UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-13324
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QUESTRON TECHNOLOGY, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 23-2257354
- --------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
6400 Congress Avenue, Suite 200, Boca Raton, FL 33487
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(Address of principal executive offices) (Zip Code)
(407) 241 - 5251
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--------- ---------
As of August 10, 1996, the issuer had 15,354,842 shares of common stock,
$.0001 par value, outstanding.
<PAGE>
QUESTRON TECHNOLOGY, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C> <C>
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet -
At June 30, 1996 and December 31, 1995 3
Consolidated Statement of Operations -
Three Month and Six Month Periods Ended
June 30, 1996 and 1995 4
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis or Plan of Operation 8 - 11
PART II. Other Information 12
Signature Page 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 289,575 $ 39,358
Accounts receivable, less allowance for
doubtful accounts of $72,773 and $43,798, respectively 1,397,113 1,347,128
Other receivables 15,853 52,808
Inventories 3,413,009 3,554,263
Other current assets 37,859 60,205
------------------ ------------------
Total current assets 5,153,409 5,053,762
Property and equipment - net 421,048 418,980
Cost in excess of net assets of business acquired,
less accumulated amortization of $216,825 and $131,203, respectively 6,780,684 6,866,305
Other assets 252,336 93,951
================== ==================
Total assets $ 12,607,477 $ 12,432,998
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,256,879 $ 1,520,094
Current portion of long-term debt 550,000 550,000
------------------ ------------------
Total current liabilities 1,806,879 2,070,094
Long-term debt 2,380,000 2,185,000
------------------ ------------------
Total liabilities 4,186,879 4,255,094
------------------ ------------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; authorized 10,000,000
shares; none issued and outstanding
Common stock, $.0001 par value; authorized 50,000,000
shares; issued and outstanding 15,473,335 shares in 1996 and 1995 1,547 1,547
Additional paid-in capital 23,887,894 23,887,894
Accumulated deficit (15,113,365) (15,356,059)
------------------- -----------------
8,776,076 8,533,382
Less: Treasury stock, 118,493 shares, at cost (355,478) (355,478)
------------------- -----------------
Total shareholders' equity 8,420,598 8,177,904
------------------- -----------------
Total liabilities and shareholders' equity $ 12,607,477 $ 12,432,998
=================== =================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Sales $ 2,848,086 $ 2,357,607 $ 5,615,223 $ 2,357,607
Fee income 40,550 73,273 91,913 180,364
------------- ------------- ------------- -------------
2,888,636 2,430,880 5,707,136 2,537,971
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of products and services sold 1,691,449 1,403,105 3,366,936 1,472,440
Selling, general & administration expenses 908,298 620,645 1,769,652 786,998
Non-recurring charges -- -- -- 125,000
Depreciation and amortization 64,677 57,918 128,949 68,918
------------- ------------- ------------- -------------
2,664,424 2,081,668 5,265,537 2,453,356
------------- ------------- ------------- -------------
Operating income (loss) 224,212 349,212 441,599 84,615
Interest expense 80,093 72,808 159,253 57,976
------------- ------------- ------------- -------------
Income before income taxes 144,119 276,404 282,346 26,639
Provision for income taxes 18,697 26,440 39,650 26,440
------------- ------------- ------------- -------------
Net income $ 125,422 $ 249,964 $ 242,696 $ 199
============= ============= ============= =============
Net income per common share $ .01 $ .02 $ .02 $ .00
============= ============= ============= =============
Average number of common shares and
common share equivalents outstanding 15,398,166 15,005,822 15,405,329 13,058,507
============= ============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 242,696 $ 199
Adjustments to reconcile net income (loss) to net
cash to net cash used in operating activities:
Depreciation and amortization 128,949 68,918
Provision for doubtful accounts 28,975 --
Loss on sale of fixed assets 2,184 --
Change in assets and liabilities:
(Increase) in accounts receivable (78,960) (648,002)
Decrease in other receivables 36,955 --
Decrease in inventories 141,254 92,723
(Increase) decrease in prepaid expenses and other assets (136,039) 85,979
(Decrease) increase in accounts payable and accrued
expenses (263,215) (13,131)
---------- ----------
Net cash provided(used) by operating activities 102,799 (413,314)
Cash flows from investing activities:
Net cash consideration paid for acquired business -- (5,229,847)
Proceeds from sale of fixed assets 280 --
Acquisition of property and equipment (47,862) (65,270)
---------- ----------
Net cash used for investing activities (47,582) (5,295,117)
---------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowings -- 300,000
Proceeds from borrowings under revolving facility 470,000 100,000
Proceeds from borrowings under term loan facility -- 2,200,000
Proceeds from private placement -- 1,740,000
Proceeds from exercise of stock options -- 281,250
Costs associated with private placement -- (238,039)
Repayment of long-term debt (275,000) (137,500)
---------- ----------
Net cash provided by financing activities 195,000 4,245,711
---------- ----------
Increase (decrease) in cash and cash equivalents 250,217 (1,462,720)
Cash and cash equivalents at beginning of period 39,358 1,520,730
---------- ----------
Cash and cash equivalents at end of period $ 289,575 $ 58,010
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Note 1. Basis of presentation.
