT STATUS
The Company's $10 million bank line of credit with Fleet Capital Corporation expires July 20, 2001. The bank line may not be extended or renewed without Fleet's agreement, and if the bank line were not extended or renewed, the Company would have to find a replacement bank line of credit. There is no assurance that the Fleet line will be extended or renewed or that such additional bank credit would be available, or if available, could be secured on terms favorable to the Company. If no debt line were available the Company may not be able to pay its debts as they become due, WHICH COULD RESULT IN A REORGANIZATION OR LIQUIDATION.
OPERATING STRATEGY RISK - NEED TO INCREASE GROSS PROFIT
As a distributor, the Company has historically operated on small gross margins. Further, the Company incurs operating expenses to maintain a sufficient level of inventory, facilities, sales staff and support personnel necessary to support sales of products. The Company took actions to improve its profitability during the first quarter of fiscal 2001 ended December 31, 2000. The Company goal is to significantly decrease low margin revenue during fiscal 2001. The primary impact of these actions on profitability is not expected to occur until the second or third quarter.
The Company's strategy is to increase gross profit, regardless of its impact on sales, and simultaneously decrease monthly expenses. The Company must achieve substantially greater gross profit to stay in business, and there can be no assurance that this will happen.
NEED TO MAINTAIN VENDOR BASE
The Company principally provides computer products manufactured by Acer, Hewlett Packard, IBM, Okidata and Unisys. Accordingly, the Company's relationships with these and its other existing vendors are critical to its ability to purchase on a favorable basis the products that it resells. In addition, from time-to-time the Company may need to initiate relationships with additional vendors without jeopardizing the Company's existing vendor relationships. The Company is also dependent upon its vendors' willingness or ability to make timely shipment of the products ordered by the Company. The failure of vendors to make shipments on a timely basis could cause a material disruption of the Company's sales. In the past, the Company has at times experienced delays in its ability to fill client orders, due to the inability of certain suppliers to meet their volume and schedule requirements and/or due to the Company's shortage of cash. Delays in shipments from suppliers can cause fluctuations in the Company's short-term results and contribute to order cancellations. During fiscal 2000, one of the Company's primary suppliers of hardware products experienced financial difficulty which caused AmeriQuest to switch to a secondary source with less favorable prices and terms. This change reduced the Company's gross margin during the second and third fiscal quarters.
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 and services that respond to current market needs. As a value-added 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 or should the safeguards referred to above be inadequate, the Company's operating results would be adversely affected.
COMPETITION
The Company competes in an industry characterized by intense competition. Competition in the technical, as opposed to fulfillment only, distribution of services and mid-range computer systems is limited but intense and focuses on mid-range, Unix and NT server systems, networking systems, storage sub-systems, printers and related products. Many distributors, resellers and retailers sell products identical or substantially similar to the products sold by the Company to corporate end users. Many of the national and regional technical distributors with which the Company competes 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. and Tech Data Corporation, which have substantially greater financial resources than AmeriQuest, may enter the market in pursuit of the greater gross profit margins of technical distribution and end-user sales. Competition in the solutions business is primarily from independent solutions providers and, at times, large national consulting firms, while competition in the leasing business comes primarily from financial institutions and speciality equipment leasing companies, all of which generally have greater financial reserves than the Company. Moreover, the manner in which computer products and services are 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.
SALES FORCE RESTRUCTURING
During fiscal 2000, the Company changed the focus of its sales and marketing function towards greater emphasis on the higher margin corporate account opportunities. This change in emphasis also resulted in a 70% turnover of the solutions sales staff since the beginning of fiscal 2000. The solutions sales staff has not generated sufficient high margin sales to offset the higher cost structure of providing expert business solutions. The inside, or product sales staff, also experienced high turnover as a result of the Company's continued emphasis on reducing the lower margin commodity hardware product sales. Management believes that the current staff is more aligned with the needs of the Company and, therefore, turnover during fiscal 2001 is expected to be lower. 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 consider restructuring alternatives.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued contributions of its key management, marketing, product development and operational personnel and the Company's ability to retain and continue to attract highly skilled personnel. Competition for employees in the computer industry is intense, and there can be no assurance that the Company will be able to attract and retain qualified employees. The Company has previously made a number of management changes, and has had substantial layoffs and other employee departures. If the Company continues to experience financial difficulties, it may become increasingly difficult for it to hire new employees and retain current employees. The Company does not carry any key person life insurance with respect to any of its personnel.
