UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- ------ ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from _______________ to _______________
Commission file number 0-13324
QUESTRON TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 23-2257354
- -------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6400 Congress Avenue, Suite 200, Boca Raton, FL 33487
- ------------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (407) 241 - 5251
----------------
Securities registered under Section 12(b) of the Exchange Act: None
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 Par Value
- --------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) has 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__
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. ____
State issuer's revenues for its most recent fiscal year. The Company's
revenues for calendar year 1995 were $7,259,155.
As of March 28, 1996, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $15,627,396 (calculated by
excluding all shares held by owners of 5% or more of the stock).
As of March 28, 1996, there were 15,354,842 shares of the issuer's Common
Stock outstanding.
Transitional Small Business Disclosure Format: YES ____ NO _X_
<PAGE>
PART I
Item 1. BUSINESS.
Change of Name
At a Special Meeting of Shareholders held on April 2, 1996, the
shareholders of Judicate, Inc. approved the change of the Corporation's name to
Questron Technology, Inc. (the "Company" or "Questron"). The Board of Directors
of the Company believe that the change of name from Judicate, Inc. to Questron
Technology, Inc. more accurately reflects the change in focus and strategic
direction of the Company's business of supplying low technology products to high
technology industries through its wholly-owned subsidiary Quest Electronic
Hardware, Inc. ("Quest"). The Company, through its wholly-owned subsidiary
Judicate of Philadelphia, Inc. ("Judicate"), continues to provide alternative
dispute resolution services ("ADR") to its clients.
Background
Judicate, Inc. was incorporated in Delaware in 1983 to provide a broad
range of ADR services, including non-binding mediations and binding arbitrations
to assist private parties in settling civil disputes. The increasing awareness
of ADR by the legal community and the resulting publicity fostered a substantial
number of competitors in the Company's marketing areas. These competitive
pressures adversely affected the profitability of the business and Judicate,
Inc. experienced substantial cash flow deficits and operating losses. In
September 1993, the Company instituted a vigorous cost reduction program with a
goal of establishing appropriate cost relationships with revenues. This led to
substantial downsizing of its activities, and by December 31, 1994, all of
Judicate, Inc.'s services and operations were handled by Judicate of
Philadelphia, Inc. (a wholly-owned subsidiary) and the business was operating
with a substantially reduced staff of administrative and sales personnel.
The foregoing caused the Company to explore acquisition opportunities
in unrelated lines of business, and in November 1994, the Company announced that
it had agreed to acquire a fasteners and electronic hardware distribution
business.
On March 31, 1995 the Company acquired 100% of the stock of Quest
Electronic Hardware, Inc. ("Quest"), a fasteners and electronic hardware
distribution business, in exchange for a 25% interest in the Company on a fully
diluted basis. The acquisition was completed pursuant to a Share Acquisition
Agreement (the "Share Agreement") dated November 29, 1994, by and among
Gulfstream Financial Group, Inc., a Florida corporation ("Gulfstream"), Phillip
D. Schwiebert, an individual ("Schwiebert"), Quest and the Company. Pursuant to
the Share Agreement, the Company issued to Gulfstream and Schwiebert (the sole
stockholders of Quest) 3,962,574 newly issued, fully-paid and non-assessable
shares of Common Stock of the Company, in exchange for all of the issued and
outstanding shares of common stock of Quest owned by such stockholders. As
required by the Share Agreement, these shares represented 25% of the outstanding
Common Stock of the Company on a fully diluted basis. The Company has accounted
for the acquisition of Quest using purchase method of accounting.
Simultaneously with the foregoing events, Quest acquired the fasteners
distribution business (the "Fasteners Business") of Arrow Electronics, Inc., a
New York corporation ("Arrow"). Such acquisition was effected pursuant to a
3
<PAGE>
Purchase of Assets Agreement, dated November 29, 1994, by and between Quest and
Arrow (the "Purchase Agreement"). Under the Purchase Agreement, Quest acquired
the assets of Arrow used exclusively in connection with Arrow's operation of the
Fasteners Business. Such assets included, but were not limited to, machinery,
equipment, furniture, motor vehicles and other personal property, inventories,
rights under contracts (including accounts receivable), agreements, leases,
permits and licenses (to the extent assignable), expensed items, price lists and
other documents.
The purchase price for the acquisition of the Fasteners Business was a
negotiated fixed price. The price consisted of a cash payment of $4,850,000 plus
the assumption of certain liabilities of the Fasteners Business. As more fully
described below, the purchase price was funded through a combination of proceeds
from borrowings under the Loan and Security Agreement (as defined below),
proceeds from the sale of the Company's securities under a private placement,
and available cash.
Under the Loan and Security Agreement, dated March 31, 1995, by and
between Quest and Silicon Valley Bank (the "Loan Agreement"), Quest borrowed
$2.2 million to partially fund the acquisition of the Fasteners Business. In
order to secure the obligations of Quest under the Loan Agreement, the Company
entered into a Stock Pledge Agreement, dated March 31, 1995, with Silicon Valley
Bank (the "Bank") . Under the terms of said agreement, the Company pledged to
the Bank the shares of capital stock of Quest which the Company held at such
date and in which the Company may thereafter acquire an interest. In addition,
Quest granted a security interest in substantially all of its assets to the
Bank.
Approximately $1.5 million of the funds used for the purchase of the
Fasteners Business were provided from the proceeds of the sale by the Company of
1,160,000 shares of Common Stock at a purchase price of $1.50 per share to a
group of subscribers in a private placement. The balance of the cash portion of
the purchase price for the Fasteners Business was provided by available cash.
Pursuant to a Management Advisory and Consulting Agreement, dated
November 29, 1994, between the Company and Gulfstream, Gulfstream acts as an
advisor and consultant to the Company and Quest, and also provides certain
administrative services to the companies. Additionally, pursuant to the terms of
said agreement, Gulfstream may be entitled to be awarded, as incentive
compensation, warrants to purchase Common Stock of the Company upon the
attainment of certain earnings targets by Quest.
Pursuant to an Employment Agreement, dated November 29, 1994, by and
between Quest and Dominic A. Polimeni ("Polimeni"), Quest agreed to employ
Polimeni, and Polimeni agreed to serve, as Chairman, Chief Executive Officer and
Chief Financial Officer of Quest for a period of five (5) years unless
terminated pursuant to the terms of said agreement. Polimeni is also a Director
and the President of Gulfstream and is the Chairman, President and Chief
Executive Officer of the Company.
Pursuant to an Employment Agreement, dated November 29, 1994, by and
between Quest and Schwiebert, Quest agreed to employ Schwiebert, and Schwiebert
agreed to serve, as President and Chief Operating officer of Quest for a period
of five (5) years unless terminated pursuant to the terms of said agreement.
Additionally, pursuant to the terms of said employment agreement, Schwiebert may
be entitled to be awarded as incentive compensation warrants to purchase Common
Stock of the Company upon the attainment of certain earnings targets by Quest.
4
<PAGE>
QUEST ELECTRONIC HARDWARE, INC. ("QUEST")
Quest is a specialized distributor of fasteners and electronic hardware
sold to electronic equipment manufacturers. The business serves more than 250
customers in the high technology electronic equipment manufacturing industry,
including leading computer, telecommunications, and medical instrumentation
companies. Prior to Quest's acquisition from Arrow, the Fasteners Business had
operated as a distributor of fasteners and electronic hardware for more than
twenty years.
Management believes that Quest has the opportunity to become a
significant participant in a very fragmented industry dominated by so called
"mom and pop" type operations. Management's goal is to expand the business
through a combination of continued penetration of existing markets, expansion
into new markets (including geographic expansion), and acquisitions.
Approximately 50% of Quest's sales are of industrial fasteners, 10% are
of "spacers" and "standoffs" (products used in conjunction with fasteners), and
the remaining sales are divided among a variety of products, including plastic
components, cable ties and accessories, drawer slides, connectors, and
design/prototype components. The demand for products offered by the Quest is
relatively stable, with minimal technological change.
Quest has developed a customer base consisting of over 250 active
customers. These customers demand quality service and in many cases are willing
to pay premium prices. Accordingly, Quest's gross margins are more than 40%, and
are sustainable because of the high level of importance placed on service by its
customers and the low level of price sensitivity for the relatively low cost
fasteners products sold (compared with the high cost electronic components) to
the manufacturers of high technology products. Over 95% of Quest's sales are
recurring sales to existing customers.
Currently, the business is concentrated in California, Texas, Colorado
and Nevada, however, Quest is beginning to expand its business to the eastern
U.S.
Markets
Quest's sales have increased at a compound annual growth rate of 17%
over the past four years. This sales growth was achieved from word-of-mouth
referrals without the benefit of a comprehensive marketing program or geographic
expansion. Management believes that Quest's future growth will be achieved by
implementing a comprehensive marketing plan, including the present strategy of
adding marketing programs responsive to customer's specific requirements (e.g.,
bin replenishment programs), further penetration of existing accounts,
identification of new accounts, geographic expansion, and acquisitions.
Management estimates that the total U.S. market for fasteners and
related products distributed by Quest is approximately $1 billion. This market
is divided into two major segments, large manufacturers of fasteners, who supply
large industrial users directly, and distributors, who service smaller
industrial users, but are increasingly supplying larger accounts that can no
longer be serviced effectively by the manufacturers. The distribution side
consists of distributors who provide a rapid response capability to service
customer needs and assist in selecting appropriate fasteners. As a distributor,
Quest's business falls into this latter category, providing such services as bin
stock replenishment programs.
5
Competition
Quest principally competes with a number of small distributors located
within the markets it serves and, to a lesser extent, its own suppliers.
Although there are a small number of larger companies serving regional
geographic markets, they do not compete directly with Quest in the markets it
serves at this time. Fasteners distribution is very fragmented in terms of
customers served, as well as the products carried. Such fragmentation allows
distributors, such as Quest, to conduct its business without a significant
competitive risk, with service and support being more important to its customers
than product price. This fragmented market also provides an opportunity for
industry consolidation through acquisitions where meaningful economies of scale
can be achieved, thereby increasing the profits of any consolidating survivors.
Quest is actively seeking to identify potential acquisition candidates and to
benefit from such consolidation.
Suppliers
Quest carries approximately 20 basic product categories and multiple
line items within each of these categories Additional and/or new products or
suppliers are added only after they have been accepted in the marketplace, are
required by new or existing customers, and have the potential for making a
contribution to profits.
Of the approximately 100 suppliers whose products are sold by Quest,
the ten largest account for approximately 30% of Quest's purchases, with the
largest supplier accounting for approximately 5%. Management does not regard any
one supplier of products to be essential to its operations and believes that
most of the products presently sold are available from other sources at
competitive prices.
Quest's products are not subject to significant technological
obsolescence and generally represent standard parts manufactured by multiple
suppliers.
Customers
Quest serves more than 250 industrial and commercial customers,
including Applied Materials, DSC Communications, International Game Technology,
Beckman Instruments, Tandem Computers, Harris Corp., Octel Communications, and
Abbott Laboratories. Most of Quest's customers require delivery of products on
schedules which are generally not available on direct purchases from the
manufacturer or involve orders of insufficient size to be placed directly with
the manufacturer. The ten largest customers account for approximately 50% of
Quest's sales, with no one customer contributing more than 14%.
Organization, Management and Employees
Quest has a total of 44 employees, which include sales, purchasing,
marketing, accounting, operations and warehouse personnel. Quest's employees are
not covered by any collective bargaining agreement. Management believes that its
relationship with its employees is satisfactory.
Quest uses its computer systems for accounting, inventory management
and order processing. All of Quest's transactions, which include order
processing, invoicing, and inventory receiving and shipping, are processed
locally by employees through their local computer system. The local system
permits each of the locations to process all of the their transactions as if
each location were an independent company.
6
<PAGE>
All order entry and shipping is handled from the respective locations.
Periodically, the transactions from each local system are consolidated into a
central computer system where all billing, credit and collection functions are
centralized and controlled by Quest from its headquarters location in Boca
Raton, Florida. In addition, general accounting, payable and receivable
functions, and related accounting reports are produced in Boca Raton, Florida,
from data generated by Quest's computer system which reflect the transactions
processed by each of the locations. Similarly, Quest's payroll is processed
centrally through a payroll service. Quest is covered by its own blanket
insurance policies.
JUDICATE OF PHILADELPHIA, INC. ("JUDICATE")
Judicate believes that its ADR services enable its clients to resolve
disputes in a prompt, confidential and cost efficient manner. Judicate's ADR
services afford an alternative to the often overburdened public courts and to
existing lay arbitration forums. Judicate's arbitrations and mediations are
heard by the judges currently on Judicate's judicial panel ("Company Judges").
Company Judges are independent contractors who make their services available to
Judicate on a case-by-case basis. Compensation to the Company Judges is based on
the number of proceedings conducted and the length of time of such proceedings.
The Company Judges can discontinue service on the judicial panel at any time and
may provide services to competing ADR providers. In addition, Judicate maintains
a panel of non-judicial arbitrators and mediators (almost exclusively practicing
attorneys) to hear its disputes ("Company Neutrals").
Judicate is not subject to any governmental regulation with respect to
the conduct or the provision of its ADR services.
Services Offered by Judicate
Arbitration.
Judicate's arbitration procedures follow a format which essentially is
similar to a non-jury trial in the public court system. This procedure is
designed to grant the parties a dignified forum in which to present their cases,
while at the same time sparing the litigants the time delays and most cumbersome
formalities commonly associated with public court trials.
Judicate's hearings are governed by its rules of procedure, which are
designed to operate in conjunction with the prescribed laws and procedures that
would be applicable to such a case in the public court system.
Subject to the agreement among the parties, the proceedings may include
discovery, the examination of non-party witnesses, the filing of post-hearing
briefs and other procedural matters that may arise in the conduct of non-jury
trials.
Generally, arbitration decisions are binding in nature and, unless
otherwise stipulated by the parties, are appealable in only very limited
circumstances in the public court system. Judicate does not currently offer any
type of appeal procedure. Judicate's arbitration decisions are generally
enforceable in the public court system by following prescribed filing procedures
in the applicable local jurisdiction.