The accompanying unaudited consolidated financial statements
include the accounts of the Company and its subsidiaries. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the instructions for Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month and six month
periods ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. The consolidated
balance sheet as of December 31, 1995 reflects the audited balance sheet at
that date. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 1995.
Note 2. Acquisition of electronic hardware distribution business.
On March 31, 1995, the Company acquired Quest Electronic
Hardware, Inc. ("Quest"), a specialized distributor of fasteners and
electronic hardware sold to electronic equipment manufacturers, in exchange
for 3,872,000 shares of the Company's common stock. Simultaneously, the
Company contributed to Quest cash of $2,850,000 as additional paid-in capital
and Quest purchased the fasteners distribution business from Arrow Electronics,
Inc. ("Arrow") for net cash consideration of $5,229,847. In connection with
these transactions, the company recorded $6,503,837 of cost in excess of net
assets of the business acquired. The Company does not expect that Statement of
Accounting Financial Standards No. 121, Accounting for the Impairment of
Long-Lived Assets, will have any impact on the Company's Financial Statements.
Note 3. Provision for restructuring.
As a result of declining revenues of the Company's ADR business,
stemming in part from increased competition, and the resultant historical
losses, the Company undertook a plan of action to downsize and restructure its
ADR business in order to establish a more acceptable relationship of expenses
of that business to its revenues. The Company's operating results for the
six month period ended June 30, 1995 includes a provision for restructuring
of $125,000. More than $60,000 of such provision is attributable to the
write-off of fixed assets and idle equipment associated with the downsizing
6
<PAGE>
of the ADR business. The balance of the provision is associated with lease
termination costs, the relocation of the ADR business to more suitable office
space, forfeiture of security deposits, and other costs associated with the
downsizing and restructuring of the ADR business. During August 1995, the
Company relocated the ADR business to more suitable office space. The Company
is evaluating its alternatives with respect to its ADR business, including the
possible sale, disposition or discontinuance of the business.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
For the three month and six month periods ended June 30, 1996.
The results of operations through June 30, 1996 include the operating
results of Quest Electronic Hardware, Inc. ("Quest"), the Company's fasteners
and electronic hardware distribution business, and the operating results of
the Company's alternative dispute resolution ("ADR") business.
The following summarizes the results of operations for each of the
Company's businesses and corporate for the three month and six month periods
ended June 30, 1996:
<TABLE>
<CAPTION>
Three months ended June 30, 1996
-----------------------------------------------------
Quest ADR Corporate Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $2,848,086 $ 40,550 $ $ 2,888,636
Costs and expenses 2,513,807 69,352 81,265 2,664,424
----------- ----------- ----------- -----------
Operating income 334,279 (28,802) (81,265) 224,212
Interest expense 79,912 -- 181 80,093
----------- ----------- ----------- -----------
Income (loss) before taxes 254,367 (28,802) (81,446) 144,119
Tax provision 18,697 -- -- 18,697
=========== =========== =========== ===========
Net income (loss) $ 235,670 $ (28,802) $ (81,446) $ 125,422
=========== =========== =========== ===========
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
Six months ended June 30, 1996
-----------------------------------------------------
Quest ADR Corporate Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $5,615,223 $ 91,913 $ $ 5,707,136
Costs and expenses 4,966,255 138,891 160,391 5,265,537
----------- ----------- ----------- -----------
Operating income 648,968 (46,978) (160,391) 441,599
Interest expense 158,290 -- 963 159,253
----------- ----------- ----------- -----------
Income (loss) before taxes 490,678 (46,978) (161,354) 282,346
Tax provision 39,650 -- -- 39,650
=========== =========== =========== ===========
Net income (loss) $ 451,028 $ (46,978) $ (161,354) $ 242,696
=========== =========== =========== ===========
</TABLE>
The significant growth in the Company's revenues for the six months
ended June 30, 1996 over the six months ended June 30, 1995 is due to the
acquisition of Quest on March 31, 1995. Revenues for Quest were $2,848,086
and $5,615,223 for the three month and six month periods ended June 30, 1996,
respectively, which represent a record level of revenues for the business.