STOCK MARKET VALIDITY
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.
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, the Company's ability to maintain access to its senior bank line of credit, the Company's ability to increase gross profit margins, the Company's ability to manage expense levels, the Company's ability to retain key vendors, the continued
financial strength of the Company's clients, and the Company's ability to accurately anticipate customer demand and manage inventories.
This Annual Report on Form 10-K contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially affect results, including those set forth above and elsewhere in this Annual Report on Form 10-K, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial, legal and business challenges making it more difficult than expected to continue as a value-added wholesale distributor and solutions provider; competitive conditions within the computer industry may change adversely; demand for the products distributed by the Company, or solutions provided 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; the Company's insistence on only accepting higher margin business may not allow the Company to generate sufficient revenue to cover its fixed operating expenses; and there may be other material adverse changes in the Company's operations or business. Certain important assumptions 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) successful implementation of sales force restructuring, the sales force identifying new clients, and marketing the Company's services and products to those clients, (iii) maintaining good relationships with key vendors (iv) accurately forecasting cash needs and (v) non-renewal of or changes in terms under the company's senior line of credit Assumptions relating to budgeting, marketing, advertising, product mix and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, cash expenditures or other budgets, which may in turn affect the Company's financial position and results of operations.
ITEM 2.
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:
ITEM 3.
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 or results of operations.
ITEM 4.
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 2000.
PART II
ITEM 5.
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 reported on NASDAQ OTC Bulletin Board for each calendar quarter since October 1, 1998.
On December 15, 2000, the stock of AmeriQuest closed at 11/64 (or approximately $0.17) per share. As of that date AmeriQuest had approximately 1,000 stockholders of record.
The Company did not declare any dividends on its Common Stock in fiscal 2000 and does not intend to declare dividends on its Common Stock in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data has been derived from and should be read in conjunction with the audited consolidated financial statements of AmeriQuest, and the notes thereto, and with "Management's Discussion and Analysis of Results of Operations and Financial Condition", included elsewhere herein and incorporated herein by this reference (dollars in thousands, except share data).
- ---------
(1) While the Company had net income of $747,000, such income included a reversal of prior year restructuring accruals of $1,376,000. Additionally, the Company recorded a significant benefit due to the reversal of other previously established reserves (See Notes 3 5, 7 and 10 to Notes to Consolidated Financial Statements).
(2) The losses in 1997 included 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.
(3) 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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the Company's line of credit with Fleet, a change in either the lender's base rate or LIBOR would affect the rate at which the Company could borrow funds thereunder. The Company believes that the effect of any such change would be minimal. Management estimates that had either the lenders base rate or LIBOR
increased by one percent, the Company's interest expense for the year ended September 30, 2000 would have increased by approximately $6,000.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See "Election of Directors" in the proxy statement for the 2001 annual meeting of the stockholders of the Company, which will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
See "Executive Officers Compensation" in the proxy statement for the 2001 annual meeting of the stockholders of the Company, which will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See "Stock Ownership" in the proxy statement for the 2001 annual meeting of the stockholders of the Company, which will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Other Information-Certain Relationships and Related Transactions" in the proxy statement for the 2001 annual meeting of the stockholders of the Company, which will be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
(b) Reports on Form 8-K
None
(c) Exhibits
EXHIBIT INDEX
EXHIBIT INDEX (CONTINUED)
- ---------- * 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.
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 12th day of January, 2001.
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.
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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States. 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 (the Company) as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's existing credit facility expires on July 20, 2001, which raises substantial doubt about the ability of the Company to continue as a going concern. In addition the Company has incurred recurring losses from operations and negative cash flows from operations. Management's plans in regard to these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a 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 22, 2000 (except with respect to the covenant waivers discussed in Notes 1 and 8, as to which the date is January 12, 2001)
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The accompanying notes are an integral part of these consolidated financial statements.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND LIQUIDITY:
Description of Business. AmeriQuest Technologies, Inc. and subsidiaries (the "Company" or "AmeriQuest"), a Delaware corporation, markets and sells products and services for business information solutions to value-added resellers ("VARs") and systems integrators, and, beginning in fiscal 2000, corporate accounts. 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 3).