7
<PAGE>
Mediation (Settlement Conferencing)
The mediation method traditionally used by Judicate has been settlement
conferencing, in essence a non-binding non-judicial mediation. The principal
advantage of settlement conferencing is that it provides an opportunity for
disputing parties to reach an early, amicable resolution without undue expense
and time-consuming litigation. The voluntary process of settlement conference
mediation can be an effective tool for a wide variety of disputes, including
tort claims and commercial conflicts.
Other Services
In addition to mediations and arbitrations, Judicate provides advisory
opinions, mini-trials, summary jury trials, and high/low arbitrations, among
other services. Judicate also offers specialized dispute resolution programs for
its clients depending on the particular client's legal and ADR needs.
Generation of Cases - Sales
Cases are submitted to Judicate for one of its ADR services principally
through the efforts of Judicate's outside sales representative and ADR
Consultants.
Judicate's ADR Consultants are Account Executives who attempt to
solicit prospective clients for Judicate's ADR services principally through
telemarketing efforts. Judicate's Account Executives target prominent attorneys
in order to attempt to generate case submissions from such attorneys or the
agreement of such attorneys to an ADR proceeding which has been initiated by one
of the other parties to a dispute. In the absence of a contractual agreement to
submit a dispute to Judicate, an ADR Consultant is not able to schedule a case
for mediation or arbitration unless all necessary parties agree to use
Judicate's ADR services. The vast majority of clients who open up accounts with
one of Judicate's ADR consultants are plaintiff attorneys who practice in small
to medium sized firms. Judicate believes that because a plaintiff attorney
generally represents a client on a contingent basis and does not collect an
hourly rate, such an attorney will be very interested in settling a client's
dispute as expeditiously as possible. Judicate's ADR Consultants are salaried
personnel. Currently there are two (2) ADR Consultants in Judicate's
Philadelphia sales office.
Marketing
Judicate has continued to solicit plaintiff attorneys and insurance
carriers for its ADR services. In addition, Judicate has targeted corporations,
commercial attorneys and insurance carriers throughout the country for its
commercial mediations and arbitration services.
Competition
Judicate's most significant competition in providing ADR services
particularly with respect to arbitrations, is the American Arbitration
Association ("AAA"), an established nonprofit corporation widely accepted in the
legal and business communities. Judicate attempts to compete with AAA primarily
in terms of quality of service, procedures and price. Because of the differing
price structures adopted by Judicate and AAA, the cost of Judicate's resolution
services as compared to AAA's services in a given case will depend upon one or
more of a wide variety of factors, including, without limitation, the number of
hearing days required, the nature of the case (i.e., commercial, construction,
labor, etc.), the amount in controversy and the nature of arrangements that
8
<PAGE>
persons utilizing AAA make with individual arbitrators. Since AAA is a
well-established organization and is widely accepted in the legal community,
Judicate suffers a competitive disadvantage in trying to obtain recognition
among practitioners accustomed to utilizing AAA for arbitration services.
Other national organizations similar to Judicate have been formed, and
similar companies may be formed in the future. For example, Resolute Systems of
Brookfield, Wisconsin, competes with Judicate as a ADR provider. Resolute
Systems has retained approximately 1,500 judges and has opened an office in
Roslyn, New York. Moreover, in certain areas of the country, organizations
similar to Judicate have been formed on a regional level, and similar companies
may be formed in the future. Furthermore, the insurance industry has continued
its support for Arbitration Forums, a not-for-profit organization created to
service the insurance subrogation market with ADR programs.
In general, the ADR industry furnishes an alternative to public dispute
mechanisms, principally the public courts. Judicate's marketing efforts have
been based on its belief that there exists a general dissatisfaction among
litigants and their counsel with the public court system. Several public court
systems have recently instituted court-coordinated ADR programs and it is
uncertain as to whether they will be effective. To the extent that the public
courts reduce case backlogs and provide effective settlement mechanisms,
Judicate's business opportunities in such markets may be significantly reduced.
While Judicate has formulated and copyrighted its own Rules of
Procedure, its basic concept of a private court system cannot be protected by
patent, copyright or other form of intellectual property protection.
Employees
As of April 3, 1996, Judicate employed four full-time persons; one in
an executive position and three in sales, marketing, administrative, and
clerical activities. As of that date, Judicate had approximately 600 Company
Judges listed on its National Panel of Judges, enabling Judicate to offer
dispute resolution services in all 50 states, the District of Columbia, Puerto
Rico and the United States Virgin Islands. In addition, Judicate has compiled a
panel of 90 Company Neutrals (almost exclusively practicing attorneys), to
preside over its commercial mediations and arbitrations. The Company Judges and
Company Neutrals are independent contractors and are not employees of the
Company. Judicate's employees are not covered by any collective bargaining
agreement. Management believes that its relationship with its employees is
satisfactory.
9
<PAGE>
ITEM 2. PROPERTIES.
The Company is headquartered at 6400 Congress Avenue, Suite 200, Boca
Raton, Florida 33487.
Quest Electronic Hardware, Inc. operates from six well equipped modern
facilities, all of which are leased, as follows:
San Jose, California - includes 3,300 square feet of office
space and 10,000 sq.ft. of warehouse space under a lease
expiring December 31, 1997 and is Quest's principal warehouse,
which space is 90% utilized;
Dallas, Texas - occupies 250 square feet of office space and
1,750 square feet of warehouse space under a lease expiring
March 31, 1998, which space is 90% utilized ;
Austin, Texas - occupies 900 square feet of office space and
8,100 square feet of warehouse space under a lease expiring
September 15, 2000, which space is approximately 40% utilized;
Colorado Springs, Colorado - occupies 1,000 square feet of
office space and 4,000 square feet of warehouse space under a
lease expiring November 30, 1998, which space is approximately
80% utilized;
Sparks, Nevada - occupies 200 square feet of office space and
800 square feet of warehouse space under a lease expiring
April 30, 1998, which space is approximately 60% utilized; and
Boca Raton, Florida - occupies 2,000 square feet of office
space sublet under a lease expiring May 31, 2000, which space
is approximately 80% utilized.
Total rent expense for Quest amounted to $112,249 in 1995. The
aggregate minimum rental commitments under all non-cancelable operating leases
for the year ending December 31, 1996 is $184,712.
Judicate of Philadelphia, Inc., entered into a lease agreement
commencing February 1, 1994 and ending February 1, 1996 for its Philadelphia
facility consisting of 6,940 square feet which included two court rooms and
three mediation rooms for a base rental of $48,000 annually. Judicate of
Philadelphia, Inc. negotiated a settlement of this lease and entered into a one
year renewable lease agreement commencing on August 1, 1995 and ending July 31,
1996 for a more suitable facility consisting of 500 square feet for a base
rental of $6,000 annually. Its premises are located in a modern office building
in downtown Philadelphia.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Judicate, Inc. v. Expedite Mediation and Arbitration Services, Inc.,
Andrew Tivoli, Larry Roher and William Gahwyler, New York State Supreme Court,
Nassau County, Index No. 27588/91. In or about October 1991, the Company
commenced a lawsuit in the Supreme Court of the State of New York, County of
Nassau against three (3) of its former employees and their current employer,
Expedite Mediation and Arbitration Services, Inc. ("Expedite"). Expedite
provides ADR services in the New York Metropolitan area. The lawsuit alleges
that: (i) the defendants wrongfully took numerous information from the Company;
(ii) the former employees breached their duty of good faith to the Company and
tortiously interfered with the Company's prospective contractual and business
relations, and (iii) the former employees engaged in unfair competition. The
defendants asserted several counterclaims alleging that: (i) Company personnel
have made false statements regarding the defendants; and (ii) the Company
refused to pay commissions or other forms of compensation. The defendants seek
damages of approximately $2,000,000, plus additional unspecified damages and
costs.
A partial settlement was made and mutual releases between the Company,
Expedite and Mr. Roher were exchanged on September 7, 1994. A partial settlement
was made and a mutual release between the Company and Mr. Gahwyler was exchanged
on January 9, 1995. On May 4, 1995, a partial settlement was agreed to between
the Company and Mr. Tivoli. Upon execution of mutual releases between such
parties, the entire action was dismissed with prejudice.
Thomas J. Glacken v. Judicate, Inc., Pennsylvania Human Relations
Division, Docket No. E-65605. On or about August 5, 1993, Thomas J. Glacken, a
former employee of the Company, filed a complaint of discrimination against the
Company with the Pennsylvania Human Relations Commission. The complaint alleges
that Mr. Glacken's employment with the Company was terminated pursuant to a
sexually discriminatory reduction of the Company's work force. On July 19, 1995,
the Company was notified that the Pennsylvania Human Relations Commission
determined that the complaint should be dismissed, and the complaint was
dismissed on such date, because the facts did not establish that probable cause
existed to support the allegation of unlawful discrimination.
William G. Blasdel, Jr. and Bellberg Enterprises, Inc. v. Judicate,
Inc., Court of Common Pleas of Philadelphia County, Pennsylvania. On or about
July 27, 1994, the Company was served with a complaint by William Blasdel and
Bellberg Enterprises that was filed with the United States District Court for
the Eastern District of Pennsylvania. The Company filed an answer with the Court
on September 14, 1994 denying plaintiff's allegations. The matter has since been
transferred to the Court of Common Pleas. The complaint charges the Company with
breach of contract by exceeding its ADR authority by granting an arbitration
award. The complaint seeks compensatory, consequential and punitive damages in
an amount in excess of $100,000. Management believes there is no basis for such
action and that any consequences of such complaint will not have a material
adverse effect on the Company's consolidated financial statements.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 2, 1996, at a Special Meeting of Shareholders, the
shareholders of the Company elected Milton M. Adler, Robert V. Gubitosi,
Mitchell Hymowitz, William J. McSherry, Jr. and Dominic A. Polimeni as Directors
and approved the following proposals put forth by management and the Board of
Directors:
<TABLE>
<CAPTION>
Affirmative Negative
Proposal Votes Votes
- --------------------------------------------------------------------------- ----------------- ------------------
<S> <C> <C>
To amend the Company's certificate of incorporation to change
the Company's name to Questron Technology, Inc. 9,259,496 23,516
To amend the Company's certificate of incorporation to
increase the number of authorized shares of common stock
of the Company to 50,000,000 shares 8,476,137 799,824
To amend the Company's certificate of incorporation to
increase the number of authorized shares of preferred stock
of the Company to 10,000,000 shares 8,437,932 833,422
To approve the Company's 1994 Director Non-Qualified Stock
Option Plan 8,506,805 722,439
</TABLE>
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the NASDAQ Small Cap Market
under the symbol "QUST" following the name change which took effect on NASDAQ
effective as of April 9, 1996 (previously, the symbol was "JUDG").
The following table sets forth the reported high and low bid quotations
of the Common Stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Common Stock
------------------------------
High Low
---- ---
1994:
- -----
First Quarter $ 1.4063 $ 1.1250
Second Quarter $ 1.1875 $ 1.1250
Third Quarter $ 1.1875 $ 1.0000
Fourth Quarter $ 3.0625 $ .8750
1995:
- -----
First Quarter $ 2.7500 $ 1.8125
Second Quarter $ 3.3750 $ 2.0000
Third Quarter $ 2.5000 $ 1.6250
Fourth Quarter $ 3.9375 $ 1.3750
On April 4, 1996, the Company's Common Stock as reported on the NASDAQ
Small Cap Market system was $1.625 (closing ask price) and $1.500 (closing bid
price). On that date there were approximately 1,000 holders of record of Common
Stock (including entities which hold stock in street name on behalf of other
beneficial owners).
The Company has not paid any cash dividends on its Common Stock to
date. The Company anticipates that for the foreseeable future it will follow a
policy of retaining earnings, if any, in order to finance the expansion and
development of its business. Payment of dividends is within the discretion of
the Company's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
For the year ended December 31, 1995 compared with 1994.
The results of operations for the year ended December 31, 1995 include
the operating results for the nine months ended December 31, 1995 of Quest
Electronic Hardware, Inc. ("Quest"), the fasteners and electronic hardware
distribution business acquired by the Company on March 31, 1995 (see Note 2 of
Notes to Consolidated Financial Statements) and the operating results of the
Company's alternative dispute resolution ("ADR") business for year ended
December 31, 1995.
The following summarizes the results of operations for each of the
Company's businesses for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Quest (1) ADR Corporate (2) Total
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Revenue $6,982,902 $276,253 $ $7,259,155
Costs and expenses 6,020,800 301,508 351,941 6,674,249
--------- ------- ------- ---------
Operating income 962,102 (25,255) (351,941) 584,906
Interest expense 201,096 -- 4,459 205,555
--------- ------- ------- ---------
Income (loss) before taxes 761,006 (25,255) (356,400) 379,351
Tax provision 27,164 -- -- 27,164
--------- ------- ------- ---------
Net income (loss) $ 733,842 $(25,255) $(356,400) $ 352,187
========= ======= ======= =========
</TABLE>
(1) The operating results for Quest are for the nine months
ended December 31, 1995.
(2) Corporate expenses include non-recurring charges of $146,867,
principally associated with the downsizing and
restructuring of the Company's ADR business.
The significant growth in the Company's revenues for year ended
December 31, 1995 over the year ended December 31, 1994 is due to the
acquisition of Quest. Revenues for Quest for the period April 1, 1995 through
December 31, 1995 were $6,982,902. Revenues of the ADR business declined by
$567,772 and $1,732,573 for the years ended December 31, 1995 and 1994,
respectively, compared with the comparable periods in the prior year. This
decline reflects the Company's continuing program of downsizing and
restructuring in response to increased competition and historical losses. Such
restructuring has resulted in bringing the ADR business, excluding corporate
expenses and non-recurring charges, to a modest operating loss for the year
ended December 31, 1995 of $25,255. 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.