The growth in revenues of Quest is attributable to its expansion into the
Austin, Texas market as well as growth in the other markets that it serves.
The opening of a new branch in Austin is primarily directed at servicing
Applied Materials, which signed a three-year Master Purchase Order and Sales
Agreement with Quest on November 13, 1995. Revenues of the ADR business for
the three month and six month periods ended June 30, 1996 declined 30% and
49%, respectively, compared with the comparable periods in the prior year.
This decline reflects the Company's downsizing and restructuring of the ADR
business in response to increased competition and historical losses. The
Company is continuing to evaluate its alternatives with respect to the future
operation of its ADR business, including the possible sale, disposition or
discontinuance of the business.
The Company's operating income was $224,212 for the three months ended
June 30, 1996 compared with operating income of $349,212 for the comparable
period of the prior year. The decline in operating income for the three month
period ended June 30, 1996 compared with the comparable prior year period is
primarily due to increased operating costs principally associated with Quest's
expansion into the Austin market. Although the expansion into the Austin
market has contributed to the record sales level achieved for the quarter,
the sales levels expected from such expansion have not as yet been attained due
9
<PAGE>
to the pause in the semiconductor industry, which management believes to be
temporary. Quest's operating cost structure, which will support a higher level
of sales, is being evaluated by management to determine the need for any
appropriate adjustments. For the six month period ended June 30, 1996,
operating income was $441,599 compared with operating income of $84,615 for the
comparable prior year period. The improvements over the six month period ended
June 30, 1996 compared to the comparable prior year period are primarily due to
the operating income achieved by Quest of $648,968. Quest's operating income
of $334,279 and $648,968 for the three month and six month periods ended June
30, 1996 represent 12% of its revenues, a relationship which is slightly less
than the historical performance of the business primarily due to increased
operating costs relative to sales, which costs are principally associated with
the opening of the Austin branch.
Interest expense for the three month and six month periods ended June
30, 1996 amounted to $80,093 and $159,253, respectively, which principally
reflects the cost of borrowings associated with the acquisition and operation
of the fasteners and electronic hardware distribution business. For the
comparable periods of the prior year, the Company's results include interest
expense of $72,808 and $57,976, respectively.
The provision for income taxes for the three month and six month
periods ended June 30, 1996 principally reflects state income tax provisions
for states in which Quest does business. The provision for income taxes also
includes a minimal provision for federal income taxes for the federal
alternative minimum tax. The Company is not expected to have a regular federal
income tax liability for 1996, as a result of the availability of net
operating loss income tax carryforwards of approximately $13.1 million as of
December 31, 1995, expiring in the years 2000 through 2009.
Net income for the three months ended June 30, 1996 amounted to
$125,422 compared with net income of $249,964 for the comparable period of the
prior year. This decline reflects the start-up costs and investment associated
with Quest's expansion into Austin, Texas. Net income for the six months
ended June 30, 1996 amounted to $242,696 compared with net income of $199 for
the comparable period of the prior year. This improvement reflects the
operating income of Quest (partially reduced by interest expense and income
taxes) and the reduction in operating losses of the ADR business.
Liquidity and Capital Resources
As of June 30, 1996, the Company had $289,575 in cash and short-term
investments, compared to $39,358 as of December 31, 1995. As of June 30, 1996,
the Company had working capital of $3,346,530, compared with working capital of
$2,983,668 as of December 31, 1995.