The accompanying consolidated financial statements have been prepared in conformity with principles of accounting applicable to a going concern. These principles contemplate the realization of assets and satisfaction of liabilities in the normal course of business. During fiscal 2000 and as of September 30, 2000, the Company was not in compliance with covenants under its bank line of credit. Such non-compliance was waived by the bank on January 12, 2001. The Company's existing credit facility expires on July 20, 2001. In addition, through September 30, 2000, the Company has incurred significant losses from operations and has generated negative cash flow from operations.
The Company has taken actions to improve its liquidity during the first fiscal 2001 quarter ended December 31, 2000 by reducing its overhead and payroll, raising minimum margins to its VAR and system integrator customer base, charging interest on its overdue accounts receivable, reducing inventory, and narrowing its focus on solution sales to concentrate on substantially higher margin sale of network infrastructure products and services, information systems asset management software and services, and distribution management systems installation and services, including serving as an application service provider to clients. Accordingly, the Company expects to significantly decrease net sales in general during fiscal 2001,and low margin sales in particular. The primary impact of these actions are not expected to have a benefit to the Company's liquidity until the second or third quarter of fiscal 2001.
In summary, the Company's strategy is to increase gross profit, regardless of its impact on revenue, and simultaneously decrease monthly expenses and the borrowings under its bank line of credit used to finance accounts receivable.
2. SIGNIFICANT ACCOUNTING POLICIES:
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 cost, using the first-in, first-out method, 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 net realizable value of these amounts and reserves for potential uncollectable balances.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and equipment. Property and equipment are stated at cost. Depreciation is computed using straight-line method over estimated useful lives as follows:
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. Sales related to engineering, integration and implementation services are recognized on a time and materials basis as the services are performed.
Restructuring Costs. In April 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 certain warehouse facilities, reduction in the number of employees and closure of its corporate headquarters in Florida. The restructuring plan was implemented, but not completed, throughout fiscal year 1997. The Company completed this restructuring plan during fiscal 1998. 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. In addition, during fiscal 1999 and 1998, the Company recorded significant benefits to its consolidated statements of operations due to the reversal of previously established reserves (See Notes 5, 7 and 10).
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 follows Statement of Financial Accounting Standards No. 128, "Earnings per Share". This statement requires the disclosure of both basic and diluted earnings per share. Basic and diluted shares outstanding for the fiscal years ended September 30, 2000, 1999 and 1998 are the same, as all common stock equivalents are anti-dilutive due to the loss to common stockholders.
Concentration of credit risks. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable are not significant due to the large number of clients. At September 30, 2000 and 1999, no one client represented greater than 10% of accounts receivable and for fiscal 2000, 1999 and 1998, no customer accounted for greater than 10% of sales.
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, 2000, 1999 and 1998, product sales derived from three, three
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and two vendors accounted for 69%, 65%, and 54%, 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.
Recent Accounting Pronouncements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" which is required to be adopted by the Company in fourth quarter of fiscal 2001. The bulletin draws on existing accounting rules and provides specific guidance on revenue recognition related to service transactions and up-front non-refundable fees. The Company does not expect the adoption of this pronouncement to have a material effect on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) which must be adopted by the Company in the year ending September 30, 2001. SFAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivative and hedging activities. As the Company does not currently hold derivative instruments or engage in hedging activities, the adoption of this pronouncement is expected to have no impact on the Company's financial position or results of operations.
3. ACQUISITION OF COMPUTER 2000 AG MAJORITY STOCK HOLDINGS BY SENIOR MANAGEMENT:
On July 2, 1998, Listen Group Partners, LLC, a group headed by AmeriQuest's senior management, Alex Kramer (CEO) and Jon Jensen (CFO), signed an agreement to acquire the 36,349,878 shares of AmeriQuest common stock owned by Computer 2000. The transaction was approved by the outside directors of AmeriQuest and by the full Board of Directors of AmeriQuest.