14
<PAGE>
The Company's operating income was $584,906 for the year ended December
31, 1995 compared with an operating loss of $641,081 for the prior year. These
improvements are due to the operating income achieved by Quest of $962,102 since
its acquisition on March 31, 1995, as well as the significant reductions in
costs and expenses of the ADR business. Such expenses were $301,508 for the year
ended December 31, 1995 compared with $1,485,106 in the prior year. Expenses for
1995 include non-recurring charges of $146,867, principally associated with the
downsizing and restructuring of the Company's ADR business. Such charges include
the write-off of fixed assets and idle equipment associated with the downsizing
of the ADR business, as well as lease termination costs, the relocation to more
suitable office space, forfeiture of security deposits and other costs
associated with the downsizing and restructuring of the ADR business. Quest's
operating income of $962,102 for the nine months ended December 31, 1995
represents 14% of its revenues, a relationship which is consistent with the
historical performance of the business.
Interest expense for the years ended December 31, 1995 and 1994
amounted to $205,555 and $34,222, respectively. The increase in interest expense
principally reflects the cost of borrowings associated with the acquisition of
the fasteners and electronic hardware distribution business (see Note 3 of Notes
to Consolidated Financial Statements). For the comparable prior year period, the
Company's results include $34,270 of interest income resulting from the
investment of excess cash.
The provision for income taxes for the year ended December 31, 1995
principally reflects state income tax provisions for states in which Quest does
business. No provision for federal income taxes is required, as the Company has
no federal tax liability for 1995 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 year ended December 31, 1995 amounted to $352,187
compared with a net loss of $641,033 in the prior year. These improvements
reflect the operating income of Quest, partially reduced by interest expense and
income taxes, and the reduction in operating expenses of the ADR business.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had $39,358 in cash and short-term
investments, compared to $1,520,730 as of December 31, 1994. As of December 31,
1995, the Company had working capital of $2,983,668, compared with working
capital of $1,439,105 as of December 31, 1994. The Company's decrease in cash
and short-term investments at December 31, 1995 compared to December 31, 1994 is
principally due to the Company's March 31, 1995 acquisition of Quest Electronic
Hardware, Inc. (see Note 2 of Notes to Consolidated Financial Statements). The
net cash consideration paid for the acquired business amounted to $5,262,268,
which was funded by $2,500,000 in borrowings (including $2,200,000 of long-term
bank borrowings), $1,468,902 in net proceeds derived from the private placement
of the Company's common stock, and available cash. In addition, the Company
repaid $137,500 of bank debt during each of the last three quarters, for an
aggregate of $412,500 of repayments for the year.
15
<PAGE>
For the year ended December 31, 1995, the net cash used in the
Company's operating activities amounted to $843,105, principally reflecting cash
requirements associated with increased accounts receivable and inventories
associated with the business of Quest. Such cash requirements were partially
offset by an increase in accounts payable and profits generated by Quest.
Corporate expenses and the operations of the Company's ADR business continued to
use cash, although at a much 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 year ended December 31, 1995, the net cash used in the
Company's investing activities amounted to $5,682,034, including, as previously
discussed, $5,262,268 net cash consideration paid for the acquisition of the
fasteners and electronic hardware distribution business. In addition, the
Company had capital expenditures of $419,766, primarily related to the
acquisition of computer system equipment for Quest. The Company does not have
significant commitments for capital expenditures as of December 31, 1995 and no
significant commitments are anticipated for 1996.
For the year ended December 31, 1995, the net cash provided by the
Company's financing activities amounted to $5,043,767, including, as previously
discussed, $2,200,000 of long-term bank borrowings under a term loan facility
and $1,468,902 in net proceeds derived from the private placement of the
Company's common stock. In addition, the Company received net proceeds of
$851,593 from the exercise of warrants and $343,750 from the exercise of stock
options. The Company also repaid borrowings obtained earlier in 1995 under
short-term notes payable and, as previously discussed, made $412,500 in
principal payments under the term loan facility. In December 1995, in connection
with certain obligations amounting to $355,478 owed to the Company by two of its
former officers and directors, the Company received 118,493 shares of its common
stock in full satisfaction of such amounts owed.
In conjunction with the acquisition of the fasteners and electronic
hardware distribution business, Quest initially obtained an $800,000 revolving
facility as a part of its loan agreement with a bank to provide working capital
financing for its business. In November 1995, Quest signed a three-year Master
Purchase Order and Sales Agreement with a major customer in Austin, Texas.
Management believes that this agreement, together with other sales opportunities
in the Austin market, could result in a material increase in Quest's annual
sales. In view of this increased level of sales and other potential growth
opportunities, Quest increased its revolving facility to $1,500,000, under terms
and conditions generally consistent with those already in effect for the
original facility. At December 31, 1995, $947,500 was borrowed and outstanding
under the revolving facility. Of the remaining $552,500 revolving facility
amount, $527,500 was fully available at December 31, 1995 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
March 29, 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.
16
<PAGE>
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 conducted by 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.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Questron Technology, Inc.
We have audited the accompanying consolidated balance sheet of Questron
Technology, Inc. and its subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Questron Technology, Inc. and its subsidiaries as of December 31, 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
April 2, 1996
18
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1995
ASSETS
1995
-------------
Current assets:
Cash and cash equivalents $
39,358
Accounts receivable, less allowance for
doubtful accounts of $43,798 1,347,128
Other receivables 52,808
Inventories 3,554,263
Other current assets 60,205
-------------
Total current assets 5,053,762
Property and equipment - net 418,980
Cost in excess of net assets of business acquired,
less accumulated amortization of $131,203 6,866,305
Other assets 93,951
-------------
Total assets $ 12,432,998
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,520,094
Current portion of long-term debt 550,000
-------------
Total current liabilities 2,070,094
Long-term debt 2,185,000
-------------
Total liabilities 4,255,094
-------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; authorized 1,000,000 --
shares; none issued and outstanding
Common stock, $.0001 par value; authorized 20,000,000
shares; issued and outstanding 15,473,335 shares 1,547
Additional paid-in capital 23,887,894
Accumulated deficit (15,356,059)
-------------
8,533,382
Less: Treasury stock, 118,493 shares (355,478)
-------------
Total shareholders' equity 8,177,904
-------------
Total liabilities and shareholders' equity $ 12,432,998
=============
See Notes to Consolidated Financial Statements.
19
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- ---------------
<S> <C> <C>
Revenue:
Sales $ 6,982,902 $ --
Fee income 276,253 844,025
------------- -----------
7,259,155 844,025
------------- -----------
Operating costs and expenses:
Cost of products and services sold 4,146,564 272,660
Selling, general & administration expenses 2,180,886 1,154,034
Non-recurring charges 146,867 --
Depreciation and amortization 199,932 58,412
------------- ------------
6,674,249 1,485,106
------------- ------------
Operating income (loss) 584,906 (641,081)
Interest income (expense):
Interest expense (205,555) (34,227)
Interest income -- 34,270
------------- ------------
Total interest income (expense) (205,555) 48
------------- ------------
Income (loss) before income taxes 379,351 (641,033)
Provision for income taxes 27,164 --
------------- ------------
Net income (loss) $ 352,187 $ (641,033)
============= ============
Net income (loss) per common share $ .03 $ (.23)
============= ============
Average number of common shares and common share
equivalents outstanding 13,795,632 2,793,402
============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------ ---------------------- Paid-in Accumulated Treasury
Shares Amounts Shares Amounts Capital Deficit Stock
----------- ----------- ----------- ---------- ------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1994 880,000 $ 8,800 1,758,077 $ 177 $15,882,528 $(15,067,213) $ --
Issuance of Shares:
Conversion of
Preferred Stock into
Common Stock (740,000) (7,400) 1,480,000 148 7,251 -- --
Exercise of Warrants -- -- 718,704 71 413,411 -- --
To Placement Agent
in Lieu of Fees in
Connection with
Exercise of Warrants -- -- 61,824 6 -- -- --
Private Placement -- -- 2,515,200 251 957,349 -- --
To Placement Agent
in Lieu of Fees in
Connection with
Private Placement -- -- 200,000 20 -- -- --
Net Loss for the Year -- -- -- -- -- (641,033) --
---------- ---------- ---------- --------- ------------ --------------- ----------
Balance -
December 31, 1994 140,000 1,400 6,733,805 673 17,260,549 (15,708,246) --
Issuance of Shares:
Conversion of
Preferred Stock into
Common Stock (140,000) (1,400) 280,000 28 1,372 -- --
Private Placement -- -- 1,160,000 116 1,468,786 -- --
Exercise of Warrants -- -- 2,786,956 279 851,314 -- --
Exercise of Options -- -- 550,000 55 343,695 -- --
In connection with
the acquisition of
Quest Electronic
Hardware, Inc. -- -- 3,962,574 396 3,962,178 -- --
Shares received by
the Company in
satisfaction of certain
obligations of former
officers and directors -- -- -- -- -- -- (355,478)
Net Income for the Year -- -- -- -- -- 352,187 --
========= ========= =========== ========= =========== ============== ===========
Balance -
December 31, 1995 -- $ -- 15,473,335 $ 1,547 $23,887,894 $(15,356,059) $ (355,478)
========= ========== =========== ========= =========== ============== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 352,187 $(641,033)
Adjustments to reconcile net income (loss) to net
cash to net cash used in
operating activities:
Depreciation and amortization 199,932 58,412
Write-down of assets 40,553 136,335
Provision for doubtful accounts 25,162 50,918
Change in assets and liabilities:
(Increase) decrease in accounts receivable (467,176) (19,091)
(Increase) decrease in other receivables 56,672 (109,480)
(Increase) in inventories (1,583,507) --
(Increase) Decrease in prepaid expenses and other assets (33,509) 44,334
Increase (decrease) in accounts payable and accrued
expenses 566,581 (13,776)
---------- ----------
Net cash used for operating activities (843,105) (493,381)
---------- ----------
Cash flows from investing activities:
Net cash consideration paid for acquired business (5,262,268) --
Acquisition of property and equipment (419,766) --
---------- ----------
Net cash used for investing activities (5,682,034) --
---------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowings 300,000 --
Proceeds from borrowings under revolving facility 947,500 --
Proceeds from borrowings under term loan facility 2,200,000 --
Proceeds from private placement 1,740,000 957,600
Costs associated with private placement (271,098) --
Proceeds from exercise of warrants 911,578 413,482
Costs associated with exercise of warrants (59,985) --
Proceeds from exercise of stock options 343,750 --
Treasury shares received in satisfaction of obligations (355,478) --
Repayment of short-term debt (300,000) --
Repayment of long-term debt (412,500) --
---------- ----------
Net cash provided by financing activities 5,043,767 1,371,082
---------- ----------
(Decrease) Increase in cash and cash equivalents (1,481,372) 877,701
Cash and cash equivalents at beginning of period 1,520,730 643,029
========== ==========
Cash and cash equivalents at end of period $39,358 $1,520,730
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 182,970 $ 34,222
Income taxes -- --
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In 1995 and 1994, the Company adjusted property and equipment to
estimated fair value as follows:
1995 1994
--------- ---------
Cost of property written down $ 668,176 $ 340,153
Accumulated depreciation (627,623) (178,818)
--------- --------
Net book value 40,553 161,335
Estimated fair value -- 25,000
========= =========
Adjustment for write-down $ 40,553 $ 136,335
========= =========
During 1995, the Company issued 3,962,574 shares of common stock in
connection the acquisition of a subsidiary and issued 280,000 shares of common
stock upon the conversion of 140,000 preferred shares.
During 1994, 200,000 shares of common stock were issued to a placement
agent in lieu of fees in connection with a private placement. Additionally,
250,000 shares of common stock for consulting services and 61,824 shares of
common stock in lieu of fees in connection with the exercise of warrants were
issued to the same placement agent. The Company also issued 1,480,000 shares of
common stock upon conversion of 740,000 preferred shares during 1994.
See Notes to Consolidated Financial Statements.
23
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
On April 2, 1996, the shareholders of the Company voted to change the
name of the Company from Judicate, Inc. to Questron Technology, Inc. ("Questron"
or the "Company"). Questron, through its subsidiary, Quest Electronic Hardware,
Inc. ("Quest"), is a specialized distributor of fasteners and electronic
hardware sold to electronic equipment manufacturers and, through its subsidiary
Judicate of Philadelphia, Inc. ("Judicate"), a supplier of alternate dispute
resolution ("ADR") services. Quest was formed on October 13, 1994. On March 31,
1995, Quest purchased the fasteners distribution business from Arrow
Electronics, Inc. ("Arrow"). Prior to this business acquisition, Quest had no
operating activities of its own, accordingly, the consolidated results of
operations for the year ended December 31, 1995 include only 9 months of
operating activities for Quest. Simultaneously with this business acquisition,
the then shareholders of Quest completed a common stock exchange with Questron,
in which Quest became a 100% owned subsidiary of Questron (see Note 2 of Notes
to Consolidated Financial Statements).
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the
accounts of the Company and all its majority owned subsidiaries. All significant
intercompany transactions are eliminated.
Cash and Cash Equivalents - The Company considers certain highly liquid
investments with original maturities of three months or less to be cash
equivalents.
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, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk - The Company extends credit to its
customers which results in accounts receivable arising from its normal business
activities. The Company does not require collateral from its customers, but
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk of its customers, believes that its
receivable credit risk exposure is limited. Such estimate of the financial
strength of such customers may be subject to change in the near term.
During the year ended December 31, 1995, sales to one customer of Quest
amounted to approximately $1,000,000 or approximately 14% of revenue. Accounts
receivable from this customer amounted to approximately $273,000.
Inventories - Inventories, which consist solely of finished products,
are stated at the lower of cost or market. Cost is determined on the first-in,
first-out (FIFO) method.
24
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Property and Equipment - Property and equipment are recorded at cost.