10
<PAGE>
For the six months ended June 30, 1996, the net cash provided by the
Company's operating activities amounted to $102,799, principally reflecting a
decrease in inventory and other receivables, as well as the profits of Quest.
Corporate expenses and the operations of the Company's ADR business continued
to use cash, although at a reduced rate compared with prior years. As
previously discussed, the Company is continuing to evaluate its alternatives
with respect to the future operations of the ADR business and there can be no
assurance that the Company will continue its ADR operations.
For the six months ended June 30, 1996, the net cash used in the
Company's investing activities amounted to $47,582 for the acquisition of fixed
ssets, primarily computer and warehouse equipment to support the continued
growth of Quest's fastener distribution business. The Company does not have
significant commitments for capital expenditures as of June 30, 1996 and no
significant commitments are anticipated for the remainder of 1996 and the
first half of 1997.
For the six months ended June 30, 1996, the net cash provided by the
Company's financing activities amounted to $195,000, which consists of advances
drawn on its revolving credit facility of $470,000 less $275,000 of principal
repaid on the term debt.
At June 30, 1996, $1,417,500 was borrowed and outstanding under the
revolving facility. The remaining amount of the $1,500,000 revolving facility,
or $82,500, was fully available at June 30, 1996 for future working capital
needs. Amounts outstanding under the revolving facility bear interest at a
rate equal to: (i) 1.5% above the lender's prime rate should Quest's tangible
net worth be less than or equal to $1,750,000; or (ii) 1.0% above the lender's
prime rate should Quest's tangible net worth be in excess of $1,750,000. As of
June 26, 1996, the interest rate on the amount outstanding under the revolving
facility was 9.75%. In order to secure the obligations of Quest under the
revolving facility and the related term loan facility under the loan and
security agreement with the lender, the Company entered into a stock pledge
agreement with the lender whereby the Company pledged to the lender the shares
of capital stock of Quest which the Company held at the date of such agreement
and any shares of Quest in which the Company may thereafter acquire an interest.
In addition, Quest granted a security interest in substantially all of its
assets to the lender and a major shareholder of the Company guaranteed the
obligations of Quest under the loan agreement.
The Company intends to identify and evaluate potential merger and
acquisition candidates engaged in lines of business complementary to the
fasteners and electronic hardware distribution business of Quest. While
certain of such potential acquisition opportunities are at various stages of
consideration and evaluation, none is at any definitive stage at this time.
Management believes that its working capital, funds available under its credit
agreement, and funds generated from operations will be sufficient to meets
its obligations through 1996, exclusive of any cash requirements which may
come about as a result of other business acquisitions.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QUESTRON TECHNOLOGY, INC.
(1) Principal Executive Officer:
Date: August 13, 1996 /s/ Dominc A. Polimeni
---------------- -------------------------
Dominic A. Polimeni
Chief Executive Officer
(2) Principal Financial and Accounting
Officer:
Date: August 13, 1996 /s/ Milton M. Adler
---------------- -------------------------
Milton M. Adler
Treasurer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE 6 MONTHS ENDED JUNE 30, 1996 AND THE
CONSOLIDATED BALANCE SHEET FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 289,575
<SECURITIES> 0
<RECEIVABLES> 1,397,113
<ALLOWANCES> 72,773
<INVENTORY> 3,413,009
<CURRENT-ASSETS> 5,153,409
<PP&E> 421,048
<DEPRECIATION> 102,107
<TOTAL-ASSETS> 12,607,477
<CURRENT-LIABILITIES> 1,806,879
<BONDS> 0
0
0
<COMMON> 1,547
<OTHER-SE> 8,419,051
<TOTAL-LIABILITY-AND-EQUITY> 12,607,477
<SALES> 5,615,223
<TOTAL-REVENUES> 5,707,136
<CGS> 3,366,936
<TOTAL-COSTS> 5,136,588
<OTHER-EXPENSES> 128,949
<LOSS-PROVISION> 28,975
<INTEREST-EXPENSE> 159,253
<INCOME-PRETAX> 282,346
<INCOME-TAX> 39,650
<INCOME-CONTINUING> 242,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242,696
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