In taking over majority control of AmeriQuest from Computer 2000, AmeriQuest's management arranged for a new $10 million asset-backed bank credit line for AmeriQuest (see Note 8), in part to release Computer 2000 from its guarantee of IBM Commercial Credit, 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 (See Note 11).
4. DISPOSITION:
Early in the first quarter of fiscal 1998, the Company 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 consolidated statement of operations.
5. INVENTORIES:
Inventories consist of finished goods and are reflected net of reserves for excess and obsolete inventory. In estimating the inventory reserves, management relied upon its knowledge of the industry, projected sales volumes, current inventory levels and aging of product on-hand. Because of the assumptions used, the amounts the Company will ultimately realize could differ materially in the near term from the net inventory balances as included in the accompanying consolidated financial statements. Inventories do not contain any labor or overhead. The Company's contracts with most of its vendors provide price protection and stock return privileges to reduce to some degree the risk of loss to the Company due to manufacturer price reductions and slow moving or obsolete inventory.
In fiscal 1999 and 1998, the Company recorded cost of sales benefits of approximately $400,000 and $1,700,000, respectively, related principally to the reversal of previously established vendor debit reserves.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
For the years ended September 30, 2000, 1999 and 1998, depreciation expense was $380,000, $301,000, and $307,000, respectively.
7. ACCRUED EXPENSES AND OTHER:
Accrued expenses and other consist of approximately $306,000 of accrued payroll and related expenses and approximately $623,000 of deferred income and other accrued expenses at September 30, 2000. Accrued expenses and other consist of approximately $377,000 of accrued payroll and related expenses and approximately $470,000 of deferred income and other accrued expenses at September 30, 1999. In fiscal 1999 and 1998, the Company recorded operating expense benefits of approximately $600,000 and $400,000, respectively, related to the reversal of previously established accruals and reserves.
8. LINES OF CREDIT:
In connection with the purchase, in fiscal 1998, by the Company's management of the Company's stock held by Computer 2000 (see Note 3), 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 bank's prime rate plus 150 basis points or LIBOR plus 400 basis points (11.0% and 9.75% at September 30, 2000 and 1999, respectively). The Credit Facility also provides for various covenants including a minimum tangible net worth and minimum cash flows, as defined. The Credit Facility expires on July 20, 2001.
The Company paid a $100,000 commitment fee during fiscal 1998 and is obligated to pay fees of 0.5% per annum of unused available borrowings and 2% per annum on outstanding letters of credit. The Credit Facility can be utilized for letters of credit in an aggregate amount not to exceed $5 million. Outstanding letters of credit are a reduction of available borrowing under the Credit Facility. As of September 30, 2000, the Company has borrowed $5.5 million on the Credit Facility and has outstanding letters of credit of $300,000. The weighted average interest rate on borrowings under the credit facility was 10.5%, 9.4% and 13.5% during fiscal 2000, 1999 and 1998, respectively.
The Company was not in compliance with the minimum tangible net worth and minimum cash flow covenants, as defined. On January 12, 2001, the Company amended its credit facility. The amendment waived defaults of these covenants as of September 30, 2000, and reset certain financial covenants effective October 1, 2000.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 is more likely than not that the net deferred tax asset would not be realized through future taxable income. 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 consolidated financial statements.
The tax effect of significant cumulative temporary differences consist of the following (in thousands):
Due to the acquisition by the Company's management of the Company's stock held by Computer 2000 on July 20, 1998 (see Note 3), there was a change in ownership as defined by section 382 of the Internal Revenue Code ("Section 382 Limitations"). The Section 382 Limitations limit the Company's ability to utilize its net operating loss carryforwards created prior to the ownership change. As of the date of ownership change (July 20, 1998), the Company had net operating loss carry-forwards available to offset future taxable income of up to approximately $11.9 million. Such carry-forwards may be subject to further limitation. Subsequent to July 20, 1998, the Company has generated additional net operating loss carryforwards of approximately $1.5 million, $4.0 million and $4.5 million in fiscal 1998, 1999 and 2000, respectively. The Company has not benefited from these net operating carryforwards as of September 30, 2000.