Expenditures for normal repairs and maintenance are charged to earnings as
incurred. When assets are retired or otherwise disposed, their costs and related
accumulated depreciation are removed from the accounts and the resulting gains
or losses are included in operations. Depreciation and amortization are recorded
using the straight-line method over the shorter of the estimated lives of the
related asset or the remaining lease term. Estimated useful lives are as
follows:
Office Equipment 5 Years
Computer Equipment 5 Years
Furniture and Fixtures 7 Years
Leasehold Improvements 5 Years
Cost in Excess of Net Assets of Business Acquired - The cost in excess
of net assets of business acquired is being amortized on a straight line basis
over 40 years. The Company has concluded that the cost in excess of net assets
of business acquired has an indeterminable life based on historic, current and
projected operating results of the business acquired (see Note 2 of notes to
consolidated financial statements). The Company's policy is to record an
impairment loss against the balance of the net unamortized cost in excess of net
assets of business acquired in the period when it is determined that the
carrying amount of the asset may not be recoverable. At each balance sheet date,
the Company evaluates the realizability of the asset for each business acquired
having a material change. This determination is based on an evaluation of such
factors as the occurrence of a significant event, a significant change in the
environment in which the business operates, or if the expected future
non-discounted cash flow of the business would become less than the carrying
value of the asset. The Company's historic recurring losses and negative cash
flows from operations have been abated and, accordingly, management believes
these factors will not negatively impact the profits and cash flows of the
business acquired.
Net income (loss) per common share - Net income (loss) per common share
is based on the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents amounted to 2,262,565 for
1995. The weighted average number of common shares outstanding for 1994 does not
include common share equivalents since the inclusion of such share equivalents
would be anti-dilutive. Net income per common share on a fully diluted basis
does not result in material dilution and, accordingly, is not presented.
25
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
2. ACQUISITION OF ELECTRONIC HARDWARE DISTRIBUTION BUSINESS
As of the close of business on March 31, 1995, the Company acquired
100% of the stock of Quest, a privately owned Company, in exchange for a 25%
interest in the Company on a fully diluted basis. Such acquisition was effected
pursuant to a share acquisition agreement, under which the Company issued
3,962,574 newly issued, fully-paid and non-assessable shares of common stock of
the Company, in exchange for all of the issued and outstanding shares of common
stock of Quest. Simultaneously with the foregoing events, Quest purchased the
fasteners distribution business of Arrow for $4,850,000 in cash, pursuant to a
Purchase of Assets Agreement, dated as of November 29, 1994, by and between
Quest and Arrow (the "Purchase Agreement"). The purchase was funded by a capital
contribution from Questron of $2,850,000 (see Note 5 of Notes to Consolidated
Financial Statements) and borrowings by Quest under a loan and security
agreement with a bank (see Note 3 of Notes to Consolidated Financial
Statements). Under the Purchase Agreement, Quest acquired the net assets of
Arrow used exclusively in connection with Arrow's operations of the fasteners
distribution business and assumed all stated liabilities associated with the
business. Such assets included all accounts receivable of the business,
inventories, and certain furniture and equipment. The stated liabilities assumed
were principally trade payables to suppliers of the business. The acquisition
has been accounted for as a purchase, effective March 31, 1995. The following
summarizes the fair value of the net assets acquired and the related cost
thereof:
Cash $ 4,500
Accounts receivable 832,913
Inventories 1,970,756
Property and equipment 57,427
------------
Total assets 2,865,596
Accounts payable 634,762
------------
Net assets acquired 2,230,834
------------
Cost:
Purchase price paid to Arrow 4,850,000
Net value of shares issued 3,961,574
Acquisition and integration expenses 416,768
------------
Total cost 9,228,342
------------
Cost in excess of net assets acquired $ 6,997,508
============
The acquisition and integration expenses noted above are principally
professional fees associated with the transactions, consulting fees and other
expenses associated with the conversion of the business to a new operating
system, and other expenses associated with completing the transaction and
integrating the business with Quest.
26
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
3. LONG-TERM DEBT
Long-term debt at December 31, 1995 consisted of the following:
Term loan, due in equal quarterly installments through
March 31, 1999, with interest payable
monthly at the prime rate plus 2% $ 1,787,500
Revolving facility, due on March 31, 1997,
with interest payable monthly at the prime
rate plus 1.5% 947,500
------------
2,735,000
Less installments due within one year 550,000
============
$ 2,185,000
============
Pursuant to a Loan and Security Agreement, as amended (the "Loan
Agreement"), dated March 31, 1995, with a bank, Quest borrowed $2.2 million
under a term loan facility to partially fund the acquisition of the fasteners
distribution business. The Loan Agreement also provides for Quest to be able to
borrow for working capital purposes under an annually renewable two-year
revolving facility, which provides for loans of up to $1,500,000. The Loan
Agreement contains a provision for the calculation of a borrowing base, which
determines the amount of borrowings available under the revolving facility. At
December 31, 1995, Quest had unused borrowing capacity of $527,500 under the
Loan Agreement.
In order to secure the obligations of Quest under the Loan Agreement,
Questron entered into a Stock Pledge Agreement, dated as of March 31, 1995, with
the bank, under which the Company pledged to the bank the shares of capital
stock of Quest which the Company held at such date and in which the Company may
thereafter acquire an interest. In addition, Quest granted a security interest
in substantially all of its assets to the bank and a major shareholder of
Questron (see Note 11 of Notes to Consolidated Financial Statements) guaranteed
the obligations of Quest under the Loan agreement. The Loan Agreement restricts
the payment of cash dividends by Quest to the Company and certain other
payments, limits long-term and short-term borrowings of Quest, and requires that
debt service coverage, net worth, tangible net worth, the ratio of debt to net
worth, and the ratio of quick assets (cash and accounts receivable) to current
liabilities be maintained at certain designated levels by Quest. Quest is in
compliance with all such requirements of the Loan Agreement.
The aggregate annual maturities of long-term debt under the Loan
Agreement for each of the five years in the period ending December 31, 2000 are
: 1996-$550,000; 1997-$1,497,500; 1998-$550,000; 1999-$137,500; and 2000-$0.
27
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 consisted of the following:
1995
---------
Office equipment $ 55,933
Computer equipment 389,730
Furniture and fixtures 12,583
Leasehold improvements 19,947
---------
Total 478,193
Less: accumulated depreciation and amortization 59,213
---------
Total $ 418,980
=========
Depreciation and amortization expense related to property and equipment
for the years ended December 31, 1995 and 1994 was $68,729 and $58,412,
respectively. At December 31, 1995, all property and equipment represent assets
used in the business of Quest. All property and equipment of the ADR business
have been written off in connection with the downsizing and restructuring of
that business.
5. SHAREHOLDERS' EQUITY
As of December 31, 1995, the Company was authorized to issue 20,000,000
shares of common stock and 1,000,000 of preferred stock. On April 2, 1996, the
shareholders of the Company approved an increase in the number of authorized
shares of common stock to 50,000,000 shares and an increase in the number of
authorized shares of preferred stock to 10,000,000 shares. The outstanding
shares of common stock are fully paid and non-assessable. In 1994, there were
outstanding 140,000 shares of Series A Preferred Stock. Each share of Series A
Preferred Stock, which was convertible, without further consideration, into two
(2) shares of common stock, has been converted.
In November 1994, the Company issued 2,515,200 shares of its common
stock in a private offering conducted through a placement agent. Net proceeds
from the offering amounted to $957,600. As additional consideration for common
shares issued, one of the purchasers tendered 103,040 Series I Warrants to the
Company for cancellation. Additionally, 200,000 shares of Company common stock
were issued to the placement agent in lieu of fees in connection with this
transaction.
In March and April 1995, the Company, through a placement agent,
consummated the sale of fifty-eight units of its securities at a gross sales
price of $30,000 per unit. Each unit consisted of 20,000 shares of Company
common stock. The net proceeds to the Company, after expenses associated with
the placement of $271,098, were $1,468,902. Such net proceeds, together with
available cash, were used to make a capital contribution to Quest at March 31,
1995, in order to provide Quest with the balance of the funds necessary to
complete the acquisition of the fasteners distribution business from Arrow. In
connection with this sale of securities, the placement agent also received a
portion of its fee in the form of 116,000 options to purchase Company common
stock at an exercise price of $3.50 per share. These options expire March 31,
2000.
The Company has issued various series of warrants to purchase shares of
its common stock. Each Series I Warrant entities the registered holder to
purchase 1.629 shares of common stock at a price of $1.80 per share on or before
June 30, 1996. Any warrant not exercised by that date will be null and void. At
December 31, 1995, there were 64,657 Series I Warrants outstanding.
28
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
In March 1994, as an inducement to raise capital, the Company offered
holders of the Series I Warrants the right to exchange each warrant for three
Series II Warrants which were exercisable at $ .625 per share. The exchange
offer expired on April 30, 1994. Pursuant to the exchange offer, the Company
received net proceeds of $413,482 upon the issuance of 718,704 shares of its
common stock. Additionally, the Company issued 61,824 shares of its common stock
to a placement agent in lieu of fees in connection with this transaction. At
December 31, 1994, all Series II Warrants had been exercised.
In connection with the November 1994 private placement, 2,200,000
Series III Warrants were issued. Each Series III Warrant entitles the registered
holder to purchase one share of common stock at an exercise price of $.35 per
share. The warrants expire November 14, 2004, and any warrant not exercised by
that date will be null and void. At December 31, 1995, there were 40,000 Series
III Warrants outstanding.
In December 1995, in connection with certain obligations amounting to
$355,478 owed to the Company by two of its former officers and directors, the
Company received 118,493 shares of its common stock in full satisfaction of such
amounts owed.
6. Stock Options
Under the terms of various stock option plans, the Company may grant
options to purchase shares of the Company's common stock to key executives and
management of the Company. Transactions under the various stock option and
incentive plans during the years ended December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------------- ----------------------------------
Incentive Non-Incentive Incentive Non-Incentive
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 554,469 513,593 17,829 46,835
Options granted 46,835 229,363 550,000 466,758
Options exercised (550,000) (626,956) -- --
Options canceled and
terminated (13,360) --
======= ======== ========= ========
Outstanding - end of year(1) 51,304 116,000 554,469 513,593
======= ========= ========= ========
</TABLE>
(1) With exercise prices ranging from $7.95 to $33.75 per share, giving
effect to the one-for-fifteen reverse stock split, which occurred on
December 22, 1993.
In addition to the above, on April 2, 1996, the shareholders approved
the adoption of the 1994 Director Non-qualified Stock Option Plan (the "Plan"),
under which options to purchase shares of the Company's common stock may be
granted to non-executive directors of the Company. Under the Plan options are to
be granted to each eligible director at the rate of 15,000 per year. Awards
under the Plan had been made previously, subject to shareholder approval.
Transactions under the Plan during the years ended December 31, 1995 and 1994
were as follows:
1995 1994
-------- --------
Outstanding - beginning of year 60,000 --
Options granted 45,000 60,000
Options exercised -- --
Options canceled and
terminated -- --
======== ========
Outstanding - end of year 105,000 60,000
======== ========
29
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
In February 1996, in accordance with the provisions of the Plan, 30,000
options to purchase shares of the Company's common stock were granted to
qualified directors.
7. RETIREMENT PLAN
Quest has a defined contribution plan for eligible employees, which
qualifies under Section 401(k) of the Internal Revenue Code. Quest's
contribution to the plan, which is based on a specified percentage of employee
contributions, amounted to $24,820 in 1995.
8. LEASE COMMITMENTS
The Company leases certain office and warehouse space under
non-cancelable operating leases expiring at various dates through 2000. Rental
expenses of all non-cancelable operating leases amounting to $112,249 and
$65,070 was charged to operations for the years ended December 31, 1995 and
1994, respectively. Aggregate minimum rental commitments under all
non-cancelable operating leases approximate $535,000 as of December 31, 1995.
Such commitments on annual basis are as follows:
Years ending December 31,
1996 $ 184,712
1997 184,812
1998 83,198
1999 42,120
2000 40,365
-----------
$ 535,207
===========
9. INCOME TAXES
The provision for income taxes included in the consolidated statement
of income is for state income taxes to which the Company and its subsidiaries
are subject. No provision for federal income taxes is required, as the Company
has no federal tax liability for 1995 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.
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", which was adopted by the Company on January 1,
1993, requires the establishment of a deferred tax asset for all deductible
temporary differences and operating loss carryforwards. Because the generation
of future taxable income is not assured, however, any deferred tax asset
established for utilization of the Company's tax loss carryforwards would
correspondingly require a valuation allowance of the same amount pursuant to
SFAS No. 109. Accordingly, no deferred tax asset is reflected in the
consolidated financial statements.
30
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
As of December 31, 1995, the approximate amount of the net operating
loss income tax carryforwards and their expiration dates are as follows:
Net
Operating Loss
Expiring in Years Ending December 31, Carryforwards
----------------
2000 $ 460,000
2001 1,243,000
2002 1,414,000
2003 1,574,000
2004 1,100,000
2005 579,000
2006 782,000
2007 2,945,000
2008 2,336,000
2009 670,000
=============
$ 13,103,000
=============
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments", which requires disclosing fair value, to the extent
practicable, for financial instruments which are recognized or unrecognized in
the balance sheet. Fair value of the financial instruments disclosed in the
balance sheet is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table summarizes
financial instruments by individual balance sheet accounts as of December 31,
1995:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 39,358 $ 39,358
Accounts receivable 1,399,936 1,399,936
Accounts payable and accrued expenses 1,520,094 1,520,094
Current portion of long-term debt 550,000 550,000
Long-term debt 2,185,000 2,185,000
</TABLE>
For certain financial instruments, including cash and cash equivalents,
trade receivables and payables, and short-term debt, it was assumed that the
carrying amount approximated fair value because of the near term maturities of
such obligations. The fair value of long-term debt was determined based on
current rates at which the Company could borrow funds with similar remaining
maturities, which amount approximates its carrying value.
32
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
11. RELATED PARTY TRANSACTIONS
The Company has entered into a five-year management advisory and
consulting agreement with Gulfstream Financial Group, Inc. ("Gulfstream"), a
company in which the Chairman, President and Chief Executive Officer of
Questron, who is also the Chairman and Chief Executive Officer of Quest, is a
50% owner. Under the terms of such agreement, Gulfstream acts as an advisor and
consultant to the Company and Quest, and also provides certain administrative
services to the companies. Such advisory and consulting services are directed
principally at the expansion of Quest's business through the identification of
new marketing opportunities and potential acquisitions, the procurement of
financing as needed by the Company and Quest, and maximizing the Company's and
Quest's profitability. For such services Gulfstream is paid a fee of $150,000
per year. In addition, upon the attainment of certain earnings targets for
Quest, Gulfstream may be entitled to be awarded as incentive compensation,
warrants, subject to certain conditions and restrictions, to purchase at a price
of $.10 per share, a number shares of common stock of the Company, such that the
number of shares so purchased represents up to 10% of the outstanding common
stock of the Company at March 31, 1995. For these purposes, the calculation of
the shares of the common stock of the Company outstanding at March 31, 1995
assumes that all warrants, options and preferred stock are converted to common
stock of the Company. Gulfstream presently owns 16.9% of the Company's common
stock outstanding and has guaranteed the obligations of Quest under its Loan
Agreement.
12. LONG-TERM EMPLOYMENT AGREEMENTS WITH EXECUTIVES
Quest has entered into a five-year employment agreement with its
Chairman and Chief Executive Officer. Under the terms of such employment
agreement, Quest has agreed to compensate this individual with regular salary at
the rate of $100,000 per year. There are no other bonus compensation
arrangements currently in effect for this individual.
Quest has also entered into a five-year employment agreement with its
President and Chief Operating Officer. Under the terms of such employment
agreement, Quest has agreed to compensate this individual with regular salary at
the rate of $100,000 per year, plus bonus compensation based on the attainment
of certain operating goals at the rate of $15,000 per quarter. In addition, upon
the attainment of certain earnings targets for Quest, this individual may be
entitled to be awarded as incentive compensation, warrants, subject to certain
conditions and restrictions, to purchase at a price of $.10 per share, a number
shares of common stock of the Company, such that the number of shares so
purchased represents up to 5% of the outstanding common stock of the Company at
March 31, 1995. For these purposes, the calculation of the shares of the common
stock of the Company outstanding at March 31, 1995 assumes that all warrants,
options and preferred stock are converted to common stock of the Company. This
individual presently owns 8.8% of the Company's common stock outstanding and has
agreed with Gulfstream to participate in its guarantee of the obligations of
Quest under its Loan Agreement, however, only to the extent of his stock
holdings in the Company.
13. NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets to be Disposed of," in March of 1995. SFAS No. 121
established accounting standards for the impairment of long-lived assets and
certain identifiable intangibles to be disposed of. SFAS No. 121 is effective
for financial statements issued for fiscal years beginning after December 15,
1995. Adoption of SFAS No. 121 is not expected to have a material impact on the
Company's financial statements.
33
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has not decided if it will adopt SFAS No. 123 or continue to apply APB
Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial note disclosure purposes in any event. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995; the disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years beginning
after December 31, 1995.
14. LITIGATION
In July 1994, the Company was served with a complaint that charges the
Company with breach of contract by exceeding its ADR authority in granting an
arbitration award and seeks compensatory, consequential and punitive damages of
an amount in excess of $100,000. The Company answered the complaint, denying the
plaintiff's allegations. The Company believes that there is no basis for such
action and that any consequences of such complaint will not have a material
adverse effect on the Company's consolidated financial statements.
15. SEGMENT INFORMATION
As of March 31, 1995, the Company is engaged in two business segments.
Through its subsidiary, Quest, it is a specialized distributor of fasteners and
electronic hardware sold to electronic equipment manufacturers and, through its
subsidiary, Judicate, it is a supplier of alternate dispute resolution ("ADR")
services. The operating results and identifiable assets of each of these
business segments, and corporate, at December 31, 1995 and for the year then
ended is as follows:
<TABLE>
<CAPTION>
Quest (1) Judicate Corporate (2) Consolidated
----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 6,982,902 $276,253 $ -- $ 7,259,155
----------- -------- ----------- ------------
Operating income (loss) 962,102 (25,255) (351,941) 584,906
Interest expense 201,096 -- 4,459 205,555
Provision for income taxes 27,164 -- -- 27,164
----------- -------- ----------- ------------
Net income (loss) $ 733,842 $(25,255) $ (356,400) $ 352,187
=========== ======== =========== ============
Depreciation and
amortization $ 112,871 $ 9,516 $ 77,545 $ 199,932
=========== ======== =========== ============
Capital expenditures $ 420,766 $ (1,000) $ -- $ 419,766
=========== ======== =========== ============
Identifiable assets $ 8,306,721 $ 79,034 $ 4,047,243 $ 12,432,998
=========== ======== =========== ============
</TABLE>
- ----------------
(1) The operating results for Quest are for the nine months ended
December 31, 1995.
(2) Corporate expenses include non-recurring charges $146,867, principally
associated with the downsizing and restructuring of the Company's
ADR business.
34
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 28, 1994, the Company appointed Mortenson and Associates,
P.C. as its independent accountants for fiscal year 1994 to replace Goldenberg
Rosenthal Friedlander effective with such appointment. The change in independent
accountants was approved by the Board of Directors of the Company.
Goldenberg Rosenthal Friedlander's report on the financial statements
of the Company for the two most recent years were, unqualified and contained a
paragraph indicating that the operations of the Company raised a substantial
doubt about its ability to continue as a going concern.
During the two most recent fiscal years and the interim period
subsequent to December 31, 1993, there have not been any disagreements with
Goldenberg Rosenthal Friedlander on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Goldenberg Rosenthal
Friedlander, would have caused that firm to make reference to the subject matter
of such disagreements in connection with its report.
This information was previously submitted by the Company on Form 8-K
dated November 28, 1994.
35
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
A. Directors and Executive Officers
The Directors and Executive Officers of the Company are set forth
herein. All directors serve until the next Annual Meeting of Stockholders or
until their successors are duly elected and qualified. All officers serve at the
pleasure of the Board of Directors, subject to any applicable employment
agreements.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Dominic A. Polimeni 49 President, Chief Operating Officer and
Director
Milton M. Adler 68 Secretary, Treasurer, and Controller
Robert V. Gubitosi 48 Director
Mitchell Hymowitz 34 Director
William J. McSherry, Jr. 48 Director
</TABLE>
Dominic A. Polimeni has been Chairman and Chief Executive Officer of
the Company since February 1996, and President, Chief Operating Officer and a
Director of the Company since March 1995. He has also been Chairman, Chief
Executive Officer and Chief Financial Officer of Quest Electronic Hardware, Inc.
since October 1994. Mr. Polimeni has been a Managing Director of Gulfstream
Financial Group, Inc., a privately held financial consulting and investment
banking firm since August 1990. Prior to that he held the position of Chief
Financial Officer of Arrow Electronics, Inc. ("Arrow") for four (4) years. He
also held several other positions, including general management positions, with
Arrow over an eight-year period. Prior to that he practiced as a Certified
Public Accountant for more than 12 years and was a Partner in the New York
office of Arthur Young & Company. He has also held the position of Chief
Operating Officer of Fugazy Express, Inc., a New York based transportation
company in its start-up phase. Mr. Polimeni is also a director of TMCI
Electronics, Inc., a NASDAQ listed company. He holds a bachelor of business
administration degree from Hofstra University. Mr. Polimeni is the
brother-in-law of Mr. Gubitosi.
Milton M. Adler has been a Director of the Company since February 1996,
Secretary of the Company since October 1993, Treasurer of the Company since
February 1992, and Controller of the Company since January 1992. Prior thereto,
Mr. Adler was employed by Travelco, a travel consulting firm, for more than 18
years in various capacities, the most recent of which was Vice President of
Administration. Mr. Adler is a Certified Public Accountant.
36
<PAGE>
Robert V. Gubitosi has been a Director of the Company since February
1996 and Director of Operations of Quest Electronic Hardware, Inc., a subsidiary
of the Company, since March 1995. Mr. Gubitosi has been a Managing Director of
Gulfstream Financial Group, Inc., a privately held financial consulting and
investment banking firm since August 1990. Prior to that he held the position of
General Partner and Chief Financial Officer of the Securities Groups, a New York
investment banking firm and primary dealer of U.S. government securities, with
responsibility for the investment banking activities of the firm. In addition,
he has held managerial positions at Goldman Sachs & Company and Oppenheimer &
Company, and specialized in brokerage accounting and auditing at Haskins & Sells
and Touche Ross & Company. He holds a bachelor of business administration degree
from Hofstra University. Mr. Gubitosi is the brother-in-law of Mr. Polimeni
Mitchell Hymowitz has been a Director of the Company since December
1993. Mr. Hymowitz has also been Principal/Chief Financial Officer of H&W
Hardware Co., Inc. and Vice President of Two Twenty First Avenue Realty Corp.
since September 1990. Prior to that he was Senior Accountant with Paritz and
Company, P.A., in New Jersey. Mr. Hymowitz earned a Bachelor of Science in
Business Administration with a degree in Accounting from State University of New
York at Buffalo in 1984.
William J. McSherry, Jr. has been a Director of the Company since
February 1996. Mr. McSherry has been a partner of Battle Fowler LLP, a law firm
with offices in New York City and Los Angeles, since July 1991. Prior to July
1991, Mr. McSherry was a partner in the law firm of Bryan Cave. Mr. McSherry is
also the President and a director of Playtex Marketing Corporation, a
privately-owned corporation, and serves as a trustee and as Deputy Mayor of the
Village of Larchmont, State of New York.
B. Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership of equity securities of the Company with the Securities and Exchange
Commission and the National Association Of Securities Dealers. Officers,
directors and greater-than-ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms that
they file.
Based solely on a review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to the Company, or written representations from
certain reporting persons that such persons have filed on a timely basis all
reports required by Section 16 (a), and without researching or making any
inquiry regarding delinquent Section 16 (a) filings, the Company believes that,
during the fiscal year ended December 31, 1995, a Form 5 was filed on a
non-timely basis by Mr. Daniel Porush and Forms 4 were filed on a non-timely
basis with respect to two transactions by Paul L. Burton and with respect to six
transactions by Stephen J. Drescher. Messrs. Burton and Drescher were officers
and Directors of the Company during 1995.
37
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth the compensation of
the named executives for the periods indicated. No executive officer received
total annual salary and bonus equal to or greater than $100,000 during the
periods indicated.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------
(a) (b) (c) (d) (e)
Name and Other Annual
Principal Position Year Salary Bonus Compensation ($)
- ------------------ ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
Dominic A. Polimeni 1995 $75,000 -- --
Chairman, President 1994 -- -- --
and Chief Executive 1993 -- -- --
Officer
Stephen J. Drescher 1995 $52,000 -- --
Former Chairman, and 1994 $52,000 -- --
Chief Executive Officer 1993 $19,000 -- --
</TABLE>
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------------------------------------
Awards Payouts
------ -------
(a) (b) (f) (g) (h) (i)
Restricted Securities
Name and Stock Underlying LTIP All other
Principal Position Year Awards ($) Options/SARs(#) Payouts ($) Compensation ($)
- ------------------ ---- ---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Dominic A. Polimeni 1995 -- -- -- --
Chairman, President 1994 -- -- -- --
and Chief Executive 1993 -- -- -- --
Officer
Stephen J. Drescher 1995 -- 0 -- --
Former Chairman and 1994 -- 250,000 -- --
Chief Executive Officer 1993 -- 0 -- --
</TABLE>
The options to acquire 250,000 shares, at an exercise price $0.625 per
share, were granted to Mr. Drescher in 1994 pursuant to the 1992 Amended and
Restated Management Incentive Option Plan
38
<PAGE>
Employment Agreements
Dominic A. Polimeni, Chairman, Chief Executive Officer and President of
the Company, is party to an employment agreement with Quest Electronic Hardware,
Inc., a subsidiary of the Company. This agreement expires on March 31, 2000 and
provides for a base salary of $100,000 per annum.
In addition, Mr. Polimeni is an executive officer and a 50% stockholder
of Gulfstream Financial Group, Inc. ("Gulfstream"), and shares voting and
investment power with respect to the shares owned by Gulfstream. Pursuant to a
Management Advisory and Consulting Agreement, dated as of November 29, 1994,
between the Company and Gulfstream, Gulfstream acts as an advisor and consultant
to the Company and Quest, and also provides certain administrative services to
the companies. Such advisory and consulting services are directed principally at
the expansion of Quest's business through the identification of new marketing
opportunities and potential acquisitions, the procurement of financing as needed
by the Company and Quest, and maximizing the Company's and Quest's
profitability. For such services Gulfstream is paid a fee of $150,000 per year.
In addition, upon the attainment of certain earnings targets for Quest,
Gulfstream may be entitled to be awarded as incentive compensation, warrants,
subject to certain conditions and restrictions, to purchase at a price of $.10
per share, a number shares of common stock of the Company, such that the number
of shares so purchased represents up to 10% of the outstanding common stock of
the Company at March 31, 1995. For these purposes, the calculation of the shares
of the common stock of the Company outstanding at March 31, 1995 assumes that
all warrants, options and preferred stock are converted to common stock of the
Company.
Quest has also entered into a five-year employment agreement with
Phillip D. Schwiebert, its President and Chief Operating Officer. Under the
terms of such employment agreement, Quest has agreed to compensate Mr.
Schwiebert with regular salary at the rate of $100,000 per year, plus bonus
compensation based on the attainment of certain operating goals at the rate of
$15,000 per quarter. In addition, upon the attainment of certain earnings
targets for Quest, Mr. Schwiebert may be entitled to be awarded as incentive
compensation, warrants, subject to certain conditions and restrictions, to
purchase at a price of $.10 per share, a number shares of common stock of the
Company, such that the number of shares so purchased represents up to 5% of the
outstanding common stock of the Company at March 31, 1995. For these purposes,
the calculation of the shares of the common stock of the Company outstanding at
March 31, 1995 assumes that all warrants, options and preferred stock are
converted to common stock of the Company.