The principal elements accounting for the difference between income taxes computed at the statutory rate and the effective rate are as follows (in thousands):
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 for all non-cancelable operating leases at September 30, 2000 are as follows (in thousands):
Total rental expense, net of sub-rental income, under non-cancelable agreements for the years ending September 30, 2000, 1999 and 1998 was approximately $391,000, $355,000, and $589,000, respectively.
In fiscal 1998, the Company settled two law suits: Kenfil Inc. vs. RLI Insurance Company and Leading Edge Products, Inc. vs. AmeriQuest. Total amounts owed for the settlements were $920,000. At September 30, 1997, the Company had reserves in excess of the settlement amounts of approximately $1.3 million, which were taken into income during fiscal 1998 as an offset to selling, general and administrative expense in the accompanying consolidated statement of operations.
The Company is a party to various legal matters arising in the ordinary course of business. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's future financial position or its results of operations.
11. STOCK OPTION PLANS:
The Company has instituted various stock option plans, which authorize the granting of options to key employees, directors, officers, vendors and clients to purchase up to 6,700,000 shares of the Company's common stock. All grants of options during the years presented have been to employees or directors and were granted at the then quoted market price. A summary of shares available for grant and the options outstanding under the plans is as follows:
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding at September 30, 2000:
The Company accounts for its option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company follows the disclosure requirements of Financial Accounting Standards Board No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 established a fair value based method of accounting for stock-based compensation plans. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan. Had the Company recognized compensation cost for its stock option plans consistent with the provisions of SFAS 123, the following pro forma net loss to common stockholders for each of the three years in the period ended September 30, 1999 would have resulted:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with risk-free interest rates of 6.18% 4.96% to 5.99% for fiscal 2000, 1999 and 1998, respectively, no expected dividend yield, an expected life of five years and a volatility factor of 50%. During fiscal 2000, 1999 and 1998, the weighted average fair value of options granted was $0.08, $0.05, and $0.04, respectively.
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EQUITY LINE AGREEMENT
In July 2000, the Company entered into a Common Stock Purchase Agreement (the "Equity Line Agreement") with an institutional investor (the "Investor") establishing a common stock equity line. Pursuant to the Equity Line Agreement, the Investor, subject to Company's satisfaction of certain conditions, has committed to purchase at the Company's option, up to $13.5 million of the Company's common stock over an 18 month period, at a 12% discount to the average trading price over a specified period prior to each draw down. The amount that can be drawn down by the Company at any one time is dependent upon a number of factors, including the Company's stock price and trading volume during the draw down period. In addition, the Company must register the shares of common stock under the Securities Act of 1933, as amended, prior to any draw downs. In connection with the Equity Line Agreement, the Company issued warrants to purchase 1,567,391 shares of common stock at an exercise price of $0.51 per share through July 2003 to the Investor and a placement agent.
13. BENEFIT PLANS
The Company has a 401(k) employee benefit plan that covers all eligible employees with at least six months of service who are between the ages of 21 and 65. Employees can contribute up to the maximum allowable under the law. The Company matches a portion of the employee's pre-tax contribution. Employer contributions become fully vested when an employee has reached five years of service. Employee benefits are distributed upon normal retirement, death, disability or termination. Amounts contributed by the Company for the years ended September 30, 2000, 1999, and 1998 were approximately $28,000, $30,000 and $27,000, respectively.
14. SEGMENT INFORMATION
Beginning in fiscal 2000, the Company is organized into three divisions; fulfillment distribution, solutions and leasing. Fulfillment distribution markets and sells products and applications to VARs and systems integrators. Solutions provides engineering, integration and implementation services to corporate accounts in addition to the sales of products and applications to those customers. Leasing assists customers in obtaining equipment leasing and technology upgrade programs through third parties. The Company evaluates and manages these divisions only at the sales and cost of sales level. Therefore, operating income, total assets, depreciation and capital expenditures by division are not presented.
During fiscal 2000, leasing represented less than 5% of total sales and therefore has been presented with fulfillment distribution. The following table represents information about the Company's divisions for the year ended September 30, 2000 ($ in thousands):
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for the years ended September 30, 2000 and 1999 is as follows:
SCHEDULE II
AMERIQUEST TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (amounts in thousands)
(1) Reversed into income due to change in estimate. See Note 2 to Notes to Consolidated Financial Statements.
(2) Reversed into income due to change in estimate.