Option/SAR Grants
There were no grants during 1995 of stock options or stock appreciation
rights to any person named in the Summary Compensation Table. Reference
is made, however, to the Management Advisory and Consulting Agreement described
above in connection with Mr. Polimeni's employment and the agreement described
above in connection with Mr. Schwiebert's employment.
39
<PAGE>
Option/SAR Exercises
Set forth below is information concerning exercises of options during
1995 and the year-end value of unexercised options for the persons named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs at Fiscal In-the-Money Options/SARs
Acquired on Value Year End (#) at Fiscal Year End ($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Dominic A. Polimeni
Chairman, President
and Chief Executive
Officer 0 0 0 0
Stephen J. Drescher
Former Chairman, and
Chief Executive Officer 250,000 $656,250 0 0
</TABLE>
The value realized is based on the difference between the exercise
price of $0.625 per share and the average of the high and low bid prices for the
Common Stock on April 28, 1995, the date of exercise.
Compensation of Directors
Other than the 1994 Director Non-Qualified Stock Option Plan described
below, the Company does not have a standard policy regarding compensation of
members of the Board of Directors. Other than as reported below, the members of
the Board of Directors did not receive compensation for their services as such
during the year ended December 31, 1995.
The 1994 Director Non-Qualified Stock Option Plan
On January 26, 1994, the Board of Directors (the "Board") adopted,
subject to stockholder approval, the above captioned plan and in February 1996
amended the plan so as to change the annual date of the grant to the first
Wednesday of February. On April 2, 1996, The 1994 Director Non-Qualified Stock
Option Plan was approved by shareholders at a special meeting. The plan, as
amended and approved, is hereinafter referred to as the "1994 Plan." Pursuant to
the terms of the 1994 Plan, options for an aggregate of 300,000 shares of the
Company's Common Stock may be granted.
All non-employee directors shall receive an option to purchase 15,000
shares of the Common Stock of the Company on the first Wednesday of February in
each calendar year at an exercise price equal to the fair market value per share
of the Common Stock on that date. Such options shall be exercisable immediately
for a period of 10 years from date of grant unless terminated earlier pursuant
to the terms of the plan. Under the 1994 Plan, 120,000 options have been granted
to date at exercise prices of $1.125 per share and $2.406 per share.
40
<PAGE>
1992 Stock Option Plan
In June 1992, the Board unanimously approved the adoption of the "1992
Plan" which was approved by the shareholders of the Company on January 8, 1993.
Under the 1992 Plan, both incentive stock options ("ISOs") and non-qualified
stock options ("Non-Qualified Options") may be granted (together, the
"Options"). Each option is to be specifically designated at the time of its
grant as an ISO (within the meaning of Section 422 of the Internal Revenue Code
of 1986) (the "Code"), or a Non-Qualified Option. All non-management employees
are eligible to receive ISOs under the 1992 Plan. All non-management employees
and non-employee consultants and Company Judges are eligible to receive
Non-Qualified Options under the 1992 Plan.
The aggregate maximum number of options issuable under the 1992 Plan to
purchase shares of the Company's Common Stock is 1,900,000 options.
The following table sets forth, since the inception of the 1992 Plan,
the persons who have received options and their respective exercise prices:
<TABLE>
<CAPTION>
No. of Exercise Expiration
Group Options Price Dates
----- ------- ------- ---------
<S> <C> <C> <C>
Employees 6,666 $12.75 12/10/97
Consultants 15,000 $28.65 7/08/97
Judges 3,333 $ 7.95 1/02/96
9,846 $15.00 2/0l/98
9,330 $17.85 7/28/96
1,666 $19.65 11/13/96
666 $22.50 6/03/97
2,332 $26.25 1/9/97
666 $33.75 9/l/97
</TABLE>
The Company will not grant additional options under the 1992 Plan.
The 1992 Amended and Restated Management Incentive Option Plan
In December 1991, the Board approved the Company's 1992 Management
Incentive Option Plan (the "Incentive Plan") . In September and October 1992,
effective as of the date of the original plan, the Board approved certain
amendments to the original plan which was ratified by the Shareholders of the
Company on January 8, 1993. Pursuant to the terms of the Incentive Plan
non-qualified options to purchase up to 533,333 shares of the Company's Common
Stock may be granted to officers, directors, key employees and consultants of
the Company.
41
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of February 28,
1996, known to the Company regarding beneficial ownership of the Company's
Common Stock by (i) any holder of more than five percent of the outstanding
shares; (ii) the Company's directors; and (iii) all executive officers and
directors as a group:
<TABLE>
<CAPTION>
Percentage
Name & Address Position With the Company Number of Shares of Shares
-------------- ------------------------- ---------------- ----------
<S> <C> <C> <C>
Dominic A. Polimeni (1) Chairman, President and Chief 2,602,721(2) 16.90%
Executive Officer
Milton M. Adler (1) Director, Secretary, 6,666(3) *
Treasurer and Controller
Robert V. Gubitosi (1) Director --(4) --
Mitchell Hymowitz (l) Director 45,000(5) *
William J. McSherry, Jr. (l) Director 35,000(6) *
Joan R. Gubitosi
c/o Gulfstream Financial Group, Inc,
6400 Congress Ave., Suite 200
Boca Raton, FL 33487 2,602,721(2) 16.90%
Phillip D. Schwiebert
c/o Quest Electronic Hardware, Inc.
1180 Murphy Avenue 1,361,360(7) 8.80%
San Jose, CA
The Miami Project to Cure Paralysis
The University of Miami
School of Medicine
1600 NW Tenth Avenue
Miami, FL 33136 1,000,000 6.50%
Gulfstream Financial Group, Inc.
6400 Congress Ave.
Suite 200
Boca Raton, FL 33487 2,602,721(2) 16.90%
All officers and directors as a group 2,689,387 17.50%
</TABLE>
42
<PAGE>
- --------------
* Less than 1 %
(1) c/o Questron Technology, Inc. , 6400 Congress Avenue, Suite 200,
Boca Raton, FL 33487.
(2) These shares are owned by Gulfstream Financial Group, Inc.
("Gulfstream"). Joan R. Gubitosi and Dominic A. Polimeni are executive
officers and the stockholders of Gulfstream and share voting and
investment power with respect to the shares owned by Gulfstream. Pursuant
to a Management Advisory and Consulting Agreement, dated as of
November 29, 1994, between the Company and Gulfstream, upon the
attainment of certain earnings targets for Quest, Gulfstream may be
entitled to be awarded as incentive compensation, warrants, subject to
certain conditions and restrictions, to purchase at a price of $.10 per
share, a number shares of common stock of the Company, such that the
number of shares so purchased represents up to 10% of the outstanding
common stock of the Company at March 31, 1995. For these purposes, the
calculation of the shares of the common stock of the Company outstanding
at March 31, 1995 assumes that all warrants, options and preferred
stock are converted to common stock of the Company.
(3) Consists of Options to purchase 6,666 shares of Common Stock at $12.75
per share granted pursuant to the 1992 Stock option Plan.
(4) Mr. Gubitosi's wife, Joan R. Gubitosi, has shared beneficial ownership of
2,602,721 shares of Common Stock (see Footnote 2). Mr Gubitosi disclaims
beneficial ownership of such shares.
(5) Consists of options to purchase 15,000 shares of Common Stock at $1.125
per share, options to purchase 15,000 shares of Common Stock at $2.406
per share and options to purchase 15,000 shares of Common Stock at
$1.906 per share granted pursuant to the 1994 Director Non-Qualified
Stock Option Plan.
(6) Includes options to purchase 15,000 shares of Common Stock at $1.906
per share granted pursuant to the 1994 Director Non-Qualified Stock
Option Plan.
(7) Pursuant to an Employment Agreement, dated as of November 29, 1994,
between the Quest and Phillip D. Schwiebert, upon the attainment of
certain earnings targets for Quest, Mr. Schwiebert may be entitled to
be awarded as incentive compensation, warrants, subject to certain
conditions and restrictions, to purchase at a price of $.10 per share, a
number shares of common stock of the Company, such that the number of
shares so purchased represents up to 5% of the outstanding common stock
of the Company at March 31, 1995. For these purposes, the calculation
of the shares of the common stock of the Company outstanding at March 31,
1995 assumes that all warrants, options and preferred stock are converted
to common stock of the Company.
As of the close of business on March 31, 1995, the Company acquired
from Gulfstream (a Florida corporation owned by Dominic A. Polimeni and Joan R.
Gubitosi) and Phillip D. Schwiebert all of the outstanding capital stock of
Quest Electronic Hardware, Inc. ("Quest"). Quest, in turn, simultaneously
acquired the fasteners distribution business of Arrow Electronics, Inc. These
events resulted in changes in ownership of the capital stock of the Company
which may have affected the control of the Company. These changes included the
following:
43
<PAGE>
a. Gulfstream became the direct beneficial owner of 22.10% of
common stock, par value $.0001 per share ("Common Stock"),
of the Company outstanding at March 31, 1995;
b. Gulfstream, in consideration of its services to the Company
under a Management Advisory and Consulting Agreement, dated as
of November 29, 1994, may be entitled to be awarded as
incentive compensation, warrants to purchase a number shares
of common stock of the Company, such that the number of shares
so purchased represents up to 10% of the outstanding common
stock of the Company at March 31, 1995, as described in
Footnote 2 above.
c. Dominic A. Polimeni ("Polimeni"), a Director, Executive
Officer and principal stockholder of Gulfstream, and Chairman,
Chief Executive Officer and Chief Financial Officer of Quest,
which became a subsidiary of the Company, was named President
and Chief Operating Officer of the Company and was
subsequently named to his current position of Chairman,
President and Chief Executive Officer of the Company; and
d. Phillip D. Schwiebert ("Schwiebert"), the President and Chief
Operating Officer of Quest, became the beneficial owner of
11.60% of the shares of Common Stock of the Company
outstanding at March 31, 1995 and, pursuant to an Employment
Agreement, dated November 29, 1994, by and between the Quest
and Schwiebert, may be entitled to be awarded as incentive
compensation, warrants to purchase a number shares of common
stock of the Company, such that the number of shares so
purchased represents up to 5% of the outstanding common stock
of the Company at March 31, 1995, as described in Footnote 7
above.
Subsequent to the foregoing events, certain principal stockholders of
the Company (Jordan R. Belfort, Richard Bronson, Elliot Lowenstern and Daniel
Porush), who, in the aggregate, beneficially owned approximately 45.00% of the
Company's outstanding stock, disposed of the bulk of these shares. In addition,
the Board of Directors of the Company has undergone a substantial restructuring
by reason of the resignation of four (4) former directors and the election of
Messrs. Adler, Gubitosi and McSherry to the Board.
44
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of the close of business on March 31, 1995, the Company acquired
from Gulfstream Financial Group, Inc. (a Florida corporation owned by Dominic A.
Polimeni and Joan R. Gubitosi) and Phillip D. Schwiebert all of the outstanding
capital stock of Quest Electronic Hardware, Inc. This transaction and related
transactions are described more fully under "Item 1. Business", "Item 7.
Financial Statements", "Item 10. Executive Compensation", and "Item 11. Security
Ownership of Certain Beneficial Owners and Management", included elsewhere
herein.
In April 1995, the Company loaned Stephen J. Drescher, then Chairman
and Chief Executive Officer of the Company, $156,250 in connection with the
exercise by Mr. Drescher of options to purchase Common Stock of the Company. The
obligation to repay this loan was satisfied by Gulfstream and Schwiebert by the
contribution of shares of Common Stock to the Company in connection with Mr.
Drescher's resignation in January 1996 as an officer and director of the
Company.
In April 1995, the Company loaned Paul L. Burton, then Executive Vice
President and a Director of the Company, $125,000 in connection with the
exercise by Mr. Burton of options to purchase Common Stock of the Company. The
obligation to repay this loan and to repay $69,228 of expenses paid by the
Company on Mr. Burton's behalf was satisfied by Gulfstream and Schwiebert by the
contribution of shares of Common Stock to the Company in connection with Mr.
Burton's resignation in January 1996 as an officer and director of the Company.
In November 1994, the Company sold to J2 Holdings, Inc., a private
company owned by Jordan Belfort, 1,202,905 units for $.35 per unit. Each unit
consisted of one common share and one warrant to purchase a share of common
stock for $.35 per share. These warrants were exercised in December 1995.
Biltmore Securities, Inc. ("Biltmore") acted as the Placement Agent for
the Company for the November 1994 Private Placement consisting of the sale of
2,000,000 shares of the Company's Common Stock. As compensation, Biltmore
received 200,000 shares of the Company's Common Stock and Warrants to purchase
200,000 shares of Common Stock of the Company at $.35 per share. These Warrants
were exercised in December 1995.
Biltmore received 250,000 shares of Common Stock of the Company as
compensation under a the Consulting Agreement dated as of January 1, 1994, and
250,000 options to purchase Common Stock of the Company at an exercise price of
$.625, which later through anti-dilution provisions resulted in 626,956 options
to purchase Common Stock of the Company at $.249 per share. These options were
exercised in December 1995. Biltmore received 61,824 shares of Common Stock of
the Company as compensation for acting as placement agent for the Exchange offer
and Series II Warrants in July 1994.
On March 31, 1995 Biltmore Securities, Inc., in consideration of its
serving as Placement Agent, was granted 116,000 options to purchase a like
number of shares of the Common Stock of the Company at $3.50 per share. Such
options expire March 31, 2000. The Company also agreed to pay Biltmore a cash
payment of $217,500 which represents a 10% placement fee and a 2.5%
non-accountable expense allowance based on total proceeds of $1,740,000.
45
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Financial Statements and Exhibits.
1. The financial statements listed in the accompanying index to
financial statements are filed as part of this annual report.
2. See Index to Exhibits on page E-1.
(b) Report on Form 8-K.
The were no reports on Form 8-K filed during the last quarter of
1995 through the date hereof.
46
<PAGE>
QUESTRON TECHNOLOGY, INC.
INDEX TO FINANCIAL STATEMENTS
(Item 13 (a))
Page
----
Report of Independent Auditors 17
Consolidated Balance Sheet as of December 31, 1995 18
For the years ended December 31, 1995 and 1994:
Consolidated Statement of Operations 19
Consolidated Statement of Changes in Stockholders' Equity 20
Consolidated Statement of Cash Flows 21
Notes to Consolidated Financial Statements at and for the years ended
December 31, 1995 and 1994 23
48
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
QUESTRON TECHNOLOGY, INC.
By: /s/ Dominic A. Polimeni
----------------------------------
Dominic A. Polimeni,
Chairman, President and Chief
Executive Officer
Date: April 12, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
indicated on April 12, 1996:
(1) Principal Executive Officer: (3) A Majority of the Board of Directors:
/s/ Dominic A. Polimeni /s/ Milton M. Adler
------------------------------- --------------------------------
Dominic A. Polimeni, Milton M. Adler, Director
Chief Executive Officer
/s/ Robert V. Gubitosi
--------------------------------
Robert V. Gubitosi, Director
(2) Principal Financial and /s/ Mitchell Hymowitz
Acccounting Officer: --------------------------------
Officer: Mitchell Hymowitz, Director
/s/ Milton M. Adler /s/ William J. Mc Sherry, Jr.
- ------------------------------- ---------------------------------
Milton M. Adler, Treasurer William J. McSherry, Jr., Director
/s/ Dominic A. Polimeni
---------------------------------
Dominic A. Polimeni, Director
48
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from _______________ to _______________
Commission file number 0-13324
QUESTRON TECHNOLOGY, INC.
- -------------------------------------------------------------------------------
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Delaware 23-2257354
- ------------------------------------------------- ----------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
6400 Congress Avenue, Suite 200, Boca Raton, FL 33487
- ------------------------------------------------- --------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (407) 241 - 5251
----------------
</TABLE>
49
<PAGE>
INDEX TO EXHIBITS
3.1 Certificate of Incorporation, incorporated by reference to Exhibit 3(i)
to the Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1987 (File No.
0-13324).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 3(i) to the
Registrant's Form 10-K filed with the Securities and Exchange
Commission for the, fiscal year ended December 31, 1993 (File No.
0-13324).
3.3 Certificate of Correction, dated December 22, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.3 to the Registrant's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
3.4 By-Laws of the Registrant, incorporated by reference to Exhibit 3b(ii)
to the Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1987 (File No.
0-13324).
3.5 Certificate of Amendment, dated April 2,1996, to Certificate of
incorporation of the Registrant.
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4. 1 to the Registrant's Registration Statement on Form S-18,
File No. 2-94721-W, ordered effective by the Securities and Exchange
Commission on February 28, 1985.
4.2 Specimen Preferred Stock Certificate, incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form 10-K
filed with the Securities and Exchange Commission for the fiscal year
ended December 31, 1993.
4.3 Certificate of Designations, Preferences and Rights of the Registrant's
Series A Cumulative Convertible Preferred Stock, incorporated by
reference to Exhibit 4(c) to the Registrant's Report on Form 10-K filed
with the Securities and Exchange Commission for the fiscal year ended
December 31, 1989 (File No. 0-13324).
4.4 Certificate of Increase relating to Series A Cumulative Convertible
Preferred Stock, incorporated by reference to Exhibit 4 (d) to the
Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1990 (File No.
0-13324).
4.5 Certificate of Designations, Preferences, and Rights establishing a
series of shares of preferred stock, incorporated by reference to
Exhibit 3.2 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1993
(File No. 0-13324).
4.6 Series I Warrant Agreement, dated April 16, 1993, issued in connection
with a private placement, incorporated by reference to Exhibit 3.2 to
the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1993 (File No.
0-13324).
50
<PAGE>
4.7 Series III Warrant Agreement, dated as of November 7, 1994, between J2
Holdings, Inc. and the Registrant, incorporated by reference to Exhibit
10.22 to the Registrant's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.1 The Incentive Stock Option Plan (1985) of the Registrant, incorporated
by reference to Exhibit 10(v), of the Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission for the fiscal year
ended December 31, 1991 (File No. 0-13324).
10.2 The Management Incentive Plan of the Registrant, incorporated by
reference to Exhibit 10 (w) , of the Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission for the fiscal year
ended December 31, 1991 (File No. 0-13324).
10.3 The Amended and Restated Management Incentive Option Plan of the
Registrant, incorporated by reference to Exhibit 10.18 of the
Registrant's Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1992 (File No.
0-13324).
10.4 The Director Non-Qualified Option Plan of the Registrant, incorporated
by reference to Exhibit 10.19 of the Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission for the fiscal year
ended December 31, 1992 (File No. 0-13324).
10.5 The 1992 Stock Option Plan of the Registrant, incorporated by reference
to Exhibit 10.20 of the Registrant's Report on Form 10-K filed with the
Securities and Exchange commission for the fiscal year ended December
31, 1992 (File No. 0-13324).
10.6 Excerpts from minutes of Board Meeting of January 26, 1994 adopting
Amendment to Management Incentive Option Plan, incorporated by
reference to Exhibit 10.21 of the Registrant's Report on Form 10-K
filed with the Securities and Exchange Commission for the fiscal year
ended December 31, 1993 (File No. 0-13324).
10.7 Consulting Agreement, dated as of January 1, 1994, by and between
Biltmore Securities, Inc. and the Registrant, incorporated by reference
to Exhibit 10.23 of the Registrant's Report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1993 (File No. 0-13324).
10.8 Stock option certificate and agreement by and between the Registrant
and Biltmore Securities, Inc., dated January 1, 1994, incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1994 (File No. 0-13324).
10.9 Judicate, Inc. 1994 Director Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 10.28 of the Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission
for the fiscal year ended December 31, 1993 (File No. 0-13324).
10.10 Employment Agreement, dated June 26, 1994, between the Registrant and
Paul L. Burton, incorporated by reference to Exhibit 10.20 to the
Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
51
<PAGE>
10.11 Subscription Agreement, dated as of November 7, 1994, between J2
Holdings, Inc. and the Registrant, incorporated by reference to Exhibit
10.21 to the Registrant's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.12 Subscription Agreement, dated as of October 1, 1994, between Stephanie
Holdings, Inc. and the Registrant, incorporated by reference to Exhibit
10.23 to the Registrant's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.13 Employment Agreement, dated November 29, 1994, between Quest
Electronic Hardware, Inc. and Dominic A. Polimeni, incorporated
by reference to Exhibit 10.24 to the Registrant's Form 10-K filed
with the Securities and Exchange Commission for the fiscal year
ended December 31, 1994 (File No. 0-13324).
10.14 Employment Agreement, dated November 29, 1994, between Quest
Electronic Hardware, Inc. and Phillip D. Schwiebert, incorporated
by reference to Exhibit 10.25 to the Registrant's Form 10-K filed
with the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.15 Management Advisory and Consulting Agreement, dated as of November 29,
1994, between Gulfstream Financial Group, Inc. and the Registrant,
incorporated by reference to Exhibit 10.26 to the Registrant's Form
10-K filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.16 Waiver, dated as of March 31, 1995, by Gulfstream Financial Group, Inc.
and Philip D. Schwiebert, incorporated by reference to Exhibit 10.27 to
the Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.17 Share Acquisition Agreement, dated as of November 29 1994, by and
among Gulfstream Financial Group, Inc., Phillip D. Schwiebert,
Quest Electronic Hardware, Inc. and the Registrant, incorporated by
reference to Exhibit 10.28 to the Registrant's Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.18 Purchase of Assets Agreement, dated as of November 29, 1994, between
Quest Electronic Hardware, Inc. and Arrow Electronics, Inc.,
incorporated by reference to Exhibit 10.29 to the Registrant's Form
10-K filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.19 Loan and Security Agreement, dated as of March 31, 1995, between
Silicon Valley Bank and Quest Electronics Hardware, Inc., incorporated
by reference to Exhibit 10.30 to the Registrant's Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.20 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to
Dallas, Texas property, incorporated by reference to Exhibit 10.31 to
the Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
52
<PAGE>
10.21 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect
to Colorado Springs, Colorado property, incorporated by reference to
Exhibit 10.32 to the Registrant's Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31,
1994 (File No. 0-13324).
10.22 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect
to San Jose, California property, incorporated by reference to Exhibit
10.33 to the Registrant's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.23 Third Party Stock Pledge Agreement, dated as of March 31, 1995, between
Silicon Valley Bank and the Registrant, incorporated by reference to
Exhibit 10.34 to the Registrant's Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.24 Common Stock Purchase Option, dated as of March 31, 1995, for Biltmore
Securities, Inc., incorporated by reference to Exhibit 10.35 to the
Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.25 Amendment No. 1, dated as of May 31, 1995, to the Loan and Security
Agreement, dated as of March 31, 1995, between Silicon Valley Bank
and Quest Electronics Hardware, Inc.
10.26 Amendment No. 2, dated as of November 16, 1995, to the Loan and
Security Agreement, dated as of March 31, 1995, between Silicon
Valley Bank and Quest Electronics Hardware, Inc.
10.27 Amendment No. 3, dated as of February 23, 1996, to the Loan and
Security Agreement, dated as of March 31, 1995, between Silicon
Valley Bank and Quest Electronics Hardware, Inc.
10.28 Letter agreement, dated December 29, 1995, between the Registrant and
Stephen J. Drescher.
10.29 Letter agreement, dated December 29, 1995, between the Registrant
and Paul L. Burton.
11.1 Statement Re: Computation of Per Share Earnings for years ended
December 31, 1995 and 1994.
16.1 Letter to Securities and Exchange Commission from the Registrant's
prior auditors, Goldenberg Rosenthal & Friedlander, incorporated by
reference to Exhibit 16.1 to the Registrant's Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1994 (File No. 0-13324).
16.2 Letter from Goldenberg Rosenthal & Friedlander confirming succession of
the client/auditor relationship, incorporated by reference to Exhibit
16.2 to the Registrant's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
21.1 Statement of Subsidiaries.
23.1 Consent of Mortenson and Associates, P. C., dated April 2, 1996.
27 Financial Data Schedule
Exhibit 3.5
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
JUDICATE, INC.
IT IS HEREBY CERTIFIED THAT:
1. The Certificate of Incorporation of Judicate, Inc.(the "Corporation") is
hereby amended by striking out Article "FIRST" thereof and by substituting in
lieu of said Article the following new Article:
"FIRST: The name of the corporation is:
QUESTRON TECHNOLOGY, INC."
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article "FOURTH" thereof and by substituting in lieu of said
Article the following new Article:
"FOURTH: The total number of shares of all classes of
capital stock which the Corporation shall have
authority to issue is sixty million (60,000,000)
shares, of which fifty million (50,000,000) shares
shall be Common Stock, par value $.0001 per share and
ten million (10,000,000) shares shall be preferred
stock, par value $.01 per share ("Preferred Stock").
The Preferred Stock may be issued with full, multiple
or fractional voting rights and with such designations,
preferences, qualifications, privileges, limitations,
options, conversion rights and other special, relative
rights that shall be fixed from time to time by
resolution of the Board of Directors."
3. That said amendments were duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware by the
affirmative vote of the holders of a majority of the stock entitled to vote
thereon at a special meeting of the stockholders of the Corporation held on
April 2. 1996.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
Dominic A. Polimeni, its President, and Milton M. Adler, its Secretary, this 2nd
day of April, 1996.
/s/ Dominic A. Polimeni
------------------------------
Dominic A. Polimeni
President
Attest:
/s/ Milton M. Adler
Milton M. Adler
Secretary
<PAGE>
Exhibit 10.25
AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT is dated as of
May 31, 1995 by and between Quest Electronic Hardware, Inc., ("Borrower")
and Silicon Valley Bank ("Bank").
RECITALS
A. Borrower and Bank are parties to a Loan and Security Agreement
dated as of March 31, 1995 (the "Loan Agreement").
B. Borrower has requested Bank to create a letter of credit subfacility
under the Loan Agreement and to amend one of the financial covenants contained
in the Loan Agreement, and Bank has agreed, provided Borrower enters into this
Amendment.
NOW, THEREFORE, the parties agree as follows:
1. A new Section 2.1.2 is added to the Loan Agreement, as follows:
"2.1.1 Letters of Credit.
(a) Subject to the terms and conditions of this Agreement,
Bank agrees to issue or cause to be issued letters of credit for the
account of Borrower in an aggregate face amount not to exceed (i) the
lesser of the Committed Line or the Borrowing Base minus (ii) the then
outstanding principal balance of the Advances provided that the face
amount of outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) shall not in any case exceed One
Hundred Thousand Dollars ($100,000). For the purpose of calculating
amounts outstanding under the Committed Line, the face amount of each
Letter of Credit (including drawn but unreimbursed Letters of Credit)
shall be deemed an Advance. Each such letter of credit shall have an
expiry date no later than ninety (90) days after the Maturity Date
provided that Borrower's letter of credit reimbursement obligation
shall be secured by cash on terms acceptable to Bank at any time after
the Maturity Date if the term of this Agreement is not extended by
Bank. All such letters of credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank's form of application and letter of credit
agreement.
(b) Borrower shall indemnify, defend and hold Bank harmless
from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection
with any letters of credit.
2.1.2 Letter of Credit Reimbursement; Reserve.
(a) Borrower may request that Bank issue a letter of credit
payable in a currency other than United States Dollars. If a demand for
payment is made under any such letter of credit, Bank shall treat such
demand as an advance to Borrower of the equivalent of the amount
thereof (plus cable charges) in United States currency at the then
prevailing rate of exchange in San Francisco, California, for sales of
that other currency for cable transfer to the country of which it is
the currency.
<PAGE>
(b) Upon the issuance of any letter of credit payable in a
currency other than United States Dollars, Bank shall create a reserve
under the Committed Line for letters of credit against fluctuations in
currency exchange rates, in an amount equal to twenty percent (20%) of
the face amount of such letter of credit. The amount of such reserve
may be amended by Bank from time to time to account for fluctuations in
the exchange rate. The availability of funds under the Committed Line
shall be reduced by the amount of such reserve for so long as such
letter of credit remains outstanding."
2. Section 6.9 of the Loan Agreement is amended to read as follows:
"6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of March 31,
1995, and the last day of each fiscal month thereafter, a ratio of
Total Liabilities to Net Worth plus Subordinated Debt of not more
than 1.25 to 1.0."
3. In consideration of Bank's entering into this Amendment, Borrower
shall pay Bank a fee of Two Hundred Fifty Dollars ($250) on the date of this
Amendment plus the fees and expenses, including attorneys' fees, incurred in
connection with this Amendment.
4. Borrower represents and warrants that the representations and
warranties contained in the Loan Agreement are true and correct as of the date
of this Amendment as though made on the date hereof and that there exist no
Events of Default under the Loan Agreement, as amended hereby.
5. This Amendment amends certain of the terms of the Loan Agreement.
Except as amended by this Amendment, such documents remain in full force and
effect. Unless otherwise defined, all terms Capitalized in this Amendment shall
have the meanings assigned in the Loan Agreement. This Amendment, together with
the Loan Agreement and the documents executed in connection therewith,
constitute the entire agreement of the parties with respect to the subject
matter hereof, and supersede all prior agreements and negotiations.
6. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, and all of which shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
QUEST ELECTRONIC HARDWARE, INC.
By: /s/ Dominic A. Polimeni
--------------------------------
Title: Chairman and CEO
SILICON VALLEY BANK
By: /s/ Mitzi R. Lazich
-------------------------------
Title: Vice President
<PAGE>
The undersigned consent to the changes effected by Amendment No. 1 to
Loan and Security Agreement, and each agrees, as to the agreement that it has
executed with Bank, that the Third Party Stock Pledge Agreement of Judicate,
Inc. and the Unconditional Guaranty of Gulfstream Financial Group, Inc., remain
in full force and effect.
JUDICATE, INC.
By: /s/ Dominic A. Polimeni
---------------------------------
Title: President
GULFSTREAM FINANCIAL GROUP, INC.
By: /s/ Dominic A. Polimeni
---------------------------------
Title: President
Exhibit 10.26
AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT
This Amendment No. 2 to Loan and Security Agreement is entered
into as of November 16, 1995, by and between Silicon Valley Bank ("Bank")
and Quest Electronic Hardware, Inc. ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of March 31, 1995 (the "Agreement"'). The parties desire to
amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Certain defined terms in Section 1.1 are amended as follows:
"Committed Line" means One Million Five Hundred Thousand
Dollars ($1,500,000).
"Debt Service Coverage" means, as of the last day of any
period, the ratio of (i) annualized earnings before interest
expense, income taxes, depreciation and amortization, to (ii)
an amount equal to the current portion of long-term debt plus
annualized interest expense for such period.
"Eligible Inventory" means that portion of Borrower's
Inventory that is located at Borrower's principal place of
business or such other locations as are permitted under
Section 7.10, that complies with the representations and
warranties set forth in Section 5.5, and that is otherwise
acceptable to Bank.
"Inventory"' means all present and future inventory in which
Borrower has any interest, including merchandise, raw
materials, parts, supplies, packing and shipping materials,
work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every
kind and description now or at any time hereafter owned by or
in the custody or possession, actual or constructive, of
Borrower, including such inventory as is temporarily out of
its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of
any of the foregoing and any documents of title representing
any of the above, and Borrower's Books relating to any of the
foregoing. Inventory shall be valued at the lower of cost or
wholesale fair market value.
2. The first paragraph of Section 2.1 is amended to read as follows:
2.1 Advances. Subject to and upon the terms and conditions of this Agreement,
Bank agrees to make Advances to Borrower in an aggregate amount not to exceed
the lesser of the Committed Line or the Borrowing Base. For purposes of this
Agreement, "Borrowing Base" shall mean an amount equal to (i) seventy-five
percent (75%) of Eligible Accounts plus (ii) (a) if the value of Borrower's
total Inventory is greater than $2,500,000, then the lesser of twenty-five
percent (2.5%) of the value of Borrower's Eligible Inventory or Seven Hundred
Thousand Dollars ($700,000), or (b) if the value of Borrower's total Inventory
is less than or equal to $2,500,000 but greater than $1,500,000, then the lesser
of twenty-five percent (25%) of the value of Borrower's Eligible Inventory or
Five Hundred Thousand Dollars ($500,000), or (c) if the value of Borrower's
total Inventory is less than or equal to $1,500,000, then the lesser of
twenty-five percent (25%) of the value of Borrower's Eligible Inventory or Three
Hundred Thousand Dollars, ($300,000); provided that the Borrowing Base shall
consist only of seventy-five percent (75%) of Eligible Accounts for thirty (30)
consecutive days during each fiscal year. Subject to the terms and conditions of
this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time prior to the Revolving Facility Maturity Date.
<PAGE>
3. Section 6.12 is amended to read as follows:
6.12 Debt Service Charge. Borrower shall maintain on a rolling
six (6) month basis a Debt Service Ratio of at least 1.75 to 1.0, except that
Borrower shall maintain a Debt Service Ratio of at least 1.65 to 1.0 for the
months of October, November and December, 1995.
3. In connection with this Amendment, Borrower shall pay Bank a fee of
Seven Thousand Dollars ($7,000) plus all Bank Expenses incurred in connection
with the preparation of this Amendment.
4. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
5. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment (except such representations and warranties to be expressly true
as of a specific date), and that no Event of Default has occurred and is
continuing.
6. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
QUEST ELECTRONIC HARDWARE, INC.,
a Delaware corporation
By: /s/ Dominic A. Polimeni
--------------------------------
Title: Chairman and CEO
SILICON VALLEY BANK
By: /s/ Mitzi R. Lazich
--------------------------------
Title: Vice President
Exhibit 10.27
AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT
This Amendment No. 3 to Loan and Security Agreement (this "Amendment")
is made as of February 23, 1996, by and between Quest Electronic Hardware,
Inc. (the "Borrower") and Silicon Valley Bank ("Bank").
RECITALS
A. Borrower and Bank are parties to a Loan and Security Agreement dated
on or about March 31, 1995, as such agreement may be amended from time to time,
("the Loan Agreement"). The Loan Agreement provided for among other things, a
Committed Line in the original amount of $800,000.00 (the "Committed Line"). The
Loan Agreement has been amended pursuant to Amendment No. 1 dated May 31, 1995,
and Amendment No. 2 dated November 16, 1995, which provided for among other
things, an increase in the Committed Line to One Million Five Hundred Thousand
and 00/100 Dollars ($1,500,000.00).
B. Borrower and Bank desire to modify the terms of the Loan Agreement.
NOW THEREFORE, Borrower and Bank agree as follows:
1. Lender hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the minimum Debt
Service Ratio covenant as of the month ended December 31, 1995. Lender's waiver
of Borrower's compliance of this covenant shall apply only to the foregoing
period. Accordingly, for the month ending January 31, 1996, Borrower shall
comply with this covenant, as amended herein.
Lender's agreement to waive the above described default (1) in
no way shall be deemed an agreement by Lender to waive Borrower's compliance
with the above-described covenant as of all other dates and (2) shall not limit
or impair the Lender's right to demand strict performance of this covenant as of
all other dates and (3) shall not limit or impair the Lender's right to demand
strict performance of all other covenants as of any date.
2. Section 6.12 is amended to read as follows-.
6.12 Debt Service Coverage. Borrower shall maintain, on a
rolling six month basis, a minimum Debt Service Ratio as follows:
1.50 to 1.00 for the months of January, February and March;
1.60 to 1.00 for the months of April, May and June;
1.75 to 1:00 for the months of July, August, September, October and
November; and
1:50 to 1:00 for the month of December.
3. Unless otherwise defined, all capitalized terms in this Amendment
shall have the meanings assigned in the Agreement. Except as amended, the
Agreement remains in full force and effect.
<PAGE>
4. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
5. This Amendment may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one instrument.
6. This Amendment amends certain terms of the Agreement. Except as
amended hereby, the Agreement remains in full force and effect. This Amendment,
together with the Agreement and any documents executed in connection with the
Agreement, constitute the entire agreement of the parties with respect to the
subject matter hereof, and supersede all prior agreements and negotiations.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
BORROWER: BANK:
QUEST ELECTRONIC HARDWARE, INC. SILICON VALLEY BANK
By: /s/ Dominic A. Polimeni By: /s/ Julie Schneider
--------------------------- ------------------------------
Title: Chairman and CEO Title: Commercial Banking Officer
Exhibit 10.28
Judicate, Inc.
200 S. Broad Street, Suite 800
Philadelphia, PA 19102
December 29, 1995
Mr. Stephen J. Drescher
101 West 67th Street
New York, New York 10023
Dear Steve:
Please be advised that your obligations in connection with a Demand
Note in favor of the Company for $156,250 (representing the full purchase price
for 250,000 shares of the Company's Common Stock which you exercised options to
purchase in April 1995), and your obligation for an outstanding amount due the
Company for a loan that the Company made to you in the amount of $5,000 in
December 1993, have been satisfied by Gulfstream Financial Group, Inc. and
Phillip D. Schwiebert, subject to your resignation as an officer and director
of the Company.
Please indicate your acceptance and resignation below.
Sincerely,
/s/ Dominic A. Polimeni
---------------------------------------
Dominic A. Polimeni
President and Chief Operating Officer
To the Board of Directors
Judicate, Inc.
I hereby accept the arrangement described above regarding the above
mentioned obligations to the Company, and I hereby resign as an officer and
director of Judicate, Inc., effective immediately, without further compensation
and acknowledge that no other amounts are owed to the Company or are due to me.
By: /s/ Stephen J. Drescher Date: January 12, 1996
----------------------------
Stephen J. Drescher
Exhibit 10.29
Judicate, Inc.
200 S. Broad Street, Suite 800
Philadelphia, PA 19102
December 29, 1995
Mr. Paul L. Burton
57 East 73rd Street
New York, New York 10021
Dear Paul:
Please be advised that your obligations in connection with a Demand
Note in favor of the Company for $125,000 (representing the full purchase price
for 200,000 shares of the Company's Common Stock which you exercised options to
purchase in April 1995), and your obligations for outstanding amounts due the
Company for certain expenses paid by the Company on your behalf in the aggregate
amount of $69,228, have been satisfied by Gulfstream Financial Group, Inc. and
Phillip D. Schwiebert, subject to your resignation as an officer and director of
the Company.
Please indicate your acceptance and resignation below.
Sincerely,
/s/ Dominic A. Polimeni
-----------------------------------
Dominic A. Polimeni
President and Chief Operating Officer
To the Board of Directors
Judicate, Inc.
I hereby accept the arrangement described above regarding the above
mentioned obligations to the Company, and I hereby resign as an officer and
director of Judicate, Inc., effective immediately, without further compensation
and acknowledge that no other amounts are owed to the Company or are due to me.
By: /s/ Paul L. Burton Date: January 12, 1996
-----------------------------
Paul L. Burton
Exhibit 11.1
QUESTRON TECHNOLOGY, INC.
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Average number of shares of common stock outstanding
during the year 11,533,067 2,793,402
Assumed conversion of the Series A Preferred Stock,
as of the beginning of the year -- 280,000
Assumed exercise of dilutive stock options and warrants, based on the
treasury method of accounting using the year-end market price per
share of the Registrant's
common stock 2,309,798 2,774,021
------------- -----------
Fully diluted average number of shares of common
stock and common stock equivalents outstanding
during the year 13,842,865 5,847,423
============ ==========
Net income (loss) available to common shareholders $ 352,187 $ (642,033)
============ ==========
Net income (loss) per common share $ .03 $ (.11)
============ ==========
</TABLE>
The calculation for 1994 is submitted in accordance with Securities
Exchange Act of 1934 Release No. 9083 although it is contrary to Paragraph 40 of
APB Opinion No. 15 because it produces an antidilutive result.
Exhibit 21.1
QUESTRON TECHNOLOGY, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
AT MARCH 31, 1996
<TABLE>
<CAPTION>
Date of State of
Name of Subsidiary Incorporation Incorporation
- ------------------------------ ------------------ -------------
<S> <C> <C>
Quest Electronic Hardware, Inc. October 12, 1994 Delaware
Questnet Components, Inc. February 13, 1996 Delaware
Judicate of Philadelphia, Inc. December 21, 1993 Delaware
Judicate of New York, Inc. February 16, 1993 Delaware
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 33-84222) and related Prospectus pertaining to the
registration of 2,140,442 shares of Questron Technology, Inc. common stock, in
the Registration Statement on Form S-3 (No. 33-63555) and related Prospectus
pertaining to the registration of 6,017,444 shares of Questron Technology, Inc.
common stock, and in the Registration Statement on Form S-8 (No. 33-87628)
pertaining to the registration of 756,667 shares of Questron Technology, Inc.
common stock issuable pursuant to the various stock option plans of Questron
Technology, Inc., of our report dated April 2, 1996 with respect to the
consolidated financial statements of Questron Technology, Inc. included in this
Annual Report on Form 10-KSB for the year ended December 31, 1995.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
April 2, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income for the 12 months ended December 31, 1995
and the Consolidated Balance Sheet for the year ended December 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 39,358
<SECURITIES> 0
<RECEIVABLES> 1,399,936
<ALLOWANCES> 43,978
<INVENTORY> 3,554,263
<CURRENT-ASSETS> 5,053,762
<PP&E> 478,193
<DEPRECIATION> 59,213
<TOTAL-ASSETS> 12,432,998
<CURRENT-LIABILITIES> 2,070,094
<BONDS> 0
0
0
<COMMON> 1,547
<OTHER-SE> 8,531,835
<TOTAL-LIABILITY-AND-EQUITY> 12,432,998
<SALES> 6,982,902
<TOTAL-REVENUES> 7,259,155
<CGS> 4,060,854
<TOTAL-COSTS> 6,327,450
<OTHER-EXPENSES> 346,799
<LOSS-PROVISION> 43,798
<INTEREST-EXPENSE> 205,555
<INCOME-PRETAX> 379,351
<INCOME-TAX> 27,164
<INCOME-CONTINUING> 352,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 352,187
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
